SCHEDULE 14C
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934
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UNITED ENERGY CORP.
_________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
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UNITED ENERGY CORP.
600 MEADOWLANDS PARKWAY #20
SECAUCUS, NEW JERSEY 07094
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June 30, 2005 |
Dear Fellow Stockholders:
We are pleased to advise you of the approval of an amendment to our certificate of incorporation providing authorization for the issuance of preferred stock. The amendment was adopted in connection with the securities purchase agreement we entered into on March 18, 2005 with two private investors. Our board of directors approved the amendment on March 16, 2005. Rather than incur the expense of a special meeting of the stockholders, the board solicited the consent of certain stockholders, who own a majority of our outstanding common stock. Collectively, they own 11,839,971 shares of our common stock. As of June 9, 2005, the record date for consent, we had 23,652,517 shares of common stock outstanding and entitled to vote; therefore, those stockholders hold 50.058% of voting power.
We are incorporated in Nevada and the Nevada Private Corporations Law permits stockholder approval to be obtained without a meeting provided that written consent is obtained from stockholders holding at least a majority of the voting power of the corporation unless a greater proportion of the voting power would be required to approve the action at a meeting. Since a majority of our outstanding shares would be sufficient to approve the amendment to our articles of incorporation at a meeting, the consents that we obtained are sufficient to satisfy the requirement for stockholder approval.
We are sending this information statement to you to advise you of this development, which is vital to our continuing efforts to expand and strengthen our financial position; as well as to comply with the Nevada Private Corporations Laws and Section 14(c) of the Securities Exchange Act of 1934, as amended.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
The approximate date upon which this Information Statement is first being sent to our stockholders is June 30, 2005. It is being sent to every stockholder of record as of June 9, 2005, the record date for consent.
Our principal executive officers are located at 600 Meadowlands Parkway, #20, Secaucus, New Jersey 07094.
If you have any questions about this Information Statement, please call the Chief Executive Officer of the company at (800) 327-3456.
Sincerely,
RONALD WILEN
Chairman of the Board
UNITED ENERGY CORP.
600 Meadowlands Parkway #20
Secaucus, New Jersey 07094
Information Statement
First sent to stockholders on June 30, 2005
In this information statement, we use the terms “United Energy,” “we,” “us” and “our” to refer to United Energy Corp., a Nevada corporation.
Stockholder Approval
The Certificate of Amendment has been approved by the holders of 11,839,971 shares of our common stock, or 50.058% of the outstanding shares. Pursuant to the Nevada Private Corporations Law, such approval in lieu of a special meeting of stockholders is valid. Rules adopted by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, require an information statement such as this to be delivered to our stockholders at least twenty (20) days prior to the effective date of the action to be taken. Therefore, the Certificate of Amendment will not be filed until at least 20 days from the date of this Information Statement, or on approximately July 20, 2005.
Stockholder Account Maintenance
Our transfer agent is Interstate Transfer Co., 6084 South 900 East, Suite 101, Salt Lake City, Utah 84121. All communications concerning accounts of stockholders of record, including address changes, name changes, inquiries as to requirements to transfer shares of common stock and similar issues can be handled by calling (801) 281-9746.
No Dissenters’ Rights
Stockholders have no statutory appraisal or dissenters’ rights with respect to the amendment to our Certificate of Incorporation or our undertaking of any of the transactions described in this Information Statement.
Questions and Requests for Assistance
Questions and requests for assistance or for additional copies of this Information Statement may be directed to the President of the Company at (800) 327-3456.
Delivery of Documents to Stockholders Sharing an Address
Only one Information Statement may be delivered to two or more stockholders who share an address, unless we have previously received contrary instructions from those stockholders. If
you share an address with another stockholder and would like to obtain an additional copy (which we will promptly send to you at no cost), would like to request that in the future you always receive multiple copies, or if you currently receive multiple copies and would like to request that you only receive one copy per address, please call or write to our Corporate Secretary as follows: (800) 327-3456, United Energy Corp., 600 Meadowlands Pkwy, #20, Secaucus, NJ 07094.
DESCRIPTION OF COMMON STOCK
We are authorized to issue 100 million shares of common stock, par value $0.01 per share. As of June 9, 2005, there are 23,652,517 shares of common stock issued and outstanding.
