AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 2004
REGISTRATION NO. 333-______
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_____________________________________
UNITED ENERGY CORP.
(Name of small business issuer in its charter)
NEVADA 1389 22-3342379
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)
600 MEADOWLANDS PARKWAY, #20, SECAUCUS, NEW JERSEY 07094
(201) 842-0288
(Address and telephone number of principal
executive offices)
_____________________________________
600 MEADOWLANDS PARKWAY, #20, SECAUCUS, NEW JERSEY 07094
(201) 842-0288
(Address of principal place of business or intended
principal place of business)
_____________________________________
RONALD WILEN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
UNITED ENERGY CORP.
600 MEADOWLANDS PARKWAY, #20
SECAUCUS, NEW JERSEY 07094
(201) 842-0288
(Name, address and telephone number of agent for service)
_____________________________________
Copy to:
SPENCER G. FELDMAN, ESQ.
GREENBERG TRAURIG, LLP
METLIFE BUILDING
200 PARK AVENUE - 15TH FLOOR
NEW YORK, NEW YORK 10166
TEL: (212) 801-9200; FAX: (212) 801-6400
_____________________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
______________________________________
CALCULATION OF REGISTRATION FEE
======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT BEING OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PRICE PER SHARE PRICE FEE
----------------------------------------------------------------------------------------------------------------------
Common Stock, 2,200,000 shares(2) $1.00(2) $2,200,000 $279.00
par value $.01 per share
Common Stock, 300,000 shares(3) $1.50(3) $450,000 $58.00
par value $.01 per share
Total 2,500,000 shares $2,650,000 $337.00
(1) This registration statement shall also cover any additional shares of
common stock that shall become issuable by reason of any stock dividend,
stock split, recapitalization or other similar transaction effected without
the receipt of consideration that results in an increase in the number of
the outstanding shares of common stock.
(2) Issuable upon conversion of an outstanding secured convertible term note at
a conversion price of $1.00 per share.
(3) Issuable upon exercise of an outstanding common stock purchase warrant at
an average exercise price of $1.50 per share.
______________________________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED MAY 13, 2004
UNITED ENERGY CORP.
2,500,000 SHARES
COMMON STOCK
______________________________________
TO BE OFFERED BY THE HOLDER OF A SECURED CONVERTIBLE TERM NOTE
AND COMMON STOCK PURCHASE WARRANT OF
UNITED ENERGY CORP.
______________________________________
This prospectus relates to the sale of up to 2,500,000 shares of our
common stock by the selling stockholder listed in this prospectus. The shares
offered by this prospectus include 1,750,000 shares of our common stock issuable
upon conversion of an outstanding secured convertible term note, 450,000 shares
issuable on account of interest and any possible penalties or anti-dilution
adjustments relating to the term note and up to 300,000 shares of our common
stock issuable upon exercise of an outstanding common stock purchase warrant.
These shares may be sold by the selling stockholder from time to time in the
over-the-counter market or other national securities exchange or automated
interdealer quotation system on which our common stock is then listed or quoted,
through negotiated transactions or otherwise at market prices prevailing at the
time of sale or at negotiated prices.
Pursuant to registration rights granted to the selling stockholder, we
are obligated to register the shares which may be acquired upon conversion of a
secured convertible term note and exercise of a common stock purchase warrant by
the selling stockholder. We will receive none of the proceeds from the sale of
the shares by the selling stockholder, except upon exercise of the common stock
purchase warrant. We will bear all expenses of registration incurred in
connection with this offering, but all selling and other expenses incurred by
the selling stockholder will borne by it.
Our common stock is quoted on the OTC Bulletin Board under the symbol
UNRG.OB. The high and low bid prices for shares of our common stock on May 6,
2004, were $.85 and $.75 per share, respectively, based upon bids that represent
prices quoted by broker-dealers on the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not represent actual transactions.
The selling stockholder and any broker-dealer executing sell orders on
behalf of the selling stockholder may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933. Commissions received by any broker-dealer
may be deemed to be underwriting commissions under the Securities Act of 1933.
___________________________________
THESE SECURITIES INVOLVE A HIGH
DEGREE OF RISK. PLEASE CAREFULLY REVIEW THE SECTION
TITLED "RISK FACTORS" BEGINNING ON PAGE 2.
___________________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________________________
THE DATE OF THIS PROSPECTUS IS __ __, 2004
================================================================================
The information in this prospectus is not complete amd may be changed. Our
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities, and it is not soliciting
offers to buy these securities in any state where the ofer or sale is not
permitted.
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM
THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, SHARES OF COMMON STOCK IN ANY JURISDICTION
WHERE OFFERS AND SALES WOULD BE UNLAWFUL. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS COMPLETE AND ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY
SALE OF THE SHARES OF COMMON STOCK.
_____________________________________
TABLE OF CONTENTS
PAGE
Summary......................................................................1
The Offering.................................................................1
Risk Factors.................................................................2
Special Note Regarding Forward-Looking Statements............................8
Where You Can Find More Information..........................................8
Market for Our Common Stock and Related Stockholder Matters..................9
Management's Discussion and Analysis........................................11
Business....................................................................18
Management..................................................................23
Stock Ownership.............................................................27
Certain Relationships and Related Transactions..............................28
Plan of Distribution........................................................31
Description of Securities...................................................33
Shares Eligible for Future Sale.............................................37
Legal Matters...............................................................38
Experts.....................................................................38
Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..................................................38
Index to Consolidated Financial Information.................................F-1
ii
SUMMARY
You should read the following summary together with the more detailed
information contained elsewhere in this prospectus, including the section titled
"Risk Factors," regarding our company and the common stock being sold in this
offering. Unless the context otherwise requires, "we," "our," "us" and similar
phrases refer to United Energy Corp.
OUR BUSINESS
We develop, manufacture and sell environmentally friendly specialty
chemical products. Our leading product, KH-30(R), a multifunctional dispersant,
and related line of biodegradable products, KX-91(R) and KH-30S(R), are used as
cleaners in oil and gas wells, pipelines and storage tanks. These products are
designed to remove and prevent the build-up of paraffin and asphalt in wells to
increase production for our oil industry customers.
We also produce and sell our Uniproof(R) proofing paper (sometimes
known as "blue line" paper), which has a photo-sensitive coating and is used in
the graphic arts and printing industry. This product has historically accounted
for the largest share of our revenue, but has become less a focus in recent
years due to a slowdown in the printing industry.
Although still in testing, in the future we expect to release a new
environmentally-friendly product called Slick Barrier, which is an underwater
protective coating that prevents the adherence of barnacles to the hulls of
boats.
Corporate Information
Our principal executive offices are located at 600 Meadowlands Parkway,
#20, Secaucus, New Jersey 07094, and our telephone number is (201) 842-0288. We
also maintain a regional sales office in Houston, Texas to service our oil
industry customers. Our website is located at www.unitedenergycorp.net.
Information on our website is not part of this prospectus.
THE OFFERING
Common stock offered by the selling stockholder:
Number of shares that may be issued upon
conversion of outstanding secured convertible
term note................................................ 2,200,000 shares
Number of shares that may be issued upon
exercise of outstanding common stock purchase warrant..... 300,000 shares
Total shares offered................................... 2,500,000 shares
Common stock outstanding........................................ 22,180,270 shares (1)
Use of proceeds................................................. We will receive none of the
proceeds from the sale of the
shares by the selling stockholder,
except upon exercise of the
common stock purchase warrant.
OTC Bulletin Board symbol....................................... UNRG.OB
----------------
(1) As of May 6, 2004. Does not include shares of our common stock that are
reserved for issuance pursuant to an outstanding secured convertible term
note and common stock purchase warrant, and shares available for future
issuance under our 2001 Equity Incentive Plan.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the following material risks, together with the other
information contained in this prospectus, before you decide to buy our common
stock. If any of the following risks actually occur, our business, results of
operations and financial condition would likely suffer. In these circumstances,
the market price of our common stock could decline, and you may lose all or part
of your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
WE HAVE A CURRENT ACCUMULATED DEFICIT OF $9.8 MILLION AND IF WE
CONTINUE TO INCUR OPERATING LOSSES, WE MAY BE UNABLE TO SUPPORT OUR BUSINESS
PLAN, WHICH WILL HAVE A DETRIMENTAL EFFECT ON THE LONG-TERM CAPITAL APPRECIATION
OF OUR STOCK.
We have incurred losses in each of our last three fiscal years. As of
December 31, 2003, we had an accumulated deficit of $9,820,222. If we continue
to incur operating losses and fail to become a profitable company, we may be
unable to support our business plan, namely to support the marketing efforts for
our KH-30(R) oil and gas well cleaner. We incurred net losses of approximately
$2,829,000 and $1,364,576 in the fiscal years ended March 31, 2003 and 2002,
respectively. We incurred a net loss of $1,846,228 for the nine months ended
December 31, 2003 and our projected net loss for the fiscal year ended March 31,
2004 is approximately $2,600,000 (estimated). The net loss expected for the
fiscal year ended March 31, 2004 is due in part to lower-than-expected sales of
Uniproof proofing paper during that period. Our future profitability depends in
large part on our ability to successfully market and support our KH-30 oil and
gas well cleaner. We cannot assure you that we will achieve or sustain
significant sales or profitability in the future. This will have a detrimental
effect on the long-term capital appreciation of our stock.
THERE ARE SIGNIFICANT OBSTACLES TO ENTERING THE OIL AND GAS PRODUCING
INDUSTRY WHICH HAVE CONTRIBUTED TO THE SLOW PACE AT WHICH OUR KH-30 PRODUCT IS
BEING INTRODUCED TO THE MARKET, MAKING OUR PROSPECTS LESS CERTAIN.
Our business plan is focused largely on marketing efforts for KH-30.
Although we believe that the application of KH-30 on a continuous basis will
result in higher production and lower lease operating costs, the introduction of
KH-30 into the oil and gas producing industry has been extremely difficult. Many
entrenched players such as the "hot oilers" and the major oil service companies
who benefit from high mark-ups on their proprietary products have no incentive
to promote the use of KH-30. Moreover, oil production engineers are extremely
reluctant to risk damage to a well from a product that does not have the
endorsement and backing of a major enterprise. Consequently, the pace of
introduction of KH-30 has been much less rapid than we initially expected. If we
and our KH-30 marketing partners are unable to successfully achieve market
acceptance for KH-30, our future results of operations and financial condition
will be adversely affected, making our prospects less certain.
IF WE ARE UNABLE TO IMPROVE SALES OF UNIPROOF, WE MAY NOT BE ABLE TO
GENERATE SUBSTANTIAL REVENUES OR ACHIEVE PROFITABILITY, WHICH WOULD SERIOUSLY
IMPAIR OUR ABILITY TO MARKET KH-30.
Our success to date has been substantially dependent on sales of our
Uniproof proofing paper. Sales of our Uniproof proofing paper accounted for
approximately 59% and 74% of revenues for the fiscal years ended March 31, 2003
and 2002, respectively, and are expected to be in a similar range for the fiscal
year ended March 31, 2004. Our business plan is to use whatever Uniproof
proofing paper sales we realize to provide cash flow to support worldwide
marketing efforts for our KH-30 oil and gas well cleaner and, to a lesser
extent, the other specialty chemical products developed by us. The decline in
the level of the United States economy during calendar years 2001-2003 severely
impacted the level of proofing paper sales. This decline resulted in large part
from a drop in the number of advertising pages in publications, one of the main
markets in which our proofing paper is used. Revenues for the first nine months
of the fiscal year ended March 31, 2004 were $786,262, a $1,370,439, or 64%,
decrease from revenues of $2,156,701 in the first nine months of the previous
fiscal year. Projected revenues for the fiscal year ended March 31, 2004 are
approximately $972,000 (estimated), as compared to revenues of $2,232,626 for
the
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fiscal year ended March 31, 2003. The decrease in revenues was primarily due
to a decrease in Uniproof paper sales. If we are unable to generate significant
revenue from this product, or fail to develop significant revenue from other
products in its place, our business plan and financial condition will be
severely affected.
THE SUCCESS OF OUR KH-30 PRODUCT WILL BE HIGHLY DEPENDENT UPON THE
LEVEL OF ACTIVITY AND EXPENDITURES IN THE OIL AND NATURAL GAS INDUSTRIES AND A
DECREASE IN THE LEVEL OF ACTIVITY OR EXPENDITURES WOULD IN ALL LIKELIHOOD
ADVERSELY IMPACT SALES OF KH-30 AND, THEREBY, OUR BUSINESS AND PROSPECTS.
We anticipate that demand for our oil and gas cleaning product will
depend on oil and gas industry activity and expenditure levels that are directly
affected by trends in oil and natural gas prices. We anticipate that demand for
KH-30 will be particularly sensitive to the level of development, production and
exploration activity of, and the corresponding capital spending by, oil and
natural gas companies. Prices for oil and gas are subject to large fluctuations
in response to relatively minor changes in the supply of and demand for oil and
gas, market uncertainty, political stability and a variety of other factors that
are beyond our control. Any prolonged reduction in oil and natural gas prices
will depress the level of exploration, development and production activity.
Lower levels of activity are expected to result in a corresponding decline in
the demand for our oil and gas well products, which could have an adverse impact
on our prospects, results of operations and financial condition. Factors
affecting the prices of oil and natural gas include:
o worldwide political, military and economic conditions, including
the ability of OPEC (the Organization of Petroleum Exporting
Countries) to set and maintain production levels and prices for
oil and gas;
o overall level of global economic growth and activity;
o global weather conditions;
o the level of production by non-OPEC countries;
o the policies of governments regarding the exploration for and
production and development of their oil and natural gas reserves;
and
o actual and perceived changes in the supply and demand for oil and
natural gas.
Spending on exploration and production activities and capital
expenditures for refining and distribution facilities by large oil and gas
companies will have a significant impact on our ability to market and sell
KH-30, which is expected to comprise a substantial portion of our chemicals
operations. Through the first nine months of our fiscal year ended March 31,
2004, increased customer spending contributed to higher levels of worldwide
drilling activity, especially gas drilling in the United States. Historically,
the markets for oil and gas have been volatile and are likely to continue to be
volatile in the future.
IF OUR STRATEGIC PARTNERS DO NOT EFFECTIVELY MARKET OUR PRODUCTS, WE
WILL NOT GENERATE SIGNIFICANT SALES OR PROFITS AND WE DO NOT CURRENTLY HAVE THE
INTERNAL RESOURCES TO MARKET OUR PRODUCTS DIRECTLY.
We utilize third parties to assist in marketing, selling and
distributing our products. We believe that the establishment of a network of
third-party strategic partners, particularly abroad, with extensive and specific
knowledge of the various applications in the oil and gas industry and printing
market, respectively, is important for us to succeed in these sectors. We cannot
assure you that our current or future strategic partners will purchase our
products at sufficient levels or provide us with adequate support. If one or
more of our partners under-performs or if any of our strategic relationships are
terminated or otherwise disrupted, our operating performance, results of
operations and financial condition will be adversely affected.
3
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE
OF OUR REVENUES, BUT WE HAVE NO LONG-TERM CONTRACTS OR BINDING PURCHASE
COMMITMENTS FROM THESE CUSTOMERS.
We currently have a limited number of recurring customers for our
products, none of whom have entered into long-term contracts or binding purchase
commitments with us. A significant portion of our revenue is earned in
connection with sales of Uniproof proofing paper to the Alameda Company of
Anaheim, California. During the fiscal years ended March 31, 2002 and 2003 and
the nine months ended December 31, 2003, sales attributable to Alameda
represented approximately 74%, 59% and 57%, respectively, of our total revenues.
Alameda did not place a paper order with us from July 2003 to March 2004.
Revenue from Alameda is expected to continue to decline as a percentage of our
total revenues. A decision by Alameda to discontinue its relationship with us
could result in a significant loss of revenue to us.
WE RELY ON THIRD PARTIES FOR THE RAW MATERIALS NECESSARY TO MAKE OUR
PRODUCTS, LEAVING US POTENTIALLY VULNERABLE TO SUBSTANTIAL COST INCREASES AND
DELAYS.
All of the raw materials necessary for the manufacture of our products
are generally available from multiple sources, although we have negotiated
favorable arrangements with our current suppliers. If one or more of our current
suppliers were no longer able to supply the raw materials needed by us, we would
be required to negotiate arrangements with alternate suppliers, which would
likely include some cost or delay, which could be substantial. In addition, no
assurance can be given that any alternative arrangements would be on terms as
favorable as our current arrangements.
WE DEPEND ON INDEPENDENT MANUFACTURERS OF OUR PRODUCTS; ANY PROLONGED
INTERRUPTION IN THEIR BUSINESS COULD CAUSE US TO LOSE OUR CUSTOMERS.
We do not own any manufacturing facilities. Our chemical products are
generally manufactured by contract blenders at a number of different facilities.
Chemical blenders are relatively easy to replace. The photosensitive coating for
our Uniproof proofing paper is applied by one independent coater. While we
believe these facilities have the capacity to meet our current production needs
and also meet all applicable environmental regulations, we cannot be certain
that these facilities will continue to meet our product needs or comply with
existing or new environmental laws. In addition, these facilities are subject to
risks of fire and other damage which would disrupt production of our products.
To the extent we were or could be forced to find alternate facilities due to
these disruptions at any facility, it would likely involve delays in
manufacturing and potentially significant costs.
The chemical blenders and independent coater are bound by
confidentiality agreements which obligate them not to disclose or use our
proprietary information. A breach of one or more of these confidential
agreements could have a detrimental effect on our business and prospects.
BECAUSE OF OUR SPECIALTY CHEMICAL BUSINESS, ENVIRONMENTAL PROBLEMS AND
LIABILITIES COULD ARISE AND BE COSTLY FOR US TO CLEAN-UP.
We are subject to various foreign, federal, state and local laws and
regulations relating to the protection of the environment including the
Industrial Site Recovery Act, a New Jersey statute requiring clearance by the
state prior to any sale of an industrial facility. These laws may provide for
retroactive, strict liability for damages to natural resources or threats to
public health and safety, or rendering a party liable for environmental damage
without regard to its negligence or fault. Sanctions for noncompliance may
include revocation of permits, corrective action orders, and administrative or
civil penalties in criminal prosecution. We have not to date incurred any
serious liabilities under environmental laws and regulations, and believe that
we are in substantial compliance with applicable laws and regulations.
Nevertheless, we cannot be certain that we will not encounter environmental
problems or incur environmental liabilities in the future which could adversely
affect our business.
4
BECAUSE WE ARE SMALLER AND HAVE FEWER FINANCIAL AND MARKETING RESOURCES
THAN MANY OF OUR COMPETITORS, WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE IN THE
VERY COMPETITIVE SPECIALTY CHEMICAL AND PRINTING INDUSTRIES.
We compete directly or indirectly with other producers of specialty
chemical products with similar uses, most of which are, or have aligned
themselves with, more established companies, have greater brand recognition and
have greater financial and marketing resources than we have. Generally, we
attempt to compete by offering what we hope to be lower prices and better
service. However, the prices for our KH-30 and related line of cleaners are
higher than competing products, and with these products, we attempt to compete
by emphasizing product effectiveness and environmental safety.
We also believe that our efforts to patent the KH-30 oil well cleaner
in the principal oil producing countries worldwide will improve our competitive
position in this market. However, we are aware that other companies may try to
imitate our products or invalidate our patents. We have in the past vigorously
enforced our trade secrets, such as those relating to Uniproof, and intend to
continue to do so in the future. We recognize that we may incur significant
costs to defend our intellectual property and that intellectual property rights
provide less than complete protection.
For our Uniproof proofing paper, our principal competitor is E.I.
duPont de Nemours & Co., which controls in excess of 95% of the U.S. proofing
paper market estimated at $80 million to $100 million per year. duPont has a
longer operating history, significantly larger customer base and significantly
greater brand recognition and financial, marketing and other resources than we
do. We attempt to compete with duPont in terms of what we consider to be better
prices and service.
WE MAY NOT BE ABLE TO RETAIN RONALD WILEN, OUR CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, WHO WE NEED TO SUCCEED, AND ADDITIONAL QUALIFIED PERSONNEL
ARE EXTREMELY DIFFICULT TO ATTRACT.
Our performance depends, to a significant extent, upon the efforts and
abilities of Ronald Wilen, our Chairman and Chief Executive Officer. We do not
have an employment agreement with Mr. Wilen and do not maintain any key-man
insurance on his life for our benefit. The loss of the services of Mr. Wilen
would have a serious and adverse effect on our business, financial condition and
results of operations. Our success will also be dependent to a great extent upon
our ability to recruit and retain additional senior management personnel. Over
the past year we have been seeking to hire additional personnel with marketing
skills and experience relevant to the development and sale of KH-30 and related
products. Competition is intense for highly skilled personnel in our industry
and, accordingly, no assurance can be given that we will be able to hire or
retain necessary personnel.
OUR MANAGEMENT OWNS A SUBSTANTIAL AMOUNT OF OUR STOCK AND IS CAPABLE OF
INFLUENCING OUR AFFAIRS.
Our directors and executive officers beneficially own approximately
30.4% of our outstanding common stock. These shareholders will be able to
significantly influence the election of the members of our board of directors
and significantly influence the outcome of corporate actions requiring
shareholder approval, such as mergers and acquisitions. This level of ownership,
together with particular provisions of our articles of incorporation, by-laws
and Nevada law, may have a significant effect in delaying, deferring or
preventing any change in control and may adversely affect the voting and other
rights of other shareholders.
