UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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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, 2004
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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 8
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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 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
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NO
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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NO
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The aggregate market value of the shares of voting stock held by non-affiliates of the Registrant as of March 31, 2005, computed by reference to the average of the bid and asked prices of the Registrant's common stock as reported on Nasdaq Small Cap on that date, was $79,008,500.
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Class
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Outstanding at March 31, 2005
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Common stock, $.01 par value
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16,264,465 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 2005, into Part III of the filing.
Indicate by check mark if disclosure of delinquent filers, pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K
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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 Rocky Mountain Gas, Inc. ("RMG") and plans for developing its coalbed methane ("CBM") acreage and its possible acquisition by a Canadian company; the disclosures about possible exploration and other programs for uranium and molybdenum properties; and the disclosures about Sutter Gold Mining Inc., formerly Globemin Resources Inc., and its plans for a gold property in 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. Important future factors that could cause actual results to differ materially from expectations will depend on:
For CBM gas, whether current plans to merge RMG into (or sell its assets to) a Canadian company will be successfully completed. If those plans are successfully completed, U.S. Energy will hold an equity interest in an oil and gas company with interest in CBM, but USE would not be directly involved in operations. If those plans are not successfully completed and RMG remains in the gas business, results of operations will depend on domestic gas prices; results of exploration drilling; the amounts of gas we will be able to produce; the availability of permits to drill and operate CBM wells; whether and when gas transmission lines will be built in reasonable proximity to the properties being developed; and whether and on what terms the capital necessary to continue holding and developing the properties can be obtained.
For the uranium properties, market prices for uranium oxide, whether and on what terms capital can be obtained to develop the properties (and for the uranium mill in Utah, refurbish and put the mill into operation); and the availability of permits to mine the properties, and for the Utah mill obtain an operating license.
For the gold properties held by Sutter Gold Mining Inc., formerly Globemin Resources Inc., whether certain permits can be obtained from the State of California, and whether and on what terms capital can be obtained for further exploration, mining and processing operations.
For the molybdenum property, that the Company expects to receive back from Phelps Dodge Corporation, the Colorado regulatory requirements which we will have to comply with to operate a water treatment plant on the properties, whether adequate water rights for mine development and operation will be obtained from Phelps Dodge or others, and whether permits and bonding for a mine can be obtained, and whether U. S. Energy Corp. and Crested Corp. can raise the necessary capital and/or enter into a joint venture or other arrangement with a third party to put the property into production.
The forward-looking statements should be considered in the context of all the information in this Annual Report.
PART I
Item 1 and Item 2. Business and Properties.
(a) General
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U.S. Energy Corp. ("USE") is a Wyoming corporation (formed in 1966) in the business of acquiring, exploring, developing and/or selling or leasing mineral properties. 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 own obligations. Crested has paid a portion of this debt by issuing common stock to USE. At December 31, 2004, Crested owed $9,650,900 to USE.
Historically, our business strategy has been, and will continue to be, acquiring grass roots and/or developed mineral properties when commodity prices are low (such as they have been in natural gas, gold, uranium and molybdenum), then operating, selling, leasing or joint venturing the properties, or selling the companies we set up to hold and explore or develop the properties to other companies in the mineral sector when prices are moving upward.
Typically, projects initially are acquired, financed and operated by USE and Crested 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 of this corporate strategy are, for gold properties, Sutter Gold Mining Inc. (formerly Globemin Resources Inc., a publicly traded British Columbia company, which acquired Sutter Gold Mining Company, and then changed its name to Sutter Gold Mining Inc.); and Rocky Mountain Gas, Inc. for CBM. Additional subsidiaries may be organized in the future such as U.S. Uranium Ltd. for uranium and U.S. Moly Corp. for molybdenum. Initial ownership of these subsidiaries is by USE and Crested, with additional stock (plus options) held by their officers, directors and employees.
In 2002 and 2003, USE's primary business focus was in the CBM business conducted through its subsidiary Rocky Mountain Gas, Inc. ("RMG"). In 2004 and into 2005, commodity prices for the minerals in all our properties (and for molybdenum, the property that we expect to receive back from Phelps Dodge Corporation) increased significantly. Accordingly, in 2004 and continuing into 2005, our business activity has been expanding to include the gold, uranium and molybdenum properties.
Principal executive offices of USE and Crested are located in the Glen L. Larsen building at 877 North 8th West, Riverton, Wyoming 82501, telephone 307-856-9271. RMG has a field office in Gillette, Wyoming. Sutter Gold Mining Inc. has an office in Sutter Creek, California.
In this Annual Report, "we," "Company" or "USE" refer to U.S. Energy Corp. including Crested Corp. ("Crested") and other subsidiaries unless otherwise specifically noted. The Company's fiscal year ends December 31.
Capital Activities in 2004 and First Quarter 2005
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USE
$350,000 Equity - 2004
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In the first quarter 2004, we obtained $350,000 of equity funding from an accredited investor (100,000 shares of USE common stock, three year warrants to purchase 50,000 shares of USE common stock, at $3.00 per share; and five year warrants to purchase 200,000 shares at $3.00 per share).
$3,000,000 Loan - 2004
. In the third quarter 2004, we borrowed $3,000,000 from Geddes and Company of Phoenix, Arizona. The loan matures on July 30, 2006, bears 10% annual interest, and is secured principally by RMG's CBM properties in the Castle Rock prospect and 4,000,000 shares of RMG stock held by USE. The loan may be prepaid in cash without penalty, but the lender at any time may convert loan principal to RMG common stock at $3.00 per share on the first $1,500,000 converted; and at $3.25, $3.50 and $3.75 per share for each additional $500,000 converted. In connection with the loan, RMG issued to the lender five year warrants to buy 600,000 shares of common stock of RMG: $3.00 per share for 300,000 shares; and $3.25, $3.50 and $3.75 per share for 100,000 shares at each price.
$4,720,000 Loan - First Quarter 2005
. On February 9, 2005, we borrowed $4,000,000 from seven accredited investors, issuing $4,720,000 face amount of debentures (including three years of annual interest at 6%). Net proceeds to USE were $3,700,000 after paying a commission and lenders' legal costs.
The debentures are unsecured; the face amount of the debentures are payable every six months from February 4, 2005, in five installments of 20%, in cash or in restricted common stock of USE. USE may pay this amortization payment in cash or in stock at the lower of $2.43 per share (the “set price”) or 90% of the volume weighted average price of USE’s stock for the 90 trading days prior to the repayment date. The set price was determined on the formula of 90% of the volume weighted average price of the stock over the 90 trading days prior to February 4, 2005. The debentures are convertible to restricted common stock of USE at the set price.
At any time, USE has the right to redeem some or all of the debentures in cash or stock, in an amount equal to 120% of the face amount of the debentures until February 4, 2006; 115% from February 5, 2006 to February 4, 2007; and 110% from February 5, 2007 until maturity. Payment in stock would be at the set price. The holders may convert the debentures to stock even if USE should seek to redeem in cash.
If at any time, after registration for public resale of the conversion shares have been approved, USE’s stock trades at more than 150% of the set price for 20 consecutive trading days, USE may convert the balance of the face amount of the debentures at the set price.
In the event of default, the investors may require payment (i) in cash equal to 130% of the then outstanding face amount; or (ii) in stock equal to 100% of face amount, with the stock priced at the set price, or (iii) in stock equal to 130% of the face amount, with the stock priced at 100% of the volume weighted average price of USE’s stock for the 90 trading days prior to default.
The preceding is a summary of the principal terms of the debentures. The form of debenture is filed as an exhibit to this Annual Report.
USE issued warrants to the investors, expiring February 4, 2008, to purchase 971,195 shares of restricted common stock, at $3.63 per share (equal to 110% of the Nasdaq closing price on February 3, 2005). The number of shares underlying the warrants equals 50% of the shares issuable on full conversion of the debentures at the set price (as if the debentures were so converted on February 4, 2005).
Warrants to purchase 100,000 shares, at the same price and for the same term as the warrants issued to the investors, have been issued to HPC Capital Management (a registered broker-dealer) as compensation (in addition to a 7% cash commission) for its services in connection with the transaction.
If in any period of 20 consecutive trading days (after registration has been approved) USE’s stock price exceeds 200% of the warrants’ exercise price, on each of the trading days, all of the warrants will expire on the 30
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day after USE sends a call notice to the warrant holders.
USE has agreed to file with the Securities and Exchange Commission a registration statement to cover the future public sale of shares issuable in payment and/or conversion of the debentures, and the shares issuable on exercise of the warrants. The registration statement also will cover the future sale by HPC Capital Management of the shares issuable on exercise of the warrants issued to HPC.
RMG
Preferred Stock - 2004
. In the first quarter 2004, RMG raised $1,800,000 of equity financing from the sale of shares of Series A Preferred Stock in RMG, and warrants to purchase shares of common stock of USE, to institutional investors. Proceeds were used to pay part of the Hi-Pro acquisition price, and for RMG working capital. Terms of the securities:
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600,000 shares of Series A Preferred Stock at $3.00 per share, 10% cumulative annual dividend payable at RMG's election in cash or shares of common stock of RMG (at $3.00 per share) or shares of common stock of USE (at 90% of USE's volume weighted average price for the five days, referred to as the "set price"). The Series A Preferred Stock was convertible at the holder's election into shares of common stock of RMG, at $3.00 per share, or shares of common stock of USE at the set price, until February 2006.
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Warrants to purchase 150,000 shares of common stock of USE, at the set price.
As of March 3, 2005, all Series A Preferred Stock including dividends has been converted to and paid with USE common stock (894,299 shares), and all warrants have been exercised (150,000 shares of USE common stock).
Purchase of the Hi-Pro Production, LLC ("Hi-Pro") Properties
. In 2004, RMG organized a wholly-owned subsidiary RMG I, LLC for the purchase of producing and non-producing CBM properties (the "Hi-Pro properties) near Gillette, Wyoming. RMG and USE participated in raising equity capital and mezzanine financing for this transaction.
Agreement for Acquisition of RMG by with Enterra Energy Trust.
As of April 11, 2005, RMG entered into a binding agreement with Enterra Energy Trust ("Enterra," listed on the Toronto Stock Exchange and the Nasdaq National Market), for the acquisition of RMG by Enterra for cash and Enterra units. Enterra would acquire RMG including approximately $3.49 million owed by RMG to its lenders.
Sutter Gold Mining Inc
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In 2004, Sutter Gold Mining Company, a majority-owned subsidiary with gold properties in California, was acquired by Globemin Resources Inc., a British Columbia corporation which is traded on the TSX Venture Exchange (“TSX-V) under its new name, Sutter Gold Mining Inc. A total of Cdn $1,061,800 of equity capital has been raised to continue exploration work on the properties.
Molybdenum
In February 2005, the United States District Court in Colorado issued an order authorizing Phelps Dodge to return mining claims at Mt. Emmons (near Crested Butte, Colorado) to USE and Crested, including a water treatment plant and the responsibility for operating it. The mining claims contain a world class molybdenum deposit. In 2005, USE and Crested expect to receive back from Phelps Dodge Corporation the patented and unpatented mining claims containing the molybdenum deposit. There are no current plans to put these properties into production but various strategies are being evaluated, including putting the property into production, or selling or leasing the property to (or joint venturing the property with) other entities. These strategies will require resolution of significant permitting issues and substantial amounts of capital. In 2005, we expect to transfer the properties to a new subsidiary, U.S. Moly Corp.
Uranium
In December 2004, USE and Crested agreed to sell a 50% interest in the 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, for $4,050,000 and 4,000,000 shares of UPC common stock payable by installments through December 2007. The parties signed a Mining Venture Agreement with UPC as of April 11, 2005 for the Sheep Mountain property and other properties to be acquired. UPC may provide up to $10,000,000 for up to 20 different projects.
Plateau Resources Limited (a wholly-owned subsidiary of USE) agreed in December 2004 to lease uranium properties now controlled or owned (and to be acquired) by a third party in reasonable proximity to Plateau’s Shootaring Canyon Mill ("Shootaring Mill") in southeastern Utah. The purpose of this agreement is to obtain uranium properties for future mining to supply the Shootaring Mill, which we plan to put into production.
In 2005, we expect to transfer the uranium claims, and Plateau Resources Limited to a new subsidiary, U.S. Uranium Ltd. We have filed a request with the State of Utah for an operational license to reopen and operate the Shootaring Mill.
Summary Information about the Subsidiaries
. Most operations are conducted through subsidiaries, the USECC Joint Venture with Crested, and jointly-owned subsidiaries of USE and Crested.
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Percent
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Primary
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Subsidiary
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Owned by USE
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Business Conducted
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Plateau Resources Limited
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100%
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Uranium (Utah) - inactive mill - shut down, application filed to reopen and operate
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Rocky Mountain Gas, Inc.
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91.1%
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CBM - active
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Crested Corp.
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70.1%
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Uranium and molybdenum (inactive and shut down, with limited reactivation in uranium planned for 2005), gold (being reactivated on a limited basis), and exploration and production activities on CBM properties.
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Sutter Gold Mining Inc.
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65.5%
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Gold (California) - inactive - being reactivated
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Four Nines Gold, Inc.
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50.9%
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Contract Drilling/Construction - inactive
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USECC Joint Venture
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50.0%
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Uranium and molybdenum (inactive and shut down, with limited reactivation in Wyoming uranium planned for 2005), gold (being reactivated), and CBM. Limited real estate and airport operations.
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Yellowstone Fuels Corp.
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35.9%
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Uranium (Wyoming) - inactive - shut down
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Pinnacle Gas Resources, Inc
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16.7%
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CBM exploration and production - active
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(1)
As of December 31, 2004
(2)
Includes ownership of Crested Corp. in RMG, Sutter Gold Mining Inc., and Pinnacle Gas Resources, Inc.
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.
From June 1, 2002 to December 31, 2003, for technical financial presentation purposes, we operated in two business segments: (i) CBM gas exploration (and holding shut down mines and mineral properties); and (ii) commercial operations (motel, real estate, and airport). By December 31, 2003, all activities in minerals (except CBM) and some of the commercial (motel/real estate/airport) had ceased or were curtailed, and the motel/commercial properties in Utah had been sold.
As of the date of this Annual Report, the primary activities of a material and recurring nature are in CBM. However, in 2004 and continuing in 2005, activities in gold and uranium were initiated, and activities are expected to start up in molybdenum in 2005. If the proposed merger with Enterra is consummated, the investments in CBM (RMG) may be changed from direct involvement in the CBM business to a continuing but passive investment in Enterra, which has conventional producing and non-producing oil and gas properties. Therefore, in 2005 and beyond, we expect to continue to have one active industry segment - exploration and development of mineral properties in gold, molybdenum and uranium.
The principal products of operating units within each of the reportable industry segments for the full years 2004 and 2003, the seven months ended December 31, 2002 and the (former) fiscal year ended May 31, 2002 are shown below. For more information, see note I to the financial statements.
Industry Segments
Principal Products
Minerals:
Acquisition and exploration of CBM properties. This activity is material and recurring, and was our principal business focus in these periods. Sales and leases of other mineral-bearing properties and, from time to time, the production and/or marketing of minerals. 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.
Commercial:
Operation of an aircraft fixed based operation (fuel sales, flight instruction and aircraft maintenance) was shut down in the (former) fiscal year 2002. The motel in Utah was sold in 2003. Real estate rental and various contract services continue, including management services for subsidiary companies.
Business and Properties
Coalbed Methane
General
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RMG was incorporated in Wyoming on November 1, 1999 for business in the CBM industry in Wyoming and Montana. RMG is a subsidiary of USE (owned 51.3% by USE and 39.8% by Crested at December 31, 2004). At December 31, 2004, RMG was indebted to the Company in the amount of
$6,059,300. The obligation was incurred by RMG's continuing operating deficits (funded by USE) and for USE issuing common stock on conversion of RMG common stock, as well as preferred stock and payment of dividends on the preferred stock. In addition, a small percentage of RMG stock is held by employees, officers and directors of USE, Crested and RMG (plus options to buy more subsidiary stock) as an equity incentive for those persons to work for the subsidiary in addition to their responsibilities to USE and Crested. The shares and options are forfeitable if service is terminated before retirement.
Please see the Glossary in this Annual Report for definitions of certain terms used in the oil and gas industry, and in this Annual Report.
In 2003, RMG transferred all of its interest in certain CBM properties, including a producing property, to Pinnacle Gas Resources, Inc. ("Pinnacle"). At the same time, Carrizo Oil & Gas, Inc.'s wholly owned subsidiary CCBM, Inc. ("CCBM," with which RMG has an agreement to jointly acquire and explore CBM properties) transferred to Pinnacle all of its interest in the same properties, and affiliates of Credit Suisse First Boston contributed equity financing to Pinnacle.
On January 30, 2004, RMG, through its wholly-owned subsidiary RMG I, LLC ("RMG I"), acquired CBM properties in the Powder River Basin of Wyoming. See "Acquisition of Producing and Non-Producing Properties from Hi-Pro." Part of the purchase price was financed under a $25 million mezzanine credit facility.
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be traded. RMG will be acquired with approximately $3,500,000 of debt owed to its mezzanine lenders.
Closing of the transaction is subject to approval of the RMG shareholders; U.S. Energy Corp. and Crested Corp., the principal shareholders of RMG, have agreed to vote in favor of the acquisition. Closing is further subject to completion of due diligence by Enterra, and to obtaining regulatory and stock exchange approvals.
RMG’s minority equity ownership of Pinnacle Gas Resources, Inc. will not be included in the transaction with Enterra, which has resulted in a decrease in the consideration to be paid by Enterra from the previously-announced $30,000,000, to the $20,000,000 in the definitive agreement signed as of April 11, 2005. However, Enterra will be entitled to be paid up to (but not more than) $2,000,000 if proceeds from a future disposition of the minority equity interest in Pinnacle exceed $10,000,000.
If the transaction with Enterra is not consummated, additional development of the RMG properties will be contingent upon RMG's ability to raise additional capital. If RMG can obtain the necessary capital, RMG may drill exploratory and development wells on the Castle Rock, Oyster Ridge and Hi-Pro properties, and seek to acquire other producing CBM properties, primarily in Wyoming. Financing may be available under the mezzanine credit facility for more acquisitions, if approved by the lenders. As of the filing date of this Annual Report, RMG does not have any agreements to acquire other producing properties.
As of the filing date of this Annual Report, RMG holds leases and options on approximately 237,200 gross mineral acres (not including acreage held by Pinnacle) of federal, state and private (fee) land in the Powder River Basin of Wyoming and Montana, and adjacent to the Green River Basin of Wyoming.
From RMG's inception, through December 31, 2004, 88 exploratory wells have been drilled primarily with funds provided by our industry partner CCBM (and another oil and gas company under a farmout agreement (completed in 2002) for exploration on our Castle Rock, Montana property). Forty-three of the wells were on properties transferred to Pinnacle in mid-2003. The balance of 45 wells, (15 of which have been plugged and abandoned) are on properties held by RMG. Proven reserves have not been established for any of the properties on which the exploratory wells were drilled.
The Castle Rock property in southeast Montana, and the Oyster Ridge property adjacent to the Green River Basin (southwest Wyoming), are large properties which will require the drilling of numerous exploratory wells and extensive dewatering for each group of wells (possibly as much as 3-12 months after drilling and completion) before an assessment of proven reserves can be made.
Among the uncertainties we face in determining if our CBM investments will yield value are the following: Because prices for gas sold in the Powder River Basin are typically lower than national prices, the economics of Powder River Basin properties can be adversely affected disproportionately by lower gas prices nationwide. The Hi-Pro properties and their cash flows after operation costs are pledged to service acquisition debt. To continue exploration efforts, additional capital will be needed. Permitting new wells on undeveloped acreage may be delayed. An unfavorable confluence of these uncertainties could result in a write-down of the carrying value of those properties which may not produce enough gas at low prices to be economic; in a write-down of the carrying value of other properties which need more wells drilled and dewatered to establish or improve the economics of production; and/or the delay (whether from lack of capital or permitting problems) in establishing reserves for the larger prospects where many wells will have to be drilled to assess their value.
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 their ownership of a portion of the CBM properties owned by RMG and CCBM, in exchange for common stock and options to buy common stock in Pinnacle; and (2) $17,640,000 cash to Pinnacle by the CSFB Parties for common stock and series A preferred stock of Pinnacle, and warrants to purchase series A preferred stock of Pinnacle. The CSFB Parties have contributed significant additional capital to Pinnacle since June 2003.
Pinnacle is a private corporation. Only 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 between Pinnacle, RMG, and the other Pinnacle shareholders.
At December 31, 2004, RMG's ownership in Pinnacle's common stock was 16.7%. RMG's ownership of Pinnacle on a fully-diluted basis will change if the CSFB Parties fund subsequent capital requests from Pinnacle and/or exercise their warrants to buy equity in Pinnacle (but RMG does not), and/or if RMG and/or CCBM exercise their options to buy equity in Pinnacle, or other events occur.
Prior to and in connection with the Pinnacle transaction, CCBM paid RMG approximately $1.8 million cash to complete its purchase of 50% of RMG's properties, thus enabling CCBM to contribute its interests in the subject properties to Pinnacle as having been fully paid for. See "Continuing Operations of RMG, Continuing Agreement with CCBM, and the AMI Agreement, after the Pinnacle Transaction" below.
Pinnacle 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 RMG or CCBM); and with voting rights (a) pari passu with the common stock on regular matters, and (b) as a separate class, to authorize changes in the series A preferred stock, to authorize issuance of stock senior to or in parity with the series A preferred stock, to approve 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 RMG 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).
- Continuing Operations of RMG, Continuing Agreement with CCBM, and the AMI Agreement after the Pinnacle Transaction
RMG retained ownership, with CCBM, of the Castle Rock, Oyster Ridge, and Baggs projects, totaling about 189,000 gross acres. The Baggs project was dropped in 2004. RMG and CCBM plan to continue exploration and development activities on Castle Rock and Oyster Ridge.
CCBM paid RMG approximately $1.8 million for CCBM's outstanding purchase obligation (under the July 2001 agreement) on CCBM's interest in those properties it contributed to Pinnacle. The $836,200 balance on the note at December 31, 2003 was paid in 2004.
Also in connection with the transaction, RMG, CCBM, Carrizo, USE and the CSFB Parties signed an area of mutual interest ("AMI") agreement. Pinnacle has the right to acquire from the other parties up to 100% of any interest in oil and gas leases, or interests therein or mineral interests or rights to acquire the same, which the other parties acquire, at the same price paid or payable by the other parties, within the Powder River Basin in Montana and Wyoming (excluding Powder River County, Montana), until the AMI expires on June 23, 2008. The original AMI agreement between CCBM and RMG from July 2001 is superseded by the new AMI agreement, except for areas outside the new AMI agreement territory, wherein the original agreement with CCBM still is in effect. The CCBM AMI expires on June 30, 2005.
Acquisition of Properties from Hi-Pro Production, LLC
On January 30, 2004, RMG I, LLC ("RMG I"), a wholly-owned subsidiary of RMG, purchased CBM properties from Hi-Pro for $6,800,000.
The purchased properties (all located in the Powder River Basin of Wyoming) included 247 completed wells and 18,450 undeveloped fee acres. As of the filing date for this Annual Report, 108 wells now are producing approximately 4.418 million cubic feet (Mmcf) of gas per day (approximately 2.615 Mmcf per day net to RMG I). Sales, net of gas used to run the compressors, are based on Mmbtu (BTU heat content). A portion of Hi - Pro production has low Mmbtu content per Mcf, which has increased overall field operating costs.
RMG I owns an average 58% working (average 46.4% net revenue) interest in the producing wells and proved developed acreage, and a 100% working (average 80% net revenue) interest in all of the undeveloped acreage. The net revenue interest percentage after deduction of the overriding royalty interests held by lenders are 44.66% for the producing and five future wells to the Wyodak coal, and 77%
for production from deeper coals and all of the undeveloped acreage.
The transaction was structured as an asset purchase, with RMG I as the purchaser, in connection with the establishment of a mezzanine credit facility for up to $25,000,000 of secured loans to acquire and develop more proven CBM reserves. RMG may utilize RMG I for future acquisitions (none presently under contract). See "Mezzanine Credit Facility." A substantial portion of the cash consideration paid to Hi-Pro was funded with the initial advance on the credit facility. RMG I replaced Hi-Pro as the contract operator for 89% of the wells that were acquired.
RMG negotiated the purchase based on the $7,113,000 present value, discounted 10%, of gas reserves recoverable (and the estimated future net revenues to be derived) from proved reserves in the Hi-Pro properties, as estimated as of November 1, 2003 by Netherland Sewell and Associates, Inc. See "Reserve Data" below for the estimate as of December 31, 2004.
The $6,800,000 purchase price for the Hi-Pro properties reflects a deduction, negotiated by the parties in January 2004, to account for the decrease in gas production from October 2003 due to the impact on production from deferred maintenance on the properties, and the expected cost of such maintenance work after closing.
- Terms of the Purchase.
The purchase price of $6,800,000 was paid:
|
1.
|
$
|
776,700
|
cash by RMG
|
|
2.
|
$
|
588,300
|
net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro.
(1)
|
|
3.
|
$
|
500,000
|
by USE's 30 day promissory note (secured by 166,667 restricted shares of USE common stock, valued at $3.00 per share).
|
|
4.
|
$
|
600,000
|
by 200,000 restricted shares of USE common stock (valued at $3.00 per share)
|
|
5.
|
$
|
700,000
|
by 233,333 restricted shares of RMG common stock (valued at $3.00 per shares).
(2)
|
|
6.
|
$
|
3,635,000
|
cash, loaned to RMG I under the credit facility agreement.
(3)
|
|
|
$
|
6,800,000
|
|
|
|
|
(588,300)
|
reverse net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro.
|
|
|
$
|
6,211,700
|
|
(1)
RMG paid all January operating costs at closing. Net revenues from the purchased properties for January 2004 were credited to RMG I's obligations under the credit facility agreement. These net revenues were considered by the parties to be a reduction in the purchase price which RMG otherwise would have paid at the January 30, 2004 closing.
(2)
All these RMG shares have been converted to shares of common stock of USE.
(3)
See "Mezzanine Credit Facility."
Reserve Data
Netherland Sewell and Associates, Inc. ("NSAI," Houston, Texas), independent petroleum engineers, have prepared a report on the proved reserves, as of December 31, 2004, estimating recoverable reserves from the Hi-Pro properties, and the present value (discounted 10%) of future cash flow therefrom. NSAI's report takes into account fixed pricing for some production in 2005, reflects the reduction in RMG's net revenue interests due to the overriding royalty interests held by lenders, and (except for fixed pricing in 2005) is based on the CIG Spot market price of $5.515 per Mmbtu, adjusted by lease for energy content, transportation fees and regional price differentials on December 31, 2004, without price escalation. Following is a summary of the December 31, 2004 reserve report:
|
|
|
|
|
Net Present
|
|
|
|
Reserves
|
|
Value
|
|
|
|
(MCF)
|
|
(discounted at 10%)
|
|
Proved Developed Producing
|
|
1,651,666
|
|
$3,486,400
|
|
Proved Developed Non-Producing
|
|
889,051
|
|
$2,304,800
|
|
Proved Undeveloped
|
|
515,224
|
|
$ 723,400
|
|
Total
|
|
3,055,941
|
|
$6,514,600
|
The present value, discounted 10% value ("PV10 value") was prepared after ad valorem and production taxes on a pre-income tax basis, and is not intended to represent the current market value of the estimated gas reserves purchased from Hi-Pro.
There are numerous uncertainties inherent in estimating gas reserves and their estimated values. Reservoir engineering is a subjective process of estimating underground accumulations of gas that cannot be measured exactly. Estimates of economically recoverable gas, and the future net cash flows which may be realized from the reserves, necessarily depend on a number of variable factors and assumptions, such as historical production from the area compared with production from other areas, the assumed effects of regulations by government agencies, assumptions about future gas prices and operating costs, severance and excise taxes, development costs, and work-over and remedial costs. The outcomes in fact may vary considerably from the assumptions.
The PV10 value takes into account RMG I's contracts to sell 1,000 Mmbtu per day in 2005 at a fixed price of $4.14 per Mmbtu and 500 Mmbtu per day for January 1, 2005 through March 31, 2005 at a fixed price of $8.10 per Mmbtu. From time to time, RMG I may sign fixed price contracts for more production. In addition, gas market prices will vary, possibly by significant amounts, throughout each year, and on an average basis from year to year. For these reasons, the cash flow realized from production likely will vary from the estimates of cash flow used to determine the PV10 value.
Estimates of the economically recoverable quantities of gas attributable to any particular property, the classification of reserves as to proved developed and proved undeveloped based on risk of recovery, and estimates of the future net cash flows expected from the properties, as prepared by different engineers or by the same engineers but at different times, may vary substantially, and the estimates may be revised up or down as assumptions change.
The PV10 discount factor, which is required by the SEC for use in calculating discounted future net cash flows for reporting purposes, is not necessarily the most appropriate discount factor, based on interest rates in effect in the financial markets, and risks associated with the gas business.
The business of exploring for, developing, or acquiring reserves is capital intensive. To the extent operating cash flow is reduced and external capital becomes unavailable or limited, RMG's ability to maintain or expand reserves would be impaired. There is no assurance future activities would increase proved reserves. Even if revenues increase because of higher gas prices, increased exploration and development costs could neutralize cash flows from the increased revenues.
Future Plans for the Hi-Pro Properties
In 2004, RMG I drilled one proven undeveloped location to the Wyodak coal, continued a remedial workover program on existing wells, and upgraded gas gathering and pipeline facilities. The workover program cost approximately $250,000 and was funded by the working interest partners. The drilling and gathering upgrade cost approximately $640,000 and was funded with a loan from the mezzanine credit
facility. The programs did not substantially increase production revenues from January 2004 levels (due to declines in BTU content from other wells) but the new well did increase proven reserves for the North Field. There are four more undrilled locations on the currently producing properties available for the Wyodak coal. The first coals of interest under the undeveloped acreage are the Anderson and Canyon coals (for example under the Reno property); the Wyodak coal is not present under the undeveloped acreage.
The Wyodak coal formation is 200 to 600 feet from surface. Existing infrastructure for the Wyodak wells in the North and South Fields (gathering lines, compressors, and water disposal) should significantly reduce gathering costs for new wells to the deeper Dannar and Moyer coals (900 to 1,300 feet). Subject to raising capital, a significant number of wells could be drilled and completed to these deeper coals in 2005 and 2006, all on locations now producing from the Wyodak. This activity is contingent upon obtaining future financing. We do not expect that immediate funding for this activity will be available through the mezzanine credit facility, as proven reserves have not yet been established.
No proven reserves have been established for the Dannar and Moyer coals. Because no other operators are producing gas from or dewatering these coals in the vicinity of the Hi-Pro properties, we expect several pods of wells will have to be drilled and completed to these coals, with an extended dewatering period before significant gas production begins.
The Reno property, part of the Hi - Pro acquisition, consists of 760 gross and net acres, all on fee acreage, located in Campbell County, Wyoming, approximately 50 miles south of Gillette. The target coals on the Reno property are the Anderson, which is about 600-650 feet in depth and approximately 40 feet thick and the Canyon which is about 700-850 feet in depth and 35 feet thick.
Four wells were previously drilled by Hi-Pro at Reno which were completed in both the Anderson and Canyon coals. In 2004, RMG I drilled and completed 4 additional wells at Reno, 2 in the Anderson coal and 2 in the Canyon coal.
- Mezzanine Credit Facility.
RMG I has a credit agreement with Petrobridge Investment Management, LLC (Houston, Texas) as lead arranger, and institutional lenders, for up to $25,000,000 of loans. The loan commitment is through June 30, 2006. All loans will have a three year term from funding date.
Funding to acquire and/or improve any project is subject to the lenders' approval of the transaction and RMG I's development plan.
The first loan ($4,340,000 on January 29, 2004) was applied to the Hi-Pro asset purchase ($3,700,000) including transaction costs and professional fees; and for drilling five development wells and production infrastructure upgrades ($640,000).
Loan balance at December 31, 2004 was $3,214,800 plus a discount of $274,100, which is accreted monthly, for a total of $3,488,900.
A summary of certain terms for all loans follows:
1.
Principal is not amortized, but interest must be paid monthly. All revenues from the properties owned by RMG I (including all current and new wells) are paid to a lock box account controlled by the lenders, from which is paid by the lenders, the lease operating costs, revenue distributions, RMG I operating fees and RMG pumping fees (all approved by the lenders). With the exception of operating
and pumping fees, no revenues will be available for RMG operations until all loans are paid off.
2.
Secured by all of RMG I's properties and by RMG's equity interest in RMG I.
3.
The lenders, in the aggregate, received an overriding royalty interest of 3% of production from the wells producing when the acquisition was closed, and 3% of production from new wells on an 8/8ths working interest basis, proportionately reduced where less than 100% of the working interest is owned by RMG I. For the Hi-Pro properties, the 3% rate applies to all wells (producing and to be drilled) to the Wyodak formation (an aggregate override of 1.74%), and 3% to all wells to deeper formations (aggregate override to be determined based on working interest ownership by well). Override payments to the lenders are not applied to the loan balances. The percentage of overrides on future properties may vary.
4.
Negative covenants: RMG I will not permit the ratio of (a total debt to EBITDA to exceed 2.00 to 1.00; (b) EBITDA to interest expense and rents (lease expense) to be less than 3.00 to 1.00; (c) current assets to current liabilities to be less than 1.00 to 1.00; or (d) PV10 proved developed producing reserves) to total debt to be less than 1.00 to 1.00. All these rations are to be determined quarterly. In addition, RMG I shall not permit net sales volume of gas from its properties to be less than 270 Mmcf, 230 Mmcf, 230 Mmcf and 210 Mmcf for each quarter in 2004, or less than 180 Mmcf per quarter in 2005 and the first two quarters of 2006.
At December 31, 2004 and as of the date this Annual Report is filed, RMG I is not in compliance with the negative covenants. As a result, the loan was classified at December 31, 2004 as a current liability. To date, the lenders have granted to RMG I conditional waivers of non-compliance; receipt of future waivers is expected but not assured.
At closing of the Hi-Pro acquisition, USE issued to the participating lenders three year warrants to purchase a total of 318,465 shares of common stock of USE (subject to vesting) at $3.30 cash per share. At closing of the Hi-Pro acquisition, warrants on 63,693 shares vested. The remaining warrants will vest at the rate of the right to buy one USE share for each $157 which RMG I subsequently borrows under the credit facility. Regardless of when vested, all warrants will expire on the earlier of January 30, 2007, or the 180th day after USE notifies the warrant holders that USE stock price has achieved or exceeded $6.60 per share for a consecutive 15 business day period.
The preceding is a summary of some of the terms of the credit agreement, and is qualified by the text of the agreement, filed as an exhibit to the Form 10-K for the year ended December 31, 2003.
Volumes, Prices and Gas Operating Expense - Hi - Pro Property
This table shows the volume of gas sold (net of usage to fuel compressors); and average sales prices for gas sold and average production costs calculated on a per mcf basis, for Hi-Pro production in 2004.
|
|
|
Year Ended
December 31,
|
|
|
|
2004
|
|
|
|
|
|
Sales volume (mcf)
|
|
728,051
|
|
Average sales price per mcf
(1)
|
|
$4.05
|
|
Average cost per mcf
(2)
|
|
$3.19
|
|
(1)
|
Represents the weighted average of selling 92% of production at fixed contract prices and 8% at the market.
|
|
(2)
|
Includes direct lifting costs (labor, repairs and maintenance, materials and supplies, workover costs, insurance and property, gathering, compression, marketing and severance taxes).
|
Acquisition and Exploration Capital Expenditures - All Properties Through December 31, 2004
From inception on November 1, 1999 through December 31, 2004, RMG incurred net acquisition (purchase price and holding costs) and exploration costs (drilling and completion) on CBM properties of approximately $8,897,300, which does not include approximately $2,500,000 funded by CCBM on RMG's behalf for leasehold, drilling and completion costs. Unproved properties on the balance sheet at December 31, 2004 reflect the reduction (by $5,706,600) to reflect the reduction of the full cost price as a result of principal payments made by CCBM under its agreement with RMG and by payments from other industry partners. The foregoing does not include $957,700 spent by RMG on properties transferred to Pinnacle, which we recorded at December 31, 2003 as an investment in Pinnacle.
The following table shows certain information regarding the gross costs incurred by RMG.
|
|
|
Year Ended
|
|
Year Ended
|
|
Seven Months Ended
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Acquisition costs
|
|
$
|
6,613,900
|
|
$
|
107,100
|
|
$
|
936,200
|
|
$
|
192,600
|
|
|
Development
|
|
|
1,642,600
|
|
|
158,300
|
|
|
97,200
|
|
|
87,400
|
|
|
|
|
$
|
8,256,500
|
|
$
|
265,400
|
|
$
|
1,033,400
|
|
$
|
280,000
|
|
The acquisition costs included amounts paid for properties, delay rentals, lease option payments, and general and administrative costs directly attributable to the acquisitions.
The recorded amounts for acquisition and exploration of $8,256,500, $265,400, $1,033,400 and $280,000 represent 26.9%, 1.1%, 3.6% and 1.0% of total assets at December 31, 2004, 2003 and 2003, and May 31, 2002.
We use the full-cost method of accounting for gas properties. Under this method, all acquisition and exploration costs are capitalized in a "full-cost pool" as incurred. Depletion of the pool will be recorded using the unit-of-production method. To the extent capitalized costs in the full-cost pool (net of depreciation, depletion and amortization and related deferred taxes exceed the present value (using a 10% discount rate) of estimated future net pre-tax cash flows from proved gas reserves as established by reserve reports, the excess costs will be charged to operations.
All acquisition and exploration costs for a property are capitalized until such time as proven reserves can be established, or not, for the property. If no proven reserves are established, those capitalized costs will be transferred to the amortization basis and be subject to an impairment test. To the extent proven reserves are established for an exploration property to be less than such costs, the costs will be written-down to the amount of present value of the proven reserves. In this event, assets would decrease and expenses would increase. Once incurred, a write-down of gas properties can't later be reversed.
In addition, if future exploration work (in particular the larger prospects) is delayed because of lack of capital or permitting delays, or both, with the result that it cannot be established whether or not proved reserves exist on the properties, the exploration costs for those properties would be written-off.
Coalbed Methane Properties
As of the filing of this Annual Report, we hold leases and options to develop approximately 237,200 gross mineral acres (including 49,493 acres under option - see "Oyster Ridge" below) under leases from the United States Bureau of Land Management, the states of Wyoming and Montana, and private landowners.
Prospects are evaluated for CBM potential using available public and industry data, taking into account proximity to other positions held by RMG and existing or planned gas transmission lines, and whether drilling and production permits can be obtained. Well drilling and testing is done by outside contract drilling companies. Drilling results (cores, gas and water flow rates, and other data) are evaluated by RMG staff, using customary technical methods, to determine if any coal zones encountered should be completed for production. Completion requires setting casing pipe down to the coal zone(s), installing pumps, and installing and setting up the necessary surface equipment (for example, water disposal lines and water holding tanks and/or holding ponds for evaluation wells, pending production permitting), and dewatering the well sufficiently so production can start. The decision whether to complete the well is made by the executive officers of RMG.
Productive Wells
At December 31, 2004, gross and net productive wells were as shown in the following table. A “productive well” is a well which is producing (or demonstrated to be capable of production but is shut in).
|
Project
|
|
Gross
|
|
Net
|
|
Hi-Pro Field
|
|
|
|
|
|
|
North
|
|
92
|
|
79
|
|
|
South
|
|
100
|
|
41
|
|
Total
|
|
|
192
|
|
120
|
Drilling Activity
The following table shows drilling activity for the two fiscal years ended December 31, 2004 and 2003, from RMG’s inception to December 31, 2004, and total wells at March 15, 2005. The data includes wells which have been plugged and abandoned.
|
Prospect
|
Twelve Months Ended 12/31/04
|
Twelve Months Ended 12/31/03
|
Inception to 12/31/04
|
Total Wells at 2/14/05
|
|
Castle Rock (2)
|
4
|
0
|
26
|
26
|
|
Oyster Ridge (3)
|
8
|
0
|
15
|
15
|
|
Hi-Pro(1)
|
4
|
0
|
4
|
4
|
|
Total
|
16
|
0
|
45
|
45
|
(1)
Does not include any wells drilled by Hi-Pro Production LLC before November 1, 2003, which wells with associated acreage were purchased by RMG in January 2004.
(2)
Includes 12 wells that have been plugged and abandoned.
(3)
Includes 3 wells that have been plugged and abandoned.
Acreage
Acreage as of March 15, 2005 is:
|
|
|
Total
|
|
Property
|
|
Gross
|
|
Net (RMG)
|
|
Castle Rock
|
|
123,520
|
|
48,772
|
|
Oyster Ridge
(1)
|
|
64,677
|
|
40,375
|
|
Hi-Pro
|
|
49,009
|
|
39,521
|
|
Total
|
|
237,206
|
|
128,668
|
(1)
Data for Oyster Ridge assumes we will earn some of the acreage under a drill-to-earn agreement with Anadarko and another oil and gas company. See "Description of Prospects - Oyster Ridge" below.
Under a 2001 agreement, CCBM agreed to pay up to $5,000,000 for drilling and completing CBM wells on the properties owned by RMG and CCBM. This drilling commitment was completed by December 31, 2004. Pursuant to the agreement with CCBM, we have a carried working interest in all of the wells drilled with the CCBM drilling fund on properties owned in July 2001 (after the Pinnacle transaction), including the Castle Rock and Oyster Ridge properties. CCBM has the right to participate up to 50% of the working interest in CBM properties we acquire until the AMI expires on June 30, 2005. We will not receive carried interests from CCBM in future wells on any properties. Also pursuant to the 2001 Agreement, CCBM has bought a 25% working interest in the Anadarko Portion of Oyster Ridge and a 6.25% working interest in Castle Rock.
RMG's leases of United States Bureau of Land Management ("BLM"), state and fee lands will require annual cash payments of approximately $347,500 in 2005 ($206,900 for RMG's portion, to keep undeveloped CBM leases.
Description of Prospects
Leases of federal mineral rights are obtained from the BLM and expire from 2005 to 2009, unless RMG establishes production on the lease, in which event the lease is held so long as CBM or other gas or oil is produced. A royalty interest of 12.5% on the production is paid to the BLM. State leases expire from 2005 to 2009 in Wyoming and Montana, unless RMG establishes production on the lease, in which event the lease is held so long as CBM or other gas or oil is produced. The royalty paid to the State of Wyoming is from 12.5% to 16.67%, and 12.5% to the State of Montana. Annual renewal fees for non-producing Federal leases is $1.50 to $2.00 per acre, and $1.00 and $2.75 for non-producing Wyoming and Montana state leases.
An environmental group has filed a lawsuit against the BLM, RMG and others, challenging the validity of numerous BLM leases in the Powder River Basin of Montana. See Item 3, "Legal Proceedings."
Leases on private (fee) land for CBM and conventional gas expire at various times from 2005 to 2009, and are held so long as the wells are capable of production on the lease. The landowner is paid a royalty from production of 12.5% to 20.0%, depending on the lease terms.
Castle Rock:
The Castle Rock project consists of 123,520 gross and 48,772 net acres located in the northeastern portion of the Powder River Basin of Montana, west of Broadus, Montana. Coals present are in the Tongue River member of the Fort Union formation and appear comparable to coals currently being
developed by other operators south of the Castle Rock acreage near the Montana/Wyoming border. Currently, there are no pipelines in this area.
Oyster Ridge:
The Oyster Ridge project consists of two acreage positions: (1) 46,896 gross acres located in southwestern Wyoming in the Ham's Fork Coal Field adjacent to the Green River Basin; RMG and CCBM have a 100% working interest (75% RMG and 25% CCBM) in 15,185 gross acres within this position, and earn-in rights on 31,711 gross acres held by Anadarko Petroleum, Inc.; and (2) 17,781 gross acres held by another oil and gas company (the "Other Party"), which are at the north and south ends of the Anadarko acreage.
The area is prospective for CBM from the Kemmerer and Adaville coals. The Kern River pipeline, which services southern California, crosses the property. Through December 31, 2004, $1,608,400 has been spent on drilling and completion at Oyster Ridge. RMG is the operator for all the acreage.
(1)
Anadarko Petroleum, Inc. is successor to Union Pacific Land Resources Corporation, which sold the acreage subject to UPLRC's back-in option to third parties, from whom RMG acquired the acreage in December 1999.
The agreement with Anadarko is a drill-to-earn-acreage agreement: We must drill at least four wells each year, each on a new section (640 acres), to earn a lease on each drilled section. Wells drilled by us (with CCBM), have earned 3,200 acres. Four of the 2004 wells were drilled to the Frontier coal and four were drilled to the Adaville coal. These wells warrant further testing and the drilling of more exploratory wells.
31,711 gross acres in the Oyster Ridge project are subject to an option held by Anadarko Petroleum, Inc. to participate as a 25% working interest owner on all wells drilled each year. Anadarko has not yet elected to participate, and has no working interest in the wells drilled to date on this prospect. If Anadarko elects to participate in the future, working interest ownership in affected wells would be 56.25% RMG, 18.75% CCBM, and 25% Anadarko.
(2)
In February 2005, RMG signed an exploration and participation agreement to earn a 65% working interest from the Other Party in 17,781 gross mineral acres held by the Other Party under federal and Wyoming state leases. This agreement replaces a 2004 agreement between the parties.
The earn-in agreement is through December 31, 2011 if not terminated sooner. The agreement has two phases:
Commitment wells
. On or before August 15, 2005, RMG will commence to drill, case and complete (at its sole expense) four CBM wells (at least one in the Frontier coal), each on a 640 acre drilling block. RMG must spend at least $300,000 on the total of four wells. Upon completion of the four wells, RMG shall have earned 65% of the Other Party's interest in the drilling block and in one additional section offsetting that block. The Other Party's retained 35% interest in each well will be relinquished until RMG attains payout.
Development program
. If the four commitment wells have been completed, RMG may elect to commit to an on-going drilling program, by drilling a minimum of five wells per year on unearned Other Party leases or in drilling blocks containing at least 50% of unearned Other Party lands. The development program is extendable in this manner for up to three additional one-year terms. Each development well will earn RMG 65% of the unearned Other Party leasehold in the drilling block, and in the unearned Other Party leasehold in one offsetting section located nearest to the drilling block.
At payout to RMG of its drilling and completion costs for each commitment well, the Other Party may then back-in for a 35% working interest in the drilling block or keep only its overriding royalty interest (from 3.5% to 5% depending on the acreage). At payout of the first development well in a drilling block, the Other Party may either back in for a 35% working interest in the well or keep only its overriding royalty interest. These elections would not apply to the extent the Other Party elects to participate for a 35% working interest in any development well.
CCBM decided not to participate with us in the Other Party earn-in agreement.
General Information About Coalbed Methane.
Methane is the primary commercial component of natural gas produced from conventional gas wells. Methane also exists in its natural state in coal seams. Natural gas produced from conventional wells generally contains other hydrocarbons in varying amounts which require the natural gas to be processed. Methane gas produced from coalbeds generally contains only methane and is pipeline-quality gas after simple water dehydration.
CBM production is similar to conventional natural gas production in terms of the physical producing facilities. However, the subsurface mechanisms that allow gas movement to the wellbore are very different. Conventional natural gas wells require a porous and permeable reservoir, hydrocarbon migration and a natural structural or stratigraphic trap. CBM is stored in four ways: 1) as free gas within the micropores (pores with a diameter of less than .0025 inch) and cleats (set of natural fractures in the coal); 2) as dissolved gas in water within the coal; 3) as absorbed gas held by molecular attraction on surfaces macerals (organic constituents that comprise the coal mass), micropores, and cleats in the coal, and 4) as absorbed gas within the molecular structure of the coal molecules. Coals at shallower depths with good cleat development contain significant amounts of free and dissolved gas while the percentage of absorbed methane generally increases with increasing pressure (depth) and coal rank. CBM gas is released by pressure changes when the water in the coal is removed. In contrast to conventional gas wells, new CBM wells initially produce water for several months. As the formation water pressure decreases, methane gas is released from the structure.
Methane production is a direct result of reducing the hydrostatic (water) pressure in the coal formation. Three principal stages are involved:
1.
Drill wells (typically eight or more in a 'pod') down to the same coal formation, in contiguous 80 acre spacing per well; test the water in the formation and test coal samples taken from the formation. Water testing determines if the geochemical environment of the coal seam is conductive to the formation of CBM.
2.
Install gathering lines to hook up and put wells on pump to "dewater" the coal formation. Hydrostatic pressure must be reduced to about 50% of initial pressure before enough data is obtained (water flow rates, CBM gas flows) to determine how much CBM the wells may produce. This dewatering stage may take 3 to 18 months, and in some instances 24 months (where there is no dewatering of the coal seam occurring from wells drilled by others on adjacent properties).
3.
Installing (or have a transmission company install) a compressor and transport lines to carry produced gas to a gas transmission line for sale to end users. Gas production starts gradually then continues to grow in volume as hydrostatic pressure is reduced; optimal production won't occur until hydrostatic pressure is reduced approximately 90% from initial levels.
Coalbed Methane Well Permitting
Operators drilling for CBM are subject to many rules and regulations and must obtain drilling, water
discharge and other permits from various governmental agencies depending on the type of mineral ownership and location of the property. Intermittent delays in the permitting process can reasonably be expected throughout the development of all RMG projects. As with all governmental permit processes, there is no assurance that permits will be issued in a timely fashion or in a form consistent with the plan of operations.
Drilling and production operations on our Powder River Basin ("PRB") leases in Wyoming and Montana are subject to environmental rules, requirements and permits issued by various federal authorities for drilling and operating on all land, regardless of ownership, and state and local regulatory agencies for land owned by the state or in fee by private interests. The primary Federal agency with related responsibilities is the BLM which has imposed environmental limitations and conditions on CBM drilling, production and related construction activities on federal leases in the PRB. These conditions and requirements are imposed through Records of Decision issued pursuant to Environmental Impact Statements ("EIS"). The BLM may also impose site-specific conditions on development activities, such as drilling and rights-of-way for the construction of roads, before it approves required applications for permits to drill and plans of development.
In April 2003, the BLM issued Records of Decision finalizing two impact statements: The Powder River Basin Oil and Gas EIS for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and Billings Resource Management Plans in Montana. Together, the impact statements authorize the development of some 77,000 CBM gas wells in the Powder River Basin, most of which would be drilled on the Wyoming side of the basin.
With the EIS completed, the BLM will be able to consider drilling or development proposals in the geographic areas studied, however, before any permits are approved, the BLM will conduct an additional round of environmental review to identify site-specific environmental impacts and appropriate mitigation measures. Three lawsuits have been filed challenging the Record of Decisions, however, no stays have been issued. See Item 3, “Legal Proceedings - Rocky Mountain Gas, Inc.”
The state-based environmental agencies have primary jurisdiction over the issuance of permits related to drilling, land, air quality and water discharge. These agencies are:
1.
Wyoming Department of Environmental Quality ("WDEQ")
2.
Wyoming Oil and Gas Conservation Commission ("WOGCC")
3.
Montana Department of Environmental Quality ("MDEQ")
4.
Montana Board of Oil and Gas Conservation ("MBOGC")
While the BLM is primarily responsible for issuing broad-based EIS's for each state, its jurisdiction over related matters and the actual issuance of drilling permits is primarily reserved for federal leases. Permits for drilling on state or fee owned land are issued by the WOGCC and MBOGC.
In contrast to Wyoming, Montana authorities have been very slow in undertaking CBM environmental studies and granting permits to drill wells. In fact, to date, only the Redstone (Fidelity) project is producing CBM gas in Montana. With the exception of a relatively small number of drilling permits available from earlier issuance (including those held by RMG which have allowed some drilling on the Castle Rock project), a drilling moratorium had been in effect during the last three years, prior to the approval of the two environmental impact statements.
The DEQs are primarily responsible for issuing air quality and water discharge permits, among other things. Water disposal has been and is expected to continue to be a significant issue, particularly with respect to CBM gas production, which typically entails substantial water production at least during the
dewatering phase of completion of a new well. The primary issue of concern is the salinity content in the produced water, which is measured by the sodium absorption ratio ("SAR"), which, depending upon a location, can range from slightly less than that in surface water to a substantially greater amount. Due to the discrepancies of the SAR content found in water from CBM wells, the disposal of this water is tightly regulated. If the SAR content is low, the water may be used for irrigation, livestock drinking water or even as a water supply for cities. If the SAR content is higher, the water quality does not merit use for drinking water or irrigation and, under these measures, the DEQ has outlined various other methods of water disposal. Man-made reservoirs may also be built near the wells, enabling the wells to drain their water into the ponds (called surface discharge). Additionally, there might be drainages which the produced water can flow into. Finally, the water might be reinjected through wells into the ground below levels from which the water was produced. Thus far, the vast majority of associated water produced has been discharged on the surface, primarily captured in reservoirs to evaporate or permeate into the ground.
Overall, RMG has not experienced any difficulty in obtaining air quality and water discharge permits from the WDEQ, and those permits are in place for the Hi-Pro properties. RMG has not yet applied for such permits in Montana.
The following summarizes permits now in place.
|
Prospect
|
Remaining Permits
|
|
Castle Rock
|
0
|
|
Hi-Pro
|
8
|
|
Oyster Ridge
|
7
|
|
|
|
|
Total
|
15
|
Drilling permits issued by the State of Wyoming allow one year for drilling completion; permits issued by the State of Montana allow six months.
Once drilled, all wells producing water in Wyoming are subject to a National Pollution Discharge Elimination System ("NPDES") permit relating to water testing and discharge. All wells in the Castle Rock project also remain subject to the Montana Board of Oil and Gas Commission approval. Upon completion of drilling, wells are subject to monthly reporting regarding status and production to the respective state agencies in which they are located.
Due to the low pressure characteristics of coalbeds, the production of CBM is dependent on the installation of multi-stage compression facilities. Gas is gathered from the wells, and transported to a low level compression station, then on to a high level compression station and finally to the transmission pipeline. The water is commonly collected through another pipeline from each of the wells and either discharged directly into the stream channel or pumped to a surface reservoir.
Companies involved in CBM production generally outsource gas gathering, compression and transmission. RMG will likely continue to outsource most of their compression to third parties at fixed charges based on volume transported.
Gas Markets
Gas production from the Powder River Basin is significant. Since this area is sparsely populated,
most of the gas must be exported to distant markets. The existing Wyoming pipeline infrastructure is already substantial and continues to expand with gathering systems and intrastate lines, yet is ultimately dependent on large interstate pipelines. With the exception of a portion of the gathering systems, this pipeline system is typically owned and operated by independent mid-stream energy companies, rather than oil and gas operators. The pipelines generally will not be financed and constructed until appropriate amounts of gas have been proven and committed for transport on the new lines. While the total current take way capacity from the PRB is approximately 1.25 billion cubic feet per day (Bcfd), excess capacity over current production rates does not exist in all locations and not all producers have a ready market for the sale of their gas at all times. Some major producers in the region reserve portions of pipeline capacity beyond their current requirements, resulting in less than stated maximum capacity being available for other producers. In addition, total stated capacity is unavailable at times as pipelines are shut down for maintenance or construction activities.
Based on the existing pipeline systems and the gas sales markets in its area of operations in Wyoming, RMG expects that, at least for the next few years, the markets in which it sells its gas, and the spot prices to which it will be subject, will be dependent upon three major sales points:
1.
The Colorado Interstate Gas ("CIG") station near Cheyenne in southeastern Wyoming which primarily feeds regional markets or markets in the Midwest.
2.
The Ventura market ("Ventura") located in Ventura, Iowa, which prices gas on the Northern Border pipeline where it interconnects with Northern Natural Gas and feeds markets in the Northern plains and Midwest.
3.
The Opal market ("Opal") in southwestern Wyoming, which delivers to the Kern River pipeline for delivery to Utah, Nevada, Arizona and California.
Pipelines That Serve the CIG Market
Two large diameter intrastate pipeline, the Fort Union and the Thunder Creek, were constructed in the Basin in 1999, and gathering system infrastructure has continued to grow significantly. These two major intrastate pipelines currently provide almost 1.1 Bcfd capacity, flowing south out of the Basin to the CIG Hub in Southeast Wyoming.
·
Fort Union. The Fort Union Gas Gathering pipeline consists of a 106 mile, 24 inch, 434 Mmcfd capacity line completed in August 1999 and a 20" pipeline with a capacity of 200 Mmcfd completed in
September 2001. It is believed that capacity could be increased by another 200 Mmcfd by adding additional compression to this line.
·
Thunder Creek. Thunder Creek Gas Services pipeline is a 126-mile, 24 inch pipeline which commenced operations on September 1, 1999 with a capacity of 450 Mmcfd.
The Hi-Pro production is delivered to the Thunder Creek pipeline where it is carried south and delivered to the CIG market.
El Paso Corporation's subsidiary Cheyenne Plains Gas Pipeline Co. received approval from the Federal Energy Regulatory Commission in March 2004 for construction of a new 380 mile pipeline from Cheyenne, Wyoming to Greensburg, Kansas, with a capacity of 560 Mmcf per day. Cheyenne Plains has announced its intent to apply to the FERC for permission to enlarge the line to handle 760 Mmcf per day. This line, with the enlarged capacity, was placed in-service in 2005, and may help further narrow the negative price differential for CIG prices compared to national prices.
Pipelines That Serve the Ventura Market
There are currently only two significant pipelines capable of transporting gas out of the Basin to the north, the Bitter Creek pipeline, which connects with the Northern Border interstate pipeline and the Grasslands pipeline. Descriptions are as follows:
·
Bitter Creek
. The Bitter Creek pipeline is owned by Williston Basin Interstate Pipeline Company ("WBI"), a subsidiary of MDU Resources Group, Inc. It was completed in 2001 with initial capacity
of 150 Mmcfd.
·
Grasslands
. In response to the need for expandable access to the Ventura market, the Grasslands pipeline, also owned by WBI, went into service in November 2003. It is a 245 mile, 16 inch line
with an initial capacity of 80 Mmcfd and reportably is expandable to 200 Mmcfd.
The Opal Market
The Opal market, in southwestern Wyoming, is a major pipeline connection point, with several intrastate and interstate lines connecting to the major interstate Kern River line with capacity of 1.73 Bcfd, delivering to markets in Utah, Nevada, Arizona and California. If the Oyster Ridge property is put into production, gas could be sold into this market.
Gas Prices
Historically, spot gas prices received by producers at the Ventura, CIG and Opal markets have generally been at discounts to the NYMEX front month contract and Henry Hub spot cash prices, although with lesser discounts during the winter months. Prices at CIG can trade at a further discount to the Ventura prices, and again with an even higher discount during the second and third quarters, because CIG is partially based on local demand which can drop outside the heating season, while Ventura serves larger national markets and is highly correlated to Chicago market prices.
The negative price differential in the prices realized by Powder River Basin producers in 2004, as compared to prices realized on the national gas market, ranged from 8% to 23%.
Inactive Mining Properties - Uranium
General.
We have interests in several uranium-bearing properties in Wyoming and Utah, and in the Shootaring Mill, in Garfield County, Utah, and properties in proximity to the mill. All the uranium-bearing properties are in areas which produced significant amounts of uranium in the 1970s and 1980s. At some future date, we could develop and operate these properties (directly or through a subsidiary company or a joint venture) to produce uranium concentrates ("U
3
O
8
") for sale to public utilities with nuclear powered electricity generating plants. Uranium concentrate spot prices have increased substantially to $22 per pound at March 23, 2005, compared to $10 in 2002. However, further increases to sustained higher prices will be needed to warrant putting the properties in production. All of the uranium properties are shut down; work is performed on the mines to prevent flooding and permitting work is done as needed (monitoring and reporting) to keep existing permits in effect.
Over a period of at least 18 months, substantial and expensive work would be required to put the uranium mines into production, including permitting, cleaning rock and other debris from shafts and tunnels, pumping water out of the mines, extending shafts and tunnels, and drill sampling to ascertain whether a 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.
At December 31, 2004, there are no values carried on the balance sheets for uranium properties.
However, we believe the uranium properties we now hold have significant value because uranium prices continue to rise and stabilize at higher prices. Our decision to proceed will be based on our efforts to raise capital through joint ventures or otherwise, to explore the properties further, and put the mines into production and refurbish the Shootaring Mill in Utah. To that end, we have signed an agreement to sell a 50% interest in the Sheep Mountain properties in Wyoming and enter into a joint venture agreement for those properties (and others to be acquired) with Bell Coast Capital Corp., now named Uranium Power Corp. ("UPC") and a separate agreement to lease and acquire more uranium properties in Utah.
Sheep Mountain - Wyoming
Unpatented lode mining claims, underground and open pit uranium mines and mining equipment in the Crooks Gap area are located on Sheep Mountain in Fremont County, Wyoming. From December 31, 1988 to June 1, 1998, these properties were held by Sheep Mountain Partners ("SMP") a Colorado general partnership. In February 1988, USE and Crested acquired from Western Nuclear, Inc. unpatented lode uranium mines, mining equipment and mineralized properties (including underground and open pit mines) at Crooks Gap in south-central Fremont County, Wyoming. The mines were first operated by Western Nuclear in the 1970s. USECC mined and milled uranium ore from one of the underground Sheep Mines in 1988 and 1989. In December 1988, USECC sold 50 percent of the interest in the Crooks Gap properties to a subsidiary of Nukem, Inc. and formed Sheep Mountain Partners ("SMP"), in which USECC received an undivided 50 percent interest.
On June 1, 1998, the USE and Crested received back from SMP all of the Sheep Mountain mineral properties and equipment, in partial settlement of certain disputes with Nukem, Inc. Other of those disputes remain in litigation - see Item 3, "Legal Proceedings."
We have recorded reclamation liabilities for the SMP properties (see note K to the consolidated financial statements). All historical costs in the SMP properties were offset against a monetary award which was received from Nukem during fiscal 1999. Permits are in place only for standby maintenance of the mines and discharge of waste water pumped from the mines.
At the filing date of this report, we own 139 unpatented lode mining claims and a 644 acre Wyoming State Mineral Lease on Sheep Mountain in the Crooks Gap area.
- UPC Joint Venture
.
Purchase and Sale Agreement. On December 8, 2004, USE and Crested entered into a Purchase and Sale Agreement (the “agreement”) with Bell Coast Capital Corp. now named Uranium Power Corp. (“UPC”), a British Columbia corporation (TSX-V “UCP-V”) for the sale to UPC of an undivided 50% interest in the Sheep Mountain properties. A summary of certain provisions in the agreement follows.
The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments.
Initial cash and equity purchase price
:
|
October 29, 2004
|
$ 175,000
|
Paid
|
|
|
|
|
|
November 29, 2004
|
$ 175,000
|
Paid
|
|
|
|
|
|
June 29, 2005
|
$ 500,000
|
and 1,000,000 common shares of UPC stock
|
|
|
|
|
|
June 29, 2006
|
$ 800,000
|
and 750,000 common shares of UPC stock
|
|
|
|
|
|
December 29, 2006
|
$ 800,000
|
and 750,000 common shares of UPC stock
|
|
|
|
|
|
June 29, 2007
|
$ 800,000
|
and 750,000 common shares of UPC stock
|
|
|
|
|
|
December 29, 2007
|
$ 800,000
|
and 750,000 common shares of UPC stock
|
|
|
|
|
|
Total
|
$ 4,050,000
|
4,000,000 common shares of UPC stock
|
The cash portion of the initial purchase price will be increased by $3,000,000 (in two $1,500,000 installments) after the uranium oxide price (long term indicator) is at or exceeds $30.00/lb for four consecutive weeks (the “price benchmark”). If the price benchmark is attained on or before April 29, 2006, the first installment will be due six months after price attainment (but not before April 29, 2006). If the price benchmark is attained after April 29, 2006, the first installment will be due six months after attainment. In either event, the second installment will be due six months after the first installment is due. These payment obligations will survive closing of the purchase of the 50% interest in the properties; if the installments are not timely paid, UPC will forfeit all of its 50% interest in the properties, and in the joint venture to be formed.
USE and Crested, and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
Closing of the agreement is required on or before December 29, 2007, with UPC’s last payment of the initial purchase price (plus, if applicable, the increase in the cash portion). At the closing, UPC will contribute its 50% interest in the properties, and USE and Crested will contribute their aggregate 50% interest in the properties, to the joint venture (see below), wherein UPC and USE/Crested each hold a 50% interest.
UPC will contribute up to $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects). USE/Crested, and UPC, each will be responsible for 50% of costs on each project in excess of $500,000.
UPC may terminate the agreement before closing, in which event UPC (i) would forfeit all payments made to termination date, (ii) lose all of its interest in the properties to be contributed by USE/Crested under the agreement and (iii) be relieved of its share of reclamation liabilities existing at December 8, 2004.
- Mining Venture Agreement
As of April 11, 2005, the company and Crested (as the USECC Joint Venture) signed a Mining Venture Agreement with UPC to establish a joint venture, with a term of 30 years, to explore, develop and mine the properties being purchased by UPC under the Purchase and Sale Agreement, and acquire,
explore and develop additional uranium properties. The joint venture generally covers uranium properties in Wyoming and other properties identified in the USECC Joint Venture uranium property data base, but excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with a future joint venture involving that mill.
The initial participating interests in the joint venture (profits, losses and capital calls) are 50% for the USECC Joint Venture and 50% for UPC, based on their contributions of the Sheep Mountain properties. Operations will be funded by cash capital contributions of the parties; failure by a party to fund a capital call may result in a reduction or the elimination of its participating interest. In addition, a failure by UPC to pay for its 50% interest in the Sheep Mountain properties may result in a reduction or the elimination of UPC’s participating interest. A budget of $567,842 for the seven months ending December 31, 2005 has been approved, relating to reclamation work at the Sheep Mountain properties, exploration drilling, geological and engineering work, and other costs. A substantial portion of this work will be performed by (and be paid to) USECC Joint Venture as manager.
The manager of the joint venture is the USECC Joint Venture; the manager will implement the decisions of the management committee and operate the business of the joint venture. UPC and the USECC Joint Venture each have two representatives on the four person management committee, subject to change if the participating interests of the parties are adjusted. The manager is entitled to a management fee from the joint venture equal to a minimum of 10% of the manager’s costs to provide services and materials to the joint venture (excluding capital costs) for field work and personnel, office overhead and general and administrative expenses, and 2% of capital costs. The manager may be replaced if its participating interest becomes less than 50%.
The preceding is a 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 this Annual Report.
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 holds a source materials license from the NRC.
The Shootaring Mill, in southeastern Utah, occupies 19 acres of a 265 acre plant site. The Shootaring Mill was designed to process 750 tpd, but only operated on a trial basis for two months in mid-summer of 1982. In 1984, Plateau (now a wholly-owned subsidiary of USE) placed the mill on standby because CPC had canceled the construction of an additional nuclear energy plant. Plateau also owns approximately 90,000 tons of uranium mineralized material stockpiled at the mill site.
In 2003 and 2004, reclamation work on uranium properties (the Tony M, Velvet, and Woods Complex, then held by Plateau in San Juan County, Utah) was completed. Plateau had relinquished these properties in 2003 and 2004, but has subsequently leased the Velvet from a third party who staked unpatented mining claims on the property (see below).
With recent improvements in uranium concentrate prices, Plateau has obtained an extension to January 2007 to commence reclamation work at the mill (reclamation costs are bonded, see Note K to the financial statements). Plateau has filed a request with the State of Utah for a permit and licenses to put the mill in operating status.
The Shootaring Mill is owned by Plateau Resources Limited ("Plateau"), a subsidiary of USE. Crested has a 50% interest in Plateau’s cash flows. The Shootaring Mill was designed to process 750 tons of material per day (tpd) and should be capable of operating at 1,000 tpd, once refurbishing is completed.
When refurbished and the operational license is issued, the Shootaring Mill will have the capacity to produce 1.5 million pounds of uranium concentrates annually depending on the grade of material fed to the Shootaring Mill. It will cost at least $25 million to modify the Shootaring
Mill’s tailings cell to Utah standards; post additional reclamation bonding; and complete other Shootaring
Mill upgrades before production can begin. Additionally, a circuit to process the vanadium which is contained in almost all of the mineralized material is planned to be added to the Shootaring
Mill.
Except for the lower grade mineralized material which has been stockpiled at the Shootaring Mill for over ten years, the grades of materials controlled at other properties in the vicinity have not been determined. Until such grades have been established with drilling and testing, and a feasibility study completed on the properties to determine the economics of running the Shootaring Mill to process these materials, we cannot determine if the properties contain any uranium reserves. 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 of material available for processing being economic (containing sufficient uranium) at such sustained high prices.
Once required financing is in place, the work is planned to be completed in approximately 18 months after the operating license is granted by the State of Utah, but unforeseen causes may delay the project. Efforts are underway while going through the State of Utah permitting process to raise the necessary financing for the project. However, financing terms have not been finalized, and we cannot predict if and when the financing will be completed.
In addition to the Shootaring Mill site, Plateau holds approximately 200 unpatented lode mining claims which have been acquired through a December 2004 agreement with a third party. Under this agreement, all of the uranium properties currently controlled or owned by the third party have been leased to Plateau (including the Velvet mine, currently shut down), and the third party will assist Plateau in locating additional uranium mineral properties for lease or purchase by Plateau. In return, the third party and Plateau will negotiate a 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.
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 has been acquired by Globemin Resources Inc., a TSX-V listed company, in a reverse takeover stock exchange transaction in 2004. Globemin has changed its name to Sutter Gold Mining, Inc.
("SGMI"). For information on ownership in SGMI by employees and director of USE, see Part III of this 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.
SGMC has taken impairments (write-downs), in the 1990s, totaling $13,098,900, of the carrying value of its gold properties. These two impairments wrote off almost 85% of the investment. We determined that we could not produce gold from these properties at a profit as a result of low market price for gold at the time. This resulted in no value allocated to the Lincoln Project; the remaining assets relating to this property include raw land which is no longer needed for mining activity, and buildings and equipment.
Due to the depressed gold prices in the past, litigation (since resolved) and lack of funding, SGMI has deferred the start of construction of a gold mill complex and extension of existing underground workings. A tourist visitor's center has been set up (see below) and leased to a third party for $1,500 per month plus a 4% gross royalty on revenues. The 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. The properties are located in the western Sierra Nevada Mountains at from 1,000 to 1,500 feet in elevation; year round climate is temperate. Access is by California State Highway 16 from Sacramento to California State Highway 49, then by paved county road approximately .4 mile outside of Sutter Creek.
Surface and mineral rights holding costs, and property taxes, will be approximately $130,000 and $9,900 respectively, for 2005.
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 have been accomplished in prior years, with 190 diamond drill holes, and modern underground development consists of a 2,850-foot declined ramp with 2,400 feet of crosscuts plus four raises.
SGMI plans to begin further exploration work and the construction of a new raise to comply with U.S. Mine Safety Health Administration regulations and improve ventilation.
Permits.
The Amador County Board of Supervisors has issued a Conditional Use Permit ("CUP") allowing mining 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. Application has been made to the California regulatory authorities, to store de-watered tails at a dry stacked surface fill unit, and also use mill tailings for mine back fill. This permit is the final major permit required for the project; a decision is expected in second quarter 2005.
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 $40,300 for 2004, $48,800 for 2003, $26,500 for the seven months ended December 31, 2002, and $41,200 in (former) fiscal year ended May 31, 2002, and are included in "real estate" in the
consolidated statements of operations included in this report. These revenues offset a portion of costs for holding the Sutter properties.
Molybdenum
In 1974, 1977 and 1987, USE and Crested leased and then sold various mining claims and mines near the town of Crested Butte, Colorado, to AMAX Inc. of Greenwich, Connecticut. AMAX Inc. (acquired by Cyprus Minerals Company and renamed Cyprus Amax Minerals Company in November 1993, then later acquired by Phelps Dodge) delineated a deposit of molybdenum on the leased claims containing approximately 146,000,000 tons of mineralization averaging 0.43% molybdenum disulfide on the properties of USE and Crested.
Since June 2002, USE and Crested have been in litigation with Phelps Dodge concerning the properties and related agreements. In late 2004 and February 2005, the U.S. District Court issued orders in the litigation (see Item 3 - "Legal Proceedings"). Although additional rulings are expected concerning water rights associated with the properties, we expect to receive back from Phelps Dodge, in 2005, the patented and unpatented lode mining claims which contain the molybdenum deposit, as well as a mine water discharge treatment plant located on those properties. Later in 2005, we expect to be receiving clarification from the Colorado Department of Public Health and the Environment (which has jurisdiction over how the treatment plant is operated to comply with environmental laws) as to our responsibilities to operate the plant. Plant operating costs, for which we will be responsible, will likely exceed $1,000,000 annually.
For more than 20 years, Phelps Dodge and its predecessor companies worked on a mine plan for the Mt. Emmons property, obtaining rights to the water necessary to mine and process molybdenum, and obtaining other permits necessary to put the property into production. We do not know why Phelps Dodge, one of the largest international mining companies, decided to cease trying to put the Mt. Emmons property into production, although the fact that Phelps Dodge is producing molybdenum from other mines may have been a factor in their decision.
In light of the rebound in molybdenum oxide prices to the $30 - $35 per pound range in March 2005 (compared to an average of approximately $3.25 per pound over the last several years), we may seek joint venture partners to work on a new mine plan and obtain the permits required to put the property into production. In this scenario, the properties would be transferred to a new subsidiary of USE and Crested, U.S. Moly Corp., then the subsidiary would seek to raise capital for the project and enlist large mining companies or other entities to enter into a joint mining venture. See Part III to this Annual Report. Ownership of the subsidiary subsequently would be reduced to the extent additional shares are sold to investors.
Development of the Mt. Emmons property for mining will require extensive capital and a long time to implement. We would have to obtain that capital through equity financing and/or a joint venture or other arrangement, however, we have no such arrangements as of the date of this Annual Report and may not obtain such. Reportedly, the mine plan of Phelps Dodge and its predecessor companies encountered opposition from local and environmental groups, and that opposition likely will continue, as Mt. Emmons is located close to Crested Butte, Colorado, a year round recreation area. Even with the resources of a joint venture partner, successful resolution of various issues arising with local and environmental groups is not assured.
Oil and Gas and Other Properties
Fort Peck Lustre Field (Montana).