Common Stock
Each share of common stock has one vote on all matters presented to the stockholders, except that at elections of directors, each stockholder is entitled to as many votes as equals the number of shares of his or her stock multiplied by the number of directors to be elected. In director elections, a stockholder may cast all such votes for a single director or distribute his or her votes among the director nominees as he or she sees fit.
The holders of common stock are entitled to receive dividends when, as and if declared by the board of directors out of funds legally available therefore. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision for claims against us. Holders of shares of common stock, as such, have no conversion, preemptive or other subscription rights, and there are no redemption provisions applicable to the common stock. All of the outstanding shares of common stock are fully paid and nonassessable.
CERTIFICATE OF AMENDMENT
TO OUR
ARTICLES OF INCORPORATION
On March 16, 2005, our board of directors unanimously adopted a resolution declaring, among other things, it advisable to amend our articles of incorporation to authorize the issuance of preferred stock. Under Nevada law, we were required to obtain our stockholders' approval of the proposed amendment to Article Fourth of our articles of incorporation. The amendment to our articles of incorporation permits the issuance of up to 100,000 shares of preferred stock in one or more series, each with such rights, preferences and privileges (including dividends or interest rate, conversion prices, voting rights, redemption price and maturity date) as may be established from time to time by our Board of Directors without any further action or authorization by our stockholders.
The amendment to our articles of incorporation will become effective at the close of business on the date the amendment is accepted for filing by the Secretary of State of the State of
Nevada, which is expected to occur on approximately July 20, 2005, twenty (20) days after this Information Statement is furnished to our Stockholders.
The certificate of amendment to our articles of incorporation is attached to this Information Statement as Appendix A. The statements made in this Information Statement with respect to the amendment should be read in conjunction with, and are qualified in their entirety by reference to Appendix A.
The consent of holders of at least a majority of the outstanding shares of our common stock was required and obtained to approve this amendment.
Transaction Description
On March 18, 2005, we entered into a securities purchase agreement with two private investors with respect to the sale of shares of our common stock and warrants and certain rights to acquire preferred stock of the Company. The agreement provides for two types of units, designated as Series A and Series B, and for several closings.
The Series A Units each consist of 100,000 shares of our common stock and a Series A Warrant to purchase 50,000 shares of our common stock at $1.00 per share, subject to adjustment. The purchase price for each Series A Unit is $80,000.00. The securities purchase agreement provides for the sale of up to twenty (20) Series A Units. The Series B Units, however, each consist of ten (10) shares of a new class of preferred stock that will be convertible into 80,000 shares of our common stock in the aggregate, subject to adjustment, and a Series B Warrant to purchase 40,000 shares of our common stock at $1.50 per share. The purchase price for each Series B Unit is $80,000. The securities purchase agreement provides for the sale of up to forty-two (42) Series B Units.
Our articles of incorporation do not currently authorize the issuance of preferred stock. Therefore, we obtained the consent of a majority of the outstanding shares to amend our articles of incorporation to provide such authorization.
An initial closing for eight (8) Series A Units was held on March 18, 2005, at which we issued 800,000 shares of common stock and Series A Warrants to purchase 400,000 shares of common stock for an aggregate purchase price of $640,000. The proceeds of this sale will be used for working capital and for general corporate purposes as will the proceeds of any future sales of Units.
Subsequent closings under the securities purchase agreement are contingent upon our receipt of purchase orders from our customers, at the rate of one Unit for each $100,000 of such orders. The 12 remaining Series A Units are to be purchased first, followed by the Series B Units. The obligation of the investors to purchase units expires on March 17, 2006.
Effect of Amendment
In addition to allowing the successful consummation of the transactions contemplated by
the securities purchase agreement described above, the amendment to our articles of incorporation will provide us with the flexibility to issue preferred stock for a variety of purposes without further action by the holders of our common stock, unless required by law. These purposes could include, among other things, the sale of stock to obtain additional funding, the purchase of property, the acquisition of or merger with or into other companies and for other bona fide corporate purposes.
We have not offered the preferred stock authorized by the Certificate of Amendment to the public and do not anticipate doing so in the future. Therefore, your ownership interest could be diluted by the issuance of additional shares of preferred stock, convertible into common stock. In addition, the preferred shares authorized in connection with the securities purchase agreement have rights and preferences in liquidation superior to yours. Therefore, preferred stockholders will receive a return on and of their investment in our preferred stock prior to your receipt of any return at all on your common stock.