IF WE CANNOT PROTECT OUR PROPRIETARY RIGHTS AND TRADE SECRETS OR IF WE
WERE FOUND TO BE INFRINGING ON THE PATENTS AND PROPRIETARY RIGHTS OF THIRD
PARTIES, OUR BUSINESS WOULD BE SUBSTANTIALLY HARMED.
Our success depends in part on our ability to protect the proprietary
nature of our products, preserve our trade secrets and operate without
infringing the proprietary rights of third parties. If other companies obtain
and copy our technology or other companies claim that we are making unauthorized
use of their proprietary technology, we may get involved in lengthy and costly
disputes to resolve questions of ownership of the technology. If we are found to
be infringing on the proprietary rights of others, we could be required to seek
licenses to use necessary technology. We cannot assure you that any licenses of
third-party patents or proprietary rights would be made available to us on
acceptable terms, if at all. In addition, the laws of some "third world"
countries may not protect
5
our intellectual property. To protect our proprietary rights, we seek patents
and we enter into confidentiality agreements with our employees, manufacturers
and marketing and distribution partners with respect to proprietary rights and
unpatented trade secrets. We cannot assure you that patent applications in which
we hold rights will result in the issuance of patents or that any issued patents
will provide significant protection for our technology and products. In
addition, we cannot assure you that other companies will not independently
develop competing technologies that are not covered by our patents. There is
also no assurance that confidentiality agreements will provide adequate
protection for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure. Any unauthorized disclosure and
use of our proprietary technology could have an adverse effect on our business,
prospects, results of operations and financial condition.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURED CONVERTIBLE TERM NOTE
ISSUED TO LAURUS, IT COULD RESULT IN A SERIOUS PROBLEM FOR US AND CAUSE US TO
CURTAIL OUR OPERATIONS OR SELL SOME OF OUR ASSETS TO REPAY THE NOTE.
On March 24, 2004, we issued a $1,750,000 secured convertible term note
to Laurus Master Fund, Ltd. That note provides for the following events of
default:
o failure to pay interest and principal payments when due,
o a breach by us of any material covenant, term or condition of the
note or in any related agreement,
o a breach by us of any material representation or warranty made in
the note or in any related agreement,
o we make an assignment for the benefit of our creditors, or a
receiver or trustee is appointed for us,
o any money judgment or similar final process filed against us for
more than $250,000, which remains unvacated, unbonded or unstayed
for a period of 90 days,
o any form of bankruptcy or insolvency proceeding is instituted by
or against us, which is not vacated within 90 days,
o our common stock is suspended for five consecutive days or five
days during any ten consecutive days from our principal trading
market, and
o our failure to timely deliver shares of our common stock when due
upon conversions of the note.
If we default on the note and the holder demands all payments due and
payable, we will be required to pay 120% of the outstanding principal amount of
the note and any accrued interest. The cash required to pay those amounts will
most likely come out of our working capital. Since we rely on our working
capital for our day-to-day operations, a default on the note could have a
serious and adverse effect on our business, operating results and financial
condition to such an extent that we are forced to restructure, sell some of our
assets or curtail our operations, any of which would have a detrimental effect
on the value of our common stock.
RISKS RELATED TO OUR COMMON STOCK
THE PUBLIC MARKET FOR OUR COMMON STOCK HAS BEEN CHARACTERIZED BY A LOW
VOLUME OF TRADING AND OUR STOCKHOLDERS MAY NOT BE ABLE TO RESELL THEIR SHARES AT
OR ABOVE THE PRICE AT WHICH THEY PURCHASED THEIR SHARES, IF AT ALL.
Historically, the volume of trading in our common stock has been low. A
more active public market for our common stock may not develop or be sustained.
The market price of our common stock may fluctuate significantly in response to
factors, some of which are beyond our control. These factors include:
o product liability claims or other litigation;
o the announcement of new products or product enhancements by us or
our competitors;
6
o developments concerning intellectual property rights and
regulatory approvals;
o quarterly variations in our competitors' results of operations;
o developments in our industry; and
o general market conditions and other factors, including factors
unrelated to our own operating performance.
The stock market in general has recently experienced extreme price and
volume fluctuations. In particular, market prices of securities of specialty
chemical products companies have experienced fluctuations that often have been
unrelated or disproportionate to the operating results of these companies.
Continued market fluctuations could result in extreme volatility in the price of
shares of our common stock, which could cause a decline in the value of our
shares. Price volatility may be worse if the trading volume of our common stock
is low.
OUR COMMON STOCK MAY BE CONSIDERED A "PENNY STOCK" AND MAY BE DIFFICULT
TO SELL WHEN DESIRED.
The SEC has adopted regulations which generally define "penny stock" to
be an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock has been less than $5.00 per share. This
designation requires any broker or dealer selling these securities to disclose
specified information concerning the transaction, obtain a written agreement
from the purchaser and determine that the purchaser is reasonably suitable to
purchase the securities. These rules may restrict the ability of brokers or
dealers to sell our common stock and may affect the ability of stockholders to
sell their shares. In addition, since our common stock is currently quoted on
the OTC Bulletin Board, stockholders may find it difficult to obtain accurate
quotations of our common stock and may experience a lack of buyers to purchase
our shares or a lack of market makers to support the stock price.
A SIGNIFICANT NUMBER OF OUR SHARES ARE ELIGIBLE FOR SALE AND THEIR SALE
OR POTENTIAL SALE WILL PROBABLY DEPRESS THE MARKET PRICE OF OUR STOCK.
Sales of a significant number of shares of our common stock in the
public market could harm the market price of our common stock. As additional
shares of our common stock become available for resale in the public market
pursuant to this registration of shares, the supply of our common stock will
increase, which could decrease its price. Some or all of the shares of our
common stock also may be offered from time to time in the open market pursuant
to Rule 144, and these sales may have a depressive effect on the market for our
common stock. In general, a person who has held restricted shares for a period
of one year may, upon the filing with the SEC of a notification on Form 144,
sell into the market common stock in an amount equal to the greater of 1% of the
outstanding shares or the average weekly number of shares sold in the last four
weeks prior to such sale. These sales may be repeated once each three months,
and all of the restricted shares may be sold by a non-affiliate after they have
been held two years.
WE DO NOT ANTICIPATE PAYING DIVIDENDS ON OUR COMMON STOCK IN THE
FORESEEABLE FUTURE AND THEREFORE YOU SHOULD NOT BUY THIS STOCK IF YOU WISH TO
RECEIVE CASH DIVIDENDS.
We currently intend to retain our future earnings to support operations
and to finance expansion and therefore do not anticipate paying any cash
dividends on our common stock in the foreseeable future.
7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Included in this prospectus, exhibits and associated documents are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as well as
historical information. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, we can give no assurance that
the expectations reflected in these forward-looking statements will prove to be
correct. Our actual results could differ materially from those anticipated in
forward-looking statements as a result of certain factors, including matters
described in the section titled "Risk Factors." Forward-looking statements
include those that use forward-looking terminology, such as the words
"anticipate," "believe," "estimate," "expect," "intend," "may," "project,"
"plan," "will," "shall," "should," and similar expressions, including when used
in the negative. Although we believe that the expectations reflected in these
forward-looking statements are reasonable and achievable, these statements
involve risks and uncertainties and no assurance can be given that actual
results will be consistent with these forward-looking statements. Important
factors that could cause our actual results, performance or achievements to
differ from these forward-looking statements include the factors described in
the "Risk Factors" section and elsewhere in this prospectus.
All forward-looking statements attributable to us are expressly
qualified in their entirety by these and other factors. We undertake no
obligation to update or revise these forward-looking statements, whether to
reflect events or circumstances after the date initially filed or published, to
reflect the occurrence of unanticipated events or otherwise.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the U.S. Securities and
Exchange Commission, or the SEC, on Form SB-2 to register the shares of our
common stock being offered by this prospectus. In addition, we file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other information that we
file at the SEC's public reference facilities at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information regarding the public reference facilities. The SEC maintains a
website, http://www.sec.gov, that contains reports, proxy statements and
information statements and other information regarding registrants that file
electronically with the SEC, including us. Our SEC filings are also available to
the public from commercial document retrieval services. Information contained on
our website should not be considered part of this prospectus.
You may also request a copy of our filings at no cost by writing or
telephoning us at:
United Energy Corp.
600 Meadowlands Parkway, #20
Secaucus, New Jersey 07094
Attention: Mr. Robert Giunta
(201) 842-0288
8
USE OF PROCEEDS
The selling stockholder will receive all of the proceeds from the sale
of the shares offered for sale by it under this prospectus. We will receive none
of the proceeds from the sale of the shares by the selling stockholder, except
upon exercise of the outstanding common stock purchase warrant. In that case, we
would receive $450,000. We will bear all expenses incident to the registration
of the shares of our common stock under federal and state securities laws other
than expenses incident to the delivery of the shares to be sold by the selling
stockholder. Any transfer taxes payable on these shares and any commissions and
discounts payable to underwriters, agents, brokers or dealers will be paid by
the selling stockholder.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of May 6, 2004, there were 455 record holders of our common stock
and there were 22,180,270 shares of our common stock outstanding. We have not
previously declared or paid any dividends on our common stock and do not
anticipate declaring any dividends in the foreseeable future.
The following table shows the high and low bid prices of our common
stock as quoted on the OTC Bulletin Board and the "Pink Sheets," as described
below, by quarter during each of our last two fiscal years ended March 31, 2003
and 2002 and for each quarter after March 31, 2003. From May 3, 2000 to April
25, 2002, our shares were quoted on the Pink Sheets. Beginning April 26, 2002,
our stock has been quoted on the OTC Bulletin Board. These quotes reflect
inter-dealer prices, without retail markup, markdown or commissions and may not
represent actual transactions. The information below was obtained from those
organizations, for the respective periods.
Fiscal Year
ended March 31 Quarter High Low
-------------- ------- ----- -----
2002 First Quarter (April-June 2001) $1.23 $ .75
Second Quarter (July-September 2001) 1.85 .66
Third Quarter (October-December 2001) 1.20 .65
Fourth Quarter (January-March 2002) 1.70 .83
2003 First Quarter (April-June 2002) $3.85 $1.60
Second Quarter (July-September 2002) 2.40 1.20
Third Quarter (October-December 2002) 3.20 1.30
Fourth Quarter (January-March 2003) 2.10 1.28
2004 First Quarter (April-June 2003) $1.43 $ .98
Second Quarter (July-September 2003) 2.30 .80
Third Quarter (October-December 2003) 1.75 .27
Fourth Quarter (January-March 2004) 1.08 .40
2005 First Quarter (through May 6) $ .99 $ .58
The high and low bid prices for shares of our common stock on May 6,
2004, were $.85 and $.75 per share, respectively, based upon bids that represent
prices quoted by broker-dealers on the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commissions,
and may not represent actual transactions. The aggregate market value of our
stock held by non-affiliates on May 6, 2004 was $13,094,136 (using the average
bid and asked price of $.80 per share). For information concerning principal
shareholders, see "Security Ownership of Certain Beneficial Owners and
Management."
This prospectus covers 2,500,000 shares of our common stock offered for
sale by the selling stockholder. The shares offered by this prospectus include
1,750,000 shares of our common stock issuable upon conversion of an outstanding
secured convertible term note, an additional 450,000 shares issuable on account
of interest and any possible penalties or anti-dilution adjustments relating to
the term note and up to 300,000 shares of our common
9
stock issuable upon exercise of an outstanding common stock purchase warrant.
See "Principal and Selling Stockholders."
DIVIDEND POLICY
While there are no restrictions on the payment of dividends, we have
not declared or paid any cash or other dividends on shares of our common stock
in the last two years, and we presently have no intention of paying any cash
dividends in the foreseeable future. Our current policy is to retain earnings,
if any, to finance the expansion of our business. The future payment of
dividends will depend on the results of operations, financial condition, capital
expenditure plans and other factors that we deem relevant and will be at the
sole discretion of our board of directors.
Equity Compensation Plan Information
The following table provides information regarding the status of our
existing equity compensation plans at March 31, 2004.
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES COMPENSATION PLANS
TO BE ISSUED UPON WEIGHTED-AVERAGE (EXCLUDING
EXERCISE OF EXERCISE PRICE OF SECURITIES REFLECTED
OUTSTANDING OPTIONS, OUTSTANDING OPTION, IN THE SECOND
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN)
------------- -------------------- ------------------- --------------------
Equity compensation plans approved by 2,205,000 $1.32 1,795,000
security holders
Equity compensation plans not approved by 4,225,000 $1.70 --
security holders
Total 6,430,000 1,795,000
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
You should read the following description of our financial condition
and results of operations in conjunction with the financial statements and
accompanying notes included in this prospectus beginning on page F-1.
OVERVIEW
Our business plan from fiscal 2001 through fiscal 2004 was to use
Uniproof(R) proofing paper sales to provide the cash flow to support worldwide
marketing efforts for our KH-30(R) and related oil well cleaner products and, to
a lesser extent, the other environmentally friendly specialty chemical products
developed by us. Today, we are focused almost exclusively on our specialty
chemical products business.
On March 24, 2004, we completed the sale of a secured convertible term
note in the principal amount of $1,750,000. In connection with the sale of the
note, we issued to the selling shareholder a common stock purchase warrant
covering 300,000 shares and paid a fee to the selling shareholder of $61,250. We
received net proceeds of $1,590,250, after expenses, from the consummation of
the sale. See "Description of Securities."
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.
On an ongoing basis, we evaluate our estimates, including those related
to product returns, bad debts, inventories, intangible assets, long-lived assets
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
REVENUE RECOGNITION
Our primary source of revenue is from sales of our products. We
recognize revenue upon shipment and transfer of title.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We monitor our accounts and note receivable balances on a monthly basis
to ensure they are collectible. On a quarterly basis, we use our historical
experience to determine our accounts receivable reserve. Our allowance for
doubtful accounts is an estimate based on specifically identified accounts, as
well as general reserves. We evaluate specific accounts where we have
information that the customer may have an inability to meet its financial
obligations. In these cases, management uses its judgment, based upon the best
available facts and circumstances, and records a specific reserve for that
customer against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are re-evaluated and adjusted
as additional information is received that impacts the amount reserved. We also
establish a general reserve for all customers based upon a range of percentages
applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change, our estimate of
the recoverability of amounts due to us could be reduced or increased by a
significant amount. A change in estimated recoverability would be accounted for
in the period in which the facts that give rise to the change become known.
11
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2002
REVENUES. Revenues for the nine-month period ended December 31, 2003
were $786,262, a $1,370,439 or 64% decrease from revenues of $2,156,701 in the
comparable nine-month period ended December 31, 2002. The decrease in revenues
was primarily due to decreased sales of Uniproof proofing paper compared with
the nine-month period ended December 31, 2002. During 2003, there was a
substantial decline in sales of Uniproof especially during the second and third
fiscal quarters due to a lower level of orders from our primary customer. For
the nine-month period ended December 31, 2003, specialty chemical sales, which
includes sales of our KH-30 products and Green Globe/Qualchem military sales
decreased 34% to $300,595 from $457,542 in the prior nine-month period ended
December 31, 2002. The decline was primarily related to a 66% decrease in Green
Globe/Qualchem military sales. We believe, in 2002, the U.S. Government stocked
up on orders and then cut its orders in 2003 due to other military priorities.
The decline in Green Globe/Qualchem military sales was partially offset by a 5%
increase in sales of our KH-30(R) family of oil field dispersant products
reflecting a higher level of orders.
COST OF GOODS SOLD. Cost of goods sold decreased 69% to $396,380 or 50%
of sales, for the nine-month period ended December 31, 2003 from $1,284,503 or
60% of sales, for the nine-month period ended December 31, 2002. The decrease in
cost of goods sold was primarily due to the reduced volume of Uniproof proofing
paper sales and change in the mix of products sold reflecting margins on
Uniproof paper sales compared to the prior year and increased costs related to
providing samples of KH-30 to prospective customers during 2002.
GROSS PROFIT. Gross profit for the nine-month period ended December 31,
2003 was 50% or $389,882, a $482,316 or 55% decrease from a 40% gross profit or
$872,198 in the corresponding period of fiscal 2002. The decrease in gross
profit and the increase in the gross profit percentage reflects the level of
Uniproof paper sales, the higher volume but average lower gross profit level of
Green Globe/Qualchem military and KH-30 sales. The gross profit was also
adversely impacted in 2002 by the cost of providing promotional samples of KH-30
to prospective customers.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $363,575, or 15% to $2,025,278, or 258% of revenues for the
nine-month period ended December 31, 2003 from $2,388,853, or 111% of revenues
for the nine-month period ended December 31, 2002. The decrease in general and
administrative expenses was primarily related to a reduction in salaries and
benefits of the new executive staff added beginning in May 2002 (four
individuals resigned from our company from February to December 2003), a
reduction in non-recurring marketing expenses incurred in 2002 related to
developing promotional brochures, logos and product branding, design and
implementation costs of a new company website, which was partially offset by
increases in certain legal services partially related to litigation, insurance
expenses, an increased level of travel related to meetings with potential
customer, and customers trials on oil wells and storage tanks.
DEPRECIATION, AMORTIZATION AND DEPLETION. Depreciation, amortization
and depletion increased to $114,403 from $57,817 reflecting additions to fixed
assets for additional S2 System equipment and capitalized legal costs related to
patent filings for our S2 System and KH-30 products.
OIL WELL OPERATING AND MAINTENANCE COST-NET. During the nine months
ended December 31, 2003, the wells produced oil which generated $34,636 in
revenues and incurred operating costs and maintenance and repair costs of
$137,298.
INTEREST INCOME, NET OF INTEREST EXPENSE. We had net interest income of
$6,233 for the nine-month period ended December 31, 2003 compared with net
interest income of $50,062 in the corresponding period in 2002. The decrease was
primarily due to the investment earnings on the lower level of remaining funds
raised from our private placement in May 2002.
NET LOSS. The nine-month period ended December 31, 2003 resulted in a
net loss of $(1,846,228) or $(0.08) per share compared to a net loss of
$(1,524,410) or $(0.07) per share for the comparable period ended
12
December 31, 2002. The increase in the loss in the nine-month period ended
December 30, 2003 was the result of a decrease in sales slightly offset by a
decrease in operating expenses. The average number of shares of common stock
used in calculating earnings per share increased by 960,000 to 22,180,270 shares
at December 31, 2003 compared with 21,220,270 shares at December 31, 2002. The
increase resulted from the issuance of 6,000,000 shares in our private placement
in May 2002.
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 2002
SALES. Sales increased to $2,232,626 for the fiscal year ended March
31, 2003 from $1,387,851 for the year ended March 31, 2002. The $844,775, or
60%, increase in sales was principally due to a 60% increase in sales of our
Uniproof proofing paper as a result of a general increase in orders and the
addition of a new customer for the Uniproof product. Sales for our specialty
chemical products including our KH-30 and KX-91 and our Green Globe / Qualchem
product line increased by 62% as our orders increased as a result of our
marketing activity and the U.S. Government replenished stocks of our military
products as a result of the higher level of U.S. military sales activity during
the year. Our largest three customers accounted for 84% of revenues for the year
ended March 31, 2003 compared with 86% for the comparable period year ended
March 31, 2002.
COST OF SALES. Cost of sales increased to $1,332,791 or 60% of sales,
for the fiscal year ended March 31, 2003 from $756,391 or 55% of sales, for the
year ended March 31, 2002. The higher cost of sales reflected the increased
levels of sales and the higher percentage of cost of sales in fiscal 2003 was
primarily due to the increased cost of production for the Uniproof paper which
was only partially offset by higher margins on specialty chemical products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3,711,464, or 166% of sales, for the
fiscal year ended March 31, 2003 from $1,970,977, or 142% of sales, for the year
ended March 31, 2002. The increase in general and administrative expenses is
primarily related to the salaries, the cost of compensation from stock options,
and benefits of the new staff added beginning in May 2002, non-recurring
marketing expenses related to developing promotional brochures, logos and
product branding, design and implementation costs of a new corporate website,
certain legal and accounting services and KH-30 customer trials on wells and
storage tanks, and increased level of travel related to meetings with potential
customers.
EXECUTIVE SERVICES CONTRIBUTED BY MANAGEMENT. The fiscal year ended
March 31, 2001 included an expense of $250,000 related to imputed but unpaid
salaries for services contributed by senior management. In 2002, that amount was
$187,500 representing the first three quarters of the year. In the fourth
quarter of fiscal year 2002 each of the two officers received stock options for
the value of their services and one of the officers began to draw a salary. In
the fiscal year ended March 31, 2003 the amount of imputed salaries was $0, as
the executives were paid a regular salary.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
to $83,481 for the fiscal year ended March 31, 2003 from $20,031 for the year
ended March 31, 2002 reflecting additions to fixed assets for laboratory
analytical equipment, manufacture of additional S2 System equipment units and
capitalized legal costs related to patent filings for our S2 System and KH-30
and related products.
INTEREST EXPENSE, NET OF INTEREST INCOME. We had net interest income of
$57,629 for the fiscal year ended March 31, 2003 compared with net interest
expense of $4,408 in the corresponding period in 2002. The increase was due
primarily to the investment earnings on the remaining funds raised from our
private placement in May, 2002.
LEGAL SETTLEMENT. The fiscal year ended March 31, 2001 included the
settlement of litigation for $231,981, which is now fully settled. During the
year ended March 31, 2002, we settled another legal matter in the amount of
$20,651. For the year ended March 31, 2003 we reached an agreement to settle and
discontinue a lawsuit. In the settlement, we agreed to pay an aggregate of
$75,000 in three installments.