We operate a small oil production facility (two wells) at the Lustre Oil Field on the Ft. Peck Indian Reservation in northeastern Montana. We receive a fee based on oil produced. This fee and other assets of the Company collateralize a $750,000 line of credit from a bank.
Wyoming.
The Company and Crested own a 14-acre tract in Riverton, Wyoming, with a two-story 30,400 square foot office building (including underground parking). The first floor is rented to non-affiliates and government agencies; the second floor is occupied by the Company. The property is mortgaged to the WDEQ as security for future reclamation work on the Sheep Mountain Crooks Gap uranium properties.
The Company also owns a fixed base aircraft facility at the Riverton Regional Airport, including a 10,000 square foot aircraft hangar and 7,000 square feet of associated offices and facilities. This facility is on land leased from the City of Riverton for a term ending December 16, 2005, with an option to renew on mutually agreeable terms for five years. The aircraft fueling operation to the public was shut down late in fiscal 2002.
The Company owns three mountain sites covering 16 acres in Fremont County, Wyoming. In Riverton, Wyoming, the Company owns four city lots and improvements including two smaller office buildings.
Colorado.
USECC owns 175 acres of undeveloped land near Gunnison, Colorado.
Utah.
On August 14, 2003, USE's wholly-owned subsidiary Plateau Resources Limited (and Plateau's wholly-owned subsidiary Canyon Homesteads, Inc.) sold all of the outstanding stock of Canyon Homesteads to The Cactus Group, LLC, for $3,470,000: $349,250 cash and $3,120,750 with The Cactus Group's five year promissory note. The note is secured with all the assets of The Cactus Group and Canyon (and is personally guaranteed by the six principals of The Cactus Group). The note is payable monthly (with annual interest at 7.5%) with a $2,940,581 balloon payment due in August 2008.
The sold properties are in Ticaboo, Utah, near Lake Powell, and included a motel, restaurant and lounge, convenience store, recreational boat storage and service facility, and improved residential and mobile home lots. Most of these properties had been acquired when the Shootaring Mill was acquired in the early 1990s.
RESEARCH AND DEVELOPMENT
No research and development expenditures have been incurred, either on the Company's account or sponsored by 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 the Company complies in all material respects with existing environmental regulations.
As of December 31, 2004, we have recorded estimated reclamation obligations of $8,027,400. We anticipate paying for those reclamation efforts over several years. For further information on the approximate reclamation costs (decommissioning, decontamination and other reclamation efforts for which we are primarily responsible or potentially responsible), see note K to the consolidated financial statements included with this Annual Report.
Other Environmental Costs.
Actual costs for compliance with environmental laws may vary considerably from estimates, depending upon such factors as changes in environmental 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.
Employees
As of the filing date of this Annual Report, USE had 35 full-time employees, including 11 working only for RMG. Persons who work only for RMG and Sutter Gold Mining Inc. are paid by USE. The expenses associated with USE's employees, including payroll taxes, fringe benefits and retirement plans is shared with Crested for all ventures in which it participates on a percentage ownership basis. Crested uses approximately 50 percent of the time of USE employees, and reimburses USE on a cost reimbursement basis.
Mining Claim Holdings
Title.
Nearly all the uranium mining properties held by the Company are on federal unpatented claims. Unpatented claims are located upon federal and public land pursuant to procedure established by the General Mining Law. Requirements for the location of a valid mining claim on public land depend on the type of claim being staked, but generally include discovery of valuable minerals, erecting a discovery monument and posting thereon a location notice, marking the boundaries of the claim with monuments, and filing a certificate of location with the county in which the claim is located and with the BLM. If the statutes and regulations for the location of a mining claim are complied with, the locator obtains a valid possessory right to the contained minerals. To preserve an otherwise valid claim, a claimant must also pay certain rental fees annually to the federal government 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 vulnerabilities not associated with other types of property interests. It is impossible to ascertain the validity of unpatented mining claims solely from public real estate records and it can be difficult or impossible to confirm that all of the requisite steps have been followed for location and maintenance of a claim. If the validity of an unpatented mining claim is challenged by the government, the claimant has the burden of proving the present economic feasibility of mining minerals located thereon. Thus, it is conceivable that during time of falling metal prices, claims which were valid when located could become invalid if challenged.
Some of the Mt. Emmons claims which the Company expects to receive back from Phelps Dodge Corporation were patented by Phelps Dodge and others are unpatented claims.
Proposed Federal Legislation.
The U.S. Congress from time to time has 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.
ITEM 3. Legal Proceedings
Material proceedings pending at December 31, 2004, and developments in those proceedings from that date to the date this Annual Report is filed, are summarized below. 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 in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado in Civil Action No. 91B1153. The Federal Court stayed the arbitration proceedings and discovery proceeded. In February 1994, all of the parties agreed to consensual and binding arbitration of all of their disputes over SMP before an arbitration panel (the "Panel").
The Panel entered an Order and Award in 1996, finding generally in favor of USE and Crested on certain of their claims and imposed a constructive trust in favor of Sheep Mountain Partners on uranium contracts Nukem entered into to purchase uranium from CIS republics, and also awarded SMP damages of $31,355,070 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 $20,044,183. In early 2004, the parties appealed this judgment to the CCA.
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the 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 timing and ultimate outcome of this litigation is not predicted. We believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
Contour Development Litigation
On July 8, 1998, USE and Crested filed a lawsuit in the U.S. District Court of Colorado in Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. for substantial damages from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado. This litigation was settled in 2004 with USE and Crested receiving nominal cash and seven real estate lots in and near Gunnison. Two lots have been sold and five are for sale.
Phelps Dodge Litigation
USE and Crested were served with a lawsuit on June 19, 2002, filed in the U.S. District Court of Colorado (Case No. 02-B-0796(PAC)) by Phelps Dodge Corporation (“PD”) and its subsidiary, Mt. Emmons Mining Company (“MEMCO”), over contractual obligations in USECC’s agreement with PD’s predecessor companies, concerning mining properties on Mt. Emmons, near Crested Butte, Colorado.
The litigation 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 Mt. Emmons properties back to USECC, which properties now include a plant to treat mine water, costing in excess of $1 million a year to operate in compliance with State of Colorado regulations. PD's and MEMCO's claim 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 Mt. Emmons properties under Paragraph 8 of the 1987 Agreement includes the transfer of ownership and operational responsibility for the Water Treatment Plant, and that PD does not owe USECC any advanced royalty payments. However, the Order did not address the NPDES permit. NPDES permits are administered and regulated by the Colorado Department of Public Health and the Environment (“CDPHE”). The timing and scope of responsibilities for maintaining and operating the plant will be addressed by the CDPHE later in 2005.
USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights from the Colorado Supreme Court opinion (decided in 2002, finding that the predecessor owners of
the Mt. Emmons property had rights to water to develop a mine), and any other appurtenant water rights, be conveyed to USECC. The motion is pending.
Rocky Mountain Gas, Inc. (RMG)
Litigation involving leases on coalbed methane properties in Montana
In April 2001, RMG was served with a Second Amended Complaint, in which the Northern Plains Resource Council ("NPRC") had filed suit in the U. S. District Court of Montana, Billings Division (No. CV-01-96-BLG-RWA) against the United States Bureau of Land Management (“BLM”), RMG, certain of its affiliates (including USE and Crested) and some 20 other defendants. The plaintiff is seeking to cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
In December 2003, Federal District Court Judge Anderson granted BLM’s and the other defendants Motion for Summary Judgment and ruled that BLM did not have to consider environmental impacts in an Environmental Impact Statement (“EIS”) prior to leasing because the 1994 Resource Management Plan (“RMP”) limited lease right to exploration and small scale development. On August 30, 2004, the Ninth Circuit Court of Appeals affirmed the District Court decision and held that the six-year statue of limitations precluded challenging the 1994 RMP and EIS. On February 10, 2005, NRPC's petition for rehearing or in the alternative petition for en banc hearing was denied by the Ninth Circuit Court of Appeals.
All of RMG's BLM Montana leases are held by RMG and are at least four years old. There is no record of any objections being made to the issue of those leases. We believe RMG’s leases were validly issued in compliance with BLM procedures, and do not believe the plaintiff’s lawsuit will adversely affect any of RMG’s BLM leases in Montana.
Lawsuits challenging BLM's Records of Decisions
There is a lawsuit currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas EIS for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and Billings Resource Management Plans in Montana:
In April of 2003 NPRC and the Northern Cheyenne Tribe and Native Action (the “Tribe”) filed a suit against BLM challenging the April 2003 decision by BLM approving the Final Statewide Oil and Gas Environmental Impact Statement (FEIS) and proposed amendments to the RMP. On February 25, 2005 Federal District Court Judge Anderson dismissed all counts with the exception of the allegation that the FEIS is inadequate because it failed to consider any alternatives to full-field development and ruled that BLM’s failure to analyze a phased development alternative renders the FEIS inadequate. BLM will now be required to perform a Supplemental EIS (“SEIS”) examining a phased development alternative, which could take 18 months to complete.
On April 5, 2005 Federal District Court Judge Anderson rejected the Tribe's request for a complete moratorium on CBM drilling in Montana and instead accepted the BLM's proposal that limited the number of Federal APDs issued by the BLM to a maximum of 500 wells per year, including federal, state and fee wells within a certain defined geographic area. The decision will prohibit the BLM from issuing Federal wells in RMG's Castle Rock property until the SEIS is completed, because it is not located with the defined geographic area. However, the decision does not limit the number of fee and state wells that can be approved in the Castle Rock property by the State of Montana. RMG will request the BLM to
extend the expiration date of the Federal leases for the period of the delay.
Neither the Company nor RMG is a party to this lawsuit. However, further permitting for federal CBM wells in Montana could be impacted until the issues have been resolved.
Litigation involving drilling
A drilling company, Eagle Energy Services, LLC filed a lawsuit against RMG for drilling services claiming $49,309.50 for non-payment in Civil Action No. C02-9-341. Eagle Energy’s bank, Community First National Bank of Sheridan, Wyoming, filed a similar suit for the same amount on an assignment from Eagle Energy against RMG in Civil Action No. CO2-9-328 in the 4
th
Judicial District of Sheridan County, Wyoming. In February 2005 RMG and Community First reached a full and complete settlement of Civil Action No. C02-9-328 and a Joint Motion to Dismiss with Prejudice is currently pending with the Court. RMG has also requested Eagle Energy to join in a Motion to Dismiss in Civil Action No. C02-9-341 because the claim was settled as noted above. Management believes that the ultimate outcome of the matters will not have a material effect on the Company’s financial condition or result of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
On June 15, 2004, the annual meeting of shareholders was held for voting on the re-election of two directors: Michael Anderson and Harold F. Herron. These directors were re-elected for a term expiring on the third succeeding Annual Meeting of Shareholders and until their successors are duly elected or appointed and qualified. With respect to the re-election of the two directors, the votes cast were:
|
Name of Director
|
|
For
|
|
Abstain*
|
|
Michael Anderson
|
|
11,554,562
|
|
334,210
|
|
Harold F. Herron
|
|
11,303,419
|
|
531,578
|
Also at the June, 2004 meeting, the shareholders approved an amendment to the 2001 Incentive Stock Option Plan, to reserve for issuance upon exercise of options that number of shares of common stock as equals 20% of the issued and outstanding shares of common stock at any point in time. With respect to this matter the votes cast were:
|
For
|
|
Against
|
|
Abstain*
|
|
|
|
|
|
|
|
3,851,612
|
|
1,327,608
|
|
21,833
|
* Includes Broker non-vote
PART II
ITEM 5. Market for Registrant's common equity, related Stockholder Matters and Issuer Purchases of Equity Securities
(a)
Market Information
Shares of USE common stock are traded on the over-the-counter market, and prices are reported on a "last sale" basis on the Nasdaq Small Cap of the National Association of Securities Dealers Automated Quotation System ("Nasdaq"). The range by quarter of high and low sales prices was:
|
Fiscal Year ended December 31, 2004
|
|
|
High
|
|
|
Low
|
|
|
First quarter ended 3/31/04
|
|
$
|
3.45
|
|
$
|
2.41
|
|
|
Second quarter ended 6/30/04
|
|
|
3.14
|
|
|
2.11
|
|
|
Third quarter ended 9/30/04
|
|
|
2.59
|
|
|
2.12
|
|
|
Fourth quarter ended 12/31/04
|
|
|
3.05
|
|
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
First quarter ended 3/31/03
|
|
$
|
3.85
|
|
$
|
2.95
|
|
|
Second quarter ended 6/30/03
|
|
|
5.92
|
|
|
3.12
|
|
|
Third quarter ended 9/30/03
|
|
|
5.70
|
|
|
3.15
|
|
|
Fourth quarter ended 12/31/03
|
|
|
3.68
|
|
|
2.30
|
|
(b)
Holders
(1) At March 31, 2005 the closing market price was $5.98 per share and there were approximately 641 shareholders of record, with 16,219,079 shares of common stock issued and outstanding, including shares owned by our subsidiaries and shares in officers' and directors' names that are subject to forfeiture.
(2) Not applicable.
(c)
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, 2004:
|
Plan category
|
Number of securities to be issued upon exercise of outstanding options
|
Weighted average exercise price of outstanding options
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
|
|
1998 USE ISOP 3,250,000 shares of common stock on exercise of outstanding options
|
1,464,646
|
$2.67
|
-0-
|
|
2001 USE ISOP 3,000,000 shares of common stock on exercise of outstanding options
|
2,659,000
|
$2.85
|
214,664
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
None
|
--
|
--
|
--
|
|
Total
|
4,123,646
|
$2.79
|
214,664
|
Sales of Unregistered Securities in 2004
During the twelve months ended December 31, 2004, pursuant to the shareholder-approved 2001 Stock Compensation Plan, 50,000 shares were issued to officers of the Company at the rate of 10,000 shares each: John L. Larsen, Keith G. Larsen, Harold F. Herron, Robert Scott Lorimer, and Daniel P. Svilar. The shares were issued at the closing market price of $3.02, $2.57, $2.46 and $2.22 as of January 5, 2004, April 1, 2004, July 1, 2004 and October 1, 2004, respectively.
In 2004, the Company issued 476,883 shares of common stock as payment of principal and interest to settle the note due two private investors; 123,879 shares of common stock in exchange for 124,444 shares of RMG stock as part of a provision given to an accredited investor when it invested in RMG common stock; 678,888 shares of common stock and 318,465 common stock warrants (exercisable until January 2007 at an exercise price of $3.28 per share) in the purchase of the Hi-Pro properties; 100,000 shares of common stock and 250,000 warrants (exercisable until March 2009 at an exercise price of $2.98 per share) to purchase common stock to an accredited investor in a private placement; 758,360 shares of common stock to an accredited investor in exchange for 500,000 shares of RMG Series A preferred stock; released 22,140 shares of forfeitable shares to employees and 50,000 shares of common stock to five employees under the 2001 Stock Award Program, which was approved by the shareholders at the 2002 shareholder's meeting, 125,000 shares to an investor who exercised its warrants and 70,439 shares to the
USE Employee Stock Ownership Plan for the calendar 2004 funding requirement. Three investment firms held an additional 300,000 shares of RMG preferred stock (at an exchange rate of 90% the Company's stock price on conversion date), convertible to the Company's common stock at 90% of the market value of the Company's common stock when converted. All this stock has been converted as of March 31, 2005. The Company also issued a total of 150,000 common stock purchase warrants (exercisable until February 2007, at an exercise price of $3.11 per share) to three accredited investment firms as part of their investment in RMG Series A preferred stock. Warrants on 125,000 of these shares have been exercised as of March 31, 2005. These transactions were exempt under Section 4(2) of the Securities Act.
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,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
5,421,500
|
|
$
|
5,191,400
|
|
$
|
4,755,300
|
|
$
|
4,597,900
|
|
$
|
4,892,600
|
|
$
|
3,330,000
|
|
$
|
3,456,800
|
|
|
Current liabilities
|
|
|
6,058,000
|
|
|
1,909,700
|
|
|
2,044,400
|
|
|
2,563,800
|
|
|
1,406,400
|
|
|
2,396,700
|
|
|
6,617,900
|
|
|
Working capital deficit
|
|
|
(636,500
|
)
|
|
3,281,700
|
|
|
2,710,900
|
|
|
2,034,100
|
|
|
3,486,200
|
|
|
933,300
|
|
|
(3,161,100
|
)
|
|
Total assets
|
|
|
30,703,700
|
|
|
23,929,700
|
|
|
28,190,600
|
|
|
30,991,700
|
|
|
30,537,900
|
|
|
30,465,200
|
|
|
30,876,100
|
|
|
Long-term obligations (1)
|
|
|
13,615,300
|
|
|
12,036,600
|
|
|
14,047,300
|
|
|
13,596,400
|
|
|
13,804,300
|
|
|
13,836,700
|
|
|
14,025,200
|
|
|
Shareholders' deficit
|
|
|
6,281,300
|
|
|
6,760,800
|
|
|
8,501,600
|
|
|
8,018,700
|
|
|
11,742,000
|
|
|
8,465,400
|
|
|
4,683,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)Includes $7,384,700, of accrued reclamation costs on properties at December 31, 2004$7,264,700 at December 31, 2003, and $8,906,800, at December 31, 2002, 2001 and May 31, 2001 and 2000, respectively. See Note K of Notes to Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Seven Months Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
For Former Fiscal Years Ended May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
4,641,700
|
|
$
|
837,300
|
|
$
|
673,000
|
|
$
|
545,900
|
|
$
|
2,004,100
|
|
$
|
3,263,000
|
|
$
|
3,303,900
|
|
|
Loss from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing operations
|
|
|
(6,659,300
|
)
|
|
(7,237,900
|
)
|
|
(3,524,900
|
)
|
|
(3,914,900
|
)
|
|
(7,454,200
|
)
|
|
(7,517,800
|
)
|
|
(11,356,100
|
)
|
|
Other income & expenses
|
|
|
13,000
|
|
|
(73,000
|
)
|
|
(387,100
|
)
|
|
1,005,000
|
|
|
1,319,500
|
|
|
8,730,800
|
|
|
802,200
|
|
|
Loss before minority interest, equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in loss of affiliates, income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
taxes, discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting change
|
|
|
(6,646,300
|
)
|
|
(7,310,900
|
)
|
|
(3,912,000
|
)
|
|
(2,909,900
|
)
|
|
(6,134,700
|
)
|
|
1,213,000
|
|
|
(10,553,900
|
)
|
|
Minority interest in loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of consolidated subsidiaries
|
|
|
397,700
|
|
|
235,100
|
|
|
54,800
|
|
|
24,500
|
|
|
39,500
|
|
|
220,100
|
|
|
509,300
|
|
|
Equity in loss of affiliates
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(2,900
|
)
|
|
Income taxes
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Discontinued operations, net of tax
|
|
|
--
|
|
|
(349,900
|
)
|
|
17,100
|
|
|
175,000
|
|
|
(85,900
|
)
|
|
488,100
|
|
|
(594,300
|
)
|
|
Cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting change
|
|
|
--
|
|
|
1,615,600
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Preferred stock dividends
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(75,000
|
)
|
|
(86,500
|
)
|
|
(150,000
|
)
|
|
(20,800
|
)
|
|
Net loss to common shareholders
|
|
$
|
(6,248,600
|
)
|
$
|
(5,810,100
|
)
|
$
|
(3,840,100
|
)
|
$
|
(2,785,400
|
)
|
$
|
(6,267,600
|
)
|
$
|
1,771,200
|
|
$
|
(10,662,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
Seven Months Ended
December 31,
|
|
For Former
Fiscal Years Ended May 31,
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2002
|
|
2001
|
|
2000
|
|
|
Per share financial data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
0.35
|
|
$
|
0.07
|
|
$
|
0.06
|
|
$
|
0.07
|
|
$
|
0.22
|
|
$
|
0.42
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
continuing operations
|
|
|
(0.51
|
)
|
|
(0.64
|
)
|
|
(0.33
|
)
|
|
(0.47
|
)
|
|
(0.80
|
)
|
|
(0.96
|
)
|
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income & expense
|
|
|
0.00
|
|
|
(0.01
|
)
|
|
(0.03
|
)
|
|
0.12
|
|
|
0.14
|
|
|
1.11
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest, equity in loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of affiliates, income taxes,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting change
|
|
|
(0.50
|
)
|
|
(0.65
|
)
|
|
(0.36
|
)
|
|
(0.35
|
)
|
|
(0.66
|
)
|
|
0.15
|
|
|
(1.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in loss (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of consolidated subsidiaries
|
|
|
0.03
|
|
|
0.02
|
|
|
--
|
|
|
--
|
|
|
0.01
|
|
|
0.03
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in loss of affiliates
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of tax
|
|
|
--
|
|
|
(0.03
|
)
|
|
--
|
|
|
0.02
|
|
|
(0.01
|
)
|
|
0.06
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounting change
|
|
|
--
|
|
|
0.14
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share, basic
|
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
$
|
(0.34
|
)
|
$
|
(0.67
|
)
|
$
|
0.23
|
|
$
|
(1.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share, diluted
|
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
$
|
(0.34
|
)
|
$
|
(0.67
|
)
|
$
|
0.23
|
|
$
|
(1.39
|
)
|
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 periods included in the accompanying financial statements. The discussion contains forward-looking statements that involve risks and uncertainties. Due to uncertainties in the minerals business, the Company's actual results may differ materially from the results discussed in any such forward-looking statements.
General Overview
U.S. Energy Corp. ("USE" or the "Company") and its subsidiaries historically have been involved in the acquisition, exploration, development and production of properties prospective for hard rock minerals including lead, zinc, silver, molybdenum, gold, uranium, oil and gas and commercial real estate. The Company manages all of its operations through a joint venture, USECC Joint Venture ("USECC"), with one of its subsidiary companies, Crested Corp. ("Crested") of which it owns a consolidated 70.1%. The narrative discussion of this MD&A refers only to USE or the Company but includes the consolidated financial statements of Crested, Rocky Mountain Gas, Inc. ("RMG"), Plateau Resources Ltd. ("Plateau"), USECC and other subsidiaries. The Company has entered into partnerships through which it either joint ventured or leased properties with non-related parties for the development and production of certain of its mineral properties. Due to either depressed metal market prices or disputes in certain of the partnerships, all mineral properties have either been sold, reclaimed or are shut down except coalbed methane. However, activities have resumed on a limited basis in uranium and gold. See Items 2 and 3 above. The Company has had no production from any of its mineral properties during the periods from May 31, 2001 through December 31, 2004, except coalbed methane.
The Company formed RMG to enter into the coalbed methane (CBM) business in 1999. The acquisition of leases and acreage for the exploration, development and production of coalbed methane became the primary business focus of the Company. At December 31, 2004, the Company on a consolidated basis, owned 91.1% of RMG. RMG has purchased or leased acreage for CBM exploration and development. RMG has entered into various agreements and joint operating agreements to develop and produce coalbed methane from these properties. Management of the Company plan to create value in RMG by growing RMG into an industry recognized producer of CBM. Management believes the fundamentals of natural gas supply and demand are, and will remain favorable well into the future. Management further believes that the investments the Company has made in RMG will provide a solid base of cash flows into the future.
The price that RMG receives for the sale of its coalbed methane is based on the Colorado Interstate Gas Index (“CIG”) for the Northern Rockies. Historically, the highest prices realized on the CIG over a twelve-month period are during the months of December and January and the lowest prices realized are during the months of late summer or early fall. The following table represents a summary of historical CIG prices:
|
|
|
Prices per mcf
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2001
|
|
2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Month High
|
|
$
|
6.98
|
|
$
|
5.01
|
|
$
|
3.33
|
|
$
|
8.63
|
|
$
|
5.95
|
|
|
12 Month Low
|
|
$
|
4.17
|
|
$
|
3.14
|
|
$
|
1.09
|
|
$
|
1.05
|
|
$
|
2.15
|
|
|
12 Month Average
|
|
$
|
5.17
|
|
$
|
3.98
|
|
$
|
1.97
|
|
$
|
3.50
|
|
$
|
3.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
6.20
|
|
$
|
4.44
|
|
$
|
3.33
|
|
$
|
2.13
|
|
$
|
5.95
|
|
Although management believes that gas prices will increase over the long term from present levels, no assurance can be given that will happen. Gas prices are directly affected by 1) weather conditions, which impact heating and cooling requirements; 2) electrical generation needs and 3) the amount of gas being produced by those companies in the gas production business. Many of the Company's industry competitors are very large international companies that are well funded. All of these factors are variable and cannot be accurately predicted.
In the first quarter 2004, the Company obtained $350,000 of equity funding from an accredited investor (100,000 shares of USE common stock, three year warrants to purchase 50,000 shares of USE common stock, at $3.00 per share; and five year warrants to purchase 200,000 shares at $3.00 per share).
In the third quarter 2004, we borrowed $3,000,000 from Geddes and Company of Phoenix, Arizona. The loan matures on July 30, 2006, bears 10% annual interest, and is secured principally by RMG's CBM properties in the Castle Rock prospect and 4,000,000 shares of RMG stock held by the Company. The loan may be prepaid in cash without penalty, but the lender at any time may convert loan principal to RMG common stock at $3.00 per share on the first $1,500,000 converted; and at $3.25, $3.50 and $3.75 per share for each additional $500,000 converted. In connection with the loan, RMG issued to the lender five year warrants to buy 600,000 shares of common stock of RMG: $3.00 per share for 300,000 shares; and $3.25, $3.50 and $3.75 per share for 100,000 shares at each price.
In the first quarter 2004, RMG raised $1,800,000 of equity financing from the sale of shares of 600,000 shares of Series A Preferred Stock in RMG, and warrants to purchase shares of common stock of the Company, to institutional investors. Proceeds were used to pay part of the Hi-Pro acquisition price, and for RMG working capital. As of March 3, 2005, all Series A Preferred Stock including dividends have been converted to and paid with 894,299 shares of the Company’s common stock. Additionally the institutional investors exercised all 150,000 of their warrants for which the Company received $251,100 during the fourth quarter of 2004 and $73,700 during the first quarter of 2005.
On January 30, 2004, RMG organized a wholly-owned subsidiary RMG I, LLC for the purchase of producing and non-producing CBM properties (the "Hi-Pro properties) near Gillette, Wyoming. RMG I, LLC ("RMG I"), a wholly-owned subsidiary of RMG, purchased CBM properties from Hi-Pro for $6,800,000. RMG and the Company participated in raising equity capital and mezzanine financing for this transaction.
During the last six months of the year ended December 31, 2004 and the first quarter of 2005 uranium, gold and molybdenum market prices have experienced significant increases. Due to these increased market price conditions and industry projected prices over the foreseeable future, the Company is in the process of re-evaluating its mineral properties for these metals. Management of the Company is developing plans to maximize the value of existing properties and is in the process of acquiring and in some cases re-acquiring uranium properties.
A major component of the Company’s future cash flow projections is the ultimate resolution of litigation with Nukem, Inc. (“Nukem”) over issues relating to Sheep Mountain Partners (“SMP”) assets. On August 1, 2003, the U. S. District Court of Colorado entered a Judgment in favor of the Company and USE against Nukem in the amount of $20,044,183. Nukem appealed this Judgment to the 10
th
Circuit Court of Appeals (“10
th
CCA”) and USECC cross appealed. Oral Arguments were heard by the 10
th
CCA on September 28, 2004.
On February 24, 2005, a three judge panel of the 10th CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the 10th CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase
rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the award is the duration of the constructive trust and whether and what costs should be deducted when computing the value of the constructive trust. Further, the arbitration panel failed to address whether prejudgment interest should be awarded on the value of the constructive trust. As a result, the district court's valuation of the constructive trust was based upon extensive guesswork. Therefore, a remand to the arbitration panel for clarification is necessary, despite the long and tortured procedural history of this case."
Management is not able to predict the timing and ultimate outcome of the Nukem litigation. We do however believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
On February 4, 2005, the U.S. District Court of Colorado entered Findings of Fact and Conclusions of Law in a case involving the Company, Crested and Phelps Dodge Corporation authorizing the return of the Mt. Emmons molybdenum properties and associated water treatment plant to the Company and Crested. USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights be conveyed to USECC. The motion is pending. The ultimate impact of this decision on the financial statements of the Company in management’s opinion will not be measurable until such time as the final decisions are reached and the property actually transferred to USECC.
Critical Accounting Policies
Asset Impairments
- We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value may not be recoverable.
Oil and Gas Producing Activities
- We follow the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized and are subject to ceiling tests to insure the carrying value does not exceed the fair market value.
Reclamation Liabilities
- The Company's policy is to accrue the liability for future reclamation costs of its mineral properties based on the current estimate of the future reclamation costs as determined by internal and external experts.
Revenue Recognition
- Revenues are reported on a gross revenue basis and are recorded at the time services are provided or the commodity is sold. Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.
Use of Accounting Estimates
- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Liquidity and Capital Resources
During the year ended December 31, 2004, operations resulted in a loss of $6,248,700 and consumed $4,282,300 of cash. Investing activities also consumed cash in the amount of $5,051,200 primarily as a result of the purchase of additional CBM properties and the exploration expenses incurred on existing
CBM properties. Financing activities generated $9,091,300 as a result of the sale of the Company’s and RMG’s stock and third party debt. All these factors together resulted in a net reduction of cash and cash equivalents of $242,300.
Cash generated by the production of coalbed methane gas operations during the year ended December 31, 2004 was swept by the financing entities to pay principal and interest. Prior to the sweep of the cash for principal and interest payments, sufficient cash to pay well and field operating costs was advanced to RMG. RMG also receives a per well monthly fee of $193, net to RMG, average per well for operating the coalbed methane operations from the working interest owners.
The liquidity of the Company during the year ended December 31, 2004 was dependant therefore upon the sale of equity and increased debt to third parties. The Company anticipates repaying the debt once it is able to sell certain mineral or coalbed methane properties.
Capital Resources
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be traded. RMG will be acquired with approximately $3,500,000 of debt owed to its mezzanine lenders.
Two major components of anticipated future capital resources during 2005 therefore are the settlement of the litigation with Nukem and the sale of RMG to Enterra. Should the sale of RMG common stock to Enterra be concluded the Company will receive cash and trust units of Enterra which would be marketable in 12 months after the closing of the transaction. Management believes both these transactions will be concluded favorably, however, the ultimate outcome of the Nukem litigation and the Enterra transaction are not certain.
During the year ended December 31, 2003, the Company sold its interests in the town site operations to a non-affiliated entity, The Cactus Group ("Cactus"). As a result of the sale of the town site, the Company received cash of $349,300 and a promissory note from Cactus in the amount of $3,120,700. The Company received $166,000 in cash payments and $44,000 in room credits from Cactus during calendar 2004. The room credits will be used by the Company as it works on developing its uranium assets in southern Utah. Cactus is to continue making monthly payments, primarily interest, until August 2008 at which time a balloon payment of $2.8 million is due.
The Company has a $750,000 line of credit with a commercial bank. The line of credit is secured by certain real estate holdings and equipment. At December 31, 2004, the full line of credit was available to the Company and has been renewed by the bank through June 30, 2005. This line of credit is used for short term working capital needs associated with operations.
On February 9, 2005, the Company borrowed $4,000,000 from seven accredited investors, issuing $4,720,000 face amount of debentures (including three years of annual interest at 6%). Net proceeds to the Company were $3,700,000 after paying a commission and lenders' legal costs.
The debentures are unsecured; the face amount of the debentures are payable every six months from February 4, 2005, in five installments of 20%, in cash or in restricted common stock of the Company. We may pay this amortization payment in cash or in stock at the lower of $2.43 per share (the “set price”) or
90% of the volume weighted average price of The Company’s stock for the 90 trading days prior to the repayment date. The set price was determined on the formula of 90% of the volume weighted average price of the stock over the 90 trading days prior to February 4, 2005. The debentures are convertible to restricted common stock of the Company at the set price.
At any time, the Company has the right to redeem some or all of the debentures in cash or stock, in an amount equal to 120% of the face amount of the debentures until February 4, 2006; 115% from February 5, 2006 to February 4, 2007; and 110% from February 5, 2007 until maturity. Payment in stock would be at the set price. The holders may convert the debentures to stock even if USE should seek to redeem in cash.
If at any time, after registration for public resale of the conversion shares have been approved, the Company’s stock trades at more than 150% of the set price for 20 consecutive trading days, USE may convert the balance of the face amount of the debentures at the set price.
In the event of default, the investors may require payment (i) in cash equal to 130% of the then outstanding face amount; or (ii) in stock equal to 100% of face amount, with the stock priced at the set price, or (iii) in stock equal to 130% of the face amount, with the stock priced at 100% of the volume weighted average price of our stock for the 90 trading days prior to default.
The Company issued warrants to the investors, expiring February 4, 2008, to purchase 971,195 shares of restricted common stock, at $3.63 per share (equal to 110% of the Nasdaq closing price on February 3, 2005). The number of shares underlying the warrants equals 50% of the shares issuable on full conversion of the debentures at the set price (as if the debentures were so converted on February 4, 2005). Warrants to purchase an additional 100,000 shares, at the same price and for the same term as the warrants issued to the investors, were a registered broker-dealer as compensation for its services in connection with the transaction. If in any period of 20 consecutive trading days (after registration has been approved) the stock price of the Company’s common stock exceeds 200% of the warrants’ exercise price, on each of the trading days, all of the warrants will expire on the 30
th
day after the Company sends a call notice to the warrant holders.
During the quarter ended March 31, 2005, the Company received $1,529,300 from the exercise of 417,811 warrants by non-employee individuals and firms. The continued exercise of employee options and non-employee warrants is contingent upon the market price of the Company’s common stock remaining above the exercise prices.
Other sources of capital are cash on hand; collection of receivables; contractual funding of drilling and development programs by non-affiliates; sale of excess equipment and real estate properties; additional debt or equity financings through third parties; equity financing of the Company's subsidiaries and a line of credit with a commercial bank.
Capital Requirements
The capital requirements of the Company during 2005 remain its General and Administrative costs and expenses; the funding of costs associated with the maintenance and operation of its coalbed methane properties; permitting and development work on its gold property and the ongoing maintenance of its uranium properties. Additionally, pending the outcome of the litigation with Phelps Dodge, the Company may incur the costs associated with holding the molybdenum property. Although it is not known what the exact cost of maintaining the molybdenum properties is, it has been represented that the cost is approximately $1.0 million per year.
Maintaining Uranium Properties
SMP Uranium Properties
The average monthly care and maintenance costs associated with the Sheep Mountain uranium mineral properties was $23,100 during the year ended December 31, 2004. Included in the average monthly cost during the year ended December 31, 2004 is ongoing reclamation work on the former SMP properties. It is anticipated that a total of $192,700 in reclamation expenditures will be conducted during 2005.
On December 8, 2004, the Company and Crested d/b/a USECC entered into a Purchase and Sale Agreement (the "agreement") with Bell Coast Capital Corp. now Uranium Power Corp. ("UPC"), a British Columbia corporation (TSX-V "UPC-V") for the sale to UPC of an undivided 50% interest in the former SMP uranium properties. The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments. All amounts are stated in US dollars.
The Company, Crested and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
UPC has agreed to contribute $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects that are approved). The Company, USE and UPC, each will be responsible for 50% of costs on each project in excess of $500,000. (see Note F)
On April 11, 2005 USECC and UPC signed a mining venture agreement. See Items 2 and 3 above.
Plateau Resources Uranium Properties
Plateau owned the Ticaboo townsite, motel, convenience store, boat storage, restaurant and lounge. During the year ended December 31, 2003, the Company sold its interest in the townsite operations to a non-affiliated entity, Cactus. As a result of the sale of the townsite, USECC received a promissory note from Cactus in the amount of $3,120,700. The Company received $166,000 in cash payments and $44,000 in room credits from Cactus during calendar 2004.
Additionally, Plateau owns and maintains the Shootaring Canyon Uranium Mill (the “Shootaring Mill”). During the year ended December 31, 2003, Plateau requested a change in the status of the Shootaring Mill from active to reclamation from the NRC. The NRC granted the change in license status which generated a surplus in the cash bond account of approximately $2.9 million which was released to Plateau. The Company received the benefit of this release of cash.
During the years ended December 31, 2004 and 2003, Plateau performed approximately $262,500 $209,600, respectively in reclamation on mining properties and the Shootaring Mill. Due to increases in the market price for uranium during the last six months of the year ended December 31, 2004 and the first quarter of 2005, the Company reconsidered its prior decision to reclaim the Shootaring Mill property. In March 2005, Plateau filed an application with the State of Utah to restart the Mill. Therefore, the Company will not expend any capital resources in the reclamation of the Mill during calendar 2005.
The cash costs per month, including reclamation costs, at the Plateau properties during calendar 2004 were approximately $32,600 per month. These costs are projected to increase to $75,000 to $100,000 per month during the year ending December 31, 2005 due to increased activity in the uranium business.
Sutter Gold Mining Inc. (SGMI) Properties
Because of the recent increase in the price of gold, management of Sutter Gold has decided to place the properties controlled by it into production. 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 has sufficient capital to pay for the anticipated work which will be done on the properties during calendar 2005. Additional financing is being sought by SGMI. (see Note F)
Development of Coalbed Methane Properties
A portion of the costs during the year ended December 31, 2004 for the development of RMG’s coalbed methane properties were funded through an agreement that RMG entered into with CCBM, Inc. (“CCBM”) a subsidiary of Carrizo Oil and Gas of Houston, Texas. At December 31, 2003, CCBM had completely satisfied its cash and drilling commitments to RMG.
During the year ended December 31, 2003, RMG and CCBM entered into a Subscription and Contribution Agreement with Credit Suisse First Boston Private Equity parties (“CSFB”) to form Pinnacle Gas Resources, Inc. (“Pinnacle”). As a result of the formation, RMG and CCBM contributed certain undeveloped and producing coalbed methane properties to Pinnacle. RMG has the opportunity to increase its ownership in Pinnacle by advancing cash to purchase common stock in Pinnacle through the exercise of options, but that increase would be offset to the extent other parties contribute additional capital to Pinnacle. See Part I “Transaction with Pinnacle Gas Resources, Inc.” Management of the Company does not anticipate exercising these options during calendar 2005 unless surplus capital resources are received. RMG has no capital commitments on the properties contributed to Pinnacle. (see Note F)
RMG continues to pursue other investment and production opportunities in the CBM business. On January 30, 2004, RMG purchased the assets of Hi-Pro Production, LLC a non-affiliated entity which included both producing and non-producing properties. The purchase of these CBM assets was accomplished by the issuance of common stock and warrants of both RMG and USE and cash, the majority of which was borrowed as a result of mezzanine financing through Petrobridge Investment Management, LLC. See Part I “Acquisition of Producing and Non-Producing Properties from Hi-Pro Production, LLC” and Note F to the financial statements in this Annual Report.
All cash flows from gas production on the Hi-Pro properties are pledged to pay the acquisition debt. See Note F to the financial statements in this Annual Report and Part I, Acquisition of Producing and Non-Producing Properties form Hi-Pro Production, LLC. The acquisition debt also requires minimum net production volumes through June 30, 2006 and maintenance of financial ratios. The Hi-Pro properties are held by RMG I, LLC, a wholly-owned subsidiary of RMG and are the sole collateral for the debt.
At December 31, 2004, RMG I was not in compliance with all of the financial covenants under the Petrobridge agreement. A revocable waiver was granted through January 31, 2006 by the lender. As the wavier is conditional, the entire debt is classified as current. Management of RMG I continues to seek solutions in the production of coalbed methane gas to bring the project into compliance. Due to lower than projected sales volumes, the Hi-Pro field will remain out of compliance unless (1) higher prices are realized, (2) costs are reduced and (3) the debt is paid down. Because it is probable that RMG I will not
be in compliance with these ratios for the next reporting period the entire $3,214,800 is classified as current debt. Should the lender declare the note in default, the only asset available for recourse is the Hi-Pro property owned by RMG I. See Note F.
Future equity financing by RMG, or industry financings, will be needed for RMGI, LLC to drill and complete wells on the substantial undeveloped acreage acquired from Hi-Pro. New production from this acreage could be needed to service the acquisition debt to offset the impact of declining production from the producing properties and/or low gas prices.
As of April 11, 2005, the Company, USE, and RMG signed a binding agreement for the acquisition of RMG by Enterra Energy Trust. (see Capital Resources above.)
If the proposed transaction with Enterra is not consummated, management of the Company believes that continued exploration and development of RMG's unproven properties will be financed through cash that RMG and USE have on hand as well as ventures with industry partners. None of the Company’s capital resources should be needed therefore to fund operations or development work of RMG during 2005.
Debt Payments
Debt to non-related parties at December 31, 2004 was $7,180,700 net of a discount of $273,000. This debt consists of debt owed by RMG I to mezzanine lenders to purchase the Hi-Pro assets of $3.2 million; long term debt related to the purchase of vehicles and a corporate aircraft of $1.2 million, and convertible debt of $2.7million. The commitment of capital resources during calendar 2005 for equipment and liability insurance debt is $185,300. The mezzanine lenders for the Hi-Pro acquisition sweep all funds from operations of the field to pay interest and principal with the exception of funds to pay (a) lease operating expenses, (b) royalties and (c) production related taxes. At December 31, 2004, RMG I was not in compliance with five of the financial covenants under the Petrobridge agreement (see note F). A revocable waiver was granted through January 31, 2006 by the lender. As the waiver is conditional, the entire debt is classified as current. The convertible debt is not due until 2006 so will only require $300,000 of the Company’s capital resources to pay interest when due quarterly.
Reclamation Costs
The asset retirement obligations are substantially long term and are either bonded through the use of cash bonds or the pledge of assets. It is anticipated that $192,700 of reclamation work on the SMP properties in Wyoming will be performed during 2005.
The asset retirement obligation on the Plateau uranium mining and milling properties in Utah at December 31, 2004 was $5,249,100, which is reflected on the Balance Sheet. This liability is fully funded by cash investments that are recorded as long term restricted assets. Due to the increased market price of uranium, the reclamation of this property has been delayed significantly and is not anticipated to commence until 2032.
The asset retirement obligation of the Sheep Mountain uranium properties in Wyoming at September 30, 2004 are $2,339,900 and are covered by a reclamation bond which is secured by a pledge of certain real estate assets of the Company and Crested.
RMG asset retirement obligations at September 30, 2004 were $463,700. It is not anticipated that any reclamation work will commence on the coalbed methane properties during 2005.
The asset retirement obligation for SGMI is $22,400 which is covered by a cash bond. No cash resources will be used for asset retirement obligations at SGMI during the twelve months ended December 31, 2005.
Liquidity Summary
The Company's capital resources during the year ended December 31, 2004 were sufficient to fund mine standby costs; coalbed methane property acquisition, maintenance and operations; limited reclamation and general and administrative expenses. The anticipated development of our gold, uranium, molybdenum and coalbed methane gas properties will require additional funding. This funding will be derived either through joint ventures with industry participants, debt or equity financings.
The current market prices for gold, uranium, molybdenum and coalbed methane gas are at levels that will warrant the exploration and development of the Company’s mineral properties. Industry projections for all these metals along with gas anticipate prices remaining at the current levels or higher during the next decade. Management of the Company therefore believes that sufficient capital will be available to develop its mineral properties. The successful development and production of these properties will greatly enhance the liquidity and financial position of the Company.
Results of Operations
During the periods presented, the Company has discontinued certain operations. Reclassifications to previously published financial statements have therefore been made to reflect ongoing operations and the effect of the discontinued operations. The Company changed its year end to December 31 effective December 31, 2002.
Year ended December 31, 2004 Compared to the Year ended December 31, 2003
Revenues:
Operating revenues during the year ended December 31, 2004 increased significantly over those recognized during the prior year. The primary cause of this increase is as a result of the purchase of producing coalbed methane properties by RMG during the first quarter of 2004. The Company recognized $3,205,700 in gas sales during the twelve months ended December 31, 2004 as compared to only $287,400 during the prior year. The gas sales during the year ended December 31, 2003 were only for six months due to the formation of Pinnacle and the contribution of all of the Company’s producing properties to that entity.
The acquisition of producing gas properties also increased management fee revenues recognized by the Company during the year ended December 31, 2004. This increase came as a result of the Company being paid a per well fee for the operation of the wells by the other working interest owners as well as a monthly fee for employees who manage the day to day production of the producing properties. During the year ended December 31, 2004 the Company recognized $796,300 in management revenues as a result of these activities. No similar revenues were recognized during the year ended December 31, 2003.
Revenues from 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. All other revenues for the year ended December 31, 2004 remained constant with those recognized during the previous year.
Costs and Expenses
:
As a result of the Company purchasing and operating coalbed methane properties during the year ended December 31, 2004, the costs associated with gas operations increased significantly from $313,100 to $4,168,800. These costs and expenses reflect the costs of operations, repairs and maintenance and amortization of the purchase price on a units of production basis. The field which was purchased by the Company had not been well maintained for some time and therefore required major repairs and enhancements. Although the operation of a gas field constantly requires ongoing maintenance, it is not anticipated by management that the major enhancement costs will be required in the future as the Company has, and is committed to, perform the required maintenance on an ongoing basis. The enhancements and maintenance performed during the year ended December 31, 2004 have increased production and improved both the cash flow and results of operations relating to the gas property.
The production on all gas properties has a life certain and therefore begins to decline the longer the property is produced. The gas property that the Company purchased is on that decline curve and it is not known how long the property will continue to produce at its current levels. There are however additional coal seams that the management of the Company is evaluating for future development and production. The overall cost of the property is therefore anticipated to remain static; however, if the lower coals are not placed into production, the profitability of the property will decrease.
The holding costs associated with the Company’s mineral properties during the year ended December 31, 2004 remained constant with those costs recorded during the previous year. It is anticipated that these costs will increase during 2005 as the Company moves forward with the permitting process relating to its uranium and gold properties. Additionally the holding cost of the molybdenum property, which the Company most probably will receive back from Phelps Dodge, will increase these costs. All costs associated with the acquisition of additional properties will be capitalized but the permitting costs will be expensed.
Real estate operating costs and general and administrative costs were reduced during the year ended December 31, 2004 from those of the year ended December 31, 2003. The reduction of real estate costs is insignificant, $7,400, and is related to the reduction of the Company’s involvement in the southern Utah property sold to a third party which had previously been operated by Plateau. The reduction in general and administrative costs of $706,400 was due to the ongoing efforts of the Company’s management to reduce overhead and related expenses.
Other Income and Expenses
:
Other Income and Expenses increased from net expenses of $73,000 during the year ended December 31, 2003 to net income of $13,000 during the year ended December 31, 2004. Although the net increase of $86,000 is insignificant there were some major changes in the individual components.
Due to the positive upward movement of the market prices for the minerals in which the Company is involved it has determined to retain its remaining mineral development and extraction equipment. The determination to retain this equipment is a direct cause of the reduction of $154,000 from the year ended December 31, 2003 to the year ended December 31, 2003 in the gain on the sale of assets.
The income recognized from the sale of investments is as a result of the liquidation of common stock of a company, Ruby Mining Company (“Ruby”), which the Company sold several years ago. The Company 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 increased from $799,100 during the twelve months ended December 31, 2003 by $266,300 to $1,065,400 at December 31, 2004 as a result of increased debt associated with the purchase of coalbed methane properties.
Net Loss
:
High and non-recurring remediation and maintenance costs associated with the new coalbed methane producing property resulted in a net loss from those operations of $963,100. This loss is offset by an increase of management fees of $964,300 which is directly tied to the operations of coalbed methane properties. Increased interest expenses and reduced interest revenues are therefore the primary causes for the increase in the loss of $438,600 during the year ended December 31, 2004 to $6,248,700 as compared to the loss during the year ended December 31, 2003 of $5,810,100. These losses reflect net losses per share of $0.47 per share and $0.52 per share for the years ended December 31, 2004 and 2003 respectively.
Year ended December 31, 2003 Compared to the Year ended May 31, 2002
Revenues:
Revenues for the twelve months ended December 31, 2003 consisted of $334,300 from real estate operations, $287,400 from gas sales and $215,600 from management fees. Revenues from real estate operations during the fiscal year ended May 31, 2002 were $1,276,200. The decrease in real estate revenues was as a result of reduced sales of commercial real estate during the twelve months ended December 31, 2003. During fiscal 2002 the Company sold a tract of land in California which was no longer needed for the SGMC development plan for operations.
During the year ended December 31, 2003 the Company reported $287,400 in gas sales. There were no similar revenues during the twelve months ended May 31, 2002 as the Company had no production of coal bed methane gas at May 31, 2002.
The Company recognized a minimal increase in management fee revenues during the year ended December 31, 2003 to $215,600 over the $208,200 recognized in management fee revenues during the twelve months ended May 31, 2002. Management fee revenues were actually reduced after June 2003 when RMG contributed its producing and certain undeveloped properties to Pinnacle. Although RMG provided the transitional accounting services for Pinnacle through December 31, 2003, it received only its actual cost for those services.
Costs and Expenses
:
Costs and expenses for the year ended December 31, 2003 were $8,075,200 as compared to $8,877,800 for the year ended May 31, 2002. Costs and expenses of real estate operations and the cost of real estate sold decreased by $1,045,500 during that twelve months ended December 31, 2003 when compared to the costs and expenses incurred during the fiscal year ended May 31, 2002. This decrease was primarily as a result of a tract of no longer needed. Real estate was sold by SGMC during the year ended May 31, 2002 while no similar sales occurred during the year ended December 31, 2003.
During the year ended December 31, 2003 the Company recognized $313,100 in gas operating expenses. No similar expenses were recorded during the fiscal year ended May 31, 2002 as the Company had not yet begun producing gas at that time.
Mineral holding costs decreased by $246,100 to $1,461,700 at December 31, 2003 from $1,707,800 at May 31, 2002. This decrease was as a result of the Company placing all its mining properties on a shut-down status and reducing costs of holding those properties.
General and administrative costs increased by $2,050,700 during the twelve months ended December 31, 2003 over the twelve months ended May 31, 2002. This increase was as a result of several non cash items. Non cash items which were expensed during the year ended December 31, 2003 were: depreciation and amortization of $554,200; accretion of asset retirement obligations of $366,700; amortization of debt discount of $537,700; amortization of non cash services of $134,700, and non cash compensation of $893,500 for a total of $2,486,800.
The amortization of debt discount increased primarily as a result of the acceleration in the discount amortization due to the conversion of approximately one half of the debt under the terms of $1.0 million of debt to common shares of the Company’s common stock.
On January 1, 2003, the Company adopted SFAS 143, Accounting for Asset Retirement Obligation. Under the terms of this accounting standard, the Company is required to record the fair value of the reclamation liability on its shut-down mining and gas properties as of the date that the liability was incurred. The accounting standard further requires the Company to review the liability and determine if a change in estimate is required as well as accrete the total liability for the future liability. As a result of the adoption of this accounting standard, the Company recorded the non cash accretion of $366,700.
Non cash compensation increased as a result of the initial funding of the 2001 Stock Award Plan whereby five of the executive officers of the company were granted a total of 100,000 shares of common stock at $3.10 per share. Under the plan, each officer is to receive 10,000 shares of common stock annually under the condition that the shares cannot be sold until the officer’s death or retirement. The plan was effective in 2001 and had not been funded. The funding for the twelve months ended December 2003 was therefore retroactive for two years. In addition to the increase due to the funding of the 2001 Stock Award Plan, the funding for the ESOP as well as the amortization of the deferred compensation recorded in prior periods were both for a full twelve months as compared to only seven months in the prior period.
The increase in the amortization of non cash services during the year ended December 31, 2003 resulted from the issuance of additional stock and warrants for legal and financial consulting services. These services related to the formation of Pinnacle and litigation with Phelps Dodge.
Other Income and Expenses
:
During the fiscal year ended May 31, 2002 the Company recognized $812,700 in gains from the sale of assets while during the year ended December 31, 2003 the Company recognized only $198,200. The Company was selling the majority of its construction equipment during the years ended May 31, 2002 and 2001. The majority of the surplus equipment to be sold was sold during those two years.
Interest income decreased $291,800 during the year ended December 31, 2003 when compared to the year ended May 31, 2002. This reduction in revenues occurred as a result of the company having less amounts of cash invested in interest bearing accounts during the year ended December 31, 2003. In May of 2002 the Company borrowed $1.5 million from third party lenders. During the year ended December
31, 2003 the Company recorded interest on this debt while there was not interest paid on this debt during fiscal 2002.
Effective January 1, 2003 the Company adopted SFAS 143 “Accounting for Asset Retirement Obligations” which requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The Company is further required to accrete the total liability for the full value of the future liability. As a result of adopting this new accounting policy the Company recorded a cumulative effect of accounting change of $1,615,600 as well as an accretion expense of 366,700.
Operations for the year ended December 31, 2003 resulted in a loss of $5,810,100 or $0.52 per share as compared to a loss of $6,181,100 or $0.66 per share during fiscal 2002.
Seven months ended December 31, 2002 Compared to the Seven months ended December 31, 2001
Revenues:
During the seven months ended December 31, 2002, the Company recognized $673,000 in revenues as compared to $545,900 in revenues during the seven months ended December 31, 2001. This increase of $127,100 in revenues was primarily as a result of the production and sale of CBM gas during the seven months ended December 31, 2002 of $119,400 while no revenues from CBM production were recognized during the same period of the previous year.
Through the purchase of the Bobcat Field, RMG began selling CBM gas during the seven months ended December 31, 2002. As anticipated, production from these newly developed wells was lower than it will be in the future. Additionally, the market price for natural gas was very low during the summer and fall months of 2002. These reasons along with high start up and operating costs of $355,200, resulted in a loss from operations for CBM of $235,800. Management believes with increased production volumes, reduced ongoing operating costs and increased market prices for natural gas, the CBM properties will show profits and cash flows during 2003.
Costs and Expenses
:
Costs and expenses during the seven months ended December 2002 were $4,197,900 as compared to costs and expenses of $4,460,800 during the seven months ended December 31, 2001. This reduction of $262,900 was as a result of a reduction in the holding costs of shut-down mineral properties and an ongoing cost cutting program. These reductions in operating costs were offset primarily by the operating costs associated with CBM.
Other Income and Expeses
:
During the seven months ended December 31, 2002, the Company recognized a loss on the sale of assets of $342,600 while it recognized a gain on the sale of assets during the seven months ended December 31, 2001 of $592,600. The Company also had an increase in interest expense of $234,500 during the seven months ended December 31, 2002 over the same period of the previous year as a result of the interest on the Company's convertible debt.
Operations for the seven months ended December 31, 2002, resulted in a loss of $3,840,100 or $0.36 per share as compared to a loss of $2,785,400 or $0.34 per share for the seven months ended December 31, 2001.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB No. 123(R),
Accounting for Stock-Based Compensation,
which replaces FASB 123,
Accounting for Stock-Based Compensation
, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees
, and its related implementation guidance. The Company will be required to implement FASB 123(R) on the quarterly report for the quarter ended September 30, 2005. Under the terms of FASB 123(R) the Company will be required to expense the fair value of stock options issued to employees. The fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option. The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, life of the option, dividends on the stock, or the risk-free interest rate.
Effective January 1, 2003, the Company adopted SFAS No. 143 “
Accounting for Asset Retirement Obligation
.” The statement requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The statement further requires that the Company review the liability each quarter and determine if a change in estimate is required as well as accrete the total liability on a quarterly basis for the future liability.
The Company will also deduct any actual funds expended for reclamation during the quarter in which it occurs. The Company has no remaining book value for these properties.
In May 2003, the FASB issued SFAS No. 150, "
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
." This Statement establishes standards for how the Company will classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that the Company classify a financial instrument within its scope as a liability. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent with the FASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no material impact on the Company's financial position or results of operations.
The Company has reviewed other current outstanding statements from the Financial Accounting Standards Board and does not believe that any of those statements will have a material adverse affect on the financial statements of the Company when adopted.
Future Operations
We have generated operating losses for the years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002 as a result of costs associated with shut down mineral properties. Management of the Company intends to take advantage of the opportunity presented by the recent and future projected market prices for all the minerals and coalbed methane gas that it is involved with.
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.
Natural Gas and Oil.
Our decision to expand into the coalbed methane industry were predicated on the projections for natural gas prices. We believe that the energy demands of the United States of America will sustain higher natural prices. As a result of RMG’s hedging activities, the price of gas will not materially affect our operations for fiscal 2005.
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. We are currently evaluating our gold and uranium properties as market prices have increased to the level that these properties could produce profitably. Management is evaluating how long this trend will continue and at what level market prices for gold and uranium will settle at for the long term.
Molybdenum.
The price of Molybdenum at December 31, 2004 was at a 20 year high of $34 per pound. Since the U.S. District Court ruled in favor of those claims brought by Phelps Dodge, the Company and Crested believe they will receive the Mt. Emmons molybdenum property near Crested Butte, Colorado back. If the properties are received, the Company and Crested will seek financing or a joint venture partner to place the Mt. Emmons property into production. The Mt. Emmons property will have a very long life and changes in prices of molybdenum would affect the revenues from that property. The Mt. Emmons property will not be placed into production during 2005 or the near term.
Contractual Obligations
The Company has two divisions of contractual obligations as of December 31, 2004: debt to third parties of $7,180,700, and asset retirement obligations of $8,075,100. The debt will be paid over a period of five to seven years and the retirement obligations will be retired during the next 30 years. During the year ended December 31, 2004, RMG incurred new debt of $3.7 million in the acquisition of the assets of Hi-Pro, and the Company incurred $3.0 million of new debt to a private lender under a credit facility. The following table shows the schedule of the payments on the debt, and the expenditures for budgeted asset retirement obligations.
|
|
|
|
|
Less
|
|
One to
|
|
Three to
|
|
More than
|
|
|
|
|
|
than one
|
|
Three
|
|
Five
|
|
Five
|
|
|
|
Total
|
|
Year
|
|
Years
|
|
Years
|
|
Years
|
|
Long-term debt obligations
|
|
$ 7,180,700
|
|
$ 3,400,100
|
|
$ 3,771,500
|
|
$ 9,100
|
|
$ --
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
8,075,100
|
|
192,700
|
|
471,100
|
|
1,946,100
|
|
5,465,200
|
|
Totals
|
|
$ 15,255,800
|
|
$ 3,592,800
|
|
$ 4,242,600
|
|
$ 1,955,200
|
|
$ 5,465,200
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 8. Financial Statements
Financial statements meeting the requirements of Regulation S-X for the Company follow immediately.
Report of Independent Registered Public Accounting Firm
U.S. Energy Corp. Board of Directors
We have audited the accompanying consolidated balance sheet of U.S. Energy Corp. and subsidiaries as of December 31, 2004 and the related consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2004. 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of December 31, 2004 and the results of their operations and their cash flows for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has experienced significant losses from operations. In addition, the Company has a working capital deficit of $636,500 as of December 31, 2004. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regards to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ EPSTEIN, WEBER & CONOVER, PLC
Scottsdale, Arizona
March 9, 2005, except for Note P
as to which the date is April 11, 2005
Report of Independent Registered Public Accounting Firm
To U.S. Energy Corp.:
We have audited the accompanying consolidated balance sheet of U.S. Energy Corp. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion of the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of U.S. Energy Corp. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year ended December 31, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002 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
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,842,500
|
|
$
|
4,084,800
|
|
|
Accounts receivable
|
|
|
|
|
|
|
|
|
Trade, net of allowance of $111,300
|
|
|
|
|
|
|
|
|
and $27,800
|
|
|
797,500
|
|
|
300,900
|
|
|
Affiliates
|
|
|
13,500
|
|
|
96,800
|
|
|
Other
|
|
|
52,700
|
|
|
--
|
|
|
Current portion of long-term notes
|
|
|
|
|
|
|
|
|
receivable, net
|
|
|
49,500
|
|
|
102,500
|
|
|
Prepaid expenses
|
|
|
489,700
|
|
|
584,700
|
|
|
Inventories
|
|
|
176,100
|
|
|
21,700
|
|
|
Total current assets
|
|
|
5,421,500
|
|
|
5,191,400
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS:
|
|
|
|
|
|
|
|
|
Non-affiliated company
|
|
|
957,700
|
|
|
957,700
|
|
|
Restricted investments
|
|
|
6,852,300
|
|
|
6,874,200
|
|
|
Total investments
|
|
|
7,810,000
|
|
|
7,831,900
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTIES AND EQUIPMENT:
|
|
|
|
|
|
|
|
|
Land
|
|
|
576,300
|
|
|
570,000
|
|
|
Buildings and improvements
|
|
|
5,922,400
|
|
|
5,777,700
|
|
|
Machinery and equipment
|
|
|
4,919,000
|
|
|
4,762,800
|
|
|
Proved oil and gas properties, full cost method
|
|
|
5,569,000
|
|
|
1,773,600
|
|
|
Unproved coal bed methane properties
|
|
|
|
|
|
|
|
|
excluded from amortization
|
|
|
5,101,900
|
|
|
1,204,400
|
|
|
Total properties and equipment
|
|
|
22,088,600
|
|
|
14,088,500
|
|
|
Less accumulated depreciation,
|
|
|
|
|
|
|
|
|
depletion and amortization
|
|
|
(8,322,000
|
)
|
|
(6,901,400
|
)
|
|
Net properties and equipment
|
|
|
13,766,600
|
|
|
7,187,100
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
Notes receivable trade
|
|
|
2,971,800
|
|
|
2,950,600
|
|
|
Deposits and other
|
|
|
733,800
|
|
|
768,700
|
|
|
Total other assets
|
|
|
3,705,600
|
|
|
3,719,300
|
|
|
Total assets
|
|
$
|
30,703,700
|
|
$
|
23,929,700
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-59-
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,751,300
|
|
$
|
727,800
|
|
|
Accrued compensation expense
|
|
|
181,700
|
|
|
180,000
|
|
|
Asset retirement obligation
|
|
|
192,700
|
|
|
--
|
|
|
Current portion of long-term debt
|
|
|
3,400,100
|
|
|
932,200
|
|
|
Other current liabilities
|
|
|
532,200
|
|
|
69,700
|
|
|
Total current liabilities
|
|
|
6,058,000
|
|
|
1,909,700
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
3,780,600
|
|
|
1,317,600
|
|
|
|
|
|
|
|
|
|
|
|
ASSET RETIREMENT OBLIGATIONS
|
|
|
7,882,400
|
|
|
7,264,700
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ACCRUED LIABILITIES
|
|
|
1,952,300
|
|
|
2,158,600
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED GAIN ON SALE OF ASSET
|
|
|
1,279,000
|
|
|
1,295,700
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTERESTS
|
|
|
871,100
|
|
|
496,000
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FORFEITABLE COMMON STOCK, $.01 par value
|
|
|
|
|
442,740 and 465,880 shares issued,
|
|
|
|
|
|
|
|
|
forfeitable until earned
|
|
|
2,599,000
|
|
|
2,726,600
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED STOCK,
|
|
|
|
|
|
|
|
|
$.01 par value; 100,000 shares authorized
|
|
|
|
|
|
|
|
|
No shares issued or outstanding
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value;
|
|
|
|
|
|
|
|
|
unlimited shares authorized; 15,231,237
|
|
|
|
|
|
|
|
|
and 12,824,698 shares issued net of
|
|
|
|
|
|
|
|
|
treasury stock, respectively
|
|
|
152,300
|
|
|
128,200
|
|
|
Additional paid-in capital
|
|
|
59,157,100
|
|
|
52,961,200
|
|
|
Accumulated deficit
|
|
|
(49,321,700
|
)
|
|
(43,073,000
|
)
|
|
Treasury stock at cost,
|
|
|
|
|
|
|
|
|
972,306 and 966,306 shares respectively
|
|
|
(2,779,900
|
)
|
|
(2,765,100
|
)
|
|
Accumulated comprehensive loss
|
|
|
(436,000
|
)
|
|
--
|
|
|
Unallocated ESOP contribution
|
|
|
(490,500
|
)
|
|
(490,500
|
)
|
|
Total shareholders' equity
|
|
|
6,281,300
|
|
|
6,760,800
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
30,703,700
|
|
$
|
23,929,700
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-60-
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven months ended
|
|
Year ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
Real estate operations
|
|
$
|
256,100
|
|
$
|
334,300
|
|
$
|
394,500
|
|
$
|
1,276,200
|
|
|
Gas sales
|
|
|
3,205,700
|
|
|
287,400
|
|
|
119,400
|
|
|
--
|
|
|
Management fees
|
|
|
1,179,900
|
|
|
215,600
|
|
|
159,100
|
|
|
208,200
|
|
|
|
|
|
4,641,700
|
|
|
837,300
|
|
|
673,000
|
|
|
1,484,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate operations
|
|
|
295,500
|
|
|
302,900
|
|
|
189,700
|
|
|
1,348,400
|
|
|
Gas operations
|
|
|
4,168,800
|
|
|
313,100
|
|
|
355,200
|
|
|
--
|
|
|
Mineral holding costs
|
|
|
1,466,700
|
|
|
1,461,700
|
|
|
737,200
|
|
|
1,707,800
|
|
|
General and administrative
|
|
|
5,291,100
|
|
|
5,997,500
|
|
|
2,915,800
|
|
|
3,946,800
|
|
|
Impairment of goodwill
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,622,700
|
|
|
Other
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
80,900
|
|
|
Provision for doubtful accounts
|
|
|
79,000
|
|
|
--
|
|
|
--
|
|
|
171,200
|
|
|
|
|
|
11,301,100
|
|
|
8,075,200
|
|
|
4,197,900
|
|
|
8,877,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS
|
|
|
(6,659,400
|
)
|
|
(7,237,900
|
)
|
|
(3,524,900
|
)
|
|
(7,393,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME & EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sales of assets
|
|
|
46,300
|
|
|
198,200
|
|
|
(342,600
|
)
|
|
812,700
|
|
|
Gain (loss) on sale of investment
|
|
|
656,300
|
|
|
(32,400
|
)
|
|
(207,800
|
)
|
|
--
|
|
|
Interest income
|
|
|
375,800
|
|
|
560,300
|
|
|
524,500
|
|
|
852,100
|
|
|
Interest expense
|
|
|
(1,065,400
|
)
|
|
(799,100
|
)
|
|
(361,200
|
)
|
|
(345,300
|
)
|
|
|
|
|
13,000
|
|
|
(73,000
|
)
|
|
(387,100
|
)
|
|
1,319,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE MINORITY INTEREST,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE EFFECT OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTING CHANGE
|
|
|
(6,646,400
|
)
|
|
(7,310,900
|
)
|
|
(3,912,000
|
)
|
|
(6,073,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MINORITY INTEREST IN LOSS OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED SUBSIDIARIES
|
|
|
397,700
|
|
|
235,100
|
|
|
54,800
|
|
|
39,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS BEFORE PROVISION FOR INCOME
|
|
|
|
|
|
|
|
|
|
|
TAXES, DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AND CUMULATIVE EFFECT OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTING CHANGE
|
|
|
(6,248,700
|
)
|
|
(7,075,800
|
)
|
|
(3,857,200
|
)
|
|
(6,034,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-61-
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven months ended
|
|
Year ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS FROM CONTINUING
|
|
|
|
|
|
|
|
|
|
|
OPERATIONS
|
|
$
|
(6,248,700
|
)
|
$
|
(7,075,800
|
)
|
$
|
(3,857,200
|
)
|
$
|
(6,034,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET OF TAX
|
|
|
--
|
|
|
(349,900
|
)
|
|
17,100
|
|
|
(146,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CUMULATIVE EFFECT OF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTING CHANGE
|
|
|
--
|
|
|
1,615,600
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
(6,248,700
|
)
|
|
(5,810,100
|
)
|
|
(3,840,100
|
)
|
|
(6,181,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED STOCK DIVIDENDS
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(86,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS AVAILABLE TO COMMON
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS
|
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
$
|
(3,840,100
|
)
|
$
|
(6,267,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE BASIC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUED OPERATIONS
|
|
$
|
(0.47
|
)
|
$
|
(0.63
|
)
|
$
|
(0.36
|
)
|
$
|
(0.65
|
)
|
|
DISCONTINUED OPERATIONS
|
|
|
--
|
|
|
(0.03
|
)
|
|
--
|
|
|
(0.01
|
)
|
|
PREFERRED DIVIDENDS
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(0.01
|
)
|
|
EFFECT OF ACCOUNTING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTING CHANGE
|
|
|
--
|
|
|
0.14
|
|
|
--
|
|
|
--
|
|
|
|
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS PER SHARE DILUTED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTINUED OPERATIONS
|
|
$
|
(0.47
|
)
|
$
|
(0.63
|
)
|
$
|
(0.36
|
)
|
$
|
(0.65
|
)
|
|
DISCONTINUED OPERATIONS
|
|
|
--
|
|
|
(0.03
|
)
|
|
--
|
|
|
(0.01
|
)
|
|
PREFERRED DIVIDENDS
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(0.01
|
)
|
|
EFFECT OF ACCOUNTING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTING CHANGE
|
|
|
--
|
|
|
0.14
|
|
|
--
|
|
|
--
|
|
|
|
|
$
|
(0.47
|
)
|
$
|
(0.52
|
)
|
$
|
(0.36
|
)
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC WEIGHTED AVERAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES OUTSTANDING
|
|
|
13,182,421
|
|
|
11,180,975
|
|
|
10,770,658
|
|
|
9,299,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED WEIGHTED AVERAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARES OUTSTANDING
|
|
|
13,182,421
|
|
|
11,180,975
|
|
|
10,770,658
|
|
|
9,299,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-62-
|
|
|
|
U.S. ENERGY & AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Unallocated
|
|
Total
|
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Treasury Stock
|
|
ESOP
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Contribution
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2001
|
|
|
8,989,047
|
|
$
|
90,000
|
|
$
|
38,681,600
|
|
$
|
(27,155,200
|
)
|
|
949,725
|
|
$
|
(2,660,500
|
)
|
$
|
(490,500
|
)
|
$
|
8,465,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding of ESOP
|
|
|
70,075
|
|
|
700
|
|
|
236,200
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
236,900
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to outside directors
|
|
|
3,429
|
|
|
--
|
|
|
14,400
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
14,400
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for services rendered
|
|
|
45,000
|
|
|
500
|
|
|
147,600
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
148,100
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants for services rendered
|
|
|
--
|
|
|
--
|
|
|
592,900
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
592,900
|
|
|
Treasury stock from payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on balance of note receivable
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
10,000
|
|
|
(79,900
|
)
|
|
--
|
|
|
(79,900
|
)
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in exchange for preferred stock
|
|
|
513,140
|
|
|
5,100
|
|
|
1,846,400
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,851,500
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in exchange for subsidiary stock
|
|
|
912,233
|
|
|
9,100
|
|
|
3,566,900
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,576,000
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to purchase property
|
|
|
61,760
|
|
|
600
|
|
|
246,200
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
246,800
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through private placement
|
|
|
871,592
|
|
|
8,700
|
|
|
2,341,800
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,350,500
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for exercised stock warrants
|
|
|
1,205
|
|
|
--
|
|
|
4,500
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4,500
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from employee options
(1)
|
|
|
253,337
|
|
|
2,500
|
|
|
600,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
602,500
|
|
|
Net loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(6,267,600
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(6,267,600
|
)
|
|
Balance May 31, 2002
(2)
|
|
|
11,720,818
|
|
$
|
117,200
|
|
$
|
48,278,500
|
|
$
|
(33,422,800
|
)
|
|
959,725
|
|
$
|
(2,740,400
|
)
|
$
|
(490,500
|
)
|
$
|
11,742,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Net of 15,285 shares surrendered by employees for the exercise of 268,622 employee stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Total Shareholders' Equity at May 31, 2002 does not include 500,788 shares currently issued but forfeitable if certain conditions are not met by the
|
|
|
|
|
|
|
|
|
|
|
recipients. "Basic and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries,
|
|
which, in consolidation, are treated as treasury shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-63-
|
|
|
|
U.S. ENERGY & AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Unallocated
|
|
Total
|
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Treasury Stock
|
|
ESOP
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Contribution
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31, 2002
|
|
|
11,720,818
|
|
$
|
117,200
|
|
$
|
48,278,500
|
|
$
|
(33,422,800
|
)
|
|
959,725
|
|
$
|
(2,740,400
|
)
|
$
|
(490,500
|
)
|
$
|
11,742,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding of ESOP
|
|
|
43,867
|
|
|
400
|
|
|
134,700
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
135,100
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to outside consultants
|
|
|
15,000
|
|
|
200
|
|
|
60,700
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
60,900
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants
|
|
|
--
|
|
|
--
|
|
|
325,900
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
325,900
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for settlement of law suit
|
|
|
20,000
|
|
|
200
|
|
|
77,600
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
77,800
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from employee options
(1)
|
|
|
26,711
|
|
|
300
|
|
|
(300
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,840,100
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,840,100
|
)
|
|
Balance December 31, 2002
(2)
|
|
|
11,826,396
|
|
$
|
118,300
|
|
$
|
48,877,100
|
|
$
|
(37,262,900
|
)
|
|
959,725
|
|
$
|
(2,740,400
|
)
|
$
|
(490,500
|
)
|
$
|
8,501,600
|
|
|
(1)
Net of 44,456 shares surrendered by employees for the exercise of 71,167 employee stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Total Shareholders' Equity at December 31, 2002 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.
