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- Proxy Statement (definitive) (DEF 14A)

Date : 04/30/2012 @ 3:05PM
Source : Edgar (US Regulatory)
Stock : U.S. Energy Corp. (MM) (USEG)
Quote : 3.97  0.05 (1.28%) @ 11:15AM
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- Proxy Statement (definitive) (DEF 14A)

 

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.  20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant   ý   Filed by a party other than the Registrant   ¨

Check the appropriate box:
¨            Preliminary Proxy Statement
¨             Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
ý            Definitive Proxy Statement
¨            Definitive Additional Materials
¨            Soliciting Material Pursuant to §240.14a-12


U.S. Energy Corp.
(Name of Registrant as Specified In Its Charter)


(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
ý            No fee required.
¨            Fee computed on table below per Exchange Act Rules 14a-6(I)(1) and 0-11.
1)      Title of each class of securities to which transaction applies:
2)      Aggregate number of securities to which transaction applies:
 
3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
4)      Proposed maximum aggregate value of transaction:
5)      Total fee paid:
 
 
 
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U.S. ENERGY CORP.
877 North 8th West
Riverton, Wyoming  82501
-------------------------
Notice of Annual Meeting of Shareholders
-------------------------

We are pleased to give you notice of our Annual Meeting of Shareholders:
 
Date:                 Friday, June 29, 2012                                                                Time:           8:30 AM MDT

Place:                 877 North 8th West, Riverton, Wyoming 82501

 
Purposes:
1.
Elect the two nominees for directors identified in the accompanying proxy statement (Keith G. Larsen and Thomas R. Bandy) to serve until the third succeeding annual meeting of shareholders and their successors have been duly elected or appointed and qualified;
 
2.
Ratify the appointment of Hein & Associates LLP as the independent auditor for fiscal year 2012;
 
3.
Hold an advisory vote on executive compensation (“Say on Pay Vote”);
 
4.
Approve a 2012 Equity and Performance Incentive Plan (“2012 Equity Plan”) to replace the expired 2001 ISOP; and
 
5
For any other purpose that properly may come before the meeting, in accordance with the Bylaws of the Company.

Record Date:                      April 30, 2012.  The stock transfer books will not be closed.

We have enclosed a copy of our Annual Report for the fiscal year ended December 31, 2011 with this Notice of Annual Meeting of Shareholders and Proxy Statement. Please read the enclosed information carefully before completing and returning the enclosed proxy card.

The Securities and Exchange Commission (“SEC”) requires companies to furnish proxy materials over the Internet, which reduces environmental impact as well as printing and mailing costs.  Unless otherwise requested by the shareholder, we are mailing to most of our stockholders a Notice of Internet Availability of Proxy Materials instead of mailing paper copies of the proxy materials.  The Notice of Availability contains instructions on how to access the proxy materials on the Internet, and also on how to request a paper copy of the proxy materials.  All stockholders who do not receive a Notice of Availability will receive a paper copy of the proxy materials by mail.

Whether or not you plan to attend the meeting, please take the time to vote -

Ø  
By the Internet – Go to the website shown on your proxy card or the Notice of Availability; or
Ø  
By Telephone – Call the toll free number shown on the Notice of Availability; or
Ø  
By mail – Complete, sign and date your proxy card and mail it in the postage paid envelope.

If you owned shares in the Company at the close of business on April 30, 2012, you may attend and vote at the meeting.  The names of shareholders of record entitled to vote at the meeting will be available for review at the meeting and during regular business hours at our headquarters in Riverton, Wyoming.

If you wish to attend the meeting and vote in person, but you are a beneficial owner (i.e., your shares are held in “street name”), contact your broker, as soon as you receive this notice, to obtain a “legal proxy” which you must bring to the meeting in order to vote in person at the meeting.

By Order of the Board of Directors
Dated:  April 30, 2012                                                                             Steven R. Youngbauer
Secretary
 
 
 
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TABLE OF CONTENTS
                                                                                                                                          Page
GENERAL
 
Who Can Vote
4
Quorum and Voting Rights
4
How Your Proxy Will Be Voted; Recommendation of the Board
5
Granting Your Proxy
5
Revoking Your Proxy
5
Proxy Solicitation
6
Requirement and Deadlines for Shareholders to Submit Proxy Proposals
6
CORPORATE GOVERANCE - Audit, Compensation and Nominating Committees
6
Advance Notice Requirements for Other Shareholder Proposals
10
Principal Holder of Voting Securities and Ownership by Officers and Directors
12
PROPOSAL 1:  ELECTION OF DIRECTORS
15
Directors
15
Filing of Reports Under Section 16(a)
18
PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
19
Principal Accounting Fees and Services
19
PROPOSAL 3: ADVISORY VOTE ON EXECUTIVE COMPENSATION
21
Executive Compensation
21
Compensation Discussion and Analysis
21
Grants of Plan-Based Awards
30
Outstanding Equity Awards at April 30, 2012
31
Option Exercises and Stock Vested
32
Potential Payments upon Change in Control
34
Retirement Policy
35
Non-Employee Director Compensation Table
38
PROPOSAL 4: 2012 EQUITY PLAN
40
Certain Relationships and Related Transactions
45
Audit Committee – Report
47
 
 
 
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U.S. ENERGY CORP.

877 North 8th West
Riverton, Wyoming  82501


PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
ON FRIDAY, JUNE 29, 2012

This proxy statement is provided in connection with a solicitation of proxies by the Board of Directors (the “Board”) of U.S. Energy Corp. (“U.S. Energy”, the “Company”, “we”, “our”, or “us”) for the annual meeting of shareholders to be held on Friday, June 29, 2012, at 8:30 am MDT (the “Annual Meeting”), and at any adjournments of the meeting.

GENERAL

Who Can Vote

Only holders of our common stock at the close of business on the record date of April 30, 2012 are entitled to receive notice and to vote at the Annual Meeting.  As of April 30, 2012, there were 27,460,978 shares of our common stock issued and outstanding.

You may hold your shares of record or in “street name.”  The difference between shareholders of record and street name holders is:

·  
Shareholder of Record .  If your shares are registered directly in your own name with our transfer agent, Computershare Trust Company, Inc., you are considered with respect to those shares to be the shareholder of record and you may vote directly by internet, telephone, mail or in person.

·  
Street Name Shareholder .  If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “street name” holder, and the beneficial owner, of those shares and you have the right to direct your broker or nominee how to vote.  However, since you are not the shareholder of record, you may not vote those shares in person at the Annual Meeting unless you obtain a “legal proxy,” which you must bring to the meeting in order to vote in person at the meeting.

Quorum and Voting Rights

A quorum for the meeting will exist if a majority of the voting power of the shareholders is present at the meeting, in person or represented by properly executed proxy delivered to us prior to the meeting.  Shares of common stock present at the meeting that abstain/withhold from voting, or that are the subject of “broker non-votes,” will be counted as present for determining a quorum.

New York Stock Exchange (“NYSE”) Rule 452 governs discretionary voting by brokers of shares held in street name when beneficial owners have not instructed how such shares should be voted.  Because the rule governs all brokers, the amendment affects all public companies that have shares held in street name, not just companies listed on the NYSE.  Under the rule, brokers have discretionary authority to vote street name shares on “routine” items such as the ratification of the Company’s appointment of auditors, but not on other matters, including the election of directors.  Of the matters to be presented at the Annual Meeting, only the ratification of auditors will be considered a routine matter for purposes of the
 
 
 
 
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rule.  Accordingly, if your broker does not receive instructions from you, your broker will not be able to vote your shares on any of the other matters, and a “broker non-vote” will occur with respect to those matters.

You are entitled to one vote for each share of U.S. Energy Corp. common stock you hold, except that in the election of directors you may cumulate your votes. Cumulative voting generally allows each holder of shares of common stock to multiply the number of shares owned by the number of directors being elected, and to distribute the resulting number of votes among nominees in any proportion that the holder chooses.  On Proposal 1, Election of Directors, nominees in number equal to the seats to be filled on the Board who receive a plurality of votes cast, will be elected as directors.  If you withhold your shares from voting, your shares will not be counted for any director.  Withheld votes and broker non-votes will have no effect on the election of directors.

Each of the other proposals, and any other matter which properly comes before the meeting in accordance with the Bylaws of the Company, will be approved if the number of votes cast in favor of the proposal exceeds the number of votes cast opposed to the proposal.  Abstentions are not considered votes cast and they will have no effect.

How Your Proxy Will Be Voted; Recommendation of the Board

The Board is soliciting a proxy in the enclosed form to provide you with the opportunity to vote on all matters scheduled to come before the meeting (as stated in the Notice of Annual Meeting which accompanies this Proxy Statement), whether or not you attend in person.

The Board recommends you vote as follows on the four proposals stated in the Proxy Statement:

·  
For Proposal 1 - the nominees for director are Keith G. Larsen and Thomas R. Bandy;

·  
For Proposal 2 - ratification of appointment of Hein & Associates LLP as the independent auditor of the Company for the fiscal year 2012;

·  
For Proposal 3 - advisory vote on executive compensation; and

·  
For Proposal 4 - approval of the 2012 Equity Plan.

Granting Your Proxy

Your shares will be voted as you specify if you properly complete and return the appropriate form of proxy.  If you make no specifications, your proxy will be voted in favor of all the proposals listed above.

We do not expect any matters to be presented for action at the meeting other than the matters stated in the Notice of Annual Meeting accompanying this Proxy Statement.  However, as permitted by SEC Rule 14a-4(c), the proxy will confer discretionary authority with respect to any other matter that may properly come before the meeting.  The persons named as proxies intend to vote in accordance with their judgment on any such matters.

Revoking Your Proxy

If you are a shareholder of record and submit a proxy, you may revoke it later or submit a revised proxy at any time before it is voted.  You also may attend the meeting in person and vote by ballot, which
 
 
 
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would cancel any proxy you previously submitted.  If you are a street name shareholder and you vote by proxy, you may change your vote by submitting new voting instructions to your bank, broker or nominee in accordance with that entity’s procedures.

Proxy Solicitation

We will pay all expenses of our solicitation of proxies for the Annual Meeting.  In addition to solicitations by mail, arrangements have been made for brokers and nominees to send proxy materials to their principals, and we will reimburse them for their reasonable expenses.  We have not hired a solicitation firm for the meeting.  Our employees and directors will solicit proxies by telephone or other means, if necessary; they will not be paid for these services.

Requirement and Deadlines for Shareholders to Submit Proxy Proposals

Under SEC rule 14a-8, if a shareholder wants us to include a proposal under that rule to be included in our proxy statement and presented at the Annual Meeting of shareholders to be held in June 2013, information about the proposal must be received by us in writing at least 120 calendar days in advance of the first anniversary of the delivery of these proxy materials, at U.S. Energy Corp., 877 North 8th West, Riverton, Wyoming 82501; Attention:  Steven R. Youngbauer, Secretary.  In addition, the Board amended the Company’s Bylaws in March 2009 to adopt “advance notice” requirements that apply to all other proposals which shareholders may wish to have included in the Company’s proxy statement, or to be stated in a notice for a special meeting of shareholders.  Information about other proposals must be provided to the Company at least 90 calendar days before the meeting date.  Please see “Advance Notice Requirements for Proposed Nominees to the Board and Other Proposals,” below.

Copies of Our Form 10-K

Promptly upon receiving a request from any shareholder, without charge we will send to the requester a copy of our Annual Report on Form 10-K for the twelve months ended December 31, 2011, with exhibits, as filed with the SEC.  Please address your request to Steven R. Youngbauer, Secretary, at U.S. Energy Corp., 877 North 8th West, Riverton, Wyoming 82501.  You also may call or fax Mr. Youngbauer at T 307.856.9271, F 307.857.3050.