NET LOSS. For the fiscal year ended March 31, 2003, we incurred a net
loss of $2,829,000, or $0.13 per share as compared to a loss of $1,364,576 for
the year ended March 31, 2002 or $0.09 per share. The increased loss
13
is primarily a result of higher expenses for the year. The average number of
shares used in calculating earnings per share increased 5,434,657 to 21,456,982
shares primarily as a result of 6,000,000 shares issued in connection with the
private placement transaction completed on May 14, 2002.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 2001
SALES. Sales decreased to $1,387,851 for the year ended March 31, 2002
from $3,482,915 for the year ended March 31, 2001. The $2,095,064, or 60%,
decrease in sales was due principally to a 67% decrease in sales of our Uniproof
proofing paper due to a general decline in the printing business and a 12%
increase in sales in its Green Globe / Qualchem product line. Our largest two
customers accounted for 86% of revenues for the year ended March 31, 2002
compared with 81% for the year ended March 31, 2001.
COST OF SALES. Cost of sales decreased to $756,391 or 55% of sales, for
the year ended March 31, 2002 from $2,325,652 or 67% of sales, for the year
ended March 31, 2001. The lower percentage in fiscal 2002 was primarily due to
the decreased cost in the production of Uniproof.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses increased to $1,970,977, or 142% of sales, for the
fiscal year ended March 31, 2002 from $1,319,362, or 38% of sales, for the year
ended March 31, 2001. The percentage increase was due to lower gross sales and
higher expenses primarily related to the value of options granted to consultants
($455,900) for services rendered to us. In June 2002, Mr. Seaman, a former
member of our Board general counsel, submitted multiple invoices in amounts
totaling $141,487 for legal fees and funds advanced on our behalf for periods
dating back to 1997. These amounts have been accrued in amounts due to related
parties and charged to selling, general and administrative expenses, except for
approximately $50,000 which has been included in prepaid offering expenses in
the financial statements.
EXECUTIVE SERVICES CONTRIBUTED BY MANAGEMENT. The year ended 2001
included an expense of $250,000 related to imputed but unpaid salaries for
services contributed by senior management. In 2002, such amount was $187,500
representing the first three quarters of the year. In the 4th quarter of fiscal
year 2002 each of the two officer received options for the value of their
services and one of the officers began to draw a salary.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense and interest
income were not significant in either fiscal year.
LEGAL SETTLEMENT. The fiscal year ended March 31, 2001 included the
settlement of litigation for $231,981. During the fiscal year ended March 31,
2002, we settled another litigation matter in the amount of $20,651.
NET LOSS. For the year ended March 31, 2002, we incurred a net loss of
$1,364,576, or $0.09 per share as compared to a loss of $404,316 for the year
ended March 31, 2001 or $0.03 per share. The increased loss is primarily a
result of lower sales and higher expenses for the year. The average number of
shares used in calculating earnings per share increased 192,055 to 16,022,325
shares primarily as a result of shares issued to an outside investor in the
second quarter of the fiscal year and additional shares issued in the fourth
quarter of the fiscal year for services provided by an officer.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2003, we had $277,607 in cash and cash equivalents,
as compared to $2,120,942 at March 31, 2003.
The $1,843,335 decrease in cash was due to net cash used in operating
activities of $1,567,270 and net cash used in investing activities of $276,065.
Cash used in investing activities consisted of $97,060 of legal expenses related
to patent applications for KH-30 and S2 System products, the purchase of
production equipment and oil wells of $177,843 and loans to employees of $1,162.
14
On April 4, 2003, we purchased oil leases for six oil wells in Laramie
County, Wyoming, for an aggregate purchase price of $97,616. We used the wells
to test our KH-30 line of products. During the nine months ended December 31,
2003, the Wyoming wells produced oil and generated $34,636 in revenues and
incurred operating costs and start-up maintenance and repair costs of $137,298,
which is expected to be non-recurring. We have capitalized $17,419 for the oil
leases and $71,429 for equipment, net of depreciation, amortization and
depletion at December 31, 2003. We maintain a refundable, interest-bearing
deposit of $75,000 with the state of Wyoming to cover the costs of eventually
capping the wells in the event they are no longer operated or are abandoned. In
April 2004, following the test period, we sold the oil well leases for $15,000,
and additionally received a 4.5% royalty on all future oil sales from these
wells. We are also in the process of receiving the refund of the $75,000 deposit
from the state of Wyoming.
As of December 31, 2003, we had no backlog. Backlog represents products
that our customers have committed to purchase. Our backlog is subject to
fluctuations and is not necessarily indicative of future sales.
During the past two fiscal years ended March 31, 2003 and 2002, we have
recorded aggregate losses from operations of $4,193,576 and have incurred total
negative cash flow from operations of $3,033,650 for the same two-year period.
During the nine months ended December 31, 2003, we experienced a net loss from
operations of $1,892,448 and negative cash flow from operating activities of
$1,613,490. These matters raise substantial doubt about our ability to continue
as a going concern. Our consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our continued existence is dependent upon several factors, including
increased sales volume, collection of existing receivables and the ability to
achieve profitability from the sale of our product lines. In order to increase
our cash flow, we are continuing efforts to stimulate sales and cut back
expenses not directly supporting our sales and marketing efforts.
On March 24, 2004, we entered into a $1,750,000 financing transaction
with Laurus Master Fund, Ltd., a financial institution specializing in funding
small and micro-capitalization companies. Under the financing agreements, we
issued a $1,750,000 secured convertible term note at a fixed conversion price of
$1.00 per share to Laurus. The loan has a term of three years and accrues
interest at the greater of the prime rate of interest, currently 4% per year (as
published in The Wall Street Journal), or 4% per year. Interest is payable
monthly in arrears commencing on May 1, 2004, and on the first day of each
consecutive calendar month after that date. Monthly amortization payments
commence on October 1, 2004, at the rate of $58,333. The proceeds of the
financing will be used for working capital.
The interest rate of the note is subject to reduction in .25%
increments on a month-by-month basis if specified conditions are met, including
that the common stock underlying the conversion of the convertible term note and
the warrant issued to Laurus are registered with the SEC and whether and to what
extent the average price of our common stock exceeds the fixed conversion price.
Laurus has the option to convert all or a portion of the term loan into
shares of our common stock at any time, subject to specified limitations, at a
fixed conversion price of $1.00 per share. The term loan is secured by a first
priority security interest in our assets. In connection with the term loan,
Laurus was paid a fee of $61,250 and received a seven-year warrant to purchase
up to 300,000 shares of our common stock at prices ranging from $1.25 per share
to $1.75 per share. All stock conversion prices and exercise prices are subject
to adjustment for stock splits, stock dividends and similar events. For more
information on the secured convertible term note and common stock purchase
warrant, see "Description of Securities."
CONCENTRATION OF RISK
We sell our Uniproof proofing paper to three customers. One of these
customers constituted 93% of graphic arts sales and 57% of total customer sales
for the nine-month period ended December 31, 2003. The customer did not place
any orders with us from July 2003 to March 2004, but did place a significant
paper order with us in April 2004, which will be realized in the current fiscal
quarter. The loss of this customer would have adverse financial consequences to
us. We have provided liberal credit terms to this customer and there is a risk
that
15
a certain amount of any receivable balance may prove to be uncollectible. We
believe that this customer will purchase additional product and we would use
that as leverage to collect any outstanding balances.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to our stockholders.
Reporting by Segments
We consider ourselves to be primarily a specialty chemicals company
because of our determination in fiscal 1998 to close our printing equipment
division and focus primarily on the sale of our KH-30 oil well cleaner and
related products. However, a significant portion of our revenues has been
related to the printing and graphic arts industry and, during the past three
fiscal years, we have derived additional revenues by acting as a graphic arts
products distributor.
The following table shows the proportion of total revenues by segment
in each of the last two fiscal years and the nine-month period ended December
31, 2003.
SPECIALTY
PERIOD GRAPHIC ARTS CHEMICALS
------ ------------ ---------
Fiscal year ended March 31, 2002....... $ 1,061,317 $ 326,534
Fiscal year ended March 31, 2003....... 1,700,738 531,888
Nine Months ended
December 31, 2003.................. 485,667 300,595
INFLATION
We do not believe that inflation in the cost of our raw materials has
had in the past or will have in the future any significant negative impact on
our operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Exit
or Disposal Activities." SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized at their fair values
when the liabilities are incurred. Under previous guidance, liabilities for
certain exit costs were recognized at the date that management committed to an
exit plan, which is generally before the actual liabilities are incurred. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated
after December 31, 2002. This statement had no effect on our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement amends the
disclosure and certain transition provisions of Statement 123, "Accounting for
Stock-Based Compensation." Its disclosure provisions, which apply to all
entities with employee stock-based compensation, are effective for fiscal years
ending after December 15, 2002. SFAS 148:
o requires all entities with stock-based employee compensation
arrangements to provide additional disclosures in their summary
of significant accounting policies note for entities that use the
intrinsic value method of APB No. 25, "Accounting for Stock
Issued to Employees", to account for employee stock compensation
for any period presented, their accounting policies note should
include a tabular presentation of pro forma net income and
earnings per share using the fair value method.
16
o permits entities changing to the fair value method of accounting
for employee stock compensation to choose from one of three
transition methods - the prospective method, the modified
prospective method, or the retroactive restatement method. The
prospective transition method, however, will not be available for
entities that initially apply the fair value method in fiscal
years beginning after December 15, 2003.
o requires interim-period pro forma disclosures if stock-based
compensation is accounted for under the intrinsic value method in
any period presented. We do not expect the adoption of this
statement to have a material impact on our consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors"
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guaranties of Indebtedness of Others." This interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. The disclosure provisions of this interpretation were
effective for our March 31, 2003 consolidated financial statements. The initial
recognition and initial measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after March
31, 2003. This interpretation had no effect on our consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In December 2003,
the FASB issued a revision to Interpretation No. 46 to clarify some of the
provisions of Interpretation No. 46, and to exempt certain entities from its
requirements. The provisions of the interpretation need to be applied in the
first reporting period that ends after December 15, 2004, except for entities
that are considered to be special-purpose entities which need to be applied as
of December 31, 2003. This interpretation is not expected to have any effect on
our consolidated financial statements.
17
BUSINESS
OVERVIEW
We develop and distribute environmentally friendly specialty chemical
products with applications in several industries and markets. Our current line
of products includes:
o KH-30 paraffin dispersant for the oil industry and related
products KH-30S and KX-91;
o Uniproof specialty-coated proofing paper for the printing
industry; and
o following additional testing, "Slick Barrier" underwater
protective coatings for use in marine applications.
Through our wholly-owned subsidiary, Green Globe Industries, Inc., we
provide the U.S. military with a variety of environmentally friendly,
non-hazardous, biodegradable solvents and cleaners under our trade name
"Qualchem." Green Globe is a qualified supplier for the U.S. military and has
sales contracts currently in place.
We have developed and patented a system referred to as our "S2 System,"
to work with our environmentally-friendly paraffin dispersants products. This
patented technology produces high volumes of steam and heat at variable
pressures and temperatures to completely dissolve most deposits of paraffin and
asphaltene within oil wells, pipelines or storage tanks. The S2 System apparatus
is portable, compact and easy to use. We are further developing the process to
enhance and support sales of KH-30 and its related products for the oil industry
and for other potential applications.
We provide specialty chemical and graphic arts products to our
customers and have generated revenues for the nine months ended December 31,
2003 of $786,262 and for the fiscal year ended March 31, 2003 of $2,232,626. As
of March 31, 2004, we employed nine persons and use the services of five other
individuals under consulting or product/production cooperation arrangements.
ORGANIZATIONAL HISTORY
We were originally incorporated in Nevada in 1971 as Aztec Silver
Mining Co. We engaged in the manufacturing and distribution of printing
equipment from 1995 through 1998. During that period, we began to develop
specialty chemical products for use in the printing industry. In March 1998, we
discontinued our printing equipment operations and changed our business focus to
the development of specialty chemical products.
Business Operations and Principal Products
KH-30, KH-30S AND KX-91 CHEMICALS
KH-30 is a mixture of modified oils, dispersants and oil-based
surfactants designed to control paraffin and asphaltene deposits in oil wells.
When applied in accordance with our recommended procedures, KH-30 has resulted
in substantial production increases of between two and five times in
paraffin-affected oil and gas wells by allowing for a faster penetration of
paraffin and asphaltene deposits. KH-30 disperses and suspends paraffin and
asphaltene in a free-flowing state and prevents solids from sticking to each
other or to oil well equipment. KH-30 is patented in the United States,
Australia, Russia, Nigeria, Venezuela, Vietnam and the OAPI (the Africa
Intellectual Property Organization, which includes the countries of
Burkina-Faso, Benin, Central African Republic, Congo, Ivory Coast, Cameroon,
Gabon, Guinea, Guinea-Bissau, Mali, Mauritania, Niger, Senegal, Chad and Togo).
We have 12 additional country patent applications pending in most of the major
oil-producing countries around the world (including the European Union and
Canada).
Although we believe that the application of KH-30 on a continuous basis
will result in higher production and lower lease operating costs in oil wells,
the introduction of KH-30 into the oil and gas producing industry has been
difficult. Many entrenched players such as the "hot oilers" and the major oil
service companies who benefit
18
from high mark-ups on their proprietary products have no incentive to promote
the use of KH-30. Moreover, oil production engineers are reluctant to risk
damage to a well from a product that does not have the endorsement and backing
of a major enterprise. Consequently, the pace of introduction of KH-30 has been
much slower than we initially anticipated. We believe that this situation has
begun to change as a result of our marketing efforts with several oil service
companies and well owners beginning to use our products after successful trials.
To increase sales of our KH-30 product we are currently expanding our
marketing efforts by producing a marketing brochure and supplemental sales
material. We have also developed two products, KH-30S and KX-91, as extensions
of our original KH-30. We expect to continue developing additional applications
for our KH-30 product.
KX-91 is a patent-pending chemical blend specifically developed for the
rapid removal of paraffin and asphaltene deposits from oil wells. It has been
effective for the removal of heavy deposits due to its wetting ability,
dispersability and solvency. KX-91 works to rapidly dissolve deposits at low
concentrations with limited contact time and can perform in extreme (-400F to
2300F) temperature ranges. It also has low emulsifying tendencies with brine
water. In laboratory tests, KX-91 has been effective at low concentrations to
enhance the flow of very heavy crude oil (low API gravity).
KH-30S is a proprietary chemical composition, specifically developed as
a drag reducer to reduce flow impairment caused by paraffin and asphaltene
depositions and high viscosity crude oil. KH-30S lowers the viscosity of very
heavy crude oil (low API gravity) with flow enhancement in pipelines and oil
wells at low concentrations. It provides an inhibitive thin barrier film on
various metal surfaces and exhibits good compatibility with most commonly used
materials of construction.
UNIPROOF PROOFING PAPER
We have developed a photo-sensitive coating that is applied to paper to
produce what is known in the printing industry as proofing paper or "blue line"
paper. We developed this formulation over several years of testing. The
formulation is technically in the public domain as being within the scope of an
expired patent of duPont. However, the exact formulation utilized by us, to the
best of our knowledge, has not been duplicated by other companies and we protect
it as a trade secret.
We introduced our proofing paper product in June 1999. Sales of
Uniproof proofing paper totaled $485,667 for the nine months ended December 31,
2003, $1,700,738 for the fiscal year ended March 31, 2003 and $1,061,317 in the
fiscal year ended March 31, 2002.
SLICK BARRIER
Slick Barrier is an underwater protective coating which prevents the
adherence of barnacles to boat hulls. The product is environmentally friendly
and biodegradable, which we believe to be particularly appealing in fresh water
marine applications. The product is currently being tested on pleasure boats
throughout the United States and Europe. A patent application for "Slick
Barrier" was filed in 2003, and we are applying for trademark protection both
nationally and internationally. We expect to release this product in 2005,
although no specific date has been set.
GREENGLOBE INDUSTRIES
In November 1998, we acquired all of the outstanding shares of Green
Globe in exchange for 30,000 shares of our common stock. Green Globe is operated
as a separate subsidiary and sells its products under the tradename
Qualchem.(TM) The acquisition of Green Globe has given us access to the
chemistry and product lines of Green Globe which include environmentally
friendly paint strippers and cleaners, many of which have been qualified for use
by the U.S. military. Of particular note in the Green Globe line was the
development of dual package cleaning and drying "wipes" which produce a clear,
non-reflective coating on glasses, computer screens and instrument panels. The
wipes were developed, and have received U.S. military approval, for the cleaning
of the instrument panels of combat aircraft.
19
MANUFACTURING AND SALES
All of the raw materials necessary for the manufacture of our products
are generally available from multiple sources, although we have negotiated
favorable arrangements with our current suppliers and would have to repeat the
process if one or more of our current suppliers were no longer to be able to
supply these raw materials to us. We do not own any special manufacturing
facilities. Our chemical products are generally manufactured by contract
blenders at a number of different locations. This method of manufacturing has
reduced the need for us to invest in facilities and to hire the employees to
staff them. Chemical blenders are relatively easy to replace and are bound by
confidentiality agreements, where appropriate, which obligate them not to
disclose or use our proprietary information.
We are not responsible for any environmental expenditures with respect
to the manufacturing of our products. First, the chemical products that we use
are generally "environmentally friendly" products in that they are low in
toxicity and rank high in biodegradability. Further, any environmental issues
involved in manufacturing are the responsibility of the blending facilities,
provided they receive adequate and accurate information from us as to the
components of the chemicals involved.
Currently, the photosensitive coating for our Uniproof proofing paper
is applied by an independent coater which is bound by a confidentiality
agreement that obligates it not to disclose or use our confidential information.
We believe this facility has the capacity to meet our production needs for the
foreseeable future and also meets all environmental manufacturing regulations
now or expected to be enacted. We believe that the services of this facility can
be duplicated by others. We believe the need for a contract with the coater is
obviated by the coater's clear economic benefit from continuing to provide
services to us. We are more concerned about a precipitous event, such as damage
to the coater's facility, which could result in an interruption of Uniproof
production. We believe that alternate coating sources do exist and that the
coater could be replaced, although with at least some interruption in production
flow.
We sell our Uniproof proofing paper to three customers. The largest,
The Alameda Company of Anaheim, California, accounted for approximately 93% of
our graphic arts sales and 57% of our total customer sales for the nine-month
period ended December 31, 2003. In fiscal 2003, Alameda accounted for
approximately 78% of graphic arts sales and 59% of total customer sales and, in
fiscal 2002, accounted for approximately 97% of graphic arts sales and 74% of
total customer sales. Alameda did not place a paper order with us from July 2003
to March 2004, but did place a significant paper order with us in April 2004,
which will be realized in our current fiscal quarter. Revenue from Alameda is
expected to continue to decline as a percentage of our total revenues. A
decision by Alameda to discontinue its relationship with us could result in a
significant loss of revenue to us.
Another Uniproof paper purchaser accounted for approximately 15% of our
total customer sales in the fiscal year ended March 31, 2003, but has not been a
significant customer since. The General Services Administration and Defense
Supply Center, which purchased our QualChem aircraft cleaning products and paint
removers, accounted together for approximately 12% and 10% of our total customer
sales in the fiscal years ended March 31, 2003 and 2002, respectively. In the
fiscal year ended March 31, 2002, ChemTech, which purchased our KH-30 oil well
cleaning product, accounted for approximately 12% of our total customer sales.
Except for these current and former customers, no other single entity
has accounted for more than 10% of our sales during any of the fiscal years
ended March 31, 2002 and 2003 and the nine months ended December 31, 2003.
All of our products are sold in U.S. dollars and, therefore, we have
had no foreign currency fluctuation risk.
Our current operations do not require a substantial investment in
inventory other than minimum commitments to our distributors. However, we
anticipate that any growth in our business will require us to maintain higher
levels of inventory.
Our order backlog at each of March 31, 2002, March 31, 2003 and
December 31, 2003 was insignificant as we generally ship product as orders are
received.
20
MARKETING AND DISTRIBUTION
We have engaged the services of independent contractors to market our
KX-30 and KX-91 oil dispersant products. These contractors work under various
non-exclusive commission and distribution agreements and have substantial
contacts among oil well owners and major oil companies in the United States,
Mexico, South America, Africa, Europe and the Middle East. These contractors
earn a commission based upon the sales value of the products that they sell.
These independent contractors use our marketing materials, brochures and website
to interest clients and to describe the attributes of our products.
Although we have not achieved the volume of sales we had anticipated
for the oil dispersant products, there have been significant barriers to entry
in this market. Most of these potential customers require substantial testing of
our product to prove its efficacy at cleaning wells, tanks and flow lines. In
many cases, additional laboratory testing is required to prove that our chemical
products are compatible with refinery systems and will not interfere with
certain chemical processes and safety requirements of the potential clients.
This process of testing has taken a great deal longer than was originally
anticipated. We believe that we have made significant inroads and expect a
higher volume of sales in the second quarter of the fiscal year ending March 31,
2005.
None of our employees is represented by a union. We consider our
relations with our employees to be good.
