AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 2004
REGISTRATION NO. 333-115484______
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
(AMENDMENT NO. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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 organization) Classification Code Number) Identification No.)
600 MEADOWLANDS PARKWAY, #20, SECAUCUS, NEW JERSEY 07094
(201) 842-0288
(Address and telephone number of
principal
executive offices)
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600 MEADOWLANDS PARKWAY, #20, SECAUCUS, NEW JERSEY 07094
(201) 842-0288
(Address of principal place of
business or
intended principal place of business)
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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)
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Copy to:
SPENCER G. FELDMAN, ESQ.
GREENBERG TRAURIG, LLP
MET LIFE BUILDING
200 PARK AVENUE - 15TH FLOOR
NEW YORK, NEW YORK 10166
TEL: (212) 801-9200; FAX: (212) 801-6400
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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. |_|
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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.
-----------------------------
The infromation in this prospectus is not complete and 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 offer or sale is not
permitted.
SUBJECT TO COMPLETION,
DATED JULY 16, 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 Laurus Master Fund, Ltd., as 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, 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 July 13,
2004, were $1.06 and $.95 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.
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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 JULY __, 2004
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.
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TABLE OF CONTENTS
PAGE
SUMMARY........................................................................1
THE OFFERING...................................................................1
RISK FACTORS...................................................................2
SPECIAL NOTE REGARDING FORWARDLOOKING 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......................................................................20
MANAGEMENT....................................................................26
STOCK OWNERSHIP...............................................................30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................31
PLAN OF DISTRIBUTION..........................................................34
DESCRIPTION OF SECURITIES.....................................................36
SHARES ELIGIBLE FOR FUTURE SALE...............................................40
LEGAL MATTERS.................................................................41
EXPERTS.......................................................................41
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
ISCLOSURE...................................................................41
INDEX TO CONSOLIDATED FINANCIAL INFORMATION...................................F1
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, KH30(R), a multifunctional dispersant,
and related line of biodegradable products, KX91(R)and KH30S(R), are used as
cleaners in oil and gas wells, pipelines and storage tanks. These products are
designed to remove and prevent the buildup 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 photosensitive 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
environmentallyfriendly 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) 8420288. 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
Total shares offered..........................................2,500,000
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
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(1) As of July 15, 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 $10.5 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 LONGTERM CAPITAL APPRECIATION
OF OUR STOCK.
We have incurred losses in each of our last three fiscal years. As of
March 31, 2004, we had an accumulated deficit of $10,543,092. 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
KH30(R) oil and gas well cleaner. We incurred net losses of $2,569,098,
$2,829,000 and $1,364,576 in the fiscal years ended March 31, 2004, 2003 and
2002, respectively. The net loss for the fiscal year ended March 31, 2004 is due
in part to lowerthanexpected sales of Uniproof proofing paper during that
period. Our future profitability depends in large part on our ability to
successfully market and support our KH30 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 longterm 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 KH30 PRODUCT IS
BEING INTRODUCED TO THE MARKET, MAKING OUR PROSPECTS LESS CERTAIN.
Our business plan is focused largely on marketing efforts for KH30.
Although we believe that the application of KH30 on a continuous basis will
result in higher production and lower lease operating costs, the introduction of
KH30 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 markups on their proprietary products have no incentive
to promote the use of KH30. 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 KH30 has been much less rapid than we initially expected. If we
and our KH30 marketing partners are unable to successfully achieve market
acceptance for KH30, 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 KH30.
Our success to date has been substantially dependent on sales of our
Uniproof proofing paper. Sales of our Uniproof proofing paper accounted for
approximately 46%, 59% and 74% of revenues for the fiscal years ended March 31,
2004, 2003 and 2002, respectively. Our business plan is to use whatever Uniproof
proofing paper sales we realize to provide cash flow to support worldwide
marketing efforts for our KH30 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 20012004 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 fiscal year ended
March 31, 2004 were $972,051, a $1,260,575, or 56%, decrease from revenues of
$2,232,626 in the previous fiscal year. 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.
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THE SUCCESS OF OUR KH30 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 KH30 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
KH30 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 nonOPEC 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
KH30, which is expected to comprise a substantial portion of our chemicals
operations. Through the 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
thirdparty 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 underperforms 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.
WE DEPEND ON A SMALL NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE
OF OUR REVENUES, BUT WE HAVE NO LONGTERM 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 longterm contracts or binding purchase
commitments with us. A significant portion of our revenue is earned in
3
connection with sales of Uniproof proofing paper to the Alameda Company of
Anaheim, California. During the fiscal years ended March 31, 2004, 2003 and
2002, sales attributable to Alameda represented approximately 46.3%, 59% and
74%, respectively, of our total revenues. 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. 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 CLEANUP.
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.
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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 KH30 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 KH30 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 keyman
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 KH30 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, bylaws
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
thirdparty 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, knowhow 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 daytoday 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 nonaffiliate 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 FORWARDLOOKING STATEMENTS
This prospectus, exhibits and associated documents contain
"forwardlooking" statements, as well as historical information. Although we
believe that the expectations reflected in these forwardlooking statements are
reasonable, we can give no assurance that the expectations reflected in these
forwardlooking statements will prove to be correct or will be realized. Our
actual results could differ materially from those anticipated in forwardlooking
statements as a result of certain factors, including matters described in the
section titled "Risk Factors." Forwardlooking statements include those that use
forwardlooking terminology, such as the words "anticipate," "believe,"
"estimate," "expect," "intend," "may," "project," "plan," "will," "shall,"
"should," and other words of similar meaning, including when used in the
negative. All statements that address expectations or projections about the
future, including statements about the company's strategy for growth, product
development, market position, expenditures and financial results, are
forwardlooking statements. Although we believe that the expectations reflected
in these forwardlooking 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 forwardlooking statements.
Important factors that could cause our actual results, performance or
achievements to differ from these forwardlooking statements include the factors
described in the "Risk Factors" section and elsewhere in this prospectus.