CORPORATE GOVERNANCE
Board of Directors, Audit, Compensation and Nominating Committees

General

We are committed to sound corporate governance principles.  To evidence this commitment, the Board has adopted charters for its committees and a Code of Ethics.  These documents, along with the Articles of Incorporation and Bylaws, provide the framework for our corporate governance.   The charters of the Audit Committee, the Compensation Committee, and the Nominating Committee may be viewed at our web site (www.usnrg.com), at the tab “Investor Relations,” then go to “Corporate Governance.”  The Code of Ethics also may be viewed at that location.  If these documents are amended (or if the Code of Ethics is waived in a manner requiring disclosure under SEC rules), the amendments (and the occurrence of the waiver of the Code of Ethics), will be disclosed on the website as required by the SEC.  Copies of each of these documents are available without charge to any person who requests them, by sending a request to U.S. Energy Corp., Attn: Steven R. Youngbauer, Secretary, 877 North 8 th West, Riverton, Wyoming 82501.

 
 
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Board and Committee Independence

The Board is comprised of a majority of independent directors.  Specifically, the Board has determined that Stephen V. Conrad, Jerry W. Danni, Leo A. Heath and Allen S. Winters are independent under applicable NASDAQ rules.  In addition, the Audit Committee, the Compensation Committee, and the Nominating Committee are each comprised solely of independent directors as required under the applicable requirements of NASDAQ and the SEC.

Meetings of the Board

The Board consists of seven members and they have primary responsibility for directing management of the business.  During 2011, the Board held nine formal meetings, which were attended by all of the directors serving on the Board, except that Leo A. Heath missed one telephonic meeting during the year.  The Board also approved three actions by unanimous consent without conducting formal meetings in addition to conferring informally on several other occasions during the year.

Attendance of Annual Meetings by Directors

The directors all attended the June 24, 2011 Annual Meeting of shareholders.

Communications from Shareholders to the Board

The independent directors have established a process for collecting and organizing communications from shareholders.  Shareholders may send communications to the Board by addressing their communications to Keith G. Larsen, Chief Executive Officer and Chairman of the Board, or Mark J. Larsen, President, at 877 North 8th West, Riverton, Wyoming 82501.  Pursuant to this process, Keith Larsen and Mark Larsen will determine which of the communications address matters of substance and which should be considered by all directors, and will send those communications to all the directors for their consideration.

Audit Committee

To provide effective direction and review of fiscal matters, the Board has established an Audit Committee.  The Audit Committee has the responsibility of reviewing our financial statements, exercising general oversight of the integrity and reliability of our accounting and financial reporting practices, and monitoring the effectiveness of our internal control systems.  The Audit Committee also recommends selection of auditing and internal audit firms and exercises general oversight of the activities of our independent auditors, principal financial and accounting officer and accounting employees and related matters. The Chairman of the Audit Committee is Stephen V. Conrad, who is a Certified Public Accountant.  The Board has determined that Mr. Conrad is an audit committee financial expert as defined in Rule 407(d) of SEC Regulation S-K.  Other members of the Audit Committee are Jerry W. Danni and Leo A. Heath.  All members of the Audit Committee are independent directors under applicable NASDAQ and SEC rules.

The Audit Committee met five times in 2011.  All Committee members either attended in person or by telephone.  The Committee reviewed our financial statements for each of the quarters ended March 31, June 30 and September 30, 2011 and for the twelve months ended December 31, 2011 and discussed them with management and our independent audit firm.  After the quarterly and year end meetings, the Committee met in executive session with our independent audit firm.  The Committee also discussed with the independent audit firm the various matters required to be discussed in SAS 61 (Codification of Statements on Auditing Standards, AU 380).  Based on the foregoing, the Committee recommended to
 
 
 
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the Board that the audited financial statements be included in our Annual Report on Form 10-K for the twelve months ended December 31, 2011.  During the year ended December 31, 2011, the Committee also met independently of management with the firm that performs internal control testing for the Company pursuant to Section 404 of the Sarbanes-Oxley Act.  All members of the Committee were present in person or on the telephone during the meeting where the internal controls were reviewed.  The Committee also reviews and reassesses the adequacy of the Audit Committee Charter on an annual basis.

Compensation Committee

The Company has a Compensation Committee, whose members are Jerry W. Danni, Stephen V. Conrad and Leo A. Heath.  These members are independent under criteria established by NASDAQ.  Mr. Danni serves as the Chairman of the Compensation Committee.  This Committee met formally on four occasions in 2011, and discussed compensation matters informally several times throughout the fiscal year.  All Compensation Committee members attended all meetings of the Committee during 2011 either in person or by phone.

The Compensation Committee reviews and recommends to the Board compensation packages for the officers of the Company.  Please see “Executive Compensation – Compensation Discussion and Analysis.”

Nominating Committee

The Company has a Nominating Committee, whose members are Allen S. Winters and Jerry W. Danni.  Both are independent directors under NASDAQ rules.  Mr. Winters serves as the Chairman of the Nominating Committee.  The Nominating Committee is responsible for identifying and recommending to the Board nominees for election to the Board to be included in the Company’s Proxy Statement for the annual shareholders meeting; and when required for election by the Board to fill vacancies in the Board occurring between annual shareholder meetings.

The Nominating Committee met two times during 2011 with all members attending either in person or by telephone.

Board Leadership

U.S. Energy combines the roles of Chief Executive Officer and Chairman of the Board, with Keith G. Larsen as CEO and Chairman.  Keith G. Larsen is responsible for setting the strategic direction for the Company, and sets the agenda for and presides over Board meetings.  The Company believes that the combined position of the Chairman and CEO has the following advantages: (i) it ensures a unity of command and a single point of accountability and responsibility, (ii) it eliminates any potential conflicts between the CEO and the Chairman, (iii) it removes any internal or external ambiguities as it pertains to the ultimate spokesperson of the firm and (iv) it provides for a more informed and expeditious decision-making process.  Mark J. Larsen, also a director and President and Chief Operating Officer, is primarily responsible for execution of strategies and daily operations.

Risk Oversight

The Company faces various risks in its business, including liquidity and operational risks.  Our exposure to credit risk is relatively limited because we do not guarantee financial instruments or obligations of third parties.  Liquidity risk is encountered in the context of balancing contractual commitments to spend capital, and also is involved in the Company’s hedging commitments for oil and gas price protection.  With approval of the Board, we entered into hedging commitments for the 2012
 
 
 
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calendar year  covering 600 barrels per day of oil production (approximately 50% of production at December 31, 2011).  Any change in hedging strategy will require approval of the Board.

General business operations are managed by the executive officers, who report to the Board as needed on developments in approved areas.  Operations are run in conformity with the annual budget presented by management and approved, with appropriate modifications as needed throughout the year, by the Board.  However, material budget variations (for example, a proposed acquisition or disposition of a significant property or an entry into a significant joint venture) are subject to prior approval by the Board, even if the category and fund allocation generally had been previously approved by the Board.  In these situations, the Chairman will call a Board meeting to discuss specific terms, costs and variables, and associated risks, before committing the Company.  We believe this process provides the Board a continuing and key role in risk   oversight.

Compensation Risk Assessment

The Compensation Committee has determined that our overall compensation package provides a balanced mix of annual salary and cash bonuses, and longer-term incentives (through awards of stock and stock options and the Company’s funding of the ESOP and a 401(k) plan).  We do not believe that the package stimulates excessive risk taking, but instead encourages behaviors that contribute to creating sustainable value for shareholders. Short term achievement is motivated by salaries plus a Performance Compensation Plan (“PCP”) which provides for cash bonuses based primarily on meeting objective Company-wide goals.  Using positive cash flow as a goal within the PCP matrix, is appropriate for the capital intensive oil and natural gas industry.  Additionally, the PCP allows for payment in cash of a discretionary Outstanding Performance Compensation Award for extraordinary service, in any given year, unrelated to the PCP matrix.  See “Executive Compensation – Compensation Discussion and Analysis – Performance Compensation Plan.”  Longer-term incentives have been provided through the award of stock options from time to time, as well as the stock award program (for executive officers) and Company-wide ESOP and 401(k) plan contributions.

Potential bonuses under the PCP range from 10% to 100% of annual base compensation depending on pay rates with senior executives the only employees eligible for a bonus of 100%.  All factors under the PCP are tied to performance of financial and production objectives.  The matrix for bonuses under the PCP is dynamic and is established each year by the Compensation Committee and approved by the Board.  Changes are made to the matrix as needed to continue motivating officer and employee performance for the improvement of shareholder value.  The Board does not believe that the PCP encourages inappropriate risk taking.  The risks associated with the PCP are significantly offset by the other Company-wide bonus elements within the PCP, and are balanced by the longer-term incentives which focus on profitability and stock price.

2011 Performance Compensation Plan

Total employee bonuses accrued during the year ended December 31, 2011 under the 2011 PCP and paid in 2012 were $249,000; the named executive officers (“NEOs”) received a total of $174,000.

Executive Committee

The Executive Committee helps implement the Board’s overall directives as necessary.  Members include Keith G. Larsen, Chairman, Mark J. Larsen and Stephen V. Conrad.   The Executive Committee usually does not conduct formal meetings.
 
 
 
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Advance Notice Requirements for Shareholder Proposals

For Proposed Nominees to the Board

When needed, as determined by the Board, the Nominating Committee considers and recommends to the Board individuals who may be suitable to be nominated to serve as directors.  The Nominating Committee has adopted a written charter regarding the Company's director and officer nomination process.  The charter requires the Committee to consider only individuals who possess the business and financial skills necessary to oversee and guide the Company, if elected.  The charter does not require that diversity (whether of background, experience, gender or other attributes) be considered in the process.

Pursuant to its charter, the Nominating Committee has adopted a policy for consideration of any director candidates recommended by shareholders, and may (or may not) recommend to the Board that candidate(s) be put on an Annual Meeting election slate and identified in the Company's proxy statement, if:

·   At least 150 calendar days before the meeting date, the shareholder requests in writing that the Nominating Committee consider an individual for inclusion as a director nominee in the next proxy statement for an Annual Meeting.  The shareholder must identify the individual and provide background information about the individual sufficient for the Committee to evaluate the suggested nominee's credentials.  Such requests should be addressed to Keith G. Larsen, Chief Executive Officer and Chairman of the Board, who will forward the requests to the Nominating Committee.

·   The candidate meets certain specific minimum qualifications: Substantial experience in top or mid-level management (or serving as a director) of public or private mineral exploration companies, with particular emphasis on understanding and evaluating mineral properties for either financing, exploration and development, or joint venturing with industry partners; contacts with oil and gas or mining industry companies to develop strategic partnerships or investments with the Company; and the ability to understand and analyze complex financial statements.  A shareholder-recommended candidate also will have to possess a good business and personal background, which the Nominating Committee will independently verify.  These same categories of qualifications will be used by the Nominating Committee in considering any nominee candidate, whether recommended by a shareholder, an officer, or another director.

·   The Company is provided with all information relating to a shareholder-recommended candidate that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the “Exchange Act”);

·   The Company is informed whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of the recommending shareholder or the candidate with respect to stock of the Company, and whether any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock) has been made by or on behalf of such holder or candidate, the effect or intent of any of the foregoing being to mitigate loss to, or to manage the risk of stock price changes for, such holder or candidate or to increase or decrease the voting power or pecuniary or economic interest of such holder or candidate with respect to stock of the Company; and
 

 
 
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·   The Company receives representations from the shareholder (i) that he, she or it is a holder of record of stock of the Company entitled to vote at a meeting of stockholders and intends to appear in person or by proxy at the meeting to propose such nomination; and (ii) whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends to solicit proxies from other stockholders in support of such nomination (if the Board determines to include the candidate in the Company’s proxy statement).

These procedures also are mandated by the Company’s Bylaws, as amended in March 2009.

All director candidates recommended by a shareholder, or a director or officer, will be evaluated by the Nominating Committee (which is comprised solely of independent directors) in good faith.  Director nominee candidates must be recommended for the Board selection by the Nomination Committee.  However, a majority vote of the Board in favor of a director nominee must also include a majority vote of the independent directors for the Company to include that individual’s name in an Annual Meeting notice and identify that individual in the Company’s proxy statement for that Annual Meeting.

For the Annual Meeting scheduled for June 29, 2012, the Nominating Committee has not received a request from any shareholder for consideration of a nominee candidate.