Research and Development
KH-30, KX-91 and KH-30S chemical products for the oil industry and
Uniproof proofing paper are developed and ready for market. Slick Barrier is in
testing. All of these products are the result of research and development
expenditures paid to vendors, excluding allocation of internal costs, estimated
to be $58,300, $181,370 and $175,534 for the fiscal years ended March 31, 2002
and 2003 and the nine months ended December 31, 2003, respectively. We have had
available the services of one research chemist and one analytical chemist, as
well as one petroleum engineer, to lead in the development of our products. A
significant amount of market adaptation has taken place in the field involving
the development of application procedures for products. We do not anticipate
having to make significant research and development expenditures on existing
products in the future. However, we do expect to continue to develop new
products to complement our existing product line.
COMPETITION
We compete directly or indirectly with other producers of specialty
chemical products with similar uses, most of which are more established
companies and have greater resources than we have. Generally, we attempt to
compete by offering what we hope to be lower prices and better service. However,
our KH-30, KX-91 and KH-30S products for the oil industry are often more
expensive, and with these products we attempt to compete by emphasizing product
effectiveness and environmental safety.
For our Uniproof proofing paper, our principal competition is E.I.
duPont de Nemours & Co., which controls in excess of 95% of the United States
proofing paper market estimated to be $80 million to $100 million per year.
Currently, we have been able to compete with duPont in terms of what we believe
to be better prices and service. We believe the market will continue to welcome
an alternative to duPont and we plan to continue our current marketing
practices.
PROPRIETARY TECHNOLOGIES
With respect to our formulations which are proprietary, we have
patented our KH-30 oil well cleaner patented in the United States, Australia,
Russia, Nigeria, Venezuela, Vietnam and OAPI. We also haves 12 additional
country patent applications pending in most of the major oil-producing countries
around the world (including the European Union and Canada). We believe our
patent is strong and will help our competitive position. However, we are aware
that others may try to imitate our product or invalidate our patents. We have in
the past vigorously enforced our trade secrets such as the one relating to our
Uniproof proofing paper, and intend to continue
21
to do so in the future. However, we recognize that intellectual property rights
provide less than complete protection. We believe that no other company is
currently producing a product similar to KH-30.
In addition to applying for patent protection on our KH-30 product, we
have also registered "KH-30" as a trademark. Trademark protection has also been
obtained for the "Uniproof" name for our proofing paper. We anticipate applying
for both patent and trademark protection for our other products in those
jurisdictions where we deem such protection to be beneficial.
EMPLOYEES
As of March 31, 2004, we employed nine persons and had available the
services of five other individuals under consulting or product/production
cooperation arrangements. The latter arrangement is meant to include a situation
where a chemist, engineer or significant marketing person is engaged by an
organization under contract with us to manufacture or market one or more of our
products.
PROPERTIES
We lease 9,600 square feet of office space at 600 Meadowlands Parkway,
#20, Secaucus, New Jersey 07094. Under the terms of the lease, which runs
through June 2007, the monthly rent is $8,635 through June 2004, then the
monthly rent increases to $9,035 for the remainder of the lease. See "Certain
Relationships and Related Transactions." In addition, we lease office space of
approximately 1,350 square feet in Midland, Texas as a regional sales office at
a rate of $759 per month. This lease runs through September 2005.
We use independent non-affiliated contract chemical blending and
manufacturing facilities in various locations around the United States for the
manufacture of our products. We contract the production of our products to
independent manufacturers and blenders and our products are therefore produced
at the manufacturing facilities of those entities. We do not own any
manufacturing facilities.
LEGAL PROCEEDINGS
In July 2002, an action was commenced against us in the Court of Common
Pleas of South Carolina, Pickens County, brought by Quantum International
Technology, LLC and Richard J. Barrett. Plaintiffs allege that they were
retained as a sales representative of ours and in that capacity made sales of
our products to the United States government and to commercial entities.
Plaintiffs further allege that we failed to pay to plaintiffs agreed commissions
at the rate of 20% of gross sales of our products made by plaintiffs. The
complaint seeks an accounting, compensatory damages in the amount of all unpaid
commissions plus interest thereon, punitive damages in an amount treble the
compensatory damages, plus legal fees and costs. Plaintiffs maintain that they
are entitled to receive an aggregate of approximately $350,000 in compensatory
and punitive damages, interest and costs. In June 2003, the action was
transferred from the court in Pickens County to a Master in Equity sitting in
Greenville, South Carolina and was removed from the trial docket. The action, if
tried, will be tried without a jury. No trial date has yet been scheduled. We
believe we have meritorious defenses to the claims asserted in the action and
intend to vigorously defend the case. We also believe that the actual amount of
damages will be under $10,000.
No other legal proceedings are currently pending or threatened against
us.
22
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows the positions held by our board of directors
and executive officers during the fiscal year ended March 31, 2004.
NAME AGE POSITION
--- --- --------
Ronald Wilen 64 Chairman of the Board, Chief Executive
Officer and Director
James McKeever, CPA 38 Interim Chief Financial Officer
Louis Bernstein 54 Director
Andrea Pampanini 63 Director
Martin Rappaport 67 Director
The principal occupations for the past five years (and, in some
instances, for prior years) of each of our executive officers and directors are
as follows:
RONALD WILEN. Mr. Wilen has served as our Chief Executive Officer and a
member of our board since October 1995. Mr. Wilen served as our President from
October 1995 to August 2001, and has been our Chairman of the Board since August
2001.
JAMES MCKEEVER, CPA. Mr. McKeever has been our Interim Chief Financial
Officer since January 2004. He also continues to be a partner in the accounting
firm of Abrams & McKeever CPA's, which he joined in January 2000. Mr. McKeever
has more than 14 years' experience in public accounting and financial and
reporting, and is a member of the American Institute of Certified Public
Accountants.
LOUIS BERNSTEIN. Mr. Bernstein has served as a member of our board
since September 2003. Mr. Bernstein is currently the Assistant General Counsel
of Pfizer Inc., one of the world's largest pharmaceutical companies, where he
has served as Pfizer's corporate counsel since December 1975.
ANDREA PAMPANINI. Mr. Pampanini has served as a member of our board
since December 2001. Mr. Pampanini is an organizational advisor with extensive
restructuring, marketing and strategic planning experience serving, among other
industries, the chemical, petroleum, pharmaceutical, basic metals, electrical
equipment, power generation and heavy industrial goods sectors. In 1989, Mr.
Pampanini founded Turnaround Associates Inc., a consulting firm specializing in
the financial and operational organization of medium to large-sized companies.
Since 1998, Mr. Pampanini has been a member of Leadership Strategies LLC, a
group of professionals specializing in strategic planning and personal
leadership coaching. Mr. Pampanini has devoted a major portion of his career to
the Middle East, including serving as Executive Vice President of Development
Resources Corporation from 1971 to 1977, during which time he supervised the
final phases of the Dez hydroelectric power and irrigation project in Iran.
MARTIN RAPPAPORT. Mr. Rappaport has served as a member of our board
since June 2001. Mr. Rappaport is self-employed. For more than 30 years, he has
developed and managed commercial and residential real estate (including owning
the building where our office is located). Mr. Rappaport is an active supporter
and contributor to Blythedale Children's Hospital in Valhalla, New York.
Directors are elected annually and serve until the next annual meeting
of the Company's stockholders, and until their successors have been elected and
have qualified. Officers are appointed to their positions, and continue in such
positions, at the discretion of the directors.
COMMITTEES OF THE BOARD
We do not currently have any formal board committees.
23
DIRECTOR COMPENSATION
Each non-employee director receives options for 10,000 shares of our
common stock in lieu of an annual retainer and meeting fees. Other than the
10,000 options granted, there are no special fees, contracts entered into, or
payments made in consideration of any director's service as a director
INDEBTEDNESS OF EXECUTIVE OFFICERS AND DIRECTORS
No executive officer, director or any member of these individuals'
immediate families or any corporation or organization with whom any of these
individuals is an affiliate is or has been indebted to us since the beginning of
our last fiscal year.
FAMILY RELATIONSHIPS
There are no family relationships among our executive officers and
directors.
LEGAL PROCEEDINGS
During the past five years, none of our executive officers, directors,
promoters or control persons has been involved in a legal proceeding material to
an evaluation of the ability or integrity of such person.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth, for the years
indicated, all cash compensation paid, distributed or accrued for services,
including salary and bonus amounts, rendered in all capacities by our chief
executive officer and all other executive officers who received or are entitled
to receive remuneration in excess of $100,000 during the stated periods.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
--------------------------------- --------------------------------------------------
Other Restricted Securities
Name and Fiscal Annual Stock Underlying LTIP All other
Principal Position year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
------------------ ------ ------- ----- ------------ ---------- ------------ ------- ------------
($) ($) (1) (#) ($)
Ronald Wilen 2004 196,931 - 22,266(2) - - - -
Chairman and CEO 2003 206,923 - 22,308(2) 100,000 100,000 - -
2002 79,500 - 18,642(2) - 400,000 - -
Rodney I. Woods (3) 2004 9,617 - 1,385 - - - -
President 2003 192,308 75,000 3,492 - 500,000 - -
2002 - - - - - - -
Sanford M. Kimmel (4) 2004 88,467 3,014 12,485
Chief Financial Officer 2003 110,584 21,986 13,439 - 62,500 - -
2002 - - - - - - -
------------------------
(1) We pay for medical insurance for all employees. Included in the table is
the amount of the premiums paid by us dependent on the coverage provided.
(2) During the fiscal year ended March 31, 2004, 2003 and 2002, we paid for the
leases on two automobiles used by Mr. Wilen under monthly lease payments.
We also paid for medical insurance for Mr. Wilen at a rate of $925.68 per
month. The financial statements reflect imputed salaries for Mr. Wilen
totaling $93,750 for the fiscal year ended March 31, 2002.
(3) Mr. Woods resigned as our President and a member of our board in April
2003.
(4) Mr. Kimmel resigned as our Chief Financial Officer in December 2003.
24
OPTIONS/SAR GRANTS IN FISCAL YEAR ENDED MARCH 31, 2004
Percent of Total
Options/SARs
Number of Securities Granted
Underlying Options/ to Employees Exercise
Name SARs Granted in Fiscal Year or Base Price Expiration
---- -------------------- ---------------- -------------- ---------------
(#) ($/Sh)
Ronald Wilen -- -- -- --
Chairman and CEO
Rodney I. Woods (1) -- -- -- --
President
Sanford M. Kimmel (2) -- -- -- --
Chief Financial Officer
----------------
(1) Mr. Woods resigned as our President and a member of our board in April 2003.
(2) Mr. Kimmel resigned as our Chief Financial Officer in December 2003.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2004 AND FISCAL YEAR END OPTION/SAR VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options/SARs at Fiscal Options/SARs at Fiscal
Shares Acquired Value Year End Year End
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
(#) ($) (#) ($)
Ronald Wilen -- -- 500,000 0
Chairman and CEO
Rodney I. Woods (1) -- -- -- --
President
Sanford M. Kimmel (2) -- -- -- --
Chief Financial Officer
--------------------------
(1) Mr. Woods resigned as President and a member of our board in April 2003.
(2) Mr. Kimmel resigned as our Chief Financial Officer in December 2003.
STOCK OPTION PLAN
In August 2001, our stockholders approved the 2001 Equity Incentive
Plan which provides for the grant of stock options to purchase up to 2,000,000
shares of common stock to any employee, non-employee director or consultant at
our board's discretion. Under the 2001 Equity Incentive Plan, options may be
exercised for a period up to ten years from the date of grant. Options issued to
employees are exercisable upon vesting, which can range between the date of the
grant to up to five years.
An amendment and restatement of the 2001 Equity Incentive Plan
increasing the number of shares issuable under the plan to a total of 4,000,000
was approved by our board of directors in May 2002 and was approved by our
shareholders at our 2003 annual meeting.
Under the plan, options are granted to non-employee directors upon
election at the annual meeting of stockholders at a purchase price equal to the
fair market value on the date of grant. In addition, non-employee
25
director stock options shall be exercisable in full twelve months after the date
of grant unless determined otherwise by the compensation committee.
There were stock options to purchase 1,795,000 shares of our common
stock available for future grant as of March 31, 2004 under the 2001 Equity
Incentive Plan.
26
STOCK OWNERSHIP
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information regarding the number of
shares of our common stock beneficially owned on May 6, 2004, by each of our
directors, each of our executive officers named in the Summary Compensation
Table above, all of our executive officers and directors as a group, and by any
person or "group," as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, known to us to own beneficially more than 5% of the
outstanding shares of our common stock. Except as otherwise set forth below, the
address of each of the persons listed below is c/o United Energy Corp., 600
Meadowlands Parkway, #20, Secaucus, New Jersey 07094.
AMOUNT AND
NATURE OF
NAME AND ADDRESS BENEFICIAL PERCENT OF
OF BENEFICIAL OWNER OWNERSHIP(1) CLASS (1)
-------------------------------------------------------------------------------
Ronald Wilen 4,087,000(2) 18.0%
James McKeever, CPA........ 3,000 *
Louis Bernstein ......... -- *
Andrea Pampanini 42,500(3) *
Martin Rappaport 3,020,100(4) 13.0%
Rodney I. Woods(5) 100,000(6) *
Sanford M. Kimmel(5) -- *
All current executive officers and
directors as a group (5 persons) 7,152,600 30.4%
5% or Greater Stockholders:
John Holmgren 1,500,000(7) 6.7%
301 Merritt 7
Norwalk, CT 06851
UNRG Investments LLC 1,500,000(7) 6.7%
3960 Howard Hughes Parkway, 5th Floor
Las Vegas, NV 89109
LSR Capital UNRG, LLC 1,500,000(7) 6.7%
50 Charles Lindbergh Blvd., Suite 500
Uniondale, NY 11553
Robert L. Seaman 2,361,627(8) 10.6%
515 Madison Ave.
New York, NY 10022
27
Laurus Master Fund, Ltd. 2,050,000(9) 8.5%
c/o Ironshore Corporate Services Ltd.
P.O. Box 1234 G.T.
Queensgate House, South Church Street
Grand Cayman, Cayman Islands
________________
* Less than 1% of outstanding shares.
(1) Unless otherwise indicated in these footnotes, each stockholder has sole
voting and investment power with respect to the shares beneficially owned.
All share amounts reflect beneficial ownership determined pursuant to Rule
13d-3 under the Exchange Act. All information with respect to beneficial
ownership has been furnished by the respective director, executive officer
or stockholder, as the case may be.
(2) Includes (i) stock options to purchase 400,000 shares at an exercise price
of $1.11 per share, and (ii) stock options to purchase 100,000 shares at an
exercise price of $1.80 per share, which are currently exercisable.
(3) Includes (i) stock options to purchase 10,000 shares at an exercise price
of $.70 per share and 10,000 shares at an exercise price of $1.80 per
share, which are currently exercisable, but are subject to reduction, on a
proportional basis, if Mr. Pampanini voluntarily resigns as a director
prior to November 2004.
(4) Includes (i) stock options to purchase 10,000 shares at an exercise price
of $.70 per share and 10,000 shares at an exercise price of $1.80 per
share, which are currently exercisable, but are subject to reduction, on a
proportional basis, if Mr. Rappaport voluntarily resigns as a director
prior to November 2004; (ii) stock options to purchase 50,000 shares at an
exercise price of $1.11 per share and warrants to purchase 750,000 shares
of common stock at an exercise price of $2.00 per share, which are
currently exercisable.
(5) Mr. Woods resigned as our President and a member of our board in April 2003
and Mr. Kimmel resigned as our Chief Financial Officer in December 2003.
(6) Represents a warrant to purchase shares of common stock at an exercise
price of $1.00 per share, which are currently exercisable.
(7) Includes 1,000,000 shares of common stock and warrants to purchase 500,000
shares of common stock.
(8) Includes (i) 1,861,627 shares held by Mr. Seaman; (ii) 100,000 shares held
by the law firm Seaman & Wehle, of which Mr. Seaman is a member; and (iii)
options to purchase 400,000 shares at an exercise price of $1.11 per share,
all of which are currently exercisable.
(9) Represents 1,750,000 shares which may be acquired immediately upon
conversion of an outstanding secured convertible term note at a conversion
price of $1.00 per share and 300,000 shares which may be purchased
immediately upon exercise of an outstanding common stock purchase warrant
at an average exercise price of $1.50 per share. Does not include an
additional 450,000 shares which may be issuable on account of interest and
any possible penalties or anti-dilution adjustments. As further discussed
below, the convertible note and warrant contain provisions which restrict
Laurus from beneficially owning in excess of 4.9% of our outstanding shares
of common stock. See "Principal and Selling Stockholders" and "Description
of Securities."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Martin Rappaport, one of our directors, owns the building in which we
lease our principal executive offices in Secaucus, New Jersey. We pay
approximately $100,000 per year under the lease, excluding real estate taxes. We
believe that this transaction was advantageous to us and was on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
28
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth:
o the name of the selling stockholder;
o the number of shares of common stock beneficially owned by the
selling stockholder as of May 6, 2004;
o the maximum number of shares of common stock that may be offered
for the account of the selling stockholder under this prospectus;
and
o the amount and percentage of common stock that would be owned by
the selling stockholder after completion of the offering,
assuming a sale of all of the common stock that may be offered by
this prospectus.
Except as otherwise noted below and elsewhere in this prospectus, the
selling stockholder has not, within the past three years, had any position,
office or other material relationship with us. The selling stockholder is not a
member of the National Association of Securities Dealers, Inc.
Beneficial ownership is determined under the rules of the U.S.
Securities and Exchange Commission. The number of shares beneficially owned by a
person includes shares of common stock underlying warrants, stock options and
other derivative securities to acquire our common stock held by that person that
are currently exercisable or convertible within 60 days after May 6, 2004. The
shares issuable under these securities are treated as outstanding for computing
the percentage ownership of the person holding these securities, but are not
treated as outstanding for the purposes of computing the percentage ownership of
any other person.
BENEFICIAL OWNERSHIP
SHARES AFTER THIS OFFERING (3)
BENEFICIAL OWNERSHIP REGISTERED IN NUMBER OF
NAME PRIOR TO THIS OFFERING(1) THIS OFFERING SHARES PERCENT
---------------------------------------------------------------------------------------------------------------------
Laurus Master Fund, Ltd.(4) 2,050,000 2,500,000(2) 0 0
c/o Ironshore Corporate Services Ltd.
P.O. Box 1234 G.T.
Queensgate House, South Church Street
Grand Cayman, Cayman Islands
--------------
(1) Beneficial ownership as of May 6, 2004, for the selling stockholder based
upon information provided by the selling stockholder or known to us.
(2) This number includes 1,750,000 shares of our common stock issuable upon
conversion of an outstanding secured convertible term note, up to 300,000
shares of our common stock issuable upon exercise of an outstanding common
stock purchase warrant, and an additional 450,000 shares issuable on
account of interest and any possible penalties or anti-dilution adjustments
relating to the term note.
(3) Assumes the sale of all shares of common stock registered pursuant to this
prospectus, although the selling stockholder is under no obligation known
to us to sell any shares of common stock at this time.
(4) Laurus Capital Management, LLC, a Delaware limited liability company, may
be deemed a control person of the shares owned by Laurus Master Fund, Ltd.
David Grin and Eugene Grin are the principals of Laurus Capital Management,
LLC. The address for Messrs. Grin is 825 Third Avenue, 14th Floor, New
York, New York 10022.
29
The terms of the term note and warrant, under which the shares of
common stock are included for resale under this prospectus, prohibit conversion
of the note or exercise of the warrant to the extent that conversion of the note
and exercise of the warrant would result in Laurus, together with its
affiliates, beneficially owning in excess of 4.9% of our outstanding shares of
common stock. Laurus may waive the 4.9% limitation upon 75 days' prior written
notice to us. This limitation does not preclude Laurus from converting or
exercising the note or warrant and selling shares underlying the note or warrant
in stages over time, where each stage does not cause it and its affiliates to
beneficially own shares in excess of the limitation percentage.
30
PLAN OF DISTRIBUTION
DISTRIBUTION BY SELLING STOCKHOLDERS
We are registering the shares of our common stock covered by this
prospectus for the selling stockholder. As used in this prospectus, "selling
stockholder" includes the donees, transferees or others who may later hold the
selling stockholder's interests. The selling stockholder will act independently
of us in making decisions with respect to the timing, manner and size of each
sale. The selling stockholder may, from time to time, sell all or a portion of
its shares of common stock on the OTC Bulletin Board or on any national
securities exchange or automated inter-dealer quotation system on which our
common stock may be listed or traded, in negotiated transactions or otherwise,
at prices then prevailing or related to the current market price or at
negotiated prices. One or more underwriters on a firm commitment or best efforts
basis may sell the shares of common stock directly or through brokers or dealers
or in a distribution. The methods by which the shares of common stock may be
sold include:
o a block trade (which may involve crosses) in which the broker or
dealer engaged will attempt to sell the shares of common stock as
agent, but may position and resell a portion of the block, as
principal, to facilitate the transaction,
o purchases by a broker or dealer, as principal, and resales by
such broker or dealer for its account pursuant to this
prospectus,
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers or through market-makers,
o transactions in put or call options or other rights (whether
exchange-listed or otherwise) established after the effectiveness
of the registration statement of which this prospectus is a part,
and
o privately-negotiated transactions.
Laurus has agreed, pursuant to the securities purchase agreement
between Laurus and us, that neither Laurus nor any of its affiliates and
investment partners will or will cause any person or entity, directly or
indirectly, to engage in "short sales" of our common stock for as long as the
term note is outstanding. "Short sales" are contracts for the sale of shares of
stock that the seller does not own, or certificates which are not within the
seller's control, so as to be available for delivery at the time when, under
applicable rules, delivery must be made.