DESCRIPTION OF PREFERRED STOCK
The preferred stock that is a component of the Series B Units offered to private investors pursuant to the securities purchase agreement has been designated our “Series A Convertible Preferred Stock.” The certificate of designation of the Series A Convertible Preferred Stock is attached to this Information Statement as Appendix B. Other than the 420 shares to be designated as Series A Convertible Preferred Stock, our Board has no current plans to authorize additional series of preferred stock or to issue any such shares. The statements in this Information Statement with respect to the Series A preferred stock should be read in conjunction with, and are qualified in their entirety by reference to Appendix B.
Dividend Rights
The Series A Convertible Preferred Stock, par value $0.01 per share, entitles holders to receive dividends at a rate of 6.0% of the stated value ($8,000.00) annually, payable twice yearly, on June 30 and December 30. Dividends on the preferred stock are cumulative and accrue daily from the date of issuance. Accrued but unpaid dividends accrue additional dividends, compounded annually, at the rate of 6.0% per annum.
Terms of Conversion
The preferred shares are convertible, in whole or in part, into fully paid and non assessable shares of our common stock, subject to certain limitations, at any time or times following issuance thereof. The number of shares of common stock issuable upon conversion of each preferred share is determined by dividing the conversion amount, which equals the stated value, by the conversion price, which equals $1.00 (subject to adjustment). Generally, in the event that we issue common stock (or are deemed to have issued common stock) for a per share price less than the conversion price, the conversion price is adjusted downward to an amount equal to such lower price. In addition, the conversion price is adjusted for any subdivision of our common stock whether by stock split, stock dividend, recapitalization or otherwise. In the event
that we issue or sell options or convertible securities that are convertible into or exchangeable or exercisable for our common stock at a variable price, the holders of the preferred stock have the right, but not the obligation, to substitute the variable price for the conversion price upon conversion of preferred stock.
Purchase Rights
If we, at any time, grant or sell any options, convertible securities or rights to purchase stock, warrants or securities to the holders of our common stock, then the holders of our preferred shares will be entitled to acquire, on the same terms and conditions, the amount of stock, warrants or securities that the preferred stockholder would have acquired had the preferred stockholder converted his or her preferred stock into common stock.
Liquidation Preference
In the event of a voluntary or an involuntary liquidation, dissolution or winding up of the Company, the preferred stockholders are entitled to receive, in cash from the assets of the Company, an amount equal to the sum of the stated value plus any accrued but unpaid dividends. Such payments will be paid to the preferred stockholders prior to the payment of any amounts to the common stockholders or to any other class of stockholders who are junior to the preferred stockholders.
Voting Rights
Preferred stockholders have no voting rights, except as required by law, and except as specifically provided in the certificate of designations.
Participation
The preferred stockholders are entitled to participate in any distributions or dividends that are paid to common stockholders to the same extent as if the preferred stockholder had converted his or her preferred stock into common stock.
Redemption
We cannot redeem any preferred stock without the prior written consent of the holders of two-thirds or more of the outstanding preferred stock until all of the preferred stock has been converted into common stock and all accrued dividends have been paid.
Reorganization, Reclassification, Consolidation, Merger or Sale
Prior to the consummation of any sale of all or substantially all of our assets, any recapitalization, reorganization, reclassification, consolidation, merger, or other transaction that entitles our common stockholders to receive securities or assets in exchange for his or her common stock, we are required to secure from the purchaser a written agreement (reasonably
satisfactory to the holders of at least two-thirds of the outstanding preferred stock), for the exchange of the outstanding preferred stock for securities of the purchaser of a type that is substantially similar in form and substance to our preferred stock.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Beneficial Ownership Information
The following table sets forth information regarding the number of shares of our common stock beneficially owned on June 9, 2005, by each of our directors, each of our executive officers, 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.
| Name
and Address |
Amount
and |
Percent
of | ||
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Ronald Wilen |
4,087,000(2) |
17.2% |
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| Brian King |
500,000(3) |
2.1% |
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James McKeever, CPA |
3,000 |
* |
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| Louis Bernstein |
-- |
* |
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Andrea Pampanini |
52,500(4) |
* |
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| Martin Rappaport |
3,020,100(5) |
12.5% |
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Sanford M. Kimmel(6) |
-- |
* |
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| All
current executive officers and directors |
7,652,600 |
30.8% |
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UNRG
Investments LLC |
1,500,000(7) |
6.3% |
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| LSR
Capital UNRG, LLC |
1,500,000(7) |
6.3% |
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Robert L. Seaman |
1,866,359(8) |
7.9% |
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| Laurus
Master Fund, Ltd. |
1,742,200(9) |
7.3% |
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Joseph
J. Grano, Jr. |
2,466,667(10) |
10.1% |
________________
* Less than 1% of outstanding shares.