|
|
|
-64-
|
|
|
|
U.S. ENERGY & AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
Unallocated
|
|
Total
|
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Accumulated
|
|
Treasury Stock
|
|
ESOP
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Contribution
|
|
Equity
|
|
|
Balance December 31, 2002
|
|
|
11,826,396
|
|
$
|
118,300
|
|
$
|
48,877,100
|
|
$
|
(37,262,900
|
)
|
|
959,725
|
|
$
|
(2,740,400
|
)
|
$
|
(490,500
|
)
|
$
|
8,501,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding of ESOP
|
|
|
76,294
|
|
|
700
|
|
|
235,700
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
236,400
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to outside directors
|
|
|
3,891
|
|
|
--
|
|
|
14,400
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
14,400
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by release of forfeitable stock
|
|
|
78,286
|
|
|
800
|
|
|
434,400
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
435,200
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from stock warrants
|
|
|
131,596
|
|
|
1,300
|
|
|
465,300
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
466,600
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in stock compensation plan
|
|
|
100,000
|
|
|
1,000
|
|
|
309,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
310,000
|
|
|
Treasury stock from sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of subsidiary
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,581
|
|
|
(4,200
|
)
|
|
--
|
|
|
(4,200
|
)
|
|
Treasury stock from payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on balance of note receivable
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
5,000
|
|
|
(20,500
|
)
|
|
--
|
|
|
(20,500
|
)
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to outside consultants
|
|
|
121,705
|
|
|
1,200
|
|
|
581,600
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
582,800
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants to outside consultants
|
|
|
--
|
|
|
--
|
|
|
886,300
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
886,300
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for settlement of lawsuit
|
|
|
10,000
|
|
|
100
|
|
|
49,900
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
50,000
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in payment of debt
|
|
|
211,109
|
|
|
2,100
|
|
|
497,900
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
500,000
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from employee options
(1)
|
|
|
265,421
|
|
|
2,700
|
|
|
609,600
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
612,300
|
|
|
Net Loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(5,810,100
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(5,810,100
|
)
|
|
Balance December 31, 2003
(2)
|
|
|
12,824,698
|
|
$
|
128,200
|
|
$
|
52,961,200
|
|
$
|
(43,073,000
|
)
|
|
966,306
|
|
$
|
(2,765,100
|
)
|
$
|
(490,500
|
)
|
$
|
6,760,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Net of 10,200 shares surrendered by employees for the exercise of 275,621 employee stock options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Total Shareholders' Equity at December 31, 2003 does not include 465,880 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic
|
|
|
|
|
|
|
|
and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries, which, in consolidation, are
|
|
treated as treasury shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-65-
|
|
|
|
U.S. ENERGY & AFFILIATES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total Other
|
|
|
|
|
|
Unallocated
|
|
Total
|
|
|
|
|
Common Stock
|
|
Paid-In
|
|
Comprehensive
|
|
Accumulated
|
|
Comprehensive
|
|
Treasury Stock
|
|
ESOP
|
|
Shareholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Loss
|
|
Deficit
|
|
Loss
|
|
Shares
|
|
Amount
|
|
Contribution
|
|
Equity
|
|
|
Balance December 31, 2003
|
|
|
12,824,698
|
|
$
|
128,200
|
|
$
|
52,961,200
|
|
|
|
|
$
|
(43,073,000
|
)
|
|
|
|
|
966,306
|
|
$
|
(2,765,100
|
)
|
$
|
(490,500
|
)
|
$
|
6,760,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding of ESOP
|
|
|
70,439
|
|
|
700
|
|
|
207,800
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
208,500
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
by release of forfeitable stock
|
|
|
23,140
|
|
|
200
|
|
|
121,700
|
|
|
|
|
|
--
|
|
|
--
|
|
|
1,000
|
|
|
5,700
|
|
|
--
|
|
|
127,600
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from stock warrants
|
|
|
125,000
|
|
|
1,300
|
|
|
249,800
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
251,100
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in stock compensation plan
|
|
|
50,000
|
|
|
500
|
|
|
127,900
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
128,400
|
|
|
Treasury stock from payment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on balance of note receivable
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
|
5,000
|
|
|
(20,500
|
)
|
|
--
|
|
|
(20,500
|
)
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to retire debt
|
|
|
476,833
|
|
|
4,700
|
|
|
1,068,200
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,072,900
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants to RMG investors
|
|
|
--
|
|
|
--
|
|
|
291,500
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
291,500
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to RMG investors
|
|
|
882,239
|
|
|
8,900
|
|
|
1,803,700
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,812,600
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to purchase property
|
|
|
678,888
|
|
|
6,800
|
|
|
1,976,300
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,983,100
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in a private placement
|
|
|
100,000
|
|
|
1,000
|
|
|
349,000
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
$
|
(6,248,700
|
)
|
|
(6,248,700
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(6,248,700
|
)
|
|
Other comprehensive loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
hedging activity
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(436,000
|
)
|
|
|
|
|
(436,000
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(436,000
|
)
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
(6,684,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
(2)
|
|
|
15,231,237
|
|
$
|
152,300
|
|
$
|
59,157,100
|
|
|
|
|
$
|
(49,321,700
|
)
|
$
|
(436,000
|
)
|
|
972,306
|
|
$
|
(2,779,900
|
)
|
$
|
(490,500
|
)
|
$
|
6,281,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Total Shareholders' Equity at December 31, 2004 does not include 442,740 shares currently issued but forfeitable if certain conditions are not met by the recipients. "Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Diluted Weighted Average Shares Outstanding" also includes 814,496 shares of common stock held by majority-owned subsidiaries, which, in consolidation, are
|
|
|
|
|
|
|
|
treated as treasury shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-66-
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended
|
|
Year Ended
|
|
|
|
|
Year Ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,248,700
|
)
|
$
|
(5,810,100
|
)
|
$
|
(3,840,100
|
)
|
$
|
(6,267,600
|
)
|
|
Adjustments to reconcile net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in loss of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated subsidiaries
|
|
|
(397,700
|
)
|
|
(235,100
|
)
|
|
(54,800
|
)
|
|
(39,500
|
)
|
|
Amortization of deferred charge
|
|
|
343,400
|
|
|
284,700
|
|
|
101,900
|
|
|
266,500
|
|
|
Depreciation
|
|
|
1,445,200
|
|
|
554,200
|
|
|
360,100
|
|
|
541,500
|
|
|
Accretion of asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retirement obligations
|
|
|
346,700
|
|
|
366,700
|
|
|
--
|
|
|
--
|
|
|
Amortization of debt discount
|
|
|
384,300
|
|
|
537,700
|
|
|
211,200
|
|
|
--
|
|
|
Impairment of goodwill
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,622,700
|
|
|
Noncash services
|
|
|
50,400
|
|
|
134,700
|
|
|
31,500
|
|
|
787,700
|
|
|
Noncash dividend
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
11,500
|
|
|
Provision for doubtful accounts
|
|
|
79,000
|
|
|
--
|
|
|
--
|
|
|
171,200
|
|
|
Recognition of deferred gain
|
|
|
(16,700
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(Gain) loss on sale of assets
|
|
|
(46,300
|
)
|
|
(199,300
|
)
|
|
342,600
|
|
|
(812,700
|
)
|
|
(Gain) on sale investments
|
|
|
(656,300
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Write off of properties
|
|
|
--
|
|
|
--
|
|
|
21,500
|
|
|
--
|
|
|
Cumulative effect of accounting change
|
|
|
--
|
|
|
(1,615,600
|
)
|
|
--
|
|
|
--
|
|
|
Noncash compensation
|
|
|
336,900
|
|
|
608,800
|
|
|
212,900
|
|
|
268,700
|
|
|
Lease holding costs
|
|
|
--
|
|
|
50,000
|
|
|
--
|
|
|
--
|
|
|
Net changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
64,500
|
|
|
(470,300
|
)
|
|
(755,600
|
)
|
|
799,900
|
|
|
Other assets
|
|
|
(207,300
|
)
|
|
1,466,000
|
|
|
8,700
|
|
|
(47,500
|
)
|
|
Accounts payable
|
|
|
132,400
|
|
|
(827,200
|
)
|
|
609,900
|
|
|
(970,100
|
)
|
|
Accrued compensation expense
|
|
|
1,700
|
|
|
--
|
|
|
--
|
|
|
90,800
|
|
|
Prepaid drilling costs
|
|
|
--
|
|
|
(134,400
|
)
|
|
(107,700
|
)
|
|
242,100
|
|
|
Reclamation and other liabilities
|
|
|
(179,800
|
)
|
|
(393,200
|
)
|
|
--
|
|
|
--
|
|
|
NET CASH USED IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES
|
|
|
(4,568,300
|
)
|
|
(5,682,400
|
)
|
|
(2,857,900
|
)
|
|
(3,334,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-67-
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended
|
|
Year Ended
|
|
|
|
|
|
|
Year Ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Development of proved gas properties
|
|
|
|
|
$
|
(435,100
|
)
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
Development of unproved gas properties
|
|
|
|
|
|
(1,385,100
|
)
|
|
(176,400
|
)
|
|
(233,400
|
)
|
|
(142,100
|
)
|
|
Acquisition of producing gas properties
|
|
|
|
|
|
(1,198,000
|
)
|
|
--
|
|
|
(650,000
|
)
|
|
--
|
|
|
Acquisition of undeveloped gas properties
|
|
|
|
|
|
(3,213,000
|
)
|
|
--
|
|
|
(650,000
|
)
|
|
--
|
|
|
Proceeds on sale of gas interests
|
|
|
|
|
|
792,100
|
|
|
2,813,800
|
|
|
1,125,000
|
|
|
1,125,000
|
|
|
Proceeds on sale of property and equipment
|
|
|
|
|
|
49,700
|
|
|
1,604,400
|
|
|
1,566,000
|
|
|
752,000
|
|
|
Proceeds from sale investments
|
|
|
|
|
|
656,300
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Net change in restricted investments
|
|
|
|
|
|
21,900
|
|
|
3,037,500
|
|
|
66,100
|
|
|
(236,800
|
)
|
|
Purchase of property and equipment
|
|
|
|
|
|
(294,500
|
)
|
|
(92,700
|
)
|
|
(411,200
|
)
|
|
(82,300
|
)
|
|
Net change in notes receivable
|
|
|
|
|
|
11,300
|
|
|
8,800
|
|
|
--
|
|
|
--
|
|
|
Net change in investments in affiliates
|
|
|
|
|
|
(64,500
|
)
|
|
(222,600
|
)
|
|
104,600
|
|
|
406,500
|
|
|
NET CASH (USED IN) PROVIDED BY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BY INVESTING ACTIVITIES
|
|
|
|
|
|
(5,058,900
|
)
|
|
6,972,800
|
|
|
1,567,100
|
|
|
1,822,3
00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
601,100
|
|
|
1,078,900
|
|
|
--
|
|
|
2,957,400
|
|
|
Issuance of subsidiary stock
|
|
|
|
|
|
2,526,700
|
|
|
650,000
|
|
|
--
|
|
|
1,000,000
|
|
|
Proceeds from long term debt
|
|
|
|
|
|
7,460,400
|
|
|
2,600
|
|
|
892,800
|
|
|
631,700
|
|
|
Net activity on lines of credit
|
|
|
|
|
|
--
|
|
|
--
|
|
|
(200,000
|
)
|
|
(650,000
|
)
|
|
Repayments of long term debt
|
|
|
|
|
|
(1,203,400
|
)
|
|
(678,100
|
)
|
|
(225,300
|
)
|
|
(547,800
|
)
|
|
NET CASH PROVIDED BY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
9,384,800
|
|
|
1,053,400
|
|
|
467,500
|
|
|
3,391,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
(242,300
|
)
|
|
2,343,800
|
|
|
(823,300
|
)
|
|
1,878,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT BEGINNING OF PERIOD
|
|
|
|
|
|
4,084,800
|
|
|
1,741,000
|
|
|
2,564,300
|
|
|
685,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT END OF PERIOD
|
|
|
|
|
$
|
3,842,500
|
|
$
|
4,084,800
|
|
$
|
1,741,000
|
|
$
|
2,564,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
|
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
|
$
|
1,065,400
|
|
$
|
799,100
|
|
$
|
361,200
|
|
$
|
345,300
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-68-
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
(continued)
|
|
|
|
|
|
|
|
|
|
|
Seven Months Ended
|
|
Year Ended
|
|
|
|
|
|
|
Year Ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Initial valuation of new asset
|
|
|
|
|
|
|
|
|
|
|
|
|
retirement obligations
|
|
|
|
|
$
|
463,700
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through issuance of stock
|
|
|
|
|
$
|
1,983,100
|
|
$
|
--
|
|
$
|
150,000
|
|
$
|
96,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock to satisfy debt
|
|
|
|
|
$
|
1,072,900
|
|
$
|
500,000
|
|
$
|
--
|
|
$
|
3,568,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock warrants in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conjunction with debt
|
|
|
|
|
$
|
291,500
|
|
$
|
--
|
|
$
|
299,800
|
|
$
|
592,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Satisfaction of receivable - employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
with stock in company
|
|
|
|
|
$
|
20,500
|
|
$
|
20,500
|
|
$
|
--
|
|
$
|
79,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
through issuance of debt
|
|
|
|
|
$
|
--
|
|
$
|
26,300
|
|
$
|
--
|
|
$
|
180,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock warrants for services
|
|
|
|
|
$
|
--
|
|
$
|
563,400
|
|
$
|
26,100
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for services
|
|
|
|
|
$
|
--
|
|
$
|
582,800
|
|
$
|
60,900
|
|
$
|
14,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock as deferred compensation
|
|
|
|
|
$
|
--
|
|
$
|
151,900
|
|
$
|
--
|
|
$
|
261,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for retired employees
|
|
|
|
|
$
|
--
|
|
$
|
435,200
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of assets through issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of a note receivable
|
|
|
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
442,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock to retire preferred stock
|
|
|
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
1,840,000
|
|
|
The accompanying notes are an integral part of these statements.
|
|
|
-69-
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003, 2002 AND MAY 31, 2002
A.
BUSINESS ORGANIZATION AND OPERATIONS:
U.S. Energy Corp. was incorporated in the State of Wyoming on January 26, 1966. U.S. Energy Corp. and subsidiaries (the "Company" or "USE") engages in the acquisition, exploration, holding, sale and/or development of mineral and coalbed methane gas properties, the production of petroleum properties and marketing of minerals and methane gas. Principal mineral interests are in coalbed methane, uranium, gold and molybdenum. Only coalbed methane was being produced during the year ended December 31, 2004. The Company's uranium and gold properties are currently all in a shut down status. The Company holds various real and personal properties used in commercial activities. Most of the Company's activities are conducted through subsidiaries and through the joint venture discussed below and in Note D.
The Company was engaged in the maintenance of two uranium properties, one in southern Utah, and the second in Wyoming known as Sheep Mountain Partners ("SMP"). SMP has been involved in significant litigation (see Note K). Sutter Gold Mining Inc. ("SGMI"), a Canadian corporation owned 65.5% by the Company at December 31, 2004, manages the Company's interest in gold properties. The Company also owns 100% of the outstanding stock of Plateau Resources Limited ("Plateau"), which owns the nonoperating uranium mill in southeastern Utah. Currently, the mill is nonoperating. Rocky Mountain Gas, Inc. ("RMG") was formed in November 1999 to consolidate all methane gas operations of the Company. The Company owns and controls 91.1% of RMG as of December 31, 2004.
The Company's Board of Directors changed the Company's year end to December 31 effective December 31, 2002.
Management's Plan
The Company has generated significant net losses during recent years and has an accumulated deficit of $49,321,700 at December 31, 2004. The Company has a working capital deficit of $636,500 at December 31, 2004. This working capital deficit is primarily a result of debt of RMG being classified as current. See Note F. The Company used cash in its operating activities during all the periods ended December 31, 2004 reported in these financial statements. During the year ended December 31, 2003 and the fiscal year ended May 31, 2002 the Company experienced positive cash flow of $2,343,800 and $1,878,800 respectively. The Company experienced negative cash flow of $242,300 and $823,300, respectively, for the year ended December 31, 2004 and the seven months ended December 31, 2002.
After these work commitments are fully funded, the Company does not have sufficient capital available to fund its portion of the anticipated exploration and development activities on its coalbed methane properties. Additionally, the Company's known cash flows through December 31, 2004 from current operations and associated overhead are negative based on current projections. In order to improve liquidity of the Company, management intends to do the following:
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
·
|
Sell raw land it owns. Management intends to sell this land at its fair market value. The land is not needed for the operations of the Company now or into the future.
|
|
·
|
Seek additional funding through either sale of equity or joint venture partner to place SGMI and uranium properties into production or sell the properties to industry partners.
|
|
·
|
Raise additional capital through a private placement.
|
|
·
|
Reduce overhead expenses.
|
|
·
|
Successfully conclude the litigation with Nukem. See Note K
|
|
·
|
Conclude the initial phase of the UPC Agreement on the SMP properties. See Note F
|
|
·
|
Conclude the sale of RMG to Enterra. See Note P. In the event that the Enterra transaction is not closed, management will pursue private placements or a public offering of RMG common stock.
|
As a result of these plans, management believes that they will generate sufficient cash flows to meet its cash requirements in calendar 2005, although there is no assurance the plans will be accomplished.
B.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of USE and subsidiaries include the accounts of the Company, the accounts of its majority-owned or controlled subsidiaries Plateau (100%), Energx, Ltd ("Energx") (90%), Four Nines Gold, Inc. ("FNG") (50.9%), SGMI (65.5%), Crested Corp. ("Crested") (70.1%), Yellowstone Fuels Corp. ("YSFC") (35.9%), Rocky Mountain Gas ("RMG") (91.1%) and the USECC Joint Venture ("USECC"), a consolidated joint venture which is equally owned by U.S. Energy Corp. and Crested, through which the bulk of their operations are conducted.
Investments of less than 20% are accounted for by the cost method. All material intercompany profits, transactions and balances have been eliminated. Because of management control, YSFC is consolidated into the financial statements of the Company.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents in bank deposit accounts which exceed federally insured limits. At December 31, 2004, the Company had approximately 77% of its cash and cash equivalents with one financial institution. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Restricted Investments
Based on the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS 115"), the Company accounts for its restricted investment in certain securities as held-to-maturity. Held-to-maturity securities are measured at amortized cost. If a decline in fair value of such investments is determined to be other than temporary, the investment is written down to fair value.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Accounts Receivable
The majority of the Company's accounts receivable are due from industry partners for operating expenses associated with coalbed methane gas wells for which RMG acts as operator and from sale of gas and properties on which the Company provided financing. The Company determines any required allowance by considering a number of factors including length of time trade accounts receivable are past due and the Company's previous loss history. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.
As of December 31, 2003, the Company was due $863,200 from CCBM, Inc. ("CCBM"), a Delaware corporation, which is wholly-owned by Carrizo Oil & Gas, Inc., Houston Texas (NMS "CRZO"),under a non-recourse promissory note receivable, which arose as part of the sale of a portion of RMG's coalbed methane properties to CCBM. The note receivable was accounted for on a cash basis due to its non-recourse nature with principal payments received credited against natural gas properties in accordance with the full cost method of accounting. During the year ended December 31, 2004, CCBM notified the Company that it was electing to reduce its participation interest in certain properties which reduced proportionately the amount due under the note. At December 31, 2004, the note from CCBM had been paid in full.
Inventories
Inventories consist of aviation fuel and supplies used in developing oil and gas properties. Inventories are stated at lower of cost or market using the average cost method.
Properties and Equipment
Land, buildings, improvements, machinery and equipment are carried at cost. Depreciation of buildings, improvements, machinery and equipment is provided principally by the straight-line method over estimated useful lives ranging from 3 to 45 years. Following is a breakdown of the lives over which assets are depreciated.
|
Equipment
|
|
|
|
Office Equipment
|
3 to 5 years
|
|
|
Planes
|
10 years
|
|
|
Field Tools and Hand Equipment
|
5 to 7 years
|
|
|
Vehicles and Trucks
|
3 to 7 years
|
|
|
Heavy Equipment
|
7 to 10 years
|
|
Building
|
|
|
|
Service Buildings
|
20 years
|
|
|
Corporate Headquarters' Building
|
45 years
|
The Company capitalizes all costs incidental to the acquisition of mineral properties as incurred. Costs are charged to operations if the Company determines that the property is not economical. Mineral exploration costs are expensed as incurred. When it is determined that a mineral property can be economically developed as a result of establishing proved and probable reserves, costs subsequently incurred are capitalized and amortized using units of production over the estimated recoverable proved and probable reserves. Costs and expenses related to general corporate overhead are expensed as incurred.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The Company has acquired substantial mining properties and associated facilities at minimal cash cost, primarily through the assumption of reclamation and environmental liabilities. Certain of these properties are owned by various ventures in which the Company is either a partner or venturer. (See Note F).
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties subject to amortization and the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major exploration and development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the capitalized cost of the property will be added to the costs to be amortized.
After there are proven reserves, the capitalized costs associated with those reserves are subject to a "ceiling test," which basically limits such costs to the aggregate of the "estimated present value," discounted at a 10-percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized.
Long-Lived Assets
The Company evaluates its long-lived assets (other than oil and gas properties which are discussed above) for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable. If the sum of estimated future cash flows on an undiscounted basis is less than the carrying amount of the related asset, an asset impairment is considered to exist. The related impairment loss is measured by comparing estimated future cash flows on a discounted basis to the carrying amount of the asset. Changes in significant assumptions underlying future cash flow estimates may have a material effect on the Company's financial position and results of operations. An uneconomic commodity market price, if sustained for an extended period of time, or an inability to obtain financing necessary to develop mineral interests, may result in asset impairment.
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.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Revenue Recognition
Revenues from real estate operations are from the rental of office space in office buildings in Riverton, Wyoming. All these revenues are reported on a gross revenue basis and are recorded at the time the service is provided.
The Company, through its subsidiary, RMG, utilizes the entitlements method of accounting for natural gas revenues whereby revenues are recognized as the Company's share of the gas is produced and delivered to a purchaser based upon its working interest in the properties. The Company will record a receivable (payable) to the extent that it receives less (more) than its proportionate share of the gas revenues. There were no significant imbalances at December 31, 2004.
Management fees are for operating and overseeing coalbed methane production and oil production on the Fort Peck Reservation in Montana. Management fees are recorded when the service is provided.
Comprehensive Income
Unrealized gains (losses) on the hedging of gas sales are excluded from net income but are reported as comprehensive income on the consolidated statements of stockholders' equity.
Hedging Activities
The results of operations and operating cash flows are impacted by changes in market prices for oil and gas. To mitigate a portion of this exposure, the Company through RMG and its subsidiary RMG I has entered into certain derivative instruments. RMG I's derivative instruments covered approximately 92% of net gas sales for the twelve months ended December 31, 2004. All derivative instruments have been entered into and designated as cash flow hedges of gas price risk and not for speculative or trading purposes. As of December 31, 2004, RMG I's derivative instruments were comprised of swaps. For swap instruments, RMG I receives (pays) a fixed price for the hedged commodity and pays (receives) a floating market price, as defined in each instrument, to the counterparty. These instruments have been designated and have qualified as cash flow hedges. Should the Company not be able to deliver the gas under hedge, it would have to acquire the gas. In the event the market price for gas exceeded the hedge price, the Company would recognize a loss.
The carrying values of these instruments are equal to the estimated fair values. The fair values of the derivative instruments were established using appropriate future cash flow valuation methodologies. The actual contribution to future results of operations will be based on the market prices at the time of settlement and may be more or less than fair value estimates used at December 31, 2004.
Net loss on hedging activities included in gas sales on the consolidated statement of operations were $254,100 during the period ended December 31, 2004. All forecasted transactions hedged as of December 31, 2004 are expected to occur by December 2005. Approximately 30,000 mmbtu per month are hedged at $4.14 per mmbtu through December 2005 and 15,000 mmbtu per month are hedged at $8.10 per mmbtu from January 1, 2005 through March 31, 2005, resulting in an estimated fair value liability of $435,900 as of December 31, 2004.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(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. However, SFAS 123 allows the continued measurement of compensation cost for such plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided that pro forma disclosures are made of net income or loss and net income or loss per share, assuming the fair value based method of SFAS 123 had been applied. The Company has elected to account for its stock-based compensation plans under APB 25; accordingly, for purposes of the pro forma disclosures presented below, the Company has computed the fair values of all options granted using the Black-Scholes pricing model and the following weighted average assumptions:
|
|
Year Ended
|
|
Seven Months ended
|
|
Year ended
|
|
|
December 31,
|
|
December 31,
|
|
May 31,
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
4.82%
|
|
5.61%
|
|
4.4%
|
|
5.6%
|
|
Expected lives (years)
|
7.1
|
|
7
|
|
8.5
|
|
10
|
|
Expected volatility
|
50.79%
|
|
58.95%
|
|
50.38%
|
|
62.65%
|
|
Expected dividend yield
|
--
|
|
--
|
|
--
|
|
--
|
To estimate expected lives of options for this valuation, it was assumed options will be exercised at the end of their expected lives. All options are initially assumed to vest. Cumulative compensation cost recognized in pro forma net income or loss with respect to options that are forfeited prior to vesting is adjusted as a reduction of pro forma compensation expense in the period of forfeiture.
If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net loss and pro forma net loss per common share would have been reported as follows:
|
|
Year Ended
December 31,
|
|
Seven Months ended December 31,
|
|
Year ended May 31,
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
Net loss to common
|
|
|
|
|
|
|
|
|
shareholders as reported
|
$(6,248,700)
|
|
$(5,810,100)
|
|
$ (3,840,100)
|
|
$ (6,267,600)
|
|
Deduct: Total stock based
employee expense
|
|
|
|
|
|
|
|
|
determined under fair
|
|
|
|
|
|
|
|
|
value based method
|
(207,100)
|
|
(652,900)
|
|
(1,410,850)
|
|
(3,079,700)
|
|
Pro forma net loss
|
$(6,455,800)
|
|
$(6,463,000)
|
|
$ (5,250,950)
|
|
$ (9,347,300)
|
|
|
|
|
|
|
|
|
|
|
As reported, Basic
|
$ (.47)
|
|
$ (.52)
|
|
$ (.36)
|
|
$ (.67)
|
|
As reported, Diluted
|
(.47)
|
|
(.52)
|
|
(.36)
|
|
(.67)
|
|
Pro forma, Basic
|
(.49)
|
|
(.58)
|
|
(.49)
|
|
(1.01)
|
|
Pro forma, Diluted
|
(.49)
|
|
(.58)
|
|
(.49)
|
|
(1.01)
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Weighted average shares used to calculate pro forma net loss per share were determined as described in Note B, except in applying the treasury stock method to outstanding options, net proceeds assumed received upon exercise were increased by the amount of compensation cost attributable to future service periods and not yet recognized as pro forma expense.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". This statement requires recognition of deferred income tax assets and liabilities for the expected future income tax consequences, based on enacted tax laws, of temporary differences between the financial reporting and tax bases of assets, liabilities and carryforwards.
SFAS 109 requires recognition of deferred tax assets for the expected future effects of all deductible temporary differences, loss carryforwards and tax credit carryforwards. Deferred tax assets are reduced, if deemed necessary, by a valuation allowance for any tax benefits which, based on current circumstances, are not expected to be realized.
Net Loss Per Share
The Company reports net 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 is computed based on the weighted average number of common shares outstanding. Diluted earnings per share is computed based on the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock, if dilutive. Potential common shares relating to options and warrants are excluded from the computation of diluted earnings (loss) per share, because they were antidilutive, totaled 5,628,820, 3,790,370, 4,910,900 and 3,999,468 at December 31, 2004, 2003 and 2002 and May 31, 2002, 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 with the presentation for the current year.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued FASB No. 123(R),
Accounting for Stock-Based Compensation,
which replaces FASB 123,
Accounting for Stock-Based Compensation
, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees
, and its related implementation guidance. The Company will be required to implement FASB 123(R) on the quarterly report for the quarter ending September 30, 2005. Under the terms of FASB 123(R) the Company will be required to expense the fair value of stock options issued to employees. The fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends on it, and the risk-free interest rate over the expected life of the option. The fair value of an option estimated at the grant date is not subsequently adjusted for changes in the price of the underlying stock or its volatility, life of the option, dividends on the stock, or the risk-free interest rate.
SFAS 143
Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligation." The statement requires the Company to record the fair value of the reclamation liability on its shut down mining and gas properties as of the date that the liability is incurred. The statement further requires that the Company review the liability each quarter and determine if a change is estimate is required as well as accrete the total liability on a quarterly basis for the future liability.
The Company will also deduct any actual funds expended for reclamation during the quarter in which it occurs. As a result of the Company taking impairment allowances in prior periods on its shut down mining properties, it has no remaining book value for these properties.
The following is a reconciliation of the total liability for asset retirement obligations:
|
|
|
Year ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Beginning balance
|
|
$
|
7,264,700
|
|
$
|
8,906,800
|
|
|
Impact of adoption of SFAS No. 143
|
|
|
--
|
|
|
(1,615,600
|
)
|
|
Addition to Liability
|
|
|
463,700
|
|
|
--
|
|
|
Liability Settled
|
|
|
--
|
|
|
(393,200
|
)
|
|
Accretion Expense
|
|
|
346,700
|
|
|
366,700
|
|
|
Ending balance
|
|
$
|
8,075,100
|
|
$
|
7,264,700
|
|
|
|
|
|
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The following table shows the Company's net loss and net loss per share on a pro forma basis as if the provisions of SFAS No. 143 had been applied retroactively in all periods presented.
|
|
|
|
|
|
|
Seven months
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
Year ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
NET LOSS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss
|
|
$
|
(6,248,700
|
)
|
$
|
(7,075,800
|
)
|
$
|
(3,857,200
|
)
|
$
|
(6,034,400
|
)
|
|
Cumulative effect of adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of SFAS No. 143
|
|
|
--
|
|
|
--
|
|
|
(200,000
|
)
|
|
(333,000
|
)
|
|
Adjusted net loss
|
|
$
|
(6,248,700
|
)
|
$
|
(7,075,800
|
)
|
$
|
(4,057,200
|
)
|
$
|
(6,367,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE OF COMMON STOCK:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss-basic
|
|
$
|
(0.47
|
)
|
$
|
(0.63
|
)
|
$
|
(0.36
|
)
|
$
|
(0.65
|
)
|
|
Cumulative effect of adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of SFAS No. 143
|
|
|
--
|
|
|
--
|
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
Adjusted net loss-basic
|
|
$
|
(0.47
|
)
|
$
|
(0.63
|
)
|
$
|
(0.38
|
)
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported net loss-diluted
|
|
$
|
(0.47
|
)
|
$
|
(0.63
|
)
|
$
|
(0.36
|
)
|
$
|
(0.65
|
)
|
|
Cumulative effect of adoption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of SFAS No. 143
|
|
|
--
|
|
|
--
|
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
Adjusted net loss-diluted
|
|
$
|
(0.47
|
)
|
$
|
(0.63
|
)
|
$
|
(0.38
|
)
|
$
|
(0.69
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average - basic
|
|
|
13,182,421
|
|
|
11,180,975
|
|
|
10,770,658
|
|
|
9,299,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average - diluted
|
|
|
13,182,421
|
|
|
11,180,975
|
|
|
10,770,658
|
|
|
9,299,359
|
|
Computed on a pro-forma basis, the provisions of SFAS No. 143 would have been $7,291,200, $7,091,200 and $6,758,200 at December 31, 2002 and May 31, 2002 and 2001, respectively.
In May 2003 the FASB issued SFAS No. 150, "
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity
." This Statement establishes standards for how the Company will classify and measure certain financial instruments with characteristics of both liabilities and equity. It requires that the Company classify a financial instrument within its scope as a liability. Some of the provisions of this Statement are consistent with the current definition of liabilities in FASB Concepts Statement No. 6, "Elements of Financial Statements." The remaining provisions of this Statement are consistent with the FASB's proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own equity shares, depending on the nature of the relationship established between the holder and the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had no material impact on the Company's financial position or results of operations.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The Company has reviewed other current outstanding statements from the Financial Accounting Standards Board and does not believe that any of those statements will have a material adverse affect on the financial statements of the Company when adopted.
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; conducts oil and gas operations; and transacts all operating and payroll expenses through a joint venture with Crested, the USECC Joint Venture.
E.
RESTRICTED INVESTMENTS:
The Company's restricted investments secure various decommissioning, reclamation and holding costs. Investments are comprised of debt securities issued by the U.S. Treasury that mature at varying times from three months to one year from the original purchase date. As of December 31, 2004 and 2003, the cost of debt securities was a reasonable approximation of fair market value. These investments are classified as held-to-maturity under SFAS 115 and are measured at amortized cost.
F.
MINERAL CLAIMS TRANSACTIONS:
Phelps Dodge
During prior years, the Company and Crested conveyed interests in mining claims to AMAX Inc. (“AMAX”) in exchange for cash, royalties and other consideration. AMAX merged with Cyprus Minerals (“Cyprus Amax”) which was purchased by Phelps Dodge Mining Company (“Phelps Dodge”) in December 1999. The properties have not been placed into production as of December 31, 2004.
Amax and later Cyprus Amax paid the Company and Crested an annual advance royalty of 50,000 (25,000 lbs. to each) pounds of molybdenum (or its cash equivalent). During fiscal 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 Phelps Dodge Corporation authorizing the return of the Mt. Emmons molybdenum properties and associated water treatment plant to the Company and Crested. USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights be conveyed to USECC. The motion is pending. The ultimate impact of this decision on the financial statements of the Company in management’s opinion will not be measurable until such time as the final decisions are reached and the property actually transferred to the Company. (See Note K)
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Sutter Gold Mining, Inc.
Sutter Gold Mining Company (“SGMC”) was established in 1990 to conduct operations on mining leases and to produce gold from the 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 Sutter Gold Mining Inc. ("SGMI") (formerly Globemin Resources, Inc.) of Vancouver, B.C. SGMI is traded on the TSX Venture Exchange. Approximately 90% of SGMI's common stock was exchanged for 40,190,647 shares of SGMI common stock. At December 31, 2004, the Company owned and controlled 65.5% of the common stock of SGMI.
At December 31, 2004, the spot market price for gold had attained levels that management believes will allow SGMI to produce gold from the property on an economic basis. This conclusion is based on engineering analysis completed on the property, although, economic reserve have not been delineated. Management of SGMI is therefore pursuing the equity capital market and non-affiliated investors to obtain sufficient capital to complete the development of the mine, construct a mill and place the property into production.
SMP
During fiscal 1989, USE and Crested, through USECC, entered into an agreement to sell a 50% interest in their Sheep Mountain properties to a subsidiary of Nukem Inc., CRIC. USECC and CRIC immediately contributed their 50% interests in the properties to a newly-formed partnership, SMP. The SMP Partnership was established to further develop and mine the uranium claims on Sheep Mountain, acquire uranium supply contracts and market uranium. Certain disputes arose among USECC, CRIC and its parent Nukem, Inc. over the operation of SMP. These disputes have been in litigation/arbitration for the past fourteen years. See Note K for the status of the related litigation/arbitration.
Due to the litigation and arbitration proceedings involving SMP, the Company has expensed all of its costs related to SMP and has no carrying value of its investment in SMP at December 31, 2004 OR December 31, 2003.
On December 8, 2004, the Company 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 “UPC-V) for the sale to UPC of an undivided 50% interest in the SMP uranium properties. A summary of certain provisions in the agreement follows.
The initial purchase price for the 50% interest in the properties is $4,050,000 and 4,000,000 shares of common stock of UPC, payable by installments. All amounts are stated in US dollars.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Initial cash and equity purchase price
:
|
October 29, 2004
|
|
$
|
175,000
|
|
Non-refundable deposit against execution of the definitive agreement.
|
|
|
|
|
|
|
|
|
November 29, 2004
|
|
$
|
175,000
|
|
Released from escrow on January 27, 2005 which was five days after TSX-V approval of the agreement.
|
|
|
|
|
|
|
|
|
June 29, 2005
|
|
$
|
500,000
|
|
and 1,000,000 common shares of UPC stock subject to TSX-V regulations.
|
|
|
|
|
|
|
|
|
June 29, 2006
|
|
$
|
800,000
|
|
and 750,000 common shares of UPC stock subject to TSX-V regulations.
|
|
|
|
|
|
|
|
|
December 29, 2006
|
|
$
|
800,000
|
|
and 750,000 common shares of UPC stock subject to TSX-V regulations.
|
|
|
|
|
|
|
|
|
June 29, 2007
|
|
$
|
800,000
|
|
and 750,000 common shares of UPC stock subject to TSX-V regulations.
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
$
|
800,000
|
|
and 750,000 common shares of UPC stock subject to TSX-V regulations
|
|
Total
|
|
$
|
4,050,000
|
|
4,000,000 common shares of UPC
|
Upward adjustment to initial cash purchase price
:
The cash portion of the initial purchase price will be increased by $3,000,000 (in two $1,500,000 installments) after the uranium oxide price (long term indicator) is at or exceeds $30.00/lb for four consecutive weeks (the “price benchmark”). If the price benchmark is attained on or before April 29, 2006, the first installment will be due six months after price attainment (but not before April 29, 2006). If the price benchmark is attained after April 29, 2006, the first installment will be due six months after attainment. In either event, the second installment will be due six months after the first installment is due. These payment obligations will survive closing of the purchase of the 50% interest in the properties; if the installments are not timely paid, UPC will forfeit all of its 50% interest in the properties, and in the joint venture to be formed.
The Company and Crested and UPC, will each be responsible for paying 50% of (i) current and future Sheep Mountain reclamation costs in excess of $1,600,000, and (ii) all costs to maintain and hold the properties.
Closing of the agreement is required on or before December 29, 2007, with UPC’s last payment of the initial purchase price (plus, if applicable, the increase in the cash portion). At the closing, UPC will contribute its 50% interest in the properties, and the Company and Crested will contribute their aggregate 50% interest in the properties, to a joint venture, wherein UPC and the Company and Crested each will hold a 50% interest. The joint venture generally will cover uranium properties in Wyoming and other properties identified in the Company's and Crested’s uranium property data base, but excluding the Green
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with a future joint venture involving that mill.
UPC will contribute up to $10,000,000 to the joint venture (at $500,000 for each of 20 exploration projects). The Company, Crested and UPC, each will be responsible for 50% of costs on each project in excess of $500,000.
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 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 Pleateau stock and agreed to assume all environmental liabilities and reclamation bonding obligations. At December 31, 2004, Plateau has a cash security in the amount of $6.8 million to cover reclamation and annual licensing of the properties (see Note K). The Directors of the Company and Crested have agreed to divide equally the cash flows derived from operations and a portion of certain reclamation obligations.
On August 1, 2003, the Company and Crested sold interest in the Ticaboo Townsite in southern Utah as a result of Pleateau entering into a Stock Purchase Agreement to sell all the outstanding shares of Canyon Homesteads, Inc. (“Canyon”) to The Cactus Group LLC, a newly formed Colorado limited liability company. The Cactus Group purchased all of the outstanding stock of Canyon for $3,370,000. Of that amount, $349,300 was paid in cash at closing and the balance of $3,120,700 is to be paid under the terms of a promissory note, which bears interest at 7.5%.
Pursuant to the note agreement, the Company and Crested received $166,000 in payments on the note receivable and $44,000 in room credits. At December 31, 2004, the note was current. The Company and Crested are to receive $10,000 per month for the months of January through March 2005 and $24,000 per month on a monthly basis after March of 2005 until August of 2008, at which time, a balloon payment of $2.8 million is due. The note is secured with all the assets of The Cactus Group and Canyon along with personal guarantees by the six principals of The Cactus Group. As additional consideration for the sale, the Company and Crested will also receive the first $210,000 in gross proceeds from the sale of either single family or mobile home lots in Ticaboo.
The Company and Crested are currently evaluating the best utilization of Plateau’s assets. Evaluations are ongoing to determine when, or if, the mine and mill properties should be placed into production. The primary factor in these evaluations relates to uranium market prices.
ROCKY MOUNTAIN GAS, INC.
In 1999, the Company and Crested organized Rocky Mountain Gas, Inc. (“RMG”) to enter into the coalbed methane gas/natural gas business. RMG is engaged in the acquisition of coalbed methane gas properties and the future exploration, development and production of methane gas from those properties. At December 31, 2004, RMG is owned 49.3% by the Company and 39.8% by Crested. At December 31, 2004, RMG owns 237,200 gross acres and 128,700 net acres.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
CCBM
RMG sold an interest in its coalbed methane properties to CCBM. The agreement between CCBM and RMG is to finance the further development of coalbed methane acreage currently owned by RMG in Montana and Wyoming, and to acquire and develop more acreage in Wyoming and the Powder River Basin of Montana. At December 31, 2004, CCBM had completed its funding and drilling commitments. RMG assigned a 25% undivided interest in its Oyster Ridge property and a 6.25% undivided interest in its Castle Rock properties to CCBM. RMG also assigned varying interests in other properties to CCBM which were later contributed to Pinnacle Gas Resources, Inc. ("Pinnacle") see discussion below on Pinnacle.
RMG is the designated operator under a Joint Operating Agreement (“JOA”) between RMG and CCBM, which will govern all operations on the properties subject to a Purchase and Sale Agreement between RMG and CCBM, subject to pre-existing JOA’s with other entities, and operation or properties in the area of mutual interest (“AMI”). CCBM has the right to participate in other properties RMG may acquire under the area of mutual interest (“AMI”), until June 30, 2005.
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.
The CSFB Parties also contributed approximately $13.0 million of cash to Pinnacle in return for the Redeemable Preferred Stock of Pinnacle (“Pinnacle Preferred Stock”), and warrants to purchase Pinnacle Common Stock (“Pinnacle Warrants”). The CSFB Parties also agreed to contribute additional cash, under certain circumstances, of up to approximately $11.8 million to Pinnacle to fund future drilling, development and acquisitions. The CSFB Parties currently have greater than 50% of the voting power of the Pinnacle capital stock through their ownership of Pinnacle Common Stock and Pinnacle Preferred Stock.
At December 31, 2004 RMG and CCBM each owned 16.7% of Pinnacle and the CSFB Parties owned 66.6%.
Pinnacle is a private corporation. Only such information about Pinnacle as its board of directors elects to release is available to the public. All other information about Pinnacle is subject to confidentiality agreements between Pinnacle, RMG and the other parties to the June 2003 transaction.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
RMG I - HI-PRO
On January 30, 2004, RMG, through its wholly owned subsidiary RMG I, purchased the producing, and non-producing properties of Hi-Pro Production LLC ("Hi-Pro"), a company in the Powder River Basin of Wyoming. The terms of the purchase were as follows:
|
$ 776,700
|
|
|
cash paid by RMG I, $75,000.
|
|
|
$ 588,300 8,300
|
|
|
net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro.
(1)
|
|
|
$ 500,000
|
|
|
by USE's 30 day promissory note (secured by 166,667 restricted shares of USE common stock, valued at $3.00 per share.)
(2)
|
|
|
$ 600,000
|
|
|
by 200,000 restricted shares of USE common stock (valued at $3.00 per share).
|
|
|
$ 700,000
|
|
|
by 233,333 restricted shares of RMG common stock (valued at $3.00 per share.)
(3)
|
|
|
$
3,635,000
|
|
|
cash, loaned to RMG I under the credit facility agreement.
|
|
|
$ 6,800,000
|
|
|
|
|
|
(588,300)
|
|
|
reverse net revenues from November 1, 2003 to December 31, 2003, which were retained by Hi-Pro
|
|
|
$ 6,211,700
|
|
|
|
|
_________________________
(1)
RMG I paid all January operating costs at closing. Net revenues from the purchased properties for January 2004 were credited to RMG I's obligations under the credit facility agreement.
These net revenues were considered by the parties to be a reduction in the purchase price which RMG I otherwise would have paid at the January 30, 2004 closing.
(2)
Pursuant to the terms of the promissory note, USE issued 166,667 shares as payment in full of this obligation during the first quarter of 2004.
(3)
The RMG shares were convertible at Hi-Pro's sole election into restricted shares of common stock of USE. The number of USE shares to be issued were based upon (A) the number of RMG
shares to be converted, multiplied by $3.00 per share, divided by (B) the average closing sale price of the shares of USE for the 10 trading days prior to notice of conversion. During the quarter
ended June 30, 2004, all of these shares were converted into 312,221 shares of the Company's common stock. The Company has filed a resale registration statement with the Securities and
Exchange Commission to cover public resale of these shares.
RMG I purchased these properties to continue its entry into the coalbed methane gas business and accounted for as a purchase transaction with the estimated fair value of assets and liabilities assumed in the acquisition as follows:
|
Estimated fair value of assets acquired
|
|
|
Current assets
|
$ 639,400
|
|
Oil and gas properties
|
6,538,300
|
|
Other property and equipment
|
146,700
|
|
Other long term assets
|
145,000
|
|
Total assets acquired
|
$
7,469,400
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
Estimated fair value of liabilities assumed
|
|
|
Current liabilities
|
$ 884,800
|
|
Asset retirement obligation
|
372,100
|
|
Total liabilities assumed
|
1,256,900
|
|
Net assets acquired
|
$ 6,212,500
|
RMG I financed $3.6 million of the cash component from a $25 million credit facility arranged by Petrobridge Investment Management, LLC (Petrobridge), a mezzanine lender headquartered in Houston, TX. The properties acquired from Hi-Pro serve as the sole collateral for the credit facility. As defined by the agreement, terms under the credit facility include the following: (1) advances under the credit facility are subject to lender's approval; (2) all revenues from oil and gas properties securing the credit facility will be paid to a lock box controlled by the lender. All disbursements for lease operating costs, revenue distributions and operating expense require approval by the lender before distributions are made; and (3) RMG I must maintain certain financial ratios and production volumes, among other requirements.
Results of operations for the year ended December 31, 2004 would not be materially affected had the purchase if Hi-Pro occurred on January 1, 2004.
At December 31, 2004, RMG I was not in compliance with five of the financial covenants under the Petrobridge agreement. The ratios and production figures that RMG I is not in compliance with are:
|
|
Terms of Loan
|
|
Actual at 12-31-04
|
|
Total Debt to EBITDA
|
No greater than 2 to 1
|
|
5.7 to 1
|
|
EBITDA to interest and rents
|
Not less than 3 to 1
|
|
1.3 to 1
|
|
Current Ratio
|
Not less than 1 to 1
|
|
.3 to 1
|
|
NPV of proved developed
Producing reserves to debt
|
Not less than 1 to 1
|
|
.9 to 1
|
|
Sales Volumes
|
230 mmcf per quarter
|
|
182.2 mmcf
|
A revocable waiver was granted through January 31, 2006 by the lender. As the wavier is conditional, the entire debt is classified by RMG as current. Management of RMG I continues to seek solutions in the production of coalbed methane gas to bring the project into compliance. Due to lower than projected sales volumes, the Hi-Pro field will remain out of compliance unless (1) higher prices are realized, (2) costs are reduced and (3) the debt is paid down. It is probable that RMG I will not be in compliance with these ratios for the next reporting period. Should the lender declare the note in default, the only asset available for recourse is the Hi-Pro property owned by RMG I.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Oil and Gas Properties and Equipment Included the Following:
|
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Oil and gas properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to amortization
|
|
|
1,773,600
|
|
|
1,773,600
|
|
|
1,773,600
|
|
|
1,773,600
|
|
|
Acquired in calendar 2004
|
|
|
3,785,400
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Acquired in calendar 2003
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Acquired in calendar 2002
|
|
|
650,000
|
|
|
650,000
|
|
|
650,000
|
|
|
--
|
|
|
|
|
|
6,209,000
|
|
|
2,423,600
|
|
|
2,423,600
|
|
|
1,773,600
|
|
|
Not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired in calendar 2004
|
|
|
4,471,100
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Acquired in calendar 2003
|
|
|
265,400
|
|
|
265,400
|
|
|
--
|
|
|
--
|
|
|
Acquired in calendar 2002
|
|
|
508,400
|
|
|
508,400
|
|
|
508,400
|
|
|
--
|
|
|
Acquired in fiscal 2002
|
|
|
363,900
|
|
|
363,900
|
|
|
363,900
|
|
|
363,900
|
|
|
Acquired in fiscal 2001
|
|
|
1,154,500
|
|
|
1,154,500
|
|
|
1,154,500
|
|
|
1,154,500
|
|
|
Acquired in fiscal 2000
|
|
|
4,727,200
|
|
|
4,727,200
|
|
|
4,727,200
|
|
|
4,727,200
|
|
|
Less prior year's sales
|
|
|
(6,315,600
|
)
|
|
(2,500,000
|
)
|
|
(1,250,000
|
)
|
|
--
|
|
|
|
|
|
5,174,900
|
|
|
4,519,400
|
|
|
5,504,000
|
|
|
6,245,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of gas property interests
|
|
|
(563,600
|
)
|
|
(3,815,600
|
)
|
|
(1,250,000
|
)
|
|
(1,250,000
|
)
|
|
|
|
|
4,611,300
|
|
|
703,800
|
|
|
4,254,000
|
|
|
4,995,600
|
|
|
Total oil and gas properties
|
|
|
10,820,300
|
|
|
3,127,400
|
|
|
6,677,600
|
|
|
6,769,200
|
|
|
Accumulated depreciation, depletion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and amortization
|
|
|
(2,917,500
|
)
|
|
(1,923,000
|
)
|
|
(1,834,100
|
)
|
|
(1,773,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net oil and gas properties
|
|
$
|
7,902,800
|
|
$
|
1,204,400
|
|
$
|
4,843,500
|
|
$
|
4,995,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company began drilling of its coalbed methane properties during 2002 and acquired producing properties in January of 2004 and June 2002.
The following sets forth costs incurred from oil and gas property acquisition and development activities:
|
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Acquisition of properties/facilities
|
|
$
|
6,613,900
|
|
$
|
107,100
|
|
$
|
936,200
|
|
$
|
192,600
|
|
|
Development
|
|
|
1,642,600
|
|
|
158,300
|
|
|
97,200
|
|
|
87,400
|
|
|
|
|
$
|
8,256,500
|
|
$
|
265,400
|
|
$
|
1,033,400
|
|
$
|
280,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The results from operations of oil and gas activities for the year ended December 31, 2004 and 2003 are as follows:
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Year ended December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
Sales to third parties
|
|
$
|
2,951,600
|
|
$
|
287,400
|
|
$
|
199,400
|
|
|
Production costs
|
|
|
(2,322,200
|
)
|
|
(224,200
|
)
|
|
(335,200
|
)
|
|
Depreciation, depletion and amortization
|
|
|
(994,500
|
)
|
|
(88,900
|
)
|
$
|
(65,200
|
)
|
|
Loss from oil and gas production activities
|
|
$
|
(365,100
|
)
|
$
|
(25,700
|
)
|
$
|
(301,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, depletion and amortization was $0.98, $1.09 and $1.14 per equivalent mcf of production for the year ended December 31, 2004, 2003 and the seven months ended December 31, 2002, respectively.
G.
DEBT:
As of December 31, 2004 and 2003 the company and its affiliates had current and long term liabilities associated with the comprehensive loss from hedging of coalbed methane gas, prepaid rents, leases, self funding of employee health insurance and accrued holding costs of its uranium properties in southern Utah as follows:
Current other liabilities:
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Comprehensive loss from hedging
|
|
$
|
436,000
|
|
$
|
--
|
|
|
Prepaid rent
|
|
|
26,500
|
|
|
--
|
|
|
Mineral property lease
|
|
|
69,700
|
|
|
69,700
|
|
|
|
|
$
|
532,200
|
|
$
|
69,700
|
|
|
|
|
|
|
|
|
|
|
Long term other liabilities:
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Employee health insurance self funding
|
|
$
|
297,900
|
|
$
|
247,500
|
|
|
Holding cost of uranium property
|
|
|
1,654,400
|
|
|
1,911,100
|
|
|
|
|
$
|
1,952,300
|
|
$
|
2,158,600
|
|
|
|
|
|
|
|
|
|
|
Lines of Credit
As of December 31, 2004, the Company had a $750,000 line of credit with a commercial bank. The line of credit bore interest at a variable rate (6.25% as of December 31, 2004). The weighted average interest rate for the year ended December 31, 2004 was 5.34%. As of December 31, 2004, there was no outstanding balance due under the line of credit. The line of credit expired on December 31, 2004 and has been renewed for 6 months to June 30, 2005. This line of credit is secured by a share of the net proceeds of fees from production of oil wells and certain assets of USECC.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Long-term Debt
|
The components of long-term debt as of December 31, 2004 and 2003 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2004
|
|
2003
|
|
|
USECC installment notes - collateralized
|
|
|
|
|
|
|
by equipment; interest at 5.25%
|
|
|
|
|
|
|
|
|
to 9.0%, matures in 2005-2009
|
|
|
|
|
$
|
1,192,300
|
|
$
|
1,407,900
|
|
|
SGMC installment notes - collateralized
|
|
|
|
|
|
|
|
by certain properties, interest at
|
|
|
|
|
|
|
|
|
|
|
|
8.0% maturity 2009
|
|
|
|
|
|
46,500
|
|
|
62,900
|
|
|
PLATEAU installment note - collateralized
|
|
|
|
|
|
|
|
by equipment, interest at 8.0%
|
|
|
|
|
|
--
|
|
|
--
|
|
|
USE convertible note - net of discount
|
|
|
|
|
|
|
|
collateralized by equipment coalbed methane
|
|
|
|
|
|
|
|
|
|
|
|
leases and 4,000,000 shares of RMG stock
|
|
|
|
|
|
|
|
|
|
|
|
interest at 10%, maturity 2006
|
|
|
|
|
|
3,000,000
|
|
|
|
|
|
Discount for issuance of USE warrants
|
|
|
|
|
|
(315,800
|
)
|
|
|
|
|
Amortization of warrants discount
|
|
|
|
|
|
42,800
|
|
|
|
|
|
|
|
|
|
|
|
2,727,000
|
|
|
--
|
|
|
USE convertible notes - net of discounts
|
|
|
|
|
|
|
|
by equipment, interest at 8.0%, maturity 2006
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
Discount for issuance of USE warrants
|
|
|
|
|
|
|
|
|
(969,900
|
)
|
|
Payment of principal
|
|
|
|
|
|
|
|
|
(500,000
|
)
|
|
Amortization of warrants discount
|
|
|
|
|
|
|
|
|
748,900
|
|
|
--
|
|
|
|
|
|
|
|
|
779,000
|
|
|
RMG production related note - collateralized
|
|
|
|
|
|
|
|
by gas properties and production,
|
|
|
|
|
|
|
|
|
|
|
|
interest at 11.0%
|
|
|
|
|
|
3,700,000
|
|
|
|
|
|
Additional borrowings
|
|
|
|
|
|
479,700
|
|
|
|
|
|
Discount for issuance of USE warrants
|
|
|
|
|
|
(80,400
|
)
|
|
|
|
|
Discount for overriding royalty
|
|
|
|
|
|
(314,200
|
)
|
|
|
|
|
Payment of principal
|
|
|
|
|
|
(690,900
|
)
|
|
|
|
|
Amortization of warrant and royalty discount
|
|
|
|
|
|
120,600
|
|
|
|
|
|
|
|
|
|
|
|
3,214,800
|
|
|
--
|
|
|
|
|
|
|
|
|
7,180,600
|
|
|
2,249,800
|
|
|
Less current portion
|
|
(3,400,100
|
)
|
|
(932,200
|
)
|
|
|
|
|
|
|
$
|
3,780,500
|
|
$
|
1,317,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal requirements on long-term debt are $3,400,100, $2,873,100, $875,000, $23,400 and $9,000
for the years ended December 31, 2005 through 2009, respectively.
|
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
On July 30, 2004, the Company entered into a credit agreement with Geddes and Company ("Geddes"), based in Phoenix, Arizona, to borrow up to $3 million (USE convertible notes above). Proceeds from the credit facility are to be used to acquire and develop gas properties, and for general corporate purposes of USE and the Company.
Collateral for the credit facility include:
|
|
(a)
|
the Company's coalbed methane leases in the Castle Rock property (located in the Montana portion of the Powder River Basin) and;
|
(b)
4 million shares of RMG's common stock owned by the Company.
In 2003, Caydal converted $500,000 of debt to 211,109 shares of common stock (33,333 shares at the original $3.00 conversion price, and 177,776 shares at the restructured price of $2.25). During the calendar year ended December 31, 2004, Caydal converted the balance of its debt of $500,000 into 222,220 shares of the Company's common stock. Tsunami parties (Tsunami") also converted its $500,000 in convertible debt into 222,220 shares of the Company's common stock. The Company paid $25,600 and $44,700 in interest to Caydal and Tsunami respectively by issuing 11,447 shares of common stock to Caydal and 20,946 shares of common stock to Tsunami.
H.
INCOME TAXES:
The components of deferred taxes as of December 31, 2004 and 2003 are as follows:
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Deferred compensation
|
|
|
1,565,700
|
|
$
|
445,400
|
|
|
Net operating loss carryforwards
|
|
|
13,978,900
|
|
|
11,596,000
|
|
|
Non-deductible reserves and other
|
|
|
523,000
|
|
|
437,200
|
|
|
Tax basis in excess of book basis
|
|
|
994,700
|
|
|
106,700
|
|
|
Total deferred tax assets
|
|
|
17,062,300
|
|
|
12,585,300
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Book basis in excess of tax basis
|
|
|
(1,397,900
|
)
|
|
(486,200
|
)
|
|
Development and exploration costs
|
|
|
(109,400
|
)
|
|
(107,600
|
)
|
|
Total deferred tax liabilities
|
|
|
(1,507,300
|
)
|
|
(593,800
|
)
|
|
|
|
|
15,555,000
|
|
|
11,991,500
|
|
|
Valuation allowance
|
|
|
(15,555,000
|
)
|
|
(11,991,500
|
)
|
|
Net deferred tax liability
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
A valuation allowance for deferred tax assets is required when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of this deferred tax asset depends on the Company's ability to generate sufficient taxable income in the future. Management believes it is more likely than not that the net deferred tax asset will not be realized by future operating results.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The valuation allowance increased $3,563,500 for the year ended December 31, 2004 and increased $2,042,100 for the year ended December 31, 2003, increased $649,000 for the seven months ended December 31, 2002 and decreased $2,740,300 for the year ended May 31, 2002.
The income tax provision (benefit) is different from the amounts computed by applying the statutory federal income tax rate to income before taxes. The reasons for these differences are as follows:
|
|
|
|
|
|
|
Seven
|
|
|
|
|
|
|
|
|
|
|
months ended
|
|
Year ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Expected federal income tax
|
|
|
(2,133,800
|
)
|
|
(2,405,800
|
)
|
|
(1,305,600
|
)
|
|
(2,131,000
|
)
|
|
Net operating losses not previously
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefitted and other
|
|
|
(1,429,700
|
)
|
|
363,700
|
|
|
655,700
|
|
|
4,871,300
|
|
|
Valuation allowance
|
|
|
3,563,500
|
|
|
2,042,100
|
|
|
649,900
|
|
|
(2,740,300
|
)
|
|
Income tax provision
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no taxes currently payable as of December 31, 2004 and December 31, 2003 related to continuing operations.
At December 31, 2004, the Company had available, for federal income tax purposes, net operating loss carryforwards of approximately $12,979,300 which will expire from 2006 to 2023. The Internal Revenue Code contains provisions which limit the NOL carryforwards available which can be used in a given year when significant changes in Company ownership interests occur. In addition, the NOL amounts are subject to examination by the tax authorities.
The Internal Revenue Service has audited the Company's and subsidiaries tax returns through the year ended May 31, 2000. The Company's income tax liabilities are settled through fiscal 2000.
I.
SEGMENTS AND MAJOR CUSTOMERS:
The Company's primary business activity during the year ended December 31, 2004 has been coalbed methane gas property acquisition and exploration and production (and holding shut down mining properties). The Company has no producing mines. The other reportable industry segment is commercial activities through motel, real estate and airport operations. The Company discontinued its drilling/construction segment in the third quarter of fiscal 2002. The following is information related to these industry segments:
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
|
|
Year ended December 31, 2004
|
|
|
|
|
Coalbed
|
|
|
|
|
|
|
|
|
Methane
|
|
|
|
|
|
|
|
|
(and holding
|
|
|
|
|
|
|
|
|
costs for inactive
|
|
Real Estate
|
|
|
|
|
|
|
mining properties)
|
|
Operations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3,205,700
|
|
$
|
256,100
|
|
$
|
3,461,800
|
|
|
Management fees
|
|
|
|
|
|
|
|
|
1,179,900
|
|
|
Total Revenues
|
|
|
|
|
|
|
|
$
|
4,641,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(2,429,800
|
)
|
$
|
(39,400
|
)
|
$
|
(2,469,200
|
)
|
|
Management fees
|
|
|
|
|
|
|
|
|
1,179,900
|
|
|
General corporate and other expenses
|
|
|
|
|
|
|
|
|
(5,370,100
|
)
|
|
Other income and expenses
|
|
|
|
|
|
|
|
|
13,000
|
|
|
Minority interest in loss of subsidiaries
|
|
|
|
|
|
|
|
|
397,700
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
$
|
(6,248,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets at December 31, 2004
|
|
$
|
16,285,300
|
|
$
|
2,177,600
|
|
$
|
18,462,900
|
|
|
Investments in affiliates
|
|
|
|
|
|
|
|
|
957,700
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
11,283,100
|
|
|
Total assets at December 31, 2004
|
|
|
|
|
|
|
|
$
|
30,703,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
8,167,900
|
|
$
|
3,600
|
|
|
|
|
|
Depreciation, depletion and
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
$
|
1,183,500
|
|
$
|
91,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
|
|
|
Net fixed assets
|
|
$
|
9,280,900
|
|
$
|
2,177,600
|
|
|
|
|
|
Other investments
|
|
|
6,852,300
|
|
|
--
|
|
|
|
|
|
Inventory
|
|
|
152,100
|
|
|
--
|
|
|
|
|
|
|
|
$
|
16,285,300
|
|
$
|
2,177,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
|
|
Year Ended December 31, 2003
|
|
|
|
|
|
|
Coalbed
|
|
|
|
|
|
|
|
|
Methane
|
|
Motel/
|
|
|
|
|
|
|
(and holding
|
|
Real Estate/
|
|
|
|
|
|
|
costs for inactive
|
|
Airport
|
|
|
|
|
|
|
mining properties)
|
|
Operations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
287,400
|
|
$
|
334,300
|
|
$
|
621,700
|
|
|
Management fees
|
|
|
|
|
|
|
|
|
215,600
|
|
|
Total revenues
|
|
|
|
|
|
|
|
$
|
837,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(1,487,400
|
)
|
$
|
31,400
|
|
$
|
(1,456,000
|
)
|
|
Management fees
|
|
|
|
|
|
|
|
|
215,600
|
|
|
General corporate and other expenses
|
|
|
|
|
|
|
|
|
(5,997,500
|
)
|
|
Other income and expenses
|
|
|
|
|
|
|
|
|
(73,000
|
)
|
|
Minority interest in loss of affiliates
|
|
|
|
|
|
|
|
|
235,100
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
$
|
(7,075,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable net assets at
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
$
|
9,365,000
|
|
$
|
3,030,100
|
|
$
|
12,395,100
|
|
|
Investment in non-affiliated company
|
|
|
|
|
|
|
|
|
957,600
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
10,577,100
|
|
|
Total assets at December 31, 2003
|
|
|
|
|
|
|
|
$
|
23,929,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
176,400
|
|
$
|
--
|
|
|
|
|
|
Depreciation, depletion and
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
$
|
217,600
|
|
$
|
102,400
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
|
|
Seven Months Ended December 31, 2002
|
|
|
|
|
|
|
Coalbed
|
|
|
|
|
|
|
|
|
Methane
|
|
Motel/
|
|
|
|
|
|
|
(and holding
|
|
Real Estate/
|
|
|
|
|
|
|
costs for inactive
|
|
Airport
|
|
|
|
|
|
|
mining properties)
|
|
Operations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
119,400
|
|
$
|
749,100
|
|
$
|
868,500
|
|
|
Management fees
|
|
|
|
|
|
|
|
|
159,100
|
|
|
Total revenues
|
|
|
|
|
|
|
|
$
|
1,027,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) Income
|
|
$
|
(973,000
|
)
|
$
|
221,900
|
|
$
|
(751,100
|
)
|
|
Management fees
|
|
|
|
|
|
|
|
|
159,100
|
|
|
General corporate and other expenses
|
|
|
|
|
|
|
|
|
(2,915,800
|
)
|
|
Other income and expenses
|
|
|
|
|
|
|
|
|
(387,100
|
)
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
--
|
|
|
Equity in loss of affiliates and
|
|
|
|
|
|
|
|
|
|
|
|
minority interest in subsidiaries
|
|
|
|
|
|
|
|
|
54,800
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
$
|
(3,840,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable net assets at
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
$
|
16,022,800
|
|
$
|
4,564,700
|
|
$
|
20,587,500
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
7,603,100
|
|
|
Total assets at December 31, 2002
|
|
|
|
|
|
|
|
$
|
28,190,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
1,033,400
|
|
$
|
37,800
|
|
|
|
|
|
Depreciation, depletion and
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
$
|
94,800
|
|
$
|
78,200
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
|
|
Year Ended December 31, 2002
|
|
|
|
|
|
|
Coalbed
|
|
|
|
|
|
|
|
|
Methane
|
|
Motel/
|
|
|
|
|
|
|
(and holding
|
|
Real Estate/
|
|
|
|
|
|
|
costs for inactive
|
|
Airport
|
|
|
|
|
|
|
mining properties)
|
|
Operations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
--
|
|
$
|
1,795,900
|
|
$
|
1,795,900
|
|
|
Management fees
|
|
|
|
|
|
|
|
|
208,200
|
|
|
Total revenues
|
|
|
|
|
|
|
|
$
|
2,004,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,707,000
|
)
|
$
|
(133,000
|
)
|
$
|
(1,840,800
|
)
|
|
Management fees
|
|
|
|
|
|
|
|
|
208,200
|
|
|
General corporate and other expenses
|
|
|
|
|
|
|
|
|
(5,821,600
|
)
|
|
Other income and expenses
|
|
|
|
|
|
|
|
|
1,319,500
|
|
|
Discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
(85,900
|
)
|
|
Equity in loss of affiliates and
|
|
|
|
|
|
|
|
|
|
|
|
minority interest in subsidiaries
|
|
|
|
|
|
|
|
|
39,500
|
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
$
|
(6,181,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable net assets at
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2002
|
|
$
|
18,138,500
|
|
$
|
4,351,600
|
|
$
|
22,490,100
|
|
|
Corporate assets
|
|
|
|
|
|
|
|
|
8,047,800
|
|
|
Total assets at May 31, 2002
|
|
|
|
|
|
|
|
$
|
30,537,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
151,300
|
|
$
|
101,500
|
|
|
|
|
|
Depreciation, depletion and
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
$
|
167,600
|
|
$
|
254,300
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
J.
SHAREHOLDERS' EQUITY:
Stock Option Plans
The Board of Directors adopted the U.S. Energy Corp. 1989 Stock Option Plan for the benefit of USE's key employees. The Option Plan, as amended and renamed the 1998 Incentive Stock Option Plan ("1998 ISOP"), reserved 3,250,000 shares of the Company's $.01 par value common stock for issuance under the 1998 ISOP. Options which expired without exercise were available for reissue.
During the year ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the year ended May 31, 2002 the following activity occurred under the 1998 ISOP:
|
|
|
|
|
|
|
|
|
Seven months
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
Year ended
|
|
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
Non-Qualified
|
|
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price of Grants
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
Low
|
|
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
|
--
|
|
77,832
|
|
71,166
|
|
243,250
|
|
|
Non-Qualified
|
|
|
|
--
|
|
71,453
|
|
1
|
|
55,372
|
|
|
|
|
|
|
--
|
|
149,285
|
|
71,167
|
|
298,622
|
|
|
Total Cash Received
|
$
|
--
|
|
$
|
364,200
|
|
$
|
170,800
|
|
$
|
742,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures/Cancellations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
|
|
|
--
|
|
|
34,782
|
|
|
--
|
|
|
78,244
|
|
|
Non-Qualified
|
|
|
|
|
|
--
|
|
|
64,233
|
|
|
--
|
|
|
346,018
|
|
|
--
|
|
|
|
|
|
|
|
|
99,015
|
|
|
--
|
|
|
424,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2001, the Board of Directors adopted (and the shareholders approved) the U.S. Energy Corp. 2001 Incentive Stock Option Plan (the "2001 ISOP") for the benefit of USE's key employees. The 2001 ISOP (amended in 2004 and approved by the shareholders) reserves for issuance shares of USE common stock equal to 20% of the USE shares of common stock issued and outstanding at any time. The 2001 ISOP has a term of 10 years.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
During the years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the year ended May 31, 2002 the following activity occurred under the 2001 ISOP:
|
|
|
|
|
|
|
Seven months
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
Year ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
1,272,000
|
|
|
--
|
|
|
459,996
|
|
|
10,000
|
|
|
Non-Qualified
|
|
|
--
|
|
|
--
|
|
|
473,004
|
|
|
950,000
|
|
|
|
|
|
1,272,000
|
|
|
--
|
|
|
933,000
|
|
|
960,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price ofGrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
2.46
|
|
|
--
|
|
$
|
2.25
|
|
$
|
3.90
|
|
|
Low
|
|
$
|
2.46
|
|
|
--
|
|
$
|
2.25
|
|
$
|
3.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
73,780
|
|
|
--
|
|
|
--
|
|
|
Non-Qualified
|
|
|
--
|
|
|
52,556
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
126,336
|
|
|
--
|
|
|
--
|
|
|
Total Cash Received
|
|
$
|
--
|
|
$
|
284,300
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures/Cancellations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
12,000
|
|
|
65,108
|
|
|
--
|
|
|
--
|
|
|
Non-Qualified
|
|
|
--
|
|
|
252,556
|
|
|
50,000
|
|
|
--
|
|
|
|
|
|
12,000
|
|
|
317,664
|
|
|
50,000
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2001 ISOP replaces the 1998 ISOP, however, options granted under the 1998 ISOP remain exercisable until their expiration date under the terms of that Plan.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The following table represents the activity in employee options for the periods covered by the Annual Report for the year ended December 31, 2004 that are not in employee stock option plans:
|
|
|
|
|
|
|
Seven months
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
Year ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
2002
|
|
|
Grants
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
10,000
|
|
|
Non-Qualified
|
|
|
--
|
|
|
10,000
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
10,000
|
|
|
--
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price ofGrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
--
|
|
$
|
2.90
|
|
$
|
--
|
|
$
|
3.82
|
|
|
Low
|
|
|
--
|
|
$
|
2.90
|
|
$
|
--
|
|
$
|
3.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Non-Qualified
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Total Cash Received
|
|
$
|
--
|
|
$
|
-
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures/Cancellations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Non-Qualified
|
|
|
10,000
|
|
|
10,000
|
|
|
100,000
|
|
|
200,000
|
|
|
|
|
|
10,000
|
|
|
10,000
|
|
|
100,000
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
A summary of the Employee Stock Option Plans activity in all plans for the year ended December 31, 2004, 2003; the seven months ended December 31, 2002 and the year ended May 31, 2002 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Seven months ended
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
Year ended May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
Options
|
|
Price
|
|
|
|
Options
|
|
Price
|
|
|
|
|
Outstanding at beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the period
|
|
|
2,873,646
|
|
$
|
2.74
|
|
|
3,565,946
|
|
$
|
2.76
|
|
|
2,854,113
|
|
|
|
|
$
|
2.92
|
|
|
2,606,997
|
|
|
|
|
$
|
2.69
|
|
|
Granted
|
|
|
1,272,000
|
|
|
2.46
|
|
|
10,000
|
|
|
2.90
|
|
|
933,000
|
|
|
|
|
|
2.25
|
|
|
970,000
|
|
|
|
|
|
3.90
|
|
|
Forfeited
|
|
|
(22,000
|
)
|
|
2.66
|
|
|
(426,679
|
)
|
|
3.17
|
|
|
(150,000
|
)
|
|
|
|
|
2.63
|
|
|
(424,262
|
)
|
|
|
|
|
3.30
|
|
|
Expired
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
--
|
|
|
|
|
|
--
|
|
|
Exercised
|
|
|
--
|
|
|
--
|
|
|
(275,621
|
)
|
|
2.35
|
|
|
(71,167
|
)
|
|
|
|
|
2.40
|
|
|
(298,622
|
)
|
|
|
|
|
2.84
|
|
|
Outstanding at period end
|
|
|
4,123,646
|
|
|
--
|
|
|
2,873,646
|
|
|
2.74
|
|
|
3,565,946
|
|
|
|
|
|
2.76
|
|
|
2,854,113
|
|
|
|
|
|
2.92
|
|
|
Exercisable at period end
|
|
|
2,863,646
|
|
|
--
|
|
|
2,873,646
|
|
|
2.74
|
|
|
2,612,946
|
|
|
|
|
|
2.94
|
|
|
1,984,113
|
|
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
|
|
$
|
1.66
|
|
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
$
|
1.99
|
|
The following table summarized information about employee stock options outstanding and exercisable at December 31, 2004:
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
Number of
|
|
average
|
|
Number of
|
|
Average
|
|
options
|
|
remaining
|
|
options
|
|
Exercise
|
|
outstanding at
|
|
contractual
|
|
exercisable at
|
|
Price
|
|
December 31, 2004
|
|
Life in years
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
$ 2.65
|
|
4,123,646
|
|
7.1
|
|
2,863,646
|
Employee Stock Ownership Plan
The Board of Directors of USE adopted the U.S. Energy Corp. 1989 Employee Stock Ownership Plan ("ESOP") in 1989, for the benefit of USE employees. During the year ended December 31, 2004 the Board of Directors of USE contributed 70,439 shares to the ESOP at the price of $2.96 for a total expense of $208,500. This compares to contributions to the ESOP during the year ended December 31, 2003, the seven months ended December 31, 2002 and fiscal year ended May 31, 2002 of 76,294, 43,867 and 70,075 shares to the ESOP at prices of $3.10, $3.08 and $3.29 per share, respectively. The Company has expensed $208,500, $236,400, $135,100 and $236,900 during the years ended December 31, 2004, 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002, respectively related
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
to these contributions. As of December 31, 2004, all shares of the USE stock that have been contributed to the ESOP have been allocated. The estimated fair value of shares that are not vested is approximately $85,500. USE has loaned the ESOP $1,014,300 to purchase 125,000 shares from the Company and 38,550 shares on the open market. During the year ended May 31, 1996, 10,089 of these shares were used to fund the Company's annual funding commitment and reduce the loan to the Company by $87,300. These loans, which are secured by pledges of the stock purchased, bear interest at the rate of 10% per annum. The loans are reflected as unallocated ESOP contribution in the equity section of the accompanying Consolidated Balance Sheets.