For Other Shareholder Proposals

For any other matter to be considered as a proper purpose for consideration by the shareholders at an annual or special meeting (referred to as an “Additional Purpose”), each of the conditions set forth below must be satisfied in order for the Additional Purpose to be included in the Company’s notice of the meeting.  If the conditions are satisfied, an Additional Purpose would be set forth in either the Company’s proxy statement, or a proxy statement prepared by the shareholder or shareholders requesting that the matter be voted upon by all shareholders.  Pursuant to the Company’s Bylaws, only the holder or holders of at least 50% of the outstanding shares may demand that the Company convene a special meeting of shareholders.

The conditions also must be met in order for a shareholder to make a motion from the floor of a meeting to nominate a person for election to the Board, if such person has not been included as a director candidate in the Company’s notice of the meeting.

At least 90 calendar days before the date for the meeting, the requesting shareholder shall give written notice to the Secretary of the Company, providing:

(a)      a brief description of the Additional Purpose which the shareholder wishes to present to the meeting;

(b)      the reason why the Additional Purpose is sought to be presented at the meeting;
 
(c)      a statement of any material interest which the requesting shareholder or its beneficial owners have in the Additional Purpose;
 
(d)      as to the requesting shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal to nominate or another proposal is made, a statement of (1) the requesting shareholder’s and such beneficial owner’s name and address, (2) the number of shares of the Company owned of record or beneficially by the requesting shareholder and such beneficial owner, (3) the name of each nominee holder of shares owned beneficially but not of record by the requesting shareholder and the number of shares of stock held by each such nominee holder, and
 
 
 
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(4) whether and the extent to which any derivative instrument, swap, option, warrant, short interest, hedge or profit interest or other transaction has been entered into by or on behalf of the requesting shareholder with respect to stock of the Company and whether any other agreement, arrangement or understanding (including any short position or any borrowing or lending of shares of stock) has been made by or on behalf of the requesting shareholder, the effect or intent of any of the foregoing being to mitigate loss to, or to manage the risk of stock price changes for, such shareholder or to increase or decrease the voting power or pecuniary or economic interest of the requesting shareholder with respect to stock of the Company;

(e)      a description of all agreements, arrangements or understandings between the requesting shareholder and any other person or persons (including their names) in connection with the proposal of the Additional Purpose;

(f)      a representation that the shareholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination and a representation whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends to solicit proxies from other stockholders in support of such nomination; and
 
(g)      the text of any amendment to the Articles of Incorporation of the Company, or the Bylaws of the Company, which would be part of the Additional Purpose.
 
Principal Holders of Voting Securities and Ownership by Officers and Directors

The following are record and beneficial holders as of April 30, 2012 who owned more than five percent of the Company’s outstanding common stock, as well as the stock beneficially held by each director and nominee, and each officer, and by all officers and directors as a group.  This information is based on SEC reports or as otherwise known to us.  Beneficial ownership includes the shares underlying presently exercisable options.

Except as noted, each holder exercises sole voting and dispositive powers over the shares listed opposite the holder's name, except for shares subject to forfeiture and those held in ESOP accounts established for the holder's benefit.

The ESOP Trustees, Keith G. Larsen and Mark J. Larsen, exercise voting powers over non-allocated ESOP shares and dispositive powers over all ESOP shares.  It should be noted that voting and dispositive powers over certain shares are shared by one or more of the listed holders; those shares are reported for each holder having a shared interest.
 
 
 
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Amount and Nature of Beneficial Ownership
 
Total
   
Name and Address
 
Voting Rights
 
Dispositive Rights
 
Beneficial
 
Percent
of Benificial Owner
 
Sole
Shared
 
Sole
Shared
 
Ownership
 
of Class (1)
                     
Keith G. Larsen
*(2)
          917,581
     466,513
 
          819,625
  1,142,662
 
   2,060,243
 
7.4%
                     
Mark J. Larsen
*(3)
          791,420
             -
 
          707,045
     676,149
 
   1,467,569
 
5.3%
                     
Robert Scott Lorimer
*(4)
          681,074
             -
 
          681,074
             -
 
      681,074
 
2.5%
                     
Allen S. Winters
*(5)
           44,900
             -
 
           44,900
             -
 
       44,900
 
0.2%
                     
Stephen V. Conrad
*(6)
           75,000
             -
 
           75,000
             -
 
       75,000
 
0.3%
                     
Jerry Danni
*(7)
           35,000
             -
 
           35,000
             -
 
       35,000
 
0.1%
                     
Leo Heath
*(8)
           25,000
             -
 
           25,000
             -
 
       25,000
 
0.1%
                     
Bryon G. Mowry
**(9)
          224,805
             -
 
          174,411
             -
 
      224,805
 
0.8%
                     
Steven R. Youngbauer
**(10)
          442,252
             -
 
          396,574
             -
 
      442,252
 
1.6%
                     
All officers and directors
                 
as a group (nine persons)
       3,237,032
     466,513
 
       2,958,629
  1,142,662
 
   4,379,694
 
15.1%
                     
                     
Sprott Asset Management
(11)
1,495,598
   
1,495,598
   
1,495,598
 
5.4%
Black Rock Global Investors
(11)
1,455,450
   
1,455,450
   
1,455,450
 
5.3%

(1)       Percent of class is computed by dividing the number of shares beneficially owned plus any options held by the reporting person, by the number of shares outstanding plus the shares underlying options held by that person.

(2)       Mr. Keith Larsen exercises sole voting rights over 435,275 directly held shares, 97,956 shares held in an ESOP account established for his benefit and 384,350 shares underlying options.  He exercises shared voting rights over 466,513 shares held in a Family Trust for which he serves as Trustee.  He exercises sole dispositive rights over 435,275 directly held shares, and 384,350 shares underlying options.  He exercises shared dispositive rights over 466,513 shares in his capacity as the Trustee of a Family Trust and 676,149 shares in his capacity as an ESOP Trustee with the other ESOP Trustee.

(3)       Mr. Mark Larsen exercises sole voting rights over 233,526 shares held directly, 84,375 shares held in the ESOP account established for his benefit, and 473,519 shares underlying options.  He exercises sole dispositive rights over 233,526 shares held directly and 473,519 shares underlying his options.  He exercises shared dispositive rights over 676,149 shares in his capacity as an ESOP Trustee with the other ESOP Trustee.

(4)       Mr. Lorimer exercises sole voting rights and dispositive rights over 611,074 directly held shares and 70,000 shares underlying options.

(5)       Mr. Winters exercises sole voting rights and sole dispositive rights over 4,900 directly held shares and 40,000 shares underlying options.
 
 
 
-13-

 
 

 
(6)       Mr. Conrad exercises sole voting and dispositive rights over 50,000 directly owned shares and 25,000 shares underlying options.

(7)       Mr. Danni exercises sole voting and dispositive rights over 35,000 shares underlying options.

(8)       Mr. Heath exercises sole voting and dispositive rights over 25,000 shares underlying options.

(9)       Mr. Mowry exercises sole voting rights over 19,411 shares held directly, 50,394 shares held in the ESOP account established for his benefit and 155,000 shares underlying options.  He exercises sole dispositive rights over the 19,411 shares directly held and 50,394 shares underlying his options.

(10)      Mr. Youngbauer exercises sole voting rights over 146,574 shares held directly, 45,678 shares held in the ESOP account established for his benefit and 250,000 shares underlying options.  He exercises sole dispositive rights over the 146,574 shares directly held and 250,000 shares underlying his options.

(11)       Based upon the March 2012 NASDAQ Pinpoint Market Intelligence Weekly Report.

*       Director
**       Officer Only

 
 
-14-

 
 

 
PROPOSAL 1:    ELECTION OF DIRECTORS
Directors

The directors are divided into three classes, each consisting of two persons so far as practicable, to be elected until the third succeeding annual meeting and until their successors have been duly elected or appointed and qualified or until death, resignation or removal.  The Company’s Bylaws limit service of the independent directors to two three year terms.  If recommended by the Chairman of the Board and approved by the Board, an independent director may serve one additional term.

Directors are subject to mandatory retirement at 70 years of age.  If a director reaches the age of 70 during his regularly elected term, he is allowed to serve out the term for which he was elected.

The nominees for election at the Annual Meeting are Keith G. Larsen, an incumbent management director who is standing for re-election, and Thomas R. Bandy, who is standing for election as an independent director to replace Allen S. Winters, whose term will expire on June 29, 2012.  Please see biographical information for the directors and the nominee below.  If approved by the shareholders, Keith G. Larsen and Thomas R. Bandy will serve terms that will expire at the 2015 annual meeting.

The NEOs are elected by the Board at the annual directors' meeting which follows each annual shareholder’s meeting, to serve until the officer's successor has been duly elected and qualified, or until death, retirement, resignation or removal.

For the reasons provided in this Proxy Statement, we are asking shareholders to vote “FOR” the following resolution:

“RESOLVED, that the shareholders approve the election of each of Keith G. Larsen and Thomas R. Bandy as a director of the Company to serve until the third succeeding annual meeting of shareholders to be held in 2015 and until his successor has been duly elected or appointed and qualified.”

Recommendation of the Board

The Board recommends you vote For Proposal 1.


Business Experience of Directors, Nominees and Officers

Set forth below is certain biographical information for each director, nominee for election as director and the NEOs as of the date of this Proxy Statement.  The Nominating Committee utilizes the framework of our corporate governance to select nominees based on their skills, achievements, and experience, and believes that each nominee should have experience in positions of responsibility and leadership and an understanding of our oil and natural gas exploration and production business.  The overall objective is to identify a group of directors that can best contribute to our long-term success.  All of the directors and the nominees discussed below are seasoned leaders who collectively bring to the Board a vast array of oil and gas industry, public company, private company, and other business experience, all at the senior executive officer level, and who meet our director qualification standards.  Among other attributes, each possesses a wide breadth of varied skills and experience in leadership, the energy industry, finance and accounting, risk management, operations management, strategic planning, business development, regulatory and government affairs, corporate governance, human resources and compensation, and public policy qualities that led the Nominating Committee and the Board to conclude that these individuals should serve as our directors at this time, in light of our business and structure, overall industry environment, and our long-term strategy.  These specific experiences, qualifications, attributes, and skills of each director and
 
 
 
-15-

 
 
 
 
nominee are briefly described below.  In addition, the directors and nominees represent diverse backgrounds, skill sets, and viewpoints, with a blend of historical and newer perspectives on our Company, and have a demonstrated ability to work collaboratively with candid discussion.

Keith G. Larsen   (53) - Management Director and Director Nominee.  Keith G. Larsen was employed by U.S. Energy and its affiliates in various non-executive positions from May of 1982 to November 25, 1997, at which time he became a director and our President and Chief Operating Officer.  On August 23, 2005, he became Chairman of the Board and Chief Executive Officer.  Keith Larsen’s experience and skills in negotiating complex transactions for acquiring, developing and selling mineral properties have led the Board to conclude that he should serve as a director, Chairman of the Board, Chief Executive Officer and as a member of the Executive Committee.

Stephen V. Conrad (65) - Independent Director.  Mr. Conrad was elected to the Board on June 25, 2010. Mr. Conrad is a former Partner of Deloitte & Touche LLP and Arthur Andersen LLP.  He has over 35 years of experience in serving public company clients including numerous oil and gas and mining companies. For the past five years Mr. Conrad has been a managing member of several oil and gas exploration and development funds.   Mr. Conrad is a CPA with a B.S. Degree in accounting from Montana State University.  The Board has concluded that Mr. Conrad’s experience qualifies him for service as an independent director and as a member of the Audit, Compensation and Nominating Committees.

Prior to Mr. Conrad’s election as an independent director in 2010, the Board considered the transaction with PetroQuest, which was entered into in 2007 with Wildes Exploration Mid-Miocene, LP (“WEMM”).  Mr. Conrad owns a profits interest in certain of WEMM’s prospects.  Mr. Conrad had no input in our involvement with WEMM and our decision was based upon the oil and gas opportunities presented to the Company by WEMM.