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(1) |
Unless otherwise indicated in these footnotes, each stockholder has sole voting and investment power with respect to the shares beneficially owned. All share amounts reflect beneficial ownership determined pursuant to Rule 13d-3 under the Exchange Act. All information with respect to beneficial ownership has been furnished by the respective director, executive officer or stockholder, as the case may be. | |||
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(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. | |||
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(3) |
Represents stock options to purchase 1,250,000 shares at an exercise price of $1.00 per share. Of the 1,250,000 shares covered by the stock options, 500,000 shares are currently exercisable and 750,000 shares shall vest and become exercisable on September 7, 2005. | |||
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(4) |
Includes 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. | |||
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(5) |
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; and (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. | |||
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(6) |
Mr. Kimmel resigned as our Chief Financial Officer in December 2003. |
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(7) |
Includes 1,000,000 shares of common stock and warrants to purchase 500,000 shares of common stock. |
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(8) |
Includes (i) 1,366,359 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. | |||
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(9) |
Represents 1,142,200 shares that may be acquired immediately upon conversion of an outstanding secured convertible term note at a conversion price of $0.80 per share and 600,000 shares that may be purchased immediately upon exercise of an outstanding common stock purchase warrant at an average exercise price of $1.50 per share. The convertible note and warrant contain provisions that restrict Laurus from beneficially owning in excess of 4.9% of our outstanding shares of common stock. 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. | |||
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(10) |
Includes 1,266,667 shares of common stock, warrants to purchase 500,000 shares of common stock and warrants to acquire 700,000 shares of common stock. | |||
Compliance with Section 16(a) of the Exchange Act
The Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities to file reports of beneficial ownership and changes in beneficial ownership with the Securities and Exchange Commission. To our knowledge, all filing requirements by our officers and directors were complied with during the current fiscal year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 Information Statement beginning on page F-1.
Overview
We are primarily a specialty chemicals company because of our determination in fiscal 1998 to close our printing equipment division and focus on our KH-30 oil well cleaner and related products. However, a significant portion of our revenues has been related to the printing and the graphic arts industry. We believe that in the future our chemical sales will increase and that our reliance on the graphic arts segment of the company will decrease. During the past two fiscal years, we have derived additional revenues by acting as a graphic arts products distributor.
We do devote almost all of our time and effort into selling, promoting and developing our chemical products and we are continuing to increase our marketing efforts to develop new products as extensions of our original KH-30 product. We do believe that in the future our sales will increase. We also believe that our reliance on the graphic arts segment of the company will decrease.
On March 18, 2005, we closed on the sale of eight Series A Units, which included 800,000 shares of Common Stock and Series A Warrants to purchase 400,000 shares for an aggregate purchase price of $640,000.
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, long-lived assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our primary source of revenue is from sales of our products. We recognize revenue upon shipment and transfer of title.
Allowance for Doubtful Accounts
We monitor our accounts and note receivable balances on a monthly basis to ensure they are collectible. On a quarterly basis, we use our historical experience to determine our accounts receivable reserve. Our allowance for doubtful accounts is an estimate based on specifically identified accounts, as well as general reserves. We evaluate specific accounts where we have information that the customer may be unable to meet its financial obligations. In these cases, management uses its judgment, based upon the best available facts and circumstances, and records a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are re-evaluated and adjusted as additional information is received that impacts the amount reserved. We also establish a general reserve for all customers based upon a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, our estimate of the recoverability of amounts due to us could be reduced or increased by a significant amount. A change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.
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Results of Operations |
Comparison of Fiscal Year Ended March 31, 2005 to Fiscal Year Ended March 31, 2004.
Sales. Sales increased to $1,850,954 for the year ended March 31, 2005 from $972,051 for the year ended March 31, 2004. The $878,903 or 90%, increase in sales was due to higher sales of Specialty Chemicals and Uniproof proofing paper. Sales for our specialty chemical products including KH-30 and KX-91, and our Green Globe / Qualchem product line increased by 168%. The increase was primarily related to a 199% increase in sales of our KH-30 family of oil field dispersant products reflecting a higher level of orders. This was partially offset by a 61% decline in the level of U.S. Military sales during the year. We believe that last fiscal year the U.S. Government stocked up on orders and then cut its orders during the 2005 fiscal year due to other military priorities. Our three largest customers accounted for 72% of revenues for the year ended March 31, 2005 compared with 56% for the comparable period in 2004. Uniproof proofing paper sales increased by 14% due to higher level of orders from our primary customer.