Executive Officer Compensation
In May 1996, the Board of Directors of USE approved an annual incentive compensation arrangement ("1996 Stock Award Program") for its CEO and four other officers of the Company payable in shares of the Company's common stock. The 1996 Stock Award Program was subsequently modified to reflect the intent of the directors which was to provide incentive to the officers of the Company to remain with USE. The shares were issued annually pursuant to the recommendation of the Compensation Committee on or before January 15 of each year, beginning January 15, 1997, as long as each officer is employed by the Company. The officers received up to an aggregate total of 67,000 shares per year for the years 1997 through 2002. The shares under the plan are forfeitable until retirement, death or disability of the officer. The shares are held in trust by the Company's treasurer and are voted by the Company's non-employee directors. As of December 31, 2003, 392,536 shares had been issued to the five officers of 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 year ended December 31, 2004 an additional 50,000 shares were issued to the officers.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Options and Warrants to Others
As of December 31, 2004, there are 1,505,174 options and warrants outstanding to purchase shares of the Company's common stock. The Company values these warrants using the Black-Scholes option pricing model and expenses that value over the life of the warrants. Activity for the periods ended December 31, 2004 for warrants is represented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Seven months ended
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
Year ended May 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
Exercise
|
|
|
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
|
|
Outstanding at beginning
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of the period
|
|
|
907,209
|
|
$
|
3.51
|
|
|
990,383
|
|
$
|
3.37
|
|
|
860,152
|
|
$
|
3.43
|
|
|
314,158
|
|
$
|
3.05
|
|
|
Granted
|
|
|
868,465
|
|
|
2.87
|
|
|
224,875
|
|
|
4.32
|
|
|
145,147
|
|
|
2.95
|
|
|
572,364
|
|
|
3.62
|
|
|
Forfeited
|
|
|
(145,500
|
)
|
|
2.63
|
|
|
(176,453
|
)
|
|
3.67
|
|
|
(14,916
|
)
|
|
--
|
|
|
(25,165
|
)
|
|
2.88
|
|
|
Expired
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
Exercised
|
|
|
(125,000
|
)
|
|
2.01
|
|
|
(131,596
|
)
|
|
3.55
|
|
|
--
|
|
|
--
|
|
|
(1,205
|
)
|
|
3.75
|
|
|
Outstanding at period end
|
|
|
1,505,174
|
|
|
3.35
|
|
|
907,209
|
|
|
3.51
|
|
|
990,383
|
|
|
3.36
|
|
|
860,152
|
|
|
3.43
|
|
|
Exercisable at period end
|
|
|
1,044,152
|
|
|
3.43
|
|
|
831,724
|
|
|
3.41
|
|
|
979,908
|
|
|
3.37
|
|
|
860,152
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the period
|
|
|
|
|
$
|
1.37
|
|
|
|
|
$
|
0.68
|
|
|
|
|
$
|
1.15
|
|
|
|
|
$
|
1.99
|
|
The following table summarized information about employee stock options outstanding and exercisable at December 31, 2004:
|
Weighted
|
|
Number of
|
|
average
|
|
Number of
|
|
Average
|
|
options
|
|
remaining
|
|
options
|
|
Exercise
|
|
outstanding at
|
|
contractual
|
|
exercisable at
|
|
Price
|
|
December 31, 2004
|
|
Life in years
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
$ 3.35
|
|
1,505,174
|
|
3.0
|
|
1,044,152
|
These options and warrants are held by persons or entities other than employees, officers and directors of the Company.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Forfeitable Shares
Certain of the shares issued to officers, directors, employees and third parties are forfeitable if certain conditions are not met. Therefore, these shares have been reflected outside of the Shareholders' Equity section in the accompanying Consolidated Balance Sheets until earned. During fiscal 1993, the Company's Board of Directors amended the stock bonus plan. As a result, the earn-out dates of certain individuals were extended until retirement. The Company recorded $216,800 of compensation expense for the year ended December 31, 2004 compared to $284,700, $178,300 for the year ended December 31, 2003, the seven months ended December 31, 2002; and $298,300 for the year ended May 31, 2002, respectively. The accompanying balance sheet at December 31, 2004 includes a deferred charge of $322,600 of which $171,000 is included in prepaid expenses. A schedule of total forfeitable shares for the Company is set forth in the following table:
|
Issue
|
|
Number
|
|
Issue
|
|
Total
|
|
|
Date
|
|
of Shares
|
|
Price
|
|
Compensation
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
May 31, 2001
|
|
|
433,788
|
|
|
|
|
$
|
2,748,600
|
|
|
May 31, 2002
|
|
|
67,000
|
|
$
|
3.90
|
|
|
261,300
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2002 and
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
|
500,788
|
|
|
|
|
|
3,009,900
|
|
|
March 24, 2003
|
|
|
43,378
|
|
$
|
3.50
|
|
|
151,900
|
|
|
Shares earned
|
|
|
(78,286
|
)
|
|
--
|
|
|
(435,200
|
)
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
465,880
|
|
|
|
|
|
2,726,600
|
|
|
Shares earned
|
|
|
(23,140
|
)
|
|
--
|
|
|
(127,600
|
)
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
442,740
|
|
|
|
|
$
|
2,599,000
|
|
K.
COMMITMENTS, CONTINGENCIES AND OTHER:
Legal Proceedings
Material proceedings pending at December 31, 2004, and developments in those proceedings from that date to the date this Annual Report is filed, are summarized below. 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 in July 1991, USECC filed a lawsuit against Nukem, CRIC and others in the U.S. District Court of Colorado in Civil Action No. 91B1153. The Federal Court stayed the arbitration proceedings and discovery proceeded. In February 1994, all of the parties agreed to consensual and binding arbitration of all of their disputes over SMP before an arbitration panel (the "Panel").
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The Panel entered an Order and Award in 1996, finding generally in favor of USE and Crested on certain of their claims and imposed a constructive trust in favor of Sheep Mountain Partners on uranium contracts Nukem entered into to purchase uranium from CIS republics, and also awarded SMP damages of $31,355,070 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 $20,044,183. In early 2004, the parties appealed this judgment to the CCA.
On February 24, 2005, a three judge panel of the CCA vacated the judgment of the U.S. District Court and remanded the case to the Panel for clarification of the 1996 Order and Award. In remanding this case, the CCA stated: "The arbitration award in this case is silent as to the definition of 'purchase rights' and the 'profits therefrom,' including the valuation of either. Also unstated in the 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 timing and ultimate outcome of this litigation is not predicted. We believe that the ultimate outcome will not have an adverse affect on our financial condition or results of operations.
Contour Development Litigation
On July 8, 1998, USE and Crested filed a lawsuit in the U.S. District Court of Colorado in Case No. 98WM1630, against Contour Development Company, L.L.C. and entities and persons associated with Contour Development Company, L.L.C. for substantial damages from the defendants for dealings in real estate owned by USE and Crested in Gunnison, Colorado. This litigation was settled in 2004 with USE and Crested receiving nominal cash and seven real estate lots in and near Gunnison. Two lots have been sold and five are for sale.
Phelps Dodge Litigation
USE and Crested were served with a lawsuit on June 19, 2002, filed in the U.S. District Court of Colorado (Case No. 02-B-0796(PAC)) by Phelps Dodge Corporation (“PD”) and its subsidiary, Mt. Emmons Mining Company (“MEMCO”), over contractual obligations in USECC’s agreement with PD’s predecessor companies, concerning mining properties on Mt. Emmons, near Crested Butte, Colorado.
The litigation 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.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
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 Mt. Emmons properties back to USECC, which properties now include a plant to treat mine water, costing in excess of $1 million a year to operate in compliance with State of Colorado regulations. PD's and MEMCO's claim 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 Mt. Emmons properties under Paragraph 8 of the 1987 Agreement includes the transfer of ownership and operational responsibility for the Water Treatment Plant, and that PD does not owe USECC any advanced royalty payments. However, the Order did not address the NPDES permit. NPDES permits are administered and regulated by the Colorado Department of Public Health and the Environment (“CDPHE”). The timing and scope of responsibilities for maintaining and operating the plant will be addressed by the CDPHE later in 2005.
USECC has filed a motion with the Court to amend the Order to determine that the decreed water rights from the Colorado Supreme Court opinion (decided in 2002, finding that the predecessor owners of the Mt. Emmons property had rights to water to develop a mine), and any other appurtenant water rights, be conveyed to USECC. The motion is pending.
Rocky Mountain Gas, Inc. (RMG)
Litigation involving leases on coalbed methane properties in Montana
In April 2001, RMG was served with a Second Amended Complaint, in which the Northern Plains Resource Council ("NPRC") had filed suit in the U. S. District Court of Montana, Billings Division (No. CV-01-96-BLG-RWA) against the United States Bureau of Land Management (“BLM”), RMG, certain of its affiliates (including USE and Crested) and some 20 other defendants. The plaintiff was seeking to cancel oil and gas leases issued to RMG et. al. by the BLM in the Powder River Basin of Montana and for other relief.
In December 2003, Federal District Court Judge Anderson granted BLM’s and the other defendants Motion for Summary Judgment and ruled that BLM did not have to consider environmental impacts in an Environmental Impact Statement (“EIS”) prior to leasing because the 1994 Resource Management Plan (“RMP”) limited lease right to exploration and small scale development. On August 30, 2004, the Ninth
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Circuit Court of Appeals affirmed the District Court decision and held that the six-year statue of limitations precluded challenging the 1994 RMP and EIS. On February 10, 2005, NRPC's petition for rehearing or in the alternative petition for en banc was denied by the Ninth Circuit Court of Appeals.
All of RMG's BLM Montana leases are held by RMG and are at least four years old. There is no record of any objections being made to the issue of those leases. We believe RMG’s leases were validly issued in compliance with BLM procedures, and do not believe the plaintiff’s lawsuit will adversely affect any of RMG’s BLM leases in Montana.
Lawsuits challenging BLM's Records of Decisions
There is a lawsuit currently pending in the Montana Federal District Court challenging BLM's Records of Decisions for the Powder River Basin Oil and Gas EIS for the Wyoming portion of the basin, and the Statewide Oil and Gas EIS and Proposed Amendment for the Powder River and Billings Resource Management Plans in Montana.
In April 2003 NPRC and the Northern Cheyenne Tribe and Native Action (the “Tribe”) filed a suit against BLM challenging the April 2003 decision by BLM approving the Final Statewide Oil and Gas Environmental Impact Statement (FEIS) and proposed amendments to the RMP. On February 25, 2005 Federal District Court Judge Anderson dismissed all counts with the exception of the allegation that the FEIS is inadequate because it failed to consider any alternatives to full-field development and ruled that BLM’s failure to analyze a phased development alternative renders the FEIS inadequate. BLM will now be required to perform a Supplemental EIS (“SEIS”) examining a phased development alternative, which could take 18 months to complete.
On April 5, 2005 Federal District Court Judge Anderson rejected the Tribe’s request for a complete moratorium on CBM drilling in Montana and instead accepted BLM’s proposal that limited the number of Federal APDs issued by BLM to maximum of 500 wells per year, including federal, state and fee wells within a certain defined geographic area. The decision will prohibit BLM from issuing Federal wells in RMG’s Castle Rock property until the SEIS is completed, because it is not located with the defined geographic area. However, the decision does not limit the number of fee and state wells that can be approved in the Castle Rock property by the State of Montana. RMG will request BLM to extend the expiration date of the Federal leases for the period of the delay.
Neither the Company nor RMG is a party to this lawsuit. However, further permitting for federal CBM wells in Montana could be impacted until the issues have been resolved.
Litigation involving drilling
A drilling company, Eagle Energy Services, LLC filed a lawsuit against RMG for drilling services claiming $49,309.50 for non-payment in Civil Action No. C02-9-341. Eagle Energy’s bank, Community First National Bank of Sheridan, Wyoming, filed a similar suit for the same amount on an assignment from Eagle Energy against RMG in Civil Action No. CO2-9-328 in the 4
th
Judicial District of Sheridan County, Wyoming. In February 2005 RMG and Community First reached a full and complete settlement of Civil Action No. C02-9-328 and a Joint Motion to Dismiss with Prejudice is currently pending with the Court. RMG has also requested Eagle Energy to join in a Motion to Dismiss in Civil Action No. C02-9-341 because the claim was settled as noted above. Management believes that the ultimate outcome of the matters will not have a material effect on the Company’s financial condition or result of operations.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Reclamation and Environmental Liabilities
Most of the Company's exploration activities are subject to federal and state regulations that require the Company to protect the environment. The Company conducts its operations in accordance with these regulations. The Company's current estimates of its reclamation obligations and its current level of expenditures to perform ongoing reclamation may change in the future. At the present time, however, the Company cannot predict the outcome of future regulation or impact on costs. Nonetheless, the Company has recorded its best estimate of future reclamation and closure costs based on currently available facts, technology and enacted laws and regulations. Certain regulatory agencies, such as the Nuclear Regulatory Commission ("NRC"), the Bureau of Land Management ("BLM") and the Wyoming Department of Environmental Quality ("WDEQ") review the Company's reclamation, environmental and decommissioning liabilities, and the Company believes the recorded amounts are consistent with those reviews and related bonding requirements. To the extent that planned production on its properties is delayed, interrupted or discontinued because of regulation or the economics of the properties, the future earnings of the Company would be adversely affected. The Company believes it has accrued all necessary reclamation costs and there are no additional contingent losses or unasserted claims to be disclosed or recorded.
The majority of the Company's environmental obligations relate to former mining properties acquired by the Company. Since the Company currently does not have any properties in production, the Company's policy of providing for future reclamation and mine closure costs on a unit-of-production basis has not resulted in any significant annual expenditures or costs. For the obligations recorded on acquired properties, including site-restoration, closure and monitoring costs, actual expenditures for reclamation will occur over several years, and since these properties are all considered future production properties, those expenditures, particularly the closure costs, may not be incurred for many years. The Company also does not believe that any significant capital expenditures to monitor or reduce hazardous substances or other environmental impacts are currently required. As a result, the near term reclamation obligations are not expected to have a significant impact on the Company's liquidity.
As of December 31, 2004, estimated reclamation obligations related to the above mentioned mining properties total $8,075,100. The Company currently has three mineral properties or investments that account for most of their environmental obligations, SMP, Plateau and SGMI. The environmental obligations and the nature and extent of cost sharing arrangements with other potentially responsible parties, as well as any uncertainties with respect to joint and several liability of each are discussed in the following paragraphs:
SMP
The Company is responsible for the reclamation obligations, environmental liabilities and liabilities for injuries to employees in mining operations with respect to the Sheep Mountain properties. The reclamation obligations, which are established by regulatory authorities, were reviewed by the Company and the regulatory authorities and they jointly determined that the reclamation liability was $2,339,800. The Company is self bonded for this obligation by mortgaging certain of their real estate assets, including the Glen L. Larsen building, and by posting cash bonds.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
Sutter Gold Mining Inc.
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 $28,200 which is covered by a cash reclamation bond. This amount was recorded by SGMC as a reclamation liability as of December 31, 2004.
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, 2004, the reclamation liability on the Plateau properties was $5.2 million. Plateau held a cash deposit for reclamation in the amount of $6.8 million.
Executive Compensation
The Company is committed to pay the surviving spouse or dependant children of certain of their officers one years' salary and an amount to be determined by the Boards of Directors, for a period of up to five years thereafter. This commitment applies only in the event of the death or total disability of those officers who are full-time employees of the Company at the time of total disability or death. Certain officers and employees have employment agreements with the Company. The maximum compensation due under these agreements for the officers covered by the agreement for the first year after their deaths, should they die in the same year, is $311,400 at December 31, 2004.
Operating Leases
The Company is the lessor of portions of the office buildings and building improvements that it owns. The Company occupies the majority of the main office building. The leases are accounted for as operating leases and provide for minimum monthly receipts of $16,400 through December, 2006. All of the Company's leases are for two years or less.
The total costs of the office buildings and building improvements totaled $4,218,200 as of December 31, 2004 and 2003 and accumulated depreciation amounted to $2,374,400 and $2,283,200 as of December 31, 2004 and 2003, respectively. Rental income under the agreements was $245,000, $256,500, $187,000 and $375,900, for the years ended December 31, 2004 and 2003, the seven months ended December 31, 2002 and the fiscal year ended May 31, 2002.
Future minimum receipts for noncancellable operating leases are as follows:
|
Years Ending
|
|
|
|
December 31,
|
|
Amount
|
|
2005
|
|
$196,300
|
|
2006
|
|
$199,300
|
The Company, through RMG, has a lease commitment until January 30, 2006 in the amount of $1,300 per month on its field office. This lease can be cancelled upon 90 day notice by either party to the lease. RMG also has a lease for a compressor through December 2005. The monthly payment under this lease is
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
approximately $17,400 per month. The total lease expense for these and another compressor lease that expired during the year was $440,000 and $41,300 for the years ended December 31, 2004 and 2003, respectively. Future commitments are as follows:
|
|
|
|
2005
|
$ 224,400
|
|
2006
|
$ 1,300
|
It is anticipated that the lease obligations for the year ended December 31, 2005 will remain consistent with those experienced during the year ended December 31, 2004 unless additional operation fields are required.
L.
DISCONTINUED OPERATIONS.
During the third quarter of the fiscal year ended May 31, 2002, the Company made the decision to discontinue its drilling/construction segment. The assets associated with this business segment were sold and or converted for use elsewhere in the Company. The financial statements for the fiscal year ended May 31, 2001 have been revised to present the effect of discontinued operations. There is no material income or loss from discontinued operations from the measurement date to December 31, 2004.
During the third quarter of the year ended December 31, 2003, the Company sold its motel and retail operations in southern Utah. The financial statements for all of the periods presented have been revised to present these operations as discontinued.
M.
SUPPLEMENTAL NATURAL GAS RESERVE INFORMATION (UNAUDITED):
The following estimates of proved gas reserves, both developed and undeveloped, represent interests owned by the Company located solely within the United States. Proved reserves represent estimated quantities of natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed gas reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells for which relatively major expenditures are required for completion.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The Company began natural gas production in June, 2002. Disclosures of gas reserves which follow are based on estimates prepared by independent engineering consultants as of December 31, 2004. Such estimates are subject to numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. These estimates do not include probable or possible reserves. The information provided does not represent Management's estimate of the Company's expected future cash flows or value of proved oil and gas reserves.
RMG's sales volumes of gas produced, average sales prices received for gas sold, and average production costs for those sales for the years ended December 31, 2004 and 2003 and for the seven months ended December 31, 2002 are as follows:
|
|
|
|
|
|
|
Seven months
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
Year ended December 31,
|
|
December 31,
|
|
|
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
Sales volumes (mcf)
|
|
|
728,051
|
|
|
81,516
|
|
|
64,315
|
|
|
Average sales price per mcf
|
|
$
|
4.05
|
|
$
|
3.71
|
|
$
|
1.86
|
|
|
Average cost (per mcf)
|
|
$
|
3.19
|
|
$
|
1.91
|
|
$
|
1.91
|
|
Changes in estimated reserve quantities
The net interest in estimated quantities of proved developed and undeveloped reserves of crude oil and natural gas and changes in such quantities and discounted future net cash flow were as follows:
|
|
|
(Unaudited) - Unescalated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCF
|
|
|
|
|
Cubic Feet
|
|
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Ended
|
|
|
|
|
December 31, 2004
|
|
December 31, 2003
|
|
December31, 2002
|
|
|
Proved developed and
|
|
|
|
|
|
|
|
|
Undeveloped reserves:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
--
|
|
585,603
|
|
--
|
|
|
Revision of previous estimates
|
|
|
(51,862
|
)
|
|
--
|
|
|
--
|
|
|
Purchase of minerals in place
|
|
|
3,404,693
|
|
|
--
|
|
|
649,918
|
|
|
Exchange of reserves in place (1)
|
|
|
--
|
|
|
(504,087
|
)
|
|
--
|
|
|
Extensions & Discoveries
|
|
|
817,459
|
|
|
--
|
|
|
--
|
|
|
Production
|
|
|
(1,114,349
|
)
|
|
(81,516
|
)
|
|
(64,315
|
)
|
|
End of year
|
|
|
3,055,941
|
|
|
--
|
|
|
585,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proved developed producing
|
|
|
1,651,666
|
|
|
--
|
|
|
489,684
|
|
|
Proved developed non-producing
|
|
|
889,051
|
|
|
--
|
|
|
--
|
|
|
Proved undeveloped
|
|
|
515,224
|
|
|
--
|
|
|
95,919
|
|
|
Total proved reserves
|
|
|
3,055,941
|
|
|
--
|
|
|
585,603
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
The standardized measure has been prepared assuming year end sales prices adjusted for fixed and determinable contractual price changes, current costs. No provision has been made for income taxes due to available operating loss carry forwards. No deduction has been made for depletion, depreciation or any indirect costs such as general corporate overhead or interest expense.
Standardized measure of discounted future net cash flows from estimated production of proved gas reserved:
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Ended
|
|
|
|
|
December 31, 2004
|
|
December 31, 2003
|
|
December 31, 2002
|
|
|
Future Cash Inflows
|
|
$
|
13,125,200
|
|
|
--
|
|
$
|
1,756,809
|
|
|
Future Production and
development costs
|
|
|
(5,208,800
|
)
|
|
--
|
|
|
(705,505
|
)
|
|
Future Net Cash Flows
|
|
|
7,916,400
|
|
|
--
|
|
|
1,051,304
|
|
|
Discount Factor
|
|
|
(1,401,800
|
)
|
|
--
|
|
|
(162,876
|
)
|
|
Standardized measure of
discounted future net cash flows
|
|
$
|
6,514,600
|
|
|
--
|
|
$
|
888,428
|
|
Changes in standard measure of discounted future net cash flows from proved gas reserves:
|
|
|
|
|
|
|
Seven Months
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Ended
|
|
|
|
|
December 31, 2004
|
|
December 31, 2003
|
|
December 31, 2002
|
|
|
Standardized measure - beginning of year
|
|
$
|
--
|
|
$
|
888,428
|
|
$
|
--
|
|
|
Sale & Transfer, net of production cost
|
|
|
(629,400
|
)
|
|
(63,200
|
)
|
|
235,800
|
|
|
Net change in sales & transfer price, net of production cost
|
|
|
(58,200
|
)
|
|
--
|
|
|
--
|
|
|
Extensions, discoveries and improved recovery, net of future production and development cost
|
|
|
2,671,800
|
|
|
--
|
|
|
--
|
|
|
Exchange or reserves in place (1)
|
|
|
--
|
|
|
(825,228
|
)
|
|
--
|
|
|
Revision of quantity estimate
|
|
|
(110,500
|
)
|
|
--
|
|
|
--
|
|
|
Purchase of reserve in place
|
|
|
7,056,400
|
|
|
--
|
|
|
652,628
|
|
|
Change in production rate & other
|
|
|
(2,415,500
|
)
|
|
--
|
|
|
--
|
|
|
Standardized measure - end of period
|
|
$
|
6,514,600
|
|
$
|
--
|
|
$
|
888,428
|
|
(1) During June 2003, RMG contributed proved and unproved properties in exchange for a 37.5% interest in Pinnacle. At December 31, 2004, RMG owned 16.7% of Pinnacle.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
N.
TRANSITION PERIOD COMPARATIVE DATA
The following table presents certain financial information for the seven months ended December 31, 2002 and 2001, respectively:
|
|
|
Seven Months Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2002
|
|
2001
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Revenues
|
|
$
|
673,000
|
|
$
|
545,900
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
(4,197,900
|
)
|
|
(4,460,800
|
)
|
|
Operating loss
|
|
|
(3,524,900
|
)
|
|
(3,914,900
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income and expenses
|
|
|
(387,100
|
)
|
|
1,005,000
|
|
|
Loss before minority interest
|
|
|
(3,912,000
|
)
|
|
(2,909,900
|
)
|
|
|
|
|
|
|
|
|
|
|
Minority interest in loss of subsidiaries
|
|
|
54,800
|
|
|
24,500
|
|
|
Loss before income taxes
|
|
|
(3,857,200
|
)
|
|
(2,885,400
|
)
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
--
|
|
|
--
|
|
|
Net loss from continuing operations
|
|
|
(3,857,200
|
)
|
|
(2,885,400
|
)
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
|
17,100
|
|
|
175,000
|
|
|
Net loss
|
|
|
(3,840,100
|
)
|
|
(2,710,400
|
)
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
--
|
|
|
(75,000
|
)
|
|
Net loss available to common stock shareholders
|
|
$
|
(3,840,100
|
)
|
$
|
(2,785,400
|
)
|
|
|
|
|
|
|
|
|
|
|
PER SHARE DATA:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
0.06
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(0.33
|
)
|
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(0.36
|
)
|
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(0.36
|
)
|
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock dividends
|
|
|
--
|
|
|
(0.01
|
)
|
|
Net loss available to common stock shareholders
|
|
$
|
(0.36
|
)
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,770,658
|
|
|
8,386,672
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
10,770,658
|
|
|
8,386,672
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
O.
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
September 30,
|
|
June 30,
|
|
March 31
|
|
|
|
|
2004
|
|
2004
|
|
2004
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,140,500
|
|
$
|
1,266,300
|
|
$
|
1,367,400
|
|
$
|
867,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,624,500
|
)
|
$
|
(1,421,200
|
)
|
$
|
(1,742,400
|
)
|
$
|
(1,871,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(1,238,400
|
)
|
$
|
(1,626,100
|
)
|
$
|
(1,609,200
|
)
|
$
|
(1,775,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,260,300
|
)
|
$
|
(1,604,200
|
)
|
$
|
(1,609,200
|
)
|
$
|
(1,775,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
|
Discontinued operations
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
14,468,336
|
|
|
13,490,917
|
|
|
12,873,194
|
|
|
12,319,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
|
Discontinued operations
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
$
|
(0.09
|
)
|
$
|
(0.12
|
)
|
$
|
(0.13
|
)
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
14,468,336
|
|
|
13,490,917
|
|
|
12,873,194
|
|
|
12,319,657
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
|
|
|
Three Months Ended
|
|
|
|
|
December 31,
|
|
September 30,
|
|
June 30
|
|
March 31
|
|
|
|
|
2003
|
|
2003
|
|
2003
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
109,000
|
|
$
|
119,300
|
|
$
|
241,300
|
|
$
|
367,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,664,800
|
)
|
$
|
(1,988,400
|
)
|
$
|
(2,418,800
|
)
|
$
|
(1,165,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss earnings from continuing operations
|
|
$
|
(1,780,800
|
)
|
$
|
(1,893,000
|
)
|
$
|
(2,214,100
|
)
|
$
|
(1,187,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of tax
|
|
$
|
(124,800
|
)
|
$
|
(88,700
|
)
|
$
|
(17,400
|
)
|
$
|
(119,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(1,905,600
|
)
|
$
|
(1,981,700
|
)
|
$
|
(2,231,500
|
)
|
$
|
308,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.16
|
)
|
$
|
(0.17
|
)
|
$
|
(0.20
|
)
|
$
|
(0.11
|
)
|
|
Discontinued operations
|
|
$
|
(0.01
|
)
|
$
|
(0.01
|
)
|
$
|
--
|
|
$
|
(0.01
|
)
|
|
Cumulative effect of accounting change
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
0.15
|
|
|
|
|
$
|
(0.17
|
)
|
$
|
(0.18
|
)
|
$
|
(0.20
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
11,383,576
|
|
|
11,127,796
|
|
|
10,916,971
|
|
|
10,881,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.34
|
)
|
$
|
(0.17
|
)
|
$
|
(0.20
|
)
|
$
|
(0.10
|
)
|
|
Discontinued operations
|
|
$
|
(0.02
|
)
|
$
|
(0.01
|
)
|
$
|
--
|
|
$
|
(0.01
|
)
|
|
Cumulative effect of accounting change
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
0.14
|
|
|
|
|
$
|
(0.36
|
)
|
$
|
(0.18
|
)
|
$
|
(0.20
|
)
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
11,383,576
|
|
|
11,127,796
|
|
|
10,916,971
|
|
|
11,385,593
|
|
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
P. SUBSEQUENT EVENT
HPC Capital Management
On February 9, 2005, U.S. Energy Corp. (the “company”) entered into, and closed, a securities purchase agreement with seven accredited investors for the issuance of $4,720,000 in face amount of debentures maturing February 4, 2008, and three year warrants to purchase common stock of the company. The face amount of the debentures includes simple annual interest at 6%; the investors paid $4,000,000 for the debentures. A commission of 7% on the $4,000,000 was paid by the company to HPC Capital Management (a registered broker-dealer) in connection with the transaction, and the company paid $20,000 of the investors’ counsel’s legal fees, resulting in net proceeds to the company of $3,700,000. Net proceeds will be used by the company for general working capital.
The debentures are unsecured; the face amount of the debentures are payable every six months from February 4, 2005, in five installments of 20%, in cash or in restricted common stock of the company. If the company gives notice that it intends to make the payment in cash, the investors have the right to take the payment in stock, at the lower of $2.43 per share (the “set price”) or 90% of the volume weighted average price of the company’s stock for the 90 trading days prior to the company’s notice that the six month payment is intended to be paid by the company in cash (the “VWAP price”). The set price equals 90% of the volume weighted average price of the company’s stock over the 90 trading days prior to February 4, 2005.
At any time, the debentures are convertible to restricted common stock of the company at the set price.
At any time, the company has the right to redeem some or all of the debentures in cash or stock, in amount equal to 120% of the face amount of the debentures until February 4, 2006; 115% from February 5, 2006 to February 4, 2007; and 110% from February 5, 2007 until maturity. Payment in stock would be at the set price.
If at any time the company’s stock trades at more than 150% of the set price for 20 consecutive trading days, the company may convert the balance of the face amount of the debentures to stock at 150% of the set price.
In the event of default, the investors may require payment (i) in cash equal to 130% of the then outstanding face amount; or (ii) in stock equal to 100% of face amount, with the stock priced at the set price, or (iii) in stock equal to 130% of the face amount, with the stock priced at 100% of the volume weighted average price of the company’s stock for the 90 trading days prior to default.
The company issued warrants to the investors, expiring February 4, 2008, to purchase 971,193 shares of restricted common stock, at $3.63 per share (equal to 110% of the closing price for the company’s stock on February 4, 2005). The number of shares underlying the warrants equals 50% of the shares issuable on full conversion of the debentures at the set price (as if the debentures were so converted on February 4, 2005).
Warrants to purchase 100,000 shares, at the same price and for the same term as the warrants issued to the investors, have been issued to HPC Capital Management as additional compensation for its services in connection with the transaction with the investors.
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
If in any period of 20 consecutive trading days the company’s stock price exceeds 200% of the warrants’ exercise price, on each of the trading days, all of the warrants shall expire on the 30
th
day after the company sends a call notice to the warrantholders.
The company has agreed to file with the Securities and Exchange Commission a registration statement to cover the future sale by the investors of the shares issuable in payment and/or conversion of the debentures, and the shares issuable on exercise of the warrants. The registration statement also will cover the future sale by HCP Capital Management of the shares issuable on exercise of the warrants issued to HCP in connection with the transaction.
Enterra
As of April 11, 2005, the company and its subsidiary Rocky Mountain Gas, Inc. (“RMG”) has entered into a binding agreement with Enterra Energy Trust (“Enterra”) for the acquisition of RMG by Enterra in consideration of $20,000,000, payable pro rata to the RMG shareholders in the amounts of $6,000,000 in cash and $14,000,000 in exchangeable shares of one of the subsidiary companies of Enterra. The shares will be exchangeable for units of Enterra twelve months after closing of the transaction. The Enterra units are traded on the Toronto Stock Exchange and on Nasdaq; the exchangeable shares will not be traded. RMG will be acquired with approximately $3,500,000 of debt owed to its mezzanine lenders.
Closing of the transaction is subject to approval of the RMG shareholders; U.S. Energy Corp. and Crested Corp., the principal shareholders of RMG, have agreed to vote in favor of the acquisition. Closing is further subject to completion of due diligence by Enterra, and to obtaining regulatory and stock exchange approvals.
RMG’s minority equity ownership of Pinnacle Gas Resources, Inc. will not be included in the transaction with Enterra, which has resulted in a decrease in the consideration to be paid by Enterra from the previously-announced $30,000,000, to the $20,000,000 in the definitive agreement signed as of April 11, 2005. However, Enterra will be entitled to be paid up to (but not more than) $2,000,000 if proceeds from a future disposition of the minority equity interest in Pinnacle exceed $10,000,000.
Uranium Power Corp.
As of April 11, 2005, the company and Crested (as the USECC Joint Venture) signed a Mining Venture Agreement with UPC to establish a joint venture, with a term of 30 years, to explore, develop and mine the properties being purchased by UPC under the Purchase and Sale Agreement, and acquire, explore and develop additional uranium properties. The joint venture generally covers uranium properties in Wyoming and other properties identified in the USECC Joint Venture uranium property data base, but excluding the Green Mountain area and Kennecott’s Sweetwater uranium mill, the Shootaring Canyon uranium mill in southeast Utah (and properties within ten miles of that mill), and properties acquired in connection with a future joint venture involving that mill.
The initial participating interests in the joint venture (profits, losses and capital calls) are 50% for the USECC Joint Venture and 50% for UPC, based on their contributions of the Sheep Mountain properties. Operations will be funded by cash capital contributions of the parties; failure by a party to fund a capital call may result in a reduction or the elimination of its participating interest. In addition, a failure by UPC to pay for its 50% interest in the Sheep Mountain properties may result in a reduction or the elimination of
U.S. ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002, AND MAY 31, 2002
(Continued)
UPC’s participating interest. A budget of $567,842 for the seven months ending December 31, 2005 has been approved, relating to reclamation work at the Sheep Mountain properties, exploration drilling, geological and engineering work, and other costs. A substantial portion of this work will be performed by (and be paid to) USECC Joint Venture as manager.
The manager of the joint venture is the USECC Joint Venture; the manager will implement the decisions of the management committee and operate the business of the joint venture. UPC and the USECC Joint Venture each have two representatives on the four person management committee, subject to change if the participating interests of the parties are adjusted. The manager is entitled to a management fee from the joint venture equal to a minimum of 10% of the manager’s costs to provide services and materials to the joint venture (excluding capital costs) for field work and personnel, office overhead and general and administrative expenses, and 2% of capital costs. The manager may be replaced if its participating interest becomes less than 50%.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON SCHEDULE
To U.S. Energy Corp:
In connection with our audit of the consolidated financial statements of U.S. Energy Corp. and subsidiaries referred to in our report dated February 27, 2004, which is included in the Company's annual report on Form 10-K, we have also audited Schedule II for the year ended December 31, 2003, the seven months ended December 31, 2002 and the year ended May 31, 2002. In our opinion, this schedule presents fairly, in all material respects, the information to be set forth therein.
/s/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
February 27, 2004
U.S. ENERGY CORP.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
|
|
|
Balance
|
|
Additions
|
|
|
|
|
|
|
|
|
beginning
|
|
charged to
|
|
Deductions
|
|
Balance end
|
|
|
|
|
of period
|
|
expenses
|
|
and Other
|
|
of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2002
|
|
$
|
27,800
|
|
|
--
|
|
|
--
|
|
$
|
27,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2002
|
|
$
|
27,800
|
|
|
--
|
|
|
--
|
|
$
|
27,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
$
|
27,800
|
|
|
--
|
|
|
--
|
|
$
|
27,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
111,300
|
|
|
--
|
|
|
--
|
|
$
|
111,300
|
|
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On December 17, 2004, the Company dismissed the audit firm Grant Thornton LLP (“GT”). GT had audited the company’s financial statements for more than the last two fiscal years.
The Company has engaged the independent audit firm Epstein, Weber & Conover, Scottsdale, Arizona, to audit the company’s financial statements for the year ended December 31, 2004.
GT’s audit report on the financial statements for the year ended December 31, 2003, the seven months ended December 31, 2002, and the (former) fiscal year ended May 31, 2002, contained a qualification of uncertainty as to whether the Company will continue as a going concern. The audit report did not contain an adverse opinion or a disclaimer of opinion, and was not otherwise qualified or modified as to audit scope or accounting principles.
The decision to change audit firms was recommended by the Company’s audit committee, and approved by that committee and the board of directors.
There has not been, during the two most recent fiscal years, or during any subsequent interim period preceding the change of audit firms, any disagreement with GT on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of GT, would have caused it to make reference to the subject matter of the disagreement in connection with its report.
In addition, during the two most recent fiscal years, there were no disagreements between the Company and GT which constituted “reportable events” under item 304(a)(1)(v) of Regulation S-K. Disclosure of such “reportable events” would be required even if the Company and GT did not express a difference of opinion regarding the event.
ITEM 9A. Controls and Procedures
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
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, 2004, 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 2005, 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 information regarding the remaining executive officers follows:
The Company has adopted a Code of Ethics. A copy of the Code of Ethics will be provided to any person without charge upon written request addressed to Daniel P. Svilar, Secretary, 877 North 8
th
West, Riverton, Wyoming 82501.
Information Concerning Executive Officers Who are Not Directors.
The following are the two executive officers of USE as of the date of this Form 10-K; these persons devote their full time to the Company’s business.
Robert Scott Lorimer,
age 54, has been the Chief Accounting Officer for both USE and Crested for more than the past five years. Mr. Lorimer also has been Chief Financial Officer for both these companies since May 25, 1991, their Treasurer since December 14, 1990, and Vice President Finance since April 1998. He serves at the will of each board of directors. There are no understandings between Mr. Lorimer and any other person, pursuant to which he was named as an officer, and he has no family relationship with any of the other executive officers or directors of USE or Crested. During the past five years, Mr. Lorimer has not been involved in any Reg. S-K Item 40(f) listed proceeding.
Daniel P. Svilar,
age 76, has been General Counsel for USE and Crested for more than the past five years. He also has served as Secretary and a director of Crested, and Assistant Secretary of USE. On March 25, 2002, Mr. Svilar was appointed Secretary of USE. His positions of General Counsel to, and as officers of the companies, are at the will of each board of directors. There are no understandings between Mr. Svilar and any other person pursuant to which he was named as officer or General Counsel. He has no family relationships with any of the other executive 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.
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 2005, under the captions "Executive Compensation" and "Director's Fees and Other Compensation."
ITEM 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholders matters.
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 2005, 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 2005, 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 years ended December 31, 2004 and 2003. Grant Thornton was dismissed as the Company’s audit firm in December 2004 (see Item 9 above). The information does not include fees paid to the new audit firm in late 2004.
|
|
|
Year ended December 31,
|
|
|
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
Audit fees (a)
|
|
$
|
115,300
|
|
$
|
80,100
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|
|
Audit-related fees(b)
|
|
$
|
27,200
|
|
$
|
--
|
|
|
Tax fees(c )
|
|
$
|
33,700
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|
$
|
15,800
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|
|
All other fees(d)
|
|
$
|
40,400
|
|
$
|
13,100
|
|
(a)
Includes fees for audit of the annual financial statements and review of quarterly financial information filed with the Securities and Exchange Commission ("SEC").
(b)
For assurance and related services that were reasonably related to the performance of the audit or review of the financial statements, which fees are not included in the Audit Fees category. The Company had no Audit-Related Fees for the periods ended December 31, 2004, and 2003.
(c)
For tax compliance, tax advice, and tax planning services, relating to any and all federal and state tax returns as necessary for the years ended December 31, 2004 and 2003.
(d)
For services in respect of other reports required to be filed by the SEC and other agencies.
(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 delegation 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 Grant Thornton for the 2002 and 2003, and with respect for the appointment of the new audit firm Epsetin Weber & Conover for the audit of the 2004 financial statements and related services.
(5)(ii) The percentage of services provided for Audit-Related Fees, Tax Fees and All Other Fees for 2004 (and 2003), all provided pursuant to the audit committee’s pre-approval policies and procedures, were: Audit-Related Fees 66% (74%); Tax Fees 16% (14%); and All Other Fees 18% (12%).
GLOSSARY OF OIL AND NATUAL GAS TERMS
The following are definitions of terms commonly used in the oil and natural gas industry and this Annual Report.
Bbl.
One stock tank barrel, or 42 U.S. gallons of liquid volume, used in reference to oil or other liquid hydrocarbons.
Btu.
British thermal unit, which is the energy required to raise the temperature of a one-pound mass of water by one degree Fahrenheit.
Coal Bed Methane ("CBM").
A form of natural gas, predominately methane, which is generated during coal formation and is contained in the coal microstructure.
Capital expenditures.
Investment outlays for exploratory and development drilling (including exploratory dry holes); leasehold acquisitions; seismic data acquisitions; geological, geophysical and land related overhead expenditures; delay rentals; producing property acquisitions; other miscellaneous capital expenditures; compression equipment and pipeline costs.
Developed acreage.
The number of acres which are allocated or assignable to producing wells or wells capable of production.
Development well.
A well drilled within the proved area of an oil or natural gas reservoir to the depth of a producing horizon known to be productive.
Exploratory well.
A well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir.
Gross acres or gross wells.
The total acres or wells, as the case may be, in which the Company has a working interest.
Lease Operating Expenses ("LOE").
All operating costs related to production activities including direct costs such as direct labor, direct materials, certain workover costs, repairs and maintenance, insurance costs, and gas collection costs.
Mcf.
One thousand cubic feet of natural gas at standard atmospheric conditions.
MMcf.
One thousand Mcf or One million cubic feet.
MMBtu.
One million Btu.
Net acres or net wells.
A net acre or well is deemed to exist when the sum of the Company's fractional ownership working interests in gross acres or wells, as the case may be, equals one. The number of net acres or wells is the sum of the fractional working interests owned in gross acres or wells, as the case may be, expressed as whole numbers and fractions thereof.
Operator.
The individual or company responsible to the working interest owners for the exploration, development and production of an oil or natural gas well or lease.
Reserves.
Oil and natural gas on a net revenue interest basis, estimated to be commercially recoverable. "Proved developed reserves" include proved developed producing reserves and proved developed behind-pipe reserves. "Proved developed producing reserves" include only those reserves expected to be recovered from existing completion intervals in existing wells. "Proved undeveloped reserves" include those reserves expected to be recovered from new wells on proved undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Royalty interest
. An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage, or of the proceeds of the sale thereof, but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
Undeveloped acreage.
Lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether or not such acreage contains proved reserves.
Working interest.
An interest in an oil and natural gas lease that gives the owner of the interest the right to drill and produce oil and natural gas on the leased acreage and requires the owner to pay their proportionate share of the costs of drilling and production operations. The share of production to which a working interest owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the balance of the production accruing to governmental tax receipts and mineral interest royalties.
ITEM 15. Exhibits, Financial Statements, Schedules, Reports and 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, 2004 and December 31, 2003
|
59-60
|
|
|
|
|
Consolidated Statement of Operations for the Years Ended December 31, 2004 and 2003, the Seven Months Ended December 31, 2002 and the Year Ended May 31, 2002
|
61-62
|
|
|
|
|
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2004 and 2003, the Seven Months Ended December 31, 2002, and the Year Ended May 31, 2002
|
63-66
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003 and 2004, the Seven Months Ended December 31, 2002, and the Year Ended May 31, 2002
|
67-69
|
|
|
|
|
Notes to Consolidated Financial Statements
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70-115
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|
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|
Report of Independent Certified Public Accountants on Schedule
|
116
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|
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|
|
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.
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Title of Exhibit
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Sequential
Page No.
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3.1
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USE Restated Articles of Incorporation
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[2]
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3.1(a)
|
USE Articles of Amendment toRestated Articles of Incorporation
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[4]
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3.1(b)
|
USE Articles of Amendment (Second) toRestated Articleds of Incorporation(Establishing Series A Convertible Preferred Stock
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[9]
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|
|
|
|
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3.1(c)
|
Articles of Amendment (Third) toRestated Articles of Incorporation(Increasing number of authorized shares)
|
[14]
|
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3.1(d)
|
Articles of Amendment to the ArticlesOf Incorporation of Rocky Mountain Gas, Inc.(to establish Series A Preferred Stock in March 2004)
|
[6]
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3.2
|
USE Bylaws, as amended through April 22, 1992
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[4]
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4.1
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Amendment to USE 1998 Incentive Stock Option Plan
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[11]
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4.2
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USE 2001 Incentive Stock Option PlanAnd Form of Stock Option Agreement
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*
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4.3-4.10
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[intentionally left blank]
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4.11
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Rights Agreement, dated as of September 19, 2001between U.S. Energy Corp. and Computershare Trust Company, Inc. as Rights Agent. The Articles ofAmendment of Articles of Incorporation creating theSeries A Preferred Stock is included herewith as anexhibit to the Rights Agreement.Form of Right Certificate (as an exhibit to theRights Agreement). Summary of Rights, which will be sent to all holdersof record of the outstanding shares of Common Stockof the registrant, also included as an exhibit to theRights Agreement
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[12]
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4.12-4.20
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[intentionally left blank]
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4.21
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USE 2001 Officers' Stock Compensation Plan
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[18]
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4.22-4.30
|
[intentionally left blank]
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10.1
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Securities Purchase Agreement for $4.72 million debentures (February 2005)
|
*
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10.2
|
Form of Debenture (February 2005)
|
*
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10.2(a)
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Form of Warrant (February 2005)
|
*
|
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|
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|
|
10.3
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Credit Agreement, Secured Convertible Note, Security Agreement and Warrant (without sub-exhibits) - Geddes and Company (July 2004)
|
*
|
|
|
|
|
|
10.4
|
Purchase and Sale Agreement, with three amendments(for purchase of Hi-Pro assets)
|
[24]
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10.5
|
Credit Agreement (mezzanine credit facility withPetrobridge Investment Management)
|
[24]
|
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|
10.6
|
Purchase and Sale Agreement (without exhibits) - Bell Coast Capital, n/k/a/ Uranium Power Corp. (December 2004)
|
*
|
10.7
|
Mining Venture Agreement (without exhibits) - Uranium Power Corp. (April 2005)
|
*
|
|
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10.8
|
Pre-Acquisition Agreement, (without exhibits) Enterra Energy Trust, Dated as of April 11, 2005
|
*
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14.0
|
Code of Ethics
|
[6]
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21.1
|
Subsidiaries of Registrant
|
[11]
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23.0
|
Consent of Netherland, Sewell & Associates, Inc., independentpetroleum engineers
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*
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31.1
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Certification under Rule 13a-14(a) John L. Larsen
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*
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31.2
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Certification under Rule 13a-14(a) Robert Scott Lorimer
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*
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32.1
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Certification under Rule 13a-14(b) John L. Larsen
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*
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32.2
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Certification under Rule 13a-14(b) Robert Scott Lorimer
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*
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* Filed herewith
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[1]
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Intentionally left blank.
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[2]
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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.
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[3]
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Intentionally left blank.
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[4]
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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.
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[5]
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Intentionally left blank.
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[6]
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Incorporated by reference from the like-numbered exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.
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[7]
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Intentionally left blank.
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[8]
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Intentionally left blank.
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[9]
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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.
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[10]
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Intentionally left blank.
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[11]
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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.
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[12]
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Incorporated by reference to exhibit number 4.1 to the Registrant's Form 9-A12G filed, September 20, 2001.
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[13]
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Intentionally left blank.
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[14]
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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.
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[15]
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Intentionally left blank.
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[16]
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Intentionally left blank.
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[17]
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Intentionally left blank.
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[18]
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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.
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[19]
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Intentionally left blank.
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[20]
|
Intentionally left blank.
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[21]
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Intentionally left blank.
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[22]
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Intentionally left blank.
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[23]
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Intentionally left blank.
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[24]
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Incorporated by referenced from the exhibit filed with the Registrant's Form 8-K, filed March 5, 2004.
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(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 paragraph (a)(1) above. No other financial statements are required to be filed..
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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U.S. ENERGY CORP. (Registrant)
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Date: April 15, 2005
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By:
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/s/ John L. Larsen
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JOHN L. LARSEN, Chief Executive Officer
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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.
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Date: April 15, 2005
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By:
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/s/ John L. Larsen
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JOHN L. LARSEN, Director
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Date: April 15, 2005
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By:
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/s/ Keith G. Larsen
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KEITH G. LARSEN, Director
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Date: March 15, 2005
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By:
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/s/ Harold F. Herron
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HAROLD F. HERRON, Director
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Date: April 15, 2005
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By:
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/s/ Don C. Anderson
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DON C. ANDERSON, Director
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Date: April 15, 2005
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By:
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/s/ H. Russell Fraser
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H. RUSSELL FRASER, Director
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Date: April 15, 2005
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By:
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/s/ Michael T. Anderson
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MICHAEL T. ANDERSON, Director
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Date: April 15, 2005
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By:
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/s/ Michael H. Feinstein
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MICHAEL H. FEINSTEIN, Director
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Date: April 15, 2005
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By:
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/s/ Robert Scott Lorimer
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ROBERT SCOTT LORIMER
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Principal Financial Officer/
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Chief Accounting Officer
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|
Amended as of June 16, 2003 by the Board of Directors,
and further amended by the Board of Directors
(and approved by the Shareholders)
as of June 15, 2004
2001 Incentive Stock Option Plan for U. S. Energy Corp.
Article I
Purpose
This Incentive Stock Option Plan (hereafter the "Plan") of U. S. Energy Corp. (the "Company") for executive and other key persons and employees, is intended to advance the Company by providing an incentive to obtain a proprietary interest to those persons who have management and key employment responsibilities, and to others who serve the Company.
Article II
Definitions
For Plan purposes, except where the context clearly indicates otherwise, the following terms shall have the meanings set forth:
a.
"Board" shall mean the Company's Board of Directors.
b.
"Code" shall mean the Internal Revenue Code of 1986 as amended from time to time, and the rules and regulations promulgated thereunder.
c.
"Committee" shall mean the Compensation Committee, or such other committee of the Board designated by the Board to administer the Plan. Until such time as the Board may designate such committee, this Plan shall be administered by the Board. The Committee shall be composed of not less than two persons appointed by the Board; Committee members also may be members of the Board. Options also may be granted by the Board. No member of the Committee or of the Board shall vote on issuance of an Incentive Stock Option to himself or herself.
d.
"Common Shares" shall mean shares of the Company's Common Stock, or, in the event that the outstanding Common Shares are hereafter changed into or exchanged for different shares or securities of the Company, such other shares or securities.
e.
"Company" shall mean U. S. Energy Corp., a Wyoming Corporation, and any parent or subsidiary of such corporation, as the terms "parent" and "subsidiary" are defined in Sections 425(e) and (f) of the Code.
f.
"Fair Market Value" shall mean, with respect to the date a given stock option is granted or exercised, the average of the highest and lowest reported sales prices of the Common Shares as reported in any trading market where the Company then is listed, or if there were no transactions in the Common Shares on such day, then the last preceding day on which transactions took place. If the Common Shares of the Company are not traded in any public market, then fair value may be established by reference to sales of Common Shares by the Company, or to sales by shareholders of outstanding Common Shares held by them, or to sales by third parties of outstanding Common Shares which had been owned by shareholders of record (for example, sales by a trustee in bankruptcy or a secured creditor or by order of court in domestic relations or probate proceedings). The above notwithstanding, the Committee may
determine the Fair Market Value in such other manner as it may deem more equitable for Plan purposes or as is required by applicable laws or regulations. The Committee always shall take into account and duly consider developments in the Company since the date of the sale or sales being used to determine Fair Market Value, including without limitation material changes in earnings per Common Share, contracts for new business, and other factors.
g.
"Incentive Stock Option" or "ISO" or "Option" shall mean a stock option issued under the Plan which is intended to meet the terms of Code Section 422A for qualified options (i.e., a "Qualified Incentive Stock Option").
h.
"Optionee" shall mean the person to whom has been granted an Incentive Stock Option.
i.
"Stock Option Agreement" shall mean the agreement between the Company and the Optionee under which the Optionee may purchase Common Shares.
j.
"Ten Percent Shareholder" shall mean an employee who owns ten percent or more of the Common Shares as such amount is calculated under Code Section 422A(b)(6). Attribution rules under Code Section 425(d) are applicable to determine whether the ten percent ownership rule is satisfied.
k.
"Vesting" and "vested" shall mean the times(s) when options are exercisable as determined by the Committee (or the Board if no Committee has been established), subject to the provisions of this Plan.
Article III
Administration
3.1
The Committee (or the Board, until a Committee is designated) shall administer the Plan with full power to grant Incentive Stock Options, and construe and interpret the Plan, establish rules and regulations and perform all other acts it believes reasonable and proper.
3.2
The determination of those eligible to receive Incentive Stock Options, and the amount and terms and conditions of such Options shall rest in the sole discretion of the Committee (or the Board, if no Committee is designated), subject to the provisions of this Plan. Eligibility and vesting shall be determined under Article V.
3.3
The Committee may cancel any Incentive Stock Options if an Optionee conducts herself or himself in a manner which the Committee in good faith determines to be not in the best interests of the Company, as set forth in Section 11.7.
3.4
The Board, or the Committee, may correct any defect, supply any omission, or reconcile any inconsistency in the Plan, or in any granted Incentive Stock Option, in the manner and to the extent it shall deem necessary to carry it into effect.
3.5
Any decision made, or action taken, by the Committee or the Board arising out of or in connection with the interpretation and administration of the Plan shall be final and conclusive.
3.6
Meetings of the Committee shall be held at such times and places as shall be determined by the Committee. Notice of meetings shall be made in the same manner as required for Board meetings under the Bylaws. A majority of the members of the Committee shall constitute a quorum for the transaction of business, and the vote of a majority of those members present shall decide any question brought before
that meeting. In addition, the Committee may take any action otherwise proper under the Plan by the signed affirmative vote, taken without an actual meeting, of all members. All proceedings of the Committee shall be evidenced by complete and detailed minutes, signed by the Committee members.
3.7
No member of the Committee shall be liable for any act or omission of any other member of the Committee or for any act or omission on her or his own part, including, but not limited to, the exercise of any power or discretion given to her or him under the Plan, except those resulting from her or his own bad faith, gross negligence, or willful misconduct.
3.8
The Plan shall always be administered in such a manner as to permit the Options to qualify as "incentive stock options" under Section 422A of the Code.
3.9
Management of the Company shall supply full and timely information to the Committee on all matters relating to eligible employees, their duties and performance, and current information on death, retirement and disability or other termination of employment of Optionees, and such other pertinent information as the Committee may require. The Company shall furnish the Committee with clerical and other assistance as necessary in performance of its duties hereunder.
Article IV
Number of Reserved Shares
4.1
Reserved Shares.
The total number of Common Shares of the Company available for issuance under the Plan always shall equal that number of shares of common stock as equals 20% of the issued and oustanding shares of common stock of the Company at any point in time. The reserved shares may be either authorized but unissued, or previously issued and subsequently reacquired.
4.2
Shares Under Expired or Terminated Options.
If an Incentive Stock Option or portion thereof shall expire or terminate for any reason without having been exercised in full, the unpurchased shares shall be available for future grants of Incentive Stock Options.
Article V
Eligibility, Vesting and Allocation
5.1
Eligibility.
Qualified Incentive Stock Options may be granted to officers and employees of the Company and of the Company's parent, subsidiary or affiliate companies, as determined by the Committee.
The Compensation Committee shall determine the length of service required for each Optionee to be eligible to participate in this Plan.
5.2
Vesting.
Subject to Section 6.8, Incentive Stock Options generally shall be exercisable at the rates established by the Committee.
5.3
Allocation.
The number of Incentive Stock Options to be issued in any calendar year shall be in the discretion of the Committee (or the Board if no Committee has been established).
Article VI
Terms and Conditions
6.1
Form of Option Agreement.
All Incentive Stock Options shall be evidenced by agreements in the form of Attachment A hereto, or in such other form as may be duly approved pursuant to this Plan.
Any such other form shall be subject to applicable provisions of the Plan, and such other provisions as the Committee may adopt, but always shall include the provisions set forth in Sections 6.2 through 6.10 below.
6.2
Price.
The option price per share for Qualified Incentive Stock Options shall be equal to or more than 100% of the Fair Market Value of a Common Share on the grant date. The price at which shares may be purchased on exercise of an Incentive Stock Option by a Ten Percent Shareholder shall be not less than 110 percent of the Fair Market Value on the grant date.
6.3
Time of Grant.
All Incentive Stock Options must be granted within 10 years from the date this Plan is adopted by shareholders. An Incentive Stock Option will remain exercisable until termination of the Option, even if the Plan itself has been terminated.
6.4
Time of Exercise.
No Incentive Stock Option granted to any Ten Percent Shareholder shall be exercisable after the expiration of five years from the date such is granted. Subject to Article V, the Committee may establish installment exercise terms for an Incentive Stock Option, such that the Option becomes fully exercisable over a series of cumulating portions.
If an Optionee shall not, in any given installment period, purchase all the Common Shares available within such period, such Optionee's right to purchase any Common Shares not purchased in such installment period shall continue until the expiration or sooner termination of such Option, unless there is a contrary provision in the Stock Option Agreement.
6.5
Exercise.
An Incentive Stock Option shall be exercised by delivery of (a) a written notice of exercise (in the form of Attachment B hereto) to the Company specifying the number of Common Shares to be purchased, and (b) payment of the full price of such Common Shares, as set forth in Section 6.6.
Not less than 100 Common Shares may be purchased at one time unless the number purchased is the total number at the time available for purchase. Until the Common Shares represented by an exercised Option are issued to an Optionee, she or he shall have none of the rights of a shareholder.
6.6
Method of Payment.
The purchase price for an Incentive Stock Option or portion thereof may be paid:
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a.
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In United States dollars by cashier's check, certified check, bank draft, or money order payable to order of the Company in an amount equal to the option price; or
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b.
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At the discretion of the Committee, through the delivery of fully paid and non-assessable Common Shares, with an aggregate Fair Market Value on the date of the exercise equal to the option price, provided such tendered shares have been owned by the Optionee for at least one year prior to such exercise; or
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c.
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By a combination of a. and b.; or
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d.
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In any other lawful consideration approved by the Committee, including without limitation Promissory notes, salary set-offs, and exchange of options with higher exercise prices.
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The Committee shall determine acceptable methods for tendering Common Shares as payment upon exercise, and may impose limitations on such use of Common Shares.
6.7
Transferability.
Except by will or the laws of descent and distribution as provided by Section 6.8(c) below, and except for transfers to a Permitted Transferee, no Option, and no right or interest in any Incentive Stock Option, shall be assignable or transferable. Transfers to a Permitted Transferee shall be authorized only if (i) the transfer is a bona fide gift and not payment of anything to any person, directly or indirectly; (ii) the Optionee receives nothing of value, directly or indirectly, for the gift; and (iii) the transferred Options continue to be subject to the identical terms and conditions as the Options prior to such transfer. A Permitted Transferee means (and shall be limited to) an Optionee's Family Members: child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother- or sister-in-law (including adoptive relationships); anyone sharing the Optionee's household (but not as a tenant or employee), or a trust or other entity in which the Optionee and Family Members hold more than 50% of its beneficial or voting interest. It is intended that the preceding comply with General Instruction A(l)(a)(5) to Form S-8 adopted by the Securities and Exchange Commission.
6.8
Termination of Employment, Disability, or Death of Optionee.
If an Optionee shall cease to be employed by the Company, dies, or become permanently or totally disabled (within the meaning of Section 22(e)(3) of the Code) while he or she is holding Options, each Option shall expire as follows:
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a.
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If the Optionee's termination of employment occurs for any reason except death, disability, or retirement pursuant to a Company approved retirement policy then in effect, during the first year after grant of the Option, the Optionee's right to exercise shall terminate to the extent not theretofore exercised
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b.
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If the Optionee's termination of employment occurs for any reason, except death or disability, more than 12 months after grant of the Option, the Optionee shall have the right to exercise the Option for three months after termination to the extent that it was exercisable on the date of termination; however, that if the employment of an Optionee shall terminate, or if a director shall be removed, for cause, all Options theretofore granted to such Optionee shall, to the extent not theretofore exercised, terminate forthwith.
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c.
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If at any time after date of the grant, the Optionee (i) retires pursuant to a Company approved retirement policy then in effect, or (ii) becomes permanently and totally disabled (within the meaning of Section 105(b)(4) of the Code), the Option shall become exercisable in full on the date of such retirement or disability and remain exercisable for one year.
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d.
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If the Optionee shall die while employed by the Company, the personal representative or administrator of the Optionee's estate or the person(s) to whom the Option was validly transferred by personal representative or administrator, shall have the right to exercise the Option for one year after death.
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No transfer of an Incentive Stock Option by the will of an Optionee, or by the laws of probate shall be effective to bind the Company unless the Company shall have been furnished with written notice thereof and an authenticated copy of the will and/or such other evidence as the Committee may deem necessary to establish validity of the transfer.
6.9
Leaves of Absence.
For purposes of the Plan, it shall not be considered a termination of employment when an Optionee is placed by the Company on military or sick leave or other type of leave of absence considered as continuing intact the employment relationship. In case of a leave of absence other than military leave, the employment relationship shall be continued until the later of the date when
such leave equals 90 days or the date when the Optionee's right to reemployment with. the Company shall no longer be guaranteed by statute or contract.
6. 10
Annual $100,000 Limit on each ISO Optionee.
Notwithstanding any other provision of the Plan, the aggregate Fair Market Value of the Common Shares, determined as of the time such Option is granted, for which any Optionee may be granted Incentive Stock Options under the Plan shall not exceed $100,000 in any such same calendar year. The Compensation Committee may reclassify Options from unqualified to qualified status under the Code form time to time to maximize the tax benefits to Optionees.
Article VII
Adjustments on Changes in Capitalization
7.1
In the event that the outstanding Common Shares of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company
Prompt, proportionate, equitable, lawful, and adequate adjustment shall be made of the aggregate number and kind of shares subject to Options which may have been granted, such that the Optionee shall have the right to purchase such Common Shares as may be issued in exchange for those purchasable on exercise of the Options had such merger, consolidation, other reorganization, recapitalization, reclassification, combination of shares, stock split-up, or stock dividend not taken place;
7.2
The foregoing adjustments and their manner of application shall be determined solely by the Committee (or by the Board, if there be no committee). No fractional shares shall be issued under the Plan on account of any such adjustments.
Article VIII
Merger or Consolidation
8.0
If the Company shall be a party to a binding agreement to any merger, consolidation, or reorganization of which the Company shall not be the survivor, each outstanding Option shall pertain and apply to the securities which a shareholder of the Company would be entitled to receive pursuant to such merger, consolidation, or reorganization. Every Optionee shall have the right immediately prior to taking effect of such a transaction, to exercise the Option to the extent not exercised by such date. If Options are not exercised by such date, the unexercised Options shall be deemed exchanged for new options to purchase common shares in the successor company, adjusted as necessary (as to price and/or number of shares) to preserve the Optionee's opportunity to buy stock in the successor company, in the proportion that the Common Shares (including Options as if they had been exercised before the transaction) bear to the total outstanding securities of the successor company.
Article IX
Amendment and Termination of Plan
9.1
The Board, without further approval of the shareholders, and at any time and from time to time, may suspend or terminate the Plan in whole or in part or amend it in such respects as the Board deems appropriate and in the best interest of the Company; provided, however, that no such amendment shall be made which would, without approval of the shareholders:
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a.
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Materially modify the eligibility requirements for receiving Options;
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b.
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Increase the total number of Common Shares which may be issued pursuant to Options, except in accordance with Article VII;
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c.
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Reduce the minimum exercise price per Common Share, except in accordance with Article VII;
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d.
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Extend the period of granting Options; or
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e.
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Materially increase in any other way the benefits to Optionees.
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9.2
No amendment, suspension, or termination of this Plan shall, without the Optionee's consent, alter or impair any of the rights or obligations under issued Options.
9.3
The Board may amend the Plan, subject to the limitations cited above, as may be necessary to permit the granting of Incentive Stock Options meeting the requirements of the Code.
9.4
No Option may be granted during any suspension of the Plan or after termination of the Plan.
Article X
Regulations
10.0
The obligation of the Company to issue Common Shares for exercised Incentive Stock Options shall be subject to all applicable laws and regulations, including without limitation (i) for citizens of the United States, the Securities Act of 1933 and state securities laws, (ii) for citizens of Canada and other jurisdictions, the securities laws of Canada and other jurisdictions, and (iii) if the Company is listed, on the NASDAQ market system, or the requirements of other changes or quotation markets.
Article XI
Miscellaneous Provisions
11.1
No Right to Employment.
No person shall have any claim or right to be granted an Option under the Plan, and the grant thereof under the Plan shall not be construed as giving any person the right to be employed by or retained as a consultant for the Company, or to continue any such employment or consulting status.
11.2
Plan Expenses.
The Company will pay all expenses of administering this Plan.
11.3
Use of Exercise Proceeds.
Money received from Optionees on the exercise of Options shall be used for the general corporate purposes of the Company.
11.4
Foreign Nationals.
Without amending the Plan, grants may be made to employees of the Company who are foreign nationals or employed outside the United States, or both, on terms and conditions consistent with the Plan's purpose but different from those specified in the Plan as may be necessary or desirable to create equitable opportunities, given differences in tax laws.
11.5
Indemnification.
In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Committee shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit, or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted thereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except a judgment based upon a finding of bad faith; provided that upon the institution of any such action, suit, or proceeding, a Committee member shall, in writing, give the Company notice thereof and an opportunity, at its own expense, to handle and defend the same before such member undertakes to handle and defend it on her or his own behalf.
11.6
Substitute Options.
Options may be granted under this Plan from time to time in substitution for options held by employees of other corporations who become employees of the Company as the result of a merger or the consolidation of the employing corporation with the Company or the acquisition by the Company of the assets of the employing corporation or the acquisition by the Company of stock of the employing corporation as a result of which it becomes a subsidiary of the Company.
11.7
Forfeiture for Dishonesty.
Notwithstanding anything to the contrary in the Plan, if the Committee in good faith finds by a majority vote, after full consideration of the facts presented on behalf of both the Company and the Optionee, that the Optionee has been engaged in fraud, embezzlement, theft, commission of a felony or dishonesty in the course of her or his employment by the Company or any subsidiary corporation, which damaged the Company or any subsidiary corporation, or for disclosing trade secrets of the Company or any subsidiary corporation, the Optionee shall forfeit all unexercised Options. The decision of the Committee as
to the cause of an Optionee's discharge and the damage done to the Company shall be final. No decision of the Committee, however, shall affect the finality of the discharge of such Optionee by the Company or any subsidiary corporation in any manner.
Article XII
Information Delivery Requirements
12.1
In order that the Company complies with its obligations under the securities laws, an Optionee desiring to exercise his or her options will notify the Chief Executive Officer or Chief Financial Officer of the Company of his or her intention, in writing. Such Officer shall direct other officer(s) of the Company to meet with the individual to deliver and discuss the following information: If the Company is registered with the SEC, copies of its last annual report, quarterly report, proxy statement and any Form 8-K reports; If the Company is not so registered, then copies of the audited financial statements for the last fiscal year and unaudited interim financial statements; a summary of current and expected contracts and overall business strategy; copies of the articles of incorporation and significant business contracts in place; and copies of debt/credit fine documents, and any other document material to the evaluation of an investment in the Company. Prior to the exercise of the Option, the Optionee shall acknowledge receipt of the delivered information in writing.
Article XIII
Disposition of Stock Acquired on Exercise of an Incentive Stock Option
13.1
Qualifying Disposition.
A disposition of Common Stock acquired by exercise of an ISO, where the disposition occurs after two years from the grant of the ISO will qualify the receipt of proceeds from disposition as capital gains income, provided that at least one year has elapsed between exercise of the ISO and disposition of the Common Shares.
13.2
Disqualifying Disposition.
A disposition of Common Stock acquired by exercise of an ISO, where the disposition occurs less than two years from the grant of the ISO, will disqualify the receipt of proceeds from disposition as capital gains income, such that (a) the receipt of such proceeds will be recognized as compensation income in the calendar year of disposition, equal to the difference between the exercise price and the fair market value of the Common Shares at the time of exercise; and (b) for
purposes of calculating capital gains tax on disposition proceeds, the basis shall equal the exercise price plus the amount of compensation income recognized.
Article XIV
Shareholder Approval and Effective Date
14.0
This Plan is effective as of the date of approval by the Board of Directors, provided the shareholders approve the plan within 12 months after that date.
* * * * * * * *
This Incentive Stock Option Plan was presented to the Shareholders of the Company and approved by the Shareholders on December 7, 2001 and incorporated into the minutes and books of the Company. Upon ratification by the Board of Directors on December 7, 2001 the Plan was filed in the Company minute book. This Plan was further amended by the Board of Directors on June 16, 2003, and again by the Board of Directors (and approved by Shareholders) on June 15, 2004.
ATTEST:
U.S. ENERGY CORP.
/s/ Daniel P. Svilar
/s/ Keith G. Larsen
Secretary
President
Attachment A to Plan
Number of Shares: ______
Date of Grant: ____________, 20___
Stock Option Agreement
Agreement made this
day of
,
, between
("Optionee") and U. S. Energy Corp. (the "Company").
1.
Grant of Option.
The Company, pursuant to the provisions of the Company's Incentive Stock Option Plan ("Plan"), hereby grants to the Optionee, subject to the terms and conditions set forth or incorporated herein, an Option to purchase from the Company all or any part of an aggregate of
Common Shares, at the purchase price of $
per Share. The provisions of the Plan governing the terms and conditions of the Option granted hereby are incorporated herein by reference.
In the event of any conflict between this Agreement and the Plan, the Plan shall control.
2.
Exercise.
This Option shall be exercisable in whole or in part (in multiples of 100 Shares, unless for the balance of this Option) on or before
.
This Option shall be exercisable by delivery to the Company of a notice of election to exercise, in the form attached hereto, specifying the number of Shares to be purchased and accompanied by payment of the full purchase price. A copy of this Stock Option Agreement shall also be delivered to the Company along with the notice of election of exercise, for the Company's endorsement of exercise on Schedule I and return to the Optionee for his or her records.
U. S. Energy Corp.
By:
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this “
Agreement
”) is dated as of February 4, 2005, among U.S. Energy Corp., a Wyoming corporation (the “
Company
”), and the purchasers identified on the signature pages hereto (each, including its successors and assigns, a “
Purchaser
” and collectively the “
Purchasers
”).
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “
Securities Act
”) and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agrees as follows:
ARTICLE I
DEFINITIONS
1.1
Definitions
. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Debentures (as defined herein), and (b) the following terms have the meanings indicated in this Section 1.1:
“
Action
” shall have the meaning ascribed to such term in Section 3.1(j).
“
Affiliate
” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act.
“
Business Day
” means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.
“
Closing
” means the closing of the purchase and sale of the Securities pursuant to
Section 2.1
.
“
Closing Date
” means the Business Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) each Purchaser’s obligations to pay the Subscription Amount have been satisfied or waived; and (ii) the Company’s obligations to deliver the Securities have been satisfied or waived.
“
Closing Price
” means the Nasdaq Official Closing Price (“NCOP”), or, if the Common Stock is not traded on Nasdaq, the closing bid price of the Common Stock as reported by Bloomberg Financial L.P.
“
Commission
” means the Securities and Exchange Commission.
“
Common Stock
” means the common stock of the Company, par value $0.001 per share, and any securities into which such common stock shall hereinafter have been reclassified into.
“
Common Stock Equivalents
” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“
Company Counsel
” means Stephen E. Rounds, Esq.
“
Debentures
” means, the Senior Convertible Debentures due three years from their date of issuance, issued by the Company to the Purchasers hereunder, in the form of
Exhibit A
.
“
Disclosure Schedules
” means the meaning ascribed to such term in Section 3.1 hereof.
“
Discussion Time
” shall mean 9 P.M. (New York Time) on such calendar day when the Purchaser was first contacted by anyone regarding an investment in the Company.
“
Effective Date
” means the date that the initial Registration Statement filed by the Company pursuant to the Registration Rights Agreement is first declared effective by the Commission.
“
Escrow Agent
” shall have the meaning set forth in the Escrow Agreement.
“
Escrow Agreement
” shall mean the Escrow Agreement in substantially the form of
Exhibit E
hereto executed and delivered contemporaneously with this Agreement.
“
Exchange Act
” means the Securities Exchange Act of 1934, as amended.
“
Exempt Issuances
” the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company pursuant to any stock or option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of non-employee directors established for such purpose or (b) securities of the Company upon the exercise of or conversion of (i) any securities issued hereunder; and (ii) convertible securities, options or warrants of the Company or the Subsidiaries which are issued and outstanding on the
date of this Agreement, provided that such convertible securities, options, or warrants have not been amended since the date of this Agreement to increase the number of such securities (an amendment which results from the application of any anti dilution provisions applicable to such securities will not constitute an amendment of such convertible securities, options, or warrants).
“
GAAP
” shall have the meaning ascribed to such term in Section 3.1(h) hereof.
“
Liens
” shall have the meaning ascribed to such term in Section 3.1(a) hereof.
“
Losses
” means any and all losses, claims, damages, liabilities, settlement costs and expenses, including without limitation costs of preparation and reasonable attorneys’ fees.
“
Material Adverse Effect
” shall have the meaning assigned to such term in Section 3.1(b) hereof.
“
Person
” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“
Principal Amount
” shall mean, as to each Purchaser, the amounts set forth below such Purchaser’s signature block on the signature pages hereto and next to the heading “
Principal Amount
”, in United States Dollars, which shall be such Purchaser’s Subscription Amount plus three years of simple interest at an annual rate of 6%.
“
Proceeding
” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“
Registration Rights Agreement
” means the Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in the form of
Exhibit B
attached hereto.
“
Registration Statement
” means a registration statement meeting the requirements set forth in the Registration Rights Agreement and covering the resale of the Underlying Shares by each Purchaser as provided for in the Registration Rights Agreement.
“
Required Approvals
” shall have the meaning ascribed to such term in Section 3.1(e) hereof.
“
Required Minimum
” means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise or conversion in full of all Warrants and Debentures (including Underlying Shares issuable as payment of interest), ignoring any conversion or exercise limits set forth therein, and
assuming that the Set Price is at all times on and after the date of determination 75% of the then Set Price on the Business Day immediately prior to the date of determination.
“
Rule 144
” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
“
SEC Reports
” shall have the meaning ascribed to such term in Section 3.1(h) hereof.
“
Securities
” means the Debentures, the Warrants and the Underlying Shares.
“
Securities Act
” means the Securities Act of 1933, as amended.
“
Set Price
” shall have the meaning ascribed to such term in the Debentures.
“
Short Sales
” shall include, without limitation, all “short sales” as defined in Rule 3b-3 of the Exchange Act.
“
Subscription Amount
”
means, as to each Purchaser, the aggregate amoun
t to be paid for Debentures and Warrants purchased hereunder as specified below such Purchaser’s name on the signature page of this Agreement and next to the heading “
Subscription Amount
”, in United States Dollars and in immediately available funds.
“
Subsequent Financing
” shall have the meaning ascribed to such term in Section 4.13.
“
Subsidiary
” means any subsidiary of the Company as set forth on Schedule 3.1(a) attached hereto.
“
Trading Day
” means any day during which the Trading Market shall be open for business.
“
Trading Market
” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: OTC Bulletin Board, the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market.