Jerry W. Danni (59) - Independent Director.  Mr. Danni was elected to the Board on June 24, 2011.  Mr. Danni has more than 30 years of experience in the domestic and international mining industry including as Executive Vice President and Senior Vice President, Corporate Affairs for Golden Minerals Company; Senior Vice President, Environment, Health and Safety for Kinross Gold Corporation; Vice President, Environmental Affairs for Cyprus Climax Metals Company; and Director, Corporate Environmental and Government Affairs for Lac Minerals Ltd. Mr. Danni has a Bachelor of Chemistry degree from Western State College and is a member of the Society of Mining Engineers.  Mr. Danni has also served on the Board of Directors for the National Mining Association and the Board of Trustees of the Northwest Mining Association.  The Board has concluded that Mr. Danni’s experience qualifies him for service as an independent director and as a member of the Audit, Compensation and Nominating Committees.

Leo A. Heath (62) - Independent Director.  Mr. Heath was elected to the Board on June 24, 2011.  Mr. Heath has almost 40 years of experience in the oil and gas industry including as Department Head/Assistant Professor of Petroleum Engineering at Montana Tech; Manager of production engineering and field operations in Montana for EnCana Energy Resources, Inc.; District Manager and Production Manager for North American Resources Company; Partner and Owner of Sylvan Petroleum Corp.; Development Manager for Petro Lewis Corp.; Drilling and Production Manager for TXO Production Corp.; and other engineering positions with various other oil and gas companies. Mr. Heath has both a Bachelor of Science degree in Petroleum Engineering and a Masters degree in Project Engineering and Management from Montana Tech. Mr. Heath is a Registered Professional Engineer, a member of the Society of Petroleum Engineers, and also serves as a Member of the Board of Directors for the Montana Petroleum Association.  The Board has concluded that Mr. Heath’s experience qualifies him for service as an independent director and as a member of the Audit and Compensation Committees.
 
 
 
 
-16-

 
 

 
Mark J. Larsen (49) - Management Director.  Mark J. Larsen was employed by U.S. Energy and its affiliates in various non executive positions from June 1984 to August 23, 2005, at which time he became President and Chief Operating Officer of the Company. Mr. Larsen became a director of the Company in October 2006.  He graduated from the University of Wyoming with a B.S. Degree in Business Management.  The Board has concluded that Mark J. Larsen’s skill in seeking opportunities for the Company in executing acquisitions and sales of oil and gas properties, as well as developing strategies to create value from the acquisition and sale of assets to qualify him for service as a director, President, Treasurer and Chief Operating Officer and as a member of the Executive Committee.

Robert Scott Lorimer (61) - Director.  Mr. Lorimer became a director in 2008.  Mr. Lorimer received a B.S. in Finance, Accounting, Economics and German from Brigham Young University and worked towards a Masters in Accountancy at the University of Nebraska. Prior to joining U.S. Energy Corp., Mr. Lorimer served as Controller for Federal American Partners, a joint venture between Tennessee Valley Authority, Federal Resources and American Nuclear. Mr. Lorimer has extensive experience in government, cost, tax and financial accounting.  Mr. Lorimer retired from U.S. Energy on June 30, 2011.  Prior to his retirement, he was employed as the Chief Accounting Officer of U.S. Energy and its subsidiaries since 1980, and has served as the Chief Financial Officer and Vice President of Finance and Treasurer since 1989.  Under his Executive Retirement benefits, Mr. Lorimer will receive 50% of his annual compensation at the date of retirement for five years as well as other employment benefits, including health insurance until such time as he reaches eligibility for Medicare coverage.  Mr. Lorimer will also be compensated for his service on the Board in the same manner as the independent directors, although he is not considered an Independent Director.  The Board has concluded that Mr. Lorimer’s experience qualifies him for service as a director.

Allen S. Winters (72) - Independent Director.  Mr. Winters became a director on January 23, 2007.  Mr. Winters has over 40 years of experience in mining industry including Vice President and General Manager with Homestake Mining Company.  Mr. Winters has a B.S. in Mining Engineering and a M.S. in Geological Engineering.  The Board has concluded that Mr. Winters’ experience qualifies him for service as an independent director and as a member of the Nominating Committee.  Mr. Winter’s term as an Independent Director will expire on July 29, 2012.

Steven R. Youngbauer (62) - General Counsel and Secretary.  Mr. Youngbauer was appointed General Counsel and Secretary in January 2007, and served as Assistant Secretary and Associate General Counsel to U.S. Energy from February 2004.  Mr. Youngbauer has over 30 years experience in the legal profession and 35 years in the mining and oil and gas industries.  Mr. Youngbauer has served in various capacities including President, Vice President and General Counsel for various oil and mining companies.  Mr. Youngbauer received a Juris Doctorate Degree from the University of Wyoming Law School and he has served as a Wyoming State Senator, Chairman of the Wyoming Environmental Quality Council and on the Board of Directors of the Wyoming Mining Association.  The Board has concluded that Mr. Youngbauer’s experience qualifies him for service as General Counsel and Secretary of the Company.

Bryon G. Mowry (53) Principal Accounting Officer.  Mr. Mowry was appointed Principal Accounting Officer in June 2011, and has served as Controller and Assistant Controller for U.S. Energy since November 1995.  Mr. Mowry has over 30 years experience in the accounting profession and 16 years in the oil and gas and mining industries.  Mr. Mowry has also held accounting positions in banking and education.  Mr. Mowry received a Bachelor of Arts degree in accounting and management information services from Chadron State College, Chadron, Nebraska.  Although, Mr. Mowry is a NEO under SEC rules, Mr. Mowry is not eligible for executive  benefits.
 
 
 
 
-17-

 

 

Business Experience of the New Director Nominee

Thomas R. Bandy (58) – Nominee for independent director.  Mr. Bandy has over 35 years of management and operational experience in the oil and gas industry.  Since 2007, Mr. Bandy has worked for Blue Tip Energy Management, LLC, a private equity company formed to purchase and expand producing oil/gas assets.  Currently Blue Tip Energy has assets in Utah, Wyoming, Kansas and Missouri.  As Executive Vice President of Business Development, his responsibilities are to assist in raising capital, supervise the effort in the search for assets to purchase, and to supervise efforts for Blue Tip Energy to sell its assets.

From 1976 to 1982, Mr. Bandy worked as a petroleum engineer for various oil and gas companies, including Phillips Petroleum Company, Getty Oil Company and Snyder Oil Company.  From 1983 to 1996, Mr. Bandy founded and managed ProTechnics International Inc., which specialized in using chemical and radioactive tracers for fracture simulation evaluation and for secondary recovery operations.  The company developed battery powered, slim hole production logging tools and downhole data management tools.  The company was sold to Core Laboratories in December 1996.  While at ProTechnics International, Mr. Bandy personally co-authored four U.S. patents for new technologies, successfully raised equity capital on numerous occasions and Pro-Technics was named finalist twice and honorable mention once for Petroleum Engineering Magazine’s meritorious awards for innovative technologies.  From 1997 to 2007, Mr. Bandy founded and managed Production Access Inc., which developed software code for an information management system used by small to mid-size oil companies to capture and manage drilling/production/financial data.  The company was sold to Petris Technologies in June of 2007.  While at Production Access, Mr. Bandy completed two successful campaigns to raise equity capital and introduced software tools to help oil companies manage their information.  If Mr. Bandy is elected as an independent director, it is anticipated that he will be appointed to serve on the Compensation and Nominating Committees.

Mr. Bandy was recommended to the Board by Mr. Winters, Chairman of the Nomination Committee.
 
 
Family Relationships

Keith G. Larsen, a director, Chief Executive Officer and Chairman of the Board, and Mark J. Larsen, a director, President, Chief Operating Officer and Treasurer, are brothers.

Section 16(a) Beneficial Ownership Reporting Compliance

Under Section 16(a) of the Exchange Act, directors, executive officers, and persons beneficially holding more than 10% of our common stock must report their initial ownership of our common stock and any changes in that ownership in reports that must be filed with the SEC and us.  The SEC has designated specific deadlines for these reports and we must identify in this Proxy Statement those persons who did not file these reports when due.

Based solely on a review of reports furnished to us and written representations from the filing persons, all directors, NEOs, and 10% owners timely filed all reports regarding transactions in our securities required to be filed for 2011 under Section 16(a) of the Exchange Act, except there was one late filing for Mr. Danni’s initial filing because the Company did not have Mr. Danni’s filer number in time to make the filing within the required time period.

 
 
 
-18-

 

 

PROPOSAL 2:  RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITIORS

The Board seeks shareholder ratification of the Audit Committee's appointment of Hein & Associates LLP, certified public accountants, to act as the auditors of our financial statements for the year ending December 31, 2012.  Hein & Associates LLP has audited our financial statements for the years ended December 31, 2010 and 2011.  The Audit Committee has not determined what action, if any, would be taken should the appointment of Hein & Associates LLP not be ratified at the meeting.

Principal Accounting Fees and Services

Hein & Associates LLP has been paid for fees and services in 2011 and 2010 as shown below:

   
Year Ended December 31,
 
   
2011
   
2010
 
             
Audit Fees (a)
  $ 255,200     $ 214,600  
Audit-Related Fees
    --       --  
Tax Fees (b)
    28,000     $ 35,900  
All Other Fees
  $ 18,300       --  
   Total
  $ 301,500     $ 250,500  
                 
(a)  
Includes fees for audit of the annual financial statements and review of quarterly financial information filed with the SEC and in 2010 fees paid in connection with our equity offering during the fourth quarter of 2009.

 
(b)
The Audit Committee approves the terms of engagement before we engage the audit firm for audit and non-audit services, except as to engagements for services outside the scope of the original terms, in which instances the services have been provided pursuant to pre-approval policies and procedures established by the Audit Committee.  These pre-approval policies and procedures are detailed as to the category of service and the Audit Committee is kept informed of each service provided.  These policies and procedures, and the work performed pursuant thereto, do not include any delegation to management of the Audit Committee's responsibilities under the Exchange Act.

The percentage of services provided for Audit-Related Fees, Tax Fees and All Other Fees for 2011 and 2010 are as follows:

 
Year Ended December 31,
 
2011
 
2010
Audit Fees
84.7%
 
85.7%
Audit-Related Fees
0.0%
 
0.0%
Tax Fees
9.3%
 
14.3%
All Other Fees
6.0%
 
0.0%
   Total
100.0%
 
100.0%
       

 
-19-

 
 

 
Relationship with Independent Accountants

Hein & Associates LLP has audited the Company's financial statements for the twelve months ended December 31, 2010 and 2011.  A representative will be present at the meeting in person or by telephone to respond to appropriate questions, and will be provided the opportunity to make a statement at the meeting.  There have been no disagreements between the Company and Hein & Associates LLP concerning any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which were not resolved to the satisfaction of that firm.

For the reasons provided in this Proxy Statement, we are asking shareholders to vote “FOR” the following resolution:

“RESOLVED, that the shareholders ratify the Audit Committee's appointment of Hein & Associates LLP, certified public accountants, to act as the auditors of our financial statements for the year ending December 31, 2012.”

Recommendation of the Board

The Board recommends you vote For Proposal 2.

 
 
-20-

 

 

PROPOSAL 3: ADVISORY VOTE ON EXECUTIVE COMPENSATION

Our shareholders are entitled to cast an advisory vote at the Annual Meeting to approve the compensation of the NEOs as a group, as disclosed in this Proxy Statement.  As an advisory vote, this Proposal 3 is not binding on the Board or the Compensation Committee.  However, the Compensation Committee will take into account the outcome of the vote when considering future executive compensation decisions.

As discussed in detail in “Executive Compensation - “Compensation Discussion and Analysis,” our executive compensation programs are designed to provide a competitive level of compensation to attract, motivate and retain talented and experienced executives and to motivate them to achieve short-term and long-term corporate goals that enhance shareholder value.