In addition, any of the shares of common stock that qualify for sale
pursuant to Rule 144 promulgated under the Securities Act of 1933 may be sold in
transactions complying with that Rule, rather than pursuant to this prospectus.
For sales to or through broker-dealers, these broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the selling stockholder or the purchasers of the shares, or both. We have
advised the selling stockholder that the anti-manipulative provisions of
Regulation M under the Securities Exchange Act of 1934 may apply to its sales in
the market and have informed it that it must deliver copies of this prospectus.
We are not aware, as of the date of this prospectus, of any agreements between
the selling stockholder and any broker-dealers with respect to the sale of the
shares of common stock.
The selling stockholder and any broker-dealers or agents participating
in the distribution of our shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, and any commissions received by any
broker-dealer or agent and profit on any resale of shares of common stock may be
deemed to be underwriting commissions under the Securities Act of 1933. The
commissions received by a broker-dealer or agent may be in excess of customary
compensation. If the selling stockholder is deemed to be an "underwriter," the
selling stockholder may have liability for the accuracy of the contents of this
prospectus under the Securities Act of 1933.
At a time a particular offer of shares is made by the selling
stockholder, a prospectus supplement, if required, will be distributed that will
set forth the names of any underwriters, dealers or agents and any discounts,
31
commissions and other terms constituting compensation from the selling
stockholder and any other required information.
In connection with distributions of the selling stockholder's shares,
or otherwise, the selling stockholder may enter into hedging transactions with
broker-dealers or others prior to or after the effective time of the
arrangement. These broker-dealers may engage in short sales of shares or other
transactions in the course of hedging the positions assumed by them or
otherwise. The selling stockholder may also:
o sell shares short and redeliver shares to close out short
positions,
o enter into option or other transactions with broker-dealers or
others that may involve the delivery to those persons the shares,
and broker-dealers may resell those shares pursuant to this
prospectus, and
o pledge the shares to a broker-dealer or others and, upon a
default, these persons may effect sales of the shares pursuant to
this prospectus.
We have advised the selling stockholder that open positions in shares
of common stock covered by this prospectus prior to the registration statement,
of which this prospectus is a part, being declared effective by the U.S.
Securities and Exchange Commission may constitute a violation of Section 5 of
the Securities Act of 1933. The selling stockholder advised us that it did not
have an open position in the common stock covered by this prospectus at the time
of its response to our inquiry.
In order to comply with securities laws of some states, if applicable,
the shares of our common stock may be sold only through registered or licensed
broker-dealers.
The selling stockholder will be subject to applicable provisions of the
Securities Exchange Act of 1934 and its rules and regulations, including without
limitation, Rule 102 under Regulation M. These provisions may limit the timing
of purchases and sales of our common stock by the selling stockholder. Rule 102
under Regulation M provides, with limited exceptions, that it is unlawful for
the selling stockholder or its affiliated purchaser to, directly or indirectly,
bid for or purchase or attempt to induce any person to bid for or purchase, for
an account in which the selling stockholder or affiliated purchaser has a
beneficial interest in any securities that are the subject of the distribution
during the applicable restricted period under Regulation M. All of the above may
affect the marketability of our common stock.
The selling stockholder may offer all of the shares of our common stock
for sale immediately. Because it is possible that a significant number of shares
could be sold at the same time under this prospectus, these sales, or that
possibility, may have a depressive effect on the market price of our common
stock.
We will receive none of the proceeds from the sale of the shares of
common stock by the selling stockholder, except upon exercise of the outstanding
common stock purchase warrant.
We will pay all costs and expenses incurred in connection with the
registration under the Securities Act of 1933 of the shares of common stock
offered by the selling stockholder, including all registration and filing fees,
listing fees, printing expenses, and our legal and accounting fees. We estimate
that these fees and expenses will total approximately $65,000. The selling
stockholder will pay all of its own brokerage fees and commissions, if any,
incurred in connection with the sale of its shares of common stock. In addition,
we have agreed to indemnify the selling stockholder against certain liabilities,
including liabilities under the Securities Act of 1933.
We cannot assure you, however, that the selling stockholder will sell
any of the shares of common stock it may offer.
32
DESCRIPTION OF SECURITIES
Our authorized capitalization consists of 100,000,000 shares of common
stock, par value $.01 per share. As of May 6, 2004, there were issued and
outstanding:
o 22,180,270 shares of common stock,
o A secured convertible term note in the principal amount of
$1,750,000, of which the principal, interest and any possible
fees under the note may be converted into shares of common stock
at a conversion price of $1.00 per share,
o a common stock purchase warrant to purchase 300,000 shares of
common stock at an average exercise price of $1.50 per share, and
o stock options to purchase 2,205,000 shares of common stock at an
average weighted price of $1.32 per share.
The following summary of the important provisions of our common stock,
secured convertible term note, common stock purchase warrant, articles of
incorporation and by-laws is qualified by reference to the provisions of our
articles of incorporation and by-laws and the forms of note and warrant
incorporated by reference as exhibits to the registration statement of which
this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares of
our common stock entitled to vote in any election of directors may elect all of
the directors standing for election. Holders of our common stock are entitled to
receive dividends ratably, if any, as may be declared from time to time by our
board of directors out of funds legally available. Upon the liquidation,
dissolution or winding up of the company, the holders of our common stock are
entitled ratably to our net assets available after the payment of all
liabilities. Holders of our common stock have no preemptive, subscription,
redemption or conversion rights, and there are no redemption or sinking fund
provisions applicable to the common stock. The outstanding shares of our common
stock are validly issued, duly authorized, fully paid and non-assessable.
SECURED CONVERTIBLE TERM NOTE
On March 24, 2004, we issued a secured convertible term note, which has
a term of three years and accrues interest at the greater of the prime rate of
interest, currently 4% per year (as published in the Wall Street Journal), or 4%
per year. Interest is payable monthly in arrears commencing on May 1, 2004, and
on the first day of each consecutive calendar month after that date. Monthly
amortization payments commence on October 1, 2004, at the rate of $58,333.
The interest rate is subject to reduction in .25% increments on a
month-by-month basis if specified conditions are met, including that the shares
of common stock underlying the conversion of the note and the common stock
purchase warrant are registered with the SEC and whether and to what extent the
average price of our common stock exceeds the fixed conversion price.
The holder of the note has the option to convert all or a portion of
the note (including principal, interest and penalties) into shares of common
stock at any time, subject to specified limitations, at a fixed conversion price
of $1.00 per share. The conversion price is subject to adjustment for stock
splits, stock dividends and similar events. Our obligations under the note are
secured by a first priority security interest in our assets.
We have the option of prepaying the note by paying to the holder a sum
of money equal to 120% of the principal amount of the note, together with
accrued but unpaid interest and any and all other sums due, accrued or payable
to the holder arising under the note outstanding on the day written notice of
redemption is given to the holder. A notice of redemption shall not be effective
with respect to any portion of the note for which the holder has a pending
election to convert shares.
33
The terms of the note prohibit conversion of the note to the extent
that conversion of the note would result in the holder, together with its
affiliates, beneficially owning in excess of 4.99% of our outstanding shares of
common stock. A holder may waive the 4.99% limitation upon 75 days' prior
written notice to us.
COMMON STOCK PURCHASE WARRANT
The common stock purchase warrant entitles the holder of the warrant to
purchase up to 300,000 shares of our common stock from March 24, 2004 to March
24, 2011. The exercise price per share for the warrant is as follows: (i) $1.25
for the first 100,000 shares, (ii) $1.50 for the next 100,000 shares, and (iii)
$1.75 for the next 100,000 shares of common stock. The warrant may not be
redeemed us.
The warrant may be exercised upon surrender of the warrant certificate
on or prior to the expiration date at our offices with the "Form of
Subscription" on the reverse side of the warrant certificate filled out and
executed as indicated, accompanied by payment of the full exercise price for the
number of shares being exercised under the warrant. In addition to the use of
cash, certified or official bank check as payment for the exercise of the
warrant, the warrant holder may also exercise the warrant by surrendering that
number of shares of common stock issuable under the warrant with a fair market
value equal to the exercise price of the portion of the warrant to be exercised.
The warrant contains provisions that protect the holder against
dilution by adjustment of the purchase price in specified events, such as stock
dividends, stock splits and similar events. The holder of the warrant will not
possess any rights as a stockholder unless and until the holder exercises the
warrant.
We may at any time during the term of the warrant reduce the then
current exercise price to any amount and for any period of time deemed
appropriate by our board of directors. The warrant does not confer upon the
holder any voting or any other rights as a stockholder.
The terms of the warrant prohibit exercise of the warrant to the extent
that exercise of the warrant would result in the holder, together with its
affiliates, beneficially owning in excess of 4.99% of our outstanding shares of
common stock. A holder may waive the 4.99% limitation upon 75 days' prior
written notice to us.
REGISTRATION RIGHTS
We have a registration rights agreements with the selling stockholder.
All of the stock subject to the registration rights agreement is being
registered in this prospectus in accordance with the terms of that agreement.
In connection with the issuance of the secured convertible term note
and the common stock purchase warrant described above, we agreed to file a
"resale" registration statement with the SEC covering the shares of our common
stock issuable upon the conversion of the note and exercise of the warrant. We
are obligated to maintain the effectiveness of the "resale" registration
statement from its effective date through and until all securities registered
under the registration statement have been sold or are otherwise able to be sold
under Rule 144(k), in which case we will no longer be required to keep the
registration statement effective. We agreed to use our best efforts to have the
"resale" registration statement declared effective by the SEC as soon as
possible and, in any event, by July 22, 2004.
ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
Articles of Incorporation and By-laws. Pursuant to our articles of
incorporation, our board of directors may issue additional shares of common
stock. Any additional issuance of common stock could have the effect of impeding
or discouraging the acquisition of control of us by means of a merger, tender
offer, proxy contest or otherwise, including a transaction in which our
stockholders would receive a premium over the market price for their shares, and
thereby protects the continuity of our management. Specifically, if in the due
exercise of its fiduciary obligations, the board of directors were to determine
that a takeover proposal was not in our best interest, shares could be issued by
our board of directors without stockholder approval in one or more transactions
that might prevent or render more difficult or costly the completion of the
takeover by:
34
o diluting the voting or other rights of the proposed acquirer or
insurgent stockholder group;
o putting a substantial voting block in institutional or other
hands that might undertake to support the incumbent board of
directors; or
o effecting an acquisition that might complicate or preclude the
takeover.
Our by-laws also allow our board of directors to fix the number of
directors in the by-laws. Our stockholders do not have cumulative voting in the
election of directors. The effect of these provisions may be to delay or prevent
a tender offer or takeover attempt that a stockholder may determine to be in his
or its best interest, including attempts that might result in a premium over the
market price for the shares held by the stockholders.
Nevada General Corporation Law. The Nevada General Corporation Law
(NGCL) generally provides that a "resident domestic corporation" shall not
engage in any "business combination" with an "interested stockholder" for a
period of three years following the date that such stockholder became an
interested stockholder unless prior to such date the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder. After three
years, a "resident domestic corporation" is only authorized to engage in a
combination which was either authorized by the board prior to the three years,
authorized by a majority of disinterested stockholders or meets various fair
price criteria.
For purposes of this statute, a "resident domestic corporation" is a
domestic corporation that has 200 or more stockholders of record. An "interested
stockholder" generally means any person that (i) is the beneficial owner, either
directly or indirectly, of 10% or more of the voting power of the outstanding
voting stock of the corporation or (ii) is an affiliate or associate of the
corporation and was the beneficial owner, either directly or indirectly, of 10%
or more of the voting power of the outstanding stock of the corporation at any
time within the three-year period immediately prior to the date on which it is
sought to be determined whether such person is an interested stockholder. For
purposes of this statute, an affiliate and associate of an interested
stockholder is likewise considered to be an interested stockholder. The term
"business combination" is broadly defined to include a wide variety of
transactions, including mergers, consolidations, sales of 5% or more of a
corporation's assets and various other transactions that may benefit an
interested stockholder.
The NGCL also prohibits an acquirer, under certain circumstances, from
voting shares of a target corporation's stock after crossing certain threshold
ownership percentages, unless the acquirer obtains the approval of the target
corporation's stockholders. The relevant threshold ownership percentages of the
voting power of the corporation in the election of directors are: one-fifth or
more but less than one-third, one-third or more but less than a majority, and a
majority or more. Once an acquirer crosses one of these thresholds, those shares
acquired in an offer or acquisition and those shares acquired within the
preceding ninety days become control shares and such control shares are deprived
of the right to vote until disinterested stockholders restore the right. This
provision will not apply if the articles of incorporation or bylaws of the
target corporation in effect on the tenth day following the acquisition of a
controlling interest provides that this provision does not apply.
The NGCL also provides that, unless otherwise provided in the
corporation's articles or bylaws in effect on the tenth day following the
acquisition of a controlling interest, in the event control shares are accorded
full voting rights and the acquirer has acquired a majority or more of all
voting power, all other stockholders who do not vote in favor of authorizing
voting rights for the control shares may dissent, in accordance with the Nevada
statutory procedures dealing with dissenters' rights, and obtain payment of the
fair value of their shares.
This statute could prohibit or delay mergers or other takeover or
change in control attempts and, accordingly, may discourage attempts to acquire
us.
Limited Liability and Indemnification. Our articles of incorporation
eliminates the personal liability of our directors and officers to us and our
stockholders for damages for breach of any duty owed to us or our stockholders
to the fullest extent permitted by law.
Under Nevada law, a corporation may indemnify a director or officer if
(i) he or she is not liable pursuant to Section 78.138 of the NGCL for breaching
fiduciary duties as an officer or director or where breach of duties
35
involved intentional misconduct, fraud or a knowing violation of law, or (ii)
acted in good faith and in a manner which he or she reasonably believed to be
in, or not opposed to, the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Insofar as indemnification for liabilities under the Securities Act may
be permitted to directors, officers or persons controlling us pursuant to the
above provisions, we have been informed that, in the opinion of the SEC, that
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Interstate
Transfer Company, Salt Lake City, Utah.
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol
UNRG.OB.
36
SHARES ELIGIBLE FOR FUTURE SALE
As of May 6, 2004, we had outstanding an aggregate of 22,180,270 shares
of our common stock, assuming no exercises of outstanding warrants, stock
options and other convertible securities. Upon conversion of the secured
convertible term note and exercise of the common stock purchase warrant, the
shares included in this prospectus will be freely tradeable without restriction
or further registration under the Securities Act, unless they are purchased by
our "affiliates," as that term is defined in Rule 144 under the Securities Act.
The 22,180,270 outstanding shares of our common stock not included in
this prospectus and the 2,500,000 shares included in this prospectus, as of May
6, 2003, will be eligible for sale in the public market as follows:
PUBLIC FLOAT
As of May 6, 2004, the public float for our common stock consisted of
16,367,670 shares. These shares are freely tradeable without restriction or
further registration under the Securities Act, unless they are purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act.
RULE 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year, including
the holding period of prior owners other than affiliates, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
o 1% of the number of shares of our common stock then outstanding,
which equaled 221,802 shares as of May 6, 2004, or
o the average weekly trading volume of our common stock on the OTC
Bulletin Board during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner-of-sale provisions,
notice requirements and the availability of current public information about us.
In order to effect a Rule 144 sale of our common stock, our transfer agent will
require an opinion from legal counsel. We may charge a fee to persons requesting
sales under Rule 144 to obtain the necessary legal opinions.
As of May 6, 2004, all of our shares of our common stock outstanding
are available for sale under Rule 144.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale and who has
beneficially owned shares for at least two years, including the holding period
of certain prior owners other than affiliates, is entitled to sell those shares
without complying with the manner-of-sale, public information, volume limitation
or notice provisions of Rule 144. Our transfer agent will require an opinion
from legal counsel to effect a Rule 144(k) transaction. We may charge a fee to
persons requesting transactions under Rule 144(k) to obtain the necessary legal
opinions. On May 14, 2004, 6,000,000 shares of our common stock, issued in an
institutional private placement on May 14, 2002, will be eligible for sale under
Rule 144(k).
EQUITY INCENTIVE PLAN
As of May 6, 2004, stock options to purchase 2,205,000 shares of our
common stock were outstanding under the 2001 Equity Incentive Plan. After this
offering, we may determine to file a registration statement on Form S-8 under
the Securities Act of 1933 covering shares of common stock reserved for issuance
under our Equity Incentive Plan. Based on the number of stock options
outstanding and shares reserved for issuance under our Equity Incentive Plan,
the Form S-8 registration statement would cover 4,000,000 shares. The Form S-8
registration
37
statement would become effective immediately upon filing. At that point, subject
to the satisfaction of applicable exercisability periods and Rule 144 volume
limitations applicable to affiliates, shares of our common stock to be issued
upon exercise of outstanding stock options granted pursuant to our Equity
Incentive Plan will be available for immediate resale in the public market.
LEGAL MATTERS
The validity of the shares of common stock offered in this prospectus
will be passed upon for us by our counsel, Greenberg Traurig, LLP, New York, New
York. A shareholder of that firm beneficially owns 15,000 shares of our common
stock.
EXPERTS
Our financial statements as of March 31, 2003 and 2002, and for the
years ended March 31, 2003 and 2002 included in this prospectus
and in the registration statement have been audited by Grant Thornton LLP,
independent public accountants, as stated in its report, appearing in this
prospectus and in the registration statement and have been so included in
reliance upon the report of such firm given upon its authority as experts in
accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On August 13, 2003, we dismissed Grant Thornton, LLP as our independent
public accountants. Grant Thornton had been previously engaged as the principal
accountants to audit our financial statements. We have engaged the firm of
Imowitz Koenig & Co., LLP, New York, New York, effective August 13, 2003, to act
as our independent auditors for the fiscal year ended March 31, 2004.
Grant Thornton's report on our financial statements for the past two
years did not contain an adverse opinion or a disclaimer of opinion, and the
report was not qualified or modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was approved by our
board of directors.
During our two most recent fiscal years, and the subsequent interim
periods, prior to August 13, 2003, there were no disagreements with Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Grant Thornton would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports.
38
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
Consolidated Financial Statements Page
Consolidated balance sheets as of December 31, 2003 (Unaudited) and F-2
March 31, 2003
Consolidated statements of operations for the three months and nine F-3
months ended December 31, 2003 (Unaudited) and 2002 (Unaudited)
Consolidated statement of stockholders' equity for the nine months F-4
ended December 31, 2003 (Unaudited)
Consolidated statements of cash flows for the nine months ended F-5
December 31, 2003 (Unaudited) and 2002 (Unaudited)
Notes to consolidated financial statements F-6-F-12
Reports of Independent Certified Public Accountants F-13- F-14
Consolidated Balance Sheets as of March 31, 2003 and 2002 F-15
Consolidated Statements of Operations for the Years Ended F-16
March 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years F-17
Ended March 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the Years Ended F-18
March 31, 2003, 2002 and 2001
Notes to consolidated financial statements F-19-F-30
Schedule II - Schedule of Valuation and Qualifying Accounts F-31
F-1
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003
AND MARCH 31, 2003
DECEMBER 31, MARCH 31,
2003 2003
----------------- ---------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 277,607 $2,120,942
Accounts receivable, net of allowance for doubtful accounts of $66,488 and
$48,113, respectively 420,943 496,715
Inventory, net of allowance of $16,290 and $16,290 222,252 211,344
Note receivable, net of reserve of $40,857 and $30,000, respectively 64,808 149,034
Prepaid expenses and other current assets 67,115 104,527
------------ -----------
Total current assets 1,052,725 3,082,562
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$191,744 and $92,883, respectively 377,729 268,597
OTHER ASSETS:
Goodwill, net of accumulated amortization of $17,704 and $17,704,
respectively 68,819 68,819
Patents, net of accumulated amortization of $59,944 and $44,253,
respectively 310,877 299,508
Loans receivable 3,238 2,076
Deposits 76,385 31,385
------------ -----------
Total assets $1,889,773 $ 3,682,947
============= ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 320,621 $ 158,048
Accrued expenses 184,978 334,198
Due to related party 244,141 244,141
------------ -----------
Total current liabilities 749,740 736,387
Asset retirement obligation 30,000 --
------------ -----------
Total liabilities 779,740 736,387
STOCKHOLDERS' EQUITY
Common stock; 100,000,000 shares authorized of $0.01 par
22,180,270 shares issued and outstanding
as of December 31, 203 and March 31, 2003 221,802 221,802
Additional paid-in capital 10,708,453 10,698,752
Accumulated deficit (9,820,222) (7,973,994)
------------ -----------
Total stockholders' equity 1,110,033 2,946,560
------------ -----------
Total liabilities and stockholders' equity $ 1,889,773 $ 3,682,947
============= ===========
The accompanying notes are an integral part of these
consolidated balance sheets.