“
Transaction Documents
” means this Agreement, the Debentures, the Warrants, the Registration Rights Agreement, the Escrow Agreement and any other documents or agreements executed in connection with the transactions contemplated hereunder.
“
Underlying Shares
” means the shares of Common Stock issuable upon conversion of the Debentures and upon exercise of the Warrants.
“
VWAP
” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading Market and if prices for the Common Stock are then reported in the “Pink Sheets” published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (c) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers and reasonably acceptable to the Company.
“
Warrants
” means collectively the Common Stock purchase warrants, in the form of
Exhibit C
delivered to the Purchasers at the Closing in accordance with Section 2.2 hereof, which Warrants shall be exercisable immediately and for a term of 3 years.
“
Warrant Shares
” means the shares of Common Stock issuable upon exercise of the Warrants.
ARTICLE II
PURCHASE AND SALE
2.1
Closing
. On the Closing Date, upon the terms and subject to the conditions set forth herein, concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and each Purchaser agrees to purchase in the aggregate, severally and not jointly,
up to
$4,720,000 in Principal Amounts of
Debentures. Each Purchaser shall deliver or cause to deliver to the Company via wire transfer or a certified check immediately available funds equal to their Subscription Amount and the Company shall deliver or cause to deliver to each Purchaser their respective Debenture and Warrants as determined pursuant to Section 2.2(a) and the other items set forth in Section 2.2 issuable at the Closing. Upon satisfaction of the conditions set forth in Section 2.2, the Closing shall occur at the offices of the Escrow Agent or such other location as the parties shall mutually agree.
2.2
Conditions to Closing
. The Closing shall be subject to the following conditions and deliveries being met on the Closing Date:
(a)
At or prior to the Closing, unless otherwise indicated below, the Company shall deliver or cause to be delivered to the Escrow Agent with respect to each Purchaser the following:
(i)
a Debenture with a principal amount equal to such Purchaser’s Principal Amount, registered in the name of such Purchaser;
(ii)
a Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 50% of the Underlying Shares
issuable upon full conversion of the Debenture issued to the Purchaser at Closing (i.e. Principal Amount divided by the Set Price multiplied by 50%), with an exercise price of 110% of the Closing Price on the day prior to Closing;
(iii)
the legal opinion of Company Counsel, in the form of
Exhibit D
attached hereto, addressed to the Purchasers;
(iv)
the Registration Rights Agreement duly executed by the Company in the form of
Exhibit B
attached hereto;
(v)
the Escrow Agreement duly executed by the Company; and
(vi)
this Agreement, duly executed by the Company.
(b)
At or prior to the Closing, each Purchaser shall deliver or cause to be delivered to the Escrow Agent the following:
(i)
such Purchaser’s Subscription Amount;
(ii)
this Agreement, duly executed by such Purchaser;
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(iii)
|
the Escrow Agreement duly executed by such Purchaser; and
|
(iv)
the Registration Rights Agreement duly executed by such Purchaser.
(c)
All representations and warranties of the other parties contained herein shall remain true and correct as of the Closing Date and all covenants of the other party shall have been performed if due prior to such date.
(d)
From the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg Financial Markets shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on the Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities, nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of the Purchasers, makes it impracticable or inadvisable to purchase the Debentures at the Closing
.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1
Representations and Warranties of the Company
. Except as set forth under the corresponding section of the disclosure schedules delivered to the Purchasers concurrently herewith (the “
Disclosure Schedules
”) which Disclosure Schedules shall be deemed a part hereof, the Company hereby makes the representations and warranties set forth below to each Purchaser.
(a)
Subsidiaries
. All of the direct and indirect subsidiaries of the Company are set forth on
Schedule 3.1(a)
. The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any lien, charge, security interest, encumbrance, right of first refusal or other restriction (collectively, “
Liens
”), and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. If the Company has no subsidiaries, then references in the Transaction Documents to the Subsidiaries shall be disregarded.
(b)
Organization and Qualification
. Each of the Company and the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate: (i) adversely affect the legality, validity or enforceability of any Transaction Document, (ii) have or result in or be reasonably likely to have or result in a material adverse effect on the results of operations, assets, prospects, business or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) adversely impair the Company's ability to perform fully on a timely basis its obligations under any of the Transaction Documents (any of (i), (ii) or (iii), a “
Material Adverse Effect
”).
(c)
Authorization; Enforcement
. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations hereunder or thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby or thereby have been duly authorized by all necessary action on the part of the Company and no further consent or action is required by the Company other than Required Approvals. Each of the Transaction Documents has been (or upon delivery will be) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors’ rights and
remedies generally and general principles of equity. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, by-laws or other organizational or charter documents except where such violation could not, individually or in the aggregate, constitute a Material Adverse Effect.
(d)
No Conflicts
. The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated thereby do not and will not: (i) conflict with or violate any provision of the Company’s or any Subsidiary's certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) subject to obtaining the Required Approvals, conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) result, in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not, individually or in the aggregate, have or result in a Material Adverse Effect.
(e)
Filings, Consents and Approvals
. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than (i) the filings required under Section 4.7, (ii) the filing with the Commission of the Registration Statement, (iii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Debentures and Warrants and the listing of the Underlying Shares for trading thereon in the time and manner required thereby and (iv) the filing of Form D with the Commission and applicable Blue Sky filings (collectively, the “
Required Approvals
”).
(f)
Issuance of the Securities
. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and non-assessable, free and clear of all Liens. The Company has reserved from its duly authorized capital stock a number of shares of Common Stock for issuance of the Underlying Shares at least equal to the Required Minimum on the date hereof. The Company has not, and to the knowledge of the Company, no Affiliate of the Company has sold, offered for sale or solicited offers to buy or otherwise negotiated in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the
Securities to the Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.
(g)
Capitalization
. The number of shares and type of all authorized, issued and outstanding capital stock of the Company is set forth in Schedule 3.1(g). No securities of the Company are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. Except as disclosed in the SEC Reports, there are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
(h)
SEC Reports; Financial Statements
. The Company has filed all reports required to be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials being collectively referred to herein as the “
SEC Reports
”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. The Company has identified and made available to the Purchasers a copy of all SEC Reports filed within the 10 days preceding the date hereof. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been
prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (“
GAAP
”), except as may be otherwise specified in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.
(i)
Material Changes
. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in the SEC Reports: (i) there has been no event, occurrence or development that has had or that could result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting or the identity of its auditors, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option or similar plans.
(j)
Litigation
. There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “
Action
”) which: (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. The Company does not have pending before the Commission any request for confidential treatment of information. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.
(k)
Compliance
. Neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or
any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, except in each case as could not, individually or in the aggregate, have or result in a Material Adverse Effect.
(l)
Labor Relations
. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company.
(m)
Regulatory Permits
. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect (“
Material Permits
”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.
(n)
Title to Assets
. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries. Any real property and facilities held under lease by the Company and the Subsidiaries are held under valid, subsisting and enforceable leases of which the Company and the Subsidiaries are in compliance.
(o)
Patents and Trademarks
. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have could have a Material Adverse Effect (collectively, the “
Intellectual Property Rights
”). Neither the Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights.
(p)
Insurance
. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including but not limited to directors and officers insurance coverage at least equal to the aggregate Subscription Amount. To the best of Company’s knowledge, such
insurance contracts and policies are accurate and complete. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.
(q)
Transactions With Affiliates and Employees
. Except as required to be set forth in the SEC Reports, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.
(r)
Sarbanes-Oxley; Internal Accounting Controls
. The Company is in material compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date.
The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company's most recently filed periodic report under the Exchange Act, as the case may be, is being prepared. The Company's certifying officers have evaluated the effectiveness of the Company's controls and procedures as of the date prior to the filing date of the most recently filed periodic report under the Exchange Act (such date, the “
Evaluation Date
”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no significant changes in the Company's internal controls (as such term is defined in Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company's knowledge, in other factors that could significantly affect the Company's internal controls.
(s)
Solvency/Indebtedness
. Based on the financial condition of the Company as of the Closing Date: (i) the fair saleable value of the Company’s assets (as estimated
internally by the Company) exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other liabilities (including known contingent liabilities) as they mature; (ii) the Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the active businesses conducted by the Company, but not taking into account projected capital requirements and capital availability thereof for mineral properties other than coalbed methane; and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. The SEC Reports set forth as of the dates thereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “
Indebtedness
” shall mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations, whether or not the same are or should be reflected in the Company’s balance sheet or the notes thereto, except guaranties by endorsement of negotiable instruments for deposit or collection in the ordinary course of business, and (c) the present value of any lease payments in excess of $50,000 due under leases required to be capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to any Indebtedness.
(t)
Certain Fees
. Except for a 7% fee payable to HPC Capital Management, on the Closing Date, and the issuance to HPC by the Company of Warrants to purchase up to 100,000 Warrant Shares (assuming receipt of an aggregate of $4,000,000 in Subscription Amounts), no brokerage or finder's fees or commissions are or will be payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement, and the Company has not taken any action that would cause any Purchaser to be liable for any such fees or commissions. The Company agrees that the Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of any Person for fees of the type contemplated by this Section with the transactions contemplated by this Agreement.
(u)
Private Placement
. Assuming the accuracy of the representations and warranties of the Purchasers set forth in Sections 3.2(b)-(f), the offer, issuance and sale of the Securities to the Purchasers as contemplated hereby are exempt from the registration requirements of the Securities Act. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.
(v)
Listing and Maintenance Requirements
. The Company’s Common Stock is registered pursuant to Section 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. The Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.
(w)
Registration Rights
. The Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the Commission or any other governmental authority that have not been satisfied.
(x)
Application of Takeover Protections
. The Company and its Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company's Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company's issuance of the Securities and the Purchasers’ ownership of the Securities.
(y)
Seniority
. As of the Closing Date, no indebtedness of the Company is senior to the Debentures in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby).
(z)
Disclosure
. The Company confirms that neither it nor any other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. The Company understands and confirms that the Purchasers will rely on the foregoing representations in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.
(aa)
Tax Status
.
The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, statue or local tax. None of the Company’s tax returns is presently being audited by any taxing authority.
(bb)
Acknowledgment Regarding Purchasers’ Purchase of Securities
. The Company acknowledges and agrees that the Purchasers are acting solely in the capacity of arm’s length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by any Purchaser or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to the Purchasers’ purchase of the Securities. The Company further represents to each Purchaser that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.
(cc)
No General Solicitation or Advertising in Regard to this Transaction
.
Neither the Company nor, to the knowledge of the Company, any of its directors or officers (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the sale of the Debentures or the Warrants, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Debentures, the Underlying Shares or the Warrants under the Securities Act or made any “directed selling efforts” as defined in Rule 902 of Regulation S.
(dd)
No Disagreements with Accountants and Lawyers.
There are no disagreements of any kind presently existing, or reasonably anticipated by the Company to arise, between the accountants and lawyers formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers.
(ee)
Accountants.
The Company’s accountants are set forth on Schedule 3.1(ee) of the Disclosure Schedule. To the Company’s knowledge, such accountants, who the Company expects will express their opinion with respect to the financial statements to be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 are a registered public accounting firm as required by the Securities Act.
(ff)
No Integrated Offering
.
Neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or which could violate any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of the Trading Market.
(gg)
Foreign Corrupt Practices.
Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (i) directly or indirectly, used any corrupt funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.
(hh)
Acknowledgement Regarding Purchasers’ Trading Activity.
Anything in this Agreement or elsewhere herein to the contrary notwithstanding (except for Section 4.16 hereof), it is understood and agreed by the Company (i) that none of the Purchasers have been asked to agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) that past or future open market or other transactions by any Purchaser, including Short Sales, and specifically including, without limitation, Short Sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) that any Purchaser, and counter parties in “derivative” transactions to which any such Purchaser is a party, directly or indirectly, presently may have a “short” position in the Common Stock, and (iv) that each Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various times during the period that the Securities are outstanding, including, without limitation, during the periods that the value of the Underlying Shares deliverable with respect to Securities is being determined and (b) such hedging activities (if any) could reduce the value of the existing stockholders’ equity
interests in the Company at and after the time that the hedging activities are being conducted.
3.2
Representations and Warranties of the Purchasers
. Each Purchaser hereby, for itself and for no other Purchaser, represents and warrants to the Company as follows:
(a)
Organization; Authority
. If the Purchaser is not an individual, such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder. If the Purchaser is not an individual, the purchase by such Purchaser of the Securities hereunder has been duly authorized by all necessary action on the part of such Purchaser, and such purchase has been made in conformity with those Federal and state securities laws applicable to the Purchaser and the conduct of its business. Each of this Agreement and the Registration Rights Agreement has been duly executed by such Purchaser if the Purchaser is not an individual, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(b)
Purchaser Representation
. Such Purchaser is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof, without prejudice, however, to such Purchaser's right, subject to the provisions of this Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant to an effective registration statement under the Securities Act or under an exemption from such registration and in compliance with applicable federal and state securities laws. Nothing contained herein shall be deemed a representation or warranty by such Purchaser to hold Securities for any period of time or limit such Purchaser’s right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and state securities laws. Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business. Such Purchaser does not have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities.
(c)
Purchaser Status
. At the time such Purchaser was offered the Securities, it was, and at the date hereof it is, and on each date on which it exercises any Warrants or converts any Debentures it will be, an “accredited investor” as defined in Rule 501(a) under the Securities Act. If the Purchaser is not an individual, such Purchaser has not been formed solely for the purpose of acquiring the Securities. Such Purchaser is not a registered broker-dealer under Section 15 of the Exchange Act.
(d)
Experience of such Purchaser
. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.
(e)
General Solicitation
. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.
The Company acknowledges and agrees that each Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2.
ARTICLE IV
OTHER AGREEMENTS OF THE PARTIES
4.1
Transfer Restrictions
.
(a)
The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser, the Company may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement.
(b)
Each Purchaser, severally and not jointly with the other Purchasers, agrees to the imprinting, so long as is required by this
Section 4.1(b)
, of the following legend on any certificate evidencing Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE OR CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.
(c)
Certificates evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) following any sale of such Underlying Shares pursuant to a registration statement (including the Registration Statement) covering the resale of such Underlying Securities in effect, or pursuant to Rule 144, or (ii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iii) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission);
provided
,
however
, in connection with the issuance of the Underlying Shares, each Purchaser, severally and not jointly with the other Purchasers, hereby agrees to adhere to and abide by all prospectus delivery requirements under the Securities Act and rules and regulations of the Commission. The Company shall cause its counsel to issue a legal opinion to the Company’s transfer agent promptly after the Effective Date if required by the Company’s transfer agent to effect the removal of the legend hereunder. If all or any portion of a Debenture or Warrant is converted or exercised (as applicable) at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144(k) or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then such Underlying Shares shall be issued free of all legends, provided that the Purchaser has sent a letter to the Company stating the Purchaser’s immediate intention to sell the Underlying Shares, and provided further, that such a letter shall not be required if the Debenture has been held for the minimum two year rule 144(k) holding period. The Company agrees that following the Effective
Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Business Days following the delivery by a Purchaser to the Company or the Company's transfer agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such third Business Day, the “
Legend Removal Date
”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section.
(d)
In addition to such Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, for each $5,000 of Underlying Shares (based on the VWAP of the Common Stock on the date such Securities are submitted to the Company’s transfer agent) delivered for removal of the restrictive legend and subject to this Section 4.1(c), $50 per Business Day (increasing to $100 per Business Day 3 Business Days after such damages have begun to accrue) for each Business Day after the Legend Removal Date until such certificate is delivered without a legend.
Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Company's failure to deliver certificates representing any Securities as required by the Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.
(e)
So long as at least 30% of the principal amount of the Debentures, in the aggregate, are then outstanding, the Company will not undertake a forward or reverse stock split or reclassification of the Common Stock without the prior written consent of each Purchaser holding Debentures at such time.
4.2
Acknowledgment of Dilution
. The Company acknowledges that the issuance of the Securities may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction Documents, including without limitation its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off, counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser
and regardless of the dilutive effect that such issuance may have on the ownership of the other stockholders of the Company.
4.3
Furnishing of Information
. As long as any Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. Upon the request of any Purchaser, the Company shall deliver to such Purchaser a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell the Securities under Rule 144. The Company further covenants that it will
take such further action as any holder of Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144.
4.4
Integration
. The Company shall not, and shall use its best efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities to the Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.
4.5
Reservation and Listing of Securities
.
(a)
The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents.
(b)
If, on any date, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than the Required Minimum on such date, then the Board of Directors of the Company shall use commercially reasonable efforts to amend the Company's certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum at such time, as soon as possible and in any event not later than the 75th day after such date.
(c)
The Company shall, if applicable: (i) in the time and manner required by the Trading Market, prepare and file with such Trading Market an additional shares listing application covering a number of shares of Common Stock at least equal to the Required Minimum on the date of such application, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on the Trading Market as soon as possible thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv) maintain the listing of such Common Stock on any date at least equal to the Required Minimum on such date on such Trading Market or another Trading Market.
4.6
Conversion and Exercise Procedures
. The form of Notice of Exercise included in the Warrants and the form of Notice of Conversion included in the Debentures
set forth the totality of the procedures required of the Purchasers in order to exercise the Warrants or convert the Debentures. No additional legal opinion or other information or instructions shall be required of the Purchasers to exercise their Warrants or convert their Debentures. The Company shall honor exercises of the Warrants and conversions of the Debentures and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents.
4.7
Securities Laws Disclosure; Publicity
. The Company shall, by 8:30 a.m. Eastern time on the Business Day following the Closing Date, issue a press release or file a Current Report on Form 8-K disclosing all material terms of the transactions contemplated hereby. The Company and the Purchasers shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby
and neither the Company nor any Purchaser shall
issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, other than in any registration statement filed pursuant to the Registration Rights Agreement and filings related thereto, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide each Purchaser with prior notice of such disclosure.
4.8
Non-Public Information
. The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company.
4.9
Use of Proceeds
. The Company shall use the net proceeds from the sale of the Securities hereunder in a manner set forth on Schedule 4.9 and not for the satisfaction of any portion of the Company's debt (other than payment of trade payables, capital lease obligations and accrued expenses in the ordinary course of the Company's business and prior practices), to redeem any Company equity or equity-equivalent securities or to settle any outstanding litigation.
4.10
Reimbursement.
If any Purchaser becomes involved in any capacity in any Proceeding by or against any Person who is a stockholder of the Company, solely as a result of such Purchaser's acquisition of the Securities under this Agreement and without causation by any other activity, obligation, condition or liability on the part of, or pertaining to such Purchaser and not to the purchase of Securities pursuant to this Agreement, the Company will reimburse such Purchaser, to the extent such reimbursement is not provided for in Section 4.11, for its reasonable legal and other expenses (including the cost of any investigation, preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations (and limitations thereon) of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person. The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement except to the extent any covenant or warranty owing to the Company is breached.
4.11
Indemnification of Purchasers.
Subject to the provisions of this Section 4.11, the Company will indemnify and hold the Purchasers and their directors, officers, shareholders, partners, employees and agents (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against a Purchaser, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser’s representation, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party. The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by an Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by the Purchasers in this Agreement or in the other Transaction Documents.
4.12
Shareholders Rights Plan
. In the event that a shareholders rights plan is adopted by the Company, no claim will be made or enforced by the Company or any other Person that any Purchaser is an “Acquiring Person” under the plan or in any way could be deemed to trigger the provisions of such plan by virtue of receiving Securities under the Transaction Documents.
4.13
Participation in Future Financing
. So long as any portion of this Debentures are outstanding, upon any financing by the Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents (a “
Subsequent Financing
”), each Purchaser shall have the right to purchase its Pro Rata Portion of up to the aggregate Principal Amount of Debentures purchased on the Closing Date (the “
Participation Maximum
”). At least 10 Business Days prior to the closing of the Subsequent Financing, the Company shall deliver to each Purchaser a written notice of its intention to effect a Subsequent Financing (“
Pre-Notice
”), which Pre-Notice shall ask such Purchaser if it wants to review the details of such financing (such additional notice, a “
Subsequent Financing Notice
”). Upon the request of a Purchaser, and only upon a request by
such Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later than 1 Business Day after such request, deliver a Subsequent Financing Notice to such Purchaser. The Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Financing is proposed to be effected, and attached to which shall be a term sheet or similar document relating thereto. If by 6:30 p.m. (New York City time) on the 10
th
Business Day after all of the Purchasers have received the Pre-Notice, notifications of the Purchasers of their willingness to participate in the Subsequent Financing (or to cause their designees to participate) is, in the aggregate, less than the total amount of the Participation Maximum, then the Company may effect the remaining portion of such Participation Maximum on the terms and to the Persons set forth in the Subsequent Financing Notice. If the Company receives no notice from a Purchaser as of such 10
th
Business Day, such Purchaser shall be deemed to have notified the Company that it does not elect to participate. The Company must provide the Purchasers with a second Subsequent Financing Notice, and the Purchasers will again have the right of participation set forth above in this Section 4.13, if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason substantially on terms no more favorable to the Purchasers than those set forth in such Subsequent Financing Notice within 60 Business Days after the date of the initial Subsequent Financing Notice. In the event the Company receives responses to Subsequent Financing Notices from Purchasers seeking to purchase more than the aggregate amount of the Participation Maximum, each such Purchaser shall have the right to purchase their Pro Rata Portion (as defined below) of the Participation Maximum. “
Pro Rata Portion
” is the ratio of (x) the Subscription Amount of a participating Purchaser and (y) the sum of the aggregate Subscription Amount of all participating Purchasers. Notwithstanding the foregoing, this Section 4.13 shall not apply in respect of an Exempt Issuance.
4.14
Prohibition on Subsequent Financings
. From the date hereof until 90 days after the Effective Date, other than as contemplated by this Agreement, neither the Company nor any Subsidiary shall issue or sell any Common Stock or Common Stock Equivalents. Notwithstanding anything herein to the contrary, the 90 day period set forth in this Section 4.14 shall be extended for the number of Business Days during such period in which (y) trading in the Common Stock is suspended by any Trading Market, or (z) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may not be used by the Purchasers for the resale of the Underlying Shares. Notwithstanding anything to the contrary herein, this Section 4.14 shall not apply in respect of an Exempt Issuance. Additionally, in additional to the limitations set forth herein, from the date hereof until such time as no Purchaser holds any of the Securities, the Company shall be prohibited from effecting or enter into an agreement to effect any Subsequent Financing involving a “
Variable Rate Transaction
” or an “
MFN Transaction
” (each as defined below). The term “
Variable Rate Transaction
” shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified
or contingent events directly or indirectly related to the business of the Company or the market for the Common Stock. An equity line of credit agreement shall be deemed to be a Variable Rate Transaction for purposes of this provision. The term “
MFN Transaction
” shall mean a transaction in which the Company issues or sells any securities in a capital raising transaction or series of related transactions which grants to an investor the right to receive additional shares based upon future transactions of the Company on terms more favorable than those granted to such investor in such offering.
4.15
Equal Treatment of Purchasers
. No consideration shall be offered or paid to any person to amend or consent to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents. Further, the Company shall not make any payment of principal or interest on the Debentures in amounts which are disproportionate to the respective principal amounts outstanding on the Debentures at any applicable time. For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended to treat for the Company the Debenture holders as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise.
4.16
Short Sales.
Each Purchaser covenants that neither it nor any affiliates acting on its behalf or pursuant to any understanding with it will execute any Short Sales during the period from the Discussion Time until prior to the time that the transactions contemplated by this Agreement are first publicly announced as described in this Agreement. Notwithstanding the foregoing, no Purchaser makes any representation, warranty or covenant hereby that it will not engage in Short Sales in the securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced as described in this Agreement.
ARTICLE V
MISCELLANEOUS
5.1
Termination
. This Agreement may be terminated by any Purchaser, by written notice to the other parties, if the Closing has not been consummated on or before February 9, 2005; provided that no such termination will affect the right of any party to sue for any breach by the other party (or parties).
5.2
Fees and Expenses
. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement, except that at Closing, the Company shall pay not more than $20,000 of the legal fees of Sichenzia Ross Friedman Ference LLP incurred in connection with the Transaction Documents ($5,000 of such $20,000 maximum fees having been paid prior to the date of this Agreement by the Company. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the issuance of any Securities.
5.3
Entire Agreement
. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
5.4
Notices
. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified on the signature page attached hereto prior to 5:30 p.m. (New York City time) on a Business Day and an electronic confirmation of delivery is received by the sender, (b) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Business Day or later than 5:30 p.m. (New York City time) on any Business Day, (c) three Business Days following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The addresses for such notices and communications are those set forth on the signature pages hereof, or such other address as may be designated in writing hereafter, in the same manner, by such Person.
5.5
Amendments; Waivers
. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and each of the Purchasers or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.
5.6
Construction
. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.
5.7
Successors and Assigns
. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. Any Purchaser may assign its rights under this Agreement and the Registration Rights Agreement to any Person to whom such Purchaser assigns or transfers any Securities.
5.8
No Third-Party Beneficiaries
. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.11.
5.9
Governing Law; Venue; Waiver of Jury Trial
. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.
Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. The parties hereby waive all rights to a trial by jury. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
5.10
Survival
. The representations and warranties contained herein shall survive the Closing and the delivery, exercise and/or conversion of the Securities, as applicable for the applicable statue of limitations.
5.11
Execution
. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) such document with the same force and effect as if such facsimile signature page were an original thereof.
5.12
Severability
. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.
5.13
Rescission and Withdrawal Right
. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents,
whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights;
provided
,
however
, in the case of a rescission of a conversion of a Debenture or exercise of a Warrant, the Purchaser shall be required to return any shares of Common Stock subject to any such rescinded conversion or exercise notice.
5.14
Replacement of Securities
. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested.
5.15
Remedies
. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.
5.16
Payment Set Aside
. To the extent that the Company makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
5.17
Usury
. To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Document. Notwithstanding any provision to the contrary contained in any Transaction Document, it is expressly agreed and provided that the total liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the “
Maximum Rate
”), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser's election.
5.18
Independent Nature of Purchasers’ Obligations and Rights
. The obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Document. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.
Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. For reasons of administrative convenience only, Purchasers and their respective counsel have chosen to communicate with the Company through Sichenzia Ross Friedman Ference LLP. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers.
5.19
Liquidated Damages
. The Company’s obligations to pay any liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such liquidated damages or other amounts are due and payable shall have been canceled.
5.20
Construction
. The parties agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments hereto.
(Signature Pages Follow)
IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
|
U.S. ENERGY CORP. WYOMING
|
Address for Notice:
|
|
By:___
/s/ Keith G. Larsen
______________________
Name: Keith G. Larsen
Title: President
|
877 North 8
th
West,
Riverton, WY 82501
T 307-856-9271
F
307-857-3050
|
|
With a copy to (which shall not constitute notice):
Stephen E. Rounds
The Law Office of Stephen E. Rounds
1544 York Street, Suite 110
Denver, Colorado 80206
T 303-377-6997
F 303-377-0231
|
|
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
[PURCHASER SIGNATURE PAGES TO USEG SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Name of Investing Entity or Individual:______________________________________________
Signature of Authorized Signatory of Investing Entity
:
_______________________________
Name of Authorized Signatory if not an Individual: ____________________________________
Title of Authorized Signatory if not an Individual: _________________________________
____
Email Address: _______________________________________________________________
Address for Notice of Investing Entity or Individual:
Address for Delivery of Securities for Investing Entity or Individual (if not same as above):
Subscription Amount:
Principal Amount:
Warrant Shares:
EIN or SSN Number:
[PROVIDE THIS UNDER SEPARATE COVER]
[SIGNATURE PAGES CONTINUE]
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “
SECURITIES ACT
”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
Original Issue Date:
February 9, 2005
Original Set Price (subject to adjustment herein):
$2.43
$
FORM OF
SENIOR CONVERTIBLE DEBENTURE [AGGREGATE AMOUNT
$4,720,000
DUE FEBRUARY 9, 2008
THIS DEBENTURE is one of a series of duly authorized and issued Senior Convertible Debentures of US Energy Corp., a Wyoming corporation, having a principal place of business at 877 North 8
th
West, Riverton, WY, 82501 (the “
Company
”), designated as its Senior Convertible Debenture, due February 9, 2008 (the “
Debentures
”).
Capitalized terms used but not defined herein shall have the meanings set forth in the Purchase Agreement.
FOR VALUE RECEIVED, the Company promises to pay to ________________________ or its registered assigns (the “
Holder
”), the principal sum of $_______________ on February __, 2008 or such earlier date as the Debentures are required or permitted to be repaid as provided hereunder (the “
Maturity Date
”).
Except as set forth in Section 7 of this Debenture,
t
he Company may not prepay any portion of the Principal Amount of this Debenture without the prior written consent of the Holder.
This Debenture is subject to the following additional provisions:
Section 1.
This Debenture is exchangeable for an equal aggregate Principal Amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange.
Section 2.
This Debenture has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
Section 3.
Events of Default
.
a)
“
Event of Default
”, wherever used herein, means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
i)
any default in the payment of (A) the Principal Amount of any Debenture, or (B) liquidated damages in respect of, any Debenture, in each case free of any claim of subordination, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default is not cured, within five Business Days;
ii)
the Company shall fail to observe or perform any other covenant or agreement contained in this Debenture or any of the other Transaction Documents (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion which breach is addressed in clause (xii) below) which failure is not cured, if possible to cure, within the earlier to occur of (A) five Business Days after notice of such default sent by the Holder or by any other Holder and (B) 10 Business Days after the Company shall become or should have become aware of such failure;
iii)
a default or event of default (subject to any grace or cure period provided for in the applicable agreement, document or instrument) shall occur under (A) any of the Transaction Documents other than the Debentures, or (B) any other material agreement, lease, document or instrument to which the Company or any Subsidiary is bound;
iv)
any representation or warranty made herein, in any other Transaction Document, in any written statement pursuant hereto or thereto, or in
any other report, financial statement or certificate made or delivered to the Holder or any other holder of Debentures shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v)
the Company or any of its Subsidiaries shall commence, or there shall be commenced against the Company or any such Subsidiary a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Company or any Subsidiary commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Company or any Subsidiary thereof or there is commenced against the Company or any Subsidiary thereof any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Company or any Subsidiary thereof is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Company or any Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Company or any Subsidiary thereof makes a general assignment for the benefit of creditors; or the Company shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Company or any Subsidiary thereof shall call a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or the Company or any Subsidiary thereof shall by any act or failure to act expressly indicate its consent to, approval of or acquiescence in any of the foregoing; or any corporate or other action is taken by the Company or any Subsidiary thereof for the purpose of effecting any of the foregoing;
vi)
the Company or any Subsidiary (except for RMG I LLC as to its non-compliance with negative loan covenants, as set forth in the Disclosure Schedules to the Purchase Agreement) shall default in any of its obligations under any mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of the Company in an amount exceeding $150,000, whether such indebtedness now exists or shall hereafter be created and such default shall result in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, provided that non-compliance by RMG I, LLC (a subsidiary of Rocky Mountain Gas, Inc.) with certain negative covenants with its mezzanine lenders shall not be deemed a default;
vii)
the Common Stock shall not be eligible for quotation on or quoted for trading on a Trading Market and shall not again be eligible for and quoted or listed for trading thereon within five Business Days;
viii)
the Company shall be a party to any Change of Control Transaction, Fundamental Transaction (as that term is defined in Section 4(c)(viii), or shall agree to sell or dispose of all or in excess of 33% of its assets in one or more transactions (whether or not such sale would constitute a Change of Control Transaction) or shall redeem or repurchase more than a de minimis number of its outstanding shares of Common Stock or other equity securities of the Company (other than redemptions of Conversion Shares and repurchases of shares of Common Stock or other equity securities of departing officers and directors of the Company; provided such repurchases shall exceed $100,000, in the aggregate, for all officers and directors during the term of this Debenture);
ix)
a Registration Statement shall not have been declared effective by the Commission on or prior to the 150
th
calendar day after the Closing Date or any other Event (as defined in the Registration Rights Agreement) shall have occurred;
x)
if, during the Effectiveness Period (as defined in the Registration Rights Agreement), the effectiveness of the Registration Statement lapses for any reason or the Holder shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Registration Statement, in either case, for more than 20 consecutive Business Days or 35 non-consecutive Business Days during any 12 month period;
provided
,
however
, that in the event that the
Company is negotiating a merger, consolidation, acquisition or sale of all or substantially all of its assets or a similar transaction and in the written opinion of counsel to the Company, the Registration Statement, would be required to be amended to include information concerning such transactions or the parties thereto that is not available or may not be publicly disclosed at the time, the Company shall be permitted an additional 15 consecutive Business Days during any 12 month period relating to such an event;
xi)
an Event (as defined in the Registration Rights Agreement) shall not have been cured to the satisfaction of the Holder prior to the expiration of thirty days from the Event Date (as defined in the Registration Rights Agreement) relating thereto (other than an Event resulting from a failure of an Registration Statement to be declared effective by the Commission on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), which shall be covered by Section 3(a)(vii));
xii)
the Company shall fail for any reason to deliver certificates to a Holder prior to the Third Business Day after a Conversion Date pursuant to and in
accordance with Section 4(b) or the Company shall provide notice to the Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversions of any Debentures in accordance with the terms hereof; or
(xiii)
the Company shall fail for any reason to deliver the payment in cash pursuant to a Buy-In (as defined herein) within five days after notice thereof is delivered hereunder; or
(xiv)
the Company shall not have amended its certificate of articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required Minimum as of the Closing date.
b)
If any Event of Default occurs, the full Principal Amount of this Debenture and other amounts owing in respect thereof, to the date of acceleration shall become, at the Holder’s election, immediately due and payable in cash. The aggregate amount payable upon an Event of Default shall be equal to the Mandatory Prepayment Amount. Commencing five days after the occurrence of any Event of Default that results in the eventual acceleration of this Debenture, interest shall accrue at the rate of 18% per annum, or such lower maximum amount of interest permitted to be charged under applicable law. All Debentures for which the full Mandatory Prepayment Amount hereunder shall have been paid in accordance herewith shall promptly be surrendered to or as directed by the Company. The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a Debenture holder until such time, if any, as the full payment under this Section shall have been received by it. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
Section 4.
Conversion
.
a)
i)
At any time after the Original Issue Date until this Debenture is no longer outstanding, this Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time (subject to the limitations on conversion set forth in Section 4(a)(ii) hereof). The Holder shall effect conversions by delivering to the Company the form of Notice of Conversion attached hereto as
Annex A
(a “
Notice of Conversion
”), specifying therein the Principal Amount of Debentures to be converted and the date on which such conversion is to be effected (a “
Conversion Date
”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is provided hereunder. To effect
conversions hereunder, the Holder shall not be required to physically surrender Debentures to the Company unless the entire Principal Amount of this Debenture has been so converted. Conversions hereunder shall have the effect of lowering the outstanding Principal Amount of this Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the Principal Amount converted and the date of such conversions. The Company shall deliver any objection to any Notice of Conversion within 1 Business Day of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Debenture, the unpaid and unconverted Principal Amount of this Debenture may be less than the amount stated on the face hereof.
ii)
Conversion Limitations
.
(A)
Reserved.
(B)
The Company shall not effect any conversion of this Debenture, and the Holder shall not have the right to convert any portion of this Debenture, pursuant to Section 4(a)
(i)
or otherwise, to the extent that after giving effect to such conversion, the Holder (together with the Holder’s affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Debenture with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted portion of this Debenture beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Debentures or the Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(a)(ii), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this section applies, the determination of whether this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of
such Holder. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 4(a)(ii), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Debenture, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 4(a)(ii) may be waived by the Holder upon, at the election of the Holder, not less than 61 days’ prior notice to the Company, and the provisions of this Section 4(a)(ii)(B) shall continue to apply until such 61
st
day (or such later date, as determined by the Holder, as may be specified in such notice of waiver).
iii)
Conversion Shares Issuable Upon Conversion of Principal Amount
. The number of shares of Common Stock issuable upon a conversion shall be determined by the quotient obtained by dividing (x) the outstanding Principal Amount of this Debenture to be converted by (y) the Set Price.
(b)
i)
Not later than three Business Days after any Conversion Date, the Company will deliver to the Holder a certificate or certificates representing the Conversion Shares which shall be free of restrictive legends and trading restrictions (other than those required by the Purchase Agreement) representing the number of shares of Common Stock being acquired upon the conversion of Debentures. The Company shall, if available and if allowed under applicable securities laws, use its best efforts to deliver any certificate or certificates required to be delivered by the Company under this Section electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions. If in the case of any Notice of Conversion such certificate or certificates are not delivered to or as directed by the applicable Holder by the Third Business Day after a Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which
event the Company shall immediately return the certificates representing the Principal Amount of Debentures tendered for conversion.
ii)
If the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Business Day after the Conversion Date, the Company shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of Principal Amount being converted, $50 per Business Day (increasing to $100 per Business Day after 3 Business Days after such damages begin to accrue) for each Business Day after such third Business Day until such certificates are delivered. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Debenture in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares;
provided
,
however
, such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. In the event a Holder of this Debenture shall elect to convert any or all of the outstanding Principal Amount hereof, the Company may not refuse conversion based on any claim that the Holder or any one associated or affiliated with the Holder of has been engaged in any violation of law, agreement or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of this Debenture shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the Principal Amount of this Debenture outstanding, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares or, if applicable, cash, upon a properly noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 3 herein for the Company’s failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
iii)
In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 4(b)(i) by the third Business Day after the Conversion Date, and if after such third Business Day the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which the Holder anticipated receiving upon such conversion (a “
Buy-In
”), then the Company shall (A) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the conversion at issue multiplied by (2) the actual sale price of the Common Stock at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation and (B) at the option of the Holder, either reissue Debentures in Principal Amount equal to the Principal Amount of the attempted conversion or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 4(b)(i). For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of Debentures with respect to which the actual sale price of the Conversion Shares at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. Notwithstanding anything contained herein to the contrary, if a Holder requires the Company to make payment in respect of a Buy-In for the failure to timely deliver certificates hereunder and the Company timely pays in full such payment, the Company shall not be required to pay such Holder liquidated damages under Section 4(b)(ii) in respect of the certificates resulting in such Buy-In.
(c)
i)
The conversion price in effect on any Conversion Date shall be equal to $2.43 (subject to adjustment herein) (the “
Set Price
”).
ii)
If the Company, at any time while the Debentures are outstanding: (A) shall pay a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company pursuant to this Debenture), (B) subdivide outstanding shares of Common Stock into a larger number of shares, (C) combine (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (D)
issue by reclassification of shares of the Common Stock any shares of capital stock of the Company, then the Set Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding before such event and of which the denominator shall be the number of shares of Common Stock outstanding after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
iii)
If the Company, at any time while Debentures are outstanding, shall offer, sell, grant any option to purchase or offer, sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Set Price (“
Dilutive Issuance
”), as adjusted hereunder (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which is issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Set Price, such issuance shall be deemed to have occurred for less than the Set Price), then the Set Price shall be reduced to equal the effective conversion, exchange or purchase price for such Common Stock or Common Stock Equivalents (including any reset provisions thereof) at issue. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. The Company shall notify the Holder in writing, no later than the business day following the issuance of any Common Stock or Common Stock Equivalents subject to this section, indicating therein the applicable issuance price, or of applicable reset price, exchange price, conversion price and other pricing terms.
iv)
If the Company, at any time while Debentures are outstanding, shall distribute to all holders of Common Stock (and not to Holders) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security, then in each such case the Set Price shall be determined by multiplying such price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holders of
the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
v)
All calculations under this Section 4 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 4, the number of shares of Common Stock outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) outstanding.
vi)
Whenever the Set Price is adjusted pursuant to any of Section 4(c)(ii) - (v), the Company shall promptly mail to each Holder a notice setting forth the Set Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. If the Company issues a variable rate security, despite the prohibition thereon in the Purchase Agreement, the Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or exercise price at which such securities may be converted or exercised in the case of a Variable Rate Transaction (as defined in the Purchase Agreement), or the lowest possible adjustment price in the case of an MFN Transaction (as defined in the Purchase Agreement).
vii)
If (A) the Company shall declare a dividend (or any other distribution) on the Common Stock; (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of the Debentures, and shall cause to be mailed to the Holders at their last addresses as they shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange;
provided
, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. Holders are entitled to convert Debentures during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice. Such conversion right does not limit any other conversion right of the Holder.
viii)
If, at any time while this Debenture is outstanding, (A) the Company effects any merger or consolidation of the Company with or into another Person, (B) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (D) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “
Fundamental Transaction
”), then upon any subsequent conversion of this Debenture, the Holder shall have the right to receive, for each Underlying Share that would have been issuable upon such conversion absent such Fundamental Transaction, the same kind and amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the “
Alternate Consideration
”). For purposes of any such conversion, the determination of the Set Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Set Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new debenture consistent with the foregoing provisions and evidencing the Holder's right to convert such debenture into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring
that this Debenture (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.
ix)
Notwithstanding the foregoing, no adjustment will be made under this paragraph (c) (i) in respect of an Exempt Issuances, or a transaction described in
Schedule 4(c)(ix)
; and (ii) that would result in an increase to the Set Price.
(d)
The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debentures, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holders, not less than such number of shares of the Common Stock as shall (subject to any additional requirements of the Company as to reservation of such shares set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 4(b)) upon the conversion of the outstanding Principal Amount of the Debentures. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Registration Statement is then effective under the Securities Act, registered for public sale in accordance with such Registration Statement.
(e)
Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the VWAP at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.
(f)
The issuance of certificates for shares of the Common Stock on conversion of the Debentures shall be made without charge to the Holders thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debentures so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.
(g)
Any and all notices or other communications or deliveries to be provided by the Holders hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, facsimile number 307-857-3050
,
Attn: Keith G. Larsen, President or such other address or facsimile number as the Company may specify for such purposes by notice to the
Holders delivered in accordance with this Section. Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile telephone number or address of such Holder appearing on the books of the Company, or if no such facsimile telephone number or address appears, at the principal place of business of the Holder. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 5:30 p.m. (New York City time), (ii) the date after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section later than 5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
Section 5
.
Definitions
. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture: (a) capitalized terms not otherwise defined herein have the meanings given to such terms in the Purchase Agreement, and (b) the following terms shall have the following meanings:
“
Business Day
” means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions in the State of New York are authorized or required by law or other government action to close.
“
Change of Control Transaction
” means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 33% of the voting securities of the Company, or (ii) a replacement at one time or within a three year period of more than one-half of the members of the Company's board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (iii) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth above in (i) or (ii).
“
Commission
” means the Securities and Exchange Commission.
“
Common Stock
” means the common stock, $0.01 par value per share, of the Company and stock of any other class into which such shares may hereafter have been reclassified or changed.
“
Conversion Date
” shall have the meaning set forth in Section 4(a)(i) hereof.
“
Conversion Shares
” means the shares of Common Stock issuable upon conversion of Debentures in accordance with the terms hereof.
“
Effective Date
” means the date that the Conversion Shares Registration Statement is declared effective by the Commission.
“
Equity Conditions
” shall mean, during the period in question,
(i) the Company shall have duly honored all conversions and redemptions scheduled to occur or occurring by virtue of one or more Conversion Notices, if any, (ii) all liquidated damages and other amounts owing in respect of the Debentures shall have been paid;
(iii) there is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares issuable pursuant to the Transaction Documents (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (iv) the Common Stock is trading on the Trading Market and all of the shares issuable pursuant to the Transaction Documents are listed for trading on a Trading Market (and the Company believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable future), (v) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable pursuant to the Transaction Documents, (vi) there is then existing no Event of Default or event which, with the passage of time or the giving of notice, would constitute and Event of Default and (vii) all of the shares issued or issuable pursuant to the transaction documents in full, ignoring for such purposes any conversion or exercise limitation therein, would not violate the limitation set forth in Section 4(a)(ii)(B) and
(ix) no public announcement of a pending or proposed Fundamental Transaction or acquisition transaction has occurred that has not been consummated.
“
Exchange Act
” means the Securities Exchange Act of 1934, as amended.
“
Late Fees
” shall have the meaning set forth in the second paragraph to this Debenture.
“
Mandatory Prepayment Amount
” for any Debentures shall equal the sum of (i) the greater of: (A) 130% of the Principal Amount of Debentures to be prepaid, or (B) the Principal Amount of Debentures to be prepaid divided by the Set Price on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is less, multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount is demanded or otherwise due
or (y) the date the Mandatory Prepayment Amount is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of such Debentures.
“
Original Issue Date
” shall mean the date of the first issuance of the Debentures regardless of the number of transfers of any Debenture and regardless of the number of instruments which may be issued to evidence such Debenture.
“
Person
” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.
“
Purchase Agreement
” means the Securities Purchase Agreement, dated as of February __, 2005, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.
“
Registration Rights Agreement
” means the Registration Rights Agreement, dated as of the date of the Purchase Agreement, to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.
“
Registration Statement
” means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.
“
Securities Act
” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“
Set Price
” shall have the meaning set forth in Section 4(c)(i).
“
Six Month Conversion Price
” shall have the meaning set forth in Section 6(a).
“
Six Month Redemption
” shall mean the redemption of the Debenture pursuant to Section 6(a).
“
Six Month Redemption Amount
” shall mean, as to a Six Month Redemption, 1/5
th
of the aggregate Principal Amounts of the Debentures issued to the Holders on the Original Issue Date.
“
Six Month Redemption Date
” means the 1
st
day of each sixth month period, commencing immediately following the 180
th
day following the Original Issuance Date and continuing until this Debenture is no longer outstanding.
“
Trading Day
” means (a) a day on which the shares of Common Stock are traded on a Trading Market on which the shares of Common Stock are then listed or quoted, or (b) if the shares of Common Stock are not quoted on a Trading Market, a day on which the shares of Common Stock are quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding its functions of reporting prices);
provided
, that in the event that the shares of Common Stock are not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean a Business Day.
“
Transaction Documents
” shall have the meaning set forth in the Purchase Agreement.
“
VWAP
” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers and reasonably acceptable to the Company.
Section 6.
Redemption
.
(a)
Six Month Redemption.
On each Six Month Redemption Date, the Company shall redeem the Holder’s Pro-Rata Portion of the Six Month Redemption Amount plus the sum of all liquidated damages and any other amounts then owing to such Holder in respect of any Debentures held by such Holder. “
Pro Rata Portion
” is the lower of (i) the product of the Six Month Redemption Amount multiplied by ratio of (A) the Principal Amount of this Debenture held by the original Holder on the Original Issue Date and (B) the sum of the aggregate original Principal Amounts of the Debentures issued to all Holders on the Original Issue Date, or (ii) the aggregate Principal Amounts of the Debentures outstanding and held by such Holder at the Redemption Date. If the Holder assigns any portion of this Debenture to multiple assignees, in connection with such assignments, the Holder shall instruct the Company as to how to apportion the original Principal Amount in (A) above among such assignees for purposes of calculating the Pro-Rata Portions of the assignees. If a Holder and its transferees no longer hold any
Debentures, then the Pro Rata Portion shall be recalculated to exclude the original Principal Amount of any Debentures once held by such Holder and its transferees, if any, from clause (B) above. On each Six Month Redemption Date, the Company will pay to each Holder in cash, except as provided in this Section, an amount equal to 100% of the Holder’s Pro-Rata Portion of the Six Month Redemption Amount. As to any Six Month Redemption and upon 20 Trading Days’ prior written irrevocable notice, in lieu of a cash redemption payment the Company may elect to pay all or a portion of a Six Month Redemption in Underlying Shares based on a conversion price equal to the lesser of (i) the then Set Price and (ii) 90% of the VWAP for the 90 Trading Days prior to the applicable Six Month Redemption Date (subject to adjustment for any stock dividend, stock split, stock combination or other similar event affecting the Common Stock during such 90 Trading Day period)
(the “
Six Month Conversion Price
”);
provided
,
however
, that the Company may not pay the Six Month Redemption Amount in Underlying Shares unless, (i) during the 20 Trading Days, prior notice period immediately prior to the applicable Six Month Redemption Date until the Six Month Redemption has occurred, each of the Equity Conditions shall have been met and (ii) on or prior to the 20
th
Trading Day prior to such Six Month Redemption Date, the Company irrevocably notifies the Holder that it will issue Underlying Shares in lieu of cash and in such notice the Company shall have indicated the amount to be paid in Underlying Shares (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised or until the Equity Conditions are no longer satisfied). The Holder may convert, pursuant to Section 4, any Principal Amount of this Debenture subject to a Six Month Redemption at any time prior to the date that the Six Month Redemption Amount and all amounts owing thereon are due and paid in full. The Company covenants and agrees that it will honor all Conversion Notices tendered up until such amounts are paid in full. If the Holder elects to convert any Principal Amount of this Debenture subject to a Six Month Redemption prior to the Six Month Redemption Date, such Holder’s Six Month Redemption Amount paid on such Six Month Redemption Date shall be reduced by the Principal Amount so converted. For clarity, such conversion shall not reduce the Six Month Redemption Amount payable on any future Six Month Redemption Date.
(b)
Redemption Procedure
. The payment of cash and/or issuance of Common Stock, as the case may be, pursuant to a Six Month Redemption shall be made on the Six Month Redemption Date. If any portion of the Six Month Redemption shall not be paid by the Company by the respective due date, interest shall accrue thereon at the rate of 18% per annum (or the maximum rate permitted by applicable law, whichever is less) until the payment of the Six Month Redemption Amount plus all amounts owing thereon is paid in full. Alternatively, if any portion of the Six Month Redemption Amount remains unpaid after such date, the Holders subject to such redemption may elect, by written notice to the Company given at any time thereafter, to invalidate such redemption. Notwithstanding anything to the contrary in this Section, the Company’s determination to redeem in cash or shares of Common Stock shall be applied among the Holders of Debentures according to each Holder’s Pro-Rata Portion.
Section 7.
Optional Redemption Right
. Commencing from the Closing Date and notwithstanding anything to the contrary contained in this Debenture, so long as the Equity Conditions are met, the Company shall have the right, exercisable on not less than ten (10) Trading Days prior written notice to the Holder of the Debentures, to prepay in part or in full the Debenture in accordance with this Section 6. Any notice of prepayment hereunder (an “
Optional Prepayment
”) shall be delivered to the Holders of the Debentures and shall state (1) that the Company is exercising its right to prepay the Debentures issued on the Original Issue Date and (2) the date of prepayment (the “
Optional Prepayment Notice
”). On the date fixed for prepayment (the “
Optional Prepayment Date
”), the Company shall make payment of the Optional Prepayment Amount (as defined below) to the Holder. If the Company exercises its right to prepay the Debenture, the Company shall make payment to the Holder of an amount in cash equal to (i) 120% (for prepayments occurring within Three Hundred and Sixty Five (365) days from the Original Issue Date), (ii) 115% (for prepayments occurring after the Three Hundred and Sixty Sixth (366
th
) day following the Original Issue Date but before the Seven Hundred and Thirtieth (730
th
) day), and (iii) 110% (for prepayments occurring after the Seven Hundred and Thirty First (731
st
) day following the Original Issue Date, multiplied by the sum of the then outstanding Principal Amount of this Debenture plus any amounts owed to the Holder (“
Optional Prepayment Amounts
”
. Notwithstanding notice of an Optional Prepayment, the Holder shall at all times prior to the Optional Prepayment Date maintain the right to convert all or any portion of the Debenture and any portion of Debenture so converted so converted after receipt of an Optional Prepayment Notice and prior to the Optional Prepayment Date set forth in such notice and payment of the aggregate Optional Prepayment Amount shall be deducted from the Principal Amount of Debenture which are otherwise subject to prepayment pursuant to such notice. If the Company delivers an Optional Prepayment Notice and fails to pay the Optional Prepayment Amount due to the Holder of the Debenture on the Optional Prepayment Date, then the Company shall forfeit its right to prepay the Debenture pursuant to such Optional Prepayment Notice and shall thereafter forfeit their right to Optional Prepayment.
Section 8
.
Forced Conversion.
Notwithstanding anything to the contrary contained in this Debenture, if after the Effective Date the VWAP for each of any 20 consecutive Trading Days (“
Threshold Period
”), which 20 consecutive Trading Day period shall have commenced only after the Effective Date, exceeds 150% of the effective Set Price, the Company may, within 3 Trading Days after any such Threshold Period, deliver a notice to all Holders (a “
Forced Conversion Notice
” and the date such notice is received by the Holders, the “
Forced Conversion Notice Date
”) to cause the Holders to immediately convert all or part of the then outstanding Debentures and the Holders shall surrender (if all Debentures are converted) their respective Debentures to the Company for conversion within 5 Trading Days of the Forced Conversion Notice Date. The Company may only effect a Forced Conversion Notice if all of the Equity Conditions have been met during the Threshold Period through the Forced Conversion Notice Date
. Any Forced Conversion Notices shall be applied ratably to all of the Holders in proportion to each Holders Principal Amount of Debentures.
Section 9
.
Except as expressly provided herein, no provision of this Debenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, and liquidated damages (if any) on, this Debenture at the time, place, and rate, and in the coin or currency, herein prescribed. This Debenture is a direct debt obligation of the Company. This Debenture ranks
pari
passu
with all other Debentures now or hereafter issued under the terms set forth herein. The Company acknowledges and agrees that the amount actually paid for this Debenture is less than the Principal Amount issued, such difference representing an original issue discount to the Holder As long as this Debenture is outstanding, the Company shall not and shall cause it subsidiaries not to, without the consent of the Holder, (a) amend its certificate of incorporation (except to increase its authorized Common Stock), bylaws or other charter documents so as to adversely affect any rights of the Holder; (b) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis
number of shares of its Common Stock or other equity securities other than as to the Conversion Shares to the extent permitted or required under the Transaction Documents or as otherwise permitted by the Transaction Documents; or (c) enter into any agreement with respect to any of the foregoing.
Section 10
.
If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the Principal Amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company.
Section 11
. Except as set forth on Schedule 11, so long as any portion of this Debenture is outstanding, the Company will not and will not permit any of its subsidiaries to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness or liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any income or profits therefrom that is senior to, or
pari
passu
with, in any respect, the Company’s obligations under the Debentures without the prior consent of the Holder.
Section 12
. All questions concerning the construction, validity, enforcement and interpretation of this Debenture shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “
New York Courts
”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, or such New York Courts are improper or inconvenient venue for such proceeding. Each
party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Debenture and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Debenture or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Debenture, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
Section 13
. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing.
Section 14
. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of this Debenture as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
Section 15.
Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
*********************
IN WITNESS WHEREOF, the Company has caused this Convertible Debenture to be duly executed by a duly authorized officer as of the date first above indicated.
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U.S. ENERGY CORP.
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By:_______
_________________________
Name: Keith G. Larsen
Title: President
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert under the Senior Convertible Debenture of US Energy Corp., a Wyoming corporation (the “Company”), due on February__, 2008, into shares of common stock, $0.01 par value per share (the “
Common Stock
”), of the Company according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:
Principal Amount to be Converted:
Principal Amount to be Converted and applied to the next Six Month Redemption Amount:
Number of shares of Common Stock to be issued:
Signature:
Name:
Address:
Schedule 1
CONVERSION SCHEDULE
Convertible Debentures due on February__, 2005, in the aggregate principal amount of $________ issued by US Energy Corp. This Conversion Schedule reflects conversions made under Section 4 of the above referenced Debenture.
Dated:
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Date of Conversion
(or for first entry, Original Issue Date)
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Amount of Conversion
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Aggregate Principal Amount Remaining Subsequent to Conversion
(or original Principal Amount)
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Company Attest
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NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “
SECURITIES ACT
”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.
FORM OF COMMON STOCK PURCHASE WARRANT
To Purchase 1,071,195 Shares of Common Stock of
U.S. Energy Corp.
Date of Issuance: February 9, 2005
THIS COMMON STOCK PURCHASE WARRANT (the “
Warrant
”) CERTIFIES that, for value received, _______ (the “
Holder
”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date of issuance of this Warrant (the “
Initial Exercise Date
”) and on or prior to the Third anniversary of the Initial Exercise Date (the “
Termination Date
”) but not thereafter, to subscribe for and purchase from US Energy Corp., a Wyoming corporation (the “
Company
”), up to 1,071,195 shares (the “
Warrant Shares
”) of Common Stock, par value $0.001 per share, of the Company (the “
Common Stock
”). The purchase price of one share of Common Stock (the “
Exercise Price
”) under this Warrant shall be
$3.63
, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein.
Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Securities Purchase Agreement (the “
Purchase Agreement
”), dated February 9, 2005, among the Company and the Purchasers signatory thereto.
1.
Title to Warrant
. Prior to the Termination Date and subject to compliance with applicable laws and Section 7 of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company.
2.
Authorization of Warrant Shares
. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
3.
Exercise of Warrant
.
(a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company); provided, however, within 5 Business Days of the date said Notice of Exercise is delivered to the Company, the Holder shall have surrendered this Warrant to the Company and the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank. Certificates for shares purchased hereunder shall be delivered to the Holder within 3 Business Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant and payment of the aggregate Exercise Price as set forth above (“
Warrant Share Delivery Date
”). This Warrant shall be deemed to have been exercised on the later of the date the Notice of Exercise is delivered to the Company by facsimile copy and the date the Exercise Price is received by the Company. The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid. If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the Third Business Day following the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise by the Third Business Day after the Warrant Share Delivery Date, and if after such day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such
exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
(b)
If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
(c)
The Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to such issuance after exercise, the Holder (together with the Holder’s affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act, it being acknowledged by Holder that the Company is not representing to Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and Holder is solely responsible for
any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 3(c) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder) and of which a portion of this Warrant is exercisable shall be in the sole discretion of such Holder, and the submission of a Notice of Exercise shall be deemed to be such Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by such Holder) and of which portion of this Warrant is exercisable, in each case subject to such aggregate percentage limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 3(c), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Business Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.
(d) If at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder at such time, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = the VWAP on the Trading Day immediately preceding the date of such election;
(B) = the Exercise Price of this Warrant, as adjusted; and
(X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.
(e) Subject to the provisions of this Section 3(e), if after the Effective Date the Closing Price for each of 20 consecutive Trading Days (the “
Measurement Period
”, which period shall not have commenced until after the Effective Date) exceeds 200% of the Exercise Price (subject to adjustment as set forth herein) (the “
Threshold Price
”) then the Company may, within three Trading Days of the end of such period, call for cancellation of all or any portion of this Warrant for which a Notice of Exercise has not yet been delivered (such right, a “
Call
”). To exercise this right, the Company must deliver to the Holder an irrevocable written notice (a “
Call Notice
”), indicating therein the portion of unexercised portion of this Warrant to which such notice applies. If the conditions set forth below for such Call are satisfied from the period from the date of the
Call Notice through and including the Call Date (as defined below), then any portion of this Warrant subject to such Call Notice for which a Notice of Exercise shall not have been received by the Call Date will be cancelled at 6:30 p.m. (New York City time) on the thirtieth Trading Day after the date the Call Notice is received by the Holder (such date, the “
Call Date
”). Notwithstanding the foregoing, the Company may not exercise a Call right to the extent, but only to the extent, that the exercise of the portion of this Warrant subject to a Call Notice prior to the Call Date would violate the provisions of Section 3 (c). Any unexercised portion of this Warrant to which the Call Notice does not pertain will be unaffected by such Call Notice. In furtherance thereof, the Company covenants and agrees that it will honor all Notices of Exercise with respect to Warrant Shares subject to a Call Notice that are tendered through 6:30 p.m. (New York City time) on the Call Date. The parties agree that any Notice of Exercise delivered following a Call Notice shall first reduce to zero the number of Warrant Shares subject to such Call Notice prior to reducing the remaining Warrant Shares available for purchase under this Warrant. For example, if (x) this Warrant then permits the Holder to acquire 100 Warrant Shares, (y) a Call Notice pertains to 75 Warrant Shares, and (z) prior to 6:30 p.m. (New York City time) on the Call Date the Holder tenders a Notice of Exercise in respect of 50 Warrant Shares, then (1) on the Call Date the right under this Warrant to acquire 25 Warrant Shares will be automatically cancelled, (2) the Company, in the time and manner required under this Warrant, will have issued and delivered to the Holder 50 Warrant Shares in respect of the exercises following receipt of the Call Notice, and (3) the Holder may, until the Termination Date, exercise this Warrant for 25 Warrant Shares (subject to adjustment as herein provided and subject to subsequent Call Notices). Subject again to the provisions of this Section, the Company may deliver subsequent Call Notices for any portion of this Warrant for which the Holder shall not have delivered a Notice of Exercise. Notwithstanding anything to the contrary set forth in this Warrant, the Company may not deliver a Call Notice or require the cancellation of this Warrant (and any Call Notice will be void), unless, from the beginning of the 30
th
consecutive Trading Days used to determine whether the Common Stock has achieved the Threshold Price through the Call Date, (i) the Company shall have honored in accordance with the terms of this Warrant all Notices of Exercise delivered by 6:30 p.m. (New York City time) on the Call Date, (ii) the Registration Statement shall be effective as to all Warrant Shares and the prospectus thereunder available for use by the Holder for the resale of all such Warrant Shares and (iii) the Common Stock shall be listed or quoted for trading on the Trading Market. The Company’s right to Call the Warrant shall be exercised ratably among the Holders based on each Holder’s initial purchase of Common Stock pursuant to the Purchase Agreement.
4.
No Fractional Shares or Scrip
. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price.
5.
Charges, Taxes and Expenses
. Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be
paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder;
provided
,
however
, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.
6.
Closing of Books
. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
7.
Transfer, Division and Combination
.
(a)
Subject to compliance with any applicable securities laws and the conditions set forth in Sections 1 and 7(e) hereof and to the provisions of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
(b)
This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.
(c)
The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.
(d)
The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.
(e)
If
, at the
time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective
registration
statement under the Securities Act
and
under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and
scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without
registration
under
the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the Securities Act
or a qualified institutional buyer as defined in Rule 144A(a) under the Securities Act
.
8.
No Rights as Shareholder until Exercise
. This Warrant does not entitle the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price (or by means of a cashless exercise), the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.
9.
Loss, Theft, Destruction or Mutilation of Warrant
. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
10.
Saturdays, Sundays, Holidays, etc
. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.
11.
Adjustments of Exercise Price and Number of Warrant Shares.
(a)
Stock Splits, etc
. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof.
Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder, the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company that are purchasable pursuant hereto immediately after such adjustment.
An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.
(b)
Anti-Dilution Provisions
. During the Exercise Period, the Exercise Price shall be subject to adjustment from time to time as provided in this Section 11(b). In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent.
(i)
Adjustment of Exercise Price
. If and whenever the Company issues or sells, or in accordance with Section 11(b)(ii) hereof is deemed to have issued or sold, any shares of Common Stock for an effective consideration per share of less than the then Exercise Price or for no consideration (such lower price, the “
Base Share Price
” and such issuances collectively, a "
Dilutive Issuance
"), then, the Exercise Price shall be reduced to equal the Base Share Price. Such adjustment shall be made whenever shares of Common Stock or Common Stock Equivalents are issued.
(ii)
Effect on Exercise Price of Certain Events
. For purposes of determining the adjusted Exercise Price under Section 11(b) hereof, the following will be applicable:
(A)
Issuance of Rights or Options
. If the Company in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or Common Stock Equivalents (such warrants, rights and options to purchase Common Stock or Common Stock Equivalents are hereinafter referred to as “
Options
”) and the effective price per share for which Common Stock is issuable upon the exercise of such Options is less than the Exercise Price (“
Below Base Price Options
”), then the maximum total number of shares of Common Stock issuable upon the exercise of all such Below Base Price Options (assuming full exercise, conversion or exchange of Common Stock Equivalents, if applicable) will, as of the date of the issuance or grant of such Below Base Price Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share and the maximum consideration payable to the Company upon such exercise (assuming full exercise, conversion or exchange of Common Stock Equivalents, if applicable) will be deemed to have been received by the Company. For purposes of the preceding sentence, the “effective price per share for which Common Stock is issuable upon the exercise of such Below Base Price Options” is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting of all such Below Base Price Options, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the exercise of all such Below Base Price Options, plus, in the case of Common Stock Equivalents issuable upon the exercise of such Below Base Price Options, the minimum aggregate amount of additional consideration payable upon the exercise, conversion or exchange thereof at the time such Common Stock Equivalents first become exercisable, convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Below Base Price Options (assuming full conversion of Common Stock Equivalents, if applicable). No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon the exercise of such Below Base Price Options or upon the exercise, conversion or exchange of Common Stock Equivalents issuable upon exercise of such Below Base Price Options.
(B)
Issuance of Common Stock Equivalents
. If the Company in any manner issues or sells any Common Stock Equivalents, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the effective price per share for which Common Stock is issuable upon such exercise, conversion or exchange is less than the Exercise Price, then the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Common Stock Equivalents will, as of the date of the issuance of such Common Stock Equivalents, be deemed to be outstanding and to have been issued and sold by the Company for such price per share and the maximum consideration payable to the Company upon such exercise (assuming full exercise, conversion or exchange of Common Stock Equivalents, if applicable) will be deemed to have been received by the Company. For the purposes of the preceding sentence, the “effective price per share for which Common Stock is issuable upon such exercise, conversion or exchange” is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Common Stock Equivalents, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise, conversion or exchange thereof at the time such Common Stock Equivalents first become exercisable, convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Common Stock Equivalents. No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon exercise, conversion or exchange of such Common Stock Equivalents.
(C)
Change in Option Price or Conversion Rate
. If there is a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the exercise, conversion or exchange of any Common Stock Equivalents; or
(iii) the rate at which any Common Stock Equivalents are convertible into or exchangeable for Common Stock (in each such case, other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Common Stock Equivalents still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.
(D)
Calculation of Consideration Received
. If any Common Stock, Options or Common Stock Equivalents are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Common Stock Equivalents are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair market value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the fair market value (closing bid price, if traded on any market) thereof as of the date of receipt. In case any Common Stock, Options or Common Stock Equivalents are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Common Stock Equivalents, as the case may be. The fair market value of any consideration other than cash or securities will be determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Company and reasonably acceptable to the holder hereof, with the costs of such appraisal to be borne by the Company.
(E)
Offerings of Other Property to Common Stock Holders
. If the Company, at any time prior to the Termination Date, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 11(b)(i)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the Closing Price determined as of the record mentioned above, and of which the numerator shall be such Closing Price on such record date less the then per share fair market value at such record
date of the portion of such assets or evidence of indebtedness so distributed to one outstanding share of the Common Stock as determined by the Board of Directors in good faith. In either case the adjustments shall be described in a statement provided to the Holders of the portion of assets or evidence of indebtedness so distributed or such subscription rights applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.
(F)
Exceptions to Adjustment of Exercise Price
. Notwithstanding the foregoing, no adjustment will be made under this Section 11(b) in respect of an Exempt Issuance.
(iii)
Minimum Adjustment of Exercise Price
. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price.
12.
Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets
.
Except as for the transactions set forth on Schedule 12, i
n case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock of the Company), or sell, transfer or otherwise dispose of its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation (“
Other Property
”), are to be received by or distributed to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, at the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) cash equal to the value of this Warrant as determined in accordance with the Black Scholes option pricing formula. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments
of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive reorganizations, reclassifications, mergers, consolidations or disposition of assets.
13.
Voluntary Adjustment by the Company
. The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.
14.
Notice of Adjustment
. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.
15.
Notice of Corporate Action
. If at any time:
(a)
the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or
(b)
there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or,
(c)
there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at least 20 days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 20 days’ prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d).
16.
Authorized Shares
. The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
17.
Miscellaneous
.
(1)
Jurisdiction
. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Purchase Agreement.
(a)
Restrictions
. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.
(b)
Nonwaiver and Expenses
. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
(c)
Notices
. Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement.
(d)
Limitation of Liability
. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
(e)
Remedies
. Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.
(f)
Successors and Assigns
. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.
(g)
Amendment
. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
(h)
Severability
. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
(i)
Headings
. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.
Dated: February__, 2005
|
U.S. ENERGY CORP.
|
|
By:__________________________________________
Name:
Keith G. Larsen
Title: President
|
NOTICE OF EXERCISE
To:
US Energy Corp.
(2)
The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(3)
Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 3(d), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 3(d).
(4)
Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:
_______________________________
The Warrant Shares shall be delivered to the following:
_______________________________
_______________________________
_______________________________
(4)
Accredited Investor
. The undersigned is an “accredited investor” as defined in Regulation D under the Securities Act of 1933, as amended.
[PURCHASER]
By: ______________________________
Name:
Title:
Dated: ________________________
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
_______________________________________________ whose address is
_______________________________________________________________.
_______________________________________________________________
Dated: ______________, _______
Holder's Signature:
_____________________________
Holder's Address:
_____________________________
_____________________________
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.
CREDIT AGREEMENT
Dated July 30, 2004
between
U. S. ENERGY CORP.
and
GEDDES AND COMPANY
CREDIT AGREEMENT
This
CREDIT AGREEMENT
entered into at Riverton, Wyoming on the 30th day of July, 2004, is by and among U.S. Energy Corp., a Wyoming corporation duly formed and existing under the laws of the State of Wyoming (the “Borrower”) and Geddes and Company, an Arizona corporation, duly formed and existing under the laws of the State of Arizona (the “Lender”).
R E C I T A L S
|
A.
|
The Borrower has requested that the Lender provide a Loan of up to $3,000,000 to the Borrower.
|
|
B.
|
The Lender has agreed to make such Loan subject to the terms and conditions of this Agreement.
|
|
C.
|
In consideration of the mutual covenants and agreements herein contained and of the loans and commitments hereinafter referred to, the parties hereto agree as follows:
|
ARTICLE I
Definitions
Section 1.01
Certain Defined Terms
.
As used in this Agreement, the following terms have the meanings specified below:
|
·
|
“
Agreement
” means this Credit Agreement, as the same may from time to time be amended, modified, supplemented or restated.
|
|
·
|
“
Collateral
” means the Properties of the Borrower described in Section 4.01 of this Agreement.
|
|
·
|
“
Commitment
” means the commitment of the Lender to make the Loan hereunder for an amount up to Three Million Dollars ($3,000,000).
|
|
·
|
“
Commitment Fee
” has the meaning assigned such term in Section 2.03(a).
|
|
·
|
“
Default
” means any event or condition which constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.
|
|
·
|
“
Effective Date”
means the date first appearing above.
|
|
·
|
“
Event of Default
” has the meaning assigned to such term in Section 10.01.
|
|
·
|
“
Initial Funding
” has the meaning assigned such term in Section 2.02.
|
|
·
|
“
Loan Documents
” means this Credit Agreement, the Note, the Pledge and Security Agreement and the Warrant Agreement.
|
|
·
|
“
Loan
” means the loan made by the Lender to the Borrower pursuant to this Agreement.
|
|
·
|
“
Maturity Date
” means the date that is two years after the Effective Date.
|
|
·
|
“
Note
” means the Secured Convertible Note of the Borrower described in Section 2.04 and being substantially in the form of Exhibit “A”, together with all amendments, modifications, replacements, extensions and rearrangements thereof.
|
|
·
|
“
Pledge and Security Agreement
” means an agreement between the Borrower, Rocky Mountain Gas, Inc., a Wyoming corporation (“RMG”) and Lender in the form of Exhibit “B”, as the same may be amended, modified or supplemented from time to time.
|
|
·
|
“
Warrant Agreement
” means that certain Warrant Agreement from RMG to the Lender in the form attached hereto as Exhibit “C”, as the same may be amended, modified or supplemented from time to time.
|
ARTICLE II
Commitment
Section 2.01
Loans
.
Subject to the terms and conditions of this Agreement, the Lender agrees to make Loans to the Borrower in an aggregate principal amount up to Three Million Dollars ($3,000,000), (the “Commitment”). Any amount of the Commitment which has not been borrowed by the Borrower prior to August 1, 2006 (the “Commitment Termination Date”) shall not be available to the Borrower for Loans from and after such Commitment Termination Date.
Section 2.02
Borrowings
.
Subject to the satisfaction of all conditions precedent by the date of such funding:
|
A.
|
Initial Funding
. On the Effective Date, the Lender shall make a Loan to the Borrower in an amount equal to Borrower’s initial Disbursement Request (the “
Initial Funding
”).
|
|
B.
|
Subsequent Funding
. Borrower, if in compliance with the terms of the Loan, shall have the right to receive the remaining balance of the Three Million Dollar ($3,000,000) Loan. Borrower shall submit a Disbursement Request to Lender as provided for in Exhibit “1” with respect to each further borrowing. Principal sums repaid or converted under Article 7 during the loan term may not be reborrowed.
|
|
C.
|
Minimum Amounts
. All borrowings made pursuant to the notices described in
B
above shall be in amounts of at least $100,000.
|
Section 2.03
Commitment Fee. The Borrower shall pay to Lender at closing a fee of $90,000, which is equal to 3.0% for all amounts committed to be loaned to the Borrower hereunder.
Section 2.04
Note
. The Loan made by the Lender shall be evidenced by a Secured Convertible Note of the Borrower in substantially the form of Exhibit A as of the date of this Agreement.
ARTICLE III
Payments of Principal and Interest
Section 3.01
Repayment of Loan
. Interest on the borrowed outstanding principal shall be payable on the first business day following each quarter ending September, December, March and June, commencing October 1, 2004 and continuing until the entire principal amount of the Note is paid in full.
Section 3.02
Interest.
|
|
A.
|
Interest Rates
. The Borrower will pay the Lender interest on the unpaid principal amount actually borrowed and drawn down from the $3,000,000 Loan at Ten Percent (10%) per annum
|
B.
Interest Rate Computations
. All interest hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
Section 3.03
Prepayments
.
The Borrower may prepay all or any portion of the Loan made without premium or penalty.
ARTICLE IV
Collateral
Section 4.01
Collateral Pool. Collateral for the Loan as provided for by the Pledge and Security Agreement will consist of the following:
|
A.
|
The Ticaboo Note and the related mortgage; and
|
|
B.
|
A 1981 Citation II 550 jet, S/N #550-0264, FAA # N777WY,; and
|
|
C.
|
RMG’s working mineral interests in Castle Rock CBM leases; and
|
|
D.
|
Four million issued and outstanding shares of Rocky Mountain Gas, Inc. (“RMG”) Common Stock .
|
ARTICLE V
Mandatory Prepayment
Section 5.01
Mandatory Prepayment. Borrower agrees to immediately prepay the balance of the Loan as specified in the Note.