Cost of Goods Sold. Cost of goods sold increased to $759,064 or 41% of sales, for the year ended March 31, 2005 from $516,647, or 53% of sales, for the year ended March 31, 2004. The increase in cost of goods sold was due to the increased sales of KH-30 products compared to the prior year and an increase in the volume of Uniproof proofing paper sales compared to the prior
fiscal year.
Selling, General and Administrative Expenses. General and administrative expenses decreased to $2,581,033 or 139% of sales, for the year ended March 31, 2005 from $2,674,968, or 275% of sales, for the year ended March 31, 2004. The slight decrease in selling, general and administrative expenses are primarily related to lower salaries and benefits due to the departure of certain executives, lower travel and entertainment expenses, bad debts, laboratory expenses and insurance partially offset by an increase in professional fees.
Oil Well Operating and Maintenance Cost – Net. 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. The Company recognized no gain or loss on the sale of the oil well leases.
Impairment Loss. During the year ended March 31, 2005, 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 $2,010 related to the Green Globe segment. During the year ended March 31, 2004, we recorded a $51,310 impairment charge related to the Green Globe segment. We also recorded a $70,467 impairment loss related to the oil leases held by United Energy Oil Corp.
Depreciation, Amortization and Depletion. Depreciation, amortization and depletion decreased to $84,401 for the year ended March 31, 2005 from $127,177 for the year ended March 31, 2004 reflecting additions to fixed assets and capitalized legal costs related to patent filings, offset by the sale of the oil leases. Depletion expenses were not material.
Interest Expense. Interest expense increased to $287,118 for the year ended March 31, 2005 compared with $6,683 for the year ended March 31, 2004. The increase was due to interest on the $1,750,000 convertible term note issued March 2004.
Net Loss. For the year ended March 31, 2005, we incurred a net loss of $1,854,876, or $0.08 per share, as compared to a net loss of $2,569,098 for the year ended March 31, 2004, or $0.12 per share. The average number of shares of common stock used in calculating earnings per share increased to 22,365,901 from 22,180,270 shares.
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, 2005, we had $365,610 in cash and cash equivalents.
Net Cash Used in Operating Activities. During the fiscal year ended March 31, 2005, net cash used in operating activities was $1,887,981 compared with $1,913,167 for the fiscal year ended March 31, 2004.
Net Cash Used in Investing Activities. During the fiscal year ended March 31, 2005, net cash used in investing activities decreased to $24,701 compared with $280,000 for the year ended March 31, 2004. The decrease was primarily a result of a reduced level of expenditures for the purchase of fixed assets to support operations and capitalized legal fees required to file patent applications for our KH-30, KX-91 and S2 system, as well as $15,000 in proceeds from the sale of the oil wells.
Net Cash Provided by Financing Activities. Net cash generated from financing activities decreased to $760,267 resulting from $626,667 of proceeds from our private placement in March 2005, as discussed below and a loan from the Chairman of the Board of $133,600. This compares to cash provided from financing activities of $1,590,250 for the year ended March 31, 2004 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 of financing costs.
On March 18, 2005, we entered into a securities purchase agreement with two private investors with the respect to the sale of shares of our common stock and warrants. The agreement provides for two types of units, designated as Series A and Series B.
The Series A Units each consist of 100,000 shares of our common stock and a Series A Warrant to purchase 50,000 shares of our common stock at $1.00 per share, subject to adjustment. The Series A Warrants expire five (5) years from the date they are issued. The purchase price for each Series A Unit is $80,000. The securities purchase agreement provides for the sale of up to twenty (20) Series A Units.
On March 18, 2005, the contract date, the company issued 8 Series A Units or 800,000 shares of its common stock for a purchase price of $640,000.
The Series B Units each consist of ten (10) shares of a new class of preferred stock that will be converted into 80,000 shares of our common stock in the aggregate, subject to adjustment, and a Series B Warrant to purchase 40,000 shares of our stock at $1.50 per share. The Series B Warrants expire five (5) years from the date they are issued. The purchase price for each Series B Unit is $80,000. The securities purchase agreement provides for the sale of up to forty-two (42) Series B Units.