F-2
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED
DECEMBER 31, 2003 AND 2002
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------------------ -----------------------------
2003 2002 2003 2002
(UNAUDITED) (UNAUDITED)
REVENUES, net $ 91,120 $ 792,092 $ 786,262 $ 2,156,701
COST OF GOODS SOLD 38,054 431,383 396,380 1,284,503
------------ ----------- ----------- -----------
Gross profit 53,066 360,709 389,882 872,198
------------ ----------- ----------- -----------
OPERATING EXPENSES:
General and administrative 558,453 901,681 2,025,278 2,388,853
Oil well operating and maintenance cost-net 11,795 - 102,662 -
Depreciation, amortization and depletion 39,447 24,780 114,403 57,817
------------ ----------- ----------- -----------
Total operation expenses 609,695 926,461 2,242,343 2,446,670
------------ ----------- ----------- -----------
Loss from operations (556,629) (565,752) (1,852,461) (1,574,472)
------------ ----------- ----------- -----------
OTHER INCOME (EXPENSE), net:
Interest income 1,254 15,250 8,523 51,374
Interest expense (588) (144) (2,290) (1,312)
------------ ----------- ----------- -----------
Total other income (expense), net 666 15,106 6,233 50,062
------------ ----------- ----------- -----------
Net loss $(555,963) $(550,646) $(1,846,228) $(1,524,410)
============ =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $(0.03) $(0.02) $(0.08) $(0.07)
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES,
Basic and diluted 22,180,270 22,180,270 22,180,270 21,220,270
============ =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-3
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003 (UNAUDITED)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ----------- ----------- ----------- ----------
BALANCE, March 31, 2003 22,180,270 $221,802 $10,698,752 $(7,973,994) $2,946,560
Options granted in consideration
for services _ _ 9,701 - 9,701
Net loss - - - (1,846,228) (1,846,228)
--------------------------------------------------------------------------------
BALANCE, December 31, 2003 22,180,270 $221,802 $10,708,453 $(9,820,222) $1,110,033
================================================================================
F-4
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
DECEMBER 31, 2003 AND 2002
FOR THE NINE MONTHS ENDED
DECEMBER 31,
---------------------------------
ASSETS 2003 2003
---------------- ----------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 1,846,228 $(1,524,410)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 114,403 57,817
Options granted in consideration for services 9,700 -
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable, net 75,772 (681,547)
(Increase) decrease in inventory, net (10,908) 91,015
Decrease in note receivable, net 84,226 -
Decrease in prepaid expenses 37,412 3,952
Increase in deposits (45,000) (1,041)
Increase in related party payable - 102,654
Increase (decrease) in accounts payable and accrued expenses 13,353 ( 193,904)
------------- -------------
Net cash used in operating activities (1,567,270) (2,145,464)
------------- -------------
CASH FROM INVESTING ACTIVITIES:
Payments on loans receivable (1,162) (119,255)
Payments for patents (97,060) (84,987)
Payments for acquisition of property and equipment (177,843) (317,542)
------------- -------------
Net cash used in investing activities (276,065) (521,784)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of line of credit - (150,000)
Payments of private placement costs - (484,200)
Proceeds from issuance of common stock - 6,000,000
------------- -------------
Net cash provided by financing activities - 5,365,800
------------- -------------
Net (decrease) increase in cash and cash equivalents (1,843,335) 2,698,552
CASH AND CASH EQUIVALENTS, beginning of period: 2,120,942 198,412
------------- -------------
CASH AND CASH EQUIVALENTS, end of period: $ 277,607 $ 2,896,964
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Cash paid during the period
Interest $ 2,290 $ 1,926
============= =============
Income taxes $ 2,154 $ 800
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 (UNAUDITED)
1. BASIS OF PRESENTATION AND GOING CONCERN
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
financial statements furnished herein include all adjustments necessary for a
fair presentation of the Company's financial position at December 31, 2003
(unaudited) and the results of its operations for the three months and nine
months ended December 31, 2003 and 2002 (unaudited) and cash flows for the nine
months ended December 31, 2003 and 2002(unaudited). All such adjustments are of
a normal and recurring nature. Interim financial statements are prepared on a
basis consistent with the Company's annual financial statements. Results of
operations for the three months and nine months ended December 31, 2003 are not
necessarily indicative of the operating results that may be expected for the
year ending March 31, 2004.
The consolidated balance sheet as of March 31, 2003 has been derived
from the audited financial statements at that date but does not include all of
the information and notes required by accounting principles generally accepted
in the United States for complete financial statements.
For further information, refer to the consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K, as
amended.
Going Concern - During the past two fiscal years ended March 31, 2003
and 2002, the Company has recorded aggregate losses from operations of
$4,193,576 and has incurred total negative cash flow from operations of
$3,033,650 for the same two-year period. During the nine months ended December
31, 2003 the Company experienced a net loss from operations of $1,846,228 and
negative cash flow from operating activities of $1,567,270. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Liquidity - The Company's continued existence is dependent upon several
factors, including increased sales volume, collection of existing receivables
and the ability to achieve profitability from the sale of the Company's product
lines. The Company is seeking additional sources of equity or debt financing and
expects to complete and fund a transaction in the next month. In order to
increase its cash flow, the Company is continuing its efforts to stimulate sales
and cut back expenses not directly supporting its sales and marketing efforts.
2. SEGMENT INFORMATION
Under the provision of SFAS No. 131, the Company's activities fall
within two operating segments: Graphic Arts and Specialty Chemicals. The
following tables set forth the Company's industry segment information for the
three months and nine months ended December 31, 2003 and 2002.
F-6
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's total revenues and net loss by segment for the three
month period ended December 31, 2003 and identifiable assets as of December 31,
2003, are as follows:
SPECIALTY
GRAPHIC ARTS CHEMICALS CORPORATE TOTAL
------------ ---------- ----------- -----------
Revenues $ 310 $ 90,810 $ -- $ 91,120
============ ========== =========== ===========
Gross profit $ 133 $ 52,933 $ -- $ 53,066
General and administrative 42,963 208,459 307,031 558,453
Oil well operating and maintenance cost-net -- 11,795 -- 11,795
-- 35,058 4,389 39,447
Depreciation, amortization and depletion
Interest income -- -- (1,254) (1,254)
Interest expense -- 36 552 588
------------ ---------- ----------- -----------
Net loss $ (42,830) $ (202,415) $ (310,718) $ (555,963)
============ ========== =========== ===========
Cash and cash equivalents $ -- $ -- $ 277,607 $ 277,607
Accounts receivable, net 363,020 57,923 -- 420,943
Inventory, net 26,162 196,090 -- 222,252
Note receivable, net 64,808 -- -- 64,808
Prepaid expenses -- -- 67,115 67,115
Property and equipment, net -- 341,520 36,209 377,729
Goodwill, net -- 68,819 -- 68,819
Patents, net -- 310,877 -- 310,877
Loans receivable, net -- -- 3,238 3,238
Deposits -- -- 76,385 76,385
------------ ---------- ----------- -----------
Total assets $ 453,990 $ 975,229 $ 460,554 $ 1,889,773
============ ========== =========== ===========
The Company's total revenues and net income (loss) by segment for the
nine month period ended December 31, 2003, are as follows:
SPECIALTY
GRAPHIC ARTS CHEMICALS CORPORATE TOTAL
------------ ---------- ----------- -----------
Revenues $ 485,667 $ 300,595 $ -- $ 786,262
============ ========== =========== ===========
Gross profit $ 244,363 $ 145,519 $ -- $ 389,882
General and administrative 153,038 848,825 1,023,415 2,025,278
Oil well operating and maintenance cost-net -- 102,662 -- 102,662
Depreciation, amortization and depletion -- 101,239 13,164 114,403
Interest income -- -- (8,523) (8,523)
Interest expense -- 149 2,141 2,290
------------ ---------- ----------- -----------
Net income (loss) $ 91,325 (907,356) $(1,030,197) $(1,846,228)
============ ========== =========== ===========
F-7
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The Company's total revenues and net income (loss) by segment for the
three month period ended December 31, 2002 and identifiable assets as of
December 31, 2002, are as follows:
SPECIALTY
GRAPHIC ARTS CHEMICALS CORPORATE TOTAL
------------ --------- --------- -----
Revenues $ 709,237 $ 82,855 $ -- $ 792,092
============== ============ =========== =============
Gross profit $ 316,048 $ 44,661 $ -- $ 360,709
General and administrative 42,196 430,973 428,512 901,681
Depreciation and amortization -- 21,385 3,395 24,780
Interest income (15,250) (15,250)
Interest expense 144 -- -- 144
-------------- ----------- ----------- ------------
Net income (loss) $ 273,708 $ (407,697) $ (416,657) $ (550,646)
============== ============ =========== =============
Cash and cash equivalents $ $ $ 2,896,964 $ 2,896,964
-- --
Accounts receivable, net 833,113 66,538 -- 899,651
Inventory, net 41,333 155,509 -- 196,842
Loans receivable, net -- 108,447 10,808 119,255
Prepaid expenses -- 80,884 32,291 113,175
Property and equipment, net -- 236,223 50,484 286,707
Goodwill, net -- 68,819 -- 68,819
Patents, net -- 203,796 -- 203,796
Other assets -- -- 2,903 2,903
-------------- ----------- ----------- ------------
Total assets $ 874,446 $ 920,216 $ 2,993,450 $ 4,788,112
============== ============ =========== =============
The Company's total revenues and net income (loss) by segment for the
nine month period ended December 31, 2002, are as follows:
SPECIALTY
GRAPHIC ARTS CHEMICALS CORPORATE TOTAL
------------ --------- --------- -----
Revenues $ 1,699,159 $ 457,542 $ -- $ 2,156,701
Gross profit $ 647,469 $ 224,729 $ -- $ 872,198
General and administrative 138,279 1,238,563 1,012,011 2,388,853
Depreciation and amortization -- 49,619 8,198 57,817
Interest income -- -- (51,374) (51,374)
Interest expense 1,312 -- -- 1,312
-------------- ----------- ----------- ------------
Net income (loss) $ 507,878 $(1,063,453) $ (968,835) $ (1,524,410)
============== ============= ============ =============
3. ACQUISITION OF OIL WELL LEASES
On April 4, 2003, the Company purchased oil leases for six oil wells in
Laramie County, Wyoming (the "Wyoming Wells") for an aggregate purchase price of
$97,616. In addition to operating the wells, the Company used the wells to test
its products. During the nine months ended December 31, 2003, the Wyoming Wells
produced oil which generated $34,636 in revenues and incurred operating costs
and start-up maintenance and repair costs of $137,298, much of which is expected
to be non-recurring. The Company has capitalized $17,419 for the oil leases and
$71,429 for equipment, net of depreciation, amortization and depletion at
December 31, 2003. The Company recorded an asset retirement obligation of
$30,000 to cover the cost of capping the wells in accordance with SFAS No. 143,
"Accounting for Asset Retirement Obligations." The Company maintains a
refundable, interest-bearing deposit of $75,000 with the State of Wyoming to
cover the costs of eventual capping the wells in the event they are no longer
operated or abandoned.
F-8
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Exit or Disposal Activities." SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized at their fair values
when the liabilities are incurred. Under previous guidance, liabilities for
certain exit costs were recognized at the date that management committed to an
exit plan, which is generally before the actual liabilities are incurred. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated
after December 31, 2002. This statement had no effect on the Company's
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement amends the
disclosure and certain transition provisions of Statement 123, "Accounting for
Stock-Based Compensation." Its disclosure provisions, which apply to all
entities with employee stock-based compensation, are effective for fiscal years
ending after December 15, 2002. SFAS 148:
o requires all entities with stock-based employee compensation
arrangements to provide additional disclosures in their summary of
significant accounting policies note for entities that use the
intrinsic value method of APB No. 25, "Accounting for Stock Issued
to Employees", to account for employee stock compensation for any
period presented, their accounting policies note should include a
tabular presentation of pro forma net income and earnings per share
using the fair value method.
o permits entities changing to the fair value method of accounting
for employee stock compensation to choose from one of three
transition methods - the prospective method, the modified
prospective method, or the retroactive restatement method. The
prospective transition method, however, will not be available for
entities that initially apply the fair value method in fiscal years
beginning after December 15, 2003.
o requires interim-period pro forma disclosures if stock-based
compensation is accounted for under the intrinsic value method in
any period presented. The Company does not currently expect the
adoption of this statement to have a material impact on its
financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guaranties of Indebtedness of Others." The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. The disclosure provisions of this Interpretation were
effective for the Company's March 31, 2003 consolidated financial statements.
The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after March 31, 2003. This Interpretation had no effect on the
Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation are immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Company will
need to apply its provisions to any existing variable interests in variable
interest entities no later than July 1, 2003. This Interpretation had no effect
on the Company's consolidated financial statements.
5. RELATED-PARTY TRANSACTIONS
Martin Rappaport, a significant shareholder and director of the
Company, owns the property from which the Company leases the 9,600 square foot
facility it occupies in Secaucus, New Jersey. The Company pays approximately
$100,000 per year under the lease, excluding real estate taxes. We believe that
the lease is at fair market value with comparable leases for similar facilities.
F-9
6. STOCK-BASED COMPENSATION
At December 31, 2003, the Company has stock-based compensation plan. As
permitted by SFAS No.123, "Accounting for Stock Based Compensation", the Company
accounts for stock-based compensation arrangements with employees in accordance
with provisions of Account Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Compensation expense for stock options issued to
employees is based on the difference on the date of grant, between the fair
value of the Company's stock and the exercise price of the option. There was no
stock-based employee compensation charged to expense for the nine months ended
December 31, 2003 and 2002. The Company accounts for equity instruments issued
to non-employees in accordance with the provisions of SFAS No.123 and Emerging
Issues Task Force (EITF) Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Stock-based
compensation for non-employees was $9,700 and $0 for the nine months ended
December 31, 2003 and 2002, respectively.
F-10
UNITED ENERGY CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table illustrated the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to all stock-based compensation:
For the Three Months For the Nine Months
Ended December 31, Ended December 31,
2003 2002 2003 2002
---------------------- -----------------------
Net Loss as reported $(555,963) $(550,646) $(1,846,228) $(1,524,410)
Deduct:
Total stock based employee compensation
Expense determined under fair value based
method for all awards (144,823) (23,892) (1,312,836) (1,182,658)
-------- ------- ---------- ----------
Proforma loss $(700,786) $(574,538) $(3,159,064) $(2,707,068)
-------- ------- ---------- ----------
Basic and diluted loss per common share
As reported $(0.03) $(0.02) $(0.09) $(0.07)
Pro forma $(0.03) $(0.03) $(0.14) $(0.13)
7. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries, in the normal course of their
respective businesses, are parties to certain litigation. In the opinion of the
Company's management, settlements of litigation will not have a material adverse
effect on the Company's results of operations, financial position or cash flows.
Texas Oil Field Accident
On October 29, 2002, an accident occurred at an oil well site near
Odessa, Texas, where the Company's equipment and products were being used in the
treatment of an oil well. Three lawsuits were commenced against the Company in
Texas state court in Crane County, arising from this incident and one additional
claim, though not formally commenced, was asserted. The insurance companies
involved have settled all of the claims and the Company has paid only $15,000 in
legal out of pocket fees relating to these claims.
In addition to the above-described litigation, OSHA commenced an
investigation into the accident. On April 8, 2003, OSHA issued its Citation and
Notification of Penalty which found that the Company had committed violations of
certain applicable rules, including having failed to provide at or in proximity
to the site a person or persons adequately trained to render first aid with
adequate first aid supplies available and having failed to develop, implement or
maintain at the site a written hazard communication program describing how
safety criteria will be met. OSHA proposed a fine of $3,000 for these
violations, which the Company has paid.
Litigation Concerning A Former Employee
On or about May 16, 2003, the Company commenced an action against Jon
Hebert, a former employee of the Company in the United States District Court for
the District of New Jersey (the "Herbert Action"), seeking preliminary and
permanent injunctive and other relief for violations by Mr. Hebert of employment
and non-disclosure agreements between him and the Company, resulting in alleged
disclosures by Hebert of the Company's confidential and proprietary information
and wrongful solicitation of the Company's customers. The Company alleges that
sales of products manufactured or distributed by Hebert's new employer may, in
addition, infringe the Company's patents. After a hearing on the Company's
motion for a preliminary injunction, the Court denied the motion, but ordered
expedited proceedings in the matter.
F-11
On or about May 27, 2003, Mr. Hebert's current employer, Fluid
Sciences, L.L.C., commenced two actions against the Company and one of its
wholly-owned subsidiaries, Nor Industries, Inc. One of the actions was commenced
in the 15th Judicial District Court, Lafayette Parish, Louisiana ("Fluid
Sciences Action #1). This action seeks a declaratory judgment that the
agreements between the Company and Mr. Hebert are not enforceable against Fluid
Sciences, L.L.C as a matter of Louisiana's public policy and laws. In addition
the action seeks judgment that the Company's efforts to enforce its agreements
with Mr. Hebert are in restraint of trade and constitute unfair competition
entitling Fluid Sciences, L.L.C. to injunctive relief and damages. In June,
2003, the Company removed this action to the United States District Court for
the Western District of Louisiana. In October 2003, the action was
administratively stayed pending the outcome of the action described in the
preceding paragraph which was brought in the United States District Court for
the District of New Jersey by the Company against Mr. Hebert.
On or about May 27, 2003, a second action was commenced in the United
States District Court for the Western District of Louisiana, entitled Fluid
Sciences, L.L.C. v. United Energy Corp. and Nor Industries, Inc (Fluid Sciences
Action #2). The complaint in this action alleges that Fluid Sciences is entitled
to a declaratory judgment that its products do not infringe on the patents of
the Company. The Company and its subsidiary intend vigorously to defend the
litigation brought by Fluid Sciences, L.L.C.
The parties to the Herbert Action and to Fluid Sciences Actions #1 and
2 have orally agreed, in principle, to settle and discontinue all of the actions
without any further cost to any of the parties. While the specific terms of the
settlements have not yet been finally established, the Company does not
anticipate that any such litigation will have an adverse affect upon the
Company. Included in these settlement negotiations are clear promises from Fluid
Sciences, L.L.C. and Jon Herbert that there will be no further violations of any
company patents.
Sales Commission Claim
On or about July 26, 2002, an action was commenced against the Company in the
Court of Common Pleas of South Carolina, Pickens County, brought by Quantum
International Technology, LLC and Richard J. Barrett. Plaintiffs allege that
they were retained as the sales representative to the Company and in that
capacity made sales of the Company's products to the United States government
and to commercial entities. Plaintiffs further allege that the Company failed to
pay to plaintiffs agreed commissions at the rate of 20% of gross sales of the
Company's products made by plaintiffs. The complaint seeks an accounting,
compensatory damages in the amount of all unpaid commissions plus interest
thereon, punitive damages in an amount treble the compensatory damages, plus
legal fees and costs. Plaintiffs maintain that they are entitled to receive an
aggregate of approximately $350,000 in compensatory and punitive damages,
interest and costs. In June 2003, the action was transferred from the court in
Pickens County to a Master in Equity sitting in Greenville, South Carolina and
was removed from the trial docket. The action, if tried, will be tried without a
jury. No trial date has been scheduled. The Company believes it has meritorious
defenses to the claims asserted in the action and intends vigorously to defend
the case. The Company also believes that the actual amount of damages will be
under $10,000.
F-12
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of United Energy Corporation:
We have audited the accompanying consolidated balance sheets of United Energy
Corporation (a Nevada corporation) and subsidiaries as of March 31, 2003 and
2002 and the related consolidated statements of income, cash flows and
stockholders' equity for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Energy Corporation and subsidiaries as of March 31, 2003 and 2002 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited the schedule II for the years ended March 31, 2003 and
2002. In our opinion, this schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.
/s/ GRANT THORNTON LLP
New York, New York
May 27, 2003 (except with respect to the matters discussed in Note 6, as to
which the date is June 18, 2003)
F-13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of United Energy Corp.:
We have audited the accompanying consolidated balance sheets of United Energy
Corp. (a Nevada corporation) and subsidiaries as of March 31, 2001 and 2000, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
Subsequent to the issuance of its March 31, 2001 financial statements, the
Company recorded compensation for the executives' services that were contributed
by management in the amount of $250,000 for each fiscal year commencing in 1996.
In addition, certain other adjustments were reflected, as discussed in Note 14.
None of these adjustments impacted working capital or total stockholders'
equity. The financial statements presented have been revised to reflect the
above.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts - Schedule II of this Form 10-K/A for the three years ended March 31,
2001 is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
\s\ ARTHUR ANDERSEN LLP
New York, New York
June 12, 2001 (except with respect to the matters discussed in Note 14, as to
which the date is July 20, 2001, respectively).
This Report of Independent Certified Public Accountants is a copy of a
previously issued Arthur Anderson LLP ("Anderson") report and has not been
reissued by Anderson. The inclusion of this previously issued Anderson report is
pursuant to the "Temporary Final Rule and Final Rule: Requirements for Arthur
Anderson LLP Auditing Clients," issued by the U.S. Securities Exchange and
Exchange Commission in March 2002. Note that this previously issued Anderson
report includes references to certain fiscal years, which are not required to be
presented in the accompanying consolidated financial as of and for the fiscal
years ended March 31, 2003.