ARTICLE VI
Warrants in RMG, Registration and Cashless Exercise
Section 6.01
Warrants in RMG. Borrower agrees to have issued in Lender’s name or its designee, warrants to purchase RMG Common Stock in accordance with the Warrant Agreement.
Section 6.02
Registration. Lender shall have full registration rights on the shares exercised once RMG goes public.
Section 6.03
Cashless Exercise. There shall be no cashless exercise except per Section 7.01 of this Agreement.
ARTICLE VII
Optional Conversion and Conversion Price
Section 7.01
Optional Conversion. Lender shall have the option at any time prior to payment of all amounts due under the Note, to convert all or any portion of the unpaid principal amount of the Note into fully paid and non-assessable shares of common stock of RMG Common Stock.
Section 7.02
Conversion Price. The number of shares of RMG Common Stock that Lender shall be entitled to receive upon conversion shall be equal to the number attained by dividing the unpaid principal amount of the Note being converted by the Conversion Price. The “Conversion Price” shall be equal to the Exercise Price (as defined in the Warrant Agreement) as of the date of conversion. Lender shall receive full registration rights on any such shares received upon conversion to the same extent as provided in the Warrant Agreement. If the Lender elects to convert any part of the Note into RMG Common Stock, the Lender shall refund back to USEG the three points paid to Geddes & Company at closing on a prorata basis (i.e., if one million dollars out of the three million dollar loan is converted, only one-third of the three points is to refunded back to USEG).
ARTICLE VIII
Conditions Precedent
Article 8.01
Initial Funding
. The obligations of the Lender to make Loans under the Initial Funding shall not become effective until the date on which each of the following conditions are satisfied.
|
A.
|
The Lender shall have received all fees and other amounts due and payable
|
on or prior to the Effective Date.
B.
The Lender shall have received the duly executed Note payable to the order of the Lender in a principal amount equal to its Commitment dated as of the date hereof.
C.
The Lender shall have received from Borrower and RMG duly executed counterparts of the Pledge and Security and Warrant Agreements described on Exhibits B and C, and delivery of any Collateral required by the terms thereof.
D. The terms of the Loan Documents have been approved by the Board of Directors of the Borrower and RMG.
E.
Lender shall have received an opinion of counsel, in form reasonably acceptable to Lender, confirming the authorization, execution and delivery of the Loan Documents by Borrower and RMG, the enforceability of the Loan Documents, and the validity, priority and perfection of the security interests granted to Lender in the Collateral.
ARTICLE IX
Representations and Warranties
The Borrower and Lender represent and warrant that:
Section 9.01
Organization; Powers
.
|
A.
|
Each of the Borrower and RMG is duly organized, validly existing and in good standing under the laws of Wyoming, has all requisite power and authority, and has all material governmental licenses, authorizations, consents and approvals necessary, to own its assets and to carry on its business as now conducted.
|
|
B.
|
The Lender is duly organized, validly existing and in good standing under the laws of Arizona, has all requisite power and authority, and has all material governmental licenses, authorizations, consents and approvals necessary, to own its assets and to carry on its business as now conducted and warrants to the Borrower it has the $3,000,000 to loan to Borrower.
|
ARTICLE X
Events of Default; Remedies
Section 10.01
Event of Default
. One or more of the following events shall constitute an “Event of Default”:
|
A.
|
The Borrower shall fail to pay any interest due on the borrowings under the Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise.
|
|
B.
|
The Borrower shall fail to pay the principal amount due on the Loan when the same shall become due and payable.
|
|
|
C.
|
The Borrower or RMG
shall default in the performance of any other
agreement or covenant contained herein or in any other Loan Document (other than as provided in subparagraph A or B above), and such default shall continue uncured for twenty (20) days after notice thereof to Borrower given by Secured Party.
|
Section 10.02
Remedies
. In the case of an Event of Default by Borrower, Lender shall have the right to declare the Note and the Loan then outstanding to be due and payable according to the terms of the Note, and shall have all rights as described in the Note or any other Loan Document.
ARTICLE XI
Miscellaneous
Section 11.01
Notices
.
A.
All notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:
1. If to the Borrower or RMG:
U. S. Energy Corp. / Rocky Mountain Gas, Inc.
877 North 8th West
Riverton, Wyoming 82501
Attn: Scott Lorimer
(Telecopy No. (307) 857-3050);
Geddes and Company
2930 East Camelback Road, Suite 110
Phoenix, Arizona 85016
(Telecopy No. (602) 468-1793).
B.
Notices and other communications to the other parties hereunder may be delivered or furnished by electronic communications pursuant to procedures agreed by the parties.
Section 11.02
Successors and Assigns
. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that any assignment must be approved in writing by the other party. Such written consent shall not be unreasonably withheld by either party.
Section 11.03
Counterparts; Integration; Effectiveness
.
A.
This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.
B. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and thereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof and thereof. This Agreement and the other Loan Documents represent the final agreement among the parties hereto and thereto and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties.
Section 11.04
Severability
. Any provision of this Agreement or any other Loan Document held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof or thereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision.
Section 11.05
Governing Law;
Jurisdiction.
A.
This Agreement and the Loan Documents (other than the Warrant Agreement) shall be governed by, and construed in accordance with the laws of the State of Arizona.
B. Any legal action or proceeding with respect to the Loan Documents (other than the Warrant Agreement) shall be brought in the Courts of the State of Arizona, and each party consents to the jurisdiction of such Courts.
Section 11.06
Headings
. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.
Section 11.07
Condition to Borrower Obligations.
The obligations of Borrower and RMG hereunder shall be ineffective until, and are subject to obtaining the approval of the Boards of Directors of Borrower and RMG of the transactions contemplated hereby; this Agreement shall automatically terminate and be of no force and effect unless such approvals are obtained on or before August 6, 2004.
The parties hereto have caused this Agreement to be duly executed as of the day and year first above written.
BORROWER
:
U. S. ENERGY CORP.
By:
/s/ Keith G. Larsen
Name: Keith G. Larsen
Title: President
LENDER
:
GEDDES AND COMPANY
By:
/s/ F. Michael Geddes
Name:
F. Michael Geddes
Title:
President
EXHIBIT “A”
SECURED CONVERTIBLE NOTE
NEITHER THIS NOTE NOR THE SHARES OF ROCKY MOUNTAIN GAS, INC. (“RMG”) COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE
"ACT"),
AND IF RMG BECOMES A PUBLIC COMPANY, THE SHARES MAY NEITHER
BE
OFFERED, SOLD N
OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE HOLDER HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE REASONABLY SATISFACTORY TO
THE MAKER THAT SUCH REGISTRATION IS NOT REQUIRED.-
$3,000,000
July 30, 2004
SECURED CONVERTIBLE NOTE
FOR
VALUE RECEIVED, U.S. Energy Corp. (the “Maker”) a Wyoming corporation
, having its principal place of business at 877 North 8
th
West, Riverton,
Wyoming 82501, hereby promises to pay to the order of Geddes and Company ("Payee") an Arizona corporation,
having its address at 2930 East Camelback Road, Suite 110, Phoenix, Arizona 85016
, the sum
of Three Million Dollars ($3,000,000), or such lesser amount which represents the actual principal amount borrowed in accordance with that certain Credit Agreement ( the “Credit Agreement”) between Maker as Borrower and Payee as Lender of even date with this Note. This Secured Convertible Note (this "Note") is issued pursuant to the Credit Agreement. All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in the Credit Agreement.
|
1.
|
Maturity.
The amount outstanding under this Note will be due and payable at
the address of Payee or such other place as Payee may designate on the earlier of: (a) August 1, 2006, or (b) the date upon which Maker’s subsidiary, Rocky Mountain Gas, Inc., becomes a public company (the "Maturity Date"). No advances shall be made by Lender after the Maturity Date.
|
|
2.
|
Payment of Interest.
Interest on the borrowed outstanding principal balance under this Note
shall be payable on the first business day following each quarter ending September, December, March and June,
commencing October 1, 2004 and continuing until the entire principal amount of this Note is paid
in full.
|
|
3.
|
Interest Rate.
T
he outstanding principal balance of this Note shall bear interest at a rate per
annum equal to Ten Percent
(10%).
|
A.
Subject to paragraph B below, from and after the date hereof, Maker
shall have the privilege at any time and from time to time of prepaying this Note in whole or in
part (each, a "Prepayment"), provided that Maker shall send a notice (each, a "Prepayment Notice") to Payee at least five (5) days prior to the date of each such prepayment (each, a "Prepayment
Date"). There shall be no premium or penalty in connection with any Prepayment. Each
Prepayment shall be applied first against accrued interest, if any, and then against principal
outstanding. Each Prepayment Notice shall set forth the Prepayment Date and the amount of the
Prepayment, specifying the amount thereof being applied against accrued interest and the amount
thereof being applied against principal. The amount of principal repaid by any Prepayment may not be re-borrowed.
B. In the event that Maker sends a Prepayment Notice to Payee, Payee
may elect prior to the Prepayment Date to convert into common stock of Rocky Mountain Gas, Inc. (“RMG Common Stock”) pursuant to Section 5
hereof, all or part of the amount of principal to be repaid
by the proposed Prepayment instead of receiving such prepayment.
|
5.
|
Optional Conversion.
At any time prior to repayment of all amounts due under the Note, all or any portion of the principal amount of the Note shall be convertible at the
option of the Payee into fully paid and non-assessable shares of
RMG Common
Stock. The number of
shares of RMG Common Stock that Payee shall be
entitled to receive upon conversion shall be equal to the number attained by dividing the principal amount of the Note being converted by the Conversion Price.
The “Conversion Price” shall be equal to the Exercise Price (as defined in the Warrant Agreement) as of the date of conversion.
|
A.
In order to exercise the conversion privilege,
shall give written notice of conversion to Maker stating Payee's election to convert this Note or the portion thereof in a minimum of $100,000 increments specified
in said notice. As promptly as practicable after receipt of the notice, Maker
shall issue and shall deliver to Payee a certificate or certificates for the number of full shares of RMG Common Stock issuable upon the conversion of this Note or portion thereof registered in the name of Payee in accordance with the provisions of this Section 5.
B. Each conversion shall be deemed to have been effected on the date
the conversion notice shall have been received
by Maker, as aforesaid, and Payee shall be deemed to have become on said date the holder of
record of the shares of Common Stock issuable upon such conversion.
No fractional shares of Common Stock
shall be issued upon
conversion of this Note.
Any amounts so converted shall not be reborrowed.
|
6.
|
Security.
As security for the repayment of all liabilities arising under this Note, the Maker hereby grants to Payee a security interest in and a lien on all of the Collateral (as that term is defined in the Pledge and Security Agreement).
Payee shall have all rights provided to a
secured party under the Pledge and Security Agreement and under the Uniform Commercial Code of the
State of Arizona. The Maker shall execute and deliver such documentation as
Payee may reasonably request to evidence and perfect Payee's security interest granted in this
Section 6.
|
|
7.
|
Use of Proceeds.
Funds advanced under this Note shall be used for the
Maker's and RMG’s acquisition and development of natural gas properties and general corporate purposes consistent with the Maker's business and that of RMG.
|
|
8.
|
Covenants.
Maker covenants and agrees that, so long as any indebtedness is outstanding hereunder, it will comply with each of the following covenants (except in any case where Payee has specifically consented otherwise in writing):
|
A.
Financial Reporting.
Maker shall furnish to Payee a copy of each financial report submitted on Form 10-K or 10-Q filed with the
Securities and Exchange Commission within seven (7) days of such filing.
B.
Notice of Event of Default.
Maker shall furnish to Payee notice of the
occurrence of any Event of Default (as defined herein) within five (5) days after it becomes
known to an executive officer of Maker.
C.
Financial Statements
. Maker shall furnish to Payee quarterly financial statements, including balance sheets and statements of income, for each of Maker and RMG, which statements shall be annually audited, as soon as practicable after they are prepared for internal use.
|
9.
|
Event of Default.
For purposes of this Note, the Maker shall be in default hereunder (and an "Event of Default" shall have occurred hereunder) if:
|
A.
Maker shall fail to pay when due any payment of principal, interest, fees, costs, expenses or any other sum payable to Payee hereunder or otherwise;
B. Maker shall default in the performance of any other
agreement or covenant contained herein (other than as provided in subparagraph A above), and such default shall continue uncured for twenty (20) days
after notice thereof to Maker given by Payee, or if an Event of Default shall occur under any other Loan Document;
C. Maker: becomes insolvent, bankrupt or generally fails to pay its debts
as such debts become due; is adjudicated insolvent or bankrupt; admits in writing its inability to pay its debts; or shall suffer a custodian, receiver or trustee for it or substantially all of its property to be appointed and if appointed without its consent, not be discharged within thirty (30) days; makes an assignment for the benefit of creditors; or suffers proceedings under any law related to bankruptcy, insolvency, liquidation or the reorganization, readjustment or the release of debtors to be instituted against it and if contested by it not dismissed or stayed within ten (10)
days; if proceedings under any law related to bankruptcy, insolvency, liquidation, or the
reorganization, readjustment or the release of debtors is instituted or commenced by Maker; if
any order for relief is entered relating to any of the foregoing proceedings; if Maker shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or if
Maker shall by any act or failure to act indicate its consent to, approval of or acquiescence in any
of the foregoing;
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10.
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Consequences of Default.
Upon the occurrence of an Event of Default and at any time thereafter, the entire unpaid principal balance of this Note, together with interest accrued thereon and with all other sums due or owed by Maker hereunder, shall become immediately due and payable. In addition, the principal balance and all past-due interest shall thereafter bear interest at the rate of 18% per annum until paid.
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11.
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Remedies not Exclusive.
The remedies of Payee provided herein or otherwise
available to Payee at law or in equity shall be cumulative and concurrent, and may be pursued
singly, successively and together at the sole discretion of Payee, and may be exercised as often as
occasion therefore shall occur; and the failure to exercise any such right or remedy shall in no
event be
a waiver or release of the same.
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12.
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Notice
.
All notices required to be given to any of the parties hereunder shall
be in writing and shall he deemed to have been sufficiently given for all purposes when
presented personally to such party or sent by certified or registered mail, return receipt requested, to such party at its address set forth below:
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If to the Maker:
U.S. Energy Corp.
877 North 8th West
Riverton, Wyoming 82501
Attn: Scott Lorimer
Fax: 307-857-3050
If to the Payee:
Geddes and Company
.
2930 East Camelback Road, Suite 110
Phoenix, Arizona 85016
Attn: F. Michael Geddes
Fax: 602-468-1793
Such notice shall be deemed to be given when received if delivered personally or
five (5) business days after the date mailed. Any notice mailed shall be sent by certified or
registered mail. Any notice of any change in such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived
in writing by the party entitled to receive such notice.
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13.
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Severability.
In the event that any provision of this Note is held to be invalid, illegal or unenforceable in any respect or to any extent, such provision shall nevertheless remain valid, legal and enforceable in all such other respects and to such extent as may be permissible. Any such invalidity, illegality or unenforceability shall not affect any other provisions of this Note, but this Note shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
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14.
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Successors and Assigns.
This Note inures to the benefit of the Payee and
binds the Maker, and its respective successors and assigns, and the words "Payee" and "Maker"
whenever occurring herein shall be deemed and construed to include such respective successors
and assigns.
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15.
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Entire Agreement.
This Note embodies the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and
thereof and supersedes all prior agreements, understandings and inducements, whether express or implied, oral and written.
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16.
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Modification of Agreement.
This Note may not be modified, altered or
amended, except by an agreement in writing signed by both the Maker and the Payee.
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17.
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Governing Law.
This instrument shall be construed according to and
governed by the laws of the State of Arizona.
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18.
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Consent to Jurisdiction and Service of Process.
Maker irrevocably appoints
each and every officer of Maker as its attorney upon whom may be served any notice, process or pleading in any action or proceeding against it arising out of or in connection with this Note; and Maker hereby consents that any action or proceeding against it be commenced and maintained in any court within the State of Arizona by
service of process on any such, officer; and Maker agrees that the courts of the State of Arizona
shall have jurisdiction with respect to the subject matter hereof and the person of Maker and the collateral securing Maker's obligations hereunder. Notwithstanding the foregoing, Payee, in its absolute discretion may also initiate proceedings in the courts of any other jurisdiction in
which
Maker may be found or in which any
of its properties or any such collateral may be located.
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19.
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Mandatory Prepayments
. Maker shall apply, as Prepayments to the Loan until paid in full, (a) all amounts received by Maker from settlement or enforcement of any judgment entered upon its claims against Nukem, Inc., and (b) all payments or proceeds received by Maker with respect to the disposition or sale of any of the Collateral (whether or not such sale or disposition is permitted by the terms of the Pledge and Security Agreement). Lender shall be required to make no further advances under this Note following a sale or disposition of any of the Collateral (whether or not such sale or disposition is permitted by the terms of the Pledge and Security Agreement).
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IN WITNESS WHEREOF, Maker has duly executed this Note as of the date first written above.
MAKER
U.S. ENERGY CORP.
By:____
/s/ Keith G. Larsen
_______
Keith G. Larsen
President
EXHIBIT “B”
PLEDGE AND SECURITY AGREEMENT
PLEDGE AND SECURITY AGREEMENT
This PLEDGE AND SECURITY AGREEMENT, dated as of July 30, 2004, is between U.S. Energy Corp. (the “Borrower”), and Rocky Mountain Gas, Inc., (“RMG”), both Wyoming corporations, and Geddes and Company, (the “Lender”) an Arizona corporation, and is executed pursuant to the Credit Agreement dated of even date herewith (as amended, supplemented or otherwise modified from time to time, the
"Credit Agreement"),
among Borrower and Lender.
RECITALS
WHEREAS, the Borrower and RMG have requested that the Lender provide a loan of up to $3,000,000 to the Borrower (the “Loan”); and
WHEREAS, the Lender has agreed to make such Loan subject to the terms of the Credit Agreement; and
WHEREAS, the Borrower and RMG, will receive direct and
indirect benefits from the Loan under the Credit Agreement; and
WHEREAS, it is a condition precedent to the obligations of the Lender to make the Loan under the Credit Agreement that the Borrower and RMG execute and deliver this Agreement;
NOW, THEREFORE, in consideration of the promises herein and to induce the Lenders
to enter into the Credit Agreement and to make the Loan
thereunder, and for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS; TERMS GENERALLY
Section 1.01
Definitions.
As used herein:
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(a)
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terms defined above have the meanings given such terms above;
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(b)
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unless otherwise defined herein, terms defined in the Credit Agreement and used herein have the meanings given to them in the Credit Agreement;
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(c)
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unless otherwise defined herein, terms defined in the Uniform Commercial
Code (as defined herein) and used herein have the same meanings herein as specified therein;
provided, however, that if a term is defined in Article 9 of the Uniform Commercial Code
differently than in another Article of the Uniform Commercial Code, then such term has the
meaning specified in Article 9; and
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(d)
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the following terms have the following meanings:
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"
Agreement
"
means this Pledge and Security Agreement, as the same may be amended, supplemented
or otherwise modified from time to time.
"
Collateral
"
has the meaning given such term in Section 2.01.
"
Obligations
"
means the collective reference to the payment and performance when due
of all indebtedness, liabilities, obligations and undertakings of the Borrower (including, without limitation, all Indebtedness) of every kind or description arising out of or outstanding under,
advanced or issued pursuant to, or evidenced by, the Loan Documents.
"
Pledged Property
"
means:
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1.
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That certain promissory note dated August 14, 2003, issued by The Cactus Group, LLC to Plateau Resources Limited (and subsequently assigned to the Borrower) (the “Ticaboo Note”) and the related mortgage securing such note, copies of which are attached hereto as Exhibit B-1; and
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2.
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A 1981 Citation II jet, 550 S/N #550-0264, FAA # N777WY, and
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3.
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RMG’s working mineral interests in all Castle Rock CBM leases, consisting of all Acquired Assets (as such term is defined in that certain Agreement for Purchase and Sale of Assets between RMG and Quantum Energy, LLC, dated January 3, 2000, as modified by that certain Purchase and Sale Agreement between RMG and CCBM, Inc. dated June 29, 2001), which leases are more specifically described on Exhibit B-2 attached hereto (the “Mineral Interests”); and
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4.
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Four million shares of Rocky Mountain Gas, Inc. (“RMG”) Common Stock (the “RMG Stock”) .
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"
Secured Party
"
means the Lender
.
"
Loan Documents
"
means the collective reference to the Credit Agreement, the Secured Convertible Note, the Warrant Agreement, this Agreement
and any other document made, delivered or given in connection with any of the foregoing.
"
Uniform Commercial Code
"
means the Uniform Commercial Code as from time to time
in effect in the State of Arizona.
Section 1.02
Terms Generally; Rules of Construction.
The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined. Whenever the context
may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.
ARTICLE II
GRANT OF SECURITY INTEREST
Section 2.01 Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, the Borrower and RMG hereby pledge to the Secured
Party, and hereby grant to the Secured Party, a first priority (second priority as to the Citation aircraft) continuing security interest in, lien
on and right of setoff against, all of the Pledged Property and all proceeds thereof (the “Collateral”).
Section 2.02
Authorization to File Financing Statements.
The Borrower and RMG hereby irrevocably authorize the Secured Party at any time and from time to time to file in any filing
office in any relevant jurisdiction any initial financing statements and amendments thereto
indicating the Collateral in such form as may be required by the Secured Party
. The Borrower
agrees to furnish any information reasonably requested by the Secured Party for such purposes promptly
upon the Secured Party's request. The Borrower and RMG also ratify their authorization for the Secured Party
to have filed in any relevant jurisdiction any like initial financing statements or amendments thereto if filed prior to the date hereof. In addition, to perfect security interests by Secured Party’s possession, Borrower or RMG will deliver to Secured Party the original Ticaboo Note, with a separate endorsement signed in blank, and a certificate representing the RMG Stock, together with stock powers endorsed in blank sufficient to effect a transfer of such stock. Upon payment in full of the Obligations, Secured Party shall return possession of all Collateral to Borrower and release all filed and recorded financing statements or other evidence of the security interests arising hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower and RMG hereby represent and warrant to Secured Party, as of the date hereof and at all times during the terms of this Agreement, as follows:
Section 3.01 Organization. The Borrower and RMG are duly organized, validly existing and in good standing under the laws of Wyoming, have all requisite power and authority, and have all material governmental licenses, authorizations, consents and approvals necessary, to own their respective assets and to carry on their business as now conducted.
Section 3.02
Authority;
Enforceability.
The execution and delivery by the Borrower and RMG of this Agreement and the other Loan Documents and the performance of their obligations hereunder and thereunder are within the powers of the Borrower and RMG and have been duly authorized by all necessary corporate Board approval, and do not contravene any law, regulation, or order applicable to the Borrower or RMG or any of its properties or assets or any contractual restriction which may, individually or in the aggregate have a material adverse effect on the business, prospects or condition (financial or otherwise) of the Pledgor.
Section 3.03
Perfected First Priority Liens.
The security interests granted pursuant to
this Agreement (a) upon the
filing
of a financing statement describing the Collateral with the
Secretary of State of Wyoming and delivery of possession of the Ticaboo Note and the RMG Stock,
shall constitute valid
perfected security interests of the Collateral in favor of the Secured Party as collateral
security for the Obligations, enforceable in accordance with the terms hereof against all creditors
of the Borrower and any Persons purporting to purchase any Collateral from the Borrower and (b) except for the Citation II aircraft there are no
prior or other Liens on the Collateral in existence on the date hereof.
Section 3.04
Solvency.
The Borrower is not insolvent as of the date hereof and will not be rendered insolvent as a result of this Agreement.
ARTICLE IV
AFFIRMATIVE COVENANTS
The Borrower and RMG hereby unconditionally covenant and agree with the Secured Party, until the entire Obligation shall have been paid in full as follows:
Section 4.01
Maintenance of Perfected Security Interest; Further Documentation.
(a)
The Borrower and RMG shall maintain the security interest and lien created by this Agreement as a perfected security interest and lien having at least the priority described in
Section 3.03; and
(b)
The Borrower shall promptly give notice to the Secured Party of, and shall defend against, any suit, action, proceeding or lien that involves the Collateral or that could adversely affect the security interest and lien granted by it hereunder, and the Borrower shall defend the security interest and lien created by this Agreement
against the claims and demands of all Persons whomsoever; and
(c)
The Borrower and RMG will furnish to the Secured Party
from
time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Secured Party may reasonably request.
(d) The Borrower and RMG shall timely perform and comply with all provisions of the Loan Documents.
ARTICLE V
NEGATIVE COVENANTS
Section 5.01 Restrictions on Sales and other Dispositions. The Borrower shall not sell, assign, convey, pledge, encumber, transfer, redeem, exchange, substitute, replace or otherwise dispose of or
abandon all or any part of the Collateral without the prior written consent of the Secured Party, provided however, the Borrower shall have the right to exercise good business judgment in the management of the Mineral Interests including lease cancellation or expiration so long as 75% of the value is not diminished.
Section 5.02
Impairment of Security Interest.
The Borrower will not take or fail to take
any action which would in any manner impair the enforceability or priority of the Secured Party's security interest in any Collateral, impair the Collateral or the rights, remedies, powers
and privileges conferred on the Secured Party pursuant to this
Agreement or by operation of law or otherwise.
ARTICLE VI
EVENT OF DEFAULT
Section 6.01 Event of Default.
One or more of the following events or circumstances
shall constitute an "Event of Default" hereunder:
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A.
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An "Event of Default" under the Credit Agreement or any other Loan Document shall occur and be
continuing; or
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B.
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The Borrower shall fail to pay any amount hereunder or under any other Loan Document to which it is a party when and as the same shall become due and payable.
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ARTICLE VII
RIGHTS AND REMEDIES
Section 7.01 Rights and Remedies.
Upon the occurrence and during the continuance of an Event of Default,
the Secured Party may exercise, in addition to all other rights and remedies granted to it in the
Secured Documents and in any other
instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the Uniform Commercial Code or any other applicable law or otherwise available at law or equity. All proceeds of sale of any Collateral shall be applied to the Obligations, and Borrower shall be entitled to any surplus proceeds or Collateral remaining after the Obligations are paid in full.
ARTICLE VIII
MISCELLANEOUS
Section 8.01
Notices.
All notices and other communications provided for herein shall be given in the manner and subject to the terms of Section 13.01 of the Credit Agreement
(including provisions regarding a change of address or telecopy number of a party). The address
and telecopy number for notices and communications with respect to the parties is as follows:
U.S. Energy Corp.
Rocky Mountain Gas, Inc.
Attn: Scott Lorimer
Attn: Scott Lorimer
877 North 8
th
West
877 North 8
th
West
Riverton, Wyoming 82501
Riverton, Wyoming 82501
(307) 856-9271
(307) 856-9271
(307) 857-3050 (facsimile)
(307) 857-3050 (facsimile)
Geddes and Company
Attn: F. Michael Geddes
2930 Camelback Road, Suite 110
Phoenix, Arizona 85016
(602) 957-1354
(602) 468-1792 (facsimile)
Section 8.02 Amendments.
No amendment, supplement or modification of this Agreement, and no waiver of any provision of this Agreement or consent to any departure by the
Borrower there from, shall in any event be effective unless the same has been agreed to in writing by the parties.
Section 8.03
Successors and Assigns.
The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that any assignment must be approved in writing by the other party. Such written consent shall not be unreasonably withheld by either party.
Section 8.04 Governing Law; Consent to Jurisdiction.
(a)
This Agreement shall be governed by, and construed in accordance with, the laws of the State of Arizona.
(b)
Any legal action or proceeding with respect to this Agreement or any other loan document shall be brought in the Courts of the State of Arizona.
Section 8.05 Entire Agreement. This written Agreement and the other Loan Documents represent the entire agreement among the parties as to the subject matter hereof.
IN WITNESS WHEREOF, intending to be legally bound, the Borrower has caused this
Agreement to be duly executed as of the date first above written.
U.S. Energy Corp.
By
:__
/s/ Keith G. Larsen
_________
Keith G. Larsen
Title: President
Rocky Mountain Gas, Inc.
By: ___
/s/ Mark J. Larsen
______
Mark J. Larsen
President
Accepted:
Geddes and Company
By:
/s/ F. Michael Geddes
F. Michael Geddes
President
EXHIBIT “C”
WARRANT AGREEMENT
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON ITS EXERCISE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS PURSUANT TO REGISTRATION UNDER THE SECURITIES ACT OR IN COMPLIANCE WITH AN EXEMPTION THEREFROM ESTABLISHED BY
AN OPINION OF COUNSEL OR OTHERWISE
TO THE REASONABLE SATISFACTION OF THE COMPANY.
Warrant. Number of Shares: AS CALCULATED BELOW
Date of Issuance: July 30, 2004
ROCKY MOUNTAIN GAS, INC.
COMMON STOCK PURCHASE WARRANT
THIS IS TO CERTIFY THAT, for value received, GEDDES AND COMPANY, an Arizona company (the "Registered Holder"), or its permitted assigns, is entitled to purchase from ROCKY MOUNTAIN GAS, INC., a Wyoming corporation (the "Company" or “RMG”), pursuant to a Credit Agreement dated July 30, 2004 between U.S. Energy Corp. and Geddes and Company, at the purchase price per share provided by the following table, the following number(s) of common shares of the Company The “Warrant Shares”):
AMOUNT OF LOAN DRAWN DOWN
$ 0
$1,000,001
$2,000,001
Terms
to
to
to
Total
and
$1,000,000
$2,000,000
$3,000,000
Warrants
Exercise Price
150,000
+75,000
+75,000
300,000
5 year warrants @3.00/share*
50,000
+25,000
+25,000
100,000
5 year warrants @3.25/share*
50,000
+25,000
+25,000
100,000
5 year warrants @3.50/share*
50,000
+25,000
+25,000
100,000
5 year warrants @3.75/share*
300,000
150,000
150,000
600,000
Total Warrants
* The “Exercise Price” shall mean the lesser of $3.00 per share or the lowest purchase price per share actually paid to and received by RMG from investors after the date hereof in RMG private placements until $20 million (of which at least $15 million must be cash and of which up to $5 million [determined in accordance with generally accepted accounting principles] may be in the form of producing properties) is cumulatively received (the “Offer Completion Date”). The above listed prices of $ 3.25 to $ 3.75 shall also be adjusted accordingly. For example, if the Exercise Price were $ 2.90 then the $ 3.25 would become $ 3.14 (8% above $ 2.90), $ 3.50 would become $ 3.38 and $ 3.75 would then become $ 3.63. The number of Warrant Shares will be determined by the aggregate
amount of advances pursuant to the Loan as described in the table above, and shall consist of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, $0.01 par value per share, of the Company. The number of shares subject to purchase hereunder and the Exercise Price are subject to adjustment as provided herein. The Warrants shall expire at 5:00 p.m., C.S.T., on the fifth anniversary of the Offer Completion Date, but no later than July 30, 2019 (“Expiration Date”).
ARTICLE I
Exercise of Warrant
1.1
Method of Exercise
. This Warrant may be exercised by the Registered Holder as a whole or in part from time to time until the Expiration Date, at which time this Warrant shall expire and be of no further force or effect. The minimum number of Warrant Shares that may be purchased on a single exercise shall be 10,000 or the entire number of shares remaining available for exercise hereunder, whichever is less. To exercise this Warrant, the Registered Holder or permitted assignees of all rights of the Registered Holder shall deliver to the Company, at the Warrant Office designated in Section 2.1(a), a written notice in the form of the Purchase Form attached as Exhibit A hereto, stating therein the election of the Registered Holder or such permitted assignees of the Registered Holder to exercise this Warrant in the manner provided in the Purchase Form, (b) payment in full of the Exercise Price for the Warrant Shares purchased, and (c) this Warrant. Subject to compliance with Section 3.1(a)(vi), this Warrant shall be deemed to be exercised on the date of receipt by the Company of the Purchase Form, accompanied by payment for the Warrant Shares to be purchased and surrender of this Warrant, and such date is referred to as the "
Exercise Date
." Upon such exercise, the Company shall issue and deliver to the Registered Holder a certificate for the full number of the Warrant Shares purchasable by the Registered Holder hereunder, against the receipt by the Company of the total Exercise Price payable hereunder for all such Warrant Shares in cash or by certified or cashier's check. The Person in whose name the certificate(s) for Common Stock is to be issued shall be deemed to have become a holder of record of the Common Stock on the Exercise Date. In case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal to the number of such shares called for by this Warrant minus the number of shares of Common Stock purchased by the Registered Holder upon exercise as provided herein.
1.2
Fractional Shares
. No fractional shares of Common Stock shall be issued upon exercise of this Warrant.
ARTICLE II
Warrant Office; Transfer
2.1
Warrant Office
. The Company shall maintain an office for certain purposes specified herein (the "
Warrant Office
"), which office shall initially be the Company's office at 877 North 8th West, Riverton, Wyoming 82501, and may subsequently be such other
office of the Company or of any transfer agent of the Common Stock of which written notice has previously been given to the Registered Holder. The Company shall maintain, at the Warrant Office, a register for the Warrant in which the Company shall record the name and address of the Registered Holder, as well as the name and address of each permitted assignee of the rights of the Registered Holder.
2.2
Ownership of Warrant
. The Company may deem and treat the Registered Holder as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer.
2.3
Transfer of Warrants
. The Company agrees to maintain at the Warrant Office books for the registration and transfer of this Warrant. This Warrant may be transferred in whole or in part only in compliance with the applicable law. The Company, from time to time, shall register the transfer of this Warrant in such books upon surrender of this Warrant at the Warrant Office, properly endorsed, together with a written assignment of this Warrant, substantially in the form of the Assignment attached as Exhibit B hereto. Upon transfer, a new Warrant shall be issued to the transferee, and the Company shall cancel the surrendered Warrant. The Registered Holder shall pay all taxes and all other expenses and charges payable in connection with the transfer of Warrants pursuant to this Section 2.3.
2.4
No Rights as Shareholder Until Exercise
. This Warrant does not entitle the Registered Holder to any voting rights or other rights as a shareholder of the Company prior to exercise. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be issued to the Registered Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. Warrant Shares shall be issued subject to no restrictions upon transfer or sale, except applicable securities laws.
2.5
Registration Rights
. The Company agrees that at the request of the Registered Holder (or Registered Holders, provided request is made by Registered Holders with 60% of the Warrants Shares issuable on exercise of this Warrant), made at any time after the Company has a class of stock registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, public resale of the Warrant Shares shall be covered by a registration statement on an appropriate form to be filed with the Securities and Exchange Commission under the Securities Act.
Once public, the Company shall use its commercially reasonable best efforts to file the registration statement as soon as possible after receipt of request from the Registered Holder, it being understood that a request for filing received in the first quarter may result in a delay of filing until the Company has filed its annual report with the Securities and Exchange Commission. The Company will file the registration statement at its sole cost and expense, have it declared effective as soon as practicable, and maintain such registration statement in effect until the first to occur of the following: (a) the third anniversary of effective date, (b) the date when all of the Warrant Shares have been sold;
or (c) the date the Registered Holder(s) is or are able to immediately sell the Warrant Shares pursuant to Rule 144. The benefits of this section 2.5 shall extend to each Registered Holder.
When, pursuant to this Section, the Company shall take any action to permit a public offering or sale or other distribution of the Warrant Shares, the Company shall:
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(a)
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furnish, without charge, to each Registered Holder of Warrant Shares
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(i)
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a reasonable number of copies of such registration statement (including any exhibits thereto other than exhibits incorporated by reference), and each amendment and supplement thereto as such Registered Holder may request,
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(ii)
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such number of copies of the prospectus included in such registration statement (including each preliminary prospectus and any other prospectus filed under Rule 424 under the Securities Act) as such Registered Holder may request, in conformity with the requirements of the Securities Act, and
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(iii) such other documents as such Registered Holder may reasonably request in order to facilitate the disposition of the Warrant Shares.
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(b)
|
bear the complete cost and expense of such registrations or qualifications.
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(c)
|
indemnify and hold harmless each Registered Holder and each underwriter, within the meaning of the Securities Act, who may purchase from or sell for a Registered Holder, any Warrant Shares, from and against any and all losses, claims, damages, and liabilities (including but not limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing, defending or settling any claim) arising from
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(i)
|
any untrue or alleged untrue statement of a material fact contained in any registration statement furnished pursuant to this Section, or any prospectus included herein or
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(ii)
|
any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. The Company shall not be liable for amounts paid in settlement of any such litigation if such settlement was effected without the consent of the Company. The indemnity agreement of the Company herein shall not inure to the benefit of any such underwriter (or to the benefit of any person who controls such underwriter) on
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account of any losses, claims, damages, liabilities (or actions or proceedings in respect thereof) arising from the sale of any of such Warrant Shares by such underwriter to a person if such underwriter failed to send or give a copy of the prospectus furnished pursuant to this Section, as the same may then be supplemented or amended (if such supplement or amendment shall have been furnished the Registered Holders), to such person with or prior to the written confirmation of the sale involved.
The Registered Holder shall supply such information as the Company may reasonably require from such Registered Holder, or any underwriter for the Registered Holder, for inclusion in such registration statement or post effective amendment.
2.6
Expenses of Delivery of Warrants
. Except as provided in Section 2.3, the Company shall pay all reasonable expenses and other charges payable in connection with the preparation, issuance and delivery of Warrants and related Warrant Shares hereunder.
2.7
Compliance with Securities Laws
. The Registered Holder (and its transferees and assigns), by acceptance of this Warrant, covenants and agrees that such Registered older is acquiring the Warrants evidenced hereby, and, upon exercise hereof, the Warrant Shares, for its own account as an investment and not with a view to distribution thereof. Neither this Warrant nor the Warrant Shares issuable hereunder have been registered under the Securities Act or any state securities laws and no transfer of this Warrant or any Warrant Shares shall be permitted unless the Company has received notice of such transfer in the form of the assignment attached hereto as Exhibit B, accompanied by an opinion of counsel reasonably satisfactory to the Company that an exemption from registration of such Warrant or Warrant Shares under the Securities Act is available for such transfer. Upon exercise of the Warrants, certificates for the Warrant Shares shall bear a restrictive legend substantially as follows:
"The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or the securities laws of any state (collectively, the "Acts"). Neither the shares nor any interest therein may be offered, sold, transferred, pledged, or otherwise disposed of in the absence of an effective registration statement with respect to the shares under all of the applicable Acts, or an opinion of counsel satisfactory to Rocky Mountain Gas, Inc. to the effect that such registration is not required."
(c)
Any attempted transfer of the Warrant or Warrant Shares not in compliance with the provisions of this section shall be void.
ARTICLE III
Anti-Dilution Provisions
3.1
Adjustment of Exercise Price and Number of Warrant Shares
. The Exercise Price and number of Warrant Shares shall be subject to adjustment from time to time as hereinafter provided in this Article III.
(a)
Adjustments
. The Exercise Price and number of Warrant Shares shall be subject to adjustment from time to time as follows:
(i)
Adjustment for Stock Splits and Combinations
. If the Company shall, at any time or from time to time after the date hereof (the "
Original Issue Date
") while this Warrant remains outstanding, effect a subdivision of the outstanding Common Stock or a dividend in Common Stock shall be paid in respect of the Common Stock, the Exercise Price in effect immediately before such subdivision shall be proportionately decreased. Conversely, if the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately before such combination shall be proportionately increased. When any adjustment is required to be made in the Exercise Price, the number of Warrants Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment. Any adjustment under this Section 3.1(a)(i) shall become effective at the close of business on the date the subdivision or combination becomes effective.
(ii)
Adjustment for Reclassification, Exchange, and Substitution
. If at any time or from time to time after the Original Issue Date while this Warrant remains outstanding, the Common Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise, the Registered Holder shall have the right thereafter to convert such stock into the kind and amount of stock and other securities receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Common Stock could have been converted immediately prior to such recapitalization, reclassification or change.
(iii)
Other Dilutive Events
. In case any material event shall occur as to which the provisions of Section 3.1(a) are not strictly applicable but the failure to make an adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles of such section, then, in such case, at the Registered Holder’s request, the Company shall appoint a firm of independent certified public accountants of recognized standing and reasonably acceptable to the Registered Holder (“Firm”). Such Firm shall give their opinion
upon the adjustment in the Exercise Price and/or Warrants, if any, on a basis necessary to preserve, without dilution, the purchase rights represented by this Warrant. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the Registered Holder and shall make the adjustments described therein; if such adjustments result in a change in exercise price of less than 5%, then the Registered Holder shall pay the cost of the Firm’s review.
(iv)
No Dilution or Impairment
. The Company will not, by amendment of its charter or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of the Warrants, but will at all times in good faith carry out all such terms and take all such action as may be necessary or appropriate in order to protect the rights of the holders of the Warrants against dilution or other impairment. Without limiting the generality of the foregoing, the Company a) will not permit the par value of any shares of stock receivable upon the exercise of the Warrants to exceed the amount payable therefore upon such exercise, b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue, free from preemptive rights, fully paid and non-assessable shares of stock upon the exercise of all Warrants from time to time outstanding, and c) will not take any action which results in any adjustment of the Warrant Price if the total number of shares of Common Stock issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock then authorized by the Company’s charter and available for the purpose of issue upon such exercise.
(v)
Determinations
. All determinations by the Company under the provisions of this Warrant shall be made in good faith with due regard to the interests of the Registered Holder, and in accordance with good financial practice.
(vi)
Reorganizations, Reclassifications, Mergers, Consolidations, or Sales of Assets
. If at any time or from time to time after the Original Issue Date while this Warrant remains outstanding, there is a capital reorganization or reclassification of the Common Stock or a merger, or consolidation of the Company with or into another corporation or transfer or sales of substantially all of the assets of the Company, provision shall be made so that the Registered Holder shall thereafter be entitled to receive upon exercise hereof the number of shares of stock or other securities or property of the Company to which a holder of the number of shares of Common Stock deliverable upon exercise immediately prior to such event would have been entitled as a result of such Company reorganization, reclassification, merger, consolidation or sale of substantially all of the Company assets.
(vii)
Rounding of Calculations; Minimum Adjustment
. All calculations under this Section 3.1(a) shall be made to the nearest cent. Any provision of this Section
3.1 to the contrary notwithstanding, no adjustment in the Exercise Price shall be made if the amount of such adjustment would be less than one cent.
(viii)
Timing of Issuance of Additional Common Stock Upon Certain Adjustments
. In any case in which the provisions of this Section 3.1(a) shall require that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event issuing to the Registered Holder after such record date and before the occurrence of such event the additional shares of Common Stock or other property issuable or deliverable upon exercise by reason of the adjustment required by such event over and above the shares of Common Stock or other property issuable or deliverable upon such exercise before giving effect to such adjustment;
provided
,
however
, that the Company upon request shall deliver to such Registered Holder a due bill or other appropriate instrument evidencing such Registered Holder's right to receive such additional shares or other property, and such cash, upon the occurrence of the event requiring such adjustment.
(b)
Statement Regarding Adjustments
. Whenever the Exercise Price shall be adjusted as provided in Section 3.1(a), and upon each change in the number of shares of the Common Stock issuable upon exercise of this Warrant, the Company shall thereafter give notice thereof to the Registered Holder, with a statement showing in detail the facts requiring such adjustment and the Exercise Price and new number of shares issuable that shall be in effect after such adjustment.
3.2
Costs
. The Registered Holder shall pay all direct documentary, stamp, transfer or other transactional taxes attributable to the issuance or delivery of the Warrant Shares upon exercise of this Warrant, or in respect of any transfer of the Warrant Shares.
3.3
Reservation of Shares
. The Company shall reserve at all times so long as this Warrant remains outstanding, free from preemptive rights, out of its treasury Common Stock or its authorized but unissued shares of Common Stock, or both, solely for the purpose of effecting the exercise of this Warrant, sufficient shares of Common Stock to provide for the exercise hereof.
3.4
Valid Issuance
. All shares of Common Stock which may be issued upon exercise of this Warrant will upon issuance by the Company be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof attributable to any act or omission by the Company, and the Company shall take no action which will cause a contrary result (including without limitation, any action which would cause the Exercise Price to be less than the par value, if any, of the Common Stock).
3.5
Reporting
. So long as this Warrant remains outstanding, the Company
shall furnish to the Registered Holder, the Company’s quarterly financial statements, including balance sheets and statements of income, which statements shall be annually audited, as soon as practicable after they are prepared for internal use.
ARTICLE IV
Covenant of the Company
The Company covenants and agrees that this Warrant shall be binding upon any corporation succeeding to the Company by merger or consolidation.
ARTICLE V
Miscellaneous
5.1
Governing Law
. This Warrant shall be governed by and construed in accordance with the internal laws of the State of Wyoming, without regard to its conflict of law provisions. Any litigation shall be conducted in the courts of the State of Wyoming, or the United States District Court for Wyoming.
5.2
Waiver and Amendment
. Any term or provision of this Warrant may be waived at any time by the party which is entitled to the benefits thereof, and any term or provision of this Warrant may be amended or supplemented at any time by the written consent of the parties (it being agreed that an amendment to or waiver under any of the provisions of Article III of this Warrant shall not be considered an amendment of the number of Warrant Shares or the Exercise Price). No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising because of any prior or subsequent such occurrence.
5.4
Illegality
. In the event that any one or more of the provisions contained in this Warrant shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Warrant shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired.
5.5
Notice
. Any notice or other document required or permitted to be given or delivered to the Registered Holder shall be delivered at, or sent by certified or registered mail to such Registered Holder at, the last address shown on the books of the Company maintained at the Warrant Office for the registration of this Warrant or at any more recent address of which the Registered Holder shall have notified the Company in writing. Any notice or other document required or permitted to be given or delivered to the Company, other than such notice or documents required to be delivered to the Warrant Office, shall be delivered at, or sent by certified or registered mail to, the office of the Company at 877 North 8th West, Riverton, Wyoming 82501 or any other address as shall have been designated in writing by the Company delivered to the Registered Holder.
5.6
Exchange, Loss, Destruction, etc. of Warrant
. Upon receipt of evidence satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory
evidence) of the loss, theft, mutilation or destruction of this Warrant, and, in the case of any such loss, theft or destruction, upon delivery of a bond of indemnity in such form and amount as shall be reasonably satisfactory to the Company, or, in the event of such mutilation upon surrender and cancellation of this Warrant, the Company will make and deliver a new Warrant of like tenor, in lieu of such lost, stolen, destroyed or mutilated Warrant;
provided
,
however
, that the original Registered Holder of this Warrant shall not be required to provide any such bond of indemnity and may in lieu thereof provide his agreement of indemnity. Any Warrant issued under the provisions of this Section 6.8 in lieu of any Warrant alleged to be lost, destroyed or stolen, or in lieu of any mutilated Warrant, shall constitute an original contractual obligation on the part of the Company. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Registered Holder of this Warrant shall pay all taxes (including securities transfer taxes) and all other reasonable expenses and charges payable in connection with the preparation, execution and delivery of replacement Warrant(s).
5.7
Headings
. The Article and Section and other headings herein are for convenience only and are not a part of this Warrant and shall not affect the interpretation thereof.
5.8
Successors and Assigns
. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Registered Holder. The provisions of this Warrant are intended to be for the benefit of all Registered Holders from time to time of this Warrant and shall be enforceable by any such Registered Holder.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name.
Dated: July 30, 2004
ROCKY MOUNTAIN GAS, INC.
By:
/s/ Mark J. Larsen
Mark J. Larsen
President
PURCHASE AND SALES AGREEMENT
BETWEEN
THE PURCHASER:
BELL COAST CAPITAL CORP. (“BCCC”)
AND
THE SELLERS:
U.S. ENERGY CORP. AND USECC, A JOINT VENTURE BETWEEN U.S. ENERGY CORP. AND CRESTED CORP. (“the USE PARTIES”)
DECEMBER 8, 2004
PURCHASE AND SALES AGREEMENT
This Purchase and Sales Agreement ("Agreement"
)
is made and en-tered into on this the 8th day of December, 2004, by and between the purchaser: Bell Coast Capital Corp., a British Columbia corporation ("BCCC"), and the sellers: U.S. Energy Corp., a Wyoming corporation (“USE”) and a joint venture between USE and Crested Corp., a Colorado corporation (“Crested”), such joint venture referred to as (“USECC”), the sellers hereinafter collectively referred to as the “USE Parties”.
1.
Statement of Purpose
.
The USE Parties own or control through contract, a block of unpatented mining claims (“Claims”) and a Wyoming State Lease (“Lease”) in the Sheep Mountain and Crooks Gap Mining Districts, Fremont County, Wyoming, as generally described in Exhibit A-1, which is incorporated by this reference. Such properties interests are hereinafter collectively referred to as the “Properties”. The Properties contain uranium deposits, shafts for underground mining, head frames, open pits from previous mining operations, tunnels, roads, buildings, equipment and utilities.
2.
Sale of Interests by the USE Parties.
Subject to the terms and conditions of this Agreement and for the consideration herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the USE Parties hereby agree to sell, transfer and assign to BCCC the right to purchase a 50% undivided interest in and to the Properties described on Exhibit A-1, subject to the royalties and burdens or third party interests described in Exhibit A-2.
3.
Purchase of Interests by BCC.
Subject to the terms and conditions of this Agreement and for the consideration herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, BCCC agrees to purchase from the USE Parties a 50% undivided interest in and to the Properties described on Exhibit A-1, subject to the royalties and burdens or third party interests described in Exhibit A-2
4.
Purchase Price.
BCCC agrees to purchase a 50% undivided interest in and to the Properties described in Exhibit A-1 by paying the USE Parties the following consideration in U.S. Dollars and issuing shares of BCCC common stock (all stock issues will be subject to the antidilution provisions provided for in Exhibit B) as follows:
(i)
October 29, 2004
$175,000
P
a
id $100,000 to the USE Parties, which is
non-refundable and $75,000 paid into
escrow, which is also non-refundable
and was released to the USE Parties
on December 3, 2004.
November 29, 2004
$175,000
To be paid into escrow and to be released
to the USE Parties 5 days after TSX Venture
Exchange (“the Exchange”) approval of the
purchase by BCCC, provided however,
such approval by the Exhange shall
not exceed 6 months from the date of the
October 29, 2004 Letter Agreement.
June 29, 2005
$500,000
and 1,000,000 common shares of BCCC
stock
subject to regulations of the Exchange.
June 29, 2006
$800,000
a
nd 750,000 common shares of BCCC stock
subject to regulations of the Exchange.
December 29, 2006
$800,000
and 750,000 common shares of BCCC stock
subject to regulation of the Exchange.
June 29, 2007
$800,000
and 750,000 common shares of BCCC stock
subject to regulations of the Exchange.
Total (Cash)
$4,050,000
(Shares) 4,000,000 common shares of
BCCC stock subject to regulations of the
Exchange.
(ii)
The payment to the USE Parties by BCCC of $3 million in two $1.5 million installments after the Ux price reported in Ux Weekly for the long term indicator for U
3
O
8
is at $30.00/lb for four (4) consecutive weeks (“Price Benchmark”), then payment shall be as follows: 1) if the Price Benchmark occurs during the first 18 months after the execution of the October 29, 2004 Letter Agreement, then the first installment of $1.5 million payment shall be 6 months from such date, but no sooner than 18 months after execution of the October 29, 2004 Letter Agreement and 2) if the Price Benchmark occurs after the first 18 months from the execution of the October 29, 2004 Letter Agreement, then the first installment of $1.5 million shall be paid 6 months from the date such Price Benchmark occurs. The second installment of $1.5 million shall be paid 6 months after the first installment. The obligation for such payments shall survive closing and shall extend through the term of the Venture. If either payment is not timely made, BCCC will forfeit any and all interest in the Properties or the Venture.
(iii)
Within 3 months of the date of this Agreement, BCCC will make available and commit $500,000 for an exploration and development program for the Properties.
5.
Closing.
The closing of the transaction contemplated by this Agreement (the “Closing”) shall take place in Riverton, Wyoming on or before December 29, 2007. In consideration of and after the receipt of the full payments described in paragraph 4: the USE Parties will convey to BCCC a 50% undivided interest in the Properties; and BCCC and the USE Parties will form a joint venture as described in paragraph 6.
6.
Representation and Warranties of the USE Parties.
The USE Parties represent to BCCC that as of the date of this Agreement:
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(a)
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Each of the USE Parties that exist as corporate entities has been duly organized, validly existing and is in good standing under the laws of the state of incorporation and has the requisite power to own its respective interest in the Properties.
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(b)
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Each of the USE Parties has all the requisite power, right and authority to enter into this Agreement and to perform its obligations under this Agreement, including the right to convey to BCCC the interest in the Properties at Closing and the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of each of the USE Parties.
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(c)
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This Agreement when executed and delivered will be a valid and binding agreement of each of the USE Parties, enforceable in accordance with its terms.
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(d)
|
There are no actions, claims, investigations or proceedings, judicial or otherwise, pending, or to the best of the knowledge of each of the USE Parties threatened, against or relating to any one of the USE Parties which would affect the USE Parties’ ability to convey the purchased interest in the Properties to BCCC or otherwise affect the USE Parties’ ability to perform the terms of this agreement.
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(e)
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The execution and delivery of this Agreement does not and the performance of this Agreement by each of the USE Parties will not (i) conflict with or violate the Articles of Incorporation or Bylaws of anyone of the USE Parties, (ii) conflict with or violate any law, rule, regulation, order, judgment or (iii) result in any breach or constitute a default (or an event which with notice or lapse of time, or both would become a default) under, or give to others any rights of termination, amendment, acceleration, cancellation, or consent, or result in the creation of a lien or encumbrance on any of the Properties, pursuant to any instrument or obligation to which USE Parties is a party or by which USE Parties is bound.
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(f)
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(i) The State of Wyoming Mineral Lease constituting part of the Properties is valid and in good standing; (ii) the USE Parties own or control the Properties, (iii) that with respect to the Claims, (1) all acts of location have been performed in accordance with all applicable federal and state laws and local mining customs and (2) that sufficient annual assessment work has been performed on each of the Claims and evidence of assessment work has been filed as required by state and
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federal law through August 31, 2004 for the last assessment year.
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(g)
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To the best of the USE Parties’ knowledge the unpatented mining claims (the "Claims") and the State Lease constituting part of the Properties are free and clear of all defects, liens or encumbrances except there are certain royalties reserved to owners or former owners of the Claims and the State Lease.
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(h)
The USE Parties have the right and ability to convey a 50% undivided interest in an to the Properties as described in Exhibit A-1 as provided for hereunder to BCCC free and clear of all claims, liens, security interests, burdens and encumbrances of any nature and kind created by through or under the USE Parties save and except as title to the Properties may be encumbered by the royalties and burdens more particularly described in Exhibit A-2
(i)
any and all underlying agreements related to any portion of the Properties are in good standing.
(j)
The USE Parties have not employed any broker for finder and has not incurred any liabilities for any brokerage fees, commissions, or finder’s fees in connection with the transactions contemplated by this Agreement for which BCCC shall have any responsibilities whatsoever.
(k)
The USE Parties make no representations or warranties with respect to title to the Properties and this agreement has been entered into on the understanding that BCCC will commission the preparation of an independent title opinion on the Properties and in this regard the USE Parties will make available to BCCC’s Wyoming Counsel all of its title records. To the best of the USE Parties’ knowledge, information and belief the information contained in Exhibit A-1 with respect to the Properties is complete and correct.
(l)
Prior to executing this Agreement, the USE Parties made available to BCCC and its agents and contractors certain information and data that the USE Parties have in their control or possession relating to the Properties and the liabilities attendant thereto, including but not limited to drilling, exploration, mining and metallurgical test data, assays, title information, and all information relating to possible environmental liabilities and to the best of their respective knowledge, information and belief the data made available is full and complete and the USE Parties are unaware of any material fact or circumstances which have not been made available to BCCC which should be disclosed or made available to BCCC in order to prevent the representations and warranties in this agreement from being materially misleading.
7.
Representation and Warranties of BCCC.
BCCC represents to the USE Parties that as of the date of this Agreement:
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(a)
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BCCC is a corporation duly incorporated and in good standing in the Province of its incorporation and that it will form a wholly owned subsidiary that will be qualified and registered to do business in the State of Wyoming prior to the Closing Date for the purpose of holding its interest in the Properties.
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(b)
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BCCC has all the requisite power, right and authority to enter into and to perform its obligations under this Agreement and the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of BCCC.
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(c)
|
This Agreement when executed and delivered will be a valid and binding agreement on BCCC, enforceable in accordance with its terms.
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(d)
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There are no actions, claims, investigations or proceedings, judicial or otherwise, pending, or to the best of the knowledge of BCCC threatened, against or relating to BCCC which would affect the BCCC’s ability to purchase on behalf of a proposed Wyoming Subsidiary an interest in the Properties or otherwise affect BCCC’s ability to perform the terms of this agreement.
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(e)
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The execution and delivery of this Agreement does not and the performance of this Agreement by BCCC will not (i) conflict with or violate the Articles of Incorporation or Bylaws of BCCC or (ii) conflict with or violate any law, rule, regulation, order, or judgment.
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(f)BCCC has not employed any broker for finder and has not incurred any liabilities for any brokerage fees, commissions, or finder’s fees in connection with the transactions contemplated by this Agreement for which the USE Parties shall have any responsibilities whatsoever.
(g)Prior to executing this Agreement, BCCC and its agents and contractors have conducted its due diligence and have had the opportunity to review certain information and data that the USE Parties have in their control or possession relating to the Properties and the liabilities attendant thereto, including but not limited to drilling, exploration, mining and metallurgical test data, assays, title information, and all information relating to possible environmental liabilities and BCCC acknowledges that it will be required to obtain an independent title report on the claims if additional comfort is required on title which is not warranted by the USE Parties.
8.
Standard of Knowledge.
For a representation or warranty made to the USE Parties or BCCC’s “knowledge” the term “knowledge” shall mean actual knowledge on the part of the officers, employees and agents (including attorneys) of either the USE Parties or BCCC, after all due inquiry, of the matter referred to or of facts that would reasonably lead to the conclusions referred to.
9.
Indemnities.
The USE Parties shall indemnify BCCC and its officers, directors, agents and employees against any loss, cost, expense, damage or liability (including attorney’s fees and other expenses incurred in defending against litigation, either threatened or pending) arising out of or based upon any material breach by USE Parties of any representation and warranty made by USE Parties in this Agreement. BCCC shall indemnify USE Parties and its officers, directors, agents and employees against any loss, cost, expense, damage or liability (including attorney’s fees and other expenses incurred in defending against litigation, either threatened or pending) arising out of or based upon any material breach by BCCC of any representation and warranty made by BCCC in this Agreement.
10.
Claims for Indemnification.
If any claim or demand is asserted against any Party (“Indemnified Party”) in respect of which the Indemnification Party may be entitled to indemnification under the provisions of Section 9 written notice of such claim or demand shall promptly be given to the Party (“Indemnifying Party”) from whom indemnification may be sought. The Indemnifying Party shall have the right, by notifying the Indemnified Party within 30 days after its receipt of the notice of the claim or demand, to assume the entire control of (subject to the right of the Indemnified Party to participate, at the Indemnified Party’s choice, in) the defense, compromise, or settlement of the matter, including, at the Indemnifying Party’s expense, employment of counsel or business of the Indemnified Party caused by a failure by the Indemnifying Party to defend, compromise, or settle a claim or demand in a reasonable and expeditious manner, after the Indemnifying Party has given notice that it will assume control of the defense, compromise, or settlement of the matter, shall be included in the damages for which the Indemnifying Party shall be obligated to indemnify the Indemnified Party.
11.
Joint Mining Venture.
At the Closing, BCCC and the USE Parties will form a joint mining venture (“Venture”) to be named hereafter, for a term of up to thirty years, or such shorter time as the parties may agree upon in the Mining Operating Agreement to be executed on or before June 29, 2005. At Closing when BCCC receives title to the Properties, BCCC shall immediately contribute their undivided 50% interest in the Properties to the Venture. At this same time, the USE Parties will also contribute their remaining 50% undivided interest in the Properties into the Venture. The Mining Operating Agreement will contain dilution provisions substantially on the terms described in Exhibit C.
12.
Reclamation Responsibilities.
Upon execution of this Agreement, both parties hereto shall 1) equally assume all current (reclamation liabilities that existed prior
to the date of this Agreement) and future (reclamation liabilities that are incurred on and after the date of this Agreement) reclamation liabilities accrued on the Properties, except that the USE Parties shall be responsible for the last $1.4 million of current $4 million reclamation liability (i.e. BCCC and the USE Parties are equally responsible for the first $2.6 million of current reclamation responsibilities on a 50% BCCC and 50% the USE Parties basis and the USE Parties are responsible for 100% of the last $1.4 million of the $4 million current reclamation responsibilities) and 2) equally assume all assessment, maintenance and leasehold costs and fees and payments to be made on the Properties. Provided however, if BCCC terminates the Agreement as provided for in paragraph 19 prior to closing on December 29, 2007, BCCC’s current (reclamation liabilities that existed prior to the date of this Agreement) reclamation liabilities shall be extinguished.
13.
Exploration Projects.
For each exploration project that is identified by either party in the USE Parties’ library, which is approved by the USE Parties and undertaken by the parties, BCCC will contribute the first $500,000 expenditure on each exploration project undertaken until BCCC has contributed $10,000,000 toward the exploration projects. After BCCC has expended the first $500,000 on each individual project, the balance of monies expended on the project shall be split 50/50 between the parties. As an example, should exploration project #1 entail expenditures of $600,000, BCCC shall be responsible for $500,000 plus $50,000 (i.e. ½ of $100,000 spent over the $500,000) and the USE Parties shall be responsible for the $50,000 balance. After BCCC has funded up to twenty (20) exploration projects with $500,000 (i.e. $10,000,000 in the aggregate) expended on each project, the USE Parties and BCCC will be obligated to carry their respective 50% interest in such projects or lose their 50% interest in the projects on a property by property basis as provided in the Mining Venture Agreement.
14.
Ownership.
The Venture when formed and the interest of both parties when contributed to in the Venture, will be owned 50% by BCCC and 50% by the USE Parties, which percentages shall be the initial Participating Interests of the parties. The Venture will be managed by a Management Committee with equal representation from each of BCCC and the USE Parties.
15.
Operator.
The USE Parties will be the Operator of the Venture, reporting to the Management Committee and may charge a minimum of cost plus 10% for its services and materials excluding capital costs furnished to the Venture as provided in the Mining Venture Agreement.
16.
Contributions and Distributions
.
Except as provided for in paragraph 13, the parties shall contribute to the costs and expenses of the Venture and share in the production of the Venture in proportion to their respective Participating Interests, as they may from time to time then appear.
17.
Area of Mutual Interest.
The area of mutual interest shall be the State of Wyoming and any other properties identified in the Atlas Minerals and Western Nuclear data bases, excluding however, (1) the Sweetwater Mill and USE Parties’ interest in the nearby “Green Mountain uranium properties” owned by Kennecott; (2) a ten mile radius
around the Shootering Canyon Mill; and (3) any properties brought by a present or future joint venture partner on the Shootering Canyon Mill.
18.
Monetary Default
.
In the event BCCC fails to make the payments provided for in paragraph 4 above when due, it shall be deemed to be in default and upon 30 days written notice of default by the USE Parties to BCCC and if such default is not corrected, BCCC shall forfeit any and all its rights in the Properties including any payments previously made to the USE Parties.
19.
Termination of this Agreement
.
This Agreement may be terminated at any time prior to the Closing by:
(a)
By the mutual written consent of BCCC and the USE Parties; or
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(b)
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By BCCC by providing written notice to the USE Parties in accordance with paragraph 24.
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and upon the occurrence of such event BCCC will forfeit and lose any and all interests it may have in the Properties.
20.
No Partnership
.
The parties intend that neither this Agreement nor the Mining Operating Agreement contemplated hereunder shall create a partnership or mining partnership between BCCC and the USE Parties. Rather their relationship is one of covenants and the liability of the parties shall be several and not joint or collective.
21.
BCCC's Initial Payment
.
BCCC has paid to the USE Parties on October 29, 2004, the non-refundable sum of $100,000 for and in consideration of the right to enter into the October 29, 2004 Letter Agreement between BCCC and the USE Parties. The $75,000 paid in the escrow on October 29, 2004, which is also non-refundable after November 29, 2004 and shall be released to the USE Parties on or before December 6, 2004. These payments are solely for the USE Parties agreeing not to seek any other entities’ participation in the said Properties for 30 days as provided for in the October 29, 2004 Letter Agreement. If all payments are made and received on or before December 29, 2007 in accordance with paragraph 4, then the USE Parties agree to credit the $100,000 and $75,000 payments against the $4.05 million obligation contained in paragraph 4 (d)(i).
22.
BCCC's Due Diligence
.
In accordance with the October 29, 2004 Letter Agreement, BCCC had until and including November 29, 2004 to conduct a due diligence investigation of the Properties. During this period, the USE Parties made available to BCCC and its agents and contractors information and data that the USE Parties had in their control or possession relating to the Properties and the liabilities attendant thereto, including but not limited to drilling, exploration, mining and metallurgical test data, assays, title information, and all information relating to possible environmental liabilities. To the best of the knowledge of the USE Parties, the information made available is full and complete and no material information was
withheld from BCCC when the data was made available.
23.
BCCC Board Approval
.
BCCC represents that it has received approval from its Board of Directors prior to the execution of this Agreement. BCCC shall provide USE Parties with a copy of such resolution.
24.
USE and Crested Board Approvals
.
The USE Parties represent that they have received approval from their respective Board of Directors prior to the execution of this Agreement. The USE Parties shall provide BCCC with a copy of such resolution(s).
25.
Confidentiality and No Public Announcements
.
During the term of this Agreement, the parties agree to keep the terms and conditions of this Agreement confidential and shall make no public announcement concerning this Agreement or operations under this Agreement without the written consent of the other party, which consent shall not be unreasonably withheld, except as may be required by the SEC or the Exchange. BCCC further agrees that its employees, agents and contractors shall maintain the confidentiality of any and all such information provided to BCCC during the due diligence period designated by the USE Parties as being confidential. Provided, however, that either party may disclose any such information to its parent or its subsidiaries or affiliates, and either party may make such disclosure to other entities with whom negotiations are being made in good faith for the mortgage, pledge, financing, sale or assignment of the rights and interests of the disclosing party hereunder. The terms and conditions of this Agreement shall otherwise not be disclosed except as mutually agreed by the parties, the consent of either party not to be unreasonably withheld, or unless the disclosing party is so required by U.S. or Canadian federal or provincial laws, rules, regulations, or orders. Upon such disclosure and, if possible, before disclosure, the disclosing party shall notify the other party of the disclosure.
26.
Notice
.
Any notice, consent, authorization or other communication to be given hereunder shall be in writing and shall be deemed duly given and received when delivered personally, when transmitted by fax, three days after being mailed by first class mail, or one day after being sent by a nationally recognized overnight delivery service, charges and postage prepaid, properly addressed to the party to receive such notice, at the following address or fax number for such party (or at such other address or fax number as shall hereafter be specified by such party by like notice):
(a)
If to the USE Parties
Keith G. Larsen,
President and Director
877 North 8th West
Riverton, WY 82501
Phone:
(307) 856-9271
Fax:
(307) 857-3050
E-Mail:
keith@usnrg.com
(b)
If to BCCC
Rahoul Sharan,
President
#525 - 999 West Hastings Street
Vancouver, BC
CANADA V6C 2W2
Phone:
(604) 869-1810
Fax:
(604) 869-1817
E-Mail: rahoul@axion.net
27.
Miscellaneous
.
(a)
This Agreement shall constitute the whole agreement and understanding between BCCC and the USE Parties as to the subject matter of this Agreement and supersedes any other prior agreements or understandings whether written or oral between BCCC and the USE Parties.
(b)
This Agreement may be modified only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought.
(c)
The waiver by either BCCC or the USE Parties of a breach of any provision of this Agreement by the other shall neither operate as nor be construed as a waiver of any subsequent breach.
(d)
In the event that any condition or other provision of this Agreement is held to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of this Agreement and shall in no way affect any other covenant or condition. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such provision shall be deemed valid to the extent of the scope or breadth permitted by law.
(e)
This Agreement may be executed in a number of identical counterparts, each of which for all purposes is to be deemed an original, and all of which constitute, collectively, one agreement.
(f)
This Agreement shall be interpreted in accordance with the laws of the State of Wyoming.
(g)
The terms and provisions hereof shall inure to the benefit of and shall be binding upon the permitted successors and assigns of the parties.
(h)
In the event either party to this Agreement shall be required to institute any suit or legal action to enforce any of the provisions of this Agreement, then the prevailing party shall be allowed, in addition to such relief as awarded by the court, reasonable attorney's fees and court costs in prosecuting that action.
(i)
Except for the non-refundable payment due on October 29
th
, 2004, which amount has now been paid, this agreement is subject to filing with the TSX Venture Exchange and BCCC receiving confirmation that it has been accepted for filing on or before April 29, 2005.
Executed to be effective on the 8
th
day of December, 2004.
BELL COAST CAPITAL CORP.
By
/s/ Rahoul Sharan
Its
President
U.S. ENERGY CORP.
By
/s/ Keith G. Larsen
Its
President
U.S. ENERGY CORP. and CRESTED CORP. dba as USECC, a JOINT VENTURE
U.S. ENERGY CORP.
By
/s/ Keith G. Larsen
Its
President
CRESTED CORP.
By
/s/ Harold F. Herron
Its
President
MINING VENTURE AGREEMENT
BETWEEN
URANIUM POWER CORP.
(FORMERLY “BELL COAST CAPITAL CORP.”)
AND
U.S. ENERGY CORP.
and a joint venture between
U.S. ENERGY CORP.
and
CRESTED CORP.
TABLE OF CONTENTS
ARTICLE
Page No.
I -
DEFINITIONS-----------------------------------------------------------------------------------------------------------------------------------------------------------------
1
1.1
"Accounting Procedure"-----------------------------------------------------------------------------------------------------------------------------------------------
1
1.2
"Affiliate"--------------------------------------------------------------------------------------------------------------------------------------------------------------
1
1.3
"Agreement" ----------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.4
"Area of Mutual Interest" ---------------------------------------------------------------------------------------------------------------------------------------------
2
1.5
"Assets" --------------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.6
"Budget"---------------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.7
"Development"---------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.8
“Effective Date” ------------------------------------------------------------------------------------------------------------------------------------------------------ 2
1.9
"Exploration" ----------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.10
"Initial Contribution"---------------------------------------------------------------------------------------------------------------------------------------------------
2
1.11
"Joint Account"-------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.12
"Liabilities" -----------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.13
"Management Committee"--------------------------------------------------------------------------------------------------------------------------------------------
2
1.14
"Manager" -----------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.15
"Mining" --------------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.16
"Net Proceeds" -------------------------------------------------------------------------------------------------------------------------------------------------------
2
1.17
"Net Milling Return" --------------------------------------------------------------------------------------------------------------------------------------------------
2
1.18
"Operations" --------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.19
"Participant" and "Participants" ----------------------------------------------------------------------------------------------------------------------------------------
3
1.20
"Participating Interest"-------------------------------------------------------------------------------------------------------------------------------------------------
3
1.21
"Plan of Operations" --------------------------------------------------------------------------------------------------------------------------------------------------
3
1.22
"Prime Rate" ----------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.23
"Products"-------------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.24
"Program"-------------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.25
"Properties"-----------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.26
“PSA” --------------------------------------------------------------------------------------------------------------------------------------------------------------- 3
1.27
"Reclamation"---------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.28
"Mining Venture"------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.29
"Transfer"-------------------------------------------------------------------------------------------------------------------------------------------------------------
3
1.30
"Venture"-------------------------------------------------------------------------------------------------------------------------------------------------------------
3
II -
REPRESENTATIONS AND WARRANTIES;
TITLE TO ASSETS--------------------------------------------------------------------------------------------------------------------------------------------------------
4
2.1
Capacity of Participants -----------------------------------------------------------------------------------------------------------------------------------------------
4
2.2
Disclosures -----------------------------------------------------------------------------------------------------------------------------------------------------------
4
2.3
Record Title ----------------------------------------------------------------------------------------------------------------------------------------------------------
4
2.4
Joint Loss of Title -----------------------------------------------------------------------------------------------------------------------------------------------------
4
ARTICLE
Page No.
III -
NAME, PURPOSES AND TERM
--------------------------------------------------------------------------------------------------------------------------------------------
5
3.1
General---------------------------------------------------------------------------------------------------------------------------------------------------------------
5
3.2
Name ----------------------------------------------------------------------------------------------------------------------------------------------------------------
5
3.3
Purposes -------------------------------------------------------------------------------------------------------------------------------------------------------------
5
3.4
Limitation-------------------------------------------------------------------------------------------------------------------------------------------------------------
5
3.5
Effective Date and Term----------------------------------------------------------------------------------------------------------------------------------------------
5
IV -
RELATIONSHIP OF THE PARTICIPANTS
--------------------------------------------------------------------------------------------------------------------------------
6
4.1
No Partnership-------------------------------------------------------------------------------------------------------------------------------------------------------
6
4.2
Federal Tax Elections ------------------------------------------------------------------------------------------------------------------------------------------------
6
4.3
State Income Tax ----------------------------------------------------------------------------------------------------------------------------------------------------
6
4.4
Tax Returns ----------------------------------------------------------------------------------------------------------------------------------------------------------
6
4.5
Other Business Opportunities-----------------------------------------------------------------------------------------------------------------------------------------
6
4.6
Waiver of Right to Partition-------------------------------------------------------------------------------------------------------------------------------------------
7
4.7
Transfer or Termination of Rights to Properties -----------------------------------------------------------------------------------------------------------------------
7
4.8
Implied Covenants---------------------------------------------------------------------------------------------------------------------------------------------------
7
V -
CONTRIBUTIONS BY PARTICIPANTS
------------------------------------------------------------------------------------------------------------------------------------
7
5.1
Participants' Initial Contributions--------------------------------------------------------------------------------------------------------------------------------------
7
5.2
Deemed Initial Contribution of USE Parties---------------------------------------------------------------------------------------------------------------------------
8
5.3
Contributions By Participants After Effective Date--------------------------------------------------------------------------------------------------------------------
8
VI -
INTERESTS OF PARTICIPANTS-------------------------------------------------------------------------------------------------------------------------------------------
9
6.1
Initial Participating Interests-------------------------------------------------------------------------------------------------------------------------------------------
9
6.2
Changes in Participating Interests-------------------------------------------------------------------------------------------------------------------------------------
9
6.3
Voluntary Reduction in Participation----------------------------------------------------------------------------------------------------------------------------------
9
6.4
Default in Making Contribution---------------------------------------------------------------------------------------------------------------------------------------
10
6.5
Elimination of Minority Interest---------------------------------------------------------------------------------------------------------------------------------------
11
6.6
Continuing Liabilities Upon Adjustments
of Participating Interests ------------------------------------------------------------------------------------------------------------------------------------------
11
VII -
MANAGEMENT COMMITTEE----------------------------
---------------------------------------------------------------------------------------------------------------
12
7.1
Organization and Composition---------------------------------------------------------------------------------------------------------------------------------------1
2
7.2
Decisions------------------------------------------------------------------------------------------------------------------------------------------------------------
12
7.3
Meetings ------------------------------------------------------------------------------------------------------------------------------------------------------------
12
7.4
Action Without Meeting ---------------------------------------------------------------------------------------------------------------------------------------------
12
7.5
Matters Requiring Approval -----------------------------------------------------------------------------------------------------------------------------------------
13
7.6
Change in the Management Committe--------------------------------------------------------------------------------------------------------------------------------
13
ARTICLE
Page No.