During the past two fiscal years ended March 31, 2005 and 2004, we have recorded aggregate losses from operations of $4,423,974 and have incurred total negative cash flows from operations of $3,801,148 for the same two-year period. The report of the independent registered public accounting firm with respect to our financial statements included in this Information Statement 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 that presents our contractual obligations and commitments at March 31, 2005:
| Contractual Obligation | Total |
Less
than 1 Year |
1-3
Years |
4-5
Years |
After 5 Years | ||||||||||||
| Convertible Note | $ | 1,600,000 | $ | 583,330 | $ | 1,016,670 | $ | — | $ | — | |||||||
| Operating leases | 305,432 | 137,028 | 165,922 | 2,482 | — | ||||||||||||
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| Total contractual | |||||||||||||||||
| Cash obligations | $ | 1,905,432 | $ | 720,358 | $ | 1,182,592 | $ | 2,482 | $ | — | |||||||
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 on our KH-30 oil well cleaner and related products. However, a significant portion of our revenues has been related to the printing and the graphic arts industry. We believe that in the future our chemical sales will increase and that our reliance on the graphic arts segment of the company will decrease. During the past two fiscal years, we have derived additional revenues by acting as a graphic arts products distributor.
We do devote almost all of our time and effort into selling, promoting and developing our chemical products and we are continuing to increase our marketing efforts to develop new products as extensions of our original KH-30 product. We do believe that in the future our sales will increase. We also believe that our reliance on the graphic arts segment of the company will decrease.
The following table shows the proportion of total revenues by segment in each of the last two fiscal years:
| Fiscal Year | Graphic Arts | Specialty Chemicals | ||||||
|---|---|---|---|---|---|---|---|---|
| 2004 | $ | 486,075 | $ | 485,976 | ||||
| 2005 | $ | 549,462 | $ | 1,301,492 | ||||
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
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 December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This revised accounting standard eliminates the ability to account for share-based compensation transactions using the intrinsic value method in accordance with APB Opinion No. 25 and requires instead that such transactions be accounted for using a fair-value-based method. SFAS No. 123R requires public entities to record noncash compensation expense related to payment for employee services by an equity award, such as stock options, in their financial statements over the requisite service period. SFAS No. 123R is effective as of the beginning of the first interim or annual period that begins after December 15, 2005 for small business issuers. The Company does not plan to adopt SFAS No. 123R prior to its fourth-quarter of fiscal 2006. The Company expects that the adoption of SFAS No. 123R will have a negative impact on the Company’s consolidated results of operations. The Company has historically provided pro forma disclosures pursuant to SFAS No. 123 and SFAS No. 148 as if the fair value method of accounting for stock options had been applied, assuming use of the Black-Scholes option-pricing model. Although not currently anticipated, other assumptions may be utilized when SFAS No. 123R is adopted.
Quantitative and Qualitative disclosures About Market Risk
The market risk inherent in our market risk sensitive instruments and positions are the potential losses arising from adverse changes in interest rate and foreign currency exchange rates.
Interest Rates
At March 31, 2005, the Company had a loan that had a variable interest rate. The loan, which had an outstanding balance of $1,600,000 at March 31, 2005, was obtained in March 2004 and has a three-year term. The loan accrues interest at the greater of the prime rate of interest (as published in the Wall Street Journal) or 4% per annum. A one-percentage point increase in the prime rate of interest affecting our term loan would increase our net loss by $16,000 over the next fiscal year.
Foreign Currency Exchange Rates
Although our business is international in scope, to date our product sales have been all U.S. dollar-denominated. As we expand, we may be affected by exchange rate fluctuations in foreign currencies relative to the U.S. dollar. We do not currently use derivative financial instruments to hedge our exposure to changes in foreign currency exchange rates.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Report contains forward-looking statements. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, many of which are beyond our control. Actual results could differ materially from these forward-looking statements as a result of, among other factors, risks related to the large amount of our outstanding term loan; history of net losses and accumulated deficits; reliance on third parties to market, sell and distribute our products; future capital requirements; competition and technical advances; dependence on the oil services market for pipe and well cleaners; ability to protect our patents and proprietary rights; reliance on a small number of customers for a significant percentage of our revenues; and other risks. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Information Statement will in fact occur.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response is submitted as a separate section of this Information Statement beginning on page F-1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to “incorporate by reference” in this Information Statement other information that we file with it, which means that we can disclose important information to you by referring to those documents. This Information Statement incorporates important business and financial information about us that is not included in or delivered with this Information Statement. The information we file later with the Securities and Exchange Commission will automatically update and supersede this Information Statement. We incorporate by reference the documents listed below and any future filings made with the Securities and Exchange Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act.