All forwardlooking statements attributable to us are expressly
qualified in their entirety by these and other factors. We undertake no
obligation to update or revise these forwardlooking 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 SB2 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 1800SEC0330 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) 8420288
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 July 15, 2004, there were 455 record holders of our common stock
and there were 22,255,270 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, 2004
and 2003 and for each quarter after March 31, 2004. 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
interdealer 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
-------------- ------- ---- ---
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 (April-June 2004) $1.08 $.52
Second Quarter (through July 13) $1.06 $.86
The high and low bid prices for shares of our common stock on July 13,
2004, were $1.06 and $.95 per share, respectively, based upon bids that
represent prices quoted by brokerdealers on the OTC Bulletin Board. These
quotations reflect interdealer prices, without retail markup, markdown or
commissions, and may not represent actual transactions. The aggregate market
value of our stock held by nonaffiliates on July 13, 2004 was $17,432,410
(using the closing price of $1.06 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 antidilution 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
COMPENSATION PLANS
NUMBER OF SECURITIES TO BE WEIGHTEDAVERAGE EXERCISE (EXCLUDING SECURITIES
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING REFLECTED IN THE
OUTSTANDING OPTIONS, OPTION, WARRANTS AND SECOND
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS COLUMN)
---------------------------- -------------------------- ----------------------- ---------------------
Equity compensation plans 2,205,000 $1.32 1,795,000
approved by security holders
Equity compensation plans not 4,225,000 $1.70 --
approved by 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 F1.
OVERVIEW
Our business plan from fiscal 2001 through fiscal 2004 was to use
Uniproof proofing paper sales to provide the cash flow to support worldwide
marketing efforts for our KH30 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
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, longlived 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 reevaluated 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 writeoff 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
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 2004 TO FISCAL YEAR ENDED MARCH 31,
2003
Sales. Sales decreased to $972,051 for the year ended March 31, 2004
from $2,232,626 for the year ended March 31, 2003. The $1,260,575, or 56%,
decrease in sales was due principally to a 71% decrease in sales of our Uniproof
proofing paper due to a lower level of orders from our primary customer. Sales
for our specialty chemical products including KH30 and KX91, and our Green
Globe / Qualchem product line decreased by 8%. The decrease was related to a 62%
decline in the level of U.S. Military sales during the year. This was partially
offset by a 54% increase in sales of our KH30 family of products reflecting a
higher order level. We believe that last fiscal year the U.S. Government stocked
up on orders and then cut its orders during the 2004 fiscal year due to other
military priorities. Our three largest customers accounted for 63% of revenues
for the year ended March 31, 2004 compared with 84% for the comparable period in
2003.
Cost of Goods Sold. Cost of goods sold decreased to $488,385, or 50% of
sales, for the year ended March 31, 2004 from $1,332,791, or 60% of sales, for
the year ended March 31, 2003. The decrease in cost of goods sold was primarily
due to the reduced volume of Uniproof proofing paper sales and the change in the
mix of products sold reflecting margins on Uniproof paper sales compared to the
prior fiscal year.
Selling, General and Administrative Expenses. General and
administrative expenses decreased to $2,674,968, or 275% of sales, for the year
ended March 31, 2004 from $3,627,983, or 162% of sales, for the year ended March
31, 2003. The decrease in general and administrative expenses are primarily
related to lower salaries and benefits due to the departure of certain
executives, lower legal and accounting fees and the reduction in certain
marketing expenses that were incurred to develop product branding, logos,
brochures and a website in 2002.
Oil Well Operating and Maintenance Cost net. During the year ended
March 31, 2004, our wells produced oil which generated $34,636 in revenues and
incurred operating costs and maintenance and repair costs of $137,298. In April
2004, we sold the oil well leases located in Laramie County, Wyoming for
$15,000, and a 4.5% royalty on all future oil sales from these wells.
Depreciation, Amortization and Depletion. Depreciation, amortization
and depletion increased to $155,439 for the year ended March 31, 2004 from
$83,481 for the year ended March 31, 2003 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 KH30 and related products.
Interest Income, Net of Interest Expense. We had net interest income of
$2,082 for the year ended March 31, 2004 compared with net interest income of
$57,629 in the corresponding period in 2003. The decrease was due primarily to
lower investment earnings on the reduced remaining funds raised from our private
placement in May 2002.
Impairment loss. During the year ended March 31, 2004, we tested our
goodwill by estimating its fair value using a discounted cash flow analysis. As
a result, we recorded a goodwill impairment charge of $51,310 related to the
Green Globe segment. We also reviewed the carrying value of the oil well leases
held by United Oil Corp. We estimated that the carrying value of the oil leases
should be adjusted due to the sale of the oil well leases in April 2004. As a
result, we recorded an oil lease impairment loss of $70,467.
Legal Settlement. 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. No legal settlements were
made during the year ended March 31, 2004.
Net Loss. For the year ended March 31, 2004, we incurred a net loss of
$2,569,098, or $0.12 per share, as compared to a net loss of $2,829,000 for the
year ended March 31, 2003, or $0.13 per share. The decrease in the loss was the
result of a lower level of general and administrative expenses. The average
number of shares of common stock used in calculating earnings per share
increased to 22,180,270 shares from 21,456,982 shares.
12
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 2003 TO FISCAL YEAR ENDED MARCH 31,
2002
Sales. Sales increased to $2,232,626 for the 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 due principally to a 60% increase in sales of our Uniproof
proofing paper due to a general increase in orders and the addition of a new
customer for the Uniproof product. Sales for our specialty chemical products
including our KH30 and KX91 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 three
largest customers accounted for 84% of revenues for the year ended March 31,
2003 compared with 86% for the comparable period in 2002.
Cost of Sales. Cost of sales increased to $1,332,791, or 60% of sales,
for the 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 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. General and
administrative expenses increased to $3,627,983, or 162% of sales, for the year
ended March 31, 2003 from $1,763,446, or 127% of sales, for the year ended March
31, 2002. The increase in general and administrative expenses are primarily
related to the salaries, the cost of compensation from options and benefits of
new staff added beginning in May 2002, nonrecurring marketing expenses related
to developing promotional brochures, logos and product branding, design and
implementation costs of a new website, certain legal and accounting services and
KH30 customer trials on wells and storage tanks, and increased level of travel
related to meetings with potential customers.
Executive Services Contributed by Management. The 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, such 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 options for the value of
their services and one of the officers began to draw a salary. In the year ended
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 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 KH30 and related
products.
Interest Income, Net of Interest Expense. We had net interest income of
$57,629 for the 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. During the year ended March 31, 2002, we settled
another litigation 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 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 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 our private
placement in May 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, operations have been financed primarily through loans,
equity contributions from directors and executive officers and from third
parties supplemented by funds generated by our business. As of March 31, 2004,
we had $1,518,025 in cash and cash equivalents.