F-14
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2002
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................... $ 2,120,942 $ 198,412
Accounts receivable, net of allowance for doubtful accounts of
$48,113 and $4,795, respectively......................................... 496,715 218,104
Inventory, net of allowance of $16,290 and $16,290, respectively........... 211,344 287,857
Note receivable, net of reserve of $30,000................................... 149,034 --
Prepaid expenses and other current assets.................................... 104,527 117,127
------------- -------------
Total current assets ............................................... 3,082,562 821,500
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $92,883 and $23,507, respectively............................ 268,597 16,883
OTHER ASSETS:
Goodwill, net of accumulated amortization of $17,704 and $17,704, respectively 68,819 68,819
Patent, net of accumulated amortization of $44,253 and $30,148 respectively.. 229,508 128,908
Loan receivable.............................................................. 2,076 --
Deposits .................................................................... 31,385 1,862
------------- -------------
Total assets........................................................ $ 3,682,947 $ 1,037,972
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit..................................................... $ -- $ 150,000
Accounts payable............................................................. 158,048 600,850
Accrued expenses............................................................. 334,198 10,875
Due to related parties....................................................... 244,141 141,487
------------- -------------
Total current liabilities........................................... 736,387 903,212
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock: $0.01 par value 100,000,000 shares authorized; 22,180,270
and 16,180,270 shares issued and ......outstanding as of March 31, 2003
and 2002, respectively................................................. 221,802 161,802
Additional paid-in capital ................................................ 10,698,752 5,117,952
Accumulated deficit........................................................ (7,973,994) (5,144,994)
------------- -------------
Total stockholders' equity........................................ 2,946,560 134,760
------------- -------------
Total liabilities and stockholders' equity ....................... $ 3,682,947 $ 1,037,972
============= =============
The accompanying notes are an integral part of these
consolidated balance sheets.
F-15
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
REVENUES, net................................................. $ 2,232,626 $ 1,387,851 $ 3,482,915
COST OF GOODS SOLD............................................ 1,332,791 756,391 2,325,652
------------- ------------- -------------
Gross profit............................................... 899,835 631,460 1,157,263
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative........................ 3,627,983 1,763,446 1,052,790
Executive services contributed by management............... -- 187,500 250,000
Depreciation and amortization............................. 83,481 20,031 16,572
------------- ------------- -------------
Total operating expenses........................... 3,711,464 1,970,977 1,319,362
Loss from operations............................... (2,811,629) (1,339,517) (162,099)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income............................................ 59,377 1,792 1,581
Interest expense........................................... (1,748) (6,200) (11,817)
Legal settlement........................................... (75,000) (20,651) (231,981)
------------- ------------- -------------
Total other income (expense)....................... (17,371) (25,059) (242,217)
------------- ------------- -------------
Net loss........................................... $ (2,829,000) $ (1,364,576) $ (404,316)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE:
Total basic and diluted loss per share............. $ (0.13) $ (0.09) $ (0.03)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, basic and diluted............................. 21,456,982 16,022,325 15,830,270
============= ============= =============
The accompanying notes are an integral part of
these consolidated statements.
F-16
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2002, AND 2001
ADDITIONAL STOCK
COMMON STOCK PAIN-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
------ ------ ------- ---------- ------- -----
BALANCE, March 31, 2000......... 15,830,270 158,302 3,792,052 (25,000) (3,376,102) 549,252
Executive services contributed
by management............... -- -- 250,000 -- -- 250,000
Net loss........................ -- -- -- -- (404,316) (404,316)
---------- ------- --------- -------- ------------ -----------
BALANCE, March 31, 2001......... 15,830,270 158,302 4,042,052 (25,000) (3,780,418) 394,936
Common stock issued for
conversion of due to
shareholder................. 250,000 2,500 347,500 -- -- 350,000
Write-off of subscription
receivable.................. (25,000) 25,000 -- --
Common stock issued for
services received........... 100,000 1,000 110,000 -- -- 111,000
Options granted in
consideration for
consulting services......... 455,900 455,900
Executive services contributed
by management............... -- -- 187,500 -- -- 187,500
Net loss........................ -- -- -- -- (1,364,576) (1,364,576)
---------- ------- --------- -------- ------------ -----------
BALANCE, March 31, 2002 16,180,270 161,802 5,117,952 -- (5,144,994) 134,760
Common stock issued for
Private placement 6,000,000 60,000 5,940,000 -- -- 6,000,000
Options granted in
consideration for services -- -- 125,000 -- -- 125,000
Private placement costs -- -- (484,200) -- -- (484,200)
Net loss........................ -- -- -- -- (2,829,000) (2,829,000)
---------- ------- --------- -------- ------------ -----------
BALANCE, March 31, 2003 22,180,270 221,802 10,698,752 -- (7,973,994) 2,946,560
========== ======= ========== ========== =========
The accompanying notes are an integral part of these consolidated statements.
F-17
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2003, 2002 AND 2001
2003 2002 2001
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (2,829,000) $ (1,364,576) $ (404,316)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization.......................... 83,481 20,031 16,572
Non-cash consulting expense............................ -- 111,000 --
Options granted in consideration for services.......... 125,000 455,900 --
Executive services contributed by management........... -- 187,500 250,000
Changes in operating assets and liabilities-
(Increase) decrease in accounts receivable, net........ (427,645) 752,329 (524,484)
Decrease (increase) in inventory....................... 76,513 (166,104) 470,532
Decrease (increase) in prepaid expenses................ 19,423 (5,649) --
Increase in deposits................................... (29,723) (277) --
Increase in related party payable...................... 102,654 -- --
(Decrease) increase in accounts payable and accrued
expenses........................................... (119,479) (25,028) 251,578
------------- ------------- -------------
Net cash (used in) provided by operating activitie (2,998,776) (34,874) 59,882
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for loans receivable.............................. (8,699) -- --
Payments for acquisition of property and equipment......... (321,090) (13,409) --
Payments for patent........................................ (114,705) -- (8,789)
------------- ------------- -------------
Net cash used in investing activities.............. (444,494) (13,409) (8,789)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit................................. (150,000) -- (165,697)
Proceeds from line of credit............................... -- 150,000 160,000
Payments of private placement costs ....................... (484,200) -- 5,291
Proceeds from issuance of common stock..................... 6,000,000 -- --
------------- ------------- -------------
Net cash provided by (used in) financing activities 5,365,800 150,000 (406)
Net increase in cash and cash equivalents.......... 1,922,530 101,717 50,687
CASH AND CASH EQUIVALENTS, beginning of year.................. 198,412 96,695 46,008
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year........................ $ 2,120,942 $ 198,412 $ 96,695
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for-
Interest............................................... $ 2,361 $ 6,266 $ 11,198
Income taxes........................................... 800 720 5,066
Conversion of account receivable into Note receivable...... $ 179,034 $ -- $ --
Conversion of accounts due to a shareholder into
common stock........................................... $ -- $ 350,000 $ --
The accompanying notes are an integral part of these consolidated statements.
F-18
UNITED ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 2002 AND 2001
1. DESCRIPTION OF BUSINESS
United Energy Corp. ("United Energy" or the "Company") considers its
primary business focus to be the development, manufacture and sale of
environmentally friendly specialty chemical products, in particular its KH-30(R)
and KX-91(R) oil well cleaners and KH-30S drag reducer products.
Green Globe is operated as a separate subsidiary of United Energy and
sells its products under the tradename Qualchem(TM). Green Globe gives United
Energy access to the chemistry and product lines of Green Globe which include
environmentally friendly paint strippers and cleaners, many of which have been
qualified for use by the U.S. Military. Green Globe developed a dual package of
cleaning and drying "wipes" which produce a clear, non-reflective coating on
glasses, computer screens and instrument panels. The "wipes" were developed for,
and have received U.S. Military approval for, the cleaning of the instrument
panels of combat aircraft.
United Energy's chemists have also developed an environmentally
friendly fire-retardant agent named FR-15. FR-15 begins as a concentrate which
can be mixed with varying amounts of water, depending on the anticipated use.
FR-15 mixture also resists re-ignition once a fire has been extinguished. This
product can also be used to reduce odors, such as those from decomposing
garbage, and for soil remediation following petroleum-based contamination. Our
FR-15 product has been developed and successfully tested by several municipal
fire departments. Underwriters Laboratories ("UL") did not have an approved test
for FR-15 as a dispersant. A reformulation of FR-15 was developed to pass the UL
fire extinguisher test. The reformulated product is being resubmitted for
testing and certification by Underwriters Laboratories ("UL"). We expect that
sales of FR-15 will commence when the product receives UL certification.
United Energy also produces a specialty chemical product called
UNIPROOF(R), which is a photosensitive coating that is applied to paper to
produce what is known in the printing industry as proofing paper or "blue line"
paper.
Slick Barrier is an underwater protective coating which prevents the
adherence of barnacles to boat hulls. The product is another in the Company's
line of environmental products in that it is environmentally friendly and
biodegradable, which the Company believes to be particularly appealing in fresh
water marine applications. The product is being tested on pleasure boats
throughout the United States and Europe. We expect to begin sales of the product
by the fall of 2003. A patent application on this product is in process.
The Company incurred significant losses and negative cash flow from
operating activities and as of March 31, 2003 and it had an accumulated deficit
of $7,973,994. As of March 31, 2003 the Company has cash and cash equivalents of
$2,120,942. Although the Company expects working capital requirements to
continue to be significant, it has begun to implement and it believes it will
continue to undertake cost reduction initiatives in Fiscal 2004. Accordingly,
the Company currently anticipates that its available cash in hand and cash
resources from expected revenues will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next
twelve months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United
Energy Corp. and its wholly-owned subsidiaries Green Globe and currently
inactive subsidiary, Nor-Graphic Industries. All intercompany transactions and
accounts have been eliminated in consolidation.
F-19
USE OF ESTIMATES
The preparation of consolidated financial statements in accordance with
accounting principals generally accepted in the United States of America
requires United Energy to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities.
On an on-going basis, United Energy evaluates its estimates, including
those related to bad debts, inventories, intangible assets, and contingencies
and litigation. United Energy bases its estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
REVENUE RECOGNITION
The Company's primary source of revenue is from the sales of its
products. The Company recognizes revenue upon shipment and transfer of title.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with original maturities of three months or less.
Inventories
Inventories consist predominately of finished goods. Inventories are
valued at the lower of cost (first-in, first-out method) or market.
Allowance for Doubtful Accounts
The Company monitors its accounts and note receivable balances on a
monthly basis to ensure they are collectible. On a quarterly basis, the Company
uses its historical experience to determine its accounts receivable reserve. The
Company's allowance for doubtful accounts is an estimate based on specifically
identified accounts as well as general reserves. The Company evaluates specific
accounts where it has information that the customer may have an inability to
meet its financial obligations. In these cases, management uses its judgment,
based upon the best available facts and circumstances, and records a specific
reserve for that customer against amounts due to reduce the receivable to the
amount that is expected to be collected . These specific reserves are
reevaluated and adjusted as additional information is received that impacts the
amount reserved. The company also establishes a general reserve based upon a
range of percentages applied to aging categories. These percentages are based on
historical collection and write-off experience. If circumstances change, the
Company's estimate of the recoverability of amounts due the company could be
reduced or increased by a material amount. Such a change in estimated
recoverability would be accounted for in the period in which the facts that give
rise to the change become known.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation has been
calculated using an accelerated tax depreciation method over the estimated
useful lives of the assets ranging from 3 to 15 years. Leasehold improvements
are amortized over the lives of the respective leases (15 years), which are
shorter than the useful life. The cost of maintenance and repairs is expensed as
incurred. Depreciation and amortization expense for the years ended March 31,
2003, 2002 and 2001 was $69,376, $3,660 and $2,527, respectively.
F-20
Property and equipment consists of the following at March 31, 2003 and 2002:
2003 2002
---- ----
Furniture and fixtures................................................... $ 67,094 $ 27,670
Machinery and equipment.................................................. 233,585 7,097
Vehicles................................................................. 35,548 --
Leasehold improvements................................................... 25,253 5,623
------------- --------------
361,480 40,390
Less Accumulated depreciation and amortization........................... (92,883) (23,507)
------------- --------------
Property and equipment, net.............................................. $ 268,597 $ 16,883
============= ==============
GOODWILL
The Company capitalized goodwill related to the acquisition of Green
Globe in September of 1998. Goodwill represents cost in excess of fair value on
the net assets acquired. Goodwill was amortized over a 15 year period using a
straight line amortization method until the adoption of SFAS No. 142 "Goodwill
and Other Intangible Assets," on April 1, 2002. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum life).
Effective April 1, 2002, the Company adopted the provisions of SFAS No. 142,
which had no material effect on its results of operations and financial
position.
PATENTS
The Company capitalizes legal costs incurred to obtain patents.
Amortization begins when the patent is approved using the straight-line basis
over the estimated useful life of 15 years.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company's long-lived assets include property and equipment, and
patents.
As of April 1, 2002, the Company adopted SFAS No.144, "Accounting for
the Impairment or Disposal of Long-lived Assets", which supersedes SFAS No.121,
"Accounting for the Impairment of Long-lived Assets to be Disposed Of." Under
SFAS No.144, intangible assets other than goodwill are reviewed on a periodic
basis for impairment whenever events or changes in circumstances indicate that
the carrying amounts of the assets may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. The company's management believes that no
such event or change has occurred. The adoption of SFAS No. 144 had no effect on
the Company.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement and the
income tax bases of assets and liabilities and for net operating loss carry
forwards existing at the balance sheet date using enacted tax rates in effect
for the years in which the taxes are expected to be paid or recovered. A
valuation allowance is established when it is considered more likely than not
that such assets will not be realizable. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period in which the
tax change occurs.
STOCK-BASED COMPENSATION
At March 31, 2003 the Company has stock based compensation plans, which
are described more fully in Note 0. As permitted by SFAS No.123, Accounting for
Stock Based Compensation, the Company accounts for stock-based compensation
arrangements with employees in accordance with provisions of Account Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Compensations expense for stock options issued to employees is based on the
difference on the date of grant, between the fair value of the Company's stock
F-21
and the exercise price of the option. Stock based employee compensations cost
for the years ended March 31, 2003, 2002 and 2001 was $125,000, $ 0.00 and $0.00
respectively. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No.123 and Emerging
Issues Task Force (EITF) Issue No.96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Stock based
compensation for non-employees was $0, $455,900 and $0 for the years ended March
31, 2003, 2002 and 2001.
The following table illustrated the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 to all stock based compensation:
Years ended March 31,
---------------------
2003 2002 2001
---- ---- ----
Net Loss
As reported (2,829,000) (1,364,576) (404,316)
Add:
Stock based compensation expenses included in
reported net loss 125,000 455,900 -
Deduct:
Total stock based employee compensation
expense determined under fair value
based method for all awards
(1,194,605) (869,187)
Pro forma (3,898,605) (1,777,863) (404,316)
Basic and diluted loss per common share
As reported (0.13) (0.09) (0.03)
Pro forma (0.18) (0.11) (0.03)
PER SHARE DATA
SFAS No. 128 establishes standards for computing and presenting
earnings per share ("EPS"). The standard requires the presentation of basic EPS
and diluted EPS. Basic EPS is calculated by dividing income/loss available to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income/loss
available to common shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilutive securities. Diluted loss
per share for the years ended March 31, 2003, 2002 and 2001 does not include
6,195,020, 1,860,000, and 0 stock options and warrants since the inclusion of
the outstanding stock options and warrants would be antidilutive.
CONCENTRATIONS OF RISK
Cash and Cash Equivalents
The Company places its cash and cash equivalents with high-quality
financial institutions and limits the amount of credit exposure to any one
institution.
Accounts and Notes Receivable
The Company has one customer which accounted for 87% and 75% of the
total accounts receivable at March 31, 2003 and 2002, respectively. Credit
losses, if any, have been provided for in the consolidated financial statements
and are based on management's expectations. The Company does not believe that it
is subject to any unusual risks, nor significant risks, in the normal course of
business.
At March 31, 2003, the company converted an accounts receivable balance
of $179,034 to a one year note receivable. The note accrues interest at the rate
of 4.5% and is paid down in 12 monthly payments and provides for a security
interest in the inventory held by this customer.
F-22
Significant Customers
The Company's revenues from major customers, as a percentage of
revenues, for the years ended March 31, 2003, 2002 and 2001, are as follows:
2003 2002 2001
---- ---- ----
Customer A............................... 0% 0% 32%
Customer B............................... 4% 12% 0%
Customer C............................... 59% 74% 49%
Customer D............................... 15% 0% 0%
Customer E............................... 10% 0% 0%
Vendors
The Company has one vendor, which accounts for over 36%, 38% and 37% of
the Company's supplies purchases for the years ended March 31, 2003, 2002 and
2001, respectively. The Company believes it can obtain the products from other
vendors on terms suitable to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
note and loan receivable, inventory, revolving line of credit, and accounts
payable and accrued expenses approximate their fair values due to the short-term
maturity of these instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses accounting and reporting
for obligations associated with the retirement for tangible long-lived assets
and the associated asset retirement costs. This statement is effective for the
fiscal years beginning after June 15, 2002. The Company is currently assessing
the impact of the new standard, although it does not expect it to affect its
financial position and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of commitment to an exit or disposal plan. SFAS
No. 146 applies to exit or disposal activities after December 31, 2002 and did
not have a material effect in the Company's financial position or results of
operations.
In December 2002, the FASB issued Statement No.148, "Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123" (SFAS No. 123), to provide alternative transition methods for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent in annual financial statements
about the method of accounting for stock-based employee compensation and the
pro-forma effect on reported results of applying fair value based method for
entities that use the intrinsic value method of accounting. The pro forma effect
disclosures are also required to be prominently disclosed in interim financial
statements. The statement is effective for financial statements for fiscal years
ending after December 15, 2002 and is effective for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002, with earlier application permitted. United Energy does not plan to change
to the fair value based method for accounting for stock-based compensation and
has included the disclosure requirements of SFAS No.148 in the accompanying
financial statements.
F-23
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken to issue the guarantee. United Energy previously did not record a
liability when guaranteeing obligations unless it became probable that United
Energy would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees United Energy issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim annual periods
ending after December 31, 2002. The Company is currently assessing the impact of
the new standard, although it does not expect to affect its results of its
operations.
3. INVENTORY
Inventory consists of the following as of March 31, 2003 and 2002:
2003 2002
---- ----
Paper.................................................................. $ 19,957 $ 182,046
Blended chemical....................................................... 111,544 89,862
Raw materials.......................................................... 79,843 15,949
Total inventory........................................................ $ 211,344 $ 287,857
4. REVOLVING LINE OF CREDIT
The revolving line of credit allows the Company to borrow up to
$1,000,000 from Fleet Bank. Borrowings under the credit line bear interest at
prime. Interest is payable monthly. Borrowings under the line of credit must be
reduced to zero for a period of 30 consecutive days in any 12-month period.
Amounts outstanding under the line of credit are subject to repayment on demand
at any time and for any reason and are secured by accounts receivable,
inventory, furniture and fixtures, machinery and equipment and a pledge of
750,000 shares of the Company's common stock which have been placed in escrow.
The line is also secured by the personal guarantee of a shareholder of the
Company. At March 31, 2002 the outstanding amount was $150,000.
The Company has repaid the line of credit in full in May 2002 with the
proceeds received from the private placement. The pledge of 750,000 shares of
the Company's common stock was returned to the Company and the shares were
cancelled.
5. RELATED PARTY TRANSACTIONS
The Company had an amount due to Robert Seaman, a major shareholder and
former director of the Company. Amounts due to related parties as of March 31,
2003 and 2002 is $244,141 and $141,487, respectively. These amounts are
unsecured, non-interest bearing and due upon demand.
At March 31, 2001, the Company was indebted to Relevant Investments
Ltd. for $350,000. In June 2001, 250,000 shares were issued to Relevant
Investments Ltd. in full satisfaction of the amount due. The amount has been
shown as due to shareholder on the balance sheet as of March 31, 2001.
Martin Rappaport, a major shareholder and director of the Company, owns
the property from which United Energy leases the 9,600 square foot facility it
occupies in Secaucus, New Jersey. The Company pays approximately $100,000 per
year under the lease, excluding real estate taxes.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company, in its normal course of business, is subject to certain
litigation. In the opinion of the Company's management, settlements of
litigation will not have a material adverse effect on the Company's results of
operations, financial position or cash flows.
F-24
Texas Oil Field Accident
On October 29, 2002, an accident occurred at an oil well site near
Odessa, Texas, where the Company's equipment and products were being used in the
treatment of an oil well. There are two lawsuits pending against the Company in
Texas state court in Crane County, arising from this incident. Simmons, et ano.
v. United Energy Corp., et al. Larry Simmons, who lost an arm and sustained
serious other injuries in the accident and his wife have commenced a suit
against the Company and other defendants including the owner of the oil well and
an oil well servicing company. Hurst, et ano. v. United Energy Corp., et al.
Stephen Hurst, whose injuries were not as serious as those of Mr. Simmons, and
his wife, have also commenced a suit against the Company. Both actions are in
the discovery stage. The Company anticipates that additional actions may be
commenced by other individuals who suffered less serious injuries in the
accident. The Company cannot at this time quantify or estimate the impact of
this litigation on the Company's operations as of March 31, 2003.
In addition to the above described litigation, OSHA commenced an
investigation into the accident. On April 8, 2003, OSHA issued its Citation and
Notification of Penalty which found that the Company had committed violations of
certain applicable rules, including having failed to provide at or in proximity
to the site a person or persons adequately trained to render first aid with
adequate first aid supplies available and having failed to develop, implement or
maintain at the site a written hazard communication program describing how
safety criteria will be met. OSHA proposed a fine of $3,000 for these
violations, which the Company has paid.
Litigation Concerning A Former Employee
On or about May 16, 2003, the Company commenced an action against Jon
Hebert, a former employee of the Company in the United States District Court for
the District of New Jersey, seeking preliminary and permanent injunctive and
other relief for violations by Mr. Hebert of employment and non-disclosures
agreements between him and the Company, resulting in alleged disclosures by
Hebert of the Company's confidential and proprietary information and wrongful
solicitation of the Company's customers. The Company alleges that sales of
products manufactured or distributed by Hebert's new employer may, in addition,
infringe the Company's patents. After a hearing on the Company's motion for a
preliminary injunction, the Court denied the motion, but ordered expedited
proceedings in the matter.