|
1. |
Our Annual Report on Form 10-KSB for the year ended March 31, 2005. |
|
2. |
Our Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004. |
|
3. |
Our Current Report on Form 8-K dated March 23, 2005. |
We have filed each of these documents with the Securities and Exchange Commission. You may read and copy any reports, statements, or other information that we file at the Securities and Exchange Commission’s public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference rooms. Our filings are also available to the public
from commercial document retrieval services and on the Internet website maintained by the Securities and Exchange Commission at http://www.sec.gov. You may also request a copy of these filings, at no cost, by writing or calling us at the following address or telephone number:
Secretary
United Energy Corp.
600 Meadowlands Parkway, #20
Secaucus, New Jersey 07094
(800) 327-3456
You should rely only on the information incorporated by reference or provided in this Information Statement. We have not authorized anyone else to provide you with different information.
By Order of the Board of Directors
RONALD WILEN
Chairman of the Board
Secaucus, New Jersey
June 30, 2005
UNITED ENERGY CORP. AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of United Energy Corp. and its subsidiaries required to be included in Item 13 of the Schedule 14C Information Statement are listed below:
Page
| Report of independent registered public accounting firm | F-2 |
|
| Consolidated balance sheets as of March 31, 2005 and March 31, 2004 | F-3-F-4 |
|
| For the periods ended March 31, 2005 and 2004: | ||
| Consolidated statements of operations | F-5 |
|
| Consolidated statements of stockholders' equity (deficit) | F-6 |
|
| Consolidated statements of cash flows | F-7 - F-8 |
|
| Notes to consolidated financial statements | F-9-F-21 |
|
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, 2005 and March 31, 2004 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Energy Corporation and subsidiaries as of March 31, 2005 and March 31, 2004 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.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ IMOWITZ, KOENIG & CO., LLP
New York, New York
June 1, 2005
F-2
UNITED
ENERGY CORP. AND SUBSIDIARIES The accompanying notes are an integral part of these consolidated statements. F-3 UNITED ENERGY CORP. AND SUBSIDIARIES
The accompanying notes are an integral part of these consolidated statements. F-4 UNITED
ENERGY CORP. AND SUBSIDIARIES The accompanying notes are an integral part of these consolidated statements. F-5 UNITED ENERGY CORP.
AND SUBSIDIARIES The accompanying notes are an integral part of these consolidated statements. F-6 UNITED ENERGY CORP.
AND SUBSIDIARIES The accompanying notes are an integral part of these consolidated statements. F-7 UNITED ENERGY CORP. AND SUBSIDIARIES The accompanying notes are an integral part of these consolidated statements. F-8 UNITED ENERGY CORP. AND SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2005 AND 2004 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 K-Product Line of Chemicals. Green Globe is operated as a separate subsidiary of United Energy and sells its products under the tradename Qualchem™. Green Globe gives United Energy access to the chemistry and product lines of Green Globe which include environmentally friendly paint strippers and cleaners, many of which have been qualified for use by the U.S. Military. Green Globe developed a dual package of cleaning and drying "wipes" which produce a clear, non-reflective coating on glasses, computer screens and instrument panels. The "wipes" were developed for, and have received U.S. Military approval for, the cleaning of the instrument panels of combat aircraft. United
Energy's chemists have also developed an environmentally friendly fire-retardant
agent named FR-15. FR-15 begins as a concentrate which can be mixed with
varying amounts of water, depending on the anticipated use. FR-15 mixture
also resists re-ignition once a fire has been extinguished. This product
can also be used to reduce odors, such as those from decomposing garbage,
and for soil remediation following petroleum-based contamination. The Company’s
FR-15 product has been developed and successfully tested by several municipal
fire
departments. Underwriters Laboratories (“UL”) did not have an approved
test for FR-15 as a dispersant. A reformulation of FR-15 was developed to
pass the UL fire extinguisher test. The reformulated product is being resubmitted
for testing and certification by Underwriters Laboratories (“UL”).