13
Net Cash Used in Operating Activities. During the fiscal year ended
March 31, 2004, net cash used in operating activities was $1,913,167 compared
with $2,998,776 for the fiscal year ended March 31, 2003. This was primarily a
result of the lower expense levels during the year.
Net Cash Used in Investing Activities. During the fiscal year ended
March 31, 2004, net cash used in investing activities decreased to $280,000
compared with $444,494 for the year ended March 31, 2003. The decrease was
primarily a result of a reduced level of expenditures for purchase of fixed
assets to support operations and capitalized legal fees required to file patent
applications for our KH30, KX91 and S2 system.
Net Cash Provided by Financing Activities. Net cash generated from
financing activities decreased to $1,590,250 resulting from the net proceeds
from sale of a secured convertible term note on March 24, 2004 in the amount of
$1,750,000 which was partially offset by $159,750, as discussed below, of
financing costs paid. This compares to cash provided from financing activities
of $5,365,800 for the year ended March 31, 2003 resulting from net proceeds from
our private placement in May 2002.
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 annum, is convertible into shares of our
common stock at a 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 sevenyear common stock
purchase 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. 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.
During the past two fiscal years ended March 31, 2004 and 2003, we have
recorded aggregate losses from operations of $5,398,098 and have incurred total
negative cash flows from operations of $4,911,943 for the same twoyear period.
The report of the independent registered public accounting firm with respect to
our financial statements included in this prospectus includes a "going concern"
qualification, indicating that our recurring losses and negative cash flows from
operations raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustment
that might result from the outcome of this uncertainty.
Our continued existence is dependent upon several factors, including
increased sales volumes, 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 our efforts to stimulate sales and cut back
expenses not directly supporting our sales and marketing efforts.
CONTRACTUAL OBLIGATIONS
Below is a table which presents our contractual obligations commitments
at March 31, 2004:
Less than After
Contractual Obligations Total 1 Year 13 Years 45 Years 5 Years
----------------------- ----- ------ -------- -------- -------
Convertible Note $1,750,000 $349,998 $699,996 $700,006 $ --
Operating leases 381,603 128,303 219,540 33,760
Total contractual
Cash obligations $ 2,131,603 $478,301 $919,536 $733,766 $ --
=========== ======== ======== ======== =======
REPORTING BY SEGMENTS
We are 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 KH30 oil well cleaner and related products.
However, a significant portion of our revenues has been related to the printing
and the graphic arts industry. During the past three fiscal years, we have
derived additional revenues by acting as a graphic arts products distributor.
14
The following table shows the proportion of total revenues by segment
in each of the last three fiscal years:
SPECIALTY
FISCAL YEAR GRAPHIC ARTS CHEMICALS
2002...................... $1,061,317 $326,534
2003...................... 1,700,738 531,888
2004...................... 486,075 486,976
OFFBALANCE SHEET ARRANGEMENTS
We do not currently have any offbalance 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.
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
StockBased CompensationTransition and Disclosure." This statement amends the
disclosure and certain transition provisions of Statement 123, "Accounting for
StockBased Compensation." Its disclosure provisions, which apply to all
entities with employee stockbased compensation, are effective for fiscal years
ending after December 15, 2002. SFAS 148:
o requires all entities with stockbased 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 interimperiod pro forma disclosures if stockbased
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
15
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 specialpurpose 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.
In December 2003, the FASB issued FASB Interpretation No. 46R (revised
December 2003), Consolidation of Variable Interest Entities (VIE'S), which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, which was issued in January
2003. We will be required to adopt FIN 46R in the first fiscal period ending
after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. It is not anticipated that the effect of this
interpretation, if any, on our consolidated financial statements would be
material.
16
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 KH30 paraffin dispersant for the oil industry and related
products KH30S and KX91;
o Uniproof specialtycoated proofing paper for the printing
industry; and
o following additional testing, "Slick Barrier" underwater
protective coatings for use in marine applications.
Through our whollyowned subsidiary, Green Globe Industries, Inc., we
provide the U.S. military with a variety of environmentally friendly,
nonhazardous, 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 environmentallyfriendly 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 KH30 and its related products for the oil industry
and for other potential applications.
A key component of our business strategy is to pursue collaborative
joint working and marketing arrangements with established international oil and
oil service companies. We intend to enter into these relationships to more
rapidly and economically introduce our KH30 product line to the worldwide
marketplace for refinery, tank and pipeline cleaning services. We are currently
negotiating potential working arrangements with several companies, including
Altena Cleaning B.V., one of Europe's leading refinery cleaning organizations,
and Petroleos de Venezuela S.A., the stateowned oil company, and have set up
small sales offices in The Netherlands and Venezuela to assist with proposed
joint projects.
We provide specialty chemical and graphic arts products to our
customers and generated revenues of $972,051 for the fiscal year ended March 31,
2004 and $2,232,626 for the fiscal year ended March 31, 2003. 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
KH30, KH30S AND KX91 CHEMICALS
KH30 is a mixture of modified oils, dispersants and oilbased
surfactants designed to control paraffin and asphaltene deposits in oil wells.
When applied in accordance with our recommended procedures, KH30 has resulted
in substantial production increases of between two and five times in
paraffinaffected oil and gas wells by allowing for a faster penetration of
paraffin and asphaltene deposits. KH30 disperses and suspends paraffin and
asphaltene in a freeflowing state and prevents solids from sticking to each
other or to oil well equipment. KH30 is patented in the United States,
Australia, Russia, Nigeria, Venezuela, Vietnam and the OAPI (the Africa
Intellectual
17
Property Organization, which includes the countries of BurkinaFaso, Benin,
Central African Republic, Congo, Ivory Coast, Cameroon, Gabon, Guinea,
GuineaBissau, Mali, Mauritania, Niger, Senegal, Chad and Togo). We have 12
additional country patent applications pending in most of the major oilproducing
countries around the world (including the European Union and Canada).
Although we believe that the application of KH30 on a continuous basis
will result in higher production and lower lease operating costs in oil wells,
the introduction of KH30 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 from high markups on their proprietary products
have no incentive to promote the use of KH30. 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 KH30 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 KH30 product we are currently expanding our
marketing efforts by producing a marketing brochure and supplemental sales
material. We have also developed two products, KH30S and KX91, as extensions
of our original KH30. We expect to continue developing additional applications
for our KH30 product.
KX91 is a patentpending 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. KX91 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, KX91 has been effective at low concentrations to
enhance the flow of very heavy crude oil (low API gravity).