VIII -
MANAGER--------------------------------------------------------------------------------------------------------------------------------------------------------------------
13
8.1
Appointment----------------------------------------------------------------------------------------------------------------------------------------------------------
13
8.2
Powers and Duties of Manager ---------------------------------------------------------------------------------------------------------------------------------------
13
8.3
Standard of Care -----------------------------------------------------------------------------------------------------------------------------------------------------
16
8.4
Resignation; Deemed Offer to Resign ---------------------------------------------------------------------------------------------------------------------------------
16
8.5
Payments to Manager-------------------------------------------------------------------------------------------------------------------------------------------------
17
8.6
Transactions With Affiliates -------------------------------------------------------------------------------------------------------------------------------------------
17
8.7
Activities During Deadlock--------------------------------------------------------------------------------------------------------------------------------------------
17
8.8
Funding of Reclamation -----------------------------------------------------------------------------------------------------------------------------------------------17
8.9
Assumed Reclamation of Burdens-------------------------------------------------------------------------------------------------------------------------------------18
IX -
PROGRAMS AND BUDGETS-----------------------------------------------------------------------------------------------------------------------------------------------1
8
9.1
Initial Program and Budget--------------------------------------------------------------------------------------------------------------------------------------------
18
9.2
Operations Pursuant to Programs and Budgets------------------------------------------------------------------------------------------------------------------------
18
9.3
Presentation of Programs and Budgets--------------------------------------------------------------------------------------------------------------------------------
18
9.4
Review and Approval of Proposed Programs and Budgets------------------------------------------------------------------------------------------------------------
18
9.5
Election to Participate ------------------------------------------------------------------------------------------------------------------------------------------------
19
9.6
Deadlock on Proposed Programs and Budgets -----------------------------------------------------------------------------------------------------------------------
19
9.7
Budget Overruns; Program Changes----------------------------------------------------------------------------------------------------------------------------------
19
9.8
Emergency or Unexpected Expenditures------------------------------------------------------------------------------------------------------------------------------
19
X -
ACCOUNTS AND SETTLEMENTS-----------------------------------------------------------------------------------------------------------------------------------------
20
10.1
Monthly Statements-------------------------------------------------------------------------------------------------------------------------------------------------
20
10.2
Cash Calls ---------------------------------------------------------------------------------------------------------------------------------------------------------
20
10.3
Failure to Meet Cash Calls or Billings-------------------------------------------------------------------------------------------------------------------------------
20
10.4
Audits--------------------------------------------------------------------------------------------------------------------------------------------------------------
20
10.5
Distributions--------------------------------------------------------------------------------------------------------------------------------------------------------
20
XI -
DISPOSITION OF PRODUCTION-----------------------------------------------------------------------------------------------------------------------------------------
21
11.1
Marketing Agreement ----------------------------------------------------------------------------------------------------------------------------------------------
21
XII -
WITHDRAWAL AND TERMINATION -----------------------------------------------------------------------------------------------------------------------------------
21
12.1
Termination by Expiration or Agreement----------------------------------------------------------------------------------------------------------------------------
21
12.2
Termination by Deadlock-------------------------------------------------------------------------------------------------------------------------------------------
21
12.3
Withdrawal --------------------------------------------------------------------------------------------------------------------------------------------------------
21
12.4
Continuing Obligations ---------------------------------------------------------------------------------------------------------------------------------------------
22
12.5
Disposition of Assets on Termination -------------------------------------------------------------------------------------------------------------------------------
22
12.6
Non-Competition Covenants---------------------------------------------------------------------------------------------------------------------------------------
23
12.7
Right to Data After Termination ------------------------------------------------------------------------------------------------------------------------------------
23
12.8
Continuing Authority -----------------------------------------------------------------------------------------------------------------------------------------------
23
ARTICLE
Page No.
XIII - ACQUISITIONS WITHIN AREA OF MUTUAL INTEREST
------------------------------------------------------------------------------------------------------------------------
23
13.1
General--------------------------------------------------------------------------------------------------------------------------------------------------------------
23
13.2
Terms of Developments for Area of Mutual Interest Lands-----------------------------------------------------------------------------------------------------------23
13.3
UPC’s Earn-In Contribution-----------------------------------------------------------------------------------------------------------------------------------------23
13.4
Notice to Non-acquiring Participant ---------------------------------------------------------------------------------------------------------------------------------
23
13.5
Option Exercised----------------------------------------------------------------------------------------------------------------------------------------------------
24
13.6
Option Not Exercised-----------------------------------------------------------------------------------------------------------------------------------------------
24
XIV - ABANDONMENT AND SURRENDER OF PROPERTIES
-------------------------------------------------------------------------------------------------------------------------
24
14.1
Surrender or Abandonment of Property ----------------------------------------------------------------------------------------------------------------------------
24
14.2
Reacquisition-------------------------------------------------------------------------------------------------------------------------------------------------------
24
XV - TRANSFER OF INTEREST
----------------------------------------------------------------------------------------------------------------------------------------------------------
25
15.1
General------------------------------------------------------------------------------------------------------------------------------------------------------------
25
15.2
Limitations on Free Transferability----------------------------------------------------------------------------------------------------------------------------------
25
15.3
Preemptive Right---------------------------------------------------------------------------------------------------------------------------------------------------
27
15.4
Exceptions to Preemptive Right ------------------------------------------------------------------------------------------------------------------------------------
28
XVI - DISPUTES
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
28
16.1
Default; Right to Cure-----------------------------------------------------------------------------------------------------------------------------------------------
28
XVII - CONFIDENTIALITY
---------------------------------------------------------------------------------------------------------------------------------------------------------------
28
17.1
General------------------------------------------------------------------------------------------------------------------------------------------------------------
28
17.2
Exceptions --------------------------------------------------------------------------------------------------------------------------------------------------------
28
17.3
Duration of Confidentiality -----------------------------------------------------------------------------------------------------------------------------------------
29
17.4
Public Statements --------------------------------------------------------------------------------------------------------------------------------------------------
29
XVIII - GENERAL PROVISIONS
---------------------------------------------------------------------------------------------------------------------------------------------------------
29
18.1
Notices -----------------------------------------------------------------------------------------------------------------------------------------------------------
29
18.2
Waiver------------------------------------------------------------------------------------------------------------------------------------------------------------
30
18.3
Modification ------------------------------------------------------------------------------------------------------------------------------------------------------
30
18.4
Force Majeure----------------------------------------------------------------------------------------------------------------------------------------------------
30
18.5
Governing Law ---------------------------------------------------------------------------------------------------------------------------------------------------
31
18.6
Rule Against Perpetuities------------------------------------------------------------------------------------------------------------------------------------------
31
18.7
Further Assurances -----------------------------------------------------------------------------------------------------------------------------------------------
31
18.8
Survival of Terms and Conditions ---------------------------------------------------------------------------------------------------------------------------------
31
18.9
Conditions---------------------------------------------------------------------------------------------------------------------------------------------------------
31
18.10
Currency---------------------------------------------------------------------------------------------------------------------------------------------------------
31
18.11
Entire Agreement; Successors and Assigns-----------------------------------------------------------------------------------------------------------------------
31
18.12
Memorandum ---------------------------------------------------------------------------------------------------------------------------------------------------
32
18.13
Interpretation and Severability -----------------------------------------------------------------------------------------------------------------------------------
32
EXHIBITS
EXHIBIT A -
1. - PROPERTIES
2. - AREA OF MUTUAL INTEREST
EXHIBIT B - ACCOUNTING PROCEDURE
EXHIBIT C - TAX MATTERS
EXHIBIT D - NET PROCEEDS CALCULATION
EXHIBIT E - INSURANCE
EXHIBIT F - NET MILLING RETURN CALCULATION
MINING VENTURE AGREEMENT
THIS MINING VENTURE AGREEMENT (“Agreement”) dated April 11, 2005, is between Uranium Power Corp. (formerly “Bell Coast Capital Corp.”), a British Columbia corporation ("UPC") of the First Part and U.S. Energy Corp., a Wyoming corporation ("USE"), and a joint venture between USE and Crested Corp., a Colorado corporation ("Crested") of the Second Part (the joint venture between USE and Crested is referred to herein as "USECC" and USE, Crested and USECC are collectively referred to herein as the "USE Parties").
RECITALS
A.
On December 8, 2004, UPC and the USE Parties entered into the PSA, whereby the USE Parties agreed to sell and UPC agreed to purchase a 50% undivided interest in the Properties defined in Section 1.24.
B.
As part of the PSA, UPC and the USE Parties agreed to enter into an agreement to form a joint mining venture and to set out the terms and conditions that will govern the Joint Venture on the Effective Date.
NOW, THEREFORE, in consideration of the covenants and agreements contained herein, UPC and the USE Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1
“Accounting Procedure” means the procedures set forth in Exhibit B.
1.2
“Affiliate” means any person, partnership, joint venture, corporation or other form of enterprise which directly or indirectly controls, is controlled by, or is under common control with, a Participant. For purposes of the preceding sentence, “control” means possession, directly or indirectly, of the power to direct or cause direction of management and policies through ownership of voting securities, contract, voting trust or otherwise.
1.3
“Agreement” means this Mining Venture Agreement, including all amendments and modifications thereof, and all schedules and exhibits, which are incorporated herein by this reference.
1.4
“Area of Mutual Interest” means the area described in Exhibit A-2.
1.5
“Assets” means the Properties, Products and all other real and personal property, tangible and intangible, held for the benefit of the Participants hereunder.
1.6
“Budget” means a detailed estimate of all costs to be incurred by the Participants with respect to a Program and a schedule of cash advances to be made by the Participants.
1.7
“Development” means all preparation for the removal and recovery of Products, including the construction or installation of a mill or any other improvements to be used for the mining, handling, milling, processing or other beneficiation of Products.
1.8
“Effective Date” as that term relates to the Properties means the date UPC closes its purchase of a 50% interest in and to the Properties under the PSA but if the term is used with respect to any mining claims included within the AMI, then the Effective Date for the Joint Venture to be established to develop those separately defined AMI lands shall be the date each of the Participants hold a 50% interest in and to the AMI lands. At that time a separate and distinct joint venture related only to the selected and defined AMI lands shall be established to the exclusion of the Properties and the Effective Date for the Joint Venture established for the properties shall remain the date UPC closes its purchase of a 50% interest in and to the properties.
1.9
“Exploration” means all activities directed toward ascertaining the existence, location, quantity, quality or commercial value of deposits of Products. Exploration may include all activities undertaken through to the completion of a feasibility study.
1.10
“Joint Account” means the account maintained in accordance with the Accounting Procedure showing the charges and credits accruing to the Participants.
1.11
“Liabilities” means any and all claims, demands, investigations, judgments, losses, liabilities, costs and expenses, including reclamation liabilities and reasonable attorneys’ fees of the Venture.
1.12
“Management Committee” means the committee established under Article VII.
1.13
“Manager” means the person or entity appointed under Article VIII to manage Operations, or any successor Manager.
1.14
“Mining” means the mining, extracting, producing, handling, beneficiation, milling or other processing of Products.
1.15
“Net Proceeds” means certain amounts calculated as provided in Exhibit D.
1.16
“Net Milling Return” means certain amounts calculated as provided in Exhibit F.
1.17
“Operations” means the activities carried out under this Agreement.
1.18
“Participant” and “Participants” mean the persons or entities that from time to time have Participating Interests.
1.19
“Participating Interest” means the percentage interest representing the operating ownership interest of a Participant in Assets, and all other rights and obligations arising under this Agreement, as such interest may from time to time be adjusted hereunder. Participating Interests shall be calculated to three decimals and rounded to two (e.g. 1.519% rounded to 1.52%). Decimals of .005 or more shall be rounded up to .01, decimals of less than .005 shall be rounded down. The initial Participating Interests of the Participants are set forth in Section 6.1.
1.20
“Plan of Operations” means a general description of the Operations to be conducted by the Manager.
1.21
“Prime Rate” means the interest rate published as “Prime Rate” in the "Money Rates" column of The Wall Street Journal, as said rate may change from day to day, or the arithmetic mean thereof.
1.22
“Products” means all ores, minerals and mineral resources produced from the Properties under this Agreement.
1.23
“Program” means a description in reasonable detail of Operations to be conducted and objectives to be accomplished by the Manager for a specified period.
1.24
“Properties” means those interests in real property described in part 1 of Exhibit A-1.
1.25
“PSA” means the Purchase and Sales Agreement dated December 8
th
, 2004 entered into between the Participants.
1.26
“Reclamation” means actions performed during or after Exploration, Development, or Operations to shape, stabilize, revegetate or otherwise affect the Properties in order to establish a safe, stable condition capable of establishing and sustaining a productive post-Operation use of the Properties and ensure public safety, as required by applicable laws and other applicable contractual commitments or obligations.
1.27
“Transfer” means sell, grant, assign, encumber, pledge or otherwise commit or dispose of.
1.28
“Venture” means the business arrangement of the Participants under this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES; TITLE TO ASSETS
2.1
Capacity of Participants
. Each of the Participants represents and warrants as follows:
(a)
that it is a corporation duly incorporated and in good standing in its province or state of incorporation and that it is qualified to do business and is in good standing in those states where necessary in order to carry out the purposes of this Agreement;
(b)
that it has the capacity to enter into and perform this Agreement and all transactions contemplated herein and that all corporate and other actions required to authorize it to enter into and perform this Agreement have been properly taken;
(c)
that it will not breach any other agreement or arrangement by entering into or performing this Agreement;
(d)
that this Agreement has been duly executed and delivered by it and is valid and binding upon it in accordance with its terms; and
(e)
that no consent or approval of any third party or governmental agency is required (i) for the execution and delivery of or the performance of its financial obligations under this Agreement, or (ii) for the performance of all its other obligations under this Agreement, except for such consents or approvals as have been obtained and evidence thereof delivered to the other Participant, and except for such consents or approvals which, while necessary for Operations, are not presently necessary and which it reasonably expects will be acquired in a timely fashion.
2.2
Disclosures
. Each of the Participants represents and warrants that it is unaware of any material facts or circumstances which have not been disclosed in this Agreement, which should be disclosed to the other Participant in order to prevent the representations in this Article II from being materially misleading.
2.3
Record Title
. On the Effective Date the Participants as tenants in common with ownership equal to their respective Participating Interests. Recorded title to the Assets or any portion thereof may be held by the Manager for the benefit of the Participants. Each Participant shall execute, acknowledge and deliver appropriate documents to reflect record title as described in this section and changes thereto resulting in any changes in Participating Interests.
2.4
Joint Loss of Title
. Any failure or loss of title to the Assets, and all costs of defending title, shall be charged to the Joint Account.
ARTICLE III
NAME, PURPOSES AND TERM
3.1
General
. UPC and the USE Parties hereby enter into this Agreement for the purposes hereinafter stated, and they agree that all of their rights and all of the Operations on or in connection with the Properties shall be subject to and governed by this Agreement.
3.2
Name
. The name of this Venture shall be the Power
Energy Mining Venture. The Manager shall accomplish any registration required by applicable assumed or fictitious name statutes and similar statutes.
3.3
Purposes
. This Agreement is entered into for the following purposes and for no others, and shall serve as the exclusive means by which the Participants, or either of them, accomplish such purposes:
(a)
to evaluate the possible Development of the Properties,
(b)
to engage in Development and Mining Operations on the Properties,
(c)
to engage in marketing Products extracted from the Properties, to the extent permitted by Article XI,
(d)
to complete Reclamation of disturbances caused by Operations on the Properties;
(e)
where applicable as this agreement may relate to the Area of mutual interest lands:
(i)
to conduct Exploration within the Area of Mutual Interest;
(ii)
to acquire additional properties within the Area of Mutual Interest;
(iii)
to engage in the activities set out in (a) to (d) as such activities are relevant to the AMI lands; and
(f)
to perform any other activity necessary, appropriate, or incidental to any of the foregoing.
3.4
Limitation
. Unless the Participants otherwise agree in writing, the Operations shall be limited to the purposes described in Section 3.3, and nothing in this Agreement shall be construed to enlarge such purposes.
3.5
Term
. The term of this Agreement shall be for thirty (30) years from the Effective Date and for so long thereafter as Products are produced from the Properties or until Reclamation of all disturbance caused by Operations is completed, unless the Agreement is earlier terminated as herein provided.
ARTICLE IV
RELATIONSHIP OF THE PARTICIPANTS
4.1
No Partnership
. Nothing contained in this Agreement shall be deemed to constitute either Participant the partner of the other, nor, except as otherwise herein expressly provided, to constitute either Participant the agent or legal representative of the other, nor to create any fiduciary relationship between them. It is not the intention of the Participants to create, nor shall this Agreement be construed to create, any
mining, commercial or other partnership. Neither Participant shall have any authority to act for or to assume any obligation or responsibility on behalf of the other Participant, except as otherwise expressly provided herein. The rights, duties, obligations and Liabilities of the Participants shall be several and not joint or collective. Each Participant shall be responsible only for its obligations as herein set out and shall be liable only for its share of the costs and expenses as provided herein, it being the express purpose and intention of the Participants that their ownership of Assets and the rights acquired hereunder shall be as Tenants in Common. Each Participant shall indemnify, defend and hold harmless the other Participants, its directors, officers, employees, agents and attorneys from and against any and all Liabilities arising out of any act or any assumption of liability by the indemnifying Participant, or any of its directors, officers, employees, agents and attorneys done or undertaken, or apparently done or undertaken, on behalf of the other Participant, except pursuant to the authority expressly granted herein or as otherwise agreed in writing between the Participants.
4.2
Federal Tax Elections
. Without chang-ing the effect of Section 4.1, the Participants agree that their relationship shall constitute a tax partnership within the mean-ing of Section 761(a) of the United States Internal Revenue Code of 1986, as amended. Tax elections and allocations shall be made as set forth in Exhibit C.
4.3
Other Business Opportunities
. Except as expressly provided in this Agreement, each Participant shall have the right independently to engage in and receive full benefits from business activities, whether or not competitive with the Operations without consulting the other. The doctrines of “corporate opportunity” or “business opportunity” shall not be applied to any other activity, venture, or operation of either Participant, and, except as otherwise provided in Section 12.6, neither Participant shall have any obligation to the other with respect to any opportunity to acquire any property outside the Area of Mutual Interest at any time or within the Area of Mutual Interest after the termination of this Agreement. Unless otherwise agreed in writing, no Participant shall have any obligation to mill, beneficiate or otherwise treat any products or any other Participant’s share of Products in any facility owned or controlled by such Participant.
4.4
Waiver of Right to Partition
. The Participants hereby waive and release all rights of partition, or of sale in lieu thereof, or other division of Assets, including any such rights provided by statute.
4.5
Transfer or Termination of Rights to Properties
. Except as otherwise provided in this Agreement, neither Participant shall Transfer all or any part of its interest in the Assets or this Agreement or otherwise permit or cause such interests to terminate.
4.6
Implied Covenants
. There are no implied covenants contained in this Agreement other than those of good faith and fair dealing.
ARTICLE V
CONTRIBUTIONS BY PARTICIPANTS
5.1
Participants' Initial Contributions
.
(a) UPC, as part of its Initial Contribution, hereby pledges to contribute 100% of its right, title and interest to be acquired in the Properties at the time of Closing after full payment of the purchase price contained in paragraph 4 as provided in the PSA.
(b) The USE Parties, as its Initial Contribution, hereby contributes 100% of its right, title and interest in the Properties at the time of Closing as provided in the PSA.
5.2
Deemed Initial Contribution of USE Parties. The agreed deemed value of the USE Parties’ Initial Contribution shall be equal to the aggregate amount paid by UPC under the PSA either in cash, securities, committed exploration funds or conditional balloon payments in order to purchase a 50% interest in and to the Properties. The amount shall include all payments made under Paragraph 4 of the PSA.
5.3
Contributions By Participants After Effective Date. On and after the Effective Date, the Participants, subject to any election permitted by Section 6.3, shall be obligated to contribute funds to implement adopted Programs in proportion to their respective Participating Interests.
ARTICLE VI
INTERESTS OF PARTICIPANTS
6.1
Initial Participating Interests
. The Participants shall have the following initial Participating Interests:
|
Uranium Power
|
50%
|
|
USE Parties
|
50%
|
6.2
Changes in Participating Interests
. A Participant’s Participating Interest shall be changed as follows:
(a)
As provided in Section 6.3, 6.4, 6.5; or
(b)
Upon an election by a Participant pursuant to Section 6.3 to contribute less to an adopted Program and Budget than the percentage reflected by its Participating Interest; or
(c)
In the event of default by a Participant in making its agreed-upon contribution to an adopted Program and Budget, followed by an election by the other Participant to invoke Section 6.4(b); or
(d)
Transfer by a Participant of less than all of its Participating Interest in accordance with Article XV; or
(e)
Acquisition of less than all of the Participating Interest of the other Participant however arising.
6.3
Voluntary Reduction in Participation
. A Participant may elect, as provided in Section 9.5, to limit its contributions to an adopted Program and Budget as follows:
(a)
to some lesser amount than its respective Participating Interest; or
(b)
to make no contribution.
If a Participant elects to contribute to an adopted Program and Budget some lesser amount than its respective Participating Interest, or not at all, the Participating Interest of that Participant shall be recalculated provisionally at the time of election by dividing: (i) the sum of (a) the agreed value of the Participant’s Initial Contribution under Section 5.2, (b) the total of all of the Participant’s contributions under Section 5.3, and (c) the amount, if any, the Participant elects to contribute to the adopted Program and Budget; by (ii) the sum of (a), (b) and (c) above for all Participants; and then multiplying the result by one hundred. The Participating Interest of the other Participant shall thereupon become the difference between 100% and the recalculated Participating Interest. The Participating Interests of each of the Participants shall be recalculated at the conclusion of each Program by dividing: (i) the sum of (a) the agreed value of the Participant’s Initial Interest under Section 5.1, and (b) the total of all of the Participant’s contributions under Section 5.1 and (c) the total of all of the transfers to or from the Participant’s account under Section 6.4(b)(1); by (ii) the sum of (a) and (b) for all Participants; and then multiplying the result by one hundred.
6.4
Default in Making Contributions
.
(a)
If a Participant defaults in making a contribution or cash call required by an approved Program and Budget, the non-defaulting Participant may advance the defaulted contribution on behalf of the
defaulting Participant and treat the same, together with any accrued interest, as a demand loan bearing interest from the date of the advance at the rate provided in Section 10.3. The failure to repay said loan upon demand shall be a default. Each Participant hereby grants to the other a lien upon its interest in the Properties and a security interest in its rights under this Agreement and in its participating Interest in other Assets, and the proceeds therefrom, to secure any loan made hereunder, including interest thereon, reasonable attorneys fees and all other reasonable costs and expenses incurred in recovering the loan with interest and in enforcing such lien or security interest, or both. A non-defaulting Participant may elect the applicable remedy under this Section 6.4(a) or under 6.4(b), or, to the extent a Participant has a lien or security interest under applicable law, it shall be entitled to its rights and remedies at law and in equity. All such remedies shall be cumulative. The election of one or more remedies shall not waive the election of any other remedies. Each Participant hereby irrevocably appoints the other its attorney-in-fact to execute, file and record all instruments necessary to perfect or effectuate the provisions hereof.
(b)
The Participants acknowledge that if a Participant defaults in making a contribution, or a cash call, or in repaying a loan, as required hereunder, it will be difficult to measure the damages resulting from such default. In the event of such default, as reasonable liquidated damages, the non-defaulting Participant may, with respect to any such default not cured within 30 days after notice to the defaulting Participant of such default, elect one of the following remedies by giving notice to the defaulting Participant:
(1)
For a default relating exclusively to a Program and Budget, the non-defaulting Participant may elect to have the defaulting Participant’s Participating Interest permanently reduced as provided in Section 6.3, then to the extent the other Participant makes up the defaulting Participant’s shortfall, the funding Participant’s account shall be credited with three times the amount covered, and twice the amount of covered default shall be deducted from the defaulting Participant’s account. In other words, in addition to being credited for the amount actually funded, twice that amount shall be transferred from the defaulting Participant’s account to the funding Participant’s account. The non-defaulting Participant’s Participating Interest shall, at such time, become the difference between 100% and the further reduced Participating Interest shall, at such time, become the difference between 100% and the further reduced Participating Interest. Such reductions shall be effective as of the date of the default.
(2)
For a default relating to a Program and Budget covering in whole or in part Development or Mining, at the non-defaulting Participant’s election, the defaulting Participant shall be deemed to have withdrawn from the Venture and to have automatically relinquished its Participating Interest to the non-defaulting Participant; provided, however, the defaulting Participant shall have the right to receive only
from 3% of the Net Milling Returns
, if any, and not from any other source, an amount equal to the defaulting Participant’s Initial contribution pursuant to Sections 5.1 and 5.5. Upon receipt of such amount the defaulting Participant shall thereafter have no further right title or interest in Assets or under this Agreement.
6.5
Elimination of Minority Interest
. Upon the reduction of its Participating Interest to less than ten percent, a Participant shall be deemed to have withdrawn from this Agreement and shall relinquish its entire Participating Interest. Such relinquished Participating Interest shall be deemed to have accrued automatically to the other Participant, the withdrawing Participant shall receive in lieu of its Participating Interest
a five percent Net Proceeds Interest
. The provisions of this Section 6.5 shall only apply to a Participant whose Participating Interest is reduced to less than ten percent pursuant to any combination of voluntary reductions in participation pursuant to Sections 6.3 or Exploration contribution defaults pursuant to Section 6.4(b)(1), and shall not apply to a Participant whose Participating Interest is relinquished pursuant to Section 6.4(b)(2).
6.6
Continuing Liabilities Upon Adjustments of Participating Interests
. Any reduction of a Participant’s Participating Interest under this Article VI shall not relieve such Participant of its share of any Liability, including Reclamation obligations, whether it accrues before or after such reduction, arising out of Operations conducted prior to such reduction or under the PSA. For the purposes of this Article VI, such Participant’s share of such liability shall be equal to its Participating Interest at the time such liability was incurred. The increased Participating Interest accruing to a Participant as a result of the reduction of the other Participant’s Participating Interest shall be free of royalties, liens or other encumbrances arising by, through or under such other Participant, other than those existing at the time the Properties were acquired or those to which both Participants have given their written consent. An adjustment to a Participating Interest need not be evidenced during the term of this Agreement by the execution and recording of appropriate instruments, but each Participant’s Participating Interest shall be shown in the books of the Manager. However, either Participant, at any time upon the request of the other Participant, shall execute and acknowledge instruments necessary to evidence such adjustment in form sufficient for recording in the jurisdiction where the Properties are located.
ARTICLE VII
MANAGEMENT COMMITTEE
7.1
Organization and Composition
. The Participants hereby establish a Management Committee to determine overall policies, objectives, procedures, methods and actions under this Agreement and to provide general direction to the Manager. Except as provided in Section 7.6, the Management Committee shall consist of two members appointed by UPC and two members appointed by the USE Parties. Each Participant may appoint one or more alternates to act in the absence of a regular member. Any alternate so acting shall be deemed a member. Appointments shall be made or changed by notice to the other Participant.
7.2
Decisions
. Each Participant, acting through its appointed members shall have one vote on the Management Committee equal to its Participating Interest. Unless otherwise provided in this Agreement, the decisions of the Management Committee shall be determined by majority of the Participating Interests of the Participants.
7.3
Meetings
. The Management Committee shall hold regular meetings at least quarterly in Riverton, Wyoming, or at another mutually agreed place. The Manager shall give 15 days’ notice to the Participants of such regular meetings. Additionally, either Participant may call a special meeting upon 5 day’s notice to the Manager and the other Participant. In case of emergency, reasonable notice of a special meeting shall suffice. There shall be a quorum if at least one member representing each Participant is present. If a Participant fails to attend a regular or special meeting for which notice has been given as provided above, the Manager or the Participant calling the meeting, as applicable, may give a second notice of the meeting in compliance with the above rules for special meetings. If the non-attending Participant does not attend the meeting scheduled by the second notice, there shall be a quorum if at least one member of one Participant is present. Each notice of a meeting shall include an itemized agenda prepared by the Manager in the case of a regular meeting, or by the Participant calling the meeting in the case of a special meeting, but any matters may be considered with the consent of all Participants. The Manager shall prepare minutes of all meetings and shall distribute copies of such minutes to the Participants within 30 days after the meeting. The minutes, when signed by all Participants, shall be the official records of the decisions made by the Management Committee and shall be binding on the Manager and the Participants. If personnel employed in Operations are required to attend a Management Committee meeting, reasonable costs incurred in connection with such attendance shall be a Venture cost. All other costs shall be paid by the Participants individually.
7.4
Action Without Meeting
. In lieu of meetings, the Management Committee may hold telephone conferences, so long as all decisions are immediately confirmed in writing by the Participants.
7.5
Matters Requiring Approval
. The Management Committee shall have ultimate authority to determine all management matters related to this Agreement. This authority shall be delegated to the Manager and the Management Committee will provide overall direction and guidance to the Manager, who will be responsible for implementing approved Programs and Budgets and carrying out the overall objectives of this Venture, including but not limited to, the specific duties set forth in Section 8.2.
7.6
Change in the Management Committee
. If the Participating Interest of the Participant with two representatives and two votes on the Management Committee under Sections 7.1 and 7.2, respectively, is reduced to less than 45% and the other Participant has a Participating Interest greater than 45%, then the Management Committee shall be restructured such that the Participant with a Participating Interest greater than 45% shall be entitled to appoint three representatives to the Management Committee under Section 7.1 and the Participant with a Participating Interest of less than 45% shall be entitled to appoint two members to the Management Committee under Section 7.1.
ARTICLE VIII
MANAGER
8.1
Appointment
. The Participants hereby appoint the USE Parties as the Manager with overall management responsibility for Operations.
8.2
Powers and Duties of Manager
. Subject to the terms and provisions of this Agreement, the Manager shall have the following powers and duties which, except as provided in Section 9.1, shall be discharged in accordance with adopted Programs and Budgets:
(a)
The Manager shall manage, direct and control Operations.
(b)
The Manager shall implement the decisions of the Management Committee, shall make all expenditures necessary to carry out adopted Programs, and shall promptly advise the Management Committee if it lacks sufficient funds to carry out its responsibilities under this Agreement.
(c)
The Manager shall: (i) purchase or otherwise acquire all material, supplies, equipment, water, utility and transportation services required for Operations, such purchases and acquisitions to be made on the best terms available, taking into account all of the circumstances; (ii) obtain such customary warranties and guarantees as are available in connection with such purchases and acquisitions; and (iii) keep the Assets free and clear of all liens and encumbrances, except for those existing at the time of, or created concurrent with, the acquisition of such Assets, or mechanic’s or materialmen’s liens which shall be released or discharged in a diligent manner, or liens and encumbrances specifically approved by the Management Committee.
(d)
The Manager shall conduct such title examinations and cure such title defects as may be advisable in the reasonable judgment of the Manager.
(e)
The Manager shall: (i) make or arrange for all payments required by leases, licenses, permits, contracts and other agreements related to the Assets; (ii) pay all taxes, assessments and like charges on Operations and Assets except taxes determined or measured by a Participant’s sales revenue or net income. If authorized by the Management Committee, the Manager shall have the right to contest in the courts or otherwise, the validity or amount of any taxes, assessments or charges if the Manager deems them to be unlawful, unjust, unequal or excessive, or to undertake such other steps or proceedings as the Manager may deem reasonably necessary to secure a cancellation, reduction, readjustment or equalization thereof before the Manager shall be required to pay them, but in no event shall the Manager permit or allow title to the Assets to be lost as the result of the nonpayment of any taxes, assessments or like charges; and (iii) shall do all other acts reasonably necessary to maintain the Assets.
(f)
The Manager shall: (i) apply for all necessary permits, licenses and approvals; (ii) comply with applicable federal, state and local laws and regulations; (iii) notify promptly the Management Committee of any allegations of substantial violation thereof; and (iv) prepare and file all reports or notices required for Operations. The Manager shall not be in breach of this provision if a violation has occurred in spite of the Manager’s good faith efforts to comply, and the Manager has timely cured or disposed of such violation through performance, or payment of fines and penalties.
(g)
The Manager shall prosecute and defend, but shall not initiate without consent of the Management Committee, all litigation or administrative proceedings arising out of Operations. The non-managing Participant shall have the right to participate, at its own expense, in such litigation or
administrative proceedings. The non-managing Participant shall approve in advance any settlement involving payments, commitments or obligations in excess of $50,000 in cash or value.
(h)
The Manager shall provide insurance for the benefit of the Participants as provided in Exhibit E.
(i)
The Manager may dispose of Assets, whether by abandonment, surrender or Transfer in the ordinary course of business, except that Properties may be abandoned or surrendered only as provided in Article XIV. However, without prior authorization from the Management Committee, the Manager shall not: (i) dispose of Assets in any one transaction having a value in excess of $50,000; (ii) enter into any sales commitments for Product, except as permitted in Article XI; (iii) begin a liquidation of the Venture; or (iv) dispose of all or a substantial part of the Assets necessary to achieve the purposes of the Venture.
(j)
The Manager shall have the right to carry out its responsibilities hereunder through agents, Affiliates or independent contractors.
(k)
The Manager shall perform or cause to be performed during the term of this Agreement all assessment and other work and shall pay all rentals fees and assessments required by law in order to maintain the Properties and the State Lease. The Manager shall have the right to perform the assessment work required hereunder pursuant to a common plan of exploration and continued actual occupancy of such claims and sites shall not be required. The Manager shall not be liable on account of any determination by any court or governmental agency that the work performed by Manager does not constitute the required annual assessment work or occupancy for the purposes of preserving or maintaining ownership of the claims, provided that the work done is in accordance with the adopted Program and Budget. The Manager shall timely record with the appropriate county and file with the appropriate United States agency, affidavits in proper form attesting to the performance of assessment work or payment of the required fees or assessments, or notices of intent to hold in proper form, and allocating therein, to or for the benefit of each claim, at least the minimum amount required by law to maintain such claim or site.
(l)
If authorized by the Management Committee, the Manager may: (i) locate, amend or relocate any unpatented mining claim or mill site or tunnel site, (ii) locate any fractions resulting from such amendment or relocation, (iii) apply for patents or mining leases or other forms of mineral tenure for any such unpatented claims or sites, (iv) abandon any mining claims for the purpose of locating mill sites or otherwise acquiring from the United States rights to the ground covered thereby, (v) abandon any mill sites for the purpose of locating mining claims or otherwise acquiring from the United States rights to the ground covered thereby, (vi) exchange with or convey to the United States any of the Properties for the purpose of acquiring rights to the ground covered thereby or other adjacent ground, and (vii) convert any claims or mill sites into one or more leases or other forms of mineral tenure pursuant to any law hereafter enacted.
(m)
The Manager shall keep and maintain all required accounting and financial records pursuant to the Accounting Procedure and in accordance with customary cost accounting practices in the mining industry.
(n)
The Manager shall keep the Management Committee advised of all Operations by submitting in writing to the Management Committee: (i) monthly progress reports which include statements of expenditures and comparisons of such expenditures to the adopted Budget; (ii) periodic summaries of data acquired; (iii) copies of reports concerning Operations; (iv) a detailed final report within 60 days after completion of each Program and Budget, which shall include comparisons between actual and budgeted expenditures and comparisons between the objectives and results of Programs; and (v) such other reports as the Management Committee may reasonably request. At all reasonable times the Manager shall provide the
Management Committee or the representative of any Participant, upon the request of any member of the Management Committee, access to, and the right to inspect and copy all maps, drill logs, core tests, reports, surveys, assays, analyses, production reports, operations, technical, accounting and financial records, and other information acquired in Operations. In addition, the Manager shall allow the non-managing Participant, at the latter’s sole risk and expense, and subject to reasonable safety regulations, to inspect the Assets and Operations at all reasonable times, so long as the inspecting Participant does not unreasonably interfere with Operations.
(o)
The Manager shall undertake all other activities reasonably necessary to fulfill the foregoing.
(p)
The Manager shall not be in default of any duty under this Section 8.2 if its failure to perform results from the failure of the non-managing Participant to perform acts or to contribute amounts required of it by this Agreement.
8.3
Standard of Care
. The Manager shall conduct all Operations in a good, workmanlike and efficient manner, in accordance with sound mining and other applicable industry standards and practices, and in accordance with the terms and provisions of leases, licenses, permits, contracts and other agreements pertaining to Assets. The Manager shall not be liable to the non-managing Participant for any act or omission resulting in damage or loss except to the extent caused by or attributable to the Manager’s willful misconduct or gross negligence.
8.4
Resignation: Deemed Offer to Resign
.
(a)
The Manager may resign upon three months’ prior notice to the other Participant, in which case the other Participant may elect to become the new Manager by notice to the resigning Participant within 60 days after the notice of resignation.
(b)
If any of the following shall occur, the Manager shall be deemed to have offered to resign, which offer shall be accepted by the other Participant, if at all, within 90 days following such deemed offer:
(1)
The Participating Interest of the Manager becomes less than 50%; or
(2)
The Manager fails to perform a material obligation imposed upon it under this Agreement and such failure continues for a period of 60 days after notice from the other Participant demanding performance; or
(3)
The Manager fails to pay or contest in good faith its bills within 60 days after they are due.
(c)
If
(1)
A receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official for a substantial part of the Manager’s assets is appointed and such appointment is neither made ineffective nor discharged within 60 days after the making thereof, or such appointment is consented to, requested by, or acquiesced in by the Manager; or
(2)
The Manager commences a voluntary case under any applicable bankruptcy, insolvency or similar law now or hereafter in effect; or consents to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator or other similar official of any substantial part of its assets; or makes a
general assignment for the benefit of creditors; or fails generally to pay its debts or the debts of the Participants arising under this Agreement as such debts become due; or takes corporate or other action in furtherance of any of the foregoing; or
(3)
Entry is made against the Manager of a judgment, decree or order for relief affecting a substantial part of its assets by a court of competent jurisdiction in an involuntary case commenced under any applicable bankruptcy, insolvency or other similar law of any jurisdiction now or hereafter in effect;
the Manager shall be deemed to have resigned without any action by the other Participant.
(d)
If a petition for relief under the federal bankruptcy laws is filed by or against the Manager, and the removal of the Manager is prevented by the federal bankruptcy court, the Participants shall comprise an interim operating committee to serve until the Manager has elected to reject or assume this Agreement pursuant to the Bankruptcy Code, and an election to reject this Agreement by the Manager as a debtor in possession, or by a trustee in bankruptcy, shall be deemed a resignation as the Manager without any action by the other Participant. During the period of time the operating committee controls Operations, a third party acceptable to the non-managing Participant, the Manager and the federal bankruptcy court shall be selected as a member of the operating committee, and all actions shall require the approval of two members of the operating committee without regard to their interest in the Properties.
8.5
Payments to Manager
. The Manager shall be compensated for its services and reimbursed for its costs
as specified hereunder in accordance with the Accounting Procedure in Exhibit C.
8.6
Transactions With Affiliates
. If the Manager engages Affiliates to provide services hereunder, it shall do so on terms no less favorable than would be the case with unrelated persons in arm’s-length transactions.
8.7
Activities During Deadlock
. If the Management Committee for any reason fails to adopt a Program and Budget, subject to the contrary direction of the management Committee and to the receipt of necessary funds, the Manager shall continue Operations at levels comparable with the last adopted Program and Budget. For purposes of determining the required contributions of the Participants and their respective participating Interests, the last adopted Program and Budget shall be deemed extended. The Participants expressly agree that the Management Committee's authority shall include the authority to replace the Manager by majority vote.
8.8
Funding of Reclamation
. The Participants agree that funds shall regularly be set aside by the Venture during the term of this Venture in an amount sufficient to meet reclamation costs which are reasonably estimated to be required for reclamation for all Operations conducted pursuant to this Agreement after Operations cease. The Management Committee will periodically, but not less frequently than once a year, estimate the amount of funds which will be required for such purposes and will establish the amount of annual funding required which, together with interest thereon, will accumulate to such estimate. The estimated annual required funding will be made part of the Program and Budget and shall be satisfied by cash contributions from the Participants or the posting of a letter of credit or other form of surety. Provided, however, that if a Participant posts a letter of credit or other form of surety, that Participant shall be obligated to make additional contributions on an annual basis so that the value of the letter of credit or other surety equals the value of a cash contribution plus interest at the rate of return realized by investment of the cash contribution as provided in this Section 8.8. Funds will be deposited in an interest-bearing escrow account or such other revenue generating investment account as the Management Committee shall direct. withdrawals
from such accounts will be restricted to the specified purpose of paying end of mine life reclamation costs; provided, however, that the Management Committee may, from time-to-time, use such funds to perform reclamation that would otherwise have to be undertaken at the end of Operations so long as the ability to fund all such reclamation is not impaired. If any escrow funds remain after reclamation obligations have been fulfilled, they shall be distributed to the Participants in pro-portion to the Participants' Participating Interests.
8.9
Assumed Reclamation Burdens. On the Effective Date, both parties hereto shall equally assume all current and future reclamation liabilities on the Properties, except as provided for by Section 14 of the PSA.
ARTICLE IX
PROGRAMS AND BUDGETS
9.1
Programs and Budgets
. Plans of Operations shall be prepared for information purposes only, shall be delivered to the Management Committee and shall describe the Operations the Manager intends to conduct during the period covered by the applicable Plan of Operations. If the Manager desires to conduct Operations substantially different from those described in the current Plan of Operations, the Manager shall, at least five days before undertaking such other Operations, notify the Management Committee. The Manager shall not be obligated to fulfill every aspect of a Plan of Operations or to conduct the Operations described therein on any particular schedule.
(a)
The Manager shall:
(1)
Keep the Management Committee generally informed concerning all Operations conducted by the Manager with respect to or affecting the Properties:
(2)
Provide the Management Committee with monthly reports pertaining to Operations conducted on or for the benefit of the Properties, on or before March 31 of each year, furnish to the Management Committee a narrative report with all maps and sections prepared by appropriate field professionals, together with copies of all non-interpretive reports and data gathered on the Properties by the Manager.
(3)
Make available for inspection and copying by the Management Committee all non-interpretive reports, studies, and analyses concerning the Properties, and make all core and other samples available for inspection by the Management Committee;
(4)
Submit to the Management Committee on or before March 31 of each year a statement of Expenses incurred during the preceding year;
(5)
Make all payments and complete all obligations required to maintain the Properties in good standing and furnish proof to the Management Committee of the making of such payments;
(6)
Discharge the powers and duties of the manager, as provided in Section 8.2, and this Article 9; and
(7)
Prepare an initial Program and Budget for consideration by the Management Committee within 60 days following the Effective Date.
9.2
Operations Pursuant to Programs and Budgets
. Except as otherwise provided in Section 9.8 and Article XIII, operations shall be conducted, expenses shall be incurred, and Assets shall be acquired only pursuant to approved Programs and Budgets. Pro-grams and Budgets shall be designed to set forth in reasonable detail the scope, direction and nature of Operations and to establish a basis for Operations, but are not expected to constitute an enumerated list of each activity and expenditure to be undertaken by the Manager.
9.3
Presentation of Programs and Budgets
. Proposed Programs and Budgets shall be prepared by the Manager for such period as the Manager, in its reasonable discretion, shall determine. Each adopted Program and Budget, regardless of length, shall be reviewed at least once a year at a meeting of the Management Committee. The Manager shall prepare and submit to each Participant and the Management Committee prior to September 30 of each year a proposed Program and Budget for the following year or as often as otherwise desired by the Participants. Each such proposed Program and Budget shall be in a form and degree of detail sufficient to allow the non-Manager to make a reasonably informed determination concerning participation therein.
9.4
Review and Approval of Proposed Programs and Budgets
. Within 30 days after submission of a proposed Program and Budget consisting solely of Exploration Operations, or within 60 days after submission of a proposed Program and Budget that includes Development or Mining Operations, each Participant shall submit to the Management Committee:
(a)
Notice that the Participant approves the proposed Program and Budget; or
(b)
Proposed modifications of the proposed Program and Budget.
(c)
Notice that the Participant rejects the proposed Program and Budget.
If a Participant fails to give either of the foregoing responses within the allotted time, the failure shall be deemed to be an approval by the Participant of the Manager’s proposed Program and Budget. If a Participant makes a timely submission to the Management Committee pursuant to Section 9.4(b), then the Management Committee shall seek, for a period of one month in the case of an Exploration Program and Budget and for a period of two months in the case of a Development or Mining Program and Budget, to develop a Program and Budget acceptable to the Participants. At the end of such period, the Management Committee shall vote on any revised Program and Budget developed pursuant to the preceding sentence or, failing agreement by the Participants on a revised Program and Budget, shall vote on the original Program and Budget submitted by the Manager.
9.5
Election to Participate
. By notice to the Management Committee within 20 days after the final vote adopting a Program and Budget, a Participant may elect to contribute to such Program and Budget in some lesser amount than its respective Participating Interest, or not at all, in which cases its participating Interest shall be recalculated as provided in Article VI. If a Participant fails to so notify the Management Committee, the Participant shall be deemed to have elected to contribute to such Program and Budget in proportion to its respective Participating Interest as of the beginning of the period covered by the Program and Budget.
9.6
Deadlock on Proposed Programs and Budgets
. If the Participants, acting through the Management Committee, fail to approve a Program and Budget by the beginning of the period to which the proposed program and Budget applies, the provisions of Sections 8.7 and 12.2 shall apply.
9.7
Budget Overruns; Program Changes
. The Manager shall immediately notify the Management Committee of any material departure from an adopted Program and Budget. If the Manager exceeds the Budget (unless directly caused by an emergency or unexpected expenditure made pursuant to Section 9.8 or unless otherwise authorized by the Management Committee and incorporated into an amended Program and Budget), the excess shall be for the sole account of the Manager and such excess shall not be included in the calculations of the Participating Interests. Budget overruns of ten percent or less shall be borne by the Participants in proportion to their respective Participating Interest as of the time the overrun occurs.
9.8
Emergency or Unexpected Expenditures
. In case of emergency, the Manager may take any reasonable action it deems necessary to protect life, limb or property, to protect the Assets or to comply with law or government regulation. The Manager may also make reasonable expenditures for unexpected events which are beyond its reasonable control and which do not result from a breach by it of its standard of care. The Manager shall promptly notify the Participants of the emergency or unexpected expenditure, and the Manager shall be reimbursed for all resulting costs by the Participants in proportion to their respective Participating Interest at the time the emergency or unexpected expenditures are incurred.
ARTICLE X
ACCOUNTS AND SETTLEMENTS
10.1
Monthly Statements
. The Manager shall promptly submit to the Management Committee monthly statements of account reflecting in reasonable detail the charges and credits to the Joint Account during the preceding month.
10.2
Cash Calls
. On the basis of the adopted Program and Budget, the Manager shall submit to each Participant prior to the last day of each month, a billing for estimated cash requirements for the next month. The Manager shall promptly submit to each Participant billings for all other authorized expenditures as they occur. Within ten days after receipt of each billing, each Participant shall advance to the Manager its proportionate share of the estimated amount. Time is of the essence of payment of such billings. The Manager shall at all times maintain a cash balance approximately equal to the rate of disbursement for up to 30 days. All funds in excess of immediate cash requirements shall be invested in insured interest-bearing accounts for the benefit of the Joint Account.
10.3
Failure to Meet Cash Calls or Billings
. A Participant that fails to meet cash calls or billings in the amount and at the times specified in Section 10.2 shall be in default, and the amounts of the defaulted cash call shall bear interest from the date due at an annual rate equal to five percentage points over the Prime Rate, but in no event shall said rate of interest exceed the maximum permitted by law. The defaulting Participant shall have the right to cure such default by paying the amount of the defaulted billing and interest within seven days after notice of such default is given by the non-defaulting Participant. Unless the default is cured, the non-defaulting Participant shall have those rights, remedies and elections specified in Section 6.4.
10.4
Audits
. Within three months following the end of any calendar year after the Effective Date the Manager shall order an audit of the accounting and financial records for such calendar year (or other accounting period). The costs associated with such audit shall be charged to the Joint Account. All written exceptions to and claims upon the Manager for discrepancies disclosed by such audit shall be made not more than three months after receipt of the audit report. Failure to make any such exception or claim within the three-month period shall mean the audit is correct and binding upon the Participants. The audits shall be conducted by a firm of certified public accountants selected by the Manager, unless otherwise agreed by the Management Committee. Additional audits may be requested by any Participant at any time, the costs of
which shall be borne by the Participant requesting the same. Such additional audits shall not interfere with the performance of the audits chargeable to the Joint Account or alter the binding effect of such audits.
ARTICLE XI
DISPOSITION OF PRODUCTION
|
11.1
|
Marketing Agreement
. The Participants select the Manager to market and dispose of all Products produced from the Properties for the Participants, subject to the general oversight and direction of the Management Committee.,
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11.2
|
Distributions. Distribution of the proceeds from production shall be made on the terms set out in Article 7 of Exhibit “B”, Accounting Procedure.
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ARTICLE XII
WITHDRAWAL AND TERMINATION
12.1
Termination by Expiration or Agreement
. This Agreement shall terminate as expressly provided in this Agreement, unless earlier terminated by written agreement of the Participants.
12.2
Termination by Deadlock
. If the Management Committee fails to adopt a Program and Budget for 12 months after the expiration of the latest adopted Program and Budget, either Participant may elect to terminate this Agreement by giving notice of termination to the other Participant.
12.3
Withdrawal
. A Participant may elect to withdraw as a Participant from this Agreement by giving notice to the other Participant of the effective date of withdrawal, which shall be the later of the end of the then current Program and Budget or at least thirty days but not more than one year after the date of the notice. Upon such withdrawal, this Agreement shall terminate, and the withdrawing Participant shall be deemed to have transferred to the remaining Participant, without cost and free and clear of royalties, liens or other encumbrances arising by, through or under such withdrawing Participant, except those exceptions to title described in part 1 of Exhibit A and those to which both Participants have given their written consent after the date of this Agreement, all of its Participating Interest in the Assets and in this Agreement. Any withdrawal under this Section 12.3 shall not relieve the withdrawing Participant of its share of Liabilities, including Reclamation obligations, (whether such accrues before or after such withdrawal) arising out of Operations conducted prior to such withdrawal. For purposes of this Section 12.3, the withdrawing Participant’s share of such Liabilities shall be equal to its Participating Interest at the time such Liability was incurred.
Notwithstanding any other provision of this Agreement, a Participant that receives notice from the other Participant of the latter’s intended withdrawal from the Venture, may, by notice given prior to the effective date of such withdrawal, itself withdraw from the Venture, in which even there shall be a voluntary mutual termination of the Venture pursuant to Section 12.1, effective as of the date specified in the notice of the Participant first electing to withdraw.
12.4
Continuing Obligations
. On termination of this Agreement under Section 12.1 or 12.2, the Participants shall remain liable for continuing obligations hereunder until final settlement of all accounts and for any liability, whether it accrues before or after termination, if it arises out of Operations during the term of the Agreement.
12.5
Disposition of Assets on Termination
. Promptly after termination under Section 12.1 or 12.2, the Manager shall take all action necessary to wind up the activities of the Venture, and all costs and expenses incurred in connection with the termination of the Venture shall be expenses chargeable to the Venture. The Assets shall first be paid, applied, or distributed in satisfaction of all Liabilities of the Venture to third parties and then to satisfy any debts, obligations, or Liabilities owed to the Participants. Before distributing any funds or Assets to Participants, the Manager shall have the right to segregate amounts which, in the Manager’s reasonable judgment, are necessary to discharge continuing obligations or to purchase for the account of Participants, bonds or other securities for the performance of such obligations. The foregoing shall not be construed to include the repayment of any Participant’s capital contributions. Thereafter, any remaining cash and all other Assets shall be distributed (in undivided interests unless otherwise agreed) to the Participants (after making any adjustments required by Exhibit C) in accordance with their respective Participating Interests. No Participant shall receive a distribution of any interest in Products or proceeds from the sale thereof if such Participant’s Participating Interest therein has been terminated pursuant to this Agreement.
12.6
Non-Compete Covenants
. Neither a Participant that withdraws pursuant to Section 12.3, or is deemed to have withdrawn pursuant to Section 6.5, nor any Affiliate of such Participant, shall directly or indirectly acquire any interest in property within the Area of Mutual Interest for 12 months after the effective date of withdrawal. If a withdrawing Participant, or the Affiliate of a withdrawing Participant, breaches this Section 12.6, such Participant or Affiliate shall be obligated to offer to convey to the non-withdrawing Participant, without cost, any such property or interest so acquired. Such offer shall be made in writing and can be accepted by the non-withdrawing Participant at any time within 45 days after it is received by such non-withdrawing Participant.
12.7
Right to Data After Termination
. After termination of this Agreement pursuant to Section 12.1 or 12.2, each Participant shall be entitled to copies of all information acquired hereunder before the effective date of termination not previously furnished to it, but a termination or withdrawing Participant shall not be entitled to any such copies after any other termination or any withdrawal.
12.8
Continuing Authority
. On termination of this Agreement under Section 12.1 or 12.2 or the deemed withdrawal of a Participant pursuant to Section 6.3(b)(2),6.4(b)(2) or 6.5 or the withdrawal of a Participant pursuant to Section 12.3, the Manager shall have the power and authority, subject to control of the Management Committee, if any, to do all things on behalf of the Participants which are reasonably necessary or convenient to: (a) wind up Operations and (b) complete any transaction and satisfy any obligation, including Reclamation obligations, unfinished or unsatisfied, at the time of such termination or withdrawal, if the transaction or obligation arises out of Operations prior to such termination or withdrawal. The Manager shall have the power and authority to grant or receive extensions of time or change the method of payment of an already existing liability or obligation, prosecute and defend actions on behalf of the Participants and the Venture, mortgage Assets, and take any other reasonable action in any matter with respect to which the former Participants continue to have, or appear or are alleged to have, a common interest or a common liability.
ARTICLE XIII
ACQUISITIONS WITHIN AREA OF MUTUAL INTEREST
13.1
General
. This Agreement provides for the development of the Properties and additional mineral claims described in Exhibit A-2 constituting mineral claims located within a defined Area of Mutual Interest.
13.2
Terms of Development for Area of Mutual Interest Lands
. The terms of development for lands located within the Area of Mutual Interest is set out in Paragraph 11 of the PSA.
13.3
UPC’s Earn-In Contribution
. For each exploration project that is identified within the Area of Mutual Interest Lands for development, UPC will contribute the first $500,000 expenditure on each defined exploration project to a maximum of twenty (20) exploration projects within the Area of Mutual Interest Lands. After UPC has expended the first $500,000, each of the Participants will be deemed to have a 50% interest in and to the lands located within the Area of Mutual Interest and each such parcel shall thereafter be developed on the terms of this Agreement which shall apply mutatis mutandis to each separate and distinct project defined and developed within the Area of Mutual Interest. The deemed Initial Contribution of each of the Parties in each separate and distinct exploration project located within the Area of Mutual Interest Lands shall be $500,000 and on the date a separate mining joint venture is formed with respect to any of such lands, the USE Parties shall be liable to reimburse UPC for one half of any expenditure made in exploring and developing such lands above the amount of $500,000 required to be spent by UPC. Any interest or right to acquire any interest in real property within the Area of Mutual Interest acquired during the term of this Agreement by or on behalf of a Participant or any Affiliate shall be subject to the terms and provisions of this Agreement.
13.4
Notice to Non-acquiring Participant
. Within ten days after the acquisition of any interest or the right to acquire any interest in real property wholly or partially within the Area of Mutual Interest (except real property acquired by the Manager pursuant to a Program), the acquiring Participant shall notify the other Participant of such acquisition. The acquiring Participant’s notice shall describe in detail the acquisition, the lands and minerals covered thereby, the cost thereof, and the reasons why the acquiring Participant believes that the acquisition of the interest is in the best interest of the Participants under this Agreement. In addition to such notice, the acquiring Participant shall make any and all information concerning the acquired interest available for inspection by the other Participant.
13.5
Option Exercised
. If, within 21 days after receiving the acquiring Participant’s notice, the other Participant notifies the acquiring Participant of its election to accept a proportionate interest in the acquired interest equal to its Participating Interest, the acquiring Participant shall convey to the other Participant, by special warranty deed, such a proportionate undivided interest therein. The acquired interest shall become a part of the Properties for all purposes of this Agreement immediately upon the notice of such other Participant’s election to accept the proportionate interest therein. Such other Participant shall promptly pay to the acquiring Participant its proportionate share of the latter’s actual out-of-pocket acquisition costs to the acquiring Participant.
13.6
Option Not Exercised
. If the other Participant does not give such notice within the 30-day period set forth in Section 13.3, it shall have no interest in the acquired interest, and the acquired interest shall not be a part of the Properties or be subject to this Agreement.
ARTICLE XIV
ABANDONMENT AND SURRENDER OF PROPERTIES
14.1
Surrender or Abandonment of Property
. Except to the extent permitted in Article VIII or this Article XIV, neither Participant shall permit or cause any right, title or the Manager to surrender or abandon part or all of the Properties. The Management Committee may authorize the Manager to surrender or abandon part or all of the Properties. If the Management Committee authorizes any such surrender or abandonment over the objection of a Participant, the Participant that desires to abandon or surrender shall assign to the objecting Participant, by special warranty deed and without cost to the surrendering Participant,
all of the surrendering Participant’s interest in the property to be abandoned or surrendered, and the abandoned or surrendered property shall cease to be part of the Properties, provided, however, that the objecting Participant shall not conduct or permit any exploration, development or mining operations on any such abandoned or surrendered property assigned to it that would unreasonably interfere with Operations of the Venture.
14.2
Reacquisition
. If any Properties are abandoned or surrendered under the provisions of this Article XIV, then, unless this Agreement is earlier terminated in which case Section 12.6 shall remain applicable, neither Participant nor any Affiliate thereof shall acquire any interest in such Properties or a right to acquire such Properties for a period of two years following the date of such abandonment or surrender. If a Participant reacquires any Properties in violation of this Section 14.2, the other Participant may elect by notice to the reacquiring Participant within 45 days after it has actual notice of such reacquisition, to have such properties made subject to the terms of this Agreement. In the event such an election is made, the reacquired properties shall thereafter be treated as Properties, and the costs of reacquisition shall be borne solely by the reacquiring Participant and shall not be included for purposes of calculating the Participants’ respective Participating Interests. Notwithstanding the foregoing provisions of this Section 14.2, the Management Committee may authorize the reacquisition of any abandoned Properties, and the Participants shall each pay a proportionate share of the cost of reacquiring such Property and the reacquired Property shall thereafter be treated as part of the Properties.
ARTICLE XV
TRANSFER OF INTEREST
15.1
General
. A Participant shall have the right to Transfer to any third party all or any part of its interest in or to this Agreement, its Participating Interest, or the Assets solely as provided in this Article IV.
15.2
Limitations on Free Transferability
. The Transfer right of the Participant in Section 15.1 shall be subject to the following terms and conditions:
(a)
No transferee of all or any part of the interest of a Participant in this Agreement, any Participating Interest, or the Assets shall have the rights of a Participant unless and until the transferring Participant has provided to the other Participant notice of the Transfer, and except as provided in Sections 15.2(g) and 15.2(h), the transferee, as of the effective date of the Transfer, has committed in writing to be bound by this Agreement to the same extent as the transferring Participant;
(b)
Each Participant shall, if possible, attempt to structure any sale or assignment of part or all of its interest in any property subject to this Agreement so as not to cause a deemed termination of the tax partnership under Section 708(b)(1)(B) of the Code, but no Participant shall have any liability to any other Participant if the tax part-nership is deemed terminated on account of such sale or assignment; No participant, without the consent of the other Participant, shall make a Transfer which shall cause termination of the tax partnership established by the provisions of Section 4.2. If, contrary to Section 15.2(b), a Transfer is made which causes termination of the tax partnership established by Section 4.2, the transferring Participant shall indemnify the other Participant from and against any and all losses, costs, (including attorneys’ and accountants’ fees) claims or damages arising from or relating to such termination;
(c)
No Transfer permitted by this Article XV shall relieve the transferring Participant of its share of any liability, whether accruing before or after such Transfer, which arises out of Operations conducted prior to such Transfer;
(d)
As provided in Exhibit C, the transferring Participant and the transferee shall bear all tax consequences of the Transfer;
(e)
In the event of a Transfer of less than all of a Participating Interest, except for tax reporting and accounting purposes, the transferring Participant and its transferee shall act and be treated as one Participant;
(f)
No Participant shall Transfer any interest in this Agreement or the Assets except by Transfer of part or all of its Participating Interest;
(g)
If the Transfer is the grant of a security interest by mortgage, deed of trust, pledge, lien or other encumbrance of any interest in this Agreement, any Participating Interest or the Assets to secure a loan or other indebtedness of a Participant in a bona fide transaction, such security interest shall be subordinate to the terms of the Agreement and the rights and interests of the other Participant hereunder. Upon any foreclosure or other enforcement of rights in the security interest the acquiring third party shall be deemed to have assumed the position of the encumbering Participant with respect to this Agreement and the other Participant, and it shall comply with and be bound by the terms and conditions of this Agreement;
(h)
If a sale or other commitment or disposition of Products or proceeds from the sale of Products by a Participant upon distribution to it pursuant to Article XI creates in a third party a security interest in Products or proceeds therefrom prior to such distribution, such sales, commitment or disposition shall be subject to the terms and conditions of this Agreement;
(i)
If requested by the transferring Participant, the election provided for under section 754 of the Internal Revenue code of 1986, as amended, shall be made, provided that all costs attributable to making such election are borne solely by the requesting Participant and its transferee.
(j)
The following shall not be deemed a Transfer, nor shall the transferee be deemed an assignee for purposes of this Agreement:
(1)
a transfer by a Participant to an Affiliate, provided that the Participant shall continue to be liable for all obligations hereunder, and provided further that any transfer of less than all of a Participant’s Participating Interest shall be subject to the provisions of Section 15.2(e);
(2)
a transfer by a Participant of all or substantially all of its assets, or a sale of all shares of a corporate Participant by its parent corporation or other entity holding such shares, or such other corporate merger, consolidation or reorganization of a Participant, by which the surviving entity shall possess substantially all of the shares, or all of the property rights and interests, and shall be subject to substantially all of the liabilities and obligations of that Participant; provided, however, that the interest of the Participant in this Agreement and the Assets and its Participating Interest are not the sole assets of the Participant; provided further, however, that the transferee is or following the Transfer will be substantially similar in financial strength to the transferring Participant;
(3)
an incorporation of a Participant; or
(4)
a transfer by a Participant to a joint venture or partnership in which such Participant is a participating venturer or partner with a majority or controlling interest, provided that any transfer of less than all of a Participant’s Participating Interest shall be subject to the provisions of Section 15.2(e).
(k)
If the interest of a Participant in this Agreement and the Assets and its Participating Interest are all or substantially all of the assets of the Participant, or are not all or substantially all of its assets but the financial strength of the transferee will be substantially less than the financial strength of the transferring Participant, a sale of all shares of a corporate Participant or the sale of all shares of any Affiliate of a Participant (by which the Participant is effectively subject to new ownership or management) or such other corporate merger, consolidation or reorganization, shall be deemed a Transfer. A transfer by a Participant to a joint venture or partnership in which such Participant is a participating venturer or partner with a minority or non-controlling interest shall also be deemed a Transfer, provided that any transfer of less than all of a Participant’s Participating Interest shall be subject to the provisions of Section 15.2(e).
15.3
Preemptive Right
. Except as otherwise provided in Section 15.4, if a Participant desires to Transfer all or any part of its interest in this Agreement, any Participating Interest, or the Assets, the other Participant shall have a preemptive right to acquire such interests as provided in this Section 15.3.
(a)
A Participant intending to Transfer all or any part of its interest in this Agreement, any Participating Interest, or the Assets shall promptly notify the other Participant of its intentions. The notice shall state the price and all other pertinent terms and conditions of the intended transaction, and shall be accompanied by a copy of the offer or contract for sale. If any portion of the consideration to be received is in nonmonetary form, including an exchange of property, a transfer of securities or an undertaking to act or refrain from acting, the notice shall describe such consideration and its monetary value, based on the fair market value of such nonmonetary consideration. The other Participant shall have 60 days from the date such notice is delivered to notify the transferring Participant whether it elects to acquire the offered interest at the same price and on the same terms and conditions as set forth in the notice (or their monetary equivalent). If it does so elect, the transaction shall be consummated promptly after notice of such election is delivered to the transferring Participant.
(b)
If the other Participant fails to so elect within the period provided for in Section 15.3(a), the transferring Participant shall have 180 days following the expiration of such period to consummate the Transfer to a third party at a price and on terms no less favorable than those offered by the transferring Participant to the other Participant in the notice required in Section 15.3(a).
(c)
If the transferring Participant fails to consummate the Transfer to a third party within the period set forth in Section 15.3(b), the preemptive right of the other Participant in such offered interest shall be deemed to be revived. Any subsequent proposal to Transfer such interest shall be conducted in accordance with all of the procedures set forth in this Section 15.3.
15.4
Exceptions to Preemptive Right
. Section 15.3 shall not apply to the following:
(a)
The transfer referred to in Section 15.2(k);
(b)
The grant by a Participant of a security interest in any interest in this Agreement, any Participating Interest, or the Assets by mortgage, deed of trust, pledge, lien or other encumbrance; or
(c)
A sale or other commitment or disposition of Products or proceeds from sale of Products by a Participant upon distribution to it pursuant to Article XI.
ARTILCE XVI
DISPUTES
16.1
Default; Right to Cure
. If a Participant defaults in any of its obligations hereunder, other than a payment obligation, the non-defaulting Participant may give the defaulting Participant written notice thereof and specify the default or defaults relied on. If the defaulting Participant has not cured or begun to cure such default within a reasonable time after receipt of such notice (which shall not, in any case, be less than 30 days), the non-defaulting Participant may exercise its legal and equitable remedies; provided that if the defaulting Participant disputes that any default has occurred, the matter shall be determined by litigation in a court of competent jurisdiction, and if the court shall find the defaulting Participant in default hereunder, the defaulting Participant shall have reasonable time (which in any case shall not be less than 60 days from receipt by the defaulting Participant of notice of entry of final judgment adverse to the defaulting Participant) to cure such default.
ARTICLE XVII
CONFIDENTIALITY
17.1
General
. The financial terms of this Agreement and all information obtained in connection with the performance of this Agreement shall be the exclusive property of the Participants and, except as provided in Section 17.2, shall not be disclosed to any third party or the public without the prior written consent of the other Participant, which consent shall not be unreasonably withheld.
17.2
Exceptions
. The consent required by Section 17.1 shall not apply to a disclosure:
(a)
To an Affiliate, consultant, contractor or subcontractor that has a bona fide need to be informed;
(b)
To any third party to whom the disclosing Participant contemplates a Transfer of all or any part of its interest in or to this Agreement, its Participating Interest, or the Assets; or
(c)
To a governmental agency or to the public which the disclosing Participant believes in good faith is required by pertinent law or regulation or the rules of any stock exchange;
In any case to which this Section 17.2 is applicable, the disclosing Participant shall give notice to the other Participant concurrently with the making of such disclosure. As to any disclosure pursuant to Section 17.2(a) or (b), only such confidential information as such third party shall have a legitimate business need to know shall be disclosed and such third party shall first agree in writing to protect the confidential information from further disclosure to the same extent as the Participants are obligated under this Article XVII.
17.3
Duration of Confidentiality
. The provisions of this Article XVII shall apply during the term of this Agreement and for two years following termination of this Agreement pursuant to Section 12.1 or 12.2, and shall continue to apply to any Participant who withdraws, who is deemed to have withdrawn, or who Transfers its Participating Interest, for two years following the date of such occurrence.
17.4
Public Statements
. Without limiting the foregoing provisions of this Article XVII, no Participant shall make any public announcement or public disclosure with regard to the Venture, including Confidential Information and non-Confidential Information, without the prior written consent of the other Participant as to the content and timing of such announcement or disclosure, which consent shall not be unreasonably withheld; provided, however, that nothing in this Section 17.4 shall prevent a Participant from making such an announcement or disclosure which is required in the good faith judgment of such Participant by applicable law, regulation or stock exchange rule.
ARTICLE XVIII
GENERAL PROVISIONS
18.1
Notices
. All notices, payments and other required communications (“Notices”) to the Participants shall be in writing, and shall be addressed respectively as follows:
If to Uranium Power Corp. (formerly “Bell Coast Capital Corp.”):
Rahoul Sharan
President
#525 - 999 West Hastings Street
Vancouver, BC
CANADA V6C 2W2
Phone:
(604) 689-1810
Fax:
(604) 689-1817
E-Mail: rahoul@axion.net
If to U.S. Energy Corp. and or USE/CC
Keith G. Larsen
President and Director
877 North 8th West
Riverton, WY 82501
Phone:
(307) 856-9271
Fax:
(307) 857-3050
E-Mail:
keith@usnrg.com
All Notices shall be given (i) by personal delivery to the Participant, or (ii) by electronic communication or facsimile, with a confirmation sent by registered or certified mail return receipt requested, (iii) by registered or certified mail return receipt requested, (iv) or by commercial courier service. All Notices shall be effective and shall be deemed delivered (1) if by personal delivery on the date of delivery if delivered during normal business hours, and, if not delivered during normal business hours, on the next business day following delivery, (2) if by electronic communication on the next business day following receipt of the electronic communication, and (3) if solely by mail or commercial carrier, on the next business day after actual receipt. A Participant may change its address by Notice to the other Participant.
18.2
Waiver
. The failure of a Participant to insist on the strict performance of any provision of this Agreement or to exercise any rights, power or remedy upon a breach hereof shall not constitute a waiver of any provision of this Agreement or limit the Participant’s right thereafter to enforce any provision or exercise any right.
18.3
Modification
. No modification of this Agreement shall be valid unless made in writing and duly executed by the Participants.
18.4
Force Majeure
. Except for the obligation to make payments when due hereunder, the obligations of a Participant shall be suspended to the extent and for the period that performance is prevented by any cause, whether foreseeable or unforeseeable, beyond its reasonable control (“Force Majeure”),
including, without limitation, labor disputes (however arising and whether or not employee demands are reasonable or within the power of the Participant to grant); acts of God; laws, regulations, orders, proclamations, instructions or requests of any government or governmental entity; judgments or orders of any court, inability to obtain on reasonably acceptable terms any public or private license, permit or other authorization, curtailment or suspension of activities to remedy or avoid an actual or alleged, present or prospective violation of federal, state or local environmental standards, acts of war or conditions arising out of or attributable to war, whether declared or undeclared; riot, civil strife, insurrection or rebellion; fire, explosion, earthquake, storm, flood, sink holes, drought or other adverse weather condition; delay or failure by suppliers or transporters of materials, parts, supplies, services or equipment or by contractors’ or subcontractors’ shortage of, or inability to obtain, labor, transportation, materials, machinery, equipment, supplies, utilities or services; accidents; breakdown of equipment, machinery or facilities; or any other cause whether similar or dissimilar to the foregoing. The affected Participant shall promptly give notice to the other Participant of the suspension of performance, stating therein the nature of the suspension, the reasons therefore, and the expected duration thereof. The affected Participant shall resume performance as soon as reasonably possible. During the period of suspension the obligations of the Participants to advance funds pursuant to Section 10.2 shall be reduced to levels consistent with Operations.
18.5
Governing Law
. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Wyoming, except for its rules pertaining to conflicts of laws.
18.6
Rule Against Perpetuities
. Any right or option to acquire any interest in real or personal property under this Agreement must be exercised, if at all, so as to vest such interest in the acquirer within 21 years after the death of the last surviving descendent of George Bush who is alive as of the effective date of this Agreement.
18.7
Further Assurances
. Each of the Participants agrees to take from time to time such actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purpose of this Agreement.
18.8
Survival of Terms and Conditions
. The following Sections shall survive the termination of this Agreement to the full extent necessary for their enforcement and the protection of the Participant in whose favor they run: Sections 2.2 (Representations and Warranties), 4.5 (Other Business Opportunities), 6.4 (Default in Making Contributions), 6.5 Elimination of Minority Interest), 6.6 (Continuing Liabilities Upon Adjustments of Participating Interests), 10.3 (Failure to Meet Cash Calls or Billings), 12.3 (Withdrawal), 12.4 (Continuing Obligations), 12.5 (Disposition of Assets After Termination), 12.6 (Non-Compete Covenants), 12.7 (Right To Data After Termination), 12.8 (Continuing Authority), 14.2 (Reacquisition), and 17.3 (Duration of Confidentiality).
18.9
Currency
. Unless otherwise stated, all currency referred to herein is referred to in lawful currency of United States.
18.11
Entire Agreement; Successors and Assigns
. This Agreement contains the entire understanding of the Participants and supersedes all prior agreements and understandings between the Participants relating to the subject matter hereof. Providing nothing in this Agreement, however, shall in any way modify or alter the provisions of the terms and conditions of the PSA that pertain to UPC's obligations to purchase and the USE Parties' obligations to sell the property interests subject to that letter agreement. This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Participants. In the event of any conflict between this Agreement and any Exhibit attached hereto, the terms of this Agreement shall be controlling.
18.12
Memorandum
. At the request of either Participant, a Memorandum or short form of this Agreement, as appropriate, which shall not disclose financial information contained herein, shall be prepared and recorded by Manager. This Agreement shall not be recorded.