For the reasons provided in this Proxy Statement, we are asking shareholders to vote “FOR” the following resolution:

“RESOLVED, that the shareholders approve, on an advisory basis, the compensation philosophy, policies and procedures and the compensation of the NEOs as disclosed in the proxy statement for U.S. Energy’s 2012 Annual Meeting of Shareholders pursuant to the compensation disclosure rules of the SEC, including the “Compensation Discussion and Analysis”, the compensation tables and the narrative disclosures that accompany the compensation tables.”

As an advisory vote, this proposal is not binding upon the Company. However, the Compensation Committee, which is responsible for designing and administering the Company’s executive compensation program, values the opinions expressed by shareholders in their vote on this proposal and will continue to consider the outcome of the vote when making future compensation decisions for NEOs.

Recommendation of the Board

The Board recommends you vote For Proposal 3.


EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

This section describes the compensation programs for our Chief Executive Officer, Principal Accounting Officer and each of our other three most highly compensated employees for the 2011 fiscal year.  The NEOs for fiscal 2011 are:

·  
Keith G. Larsen, Chairman of the Board and Chief Executive Officer;
·  
Robert Scott Lorimer, CFO, Treasurer and V.P. Finance (retired on June 30, 2011);
·  
Bryon Mowry, Principal Accounting Officer*;
·  
Mark J. Larsen, President, Chief Operating Officer and Treasurer; and
·  
Steven R. Youngbauer, General Counsel and Secretary

 
*
Although, Mr. Mowry is a NEO under SEC rules, Mr. Mowry is not eligible for executive  benefits.

 
 
-21-

 

 
The Compensation Committee believes that the interests of the NEOs should be aligned with shareholder interests, that executive compensation should be structured to incentivize and reward contributions made to the Company through the achievement of performance goals, and that compensation packages should be designed to attract and retain experienced executives.

Short term alignment is based on a salary under employment contracts, and a bonus is available through the Performance Compensation Plan, (“PCP”); these components are intended to compensate for activity during the year that is reasonably expected to benefit the Company in the future.  An additional bonus for extraordinary performance may be awarded.

Long term alignment has been tied to stock options and stock awards, two broad-based plans for all employees (an ESOP and a 401(k) plan), and an agreement to pay cash and benefits if there is a change in control of the Company.  Other than company-wide health insurance premiums paid by us, there are no material perquisites afforded to the executives.

In the first quarter of 2012, our Compensation Committee retained a compensation consultant, Denver Compensation & Benefits, LLC (“Denver Compensation & Benefits”), to review our policies and procedures with respect to executive compensation. Denver Compensation & Benefits reviewed the roles and job responsibilities of each of the executive officers, compiled an industry peer group for comparison of compensation policies and then prepared and provided to the Compensation Committee an executive compensation review for the Company. The peer group utilized for the analysis included the following companies:  Barnwell Industries, CAMCA Energy Inc., Double Eagle Petroleum Co., FX Energy, Inc., Gastar Exploration Limited (USE), GeoMet, Inc., Isramco, Inc., Magellan Petroleum Corporation, Sonde Resources Corp., Toreador Resources Corporation, Abraxas Petroleum Corp., Endeavour International Corporation, CREDO Petroleum Corporation, Gasco Energy, Inc., HKN, Inc. Tengasco, Inc., Revette Minerals Inc. and Rockwell Diamonds, Inc. (hereinafter referred to as the “Peer Group”).

Based upon a comparison of U.S. Energy’s executive compensation and the Peer Group, Denver Compensation & Benefits made the following findings and conclusions:

·  
The base salary for the CEO and General Counsel were below the market median at the 17 th and 27 th percentiles, respectively.  The COO and CFO were much closer to the market median for base salary, at the 47 th and 62 nd percentiles.
 
·  
The short-term compensation (“STI”) for the CEO, COO and General Counsel was significantly below the market median for STI, with STI at the 28 th , 35 th and 36 th percentiles, respectively.  For the CFO, STI w as in-line with the market median at the 47 th percentile.
 
·  
The total cash compensation (“TCC”) for the CEO, COO and General Counsel was significantly below the market median at the 22 nd , 35 th and 23 rd percentiles, respectively.  For the CFO, TCC was in-line with the market median at the 57 th percentile.
 
·  
The long-term incentive compensation (“LTI”) awards for the CEO, COO, CFO and General Counsel was significantly above the market median, at the 67 th , 76 th , 74 th and 84 th percentiles, respectively.  This is primarily the result of grants under the Stock Award Program originally approved by the shareholders in 2001, with an amendment approved by the shareholders in 2007.
 
·  
The total direct compensation (“TDC”) for the CEO was in-line with the market median at the 51 st percentile.  However, due to the LTI awards (primarily under the Stock Award Program), TDC for the COO, CFO and General Counsel was above the market median, ranging from the 70 th to 76 th percentiles.
 
 
 
-22-

 
 

·  
In summary, U.S. Energy’s TDC is for all NEOs is generally in-line with market norms; U.S. Energy’s STI is generally in-line with market practices both with regard to the metrics used as well as target bonuses as a percent of the base salary; and U.S. Energy’s LTI is also generally in-line with market practices with regard to the form of the awards.  However, while U.S. Energy grants stock that is immediately vested, the majority of the peer group uses restricted stock with some form of vesting requirement.  In addition, U.S. Energy requires the executives to retain ownership of this stock until they leave the Company.

Based on the Compensation Committee’s review of the information provided to it by Denver Compensation & Benefits, the committee has determined that the compensation package generally is consistent with compensation arrangements at similarly-sized corporations in the oil and gas and minerals business, and that our package (including the Performance Compensation Plan) is attaining the Committee’s objectives.  The Board has concurred with the Committee’s determination.

Payment of each of these compensation components (except the award of options and stock, which is determined only by the Compensation Committee) is made on authorization of the Board, following the recommendations of the Compensation Committee each year.  Each component is considered independent of the others.  Base salary is paid regardless of company-wide performance or payment of cash bonuses, and awards of options and stock are not related to salaries or cash bonuses.  We currently do not have any policies regarding the adjustment or claw back of payments or awards, if after payment or award the Company-level performance measures are restated or otherwise adjusted in a manner that would have reduced the size of the payment or award.  The Board and the Compensation Committee are awaiting further guidance on the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act before determining whether the implementation of such policies is appropriate.  We will continue to periodically review best practices and re-evaluate our position with respect to such matters.

In addition, with respect to annual stock awards under the 2001 Stock Compensation Plan, there is no management exposure to downside equity performance.

The Committee does not consider the impact upon the Company of the accounting treatment of any form of compensation paid to the executives, and gives only limited consideration to the tax treatment of such compensation.   Other than actuarial consultants who help assess ESOP valuation, professional management of the 401(k) plan and the accrual of the executive retirement benefit, the Committee generally does not use outside consultants, although, as discussed above, it retained Denver Compensation & Benefits in 2012.  The actuarial consultants are not involved in bonus recommendations or otherwise in connection with executive compensation issues.

The Committee is provided information on Company and individual and department performance by the executives.  Each year, the Committee undertakes an analysis of the compensation package to determine if any one component should be recommended to the Board for changes.   With regard to the executives who have employment contracts with the Company, the criteria or metrics to be attained (and the weight assigned to each) may be changed by the Board, but the Performance Compensation Plan itself cannot be changed for any executive without his concurrence.  Management does not participate in the Committee’s deliberations.  Additionally, any changes to compensation for non-executive employees related to the executives must be approved by the Compensation Committee.  At the 2011 Annual Shareholders Meeting, the shareholders advisory vote on executive compensation (“say-on-pay”) was 9,779,997 votes for, 527,165 against and 614,832 votes abstaining.  The Committee carefully considered the shareholder advisory vote on executive compensation in determining the 2012 PCP.

 
 
-23-

 
 

 
The summary below shows the compensation components.

·  
Base Salary

The Compensation Committee believes that base salary is critical in attracting and keeping outstanding employees at all levels.  Base salaries are determined by the Committee (subject to Board approval) for executive officer positions and are based on the scope of responsibilities, seniority, our ability to replace the individual, and other factors.  Base salaries now are paid under contracts entered into on April 20, 2009.  These contracts were scheduled to expire on April 20, 2012, but were extended by the Board until April 20, 2013 – see “Employment Agreements” below.

·  
Cash Bonuses

Payment of annual cash bonuses (not more than 100% of base salary) is determined by the Compensation Committee with input from executives, in accordance with the Performance Compensation Plan. In addition, we have traditionally paid a cash holiday bonus to all employees, including executives, based on a percentage of base pay, ranging from 3-10%. The holiday bonus is paid at the discretion of management, depending on available cash and the budget for the next year.

·  
Performance Compensation Plan for 2011

Adopted in April 2009 and amended in 2011, the PCP is intended to compensate all employees (including executive officers) for improvement of shareholder value by rewarding the accomplishment of aggressive yet realistic financial and production objectives.  The activation trigger for any bonuses under the PCP is positive cash flow from operations (“Cash Flow”).  Cash Flow is defined as net cash provided by operating activities from the audited year end statement of cash flows filed with the SEC.  Bonus compensation pursuant to the PCP will not exceed, in aggregate for all employees, more than 10% of Cash Flow for the relevant year.  Once triggered, the Compensation Committee determines whether performance factors (which are assigned a percentage out of the maximum percentage of base salary attainable) were achieved in the prior year.  For executives, the maximum percentage is 100%; other employees’ maximums range from 10% to 50% for the year ended December 31, 2011.  The table below shows the elements applicable to executives.  As a result of positive Cash Flow and the accomplishment of portions of the PCP, an accrual was made for all employees at December 31, 2011 and the bonus was paid in March 2012.  The accrued bonuses for Company executives were as follows: Keith G. Larsen $52,600; Mark J. Larsen $50,900; Robert Scott Lorimer $24,900; Steven R. Youngbauer $35,900; and Bryon G. Mowry $9,800, based on the performance objectives as detailed in the following table:
 
 
 
-24-

 
 
 
 
 
% of Annual Base Pay
 
Eligible
 
Amount
Performance Element
Amount
 
Earned
       
Stock Price (1)
20%
 
0%
Earnings per Share (2)
20%
 
0%
Cash Flow Factor (3)
20%
 
3%
General Costs (4)
10%
 
10%
Proved Reserves (5)
15%
 
15%
Production (6)
10%
 
0%
Budget & Mt Emmons (7)
5%
 
5%
 
100%
 
33%
       

(1)        Stock Price Factor - The 200 day average stock price ending December 31, 2011 must have exceeded the same 200 day average stock price ending December 31, 2010 by 15 percent or greater to earn the 20% assigned award.  No award would be earned for less than the targeted 15% increase.  This factor was not met for 2011.

(2)        EPS Factor – During the year ended December 31, 2011 there must have been positive reported earnings per share.  No award would be earned if earnings per share were not positive.  This factor was not met for 2011.

(3)        Cash Flow Factor- 2011 Cash Flow must have met or exceeded $15 million to qualify for the full percentage award of 20%.  In the event that Cash Flow was less than the targeted $15 million, the award would be reduced downward on a pro-rata basis using the following formula:

Actual Cash Flow was $2,567,000.

(4)        Cost Control – G&A – Percentage points earned would be based on total reported general and administrative cost (subject to exceptions for non-budgeted special projects, critical employee requirements or extraordinary costs recommended for exclusion from the calculation by the Compensation Committee with Board approval) compared to the previous year exclusive of any bonus earned.  For cost increases under 5%, the full 10 percentage points would be awarded.  For cost increases between 5-10%, the percentage points earned would decrease on prorated bases from 10 to 1.  No percentage award would be earned for cost increases above 10%.

Costs for 2011 increased less than 5%, so the full 10 percentage points were awarded.

 (5)             Reserves - Increased proved developed and proved undeveloped oil and gas reserves at December 31, 2011 to 3 million BOE, with the BOE ratio for natural gas calculated at 6 mcf to 1 BOE.  No award would be earned if the Company’s 2011 year end reserves were less than 3 million BOE.  This criterion was achieved so the full 10% was awarded.

(6)        Daily Production Increased average daily oil and gas production for the year ended December 31, 2011 to 1,500 BOE/D, with the BOE ratio for natural gas calculated as described above.  No award would be earned if the Company’s average daily production was less than 1,500 BOE/D for the year ended December 31, 2011.  This criterion was not achieved.
 