KH30S 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. KH30S 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 photosensitive 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 $481,636 for the fiscal year ended March 31,
2004, $1,692,735 for the fiscal year ended March 31, 2003 and $1,033,574 for 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.
18
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,
nonreflective 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.
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 46.3% of our total customer sales for the fiscal year
ended March 31, 2004. 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. 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 6.4% of
our total customer sales in the fiscal year ended March 31, 2004, 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 6.1% of our total
customer sales in the fiscal year ended March 31, 2004. In the fiscal year ended
March 31, 2004, two oil field service companies, which purchased our KH30 and
KX91 oil well cleaning products, accounted for approximately 10.2% and 4.3%,
respectively, of our total customer sales.
19
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, 2004, 2003 and 2002.
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, 2004 was insignificant as we
generally ship product as orders are received.
MARKETING AND DISTRIBUTION
We have engaged the services of independent contractors to market our
KX30 and KX91 oil dispersant products. These contractors work under various
nonexclusive 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.
RESEARCH AND DEVELOPMENT
KH30, KX91 and KH30S 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 $229,219, $181,370 and $58,300 for the fiscal years ended March 31, 2004,
2003 and 2002, 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
lines.
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 KH30, KX91 and KH30S 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.
20
PROPRIETARY TECHNOLOGIES
With respect to our formulations which are proprietary, we have
patented our KH30 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 oilproducing 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 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 KH30.
In addition to applying for patent protection on our KH30 product, we
have also registered "KH30" 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 $9,035. 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 nonaffiliated 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.
21
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 largesized 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 selfemployed. 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.
22
DIRECTOR COMPENSATION
Each nonemployee 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 $100,000 during the stated periods.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
---------------------------- ---------------------------------
Restricted Securities
Name and Fiscal Other Stock Underlying LTIP All other
Principal Position year Salary Bonus Annual Award(s) Options/SARs Payouts Compensation
------------------ ------ ------ ----- -------- ------------ ------- ------------
Compensation
($) ($) (1) (#) ($)
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 years 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 $93,750 for the fiscal year ended March 31, 2002.
(3) Mr. Woods resigned as our President and a member of our board in April
2003.
(4) Mr. Kimmel resigned as our Chief Financial Officer in December 2003.
23
OPTIONS/SAR GRANTS IN FISCAL YEAR ENDED MARCH 31, 2004
Percent of Total
Options/SARs Granted
Number of Securities to Employees
Underlying Options/ in Fiscal Exercise
Name SARs Granted Year or Base Price Expiration
---------------------------- -------------------- --------------------- ------------- ----------
(#) ($/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 Director 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 InTheMoney
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 Director 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, nonemployee 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 nonemployee 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, nonemployee
24
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.
25
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 July 15, 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 7,152,600 30.4%
directors as a group (5 persons)
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
26
Robert L. Seaman 2,361,627(8) 10.6%
515 Madison Ave.
New York, NY 10022
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
13d3 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 antidilution 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.
27
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 July 15, 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
AFTER THIS OFFERING (3)
SHARES -----------------------
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 July 15, 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 antidilution 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.
28
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.
29
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 interdealer 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 marketmakers,
o transactions in put or call options or other rights (whether
exchangelisted or otherwise) established after the
effectiveness of the registration statement of which this
prospectus is a part, and
o privatelynegotiated 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 brokerdealers, these brokerdealers 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 antimanipulative 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 brokerdealers with respect to the sale of the
shares of common stock.
The selling stockholder and any brokerdealers 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
brokerdealer 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 brokerdealer 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,
30
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
brokerdealers or others prior to or after the effective time of the
arrangement. These brokerdealers 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 brokerdealers or
others that may involve the delivery to those persons the
shares, and brokerdealers may resell those shares pursuant to
this prospectus, and
o pledge the shares to a brokerdealer 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
brokerdealers.
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.
31
DESCRIPTION OF SECURITIES
Our authorized capitalization consists of 100,000,000 shares of common
stock, par value $.01 per share. As of July 15, 2004, there were issued and
outstanding:
o 22,255,270 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 bylaws is qualified by reference to the provisions of our
articles of incorporation and bylaws 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 nonassessable.
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
monthbymonth 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.
32
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.
ANTITAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
Articles of Incorporation and Bylaws. 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:
33
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 bylaws also allow our board of directors to fix the number of
directors in the bylaws. 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 threeyear 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: onefifth or
more but less than onethird, onethird 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
34
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.
35
SHARES ELIGIBLE FOR FUTURE SALE
As of July 15, 2004, we had outstanding an aggregate of 22,255,270
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 22,255,270 outstanding shares of our common stock not included in
this prospectus and the 2,500,000 shares included in this prospectus, as of July
15, 2004, will be eligible for sale in the public market as follows:
PUBLIC FLOAT
As of July 15, 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 threemonth 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 222,552 shares as of July 15, 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 mannerofsale 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 July 15, 2004, all of our shares of our common stock outstanding
are available for sale under Rule 144, except for 75,000 shares of common stock.
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 mannerofsale, 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, became eligible for sale under
Rule 144(k).
EQUITY INCENTIVE PLAN
As of July 15, 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 S8 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
36
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, 2004 included in this
prospectus and in the registration statement have been audited by Imowitz,
Koenig & Co., LLP, New York, New York, independent public accountants, as stated
in its report, appearing in this prospectus and in this 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.
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
registered public accounting firm, 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
registered public accounting firm. 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.