On or about May 27, 2003, Mr. Hebert's current employer, Fluid
Sciences, L.L.C., commenced two actions against the Company and one of its
wholly owned subsidiaries, Nor Industries, Inc. One of the actions was commenced
in the 15th Judicial District Court, Lafayette Parish, Louisiana. This action
seeks a declaratory judgment that the agreements between the Company and Mr.
Hebert are not enforceable against Fluid Sciences, L.L.C as a matter of
Louisiana's public policy and laws. In addition the action seeks judgment that
the Company's efforts to enforce its agreements with Mr. Hebert are in restrain
of trade and constitute unfair competition entitling Fluid Sciences, L.L.C. to
injunctive relief and damages.
On or about May 27, 2003, a second action was commenced in the United
States District Court for the Western District of Louisiana, entitled Fluid
Sciences, L.L.C. v. United Energy Corp. and Nor Industries, Inc. The complaint
in this action alleges that Fluid Sciences is entitled to a declaratory judgment
that its products do not infringe the patents of the Company.
The Company and its subsidiary intend vigorously to defend the two
actions brought by Fluid Sciences, L.L.C.
Sales Commission Claim
On or about July 26, 2002, an action was commenced against the Company
in the Court of Common Pleas of South Carolina, Pickens County, brought by
Quantum International Technology, LLC and Richard J. Barrett. Plaintiffs allege
that they were retained as the sales representative to the Company and in that
capacity made sales of the Company's products to the United States government
and to commercial entities. Plaintiffs further allege that the Company failed to
pay to plaintiffs agreed commissions at the rate of 20% of gross sales of the
Company's products made by plaintiffs. The complaint seeks an accounting,
compensatory damages in the amount of all unpaid commissions plus interest
thereon, punitive damages in an amount treble the compensatory damages, plus
legal fees and costs. Plaintiffs maintain that they are entitled to receive an
aggregate of approximately $350,000 in compensatory and punitive damages,
interest and costs. The action is presently listed on the trial docket for July
1,
F-25
2003. It is likely that the trial of the action will not take place as
scheduled. The Company believes it has meritorious defenses to the claims
asserted in the action and intends vigorously to defend the case.
SMK Industries, Inc. v. Nor Graphics, Inc.
In its 10K for the fiscal year ended March 31, 2002, the Company
reported with respect to an action commenced against it in 1997 by SMK
Industries seeking damages for breach of contract of approximately $120,000. On
June 18, 2003, the Company and plaintiff have reached an agreement to settle and
discontinue the lawsuit. In the settlement, the Company will pay an aggregate of
$75,000 in three installments, which was accrued for in the accompanying
financial statements.
NEW MANAGEMENT
As part of the private financing transaction, the Company began the
process of identifying and making employment offers to a new management team to
focus on the sales and marketing of KH-30 and other products. Three of four of
the new management team have accepted employment starting in May 2002. Each of
these executives has employment agreements with terms from one to three years.
These agreements provide, among other things, for annual base salaries and
bonuses totaling $262,000, $262,000 and $35,000 in fiscal, 2004, 2005 and 2006.
LEASE COMMITMENTS
The Company leases office facilities, equipment and autos under
operating leases expiring on various dates through 2007. Certain leases contain
renewal options. The following is a schedule by years, of future minimum lease
payments under operating leases having remaining terms in excess of one year as
of March 31, 2003.
OPERATING
YEAR LEASES
-------------
2004........................................................ $103,356
2005........................................................ 100,987
2006........................................................ 97,114
2007........................................................ 88,110
Thereafter.................................................. 21,600
-------------
Total minimum lease payments................................ $411,157
=============
The expenses for all operating leases were $120,214, $107,304, and
$105,466 for the years ended March 31, 2003, 2002 and 2001, respectively.
7. STOCKHOLDERS' EQUITY
On May 14, 2002, the Company issued, in a private placement, an
aggregate of 6,000,000 shares of its common stock at an aggregate price of
$6,000,000. In connection with the common stock issuance, the Company issued
warrants to purchase 3,000,000 of the Company's common stock at an exercise
price of $2 per share exercisable for a five year period. The Company incurred
$484,000 in issuance expenses in connection with the financing. In addition, the
Company issued 750,000 additional warrants to purchase 750,000 of the Company's
common stock at an exercise price of $0.60 per share with a five year term but
not exercisable during the first two years from the grant date for relinquishing
rights of immediate exercise of 500,000 warrants issued in connection with the
private placement.
During year ended March 31, 2002, the Company issued an aggregate of
100,000 shares of common stock in exchange for consulting services. These
issuances were recorded as an increase to equity and consulting expense for the
fair value of the shares of common stock on their respective grant dates.
Until December 31, 2001, the CEO and CFO provided services to the
Company for which they had not received any compensation. The financial
statements through that date reflect a charge and associated credit to
shareholders' equity reflecting the fair value of such contributed services.
Both these individuals received option
F-26
and/or cash compensation commencing in the fourth quarter and accordingly the
Company ceased reflecting the value of contributed services as of January 1,
2002.
8. INCOME TAXES
Deferred income taxes are provided for the temporary difference between
the financial reporting basis and tax basis of the Company's assets and
liabilities including those assets and liabilities recorded in connection with
acquisitions. Deferred tax assets and liabilities result principally from
recording certain expenses or income in the financial statements in a different
period from recognition for income tax purposes. As of March 31, 2003, the
Company had a net operating loss carryforward for tax purposes of approximately
$6,000,000, which is available to reduce its future taxable income and expires
at various dates through 2023. A full valuation allowance has been established
against the deferred tax assets, which are mainly related to the net loss
carryforward, due to the uncertainties surrounding the utilization of the
carryforward and limitations resulting from a change in control. There are no
other significant timing differences.
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of net operating loss carryforwards before
utilization.
9. EMPLOYEE BENEFITS PLAN
Stock Option Plans
In August, 2001, the Company's stockholders approved, the 2001 Equity
Incentive Plan (the "2001 Plan"), which provides for the grant of stock options
to purchase up to 2,000,000 shares of common stock to any employee, non-employee
director, or consultant at the Board's discretion. Under the 2001 Plan, these
options may be exercised for a period up to ten years from the date of grant.
Options issued to employees are exercisable upon vesting, which can range
between the date of the grant to up to 5 years.
An amendment and restatement of the 2001 Equity Incentive Plan
increasing the number of shares for a total of 4,000,000 was approved by the
Board of Directors on May 29, 2002 and was approved by the shareholders at the
annual meeting.
Under the 2001 Plan, options are granted to non-employee directors upon
election at the annual meeting of stockholders at a purchase price equal to the
fair market value on the date of grant. In addition, the non-employee director
stock options shall be exercisable in full twelve months after the date of grant
unless determined otherwise by the compensation committee.
There were 2,664,980 options available for future grant at March 31,
2003 under the equity incentive plan. The company issues options from time to
time outside the plan described above. As of March 31, 2003 there were 1,110,000
non- plan options granted.
Fair Value of Stock Options
For disclosure purposes under SFAS No. 123, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions:
2003 2002
---- ----
Expected life (in years)................................ 10 7
Risk-free interest rate................................. 4.73% 5.39%
Volatility.............................................. 105.45 100.60
Dividend yield.......................................... 0% 0%
Utilizing these assumptions, the weighted average fair value of options
granted with an exercise price equal to their fair market value at the date of
the grant is $ 1.78 and $0.94 for the years ended March 31, 2003 and 2002,
respectively.
F-27
Summary Stock Option Activity
The following table summarizes stock option information with respect to
all stock options for the year ended March 31, 2003 and 2002:
WEIGHTED
WEIGHTED AVERAGE
NUMBER AVERAGE REMAINING
OF EXERCISE CONTRACTUAL
SHARES PRICE LIFE (YEARS)
------ ----- ------------
Options outstanding, April 1, 2001...................... - -
Granted 1,110,000 $1.10
--------- -----
Options outstanding March 31, 2002...................... 1,110,000 $1.10
Granted 2,142,500 $1.70
Cancelled (807,480) $1.90
--------- -----
Options outstanding March 31, 2003...................... 2,445,020 $1.38 9.10
========= ===== ====
As of March 31, 2003 there were 1,701,270 options exercisable with weighted
average exercise price of $1.20 per share. Options outstanding at March 31, 2003
have an exercise price ranging between $0.70 to $2.05.
10. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public companies report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance.
F-28
The Company's total revenues, income from operations and identifiable
assets by segment for the year ended March 31, 2003, are as follows:
GRAPHIC SPECIALTY
ARTS CHEMICALS CORPORATE TOTAL
---- --------- --------- -----
Revenues ....................................... $ 1,700,738 $ 531,888 $ -- $ 2,232,626
============= ============= ============= =============
Gross profit..................................... $ 604,503 $ 295,332 $ -- $ 899,835
Sales, general and administrative expenses....... 203,921 1,902,206 1,521,856 3,627,983
Depreciation and amortization.................... -- 72,490 10,991 83,481
Interest expense (income)........................ 1,748 -- (59,377) (57,629)
Legal settlement................................. -- -- 75,000 75,000
Income (loss) from continuing operations......... $ 398,834 $ ( 1,679,364) $ ( 1,548,470) $ (2,829,000)
Cash and cash equivalents........................ $ -- $ -- $ 2,120,942 $ 2,120,942
Accounts receivable.............................. 449,046 47,669 -- 496,715
Inventory........................................ 62,669 148,675 -- 211,344
Note receivable.................................. 149,034 -- -- 149,034
Loan receivable.................................. -- 2,076 2,076
Prepaid expenses................................. -- -- 104,527 104,527
Fixed assets..................................... -- 221,116 47,481 268,597
Goodwill ........................................ -- 68,819 -- 68,819
Patent ........................................ -- 229,508 -- 229,508
Deposits ........................................ -- 30,000 1,385 31,385
Total assets..................................... $ 660,749 $ 745,787 2,276,411 $ 3,682,947
The Company's total revenues, income from operations and identifiable assets by
segment for the year ended March 31, 2002, are as follows:
GRAPHIC SPECIALTY
ARTS CHEMICALS CORPORATE TOTAL
Revenues ....................................... $1,061,317 $ 326,534 $ -- $ 1,387,851
Gross profit..................................... $ 496,385 $ 135,075 $ -- $ 631,460
Sales, general and administrative expenses....... 241,097 274,802 1,247,547 1,763,446
Depreciation and amortization.................... -- 19,053 978 20,031
Interest expense (income)........................ 6,200 -- (1,792) 4,408
Legal settlement................................. -- 20,651 -- 20,651
Executive services contributed by management..... -- -- 187,500 187,500
Income (loss) from continuing operations......... $ 249,088 $ (179,431) $ ( 1,434,233) $ (1,364,576)
Cash and cash equivalents........................ $ -- $ -- $ 198,412 $ 198,412
Accounts receivable.............................. 162,961 55,143 -- 218,104
Inventory........................................ 182,046 105,811 -- 287,857
Prepaid offering costs........................... -- -- 117,127 117,127
Fixed assets..................................... -- -- 16,883 16,883
Goodwill ........................................ -- 68,819 -- 68,819
Patent ........................................ -- 128,908 -- 128,908
Other assets..................................... -- -- 1,862 1,862
Total assets..................................... $ 345,007 $ 358,681 334,284 $ 1,037,972
F-29
The Company's total revenues and loss from operations by segment for
the year ended March 31, 2001, are as follows:
GRAPHIC SPECIALTY
ARTS CHEMICALS CORPORATE TOTAL
---- --------- --------- -----
Revenues......................................... $3,190,824 $ 292,091 $ -- $ 3,482,915
Gross profit .................................... $1,027,922 $ 129,341 $ -- $ 1,157,263
Sales, general and administrative expenses ...... 216,076 210,211 626,503 1,052,790
Depreciation and amortization .................. -- 15,095 1,477 16,572
Interest expense (income) ....................... 11,817 -- (1,581) 10,236
Legal settlement................................. -- -- 231,981 231,981
Executive services contributed by management..... -- -- 250,000 250,000
Income (loss) from continuing operations......... $ 800,029 $ ( 95,965) $ (1,108,380) $ (404,316)
11. SUBSEQUENT EVENT
On April 4, 2003 the Company purchased oil leases for six oil wells
located in Laramie County, Wyoming for an aggregate purchase price of $ 95,216.
The Company intends to operate the oil wells and use the oil wells to test the
Company's products.
F-30
SCHEDULE II
UNITED ENERGY CORP.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
------- -------- ---------- -----------
For the fiscal year ended March 31, 2003:
Allowance for doubtful accounts......... $ 4,795 $ 48,113 $ 4,795 $ 48,113
---------- ------------- ------------- -------------
Reserve for Note Receivable............. $ -- $ 30,000 $ -- $ 30,000
---------- ------------- ------------- -------------
For the fiscal year ended March 31, 2002:
Allowance for doubtful accounts......... $ 71,656 $ 4,795 $ 71,656 $ 4,795
---------- ------------- ------------- -------------
For the fiscal year ended March 31, 2001:
Allowance for doubtful accounts......... $ 18,260 $ 53,396 $ -- $ 71,656
---------- ------------- ------------- -------------
For the fiscal year ended March 31, 2003:
Reserve for inventory obsolescence...... $ 16,290 $ -- $ -- $ 16,290
---------- ------------- ------------- -------------
For the fiscal year ended March 31, 2002:
Reserve for inventory obsolescence...... $ -- 16,290 $ -- $ 16,290
---------- ------------- ------------- -------------
F-31
II-4
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our articles of incorporation eliminate the personal liability of our
directors and officers to United Energy and its stockholders for damages for
breach of any duty owed to United Energy or its stockholders to the fullest
extent permitted by law.
Under Nevada law, a corporation may indemnify a director or officer if
(i) he or she is not liable pursuant to Section 78.138 of the NGCL for breaching
fiduciary duties as an officer or director or where breach of duties involved
intentional misconduct, fraud or a knowing violation of law, or (ii) acted in
good faith and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
We have been advised that, in the opinion of the SEC, any
indemnification for liabilities arising under the Securities Act of 1933 is
against public policy, as expressed in the Securities Act, and is, therefore,
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration fees....................................... $ 280.00
Federal taxes........................................... -
State taxes............................................. -
Legal fees and expenses................................. 30,000.00
Printing and engraving expenses......................... 5,000.00
Blue sky fees........................................... 10,000.00
Accounting fees and expenses............................ 10,000.00
Miscellaneous........................................... 9,720.00
---------------
Total.......................................... $65,000.00
===============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On March 24, 2004, pursuant to a Securities Purchase Agreement dated as
of the same date, we completed the sale of a secured convertible term note in
the principal amount of $1,750,000. The note, which has a term of three years
and accrues interest at the greater of the prime rate of interest (as published
in the Wall Street Journal) or 4% per year, is convertible into shares of our
common stock at a fixed conversion price of $1.00 per share.
In connection with the sale of the note, we paid the purchaser of the
note a fee of $61,250 and issued the purchaser a seven-year common stock
purchase warrant to purchase up to 300,000 shares of our common stock at priced
ranging from $1.25 per share to $1.75 per share. Also in connection with the
sale of the note, we agreed to register for resale the shares of common stock
into which the note is convertible and the warrant is exercisable.
The foregoing note, warrant and the shares of common stock into which
they may be converted or exercised were not registered under the Securities Act
of 1933 and, as a result, are "restricted securities" (or in the case of the
common stock, will be "restricted securities" upon issuance) and may not be
offered or sold in the United States absent registration or an applicable
exemption from the registration requirements. Certificates and agreements
representing the note, warrant and these shares, contain a legend stating the
same. These securities were issued by us in reliance upon an exemption from
registration set forth in Section 4(2) of the Securities Act of 1933 and Rule
506 of Regulation D promulgated under that Act. The issuance of these securities
was undertaken without general solicitation or advertising. The purchaser
represented to us that, among other things, it was acquiring these securities
for investment purposes only and not with a view toward public distribution and
that it was an "accredited investor" within the meaning of Rule 501 of
Regulation D. In addition, the purchaser acknowledged that the securities issued
to it (or to be issued upon conversion of the note or exercise of the warrant)
were "restricted securities."
II-1
On May 14, 2002, we issued in a private placement an aggregate of
6,000,000 unregistered shares of our common stock at an aggregate price of
$6,000,000. In connection with the common stock issuance, we issued warrants to
purchase 3,000,000 shares of our common stock at an exercise price of $2.00 per
share exercisable for a five-year period. We incurred $484,000 in issuance
expenses in connection with the financing. In addition, we issued 750,000
additional warrants to purchase 750,000 shares of our common stock at an
exercise price of $.60 per share with a five-year term, but not exercisable
during the first two years from the grant date for relinquishing rights of
immediate exercise of 500,000 warrants issued in connection with the private
placement.
On March 4, 2002, 100,000 shares of our unregistered common stock were
issued to the firm of Seaman & Wehle as partial consideration for legal services
rendered during the fiscal year ended March 31, 2002. The closing price on that
date was $1.11, for an aggregate value of $111,000. The transactions on May 14,
2002 and March 4, 2002 were exempted from the registration requirements of the
Securities Act of 1933 by virtue of Section 4(2) of that Act.
ITEM 27. EXHIBITS.
Exhibit
No. Description of Exhibit
3.1 Articles of Incorporation of United Energy Corp.(1)
3.2 Amendment to the Articles of Incorporation.(2)
3.3 By-Laws of United Energy Corp.(1)
4.1 Articles of Incorporation: Articles Fourth, Fifth and Seventh.(1)
4.2 By-Laws: Article I: Sections: Six, Seven, Eight, Nine, Ten; Article II:
Section Nine: Article IV: Section Two.(1)
4.3 Form of Stock Certificate of United Energy Corp.(1)
4.4 Secured Convertible Term Note dated March 24, 2004.(4)
5.1 Opinion of Greenberg Traurig, LLP, as to the legality of the shares of
common stock.(7) 10.1 Distribution Agreement and Option Agreement with
International Research and Development, dated August 25, 1999.(1)
10.2 2001 Equity Incentive Plan, as amended on May 29, 2002.(5)
10.3 Securities Purchase Agreement, dated March 24, 2004, between United
Energy Corp. and Laurus Master Fund, Ltd.(4)
10.4 Secured Convertible Term Note, dated March 24, 2004.(4)
10.5 Security Agreement, dated March 24, 2004, between United Energy Corp.
and Laurus Master Fund, Ltd.(4)
10.6 Registration Rights Agreement, dated March 24, 2004, between United
Energy Corp. and Laurus Master Fund, Ltd.(4)
10.7 Common Stock Purchase Warrant, dated March 24, 2004.(4)
16.1 Letter re Change in Certifying Accountant.(3)
21.1 List of Subsidiaries.(6)
23.1 Consent of Greenberg Traurig, LLP (included in the opinion filed as
Exhibit 5.1).(7)
23.2 Consent of Grant Thornton, LLP.(6)
24.1 Power of Attorney (set forth on signature page of the Registration
Statement).(6)
____________________________
(1) Incorporated by reference from the exhibits filed with the registrant's
Form 10 on June 20, 2000.
(2) Incorporated by reference from the exhibits filed with the registrant's
Form 10-Q for the period ended September 30, 2001.
(3) Incorporated by reference from the exhibits filed with the registrant's
Form 8-K filed on June 3, 2002.
(4) Incorporated by reference from the exhibits filed with the registrant's
Form 8-K filed on March 30, 2004.
(5) Incorporated by reference from the exhibits filed with the registrant's
Schedule 14A for the year ended March 31, 2003.
II-2
(6) Filed herewith.
(7) To be filed by amendment.
(b) Reports on Form 8-K
During the three months ended March 31, 2004, we filed the following
Current Report on Form 8-K:
o Form 8-K dated March 24, 2004 (filed on March 30, 2004), which
described our private placement of a secured convertible term
note and common stock purchase warrant to Laurus Master Fund,
Ltd.
ITEM 28. UNDERTAKINGS.
(a) The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which it offers and sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of
Secaucus, State of New Jersey, on May 10, 2004.
UNITED ENERGY CORP.
By:/s/ Ronald Wilen
------------------------------
Ronald Wilen
Chairman and Chief Executive Officer
(principal executive officer)
By:/s/ James McKeever
------------------------------
James McKeever
Interim Chief Financial Officer
(principal financial and accounting officer)
POWER OF ATTORNEY
We, the undersigned officers and directors of United Energy Corp.,
hereby severally constitute and appoint Ronald Wilen and James McKeever and each
of them (with full power to each of them to act alone), our true and lawful
attorneys-in-fact and agents, with full power of substitution, for us and in our
stead, in any and all capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this Registration Statement and
all documents relating thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the U.S. Securities and
Exchange Commission, granting to said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
necessary or advisable to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all the said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
/s/ Ronald Wilen
----------------------------- Director, Chairman and Chief Executive Officer May 10, 2004
Ronald Wilen
/s/ James McKeever
----------------------------- Interim Chief Financial Officer May 10, 2004
James McKeever
/s/ Louis Bernstein
----------------------------- Director May 12, 2004
Louis Bernstein
/s/Andrea Pampanini
----------------------------- Director May 10, 2004
Andrea Pampanini
/s/Martin Rappaport
----------------------------- Director May 10, 2004
Martin Rappaport