18.13
Interpretation and Severability
. In the event that any condition, covenant or other provision of this Agreement is held to be invalid or void by any court of competent jurisdiction, the same shall be deemed severable from the remainder of this Agreement and shall in no way affect any other condition, covenant or other provision of this Agreement. If such condition, covenant or other provision shall be deemed invalid due to its scope or breadth, such condition, covenant or other provision shall be deemed valid to the extent of the scope or breadth permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
BELL COAST CAPITAL CORP.
By
/s/ Rahoul Sharan
Its
President
U.S. ENERGY CORP.
By
/s/ Keith G. Larsen
Its
President
U.S. ENERGY CORP. and CRESTED CORP. dba as USECC, a JOINT VENTURE
U.S. ENERGY CORP.
By
/s/ Keith G. Larsen
Its
President
CRESTED CORP.
By
/s/ Harold F. Herron
Its
President
ROCKY MOUNTAIN GAS, INC.
PRE-ACQUISITION AGREEMENT
Dated February 22, 2005
TABLE OF CONTENTS
Page
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ARTICLE 1 THE OFFER
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2
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1.1
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General
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2
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1.2
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RMG Approval of the offer and Share Exchange Plan
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4
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1.3
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RMG Covenants
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4
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1.4
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Enterra Cooperation
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5
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1.5
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Public Disclosure
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5
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1.6
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Outstanding RMG Share Rights
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5
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1.7
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Outstanding Geddes Loan and Geddes Conversion Option
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5
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1.8
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No Registration of the Exchangeable Shares or the Underlying Trust Units
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5
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ARTICLE 2 COVENANTS OF RMG
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6
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2.1
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Ordinary Course of Business
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6
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2.2
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Non-Solicitation
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7
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2.3
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Access to Information
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9
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2.4
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Structure of Transaction
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9
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ARTICLE 3 DUE DILIGENCE/MATERIAL TITLE DEFECTS
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9
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3.1
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Due Diligence
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9
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3.2
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Deficiencies
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9
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3.3
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Time to Satisfy
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10
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ARTICLE 4 COVENANTS OF USE
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11
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4.1
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Covenants of RMG
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11
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4.2
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Transition Period
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11
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4.3
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Indemnity Respecting Legal Actions
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11
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4.4
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Indemnity Agreement
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11
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4.5
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Payment of 'Fair Value' of RMG Shares Held by Dissenters
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12
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ARTICLE 5 COVENANTS OF ENTERRA
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5.1
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Transition Period
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12
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5.2
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Rule 904 Cooperation
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12
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5.3
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Maintenance of Toronto Stock Exchange Listing; Covenant to Register Resale on Nasdaq in the Event of Delisting
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12
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ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF RMG, USE AND CRESTED
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6.1
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Representations
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12
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6.2
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Investigations
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13
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ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF ENTERRA
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13
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7.1
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Representations
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13
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ARTICLE 8 MUTUAL COVENANTS
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13
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8.1
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Consultation
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13
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8.2
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Further Assurance
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13
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ARTICLE 9 TERMINATION FEES AND THE DEPOSIT
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14
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9.1
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Termination Fees and the deposit
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14
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ARTICLE 10 TERMINATION
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15
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10.1
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Termination
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15
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ARTICLE 11 MISCELLANEOUS
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16
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11.1
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Amendment or Waiver
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16
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11.2
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Entire Agreement
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16
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11.3
|
Headings
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16
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11.4
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Notices
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16
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11.5
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Counterparts
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17
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11.6
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Expenses
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17
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11.7
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Assignment
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17
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11.8
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Severability
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17
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11.9
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Currency
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18
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ARTICLE 12 REGARDING FUTURE DISPOSITION OF EQUITY HOLDINGS IN PINNACLE GAS RESOURCES, INC.
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18
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12.1
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Disposition of Equity Holdings
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18
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12.2
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Payment Due on Disposition
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18
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12.3
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Application to Other Dispositions
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19
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12.4
|
No Limits on Disposition; No Payment Owed if Disposition is for Less then $10 Million
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19
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SCHEDULE "A" CONDITIONS OF COMPLETION OF THE OFFER
SCHEDULE "A" EXHIBIT 1 ALLOCATION OF CONSIDERATION
SCHEDULE "B" REPRESENTATIONS AND WARRANTIES OF RMG, USE AND CRESTED
SCHEDULE "C" REPRESENTATIONS AND WARRANTIES OF ENTERRA
SCHEDULE "D" ROCKY MOUNTAIN GAS, INC. AUDITED ANNUAL FINANCIAL STATEMENTS DECEMBER 31, 2004
SCHEDULE "E" INDEMNITY AGREEMENT
PRE-ACQUISITION AGREEMENT
THIS PRE-ACQUISITION AGREEMENT
is made effective as of the 22nd day of February, 2005;
AMONG
:
ENTERRA ENERGY TRUST
, an open-ended unincorporated trust governed by the laws of the Province of Alberta and having an office in the City of Calgary, Alberta (hereinafter called “
Enterra
”)
- and -
ROCKY MOUNTAIN GAS, INC.
, a body corporate incorporated under the laws of the State of Wyoming and having an office in the City of Riverton, Wyoming (hereinafter called “
RMG
”)
- and -
U.S. ENERGY CORP.
, a body corporate incorporated under the laws of the State of Wyoming and having an office in the City of Riverton, Wyoming (hereinafter called “
USE
”)
- and -
CRESTED CORP.
, a body corporate incorporated under the laws of the State of Colorado and having an office in the City of Riverton, Wyoming (hereinafter called “
Crested
”)
WHEREAS
:
|
A.
|
the board of directors of RMG wishes to have Enterra make an offer to the Shareholders of RMG to purchase all of the issued and outstanding shares of RMG by way of a Plan and Agreement of Share Exchange under Wyoming law (the “
Share Exchange Plan
”);
|
|
B.
|
as at the date hereof, RMG has issued outstanding common shares (the “
RMG Shares
”); as well as outstanding warrants and options to purchase common shares and Class A preferred shares convertible to common shares, (collectively the “
RMG Share Rights
”)and an option by Geddes and Company to convert an outstanding liability owing by USE (the “
Geddes Loan
”) to common shares of RMG (the “
Geddes Conversion Option
”);
|
|
C.
|
the board of directors of RMG has determined that it would be in the best interest of RMG and the holders of RMG Shares (“
the Shareholders
”) to (i) recommend approval of the Plan of Share Exchange; and (ii) cooperate with Enterra and take all reasonable action to support Enterra’s offer;
|
|
D.
|
the board of directors of RMG has determined that it would be in the best interests of RMG and its Shareholders for RMG to enter into this Agreement;
|
|
E.
|
Enterra has determined to offer to purchase all of the RMG Shares subject to the terms and conditions of this Agreement;
|
|
F.
|
USE and Crested have determined to vote their RMG Shares in favor of the Plan of Share Exchange subject to the terms and conditions of this Agreement, and to support the offer of Enterra by making indemnities, representations and warranties to Enterra respecting RMG; and
|
|
G.
|
Enterra has paid an earnest money deposit in the amount of $500,000 (the “
Deposit
”) to USE, which is being held by USE in a segregated escrow account.
|
NOW THEREFORE IN CONSIDERATION
of the mutual covenants hereinafter set out, the parties hereby agree as follows.
ARTICLE 1
THE OFFER
1.1.1
Subject to the terms and conditions set forth in this Agreement (including those set out in Schedule “A” hereto), Enterra offers to purchase all of the RMG Shares, on a fully diluted basis, for total aggregate consideration of $20,000,000. (The foregoing offer, as amended from time to time as permitted under this Agreement, is hereinafter referred to as the “
Offer
”.) RMG agrees to call a meeting of the Shareholders (the “
Meeting
”) to consider approval of the Offer and Share Exchange Plan, and to prepare and send to the Shareholders a proxy statement (the “
Circular
”), recommending approval of the Share Exchange Plan. Enterra agrees to cooperate with RMG to provide all information respecting Enterra required for the Circular. The Offer will be deemed made as of the date the Circular is sent to the Shareholders.
1.1.2
Subject to Section 1.1.6, the consideration payable for the RMG Shares shall be the issuance of 736,842 exchangeable shares (the “
Exchangeable Shares
”) at a stated value of $19.00 per Exchangeable Share and payment of cash in the amount of $6,000,002 (including the Deposit). Provided, that if, before or as of the date of completion of the Share Exchange Plan, all of the overriding royalty interests held by the secured lenders of outstanding debt owed by RMG I, LLC (approximately $3.539 million) are not purchased by USE for $266,000 and immediately completely extinguished, the cash consideration to be paid to the Shareholders shall be reduced by $266,000, pro rata for each Shareholder, which $266,000 (for purposes of this Section 1.1.2) is the agreed value of the overriding royalty interests. If the purchase price for all the interests is more than $266,000, Enterra shall pay the excess and shall not be entitled to a credit under this Agreement. If all or less than all the interests are purchased, for less than $266,000, then USE shall pay that amount and the difference between the amount paid and $266,000 shall be deducted, pro rata, from the cash consideration to be paid by Enterra to the Shareholders.
1.1.3
The form of documents for such extinguishment shall be subject to the prior approval of Enterra. USE shall be solely responsible for payment to the holders of the overriding royalty interests, and for recording their extinguishments.
1.1.4
Each Exchangeable Share shall be exchanged automatically on the first anniversary of the Effective Date (as hereinafter defined) for one trust unit (a “
Trust Unit
”) of Enterra.
1.1.5
If the Share Exchange Plan is approved, each Shareholder who does not perfect his or her rights under Wyoming law to dissent from the Share Exchange Plan shall receive the allocation of consideration between Exchangeable Shares and cash as set out on Exhibit 1 to Schedule “A,” to be provided to Enterra prior to the completion of the Share Exchange Plan. Each Shareholder’s right to receive the consideration shall be conditioned on Enterra’s receipt of his or her certificate(s) for the RMG Shares, with the Shareholder’s signature Medallion guaranteed. The aggregate amount of consideration was determined by approximately two-thirds of the consideration payable in Exchangeable Shares and approximately one-third in cash, adjusted as necessary for the receipt by each Shareholder of a whole number of Exchangeable Shares after aggregating all of the shareholdings of each Shareholder.
1.1.6
The parties hereto understand that as a trust, Enterra cannot issue shares and agree that the Exchangeable Shares shall be issued by one or more direct or indirect wholly owned subsidiaries, or any combination thereof (which, for the purposes hereof, may include a partnership, all of the partners of which are direct or indirect subsidiaries of Enterra), and, the parties further agree that all or any part of the cash component of the consideration may be provided by parties other than Enterra. The term “Enterra” as used herein will include Enterra Energy Trust, the issuer(s) of the Exchangeable Shares and all parties providing the cash component of the consideration, but Enterra will continue to be liable to RMG for any default in the performance of any obligations hereunder by any such entity, as more fully provided in this Agreement.
1.1.7
If a more effective alternative from the aspect of taxation other than the issuance of Exchangeable Shares is mutually agreed upon by the Parties prior to the mailing of the Circular, the Parties may agree upon a substitute mechanism for the issuance and distribution to the Shareholders of 736,842 Trust Units at a stated value of $19.00 per Trust Unit on the first anniversary of the Effective Date.
1.1.8
The Offer will expire on the earlier of (i) the completion of the Share Exchange Plan; (ii) the termination of this Agreement, or (iii) June 30, 2005 (or, if any such date is not a business day, on the next following business day), provided that the Offer may be extended, at the sole discretion of Enterra, if any of the conditions thereto set forth in Schedule “A” hereto is not satisfied on the expiry date of the Offer. Subject to the satisfaction or waiver of the conditions set forth in Schedule “A” hereto, Enterra will, within seven (7) calendar days following the Meeting, take up and pay for all RMG Shares. Enterra will use its best efforts to consummate the Offer, subject only to satisfaction of the terms and conditions set forth in this Agreement (including those set out in Schedule “A”).
1.1.9
Subject to completion of the Share Exchange Plan, it is agreed that payment of all of RMG’s general and administrative expenses up to the date of completion of the Share Exchange Plan (the date when Enterra pays for the RMG Shares) shall be the sole responsibility of USE. Payment of such expenses thereafter shall be the responsibility of RMG, or otherwise governed by the Transition Services Agreement. Subject to completion of the Share Exchange Plan, it is agreed that all other expenses of RMG (including, without limitation, lease operating and field expenses), beginning April 1, 2005, shall the sole responsibility of RMG.
1.1.10
Enterra expressly reserves the right to amend, extend, vary or waive any term or condition of the Offer, except that, without the prior written consent of RMG, Enterra will not: (i) reduce the consideration payable by Enterra pursuant to the Offer, as provided for herein; (ii) change the form of consideration payable under the Offer; or (iii) add to, amend or change any of the terms of the Offer in any manner adverse to the Shareholders (it being understood that an extension of the Offer or waiver of any condition thereto will not be considered to be a change adverse to the Shareholders). Enterra agrees to provide RMG with not less than two days prior written notice of any waiver or amendment of any term or condition of the Offer.
|
1.2
|
RMG Approval of the Offer and Share Exchange Plan
|
RMG hereby represents that its board of directors has determined unanimously (i) that the Offer and the Share Exchange Plan is fair to the Shareholders and is in the best interests of RMG and the Shareholders; (ii) the board of directors will unanimously recommend approval of the Share Exchange Plan by the Shareholders subject to Section 1.3, and (iii) the RMG officers and directors will vote their RMG Shares in favor of the Share Exchange Plan, provided that the Offer is not amended except in accordance with the terms of this Agreement. Such recommendation (and agreement by the RMG officers and directors to so vote) will be stated in the Circular.
1.3.1
Subject to the fiduciary obligations of its board of directors, RMG hereby covenants to cooperate with Enterra and to take all reasonable action to support the Offer and ensure that the Share Exchange Plan is accepted by the Shareholders.
1.3.2
As soon as practicable following the date hereof and in any event prior to the completion of the Share Exchange Plan, RMG will cause to be delivered to Enterra a list (in paper and electronic form, if available) as Exhibit 1 to Schedule A, made up to a date as of completion of the Share Exchange Plan, setting out the registered names of the Shareholders, their municipalities of residence, and the number of RMG Shares held by each. RMG will immediately give written notice to Enterra if RMG Shares are issued between February 22, 2005 and the completion of the Share Exchange Plan to Shareholder(s) resident in a state where no Shareholders were resident on February 22, 2005. RMG will also make such of its executive officers available for meetings with Shareholders as Enterra may reasonably request.
1.3.3
RMG will, on a confidential basis, provide Enterra with a draft copy of the Circular (and any amendments thereto), prior to the mailing thereof and will provide Enterra
with a reasonable opportunity to review and provide comments thereon. The Circular will set forth (among other things) the recommendation of the board of directors referred to in Paragraph 1.2(i) hereof and the agreement of the directors and officers referred to in Paragraph 1.2(ii) hereof. It is understood that the content of the Circular will be determined by the board of directors of RMG, acting reasonably, provided that such Circular will not contain any information or statements inconsistent with matters that are specifically addressed or provided for in this Agreement, and provided further that the information about Enterra which is contained in the Circular (as such information is approved by Enterra after review) will be the responsibility of Enterra as to its accuracy and completeness.
|
1.4
|
Enterra Cooperation
.
|
1.4.1
Enterra hereby covenants to cooperate with RMG and to take all reasonable action to support the Meeting and ensure that the Share Exchange Plan is accepted by the Shareholders.
1.4.2
Enterra will make such of its executive officers available for meetings with Shareholders as RMG may reasonably request.
1.4.3
Enterra will provide RMG with all information concerning Enterra that is required or reasonably desired to be provided in the Circular.
The parties will consult each other with respect to any public disclosures respecting this Agreement, the Offer and any matter related thereto prior to making any public disclosure.
|
1.6
|
Outstanding RMG Share Rights
.
|
Prior to completion of the Share Exchange Plan, all of the RMG Share Rights shall have been terminated.
|
1.7
|
Outstanding Geddes Loan and Geddes Conversion Option
.
|
Prior to or simultaneously with the completion of the Share Exchange Plan, USE shall have obtained the agreement of Geddes and Company that the collateral security for the Geddes Loan consisting of 4,000,000 RMG Shares held by USE and security in RMG’s interests in the Castle Rock area mineral leases shall be released and the Geddes Conversion Option shall have been either terminated or exercised in full or in part for additional RMG Shares (and if in part, the balance shall have been terminated), which additional shares (if any) will be issued and outstanding as of the date the Circular is sent to the Shareholders.
|
1.8
|
No Registration of the Exchangeable Shares or the Underlying Trust Units
.
|
RMG, USE and Crested acknowledge and agree that (i) neither the issuance of the Exchangeable Shares nor the underlying Trust Units into which the Exchangeable Shares may be exchanged have been or will be registered under the U.S. Securities Act or the securities laws of any state of the United States (and resale of the Trust Units by the Shareholders will not be so
registered, unless Enterra ceases to be listed on the Toronto Stock Exchange, as provided in Section 5.2) ; (ii) neither the Exchangeable Shares nor the underlying Trust Units into which the Exchangeable Shares may be exchanged may be offered or sold in the United States without registration under the U.S. Securities Act or compliance with requirements of an exemption from registration under the U.S. Securities Act and all applicable state laws, and (iii) Enterra is not obligated to file and has no present intention of filing with the U.S. Securities and Exchange Commission or with any state securities administrator any registration statement in respect of resale of the Common Shares in the United States.
ARTICLE 2
COVENANTS OF RMG
|
2.1
|
Ordinary Course of Business
.
|
RMG covenants and agrees that, prior to completion of the Share Exchange Plan, or the termination of this Agreement pursuant to its terms, unless Enterra otherwise agrees in writing or as otherwise expressly contemplated or permitted by this Agreement:
2.1.1
RMG will not, directly or indirectly, do or permit to occur any of the following:
(a)
pledge, lease, dispose of or encumber, or agree to pledge, lease, dispose of or encumber;
(b)
except in the usual, ordinary and regular course of business and consistent with past practice, any assets of RMG, except for the disposition of its equity holdings in Pinnacle Gas Resources Inc.;
(c)
amend or propose to amend its articles or by laws;
(d)
split, combine or reclassify any outstanding RMG Shares, or declare, set aside or pay any dividend or other distribution payable in cash, stock, property or otherwise with respect to the RMG Shares;
(e)
reorganize or merge RMG with any other person, corporation, partnership or other business organization whatsoever; or
(f)
incur or commit to incur any indebtedness for borrowed money or issue any debt securities except for the borrowing of working capital in the ordinary course of business and consistent with past practice other than renewals of existing credit facilities;
2.1.2
RMG shall promptly notify Enterra in writing of:
(a)
any material change (actual, anticipated, contemplated or, to the knowledge of RMG, threatened, financial or otherwise) in the business, affairs, operations, assets, liabilities (contingent or otherwise) or capital of RMG and its subsidiaries considered as a whole; or
(b)
any change in any representation or warranty set forth in Schedule B which change is or may be of such a nature as to render any such representation or warranty misleading or untrue in a material respect.
RMG shall in good faith discuss with Enterra any change in circumstances (actual, anticipated, contemplated or, to the knowledge of RMG, threatened, financial or otherwise) which is of such a nature that there may be a reasonable question as to whether notice need to be given to Enterra pursuant to this Section 2.1.2.
2.1.3
RMG will not (otherwise than as may be contemplated in this Section 2.1:
(a)
enter into any employment, severance or similar agreement, policy or arrangement with, or grant any bonuses, salary increases, severance or termination pay to or make any loan to, any officers or directors of RMG; or
(b)
hire any employees.
2.1.4
RMG will use reasonable commercial efforts to cause its current insurance (or re insurance) policies not to be cancelled or terminated or any of the coverage thereunder to lapse, unless simultaneously with such termination, cancellation or lapse, replacement policies underwritten by insurance and re insurance companies of nationally recognized standing providing coverage equal to or greater than the coverage under the cancelled, terminated or lapsed policies for substantially similar premiums are in full force and effect;
2.1.5
RMG will:
(a)
use reasonable commercial efforts to preserve intact their respective business organizations and goodwill, to keep available the services of its officers and consultants as a group and to maintain satisfactory relationships with suppliers, agents, distributors, customers and others having business relationships with it; and
(b)
not take any action that would render, or that reasonably may be expected to render, any representation or warranty made by it in this Agreement untrue in any material respect at any time prior to the Effective Date;
2.1.6
RMG will not enter into or modify in any material respect any contract, agreement, commitment or arrangement with respect to any of the matters set forth in this Section 2.1.
2.2.1
RMG shall not, directly or indirectly, through any officer, director, employee, representative or agent of RMG: (i) solicit, initiate or encourage (including, without limitation, by way of furnishing information or entering into any form of agreement, arrangement or understanding) any inquiries or proposals regarding any merger, amalgamation, take over bid, sale of substantial assets, sale of treasury shares or any similar transaction or transactions involving RMG (any of the foregoing inquiries or proposals being referred to herein as an “Acquisition Proposal”); or (ii) provide any confidential information to, participate in any
discussions or negotiations relating to any such transactions with, or otherwise cooperate with or assist or participate in any effort to take such action by, any corporation, person or other entity or group; provided, however, that nothing contained in this Section 2.2 or other provision of this Agreement shall prevent the board of directors of RMG from considering, negotiating, approving and recommending to the Shareholders an unsolicited, bona fide, written Acquisition Proposal for which adequate financial arrangements have been made, that the board of directors of RMG determines in good faith (after consultation with its financial advisors, and after receiving a written opinion of outside counsel, or advice of outside counsel that is reflected in the minutes of the board of directors of RMG, to the effect that the board of directors is required to do so in order to discharge properly its fiduciary duties to RMG) would, if consummated in accordance with its terms, result in a transaction financially superior for the Shareholders than the transaction contemplated by this Agreement (any such Acquisition Proposal being referred to herein as a “Superior Proposal”).
2.2.2
RMG previously has been approached by Silverado Exploration regarding a proposed purchase by Silverado Exploration of interests in RMG’s Castle Rock and Oyster Ridge properties. RMG shall not discuss such proposed purchase with Silverado Exploration without prior consultation with and approval by Enterra, unless this Agreement is terminated.
2.2.3
In the event that any Acquisition Proposal is for consideration other than all cash, then the value of that Superior Proposal shall be as determined by agreement by the financial advisors to Enterra and RMG, or failing such agreement, the value of the Superior Proposal shall be determined by the financial advisors to RMG alone.
2.2.4
RMG will, and will direct and use its best efforts to cause its officers, directors, consultants, representatives and agents to, immediately cease and cause to be terminated any existing discussions or negotiations with any parties (other than Enterra) with respect to any potential Acquisition Proposal. Subject to Section 2.2.5 below, RMG will immediately close any data rooms that may be open. RMG agrees not to release any third party from any confidentiality or standstill agreement to which RMG and such third party are a party. RMG will immediately request the return or destruction of all information provided to any third parties who have entered into a confidentiality agreement with RMG relating to a potential Acquisition Proposal and will use its best efforts to ensure that such requests are honored.
2.2.5
RMG will immediately notify Enterra of any future Acquisition Proposal or any request for non public information relating to RMG or for access to the properties, books or records of RMG by any person or entity that informs any member of the board of directors of RMG that it is considering making, or has made, an Acquisition Proposal. Such notice to Enterra will be made, from time to time, orally and in writing and will indicate such details of the proposal, inquiry or contact as Enterra may reasonably request including the identity of the person making such proposal, inquiry or contact.
2.2.6
RMG will not make available, after the date hereof, any material non public information to any party in connection with any potential or actual Acquisition Proposal. Notwithstanding the foregoing sentence of this Paragraph 2.2.6, in the event that the board of directors of RMG receives a request for material non public information from a party who proposes to RMG a bona fide Acquisition Proposal and the board of directors of RMG
determines in good faith that such proposal is a Superior Proposal as contemplated by Section 2.2.1, then, and only in such case, RMG may, subject to the execution of a confidentiality agreement substantially similar to that then in effect between RMG and Enterra, provide such party with access to information regarding RMG. RMG agrees to send a copy of any such confidentiality agreement to Enterra immediately upon its execution.
2.2.7
RMG will ensure that the officers, directors and employees of RMG and any investment bankers or other advisors or representatives retained by RMG are aware of the provisions of this Section 2.2, and RMG will be responsible for any breach of this Section 2.2 by such bankers, advisors or representatives.
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2.3
|
Access to Information
.
|
Subject to the existing Confidentiality Agreement between RMG and Enterra, dated January 6, 2005 and the provisions of existing confidentiality agreements between RMG and third parties restricting RMG from disclosing the existence of discussions or negotiations between RMG and such third parties occurring prior to the date hereof, upon reasonable notice RMG will afford Enterra’s officers, employees, counsel, accountants and other authorized representatives and advisors (“Representatives”) access, at all reasonable times from the date hereof and until the termination of this Agreement, to its properties, books, contracts and records as well as to its management personnel, employees and agents or advisors, and, during such period, RMG will furnish promptly to Enterra all information concerning its business, properties and personnel as Enterra may request and Enterra will hold in confidence all such information on the terms and subject to the conditions contained in the existing Confidentiality Agreement between RMG and Enterra.
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2.4
|
Structure of Transaction
.
|
RMG will cooperate with Enterra in structuring the acquisition by Enterra of RMG in a tax efficient manner, provided that no such cooperation will be required where such structuring will have an adverse effect on RMG or the existing Shareholders of RMG or cause any breach of or default under this Agreement by RMG.
ARTICLE 3
DUE DILIGENCE/MATERIAL TITLE DEFECTS
Subject to Enterra receiving the access to information contemplated by Section 2.3, Enterra will have until April 15, 2005 to complete a due diligence review of RMG’s assets, business, operations, title documents, financial records, corporate records, wells and facilities, and Enterra’s obligation to complete the Share Exchange Plan is conditional upon the due diligence review being satisfactory to Enterra in all material respects, under the procedures of Sections 3.2 and 3.3.
On or before April 15, 2005 Enterra shall give written notice to RMG of any material deficiencies (“Due Diligence Deficiencies”) identified in the due diligence review, the non-
satisfaction of which would cause Enterra to terminate this Agreement and not complete the Share Purchase Plan. “Materiality” in this Section shall be construed in the context of RMG’s business and assets. However, resolution as between Enterra and RMG of material defects in RMGs title to assets (“Material Title Defects” as defined in Section 3.3.2 below), where the Material Title Defects are not cured by April 30, 2005 under Section 3.3.1, shall be subject to Section 3.3.2.
3.3.1
RMG shall have until April 30, 2005 to satisfy any Due Diligence Deficiencies for which it has received written notice from Enterra pursuant to Section 3.2 to the satisfaction of Enterra, acting reasonably. The April 30, 2005 deadline may be extended by agreement of the parties, it being understood that satisfaction of a deficiency could require more time (for examples, difficulty in obtaining signature of lessors in an instance of title failure, or a delay in confirmation or amendment of a permit due to backlogs at a regulatory agency).
3.3.2
If any of the information or materials supplied by RMG relating to RMG’s title to mineral properties pursuant to Section 3.1, reflects the existence of any encumbrance, encroachment, defect in or objection to title that renders title to the properties defective or encumbered, and not cured by April 30, 2005 (subject to mutual extension of time), which defect in or objection to title makes such title unmarketable in accordance with accepted industry standards (“Material Title Defects”), then:
(a)
Enterra shall notify RMG in writing of the Material Title Defects as they are identified, providing RMG with adequate information to enable RMG to go forward with curing the Material Title Defects. RMG then shall furnish to Enterra all documentation reasonably satisfying the Material Title Defects.
(b)
If RMG is unable to cure the Material Title Defects before completion of the Share Exchange Plan, Enterra shall have the option to: (A) accept the properties as being owned by RMG, with the Material Title Defects, and adjust the consideration to be paid to the RMG Shareholders in an amount to be agreed upon between RMG and Enterra; (B) accept the properties as being owned by RMG, with the Material Title Defects, and go forward to resolve the Material Title Defects after completion of the Share Exchange Plan pursuant to (iii) below; or (C) terminate this Agreement and receive a refund of the Deposit from USE,
provided that for purposes of (A), t
he aggregate value of the Material Title Defects must exceed 5% of the aggregate consideration set out in Section 1.1.1 before any adjustment will be made; and
provided further
, that for purposes of (C), the aggregate value of the Material Title Defects must exceed 10% of such aggregate consideration before Enterra will have the right to terminate this Agreement.
(c)
If RMG is unable to cure the Material Title Defects before completion of the Share Exchange Plan, Enterra may elect to accept the properties as being owned by RMG, with the Material Title Defects, and the former officers of RMG shall continue to work with Enterra to resolve such Defects. USE shall hold in reserve (from its portion of the Share Exchange Plan consideration) cash and Exchangeable Shares sufficient to pay back to Enterra an amount equal to the value (agreed to by RMG and Enterra) of the mineral properties
in question, and shall pay that amount to Enterra (one-third in cash and two-thirds in Exchangeable Shares), if the Material Title Defects are not resolved to Enterra’s reasonable satisfaction on or before six months after completion of the Share Exchange Plan. Provided, that the amount which USE may be obligated to pay Enterra shall not exceed $1,000,000 in aggregate amount, under any circumstances. Enterra’s ‘reasonable satisfaction’ shall (a) be construed in accordance with industry title standards as applied to the coalbed methane business, and (b) not be unreasonably withheld.
(d)
Enterra shall give written notice to USE of all payments due from USE under subsection (c) before that six months date; and upon receipt by Enterra of full payment therefore, thereafter, no payments shall be due from USE, and all Material Title Defects then outstanding shall be deemed waived by Enterra as of that six months date. For clarity, the parties understand that if the Share Exchange Plan is completed (which for all purposes of this Agreement shall be defined to be the date when Articles of Share Exchange are filed with the Wyoming Secretary of State (which filing is to be made as soon as possible after Enterra pays for the RMG Shares), then, by way of example only, if that filing is made on May 15, 2005, then the six months date would be as of the close of business on November 15, 2005.
(e)
Material Title Defects which become subject to (b) or (c) above shall not be deemed to be breaches of the representations and warranties in paragraph 12 of Schedule B
ARTICLE 4
COVENANTS OF USE
USE, as the major and controlling Shareholder and the provider of personnel to RMG, shall cause RMG to perform and comply with its covenants and agreements set out herein.
Subject to the completion of the Share Exchange Plan, Enterra and USE shall enter into a Transition Agreement in the form attached as Schedule “E” hereto.
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4.3
|
Indemnity Respecting Legal Actions
.
|
Subject to the completion of the Share Exchange Plan, USE agrees to indemnify and save harmless RMG and Enterra, their respective officers, directors, employees, agents, shareholders and unitholders, from and against any and all legal actions, suits and claims of whatever nature by any third party respecting RMG or its operations and affairs arising prior to February 22, 2005; any judgments, settlements, or demands arising therefrom, and all expenses, costs and fees, including without limitation legal fees, pertaining thereto.
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4.4
|
Indemnity Agreement
.
|
Subject to the completion of the Share Exchange Plan, USE and Enterra shall enter into an indemnification agreement in the form attached as Schedule “E” hereto.
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4.5
|
Payment of ‘Fair Value’ of RMG Shares Held by Dissenters
.
|
Subject to completion of the Share Exchange Plan, USE shall pay to those Shareholders who perfect their rights as dissenters under Wyoming law the ‘fair value’ of their RMG Shares. Enterra shall not be responsible for any of such payments. The rights of Shareholders who wish to dissent from the Share Exchange Plan shall be set forth in the Circular.
ARTICLE 5
COVENANTS OF ENTERRA
Subject to the completion of the Share Exchange Plan, Enterra and USE shall enter into a Transition Agreement in the form attached as Schedule “E” hereto.
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5.2
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Rule 904 Cooperation
.
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Following completion of the Share Exchange Plan, Enterra shall cooperate in providing, promptly, documents and/or approval of submissions related to sale of the Trust Units on the Toronto Stock Exchange under SEC rule 904.
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5.3
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Maintenance of Toronto Stock Exchange Listing; Covenant to Register Resale on Nasdaq in the Event of Delisting
.
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For at least 24 months after issuance of the trust units, Enterra shall maintain its listing on the Toronto Stock Exchange. If Enterra is delisted from the Toronto Stock Exchange, for any reason, before the end of the 21st month after issuance of the Trust Units, Enterra shall (i) give notice thereof to the shareholders; and (ii) at Enterra’s sole expense, promptly file a registration statement with the sec and use its best efforts to have it declared effective as soon as possible, and make appropriate filings with state securities administrators, and keep those registrations in effect, until the sooner to occur of (i) all the Trust Units having been sold by the shareholders; (ii) at such time as all Trust Units held by a holder can be sold in a three month period pursuant to Rule 144; or (iii) the second anniversary of the original issue date of the Trust Units, in order to permit the public sale of the Trust Units on the Nasdaq National Market.
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ARTICLE 6
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REPRESENTATIONS AND WARRANTIES OF RMG, USE AND CRESTED
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Each of RMG, USE and Crested, on a joint and several basis, hereby represents and warrants to Enterra as set forth in Schedule “B” to this Agreement and acknowledges that Enterra is relying upon those representations and warranties in connection with the execution and delivery of this Agreement and the making of the Offer. These representations and warranties shall survive completion of the Share Exchange Plan for a period of two years.
Any investigation by Enterra and its advisors shall not mitigate, diminish or affect the representations and warranties of RMG, USE and Crested provided pursuant to this Agreement, except as those representations and warranties may be modified as a result of proper notice and cure under Article III. Where the provisions of Schedule “B” or elsewhere in this Agreement refer to disclosure in writing, such disclosure shall either be stated in this Agreement or be made expressly in response to the applicable provision (which shall be prominently identified) and shall be signed by a senior officer of RMG.
ARTICLE 7
REPRESENTATIONS AND WARRANTIES OF ENTERRA
Enterra hereby represents and warrants to each of RMG, USE and Crested as provided in Schedule “C” to this Agreement (and acknowledges that RMG, USE and Crested are relying upon such representations and warranties in connection with the execution and delivery of this Agreement). These representations and warranties shall survive completion of the Share Exchange Plan for a period of two years (except the representation and warranty contained in the last sentence of number 5, which shall terminate on the thirtieth day after such completion).
ARTICLE 8
MUTUAL COVENANTS
Subject to applicable securities laws and stock exchange rules, Enterra and RMG agree to consult with each other in issuing any press releases or otherwise making public statements with respect to the Share Exchange Plan or any other Acquisition Proposal and in making any filings with any federal, provincial, governmental or regulatory agency or with any securities exchange with respect thereto. Each party will use its best efforts to enable the other party to review and consent to all such press releases prior to release thereof.
Subject to the terms and conditions herein, Enterra and RMG agree to use their respective commercially reasonable efforts to take, or cause to be taken, all acts and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations, to consummate the transactions contemplated by this Agreement and the Share Exchange Plan., including the filing of Articles of Share Exchange with the Wyoming Secretary of State (promptly after completion of the Share Exchange Plan and payment to the Shareholders of the Exchangeable Shares and the cash) as required under Wyoming law RMG and Enterra will, and will cause each of their respective Subsidiaries to, use their commercially reasonable efforts to: (i) obtain all necessary waivers, consents and approvals from other parties to material loan agreements, leases and other contracts or agreements (including, in particular but without limitation, the agreement of any persons as may be required pursuant to any agreement, arrangement or understanding relating to RMG’s operations); (ii) obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, provincial or foreign law or regulations with respect to this Agreement or the Share Exchange Plan; (iii) lift or
rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby or by the Share Exchange Plan; and (iv) fulfill all conditions and satisfy all provisions of this Agreement and the Share Exchange Plan .
ARTICLE 9
TERMINATION FEES AND THE DEPOSIT
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9.1
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Termination Fees and the Deposit
.
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9.1.1
If at any time after the execution of this Agreement, RMG has complied with all representations, conditions and covenants of RMG contained herein, any Due Diligence Deficiencies of which RMG has been given notice in accordance with Section 3.2 have been satisfied to the satisfaction of Enterra, acting reasonably, by April 30, 2005 (subject to extension by agreement of the parties), and all conditions precedent for the benefit of Enterra have been either satisfied or waived, and
(a)
Enterra fails to take up and pay for the RMG Shares within 7 calendar days of the Meeting at which the Share Exchange Plan is approved, then Enterra shall pay to RMG $500,000 in immediately available funds to an account designated by RMG, within two business days after the first to occur of the events described above, and the Deposit shall become non-refundable to Enterra and may be transferred from the escrow account to any general account of USE together with any interest accrued thereon.
9.1.2
If at any time after the execution of this Agreement, Enterra has complied with all representations, conditions and covenants of Enterra contained herein (except to take up and pay for the RMG Shares), any Due Diligence Deficiencies of which RMG has been given notice in accordance with Section 3.2 have been satisfied to the satisfaction of Enterra, acting reasonably, by April 15, 2005, and all conditions precedent for the benefit of RMG have been either satisfied or waived, and:
(a)
RMG fails to hold the Meeting by June 23, 2005 (unless the failure is due to not sending the Circular to Shareholders at least 10 days before the RMG meeting of Shareholders, owing to delays in Enterra delivering information to RMG which is required to be in the Circular); or
(b)
the Shareholders fail to approve the Share Exchange Plan; or
(c)
RMG fails to fully comply with or breaches any of its representations, warranties or covenants made in this Agreement in any material respect, including, without limitation, the representations and covenants in Articles IV and VI (but not as to Material Title Defects which Enterra has elected to resolve under the provisions of Section 3.3.2(b) or (c)) then RMG shall pay to Enterra $500,000 in immediately available funds to an account designated by Enterra, and USE shall refund to Enterra the Deposit together with any interest accrued thereon, within two business days after the first to occur of the events described above.
9.1.3
If at any time after the execution of this Agreement, both RMG and Enterra have complied with all representations, conditions and covenants of each contained
herein (except of Enterra to take up and pay for the RMG Shares), but all Due Diligence Deficiencies of which RMG has been given notice in accordance with Section 3.2 have not been satisfied to the satisfaction of Enterra, acting reasonably, by April 15, 2005 and Enterra terminates this Agreement as a consequence thereof, no termination fee shall be payable by either Enterra or RMG to the other, but USE shall refund to Enterra the Deposit together with any interest accrued thereon, within two business days after receipt of Enterra’s notice to terminate.
9.1.4
If the Share Exchange Plan is completed, the Deposit together with all interest accrued thereon shall form part of the cash component of the consideration payable to USE for its RMG Shares.
ARTICLE 10
TERMINATION
This Agreement may be terminated at any time prior to the date on which Enterra takes up and pays for the RMG Shares:
10.1.1
by mutual written consent of the parties;
10.1.2
by Enterra if (i) the Meeting has not been held by June 23, 2005 (subject to Section 9.1.2(a)); (ii) the Share Exchange Plan is not approved by the Shareholders at the Meeting; (iii) subject to Section 4.5, the number of RMG Shares for which dissent rights under Wyoming law have been exercised are not satisfactory to Enterra in its sole discretion; or (iv) any Due Diligence Deficiencies of which RMG has been given notice pursuant to Section 3.2 have not been satisfied to the satisfaction of Enterra, acting reasonably, by April 15, 2005, subject to extension by agreement of the parties (but this clause (iii) shall not apply as to Material Title Defects which Enterra has elected to resolve under the provisions of Section 3.3.2(b) or (c));
10.1.3
by RMG, USE or Crested if Enterra is in material breach of any of its material covenants, agreements or representations or warranties contained in this Agreement; or by Enterra if any of RMG, USE or Crested is in material breach of any of its respective material covenants, agreements or representations or warranties contained in this Agreement; or
10.1.4
by Enterra if any of the conditions set forth in Section 1.3 hereof are not satisfied prior to the date specified therein.
In the event of the termination of this Agreement as provided in this Section 10.1: (i) this Agreement shall forthwith become void and there shall be no liability on the part of Enterra, RMG, USE or Crested hereunder except with respect to the obligations set forth in Section 9.1, as applicable, for refund of the Deposit and/or payment of a termination fee, which will survive such termination; (ii) if such termination occurs prior to the purchase of RMG Shares pursuant to the Offer, the Offer shall be terminated without any RMG Shares being purchased.; and (iii) the confidentiality agreements between the parties shall continue in effect.
ARTICLE 11
MISCELLANEOUS
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11.1
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Amendment or Waiver
.
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This Agreement may be amended, modified or superseded, and any of the terms, covenants, representations, warranties or conditions hereof may be waived, but only by written instrument executed by Enterra , RMG, USE and Crested; provided, however, that either Enterra or RMG may in its discretion waive a condition herein which is solely for its benefit without the consent of the other parties. No waiver of any nature, in any one or more instances, will be deemed or construed as a further or continued waiver of any condition or any breach of any other term, representation or warranty in this Agreement.
This Agreement and the documents referred to herein constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements, arrangements or understandings with respect thereto, including without limitation the letter of intent among the parties dated February 22, 2005.
The descriptive headings contained in this Agreement are for convenience of reference only and shall not control or affect the meaning or construction of any provision of this Agreement.
All notices or other communications which are required or permitted hereunder shall be communicated confidentially and in writing and shall be sufficient if delivered personally or by overnight courier service, or sent by confidential facsimile (with confirmation of receipt) addressed as follows:
To Enterra
-
2600, 500 - 4th Avenue S.W.
Calgary, Alberta T2P 2V6
Attention: Marcia L. Johnston, Esq.
Facsimile: 403 265 1241
with a copy to
-
Dorsey & Whitney LLP
Attorneys at Law
1420 Fifth Avenue, Suite 3400
Seattle, Washington 98101
Attention: Kimberley Anderson, Esq.
Facsimile: 206-903-8820
To RMG, USE and Crested:
-
877 N. 8th West
Riverton, Wyoming 82501
Attention: Steve R. Youngbauer, Esq.
Facsimile: 307-857-3050
with a copy to
-
Stephen E. Rounds, Esq.
Attorney at Law
1544 York Street, Suite 110
Denver, Colorado 80206
Facsimile: 303-377-0231
This Agreement may be executed in any number of counterparts and each such counterpart will be deemed to be an original instrument and all such counterparts together shall constitute but one Agreement.
Each party shall be responsible for the payment of all legal, accounting and other fees incurred by it in connection with the transactions described herein. Enterra and RMG represent and warrant to each other that no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission, or to the reimbursement of any of its expenses, in connection with the transaction.
In accordance with Paragraph 1.1.6, Enterra may assign all or any part of its rights or obligations under this Agreement (i) relating to the issue of the Exchangeable Shares to one or more direct or indirect wholly owned subsidiaries of Enterra or any combination thereof (which may include a partnership all of the partners of which are direct or indirect subsidiaries of Enterra, Enterra or any combination thereof), and (ii) relating to all or part of the cash component of the consideration to third parties; but, if any such assignment(s) take place, Enterra will continue to be liable to the Shareholders for the full amount of any default in the performance of obligations hereunder by an assignee. In the event of such a default, Enterra’s liability to the Shareholders shall be absolute, unconditional, and immediate. RMG shall not be required to take any actions or give any notices in order for Enterra’s liability, in the event of such a default, to be absolute, unconditional and immediately due and payable to the Shareholders . This Agreement shall not otherwise be assignable by any party without the prior written consent of the other parties.
If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement will remain in full force and effect and
will in no way be affected, impaired or invalidated and the parties will negotiate in good faith to modify the Agreement to preserve each party’s anticipated benefits under the Agreement.
All dollar amounts in this Agreement are expressed in currency of the United States of America.
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ARTICLE 12
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REGARDING FUTURE DISPOSITION OF EQUITY HOLDINGS IN PINNACLE GAS RESOURCES, INC.
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12.1
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Disposition of Equity Holdings
.
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Before or as of the date of the completion of the Share Exchange Plan, RMG shall have disposed of all of its Equity Holdings in Pinnacle Gas Resources, Inc. (“Pinnacle”) by assignment of such Equity Holdings to USE. For purposes of this Article 12, “Equity Holdings” means (i) any and all shares, and warrants and other rights to acquire shares and other capital stock of Pinnacle; (ii) any and all liabilities, duties and obligations associated with such shares, warrants and other rights; and (iii) any and all other rights to participate in a distribution of Pinnacle assets (whether on liquidation, a sale of assets, or otherwise).
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12.2
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Payment Due on Disposition
.
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If at any time after completion of the Share Exchange Plan,
12.2.1
(a) Pinnacle’s shares are listed for trading on an exchange or Nasdaq, and the value of the Equity Holdings held by USE at any time thereafter equals at more than $12 million for 15 consecutive trading days (the “First Measurement Period),” computed on the basis of simple averaging of the closing prices for the Pinnacle stock during the Measurement Period, regardless of whether USE is subject to a lockup agreement for the Equity Holdings, then USE shall pay Enterra (on or before the 15
th
consecutive trading day following the First Measurement Period) $2 million, in cash, common stock of USE, a portion of the Equity Holdings then owned by USE, or a combination of cash and such USE stock and Equity Holdings, at USE’s sole election. If the value of the Equity Holdings is more than $10 million but less than $12 million for all the trading days in any 90 calendar period (the “Second Measurement Period”), computed on the basis of simple averaging of the closing prices for the Pinnacle stock during the Second Measurement Period, regardless of whether USE is subject to a lockup agreement for the Equity Holdings, then USE shall pay Enterra (on or before the 15
th
consecutive trading day following the Second Measurement Period) the difference between $12 million and the value of the Equity Holdings as so determined in the Second Measurement period, in cash, common stock of USE, a portion of the Equity Holdings then owned by USE, or a combination of cash and such USE stock and Equity Holdings, at USE’s sole election, and no further amount will be owed to Enterra under this Section 12.2.1.
(b) A payment in USE common stock shall be valued at the average Nasdaq Official Close Price for USE stock for the 15 consecutive trading days following the Measurement Period. If paid in stock, such stock shall be restricted under rule 144 of the Securities Act of 1933, however, USE shall (i) as soon as practicable after issuance of the stock,
to Enterra, file with the SEC, for the benefit of Enterra, a resale registration statement for the public sale of such stock; (ii) use its best efforts to have that registration statement declared effective by the SEC as soon as practicable; (iii) if necessary, qualify the public sale of such stock under the securities laws of one state of Enterra’s choice; and (iv) keep that registration statement effective under the Securities Act of 1933 (and the laws of the one state, if necessary) for a period of 12 months after being declared effective, all at USE’s sole expense. Any payment to Enterra with a portion of the Equity Holdings then held by USE shall be computed on the basis of simple averaging of the closing prices for the Pinnacle stock during the Measurement Period.
12.2.2
Pinnacle or Pinnacle’s assets is or are acquired by a third party, and USE receives at least $12 million for its Equity Holdings (regardless of how that amount is paid), then USE shall pay Enterra (on or before the 15
th
consecutive trading day after the closing of the sale of Pinnacle or Pinnacle’s assets), $2 million, in cash, common stock of USE, a portion of the securities received from the acquiror of Pinnacle or Pinnacle’s assets, or a combination of cash and such USE stock and securities of the acquiror, at USE’s sole election. The value of the acquiror’s securities received in the transaction shall be computed on the basis of simple averaging of the closing prices for the acquiror’s stock during the 15 consecutive trading days after closing of the sale of Pinnacle or Pinnacle’s assets, regardless of whether USE is subject to a lockup agreement for the acquiror’s securities. If the value of the consideration received by USE is more than $10 million but less than $12 million, the amount owed to Enterra shall be the amount in excess of $10 million. Section 12.2.1(b) shall apply if the payment to Enterra under this Section 12.2.2 is to be made in USE stock, After payment has been made under this Section 12.2.2, no further amount will be owed to Enterra under this Section 12.2.2.
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12.3
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Application to Other Dispositions
.
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The parties agree that the foregoing obligation of USE to pay up to $2 million to Enterra also shall apply, using the same mechanisms as set forth in Section 12.2, if USE disposes of its Equity Holdings in Pinnacle by any means other than set forth in this Article 12. If the Equity Holdings are acquired for consideration including stock in a private company, the value of the that stock shall be determined by an independent qualified appraiser to be selected by agreement of Enterra and USE.
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12.4
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No Limits on Disposition; No Payment Owed if Disposition is for Less than $10 Million
.
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The parties agree that nothing in this Article 12 shall operate to limit USE’s right to dispose of the Equity Holdings to a non-affiliated third party in any manner. The parties agree that if a disposition to a non-affiliated third party results in proceeds to USE of less than $10 million, USE shall not owe Enterra any amount under this Article 12.
IN WITNESS WHEREOF
the parties hereto have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized on April __, 2005 and effective as of the date first written above.
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ENTERRA ENERGY TRUST
by its Administrator,
ENTERRA ENERGY CORP.
Per:
/s/ Reg J. Greenslade
Reg J. Greenslade, President and CEO
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ATTEST:
By:
/s/ Daniel P. Svilar
Daniel P. Svilar, Secretary
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ROCKY MOUNTAIN GAS, INC.
By:
/s/ March J. Larsen
Mark J. Larsen, President
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ATTEST:
By:
/s/ Daniel P. Svilar
Daniel P. Svilar, Secretary
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U.S. ENERGY CORP.
By:
/s/ Keith G. Larsen
Keith G. Larsen, President
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ATTEST:
By:
/s/ Daniel P. Svilar
Daniel P. Svilar, Secretary
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CRESTED CORP.
By:
/s/ Harold F. Herron
Harold F. Herron, President
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SCHEDULE “A”
CONDITIONS OF COMPLETION OF THE OFFER
Capitalized terms in the following conditions shall have the meanings ascribed to such terms in the Pre-Acquisition Agreement of which this Schedule “A” is attached and forms a part. Completion of the Offer shall by subject to the satisfaction of the following conditions:
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(1)
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Prior to the Effective Date and at the time Enterra shall first take up and pay for the RMG Shares under the Offer, the Share Exchange Plan shall have been approved by the Shareholders at the Meeting, and, subject to Section 4.5, the number of RMG Shares for which dissent rights have been exercised, if any, shall be satisfactory to Enterra in its sole discretion.
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(2)
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All government and regulatory approvals, orders, rulings, exemptions and consents (including, without limitation, those of any stock exchanges or securities or other regulatory authorities) that are necessary or desirable shall have been obtained and shall be in full force and effect. Enterra
shall have received evidence satisfactory to it that fewer than 35 of RMG shareholders do not satisfy the definition of "accredited investor" as defined in Rule 501(a) under the Securities Act of 1933, as amended, and that any such shareholders that are not “accredited investors” either alone or with his purchaser representative has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the Offer and the securities to be received in the Offer.
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(3)
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No act, action, suit or proceeding shall have been threatened or taken before or by any domestic or foreign court or tribunal or governmental agency or other regulatory authority or administrative agency or commission by any elected or appointed public official or by any private person in the United States, Canada or elsewhere, whether or not having the force of law, and no law, regulation or policy shall have been proposed, enacted, promulgated or applied, whether or not having the force of law:
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(a)
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that has the effect or may have the effect to enjoin, prohibit or impose material limitations, damages or conditions on the purchase by, or the sale to, Enterra, of the RMG Shares or the right of Enterra to own or exercise full rights of ownership of the RMG Shares; or
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(b)
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that has had or may have a material adverse effect on RMG or Enterra and its subsidiaries considered on a consolidated basis.
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(4)
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There shall not exist any prohibition at law against Enterra making the Offer or taking up and paying for all of the Shares under the Share Exchange Plan.
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(5)
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There shall not have occurred (and there shall not have been publicly disclosed, and Enterra shall not have otherwise learned of, if previously not publicly disclosed) any change (or any condition, event or development involving a prospective change) not publicly disclosed prior to the announcement of the Offer
n the business, operations, assets, capitalization, financial condition, licenses, permits, rights, liabilities, prospects or privileges, whether contractual or otherwise, of RMG or any of its subsidiaries considered as a whole which, in the sole judgment of Enterra, acting reasonably, is materially adverse to the business of RMG or to the value of the RMG Shares to Enterra.
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(6)
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There shall not have occurred any material breach by any RMG, USE, Crested or Enterra of any of the terms of the Pre Acquisition Agreement or any termination of the Pre Acquisition Agreement pursuant to the terms thereof.
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(7)
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The representations and warranties set out in the Pre-Acquisition Agreement shall be true in all material respects.
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(8)
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There shall not be any Due Diligence Deficiencies outstanding and unsatisfied.
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(9)
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The RMG Shares Rights and the Geddes Conversion Option shall not be outstanding.
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(10)
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There shall be been no material changes to the financial condition of RMG as set out on the Financial Statements and the debt shall not exceed $3.539 million.
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(11)
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Prior to the completion of the Share Exchange Plan, RMG shall have disposed of all of its equity holdings in Pinnacle Gas Resources, Inc. and any and all liabilities associated therewith.
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The foregoing conditions that are for the exclusive benefit of Enterra or RMG, may be waived by Enterra or RMG, as applicable, in whole or in part at any time and from time to time, both before or after the Expiry Date.
SCHEDULE “B”
REPRESENTATIONS AND WARRANTIES OF RMG, USE AND CRESTED
Capitalized terms in the following representations and warranties shall have the meanings ascribed to such terms in the Pre-Acquisition Agreement of which this Schedule “B” is attached and forms a part.
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(1)
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Organization
. RMG is an entity duly organized, validly existing and in good standing under the laws of the State of Wyoming, has full requisite power and authority to carry on its business as it is currently being conducted and to own, lease and operate the properties currently owned, leased and operated by it, and is duly registered to do business and is in good standing in each jurisdiction in which the character of its properties, owned or leased, or the nature of its activities make such registration necessary, except where the failure to be so registered or in good standing would not have a material adverse effect on RMG..
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(2)
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Material Subsidiaries and Secured Debt of RMG I, LLC
. RMG has no material subsidiaries other than RMG I LLC, which is wholly owned by RMG and which holds the assets and liabilities acquired by RMG from Hi - Pro Production, LLC. RMG I, LLC owes approximately $3.539 million of secured debt. Upon completion of the Share Exchange Plan, Enterra will own RMG and its subsidiary RMG I, LLC, and that debt will continue to be outstanding.
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(3)
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Capitalization
. As of the date the Circular is sent to the Shareholders, there shall be no outstanding RMG Share Rights. As of the date Enterra takes up and pays for the RMG Shares, Geddes and Company shall have agreed to release the RMG Shares and the RMG properties which collateralize the Geddes Loan, and to have exercised or canceled the Geddes Conversion Option, such release, exercise or cancellation to be effective on the same date Enterra takes up and pays for the RMG Shares. RMG and USE shall provide the form of agreement for such release, exercise or cancellation for Enterra’s review and approval. The RMG Shares have been duly authorized and validly issued as fully paid and non assessable and are not and will not be subject to, and were not and will not be issued in violation of any pre emptive rights or other rights of any person. RMG will provide a certified list of the Shareholders and the number of RMG Shares owned by each, as of the date of the Offering Circular, and amend that list as necessary for any Shareholders who dissent. Except as described in this paragraph 3, there are no options, warrants, conversion privileges or other rights, agreements, arrangements or commitments obligating RMG to issue or sell any shares in the capital of RMG or securities or obligations of any kind convertible into or exchangeable for any shares in the capital of RMG, or any other person, nor are there outstanding any stock appreciation rights, phantom equity or similar rights, agreements, arrangements or commitments based upon the book value, income or any other attribute of RMG.
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(4)
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Authority
. Each of RMG, USE and Crested has the requisite corporate power and authority to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement by RMG, USE and Crested and the consummation by RMG of the transactions contemplated by this Agreement have been duly authorized by the respective boards of directors of RMG (unanimously in the case of the RMG board of directors), and by USE and Crested, and no other corporate proceedings on the part of RMG (except for obtaining Shareholder approval for the Share Exchange Plan) are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of RMG, USE and Crested and constitutes a valid and binding obligation of each, enforceable against each in accordance with its terms subject to securities laws, bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other laws relating to or affecting creditors’ rights generally and to general principles of equity. The execution and delivery by RMG of this Agreement and performance by it of its obligations hereunder and the completion of the Share Exchange Plan and the transactions contemplated thereby, will not:
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(a)
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result in a violation or breach of, require any consent to be obtained under or give rise to any termination rights under any provision of:
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(i)
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its certificate of incorporation, articles, by laws or other charter documents, including any unanimous shareholder agreement or any other agreement;
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(ii)
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any law, regulation, order, judgment or decree; or
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(iii)
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any material contract, agreement, license, franchise or permit to which RMG is bound or is subject or is the beneficiary;
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(b)
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give rise to any right of termination or acceleration of indebtedness, or cause any indebtedness to come due before its stated maturity or cause any available credit to cease to be available (and RMG shall have obtained the consent of the secured lenders to RMG I, LLC to the Share Exchange Plan, if RMG determines, in consultation with Enterra, that obtaining that consent is necessary or appropriate); or
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(c)
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result in the imposition of any encumbrance, charge or lien upon any of its assets, or restrict, hinder, impair or limit the ability of RMG to carry on the business of RMG as and where it is now being carried on or as and where it may be carried on in the future.
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(5)
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Absence of Material Adverse Changes
. Since December 31, 2004 there has not been any material adverse change in the financial conditions, results of operations or business of RMG.
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(6)
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No Undisclosed Material Liabilities
. Except (a) as disclosed or reflected in the consolidated audited financial statements of RMG as at December 31, 2004; and (b) for liabilities and obligations (i) incurred in the ordinary course of business and consistent with past practice, (ii) pursuant to the terms of this Agreement, or (iii) as disclosed in writing to Enterra, RMG, taken as a whole, has not incurred any material liabilities of any nature, whether accrued, contingent or otherwise, or which would be required by generally accepted accounting principles in the United States to be reflected on a consolidated balance sheet of RMG as of the date hereof.
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(7)
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Financial Statements
. The audited, consolidated financial statements of RMG for the fiscal year ended December 31, 2004, were prepared in accordance with generally accepted accounting principles in the United States consistently applied, and fairly present the consolidated financial condition of RMG at that date and the results of operations of RMG (on a consolidated basis) for the period covered.
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(8)
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Indebtedness
. RMG’s consolidated indebtedness as of the date of this Agreement does not exceed $3.539 million.
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(9)
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Books and Records
. The corporate records and minute books of RMG have been maintained in accordance with all applicable statutory requirements and prudent business practices and are complete and accurate in all material respects.
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(10)
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Litigation, etc.
Except as set forth, or as disclosed in writing to Enterra prior to the date hereof, there is no claim, action, proceeding or investigation pending or, to the knowledge of RMG, threatened against or relating to RMG or affecting any of its properties or assets before any court or governmental or regulatory authority or body that, if adversely determined, is likely to have a material adverse effect on RMG or prevent or materially delay consummation of the transactions contemplated by this Agreement or the Share Exchange Plan, nor is RMG aware of any basis for any such claim, action, proceeding or investigation. RMG is not subject to any outstanding order, writ, injunction or decree that has had or is reasonably likely to have a material adverse effect or prevent or materially delay consummation of the transactions contemplated by this Agreement or the Share Exchange Plan. RMG has disclosed to Enterra recent developments in the Northern Plains Resource Council litigation involving coalbed methane drilling in Montana.
|
|
(11)
|
Environmental
. Except as has been disclosed in writing to Enterra prior to the date hereof, RMG is not aware of, or has received:
|
|
(a)
|
any order or directive which relates to environmental matters, and which requires any material work, repairs, construction, or capital expenditures; or
|
|
(b)
|
any demand or notice with respect to the material breach of any environmental, health, or safety law applicable to RMG, including, without limitation, the Environmental Laws and any regulations respecting the use, storage, treatment, transportation, or disposition of environmental contaminants; or
|
|
(c)
|
any violation of any Environmental Laws applicable to RMG’s properties, or notice alleging such violation is pending or threatened against the RMG properties.
For purposes of this Agreement, the term “
Environmental Laws
” shall mean all laws, statutes, ordinances, court decisions, rules and regulations of any governmental authority pertaining to health or the environment as may be interpreted by applicable court decisions or administrative orders, including, without limitation, the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended (
“
CERCLA
”
), the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act, as amended, the Resources Conservation and Recovery Act, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendment and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and comparable state and local laws.
|
|
(12)
|
Leases.
To RMG’s best knowledge, all leases and other documents of title by which it holds its assets (
collectively the “Leases”
) are in full force and effect and are valid and subsisting documents, and all royalties, rentals and other payments due under the Leases have been fully, properly and timely paid. RMG will use its commercially reasonable efforts to take all action necessary to keep the Leases in full force and effect until completion of the Share Exchange Plan. RMG has not received a written notice of material default with respect to the Leases that remains uncured. This representation and warranty is subject to Article 3 of the Agreement.
|
|
(13)
|
Taxes and Royalties
.
All due and payable ad valorem, property, production, severance and similar taxes and assessments based on or measured by the ownership of property or the production of natural gas or the receipt of proceeds therefrom on RMG’s interests in the Leases, which become due prior to the Closing Date for any periods prior to the Closing Date, have been properly paid. RMG has not received a written notice of default, non-payment of taxes or mispayment of taxes which remains uncured.
|
|
(14)
|
Special Warranty of Title.
RMG represents, warrants and agrees that the Subject Properties are (or will be at Closing) free and clear of all of all liens, encumbrances, burdens and defects of title arising by, through or under RMG, but not otherwise.
|
|
(15)
|
Broker.
RMG
has incurred no obligation or liability, contingent or otherwise, for brokers’ or finders’ fees with respect for this transaction for which Enterra shall have any obligation or liability.
|
|
(a)
|
The Affiliated Group has filed all Tax Returns that it was required to file under applicable laws and regulations for each taxable period during which RMG (or its predecessors) was a member of such Affiliated Group. RMG has filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all material respects and have been prepared in substantial compliance with all applicable laws and regulations. All material Taxes due and payable by RMG (whether or not shown on any Tax Return), except for sales or use Taxes reflected on the Closing Date Balance Sheet, have been paid. No claim has ever been made by an authority in a jurisdiction where RMG does not file Tax Returns that RMG is or may be subject to taxation by that jurisdiction. There are no security interests on any of the assets of RMG that arose in connection with any failure (or alleged failure) to pay any Tax. RMG has not been a member of an Affiliated Group (other than a group the common parent of which was USE) that has filed a “consolidated return” within the meaning of Code Section 1501, or has filed a combined or consolidated return with another entity with any other taxing authority.
|
|
(b)
|
Each member of the Affiliated Group has made all withholdings of Taxes required to be made in connection with amounts paid or owing to any employee, independent contractor, creditor, shareholder, or other third party and such withholdings have either been paid to the appropriate governmental agency or set aside in appropriate accounts for such purpose.
|
|
(c)
|
There is no dispute or claim concerning any material Income Tax liability of the Affiliated Group for any taxable period during which RMG (or its predecessors) was a member of such Affiliated Group either (A) claimed or raised by any governmental tax authority in a writing or (B) as to which USE or any of its officers responsible for Tax matters has knowledge based upon personal contact with any agent of such tax authority. Neither USE nor any officer responsible for Tax matters of RMG expects any tax authority to assess any additional Taxes against RMG or for which RMG may be liable for any period for which returns have been filed. RMG is not currently under audit with respect to Taxes by any tax authority, and has not received any notice or other indication that any tax authority is considering assessing any additional Taxes for any period for which Tax Returns have been filed since inception of RMG. There is no dispute or claim concerning any Tax Liability of RMG either (A) claimed or raised by any tax authority in writing or (B) as to which RMG has knowledge based upon personal contact with any agent or representative of such tax authority. RMG has previously provided Enterra with a list of all material federal, state, local, and foreign income Tax returns filed with respect to RMG for taxable periods ended on or after the inception of RMG, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. RMG has delivered to Enterra true, correct and complete copies of all material federal and foreign income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by RMG.
|
|
(d)
|
No member of the Affiliated Group has waived any statute of limitations in respect of Income Taxes or agreed to any extension of time with respect to an Income Tax assessment or deficiency. RMG has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency.
|
|
(e)
|
RMG has not filed a consent under Code Section 341(f) concerning collapsible corporations. RMG is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any “excess parachute payment” within the meaning of Code Section 280G (or any corresponding provision of state, local or foreign Tax law). RMG has not been a United States real property holding corporation within the meaning of Code Section 897(c)(2) during the applicable period specified in Code Section 897(c)(1)(A)(ii). Each member of the Affiliated Group has disclosed on its federal Income Tax Returns all positions taken therein that could give rise to a substantial understatement of federal Income Tax within the meaning of Code Section 6662. RMG (or its predecessors) (x) has not been a member of an Affiliated Group filing a consolidated federal Income Tax Return (other than a group the common parent of which was USE) and (y) has no liability for the Taxes of any Person (other than RMG and the Affiliated Group) under Treasury Regulation Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.
|
|
(f)
|
The unpaid Taxes of RMG did not, as of the date of the Financial Statements, exceed the reserve for Tax liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) set forth on the face of the Financial Statements (rather than in any notes thereto). Since the date of the current Financial Statements, RMG has not incurred any liability for Taxes arising from extraordinary gains or losses, as that term is used in GAAP, outside the ordinary course of business consistent with past custom and practice.
|
|
(g)
|
RMG will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any: (A) change in method of accounting for a taxable period ending on or prior to the Closing Date; (B) “closing agreement” as described in Code Section 7121 (or any corresponding or similar provision of state, local or foreign Tax law) executed on or prior to the Closing Date; (C) intercompany transactions or any excess loss account described in Treasury Regulations promulgated under Code Section 1502 (or any corresponding or similar provision of state, local or foreign Tax law); (D) installment sale or open transaction disposition made on or prior to the Closing Date; or (E) prepaid amount received on or prior to the Closing Date.
|
|
(h)
|
Notwithstanding any provision to the contrary in this Agreement, with respect to the representations and warranties set forth in this Section 16:
|
|
(i)
|
“
Affiliated Group
” shall mean a group of corporations which includes RMG and only for such period in which RMG is included in such group of corporations;
|
|
(ii)
|
“
Tax Returns
” when such term is used with reference to Tax Returns required to be filed by the Affiliated Group, shall only include Tax Returns which report financial data of RMG, such as revenues and expenses, but such term shall not be so limited when referring to Tax Returns required to be filed by RMG; and
|
|
(iii)
|
“
Tax
” shall only include Taxes for which RMG is directly or indirectly liable.
|
|
(17)
|
Employee Matters.
RMG has no employees and is not bound by or a party to:
|
|
(a)
|
any benefit plan including, without limiting the generality of the foregoing, any pension plan, retirement savings plan, retirement compensation arrangement, salary deferral arrangement, health care plan or deferred profit sharing plan, or any benefit arrangement, obligation, custom, or practice, whether or not legally enforceable, to provide benefits, other than salary, as compensation for services rendered, to present or former directors, employees, agents, or independent contractors including, without limiting the generality of the foregoing, employment agreements, severance agreements, executive compensation arrangements, incentive programs or arrangements, sick leave, vacation pay, severance pay policies, plant closing benefits, salary continuation for disability, consulting, or other compensation arrangements, workers' compensation, retirement, deferred compensation, bonus, stock option or purchase, hospitalization, medical insurance, life insurance, tuition reimbursement or scholarship programs, any plans providing benefits or payments in the event of a change of control, change in ownership, or sale of a substantial portion (including all or substantially all) of the assets of any business or portion thereof, in each case with respect to any present or former employees, directors, or agents maintained by or on behalf of RMG for any of its employees (
each, a "Benefit Plan"
), or
|
|
(b)
|
any liability for any unfunded obligation for any benefit or compensation for employees including, without limiting the generality of the foregoing, any profit sharing plans, or
|
|
(c)
|
any liability for any contingent obligation which will become an obligation upon the consummation of the Share Exchange Agreement including, without limiting the generality of the foregoing, any retirement allowance or retirement compensation arrangement.
|
|
(18)
|
Insurance
. Policies of insurance in force as of the date hereof naming RMG as an insured adequately cover all risks reasonably and prudently foreseeable in the operation and conduct of the business of RMG. All such policies of insurance will remain in force and effect and will not be cancelled or otherwise terminated as a result of the transactions contemplated hereby or by the Share Exchange Plan.
|
|
(19)
|
Confidentiality
. RMG has not, to the date hereof, waived any provision set forth in any confidentiality agreement in favor of the other party thereto.
|
In the event that one or more of the representations and warranties set forth in this Schedule “B” is not true and correct immediately prior to the Effective Date, Enterra shall be relieved of its obligations under the Pre-acquisition Agreement, unless RMG has notified Enterra under Section 2.1.2 of the Agreement of any changes covered therein and Enterra has consented to or otherwise approved of such changes. The representation and warranty as to leases is subject to the resolution provisions of Article 3.
SCHEDULE “C”
REPRESENTATIONS AND WARRANTIES OF ENTERRA
Capitalized terms in the following representations and warranties shall have the meanings ascribed to such terms in the Pre-Acquisition Agreement of which this Schedule “C” is attached and forms a part.
1.
Organization
. Enterra and each of its direct and indirect subsidiaries, partnerships and other entities over which it exercises direction or control (collectively, the “Subsidiaries”) has been duly incorporated or formed under applicable law, is validly existing and has full corporate or legal power and authority to own its properties and conduct its businesses as presently owned and conducted.
2.
Authority
. Enterra has the requisite power and capacity to enter into this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement by Enterra and the consummation by Enterra of the transactions contemplated by this Agreement have been duly authorized by the board of directors of Enterra’s administrator, Enterra Energy Corp., and no other corporate proceedings on the part of Enterra are necessary to authorize this Agreement or the transactions contemplated hereby. This Agreement has been duly executed and delivered by Enterra and constitutes a valid and binding obligation of Enterra, enforceable against Enterra in accordance with its terms subject to securities laws, bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and other laws relating to or affecting creditors’ rights generally and to general principles of equity. Except as disclosed in writing to Enterra prior to the date hereof, the execution and delivery by Enterra of this Agreement and performance by it of its obligations hereunder and the completion of the Offer and the transactions contemplated thereby, will not:
(a)
result in a violation or breach of, require any consent to be obtained under or give rise to any termination rights under any provision of:
(i)
its or any Subsidiary’s certificate of incorporation, articles, by laws or other charter documents, including any unanimous shareholder agreement or any other agreement or understanding with any party holding an ownership interest in any Subsidiary;
(ii)
any law, regulation, order, judgment or decree; or
(iii)
any material contract, agreement, license, franchise or permit to which Enterra or any Subsidiary is bound or is subject or is the beneficiary;
(b)
give rise to any right of termination or acceleration of indebtedness, or cause any indebtedness to come due before its stated maturity or cause any available credit to cease to be available; or
(c)
result in the imposition of any encumbrance, charge or lien upon any of its assets or the assets of any Subsidiary, or restrict, hinder, impair or limit the ability of Enterra or any Subsidiary to carry on the business of Enterra or any Subsidiary as and where it is now being carried on or as and where it may be carried on in the future.
3.
Funds Available
. The aggregate cash consideration payable pursuant to the Offer is available to Enterra so that Enterra is in a position to pay for all RMG Shares in accordance with the Share Exchange Plan.
4.
Knowledge
. As of the date hereof, Enterra has no actual knowledge of any misrepresentation, breach or non performance by RMG of any representation, warranty or covenant contained in this Agreement which would have or would be reasonably likely to have a material adverse effect on Enterra should the Share Exchange Plan be completed.
5.
SEC Filings and Listings.
Enterra’s reports filed with the SEC in calendar 2004 and through the completion of the Share Exchange Plan are complete and contain no material misstatements of material fact, or omit to state any material facts necessary to make the statements made not misleading. The description of the Enterra trust units in the Form 20-F (filed April 27, 2004) is a complete summary of the principal terms of the trust and the rights of unit holders. Enterra is in compliance with the listing standards of the Toronto Stock Exchange and the Nasdaq National Market. Enterra has received no notice of noncompliance with such listing standards which it reasonably does not expect to rectify in a timely manner, and has no reasonable expectation of receipt of such a notice.
6.
TSX Hold Period.
The four month hold period required by the Toronto Stock Exchange will apply only to the Exchangeable Shares, beginning upon the date of their issuance, because the contractual or other relationship between the issuer or issuers of the Exchangeable Shares, and the Enterra Trust Units, will be such, as of the completion of the Share Exchange Plan, that no additional TSX hold period shall be imposed on the Trust Units upon their issuance.
(Graphic Omitted)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We
hereby
consent
to
the filing
of
the
Annual
Report
on
Form 10-K,
for
the
year
ended
December 31, 2004, for U.S. Energy Corp. in accordance with the requirements of the Securities
Exchange Act of 1934, with the inclusion in such Annual Report of our Rocky Mountain
Gas, Inc.
reserve report incorporated therein, and references to our name in the form and context in which
they appear.
NETHERLAND, SEWELL & ASSOCIATES, INC.
B
y
:
/s/ Frederic D. Sewell
Fre
deric D. Sewell
Chairman and Chief Executive Officer
Dallas, Texas
April 8, 2005
Exhibit 31.1
CERTIFICATION
I, John L. Larsen, certify that:
|
1.
|
I have reviewed this annual report on Form 10-K of U.S. Energy Corp.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this transition report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
|
|
|
a.
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
|
b.
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
|
c.
|
Disclosed in this report any change in the resented in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and;
|
|
5.
|
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
|
|
a.
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
|
|
b.
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
DATED this 12
th
day of April, 2004.
/s/ John L. Larsen
John L. Larsen
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Robert Scott Lorimer, certify that:
|
1.
|
I have reviewed this annual report on Form 10-K of U.S. Energy Corp.;
|
|
2.
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this transition report;
|
|
3.
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
|
|
4.
|
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
|
|
|
a.
|
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
|
|
|
b.
|
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
|
|
|
c.
|
Disclosed in this report any change in the resented in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and;
|
|
5.
|
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
|
|
a.
|
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
|
|
|
b.
|
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
|
DATED this 12
th
day of April, 2004.
/s/ Robert Scott Lorimer
Robert Scott Lorimer
Chief Financial Officer
Exhibit 32.1
Certification of CEO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of U.S. Energy Corp. (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on April __, 2005 (the "Report"), John L. Larsen Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ John L. Larsen
John L. Larsen,
Chief Executive Officer
April 12, 2005
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to Crested Corp. and will be retained by Crested Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of CFO Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of U.S. Energy Corp. (the "Company") on Form 10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on April ___. 2005 (the "Report"), Robert Scott Lorimer, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Robert Scott Lorimer
Robert Scott Lorimer,
Chief Financial Officer
April 12, 2005
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to Crested Corp. and will be retained by Crested Corp. and furnished to the Securities and Exchange Commission or its staff upon request.