37
UNITED ENERGY CORP. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Reports of independent registered public accounting firms...............F2, F3
Consolidated balance sheets as of March 31, 2004 and March 31, 2003.........F4
For the periods ended March 31, 2004, 2003 and 2002:
Consolidated statements of operations..............................F5
Consolidated statements of stockholders' equity (deficit)..........F6
Consolidated statements of cash flows..............................F7
Notes to consolidated financial statements...............................F8F22
Schedule II Schedule of Valuation and Qualifying Accounts.................F23
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of United Energy Corporation:
We have audited the accompanying consolidated balance sheet of United Energy
Corporation (a Nevada corporation) and subsidiaries as of March 31, 2004 and the
related consolidated statements of income, cash flows and stockholders' equity
for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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, 2004 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred recurring losses and negative cash flows
from operations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We have also audited the schedule II for the year ended March 31, 2004. 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/ IMOWITZ, KOENIG & CO., LLP
New York, New York
May 11, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
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
F-3
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
MARCH 31, MARCH 31,
2004 2003
---------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,518,025 $2,120,942
Accounts receivable, net of allowance for do 393,941 496,715
accounts of $45,736 and $48,113 respectively
Inventory, net of allowance of $16,290 and 176,487 211,344
$16,290, respectively
Note receivable, net of reserve of $31,350 a 63,650 149,034
$30,000, respectively
Prepaid expenses and other current assets 80,296 104,527
---------- ---------
Total current assets 2,232,399 3,082,562
PROPERTY AND EQUIPMENT, net 243,313 268,597
OTHER ASSETS:
Goodwill, net 17,509 68,819
Patents, net of accumulated amortization of 309,424 229,508
and $44,253, respectively
Loans receivable 1,538 2,076
Deposits 76,385 31,385
Deferred financing costs, net of accumulated
amortization of $2,000 and $0, respectively 310,893
---------- ---------
Total assets $3,191,461 $3,682,947
========== =========
The accompanying notes are an integral part of these consolidated balance sheets
F-4
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
MARCH 31, MARCH 31,
2004 2003
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 276,115 $ 158,048
Accrued expenses 379,098 334,198
Convertible term note payable 349,998
Due to related parties 244,141 244,141
--------------- --------------
Total current liabilities 1,249,352 736,387
LONG TERM LIABILITIES:
Convertible term note payable 1,120,133 --
--------------- --------------
Total liabilities 2,369,485 736,387
--------------- --------------
COMMITMENTS AND CONTINGINCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock: $0.01 par value 100,000,000 shares
authorized; 22,180,270 shares issued and 221,802 221,802
outstanding as of March 31, 2004 and 2003
Additional paidin capital 11,143,266 10,698,752
Accumulated deficit (10,543,092) (7,973,994)
--------------- --------------
Total stockholders' equity 821,976 2,946,560
--------------- --------------
Total liabilities and stockholders'
equity $ 3,191,461 $ 3,682,947
=============== ==============
The accompanying notes are an integral part of these consolidated balance sheets
F-5
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
------------------ ------------------ ------------------
REVENUES, net $ 972,051 $ 2,232,626 $ 1,387,851
COST OF GOODS SOLD 488,385 1,332,791 756,391
------------------ ------------------ ------------------
Gross profit 483,666 899,835 631,460
------------------ ------------------ ------------------
Selling, general and administrative 2,674,968 3,627,983 1,763,446
Oil well operating and maintenance cost, net 102,662 -- --
Executive services contributed by management -- -- 187,500
Depreciation, amortization and depletion 155,439 83,481 20,031
------------------ ------------------ ------------------
Total operating expenses 2,933,069 3,711,464 1,970,977
Loss from operations (2,449,403) (2,811,629) (1,339,517)
OTHER INCOME (EXPENSE), net:
Interest income 8,765 59,377 1,792
Interest expense (6,683) (1,748) (6,200)
Impairment loss (121,777) -- --
Legal settlement -- (75,000) (20.651)
------------------ ------------------ ------------------
Total other income (expense), net (119,695) (17,371) (25,059)
Net loss $ (2,569,098) $ (2,829,000) $ (1,364,576)
================== ================== ==================
BASIC AND DILUTED LOSS PER SHARE:
Total basic and diluted loss per share $ (0.12) $ (0.13) $ (0.09)
================== ================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES,
OUTSTANDING, basic and diluted 22,180,270 21,456,982 16,022,325
================== ================== ==================
The accompanying notes are an integral part of these consolidated statements.
F-6
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2003, AND 2002
ADDITIONAL STOCK
COMMON STOCK PAIN-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
---------- --------- ------------ ------------- ------------- -----------
BALANCE, April 1, 2001 15,830,270 $158,302 $4,042,052 $(25,000) $(3,780,418) $394,936
Common stock issued for
conversion
of loan 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 6,000,000 60,000 5,940,000 -- -- 6,000,000
Private placement
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
Options granted in
consideration
for services -- -- 9,700 -- -- 9,700
Warrants granted in
consideration
for convertible term note -- -- 281,670 -- -- 281,670
Warrants granted in
consideration
for finance services -- -- 153,144 -- -- 153,144
Net loss -- -- -- -- (2,569,098) (2,569,098)
---------- ------- --------- -------- ----------- -----------
BALANCE, March 31, 2004 22,180,270 $221,802 $11,143,266 -- $(10,543,092) $821,976
========== ======== =========== ======== ============= ===========
The accompanying notes are an integral part of these consolidated statements.
F-7
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,569,098) $(2,829,000) $(1,364,576)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation, amortization and depletion 159,241 83,481 20,031
Impairment loss 121,777 - -
Non-cash consulting expense - - 111,000
Options granted in consideration for services 9,700 125,000 455,900
Executive service contributed by management - - 187,500
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable, net 102,774 (427,645) 752,329
Decrease (increase) in inventory, net 34,857 76,513 (166,104)
Decrease in note receivable, net 85,384 - -
Decrease (increase) in prepaid expenses 24,231 19,423 (5,649)
Increase in deposits (45,000) (29,723) (277)
Increase in related party payable - 102,654 -
Increase (decrease) in accounts payable and accrued expenses 162,967 (119,479) (25,028)
------------ ----------- --------
Net cash used in operating activities (1,913,167) (2,998,776) (34,874)
------------ ----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments/receipts for loans receivable-net 538 (8,699) -
Payments for acquisition of property and equipment-net (177,843) (321,090) (13,409)
Payments for patent (102,695) (114,705) -
------------ ----------- --------
Net cash used in investing activities (280,000) (444,494) (13,409)
------------ ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible term note 1,750,000 - -
Payment of financing costs (159,750) - -
Payments on line of credit - (150,000) -
Proceeds from line of credit - - 150,000
Payment of private placement costs - (484,200) -
Proceeds from issuance of common stock - 6,000,000 -
Net cash provided by financing activities 1,590,250 5,365,800 150,000
Net (decrease) increase in cash and cash equivalents (602,917) 1,922,530 101,717
CASH AND CASH EQUIVALENTS, beginning of period 2,120,942 198,412 96,695
------------ ----------- --------
CASH AND CASH EQUIVALENTS, end of period $1,518,025 $2,120,942 $198,412
============ =========== ========
F-8
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
Interest $2,882 $2,361 $6,266
Income taxes $2,154 $800 $720
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of warrants with convertible term loan $281,670 $- $-
Issuance of warrants for financing costs $153,143 $- $-
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-9
UNITED ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
1. DESCRIPTION OF BUSINESS AND BUSINESS PLAN
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 KH30
and KX91 oil well cleaners and KH30S 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, nonreflective 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 fireretardant agent named FR15. FR15 begins as a concentrate which
can be mixed with varying amounts of water, depending on the anticipated use.