 
 
 
-25-

 

 

(7)        Budget and Mt. Emmons – Drilling and operating budgets are adequately funded, and the Mt. Emmons water treatment plant is operated without violation of any applicable regulatory requirement.  These criteria were achieved so the full 5% was awarded.

 
·  
Performance Compensation Plan for 2012

In December 2011 the Compensation Committee recommended changes to the PCP matrix for 2012 that were adopted by the Board on December 8, 2011.  The maximum bonus that can be earned during the year ended December 31, 2012 for executives remained at 100% of base cash compensation; other employees’ maximums range from 10% to 50% for the year ended December 31, 2012.

The PCP Bonus Matrix was changed to further enhance shareholder value.  For the year ended December 31, 2012 the components of the PCP matrix for all employees is detailed in the following table and notes:
 
   
Target Percent
   
of Base Cash
Financial Factors
 
Compensation
Stock Price Factor (1)
 
20.0%
EPS Factor (2)
 
20.0%
Cash Flow Factor (3)
 
20.0%
Company Goals
   
Reserves (BOE) (4)
 
20.0%
Production (BOE/day) (5)
20.0%
   
100%
     
 
Financial Factors

 
(1)
Stock Price Factor - The 200 day average stock price ending December 31, 2012 must exceed the same 200 day average stock price ending December 31, 2011 by 15 percent or greater to earn the 20% assigned award.  No award will be earned for less than the targeted 15% increase in the 200 day moving day average stock price.

 
(2)
EPS Factor - For the year ended December 31, 2012, reported earnings per share must be $0.05 or more per share to attain the 20% award.

 
(3)
Cash Flow Factor - 2012 Cash Flows must be at least $21 million to trigger the award.  To qualify for the full 20% award, Cash Flow must be $30 million or greater.  Cash Flow between $21 million and $30 million will be awarded in 2% increments up to the full 20% allocated award amount.

Operational Factors

 
(4)
Reserves Factor - Increase proved oil and gas reserves by 30% at December 31, 2012 from proved reserves at December 31, 2011.

 
(5)
Production Factor - Increase average daily oil and gas production for the year ended December 31, 2012 by 40% from 2011 average daily production.  No award will be earned for less than a 40% increase for the year ending December 31, 2012.
 
 
 
 
-26-

 

 
·  
Stock Options

The 2001 ISOP expired on December 6, 2011. The options granted pursuant to the 2001 ISOP were both non-qualified stock options and option options that were intended to qualify under section 422 of the Internal Revenue Code as incentive stock options. Options were issued at exercise prices equal to the market price on the relevant grant dates and vested (became exercisable) at various times as determined by the Compensation Committee and approved by the Board.  All options are exercisable for cash, delivery of shares of common stock (valued at market), or on a “net” or “immaculate” exercise.  Any income taxes due as a result of the exercise of options is paid by the holder of the options at the time of exercise either in cash or shares being withheld resulting in fewer shares being issued.
 
All options granted under the 2001 ISOP prior to the expiration date will remain in effect pursuant to the terms under which they were issued.

·  
Stock Awards

The 2001 Stock Compensation Plan (the "2001 SCP") is currently scheduled to expire at the annual meeting held in 2018 unless extended by the shareholders.  If the shareholders approve Proposal #4 “2012 Equity Plan” at the June 29, 2012 annual meeting, the 2001 SCP will be terminated on April 20, 2013 (which is the expiration date of the executive employment agreements) and the last shares issued under the 2001 SCP by the Company will be in April 2013.   However, if the 2012 Equity Plan does not pass, then the 2001 SCP will continue and not be terminated.  Under the SCP, each eligible executive officer receives 5,000 shares of U.S. Energy common stock per quarter.  We gross up the stock compensation for the federal income tax effect on the issuance of shares to the executives.  The shares are issued as fully vested, but the shares cannot be sold, pledged or otherwise transferred until retirement, total disability or death.  Awards are not tied to any metric of Company or executive performance.

·  
Executive Officer Retirement Benefits

A retirement plan for executives was approved by the Board on October 20, 2005.  Eligibility requirements for receiving benefits under the plan include reaching age 60 and having served for a minimum of 15 years as a designated executive and being employed by the Company on December 31, 2010.

Benefits include five years of payments equal to 50% of the greater of the average of the individual’s last five years of base pay or the last annual base pay.  As a condition to payments, an executive, if requested by the Board, will provide up to 1,040 post-retirement consulting hours to assist with transition to other executives.  If a retired executive is asked to provide more than 1,040 hours, he will be compensated at commensurate hourly rates.  In the case of death, benefits will be paid to the executive’s estate.  Beginning in 2007, the required funding for current officers was funded through a Rabbi Trust administered by a third party trustee.
 
Executive Severance and Non-compete Agreements

We have individual severance and non-compete agreements for the executive officers (Keith G. Larsen, Chairman and CEO, Mark J. Larsen, President, and Steven R. Youngbauer, Secretary and General Counsel) to ensure they remain focused on current operations as well as maintain protection against competition in the event of a change in control of the Company. Each agreement provides that if the executive’s employment is terminated within three years of a
 
 
 
-27-

 
 
 
change in control, other than retirement, death or cause, the Company will be required to pay to the executive an amount equal to three times the average annual compensation over the five years ending before the change in control plus certain other amounts described in “Potential Payments upon Change in Control.”
 
  Summary Compensation Table

Name and Position
Year
 
Salary
   
Bonus 
(1)
   
Stock
Awards 
(2)
   
Option
Awards 
(3)
   
Non-Equity Incentive Compensation
(4)
   
Change in Pension Value
& Non-
Qualified
Deferred Compensation Earnings
(5)
   
All Other Compensation 
(6)
   
Total
 
Keith G. Larsen,           
Chairman and Chief
Executive Officer
2011
  $ 257,300     $ 25,700     $ 152,800     $ --     $ 52,600     $ 21,600     $ 29,000     $ 539,000  
 
2010
  $ 257,300     $ 25,700     $ 174,300     $ --     $ 193,000     $ 20,500     $ 33,000     $ 683,300  
 
2009
  $ 240,500     $ 49,100     $ 76,100     $ --     $ 255,900     $ 99,800     $ 31,100     $ 652,700  
                                                                   
Mark J. Larsen,       
President and COO
2011
  $ 248,500     $ 24,900     $ 152,800     $ --     $ 50,900     $ 17,100     $ 29,100     $ 523,300  
 
2010
  $ 248,800     $ 24,900     $ 174,300     $ --     $ 187,000     $ 16,400     $ 33,100     $ 668,100  
 
2009
  $ 231,800     $ 93,200     $ 76,100     $ --     $ 249,400     $ 82,000     $ 31,000     $ 681,500  
                                                                   
Robert Scott Lorimer,     
Chief Financial Officer and Treasurer
2011
  $ 140,500     $ -     $ 136,700     $ --     $ 24,900     $ --     $ 81,200     $ 383,300  
 
2010
  $ 243,400     $ 24,300     $ 174,300     $ --     $ 182,600     $ 30,600     $ 33,500     $ 658,100  
 
2009
  $ 227,500     $ 47,800     $ 74,600     $ --     $ 244,800     $ 143,700     $ 31,500     $ 626,200  
                                                                   
Steven R. Youngbauer,
General Counsel
2011
  $ 175,800     $ 17,600     $ 152,800     $ --     $ 35,900     $ 3,500     $ 29,900     $ 415,500  
 
2010
  $ 175,800     $ 17,600     $ 174,300     $ --     $ 131,800     $ 3,300     $ 33,900     $ 533,400  
 
2009
  $ 169,000     $ 41,900     $ 76,100     $ --     $ 140,600     $ 63,500     $ 31,500     $ 459,100  
                                                                   
Bryon G. Mowry,
Principal Accounting Officer
2011
  $ 137,700     $ 13,800     $ --     $ --     $ 9,800     $ --     $ 24,700     $ 186,000  
                                                                   
                Total
2011
  $ 959,800     $ 82,000     $ 595,100     $ --     $ 174,100     $ 42,200     $ 193,900     $ 2,047,100  
 
2010
  $ 925,300     $ 92,500     $ 697,200     $ --     $ 694,400     $ 70,800     $ 133,500     $ 2,542,900  
 
2009
  $ 868,800     $ 232,000     $ 302,900     $ --     $ 890,700     $ 389,000     $ 125,100     $ 2,419,500  


(1)   
All officers and employees were also paid a 10% of base compensation holiday bonus during the years ended December 31, 2011, 2010 and 2009.

 
A cash bonus of $25,000 was paid to the Company’s CEO, CFO and General Counsel and a cash bonus of $70,000 to the Company’s President in 2009 for work completed in 2008.  The 2008 performance bonus was not accrued at December 31, 2008.

 
(2)
Each eligible officer received 5,000 shares per quarter of U.S. Energy’s common stock under the 2001 SCP during the years ended December 31, 2011, 2010 and 2009, respectively.  Each grant of shares was made at the beginning of each quarter and valued at market. U.S. Energy paid all applicable taxes on these shares as the executives have agreed not to sell, transfer or pledge these shares until the first of either of their retirement, total disability or death. The amounts do not represent cash paid by U.S. Energy to these persons.
 
 
 
 
-28-

 
 

 
 
(3)
The Company granted options to its employees and officers from time to time.  Grants are not scheduled or part of any incentive compensation plan.  There were no option grants in 2011, 2010 or 2009.

 
(4)
The Compensation Committee granted the accrual of a performance bonus at December 31, 2011 in the amount of $52,600 to Keith Larsen, $50,900 to Mark Larsen, $24,900 to Scott Lorimer, $35,900 to Steve Youngbauer and $9,800 to Bryon Mowry.  These bonuses were paid during the first quarter of 2012.
 
 
During the year ended December 31, 2010, bonuses were accrued in the amount of $193,000 for Keith Larsen, $187,000 for Mark Larsen, $182,600 for Scott Lorimer and $131,800 for Steve Youngbauer.  These bonuses were paid during the first quarter of 2011.

 
During the year ended December 31, 2009 bonuses were accrued in the amount of $255,900 for Keith Larsen, $249,400 for Mark Larsen, $244,800 for Scott Lorimer and $140,600 for Steve Youngbauer.  These bonuses were paid during the first quarter of 2010.

 
(5)
The amounts shown in this column are attributable to the increase, if any, in the actuarial value of each NEO's combined benefits under our qualified and nonqualified benefit plans determined using interest rate and mortality assumptions consistent with those used in our financial statements.  No NEO received preferential or above market earnings on deferred compensation.

 
(6)
Components of Other Compensation consist of life insurance, ESOP and 401(k) contributions and retirement benefits.  These areas of compensation are detailed in the following table:
 
 
     
Life
   
ESOP
      401(K)    
Retirement
       
     
Insurance
   
Contribution
   
Contribution
   
Benefit
   
Total
 
           
(a)
   
(b)
   
(c)
       
Keith G. Larsen
2011
  $ 400     $ 24,700     $ 4,000     $ --     $ 29,100  
 
2010
  $ 400     $ 28,700     $ 4,000     $ --     $ 33,100  
 
2009
  $ 400     $ 26,700     $ 4,000     $ --     $ 31,100  
                                           
Mark J. Larsen
2011
  $ 300     $ 24,700     $ 4,000     $ --     $ 29,000  
 
2010
  $ 300     $ 28,700     $ 4,000     $ --     $ 33,000  
 
2009
  $ 300     $ 26,700     $ 4,000     $ --     $ 31,000  
                                           
Robert Scott Lorimer
2011
  $ 1,000     $ 24,700     $ 4,000     $ 51,500     $ 81,200  
 
2010
  $ 800     $ 28,700     $ 4,000     $ --     $ 33,500  
 
2009
  $ 800     $ 26,700     $ 4,000     $ --     $ 31,500  
                                           
Steven R. Youngbauer
2011
  $ 1,200     $ 24,700     $ 4,000     $ --     $ 29,900  
 
2010
  $ 1,200     $ 28,700     $ 4,000     $ --     $ 33,900  
 
2009
  $ 800     $ 26,700     $ 4,000     $ --     $ 31,500  
                                           
Bryon G. Mowry
2011
  $ 100     $ 20,600     $ 4,000     $ --     $ 24,700  
                                           
Total
2011
  $ 3,000     $ 119,400     $ 20,000     $ 51,500     $ 193,900  
 
2010
  $ 2,700     $ 114,800     $ 16,000     $ -     $ 133,500  
 
2009
  $ 2,300     $ 106,800     $ 16,000     $ -     $ 125,100  
 
 
 
 
 
 
-29-

 
 
 
(a)       Each executive officer participates in the ESOP, which was established to make annual contributions to employee retirement.  During 2011, 2010 and 2009, all officers received a contribution to their ESOP accounts as a result of the Compensation Committee recommending and the Board approving funding of the 10% of contribution required amount for 2011, 2010 and 2009 with common stock of the Company.  The computation of the 10% contribution of wages paid is limited by ceiling wage amounts as outlined in the Internal Revenue Code.  In addition to the 10% funding, the officers received certain unallocated shares from terminated employees pursuant to the terms of the ESOP.  The value of these forfeited shares is included in the officer compensation.