FR15 mixture also resists reignition 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 petroleumbased contamination. Our
FR15 product has been developed and successfully tested by several municipal
fire departments. Underwriters Laboratories ("UL") did not have an approved test
for FR15 as a dispersant. A reformulation of FR15 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 FR15 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 still being tested on pleasure boats
throughout the United States and Europe. We expect to begin sales of the product
by the beginning of 2005 . A patent application on this product is in process.
During the past two fiscal years ended March 31, 2004 and 2003, we have
recorded aggregate losses from operations of $5,398,098 and have incurred total
negative cash flows from operations of $4,911,943 for the same twoyear period.
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.
Our continued existence is dependent upon several factors, including
increased sales volumes, 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 our efforts to stimulate sales and cut back
expenses not directly supporting our sales and marketing efforts.
F-10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United
Energy Corp. and its whollyowned subsidiary Green Globe Industries, Inc. and
currently inactive subsidiary, NorGraphic Industries. All intercompany
transactions and accounts have been eliminated in consolidation.
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 ongoing basis, United Energy evaluates its estimates, including
those related to bad debts, inventories, intangible assets, 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 (firstin, firstout 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 writeoff 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 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.
F-11
Depreciation and amortization expense for the years ended March 31, 2004, 2003
and 2002 was $132,660, $69,376, and $3,660, respectively.
Property and equipment consists of the following at March 31, 2004 and 2003:
2004 2003
Furniture and fixtures....................... $ 68,036 $ 67,094
Machinery and equipment...................... 366,098 233,585
Vehicles..................................... 78,986 35,548
Leasehold improvements....................... 26,203 25,253
........................................ 539,323 361,480
Less Impairment loss......................... (70,467) --
Less Accumulated depreciation and
amortization ............................. (225,543) (92,883)
Property and equipment, net.................. $ 243,313 $ 268,597
============ ==========
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.
As required by SFAS 142, the Company completed its transitional
impairment testing of intangible assets. Under SFAS 142, the goodwill impairment
exists if the net book value of a reporting unit exceeds its estimated fair
value. The impairment testing is performed in two steps: (i) the Company
determines impairment by comparing fair value of a reporting unit with its
carrying value, and (ii) if there is an impairment, the Company measures the
amount of impairment loss by comparing the implied fair value of goodwill with
the carrying amount of that goodwill.
As of March 31, 2004 the Company completed its annual impairment
testing of goodwill. The Company estimated the fair value of its goodwill by
using discounted cash flow analysis. As a result of the impairment tests, the
Company recorded a goodwill impairment charge of $51,310 related to the Green
Globe segment, during the year ended March 31, 2004.
Goodwill consists of the following at March 31, 2004 and 2003:
2004 2003
-------- --------
Goodwill $ 86,523 $ 86,523
Less: Impairment loss 51,310 -
Less: Accumulated amortization 17,704 17,704
-------- --------
Goodwill, net $ 17,509 $ 68,819
======== ========
PATENTS
The Company capitalizes legal costs incurred to obtain patents.
Amortization begins when the patent is approved using the straightline basis
over the estimated useful life of 15 years.
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 year ended March 31, 2004, the Wyoming Wells produced
oil which generated $34,636 in revenues and incurred operating costs and
startup maintenance and repair costs of $137,298.
F-12
The Company has capitalized $17,352 for the oil leases and $68,571 for
equipment, net of depreciation, amortization and depletion at March 31, 2004.
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, interestbearing
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.
As of March 31, 2004 the company reviewed the carrying value of the oil
well leases held by United Oil Corp. The Company estimated that the carrying
value of the oil leases should be adjusted due to the sale of the oil well
leases in April 2004(see subsequent events footnote). As a result the Company
recorded an oil leases' impairment loss of $70,467 which has been included as a
cumulative effect of an accounting change in the accompanying consolidated
statement of income for the year ended March 31, 2004.
ACCOUNTING FOR LONGLIVED ASSETS
The Company's longlived assets include property and equipment and
patents.
In accordance with SFAS 144, longlived 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.
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.
STOCKBASED COMPENSATION
At March 31, 2004, the Company has stock based compensation plans,
which are described more fully in Note 10. As permitted by SFAS No.123,
Accounting for Stock Based Compensation, the Company accounts for stockbased
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 and the exercise price of the option. Stock based employee compensation
cost for the years ended March 31, 2004, 2003 and 2002 was $0, $125,000 and $0,
respectively. The Company accounts for equity instruments issued to
nonemployees in accordance with the provisions of SFAS No.123 and Emerging
Issues Task Force (EITF) Issue No.9618, "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 nonemployees was $9,700, $0 and $455,900 for the years ended
March 31, 2004, 2003 and 2002.
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:
F-13
Years ended March 31,
----------------------------------------------------
2004 2003 2002
------------ ---------------- -------------
Net Loss
As reported (2,569,098) (2,829,000) (1,364,576)
Add:
Stock based compensation expenses included in
reported net loss 9,700 125,000 455,900
Deduct:
Total stock based employee compensation expense
determined under fair value based method for all
awards (1,361,668) (1,194,605) (869,187)
Pro forma (3,921,066) (3,898,605) (1,777,863)
Basic and diluted loss per common share
As reported (0.12) (0.13) (0.09)
Pro forma (0.18) (0.18) (0.11)
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, 2004, 2003 and 2002 does not include
6,430,000, 6,195,020 and 1,860,000 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 maintains cash balances at financial institutions insured
up to $100,000 by the Federal Deposit Insurance Corporation. Balances exceeded
these insured amounts during the year.
Accounts and Notes Receivable
The Company has one customer which accounted for 50% and 87% of the
total accounts receivable at March 31, 2004 and 2003 respectively. Credit
losses, if any, have been provided for in the consolidated financial statements
and are based on management's expectations.
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. During the year ended March 31,
2004, the customer returned goods in the amount of $30,225, which reduced the
note. Principal payments in the amount of $53,807 have also been paid. No
interest has been paid to date. On March 28, 2004, the customer agreed to a
balance of $95,000, which they will pay $5,000 per month.
Significant Customers
The Company's revenues from major customers, as a percentage of
revenues, for the years ended March 31, 2004, 2003 and 2002, are as follows:
F-14
2004 2003 2002
------ ------ -----
Customer A ................................................... 10% 0% 0%
Customer B ................................................... 0% 4% 12%
Customer C ................................................... 46% 59% 74%
Customer D ................................................... 0% 15% 0%
Customer E ................................................... 4% 10% 0%
Vendors
The Company has one vendor, which accounts for over 26%, 36% and 38% of
the Company's supplies purchases for the years ended March 31, 2004, 2003 and
2002, 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, accounts payable and accrued expenses
approximate their fair values due to the shortterm 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 December 2003, the FASB issued FASB Interpretation No. 46R (revised December
2003), Consolidation of Variable Interest Entities ("VIE'S"), which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to adopt FIN 46R in the first fiscal period ending
after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. It is not anticipated that the effect of this
interpretation, if any, on the Company's Consolidated Financial Statements would
be material.
3. INVENTORY
Inventory consists of the following as of March 31, 2004 and 2003:
2004 2003
---- ----
Paper................................ $ 4,416 $ 19,957
Blended chemical..................... 104,668 111,544
Raw materials........................ 67,403 79,843
------------- -------------
Total inventory...................... $ 176,487 $ 211,344
============= =============
4. REVOLVING LINE OF CREDIT
The Company had a revolving line of credit which allowed the Company to
borrow up to $1,000,000 from Fleet Bank. Borrowings under the credit line bore
interest at prime. Interest was payable monthly. The Company repaid the line of
credit in full in May 2002 with the proceeds received from the private placement
and the credit line was closed.
F-15
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 a related party as of March 31,
2004 and 2003 is $244,141. These amounts are unsecured, noninterest bearing and
due upon demand.
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 $108,000 per
year under the lease, excluding real estate taxes. The Company believes that the
lease is at fair market value with leases for similar facilities.
6. CONVERTIBLE DEBT
On March 24, 2004, the Company issued a secured convertible term note
in the amount of $1,750,000, 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 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. The Company's obligations under the
note are secured by a first priority security interest in the Company's assets.
Convertible term note $1,750,000
Discount on convertible term note (279,869)
-----------
Current portion (349,998)
-----------
LongTerm Debt $1,120,133
==========
Estimated maturities on longterm debt are as follows:
2004 $699,996
2005 420,137
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
Sales Commission Claim
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. The outcome of this matter cannot be
determined at this time.
F-16
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.
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 NONDISCLOSURE
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 ALLEGED 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
whollyowned subsidiaries, Nor Industries, Inc. One of the actions was commenced
in the 15th Judicial District Court, Lafayette Parish, Louisiana. This action
sought 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 sought 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.
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 alleged that Fluid Sciences was entitled to a declaratory
judgment that its products do not infringe the patents of the Company. The
parties to the Herbert action and the Fluid Sciences actions settled and
discontinued all of those actions without any further costs to the parties.
Included in the settlements were agreements from Fluid Sciences, L.L.C. and Jon
Herbert that, among other things, there will be no further violations of any
Company patents.
SMK Industries, Inc. v. Nor Graphics, Inc.
In its Form 10K for the fiscal year ended March 31, 2002, the Company
reported 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 reached an agreement to settle and discontinue the
lawsuit. The Company paid $75,000.
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, 2004.
Operating
Year Leases
---- ------
2005 128,303
2006 116,550
2007 102,990
2008 33,760
--------
Total minimum lease payments $381,603
========
F-17
The expenses for all operating leases were $131,509, $120,214 and
$107,304 for the years ended March 31, 2004, 2003 and 2002, respectively.
8. STOCKHOLDERS' EQUITY
In connection with the convertible term note (see note 6), the Company
issued warrants to purchase up to 300,000 shares of the Company's common stock
at an exercise price per share ranging from $1.00 to $1.50. The warrants are
fully exercisable for seven years from the date of issuance. The estimated fair
value of the warrants of $281,670 was recorded as a discount to the convertible
term note and is being amortized to interest expense over the life of the note.
The unamortized amount as of March 31, 2004 was $279,869. As of March 31, 2004,
these warrants were unexercised and outstanding.
The Company issued warrants in exchange for services provided in
connection with the issuance of the convertible term note to purchase up to
175,000 shares of the Company's common stock at an exercise price per share of
$1.50. The warrants are fully exercisable for five years from the date of
issuance. The estimated fair value of $153,143 was recorded as a deferred
financing cost and is being amortized over the life of the note. The unamortized
amount as of March 31, 2004 was $152,164. As of March 31, 2004, these warrants
were unexercised and outstanding.
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.
As part of the private placement transaction, the Company began the
process of identifying and making employment offers to a new management team to
focus on sales and marketing of KH30 and other products. Three of four of the
new management team accepted employment starting in May 2002. Agreements with
each of these executives have been cancelled as of March 31, 2004, and no new
agreements are in place.
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 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
9. 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, 2004, the
Company had a net operating loss carryforward for tax purposes of approximately
$8,540,000, which is available to reduce its future taxable income and expires
at various dates through 2023. $106,000 expiring in 2015, $820,000 expiring in
2016, $889,000 expiring in 2017, $736,000 expiring in 2018, $100,000 expiring in
2020, $782,000 expiring in 2021, $2,692,000 expiring in 2022 and $2,415,000
expiring in 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.
F-18
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.
10. 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, nonemployee
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 nonemployee 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 nonemployee 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 common stock
for future grant as of March 31, 2004 under the 2001 equity incentive plan.
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 BlackScholes option
valuation model with the following weightedaverage assumptions:
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.
10. 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 stock options to purchase 1,795,000 shares of common stock
for future grant as of March 31, 2004 under the 2001 equity incentive plan.
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:
2004 2003
---- ----
Expected life (in years).................... 10% 10%
Risk-free interest rate..................... 4.54% 4.73%
Volatility.................................. 138.00 105.45
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 $1.32 and $1.78 for the years ended March 31, 2004 and 2003, respectively.
F-19
Summary Stock Option Activity
The following table summarizes stock option information with respect to
all stock options for the year ended March 31, 2004 and 2003:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL
SHARES PRICE LIFE (YEARS)
--------- -------- ------------
Options outstanding April 1, 2002.................... - -
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
====
Granted..................................... 475,000 $1.10
Cancelled (715,020) $1.28
--------- -----
Options outstanding March 31, 2004................. 2,205,000 $1.32 8.32
========= ===== ====
As of March 31, 2004, there were 1,881,459 options exercisable with
weighted average exercise price of $1.28 per share. Options outstanding at March
31, 2004 have an exercise price ranging between $0.70 to $2.00.