(b)       All executives also participate in the 401(k) plan and all received a $4,000 contribution during 2011, 2010 and 2009 as matching funds under the plan for their contributions to the plan.

(c)       Retirement benefit paid under the executive retirement policy.

Grants of Plan-Based Awards

On the recommendation of the Compensation Committee,  the Board approved stock awards under the 2001 SCP  to each of the eligible NEOs in 2011, 2010 and 2009.

   
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
 
Extimated Future Payouts Under
Equity Incentive Plan Awards
 
All Other
Stock
Awards
 
All Other Option Awards
 
Exercise or
Base Price of Option Awards
 
Name and Position
 
Threshold
 
Target
 
Max
 
Threshold
 
Target
 
Max.
               
   
($)
 
($)
 
($)
    (#)     (#)     (#)     (#)     (#)  
($/SH)
 
Keith G. Larsen, 
Chairman and Chief
Executive Officer
                                   
2011
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
2010
  $ --   $ --   $ --     --     --     --     20,000 (1 )   --     --  
2009
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
                                                         
Mark J. Larsen, 
President and COO
                                                 
2011
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
2010
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
2009
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
                                                         
Robert Scott Lorimer, 
Chief Financial Officer
and Treasurer
                                     
2011
        $ --   $ --     --     --     --     15,000 (1)   --     --  
2010
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
2009
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
                                                         
Steven R. Youngbauer,
General Counsel
                                                 
2011
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
2010
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
2009
  $ --   $ --   $ --     --     --     --     20,000 (1)   --     --  
                                                         
Bryon G. Mowry,
Principal Accounting Officer
                                           
2011
  $ --   $ --   $ --     --     --     --     --     --     --  
                                                         
Total
                                                       
2011
  $ --   $ --   $ --     --     --     --     75,000     --     --  
2010
  $ --   $ --   $ --     --     --     --     80,000     --     --  
2009
  $ --   $ --   $ --     --     --     --     80,000     --     --  
 
 
(1)
Shares granted under the 2001 SCP.
 
 
 
 
-30-

 

 
Outstanding Equity Awards at April 30, 2012
 
   
Option Awards
 
Stock Awards
 
   
Number of Securities Underlying Unexercised Options
 
Number of Securities Underlying Unexercised Options
 
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options
 
Option
Exercise
Price
 
Option
Expiration
Date
 
Number of
shares of
stock that
have not
vested
 
Market Value
of shares of
stock that
have not
vested
 
Equity Incentive Plan Awards: Number of unearned shares, units or other rights that have not vested
 
Equity Incentive Plan Awards: Market or payout value of unearned shares, units or other rights that have not vested
 
      (#)     (#)     (#)  
($/SH)
        (#)  
($)
    (#)  
($)
 
Name and Position     Exercisable      Unexercisable                                     
                                                 
Keith G. Larsen
                                               
Chairman/CEO
    59,350     --     --   $ 2.46  
06/30/14
    N/A     N/A     N/A     N/A  
      75,000     --     --   $ 2.52  
09/21/18
    N/A     N/A     N/A     N/A  
      100,000     --     --   $ 3.86  
10/13/15
    N/A     N/A     N/A     N/A  
      150,000     --     --   $ 4.97  
07/26/17
    N/A     N/A     N/A     N/A  
                                                       
Mark J. Larsen
                                                     
President/COO
    98,519     --     --   $ 2.46  
06/30/14
    N/A     N/A     N/A     N/A  
      75,000     --     --   $ 2.52  
09/21/18
    N/A     N/A     N/A     N/A  
      100,000     --     --   $ 3.86  
10/13/15
    N/A     N/A     N/A     N/A  
      200,000     --     --   $ 4.97  
07/26/17
                         
                                                       
Robert Scott Lorimer
                                                     
CFO/Treasurer
    25,000     --     --   $ 2.52  
09/21/18
    N/A     N/A     N/A     N/A  
      15,000     15,000     --   $ 2.85  
03/22/22
    N/A     N/A     N/A     N/A  
      30,000     --     --   $ 4.97  
07/26/17
    N/A     N/A     N/A     N/A  
                                                       
Steven R. Youngbauer
                                                     
General Counsel
    25,000     --     --   $ 2.46  
06/30/14
    N/A     N/A     N/A     N/A  
      75,000     --     --   $ 2.52  
09/21/18
    N/A     N/A     N/A     N/A  
      50,000     --     --   $ 3.86  
10/13/15
    N/A     N/A     N/A     N/A  
      100,000     --     --   $ 4.97  
07/26/17
    N/A     N/A     N/A     N/A  
                                                       
Bryon G. Mowry
                                                     
Principal Accounting Officer
    50,000     --     --   $ 2.46  
06/30/14
    N/A     N/A     N/A     N/A  
      30,000     --     --   $ 2.52  
09/21/18
    N/A     N/A     N/A     N/A  
      75,000     --     --   $ 4.97  
07/26/17
    N/A     N/A     N/A     N/A  
Total
                                                     
      1,332,869     15,000                                          
                                                       
 

 
 
-31-

 


Option Exercises and Stock Vested

     
Option Awards
 
Stock Awards
 
     
Number of
Shares Acquired
on Exercise
 
Value Realized
on Exercise
 
Number of
Shares Acquired
on Vesting
 
Value
Realized on
Vesting
 
Name and Position
      (#)  
($)
    (#)  
($)
 
                         
Keith G. Larsen
2011
    52,556   $ 24,200     20,000   $ 152,800 (1)
Chairman/CEO
2010
    267,734   $ 763,000     20,000   $ 174,300 (1)
 
2009
    --   $ --     20,000   $ 76,100 (1)
                             
Mark J. Larsen
2011
    52,556   $ 21,000     20,000   $ 152,800 (1)
President/COO
2010
    41,248   $ 137,400     20,000   $ 174,300 (1)
 
2009
    --   $ --     20,000   $ 76,100 (1)
                             
Robert Scott Lorimer
2011
    259,642   $ 540,000     15,000   $ 136,700 (1)
CFO/Treasurer
2010
    302,497   $ 768,600     20,000   $ 174,300 (1)
 
2009
    --   $ --     20,000   $ 74,600 (1)
                             
Steven R. Youngbauer
2011
    --   $ --     20,000   $ 152,800 (1)
General Counsel
2010
    --   $ --     20,000   $ 174,300 (1)
 
2009
    --   $ --     20,000   $ 76,100 (1)
                             
Bryon G. Mowry
2011
    15,000   $ 39,800     --   $ --  
Principal Accounting Officer
                           
                             
Total
2011
    379,754   $ 625,000     75,000   $ 595,100  
 
2010
    611,479   $ 1,669,000     80,000   $ 697,200  
 
2009
    --   $ --     80,000   $ 302,900  
 

 
(1)
Value of shares issued under the 2001 SCP on the date of issue.  U.S. Energy pays all taxes due on these shares as the executive officer recipient has agreed not to sell, transfer or pledge these shares until his retirement, permanent disability or death.

Nonqualified Deferred Compensation

None of the executives participate in or have account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by the Company.  The Compensation Committee may elect to provide these benefits in the future but there are no current plans to do so.

Employment Agreements

The Company has executive employment agreements with three executive officers, Keith G. Larsen, Mark J. Larsen, and Steven R. Youngbauer.  The terms of the agreements were negotiated between the executives and the Compensation Committee.  The terms of the Performance Compensation Plan (relating to bonuses) were not negotiated but were proposed by the Compensation Committee then approved by the Board with the inside directors abstaining.  The employment agreements do not supersede the executive severance and non-compete agreements upon a change of control.
 
 
 
 
-32-

 
 
 
 
The 2007 agreements provided for three years of employment, renewable automatically for additional one-year terms unless the Company or executive provide written notification 90 days before the expiration date of their intention not to renew the contract. At the recommendation of the Compensation Committee and at the direction of the Board, on January 16, 2012 the agreements were extended for one additional year (until April 20, 2013).  Except for the initial base salary amounts, Mr. Youngbauer not eligible under the Executive Officer Retirement Benefits Plan and as noted below, the provisions of each agreement are identical.

·  
Annual base salary for 2011 paid to Keith G. Larsen was $257,300; $248,500 to Mark J. Larsen and $175,800 to Steven R. Youngbauer.  Annual base compensation in subsequent years may be changed upon recommendation of the Compensation Committee and approval by the Board (and concurrence by each affected executive).

·  
Each executive is eligible for the 2001 SCP and they will continue to be eligible to participate in any compensation plans adopted by the Board for the benefit of all employees.  The benefits of the existing executive severance and non-compete agreements with each executive (providing for payments in the event of termination in the three years following a change in control – see “Compensation Discussion and Analysis – Executive Severance and Non-compete Agreements” above and “Potential Payments Upon Change in Control” below) are not affected by the employment agreements.

·  
If the executive’s employment is terminated by the Company without cause, or by the executive for good reason, the Company will pay him a lump sum equal to (i) 300% of the annual base compensation then in effect (200% in the case of Mr. Youngbauer, due to his lesser period of service with the Company), plus (ii) an amount equal to the value of all vested options based on market price of the Company’s common stock at termination date.  If employment is terminated following a change in control of the Company, payments will be made to the executive as required under the Executive Severance and Non-Compete Agreements (see “Compensation Discussion and Analysis – Executive Severance and Non-Compete Agreements” above).

·  
Once the executive reaches the age of 60 and is still employed by the Company, the Company will continue paying for health insurance coverage for the executive and his spouse until the executive is eligible for Medicare coverage.  The funding of such premiums will be taken from a Rabbi Trust account which is funded annually for this benefit.

·  
So long as the employment agreement is in effect, each executive is eligible to receive (following the filing of the Annual Report on Form 10-K) an annual cash performance award of not more than 100% of base compensation, based upon the Performance Compensation Plan then in effect.  All other Company employees are entitled to earn performance awards in amounts ranging from 10% to 50% of their annual base compensation, depending on their ranking by base compensation.  The percentage weight assigned to each of the factors considered in computing the annual award may be modified each year by the Board after recommendations have been made by the Compensation Committee.  See “Compensation Discussion and Analysis—Performance Compensation for 2012” for information about the PCP in effect with respect to 2012.

Only if the Company has reported positive Cash Flow for the prior year will payment of the performance awards be considered.  However, the Board may pay cash awards for outstanding performance by employees (including executives) who make a significant contribution to the Company, which contribution is not within the performance matrix of the PCP.  These awards for outstanding performance
 
 
 
 
-33-

 
 
 
 
will be determined by the Board without regard to positive Cash Flow.  Bonus amounts are accrued during the year in which they are earned but are not paid until the subsequent year but no later than April 15 th of the subsequent year.

Potential Payments upon Change in Control

U.S. Energy Corp. has Executive Severance and Non-Compete Agreements with Keith G. Larsen, Mark J. Larsen, Steven R. Youngbauer and Richard P. Larsen which combine severance and non-compete provisions.