11. 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-20
The Company's total revenues, income from operations and identifiable
assets by segment for the year ended March 31, 2004, are as follows:
Graphic Specialty Corporate Total
Arts Chemicals
--------- ------------ ------------ -----------
Revenues $486,075 $ 485,976 $-- $972,051
========= ============ ============ ===========
Gross profit $ 244,328 $239,338 $-- $ 483,666
Sales, general and administrative expenses 146,351 1,270,148 1,258,469 2,674,968
Oil well operating and maintenance costs-net -- 102,662 -- 102,662
Depreciation, amortization and depletion -- 137,889 17,550 155,439
Impairment loss -- 121,777 -- 121,777
Interest expense (income) 6,683 -- (8,765) (2,082)
--------- ------------ ------------ -----------
Income (loss) from continuing operations $ 91,294 $( 1,393,138) $( 1,267,254) $(2,569,098)
========= ============ ============ ============
Cash and cash equivalents $ -- $-- $1,518,025 $1,518,025
Accounts receivable 229,997 163,944 -- 393,941
Inventory 42,452 134,035 -- 176,487
Note receivable 63,650 -- -- 63,650
Loan receivable -- -- 1,538 1,538
Prepaid expenses -- -- 80,296 80,296
Fixed assets -- 211,492 31,821 243,313
Goodwill -- 17,509 -- 17,509
Patent -- 309,424 -- 309,424
Deferred note costs -- -- 310,893 310,893
Deposits -- 75,000 1,385 76,385
--------- ------------ ------------ ------------
Total assets $ 336,099 $911,404 $1,943,958 $3,191,461
========= ============ ============ ============
Capital expenditures $-- $175,953 $1,890 $177,843
========= ============ ============ ============
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 Corporate Total
Arts Chemicals
--------- ------------ ------------ ------------
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, amortization and depletion -- 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
========= ============ ============ ===========
Capital expenditures $-- $263,693 $57,397 $321,090
========= ============ ============ ===========
F-21
The Company's total revenues and loss from operations by segment for the year
ended March 31, 2002, are as follows:
Graphic Specialty Corporate Total
Arts Chemicals
--------- ------------ ------------ ------------
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)
========= ============ ============ ===========
Geographic Information
Revenues
2004 2003 2002
U.S. 850,021 2,193,101 1,387,851
Non-U.S. 122,030 39,525
------- ------
Totals 972,051 2,232,626 1,387,851
======= ========= =========
12. SUBSEQUENT EVENT FOOTNOTE
In April 2004, the Company sold the oil well leases located in Laramie
County, Wyoming for $15,000, and a 4.5% royalty on all future oil sales from
these wells. The Company is also in the process of receiving the refund of the
$75,000 deposit from the State of Wyoming.
F-22
SCHEDULE II
UNITED ENERGY CORP.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged Deductions Balance at
Beginning To Costs and End of Year
Of Year Expenses
------- -------- ------- -------
For the fiscal year ended March 31, 2004:
Allowance for doubtful accounts $48,113 $ -- $ 2,377 $45,736
------- -------- ------- -------
Reserve for Note Receivable $30,000 $ 1,350 $ -- $31,350
------- -------- ------- -------
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, 2004:
Reserve for inventory obsolescence $16,290 $ -- $ -- $16,290
------- -------- ------- -------
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-23
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 July 1, 2004, we agreed to issue 75,000 shares of our unregistered
common stock to the firm of C.C.R.I. Corporation, as consultant, pursuant to a
consulting agreement, dated as of May 17, 2004, in consideration for providing
us with certain investor relations and development services. The closing price
on that date was $.95 per share, for an aggregate value of $71,250. In
connection with that issuance, we also agreed to grant to the consultant
warrants to purchase 100,000 shares of common stock at a price of $2.00 per
share. The warrants also include certain "piggy-back" registration rights on the
first available registration. This transaction will be exempted from the
registration requirements of the Securities Act of 1933 by virtue of Section
4(2) of that Act.
On March 24, 2004, we sold a secured convertible term note in the
principal amount of $1,750,000 pursuant to a securities purchase agreement dated
as of the same date. The convertible term note has a term of three years and
accrues interest at the greater of (1) the prime rate of interest (as published
in the Wall Street Journal) or (2) 4% per year. The convertible note may be
converted into shares of our common stock at a fixed conversion price of $1.00
per share. We also agreed to register the shares of common stock into which the
convertible note is convertible.
As part of the sale of the convertible note and the consideration paid
in connection therewith, we issued and the purchaser received a common stock
purchase warrant (maturing in 2011) to purchase up to 300,000 shares of our
common stock at prices ranging from $1.25 per share of common stock to $175 per
share of common stock. We also agreed to register for resale the shares of
common stock into which the common stock purchase warrant is exercisable by the
purchaser. In connection with the sale of the convertible note and the issuance
of the common stock purchase warrant, we paid certain fees to the purchaser in
the amount of $61,250.
The above-referenced convertible note, common stock purchase 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,
II-1
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."
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.(6)
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.(7)
23.1 Consent of Greenberg Traurig, LLP (included in the opinion filed as
Exhibit 5.1).(6)
23.2 Consent of Imowitz, Koenig & Co., LLP.(6)
23.3 Consent of Grant Thornton, LLP.(6)
24.1 Power of Attorney (set forth on signature page of the Registration
Statement).
----------------------------
II-2
(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.
(6) Filed herewith.
(7) Previously filed.
(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.
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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.
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FORM SB-2
(AMENDMENT NO. 1)
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 Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned, in the
City of Secaucus, State of New Jersey, on July 15, 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)
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to 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 July 15, 2004
--------------------------------------------
Ronald Wilen
/s/ James McKeever Interim Chief Financial Officer July 15, 2004
--------------------------------------------
James McKeever
Director
--------------------------------------------
Louis Bernstein
/s/ Andrea Pampanini* Director July 15, 2004
--------------------------------------------
Andrea Pampanini
/s/ Martin Rappaport* Director July 15, 2004
--------------------------------------------
Martin Rappaport
*/s/ James McKeever
--------------------------------------------
James McKeever, as Attorney-in-Fact
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