Each agreement provides that if the executive’s employment is terminated within three years of a change in control of the Company, the Company will be required to pay (i) an amount equal to three times the average annual compensation over the five years ending before the change in control, (ii) legal fees and expenses incurred by such persons as a result of termination; (iii) the difference between market value (as of the termination date) of shares issuable on exercise of options and the options' exercise price; (iv) continued insurance coverage (life, health, medical, and disability); (v) any unpaid bonuses (including a pro rata (based on months of service in the year of termination) portion of bonuses paid in the calendar year after termination, if he served for at least six months in the termination year); (vi) two years of non-compete compensation ($200,000 per year) and (vii) a $1 million term life policy with the premiums to be paid by the Company; total premiums paid will be reimbursed from any death benefits paid.

A change of control is defined to mean:

·  
the acquisition by any person or entity of the beneficial ownership of securities representing 25% or more of the combined voting power of the Company’s then outstanding voting securities, whether or not that ownership is coupled with or followed by election of new directors who make up a majority of the Board;

·  
during any two consecutive years, the directors at the beginning of the period cease to be a majority of the Board; or

·  
as a result of a tender offer, merger, contested election or similar transaction, the directors before the transaction no longer make up a majority of the Board (unless the change in the Board was approved by a majority vote of the directors before the transaction).

If there is a change in control, the executive’s employment will be deemed terminated if he is subsequently assigned duties inconsistent with prior responsibilities, he is not re-elected to the same positions, his base salary is reduced, or any benefit or compensation elements are changed adversely to him.

In addition, during the two years after termination of employment, the executive will not directly or indirectly be involved in the minerals business in most of the western United States.

This table shows our potential payment obligations under the severance and non-compete agreements, as if termination took place on December 31, 2011.  Actual payments could be more or less.  For the option buyout component, the closing market price of U.S. Energy’s stock on December 31, 2011 is used.  No estimate is made of legal fees that might be involved and no provision is made for bonuses.

 
 
-34-

 
 

 
Table of Potential Change in Control – Termination Payments
(as if termination had occurred on December 31, 2011)
 
 
Amounts shown as 300% of average compensation are based on the average annual salary for the five year period ending on December 31, 2011.
 
 
Name and Position
 
300% of
Average Compensation
   
Value of Option Exercise at 
12-31-11 (1)
   
Value of Stock Awards at 
12-31-11 (2)
   
Value of Health Insurance for
Three Years
   
Total
 
Keith G. Larsen,
Chief Executive Officer
Effective Date 2-14-01
  $ 731,400     $ 56,000     $ 268,600     $ 61,200     $ 1,117,200  
Mark. J. Larsen,
President
Effective Date 2-14-01
  $ 698,700     $ 73,600     $ 268,600     $ 61,200     $ 1,102,100  
Steven Youngbauer,
General Counsel
Effective Date 5-1-07
  $ 507,500     $ 40,500     $ 268,600     $ 61,200     $ 877,800  
Richard P. Larsen,
Chief Pilot
Effective Date 2-14-01
  $ 426,200     $ 6,300     $ --     $ 61,200     $ 493,700  
Total
  $ 2,363,800     $ 176,400     $ 805,800     $ 244,800     $ 3,590,800  
                                         
(1) Equals closing price on December 31, 2011 less the strike price of issued options times the number of exercisable options.
 
                                         
(2) Stock awards pursuant to the 2001 Stock Compensation Plan
                         
 
 
Retirement Policy

The Company adopted an executive retirement policy in 2005 and amended it in 2006 and 2007.  The executive retirement policy, like the policy for all Company employees, sets a mandatory retirement age of 70, although the Board may request service thereafter.

The executive retirement policy provides retirement benefits for an eligible officer who has reached 60 years of age, has served a minimum of 15 years as an executive officer, and was employed until December 31, 2010.  All conditions of eligibility must be met completely to qualify for cash payments under the plan.  The officers potentially eligible for this benefit under the plan as amended are Keith G. Larsen, Mark J. Larsen and Robert Scott Lorimer.  Mr. Lorimer became eligible for retirement under the executive retirement policy in January 2011.  Keith G. Larsen will be eligible for retirement in October 2018 and Mark J. Larsen will become eligible for retirement in October 2022.

At retirement, an executive will receive, for five years, 50% of the greater of (i) annual base salary (using his final regular pay check to calculate the annual rate), or (ii) the average annual salary which he received over the last five years.  The benefit will be paid monthly (in accordance with normal bi-weekly payroll practices) for five years following retirement from employment.  The first six months of benefits may be paid in the seventh month for a “specified employee” (as defined in Section 409(a)(2)(B) of the Internal Revenue Code) instead of bi-weekly for the first six months.  At death, the unpaid installments will be paid to his designee (or classes of preference beneficiaries, if there is no designee).  The benefits are not assignable.  No perquisites will be continued or provided.  Upon retirement, officers, including
 
 
 
-35-

 
 
 
Mr. Youngbauer, are eligible for healthcare insurance for themselves and their spouse and dependent children until the employee reaches Medicare eligibility.  Mr. Youngbauer became eligible for the health insurance benefit in February 2010.

The retired executive will be available to the Company for up to 1,040 hours per year during the benefit period for consulting or other services the Board deems is needed, for which he will not be paid any additional compensation.  Services in addition to the annual available hours would be compensated on an hourly basis at the rate in effect at retirement.  This retirement benefit may be extended beyond the benefit period at the discretion of the Board at a rate which would be negotiated but would not be less than the initial retirement rate.

During 2008, the Board ratified the recommendation of the Compensation Committee to fund the executive retirement plan for the three eligible officers.  The plan is managed by an independent trustee. Annual amounts are set aside to fund the retirement plan and the healthcare insurance benefit and will be paid out per the plan by the trustee to eligible retired officers pursuant to the terms of the plan and the executives’ employment contracts.  The following table sets forth the status of the executive retirement plan:
 
Name and Position
Plan Year
 
Number of
Years
Credited
Service
   
Present Value
of Accumulated
Salary Benefit
(1)
   
Present Value of Accumulated
 Health Insurance Benefit
(2)
   
Payments
during Last
Calendar Year
 
                           
Keith G. Larsen
2011
    14     $ 411,600     $ 65,300     $ --  
Chairman/CEO
2010
    13     $ 393,000     $ 62,300     $ --  
 
2009
    12     $ 375,300     $ 59,500     $ --  
                                   
Mark J. Larsen
2011
    6     $ 331,700     $ 54,300     $ --  
President/COO
2010
    5     $ 317,000     $ 51,900     $ --  
 
2009
    4     $ 302,900     $ 49,600     $ --  
                                   
Robert Scott Lorimer
2011
    20     $ 544,100     $ 91,200     $ 51,500  
CFO/Treasurer
2010
    19     $ 544,100     $ 91,200     $ --  
 
2009
    18     $ 517,900     $ 86,800     $ --  
                                   
Steven R. Youngbauer
2011
          $ --     $ 70,300     $ --  
General Counsel/Secretary
2010
          $ --     $ 66,800     $ --  
 
2009
          $ --     $ 63,500     $ --  
                                   
                Total
2011
          $ 1,287,400     $ 281,100     $ 51,500  
                Total
2010
          $ 1,254,100     $ 272,200     $ --  
                Total
2009
          $ 1,196,100     $ 259,400     $ --  
 
(1)   
The Company utilizes a certified actuary to compute the present value of the retirement benefit under the executive retirement plan based upon mortality tables, termination factors, interest rates and longevity of each officer.

(2)   
The Company utilizes a certified actuary to compute the present value of the health insurance benefit under the employment contracts based on mortality tables, termination factors, interest rates and longevity of each officer.  The actuarial consultant reviewed prevailing interest rates for high-quality long term fixed-income investments. The basis used to determine the overall expected long-term rate of return on assets assumption was an analysis of the historical rate of return for a portfolio with a similar asset allocation.  The duration of the plan's liabilities as of December 31, 2011, was 16.0 years.  Based on this review and the plan's duration, the actuarial determined a reasonable discount rate of 4.5%.   The actuarial also used widely accepted mortality rate tables, the age and longevity of the plan participants when completing the computations for the present value of the retirement and health insurance benefits.
 
 
 
 
-36-

 
 

 
Three former executive officers were eligible for benefits under the plan: (1) Robert Scott Lorimer, who will receive retirement benefits under the plan from July 1, 2011 through June 30, 2016.  Mr. Lorimer is also eligible for healthcare insurance for himself, his spouse and his dependent children until he reaches Medicare eligibility; (2) John L. Larsen, former Chairman and CEO, who qualified under the plan and passed away on September 4, 2006.  John L. Larsen’s estate received benefits earned under the plan through September 4, 2011; and (3) Daniel P. Svilar, former General Counsel and Secretary, who retired on January 12, 2007.  Mr. Svilar received benefits pursuant to the plan through January 12, 2012.  The benefits due to Robert Scott Lorimer were funded, but the benefits paid to John L. Larsen and Daniel P. Svilar were not funded.

Changes to Long-Term Equity-Based Incentive Awards

Subject to the approval of our shareholders at the Annual Meeting, the 2012 Equity and Performance Incentive Plan (the “2012 Equity Plan”) will become effective July 1, 2012.  For the 2012 compensation period and until expiration of the current employment contracts on April 20, 2013, we plan to continue to make equity grants to existing eligible executives under the 2001 SCP, unless otherwise agreed to in writing by the eligible executives and we plan to make any equity grants made to new employees hired after July 1, 2012 under the 2012 Equity Plan.  Upon expiration of the existing executives’ current employment contracts on April 20, 2013, we plan to make equity grants to executives, for both new hires and existing executives under the 2012 Equity Plan.

Executive Stock Retention Guidelines

In order to better align the interests of our executive officers with the interests of our stockholders and to promote our commitment to sound corporate governance, the Board, upon the recommendation of our Compensation Committee, will consider equity retention guidelines for implementation in late 2012 or 2013.

Non-Employee Director Compensation.

Directors who are full-time employees of the Company are not paid for service as directors.  Non-employee directors receive a combination of cash payments ($2,500 per month effective September 2010 for 2011 and $1,000 per month in 2009 and 2008).  As part of the compensation analysis the Company engaged Denver Compensation & Benefits to perform an analysis of our compensation to Executive Officers and Directors.  To perform this analysis, Denver Compensation & Benefits benchmarked our compensation for non-employee directors against the director compensation levels of the Peer Group.  After reviewing the results and recommendations of Denver Compensation & Benefits’ report, the Board decided to make several changes to the Company’s non-employee director compensation.  Directors who are full-time employees of the Company will continue to not be paid for service as directors.  Beginning in 2012, non-employee directors will continue to receive cash payments of $2,500 per month.  Effective April 1, 2012, Committee Chairmen will also receive the following additional annual compensation, paid 1/12th monthly:  Audit Committee $15,000 per year; Compensation Committee $7,500 per year and Nomination Committee $5,000 per year.  Previously, the Chairmen of the Audit and Compensation Committees received $1,200 per year.  In addition, effective April 1, 2012, non-employee directors also receive $1,000 for attending Board meetings in person (previously $500 per meeting), and reimbursements for any travel expenses incurred in attending the meetings.  On March 22, 2012, the Board granted 15,000 stock options to all of the independent directors, except for Mr. Winters who was granted 10,000 stock options.  The stock options will be granted under the 2008 Stock Option Plan for Independent Directors.  The stock options will vest in equal tranches annually over a three-year period,
 
 
 
-37-

 
 
 
except that Mr. Winters’ stock options vested immediately.  All unvested options will immediately vest upon the discontinuation of a director’s service with the board.  Amounts paid to these directors in 2011, 2010 and 2009 were as follows:

   
Fee Earned or
Paid in Cash
(1)
   
Stock
Awards
   
Options
Awards 
(2)
   
Non-Equity
Incentive Plan Compensation
   
Change in
Pension Value
and
Nonqualified
Deferred Compensation Earnings
   
All Other Compensation
(3)
   
Total
 
   
($)
   
($)
   
($)