United Energy expects that sales of FR-15 will commence when the product
receives UL certification. United Energy also produces a specialty chemical product called UNIPROOF®, 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. United Energy expects to begin sales of the
product by the end
of 2005. A patent application on this product is in process. During
the past two fiscal years ended March 31, 2005 and 2004, the Company has
recorded aggregate losses from operations of $4,423,974 and has incurred
total negative
cash
flows from operations of $3,801,148 for the same two-year 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. United
Energy's 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 its product lines. In order to increase its cash flow, the
Company is continuing its efforts to stimulate sales and cut back expenses
not directly supporting its sales and marketing efforts. F-9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of United Energy Corp. and its wholly-owned subsidiary Green Globe Industries, Inc. and currently inactive subsidiary, Nor-Graphic 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 on-going 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 (first-in, first-out method) or market. Allowance for Doubtful Accounts The
Company monitors its accounts and note receivable balances on a monthly basis
to ensure they are collectible. On a quarterly basis, the Company uses its historical
experience to determine its accounts receivable reserve. The Company’s
allowance for doubtful accounts is an estimate based on specifically identified
accounts as well as general reserves. The Company evaluates specific accounts
where it has information that the customer may have an inability to meet its
financial obligations. In these cases, management uses its judgment, based upon
the best available facts and circumstances, and records a specific reserve for
that customer against amounts due to reduce the receivable to the amount that
is expected to be collected. These specific reserves are reevaluated and adjusted
as additional information is received that impacts the amount reserved. The
Company also establishes a general reserve based upon a range of percentages
applied to aging categories. These percentages are based on historical collection
and write-off experience. If circumstances change, the Company’s estimate
of the recoverability of amounts due the Company could be reduced or increased
by a material amount. Such a change in estimated recoverability would be accounted
for in the period in which the facts that give rise to the change become known. F-10 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. Depreciation and amortization expense for the years ended March 31, 2005 and 2004 was $92,196 and $132,660, respectively. Property
and equipment consists of the following at March 31, 2005 and 2004: 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, 2005, 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 $2,010 related to the Green Globe segment, during the year
ended March 31, 2005. During the year ended March 31, 2004, the Company recorded
a goodwill impairment charge of $51,310. Goodwill
consists of the following at March 31, 2005 and 2004: Patents The Company capitalizes legal costs incurred to obtain patents. Amortization begins when the patent is approved using the straight-line basis over the estimated useful life of 15 years. F-11 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 start-up
maintenance and repair costs of $137,298. The Company 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.” 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. As a result, the Company recorded an oil
leases’ impairment loss of $70,467. In
April 2004, the Company sold their 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 recognized no gain or loss on the sale of the oil well leases. In
May 2004, the state of Wyoming returned the $75,000 deposit made by the Company
at the time the oil leases were purchased. There were no royalty payments received
during the year ended March 31, 2005. Accounting for Long-Lived Assets The Company’s long-lived assets include property and equipment and patents. In accordance with SFAS 144, long-lived 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. Stock-Based Compensation At March 31, 2005, 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 stock-based compensation arrangements with employees in accordance with provisions of Account Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Compensation expense for stock options issued to employees is based on the difference on the date of grant, between the fair value of the Company’s stock and the exercise price of the option. There was no stock based employee compensation cost for the years ended March 31, 2005 and 2004. The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No.123 and Emerging Issues Task Force (EITF) Issue No.96-18, “Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Stock based compensation for non-employees was $208,740 and $9,700 for the years ended March 31, 2005 and 2004.
F-12 The following table illustrates 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: Recently Issued Accounting Standards In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No.
123R”). This revised accounting standard eliminates the ability to account
for share-based compensation transactions using the intrinsic value method in
accordance with APB Opinion No. 25 and requires instead that such transactions
be accounted for using a fair-value-based method. SFAS No. 123R requires public
entities to record noncash compensation expense related to payment for employee
services by an equity award, such as stock options, in their financial statements
over the requisite service period. SFAS No. 123R is effective as of the beginning
of the first interim or annual period that begins after December 15, 2005 for
small business issues. The Company does not plan to adopt SFAS No. 123R prior
to its fourth-quarter of fiscal 2006. The Company expects that the adoption
of SFAS No. 123R will have a negative impact on the Company’s consolidated
results of operations. The Company has historically provided pro forma disclosures
pursuant to SFAS No. 123 and SFAS No. 148 as if the fair value method of accounting
for stock options had been applied, assuming use of the Black-Scholes option-pricing
model. Although not currently anticipated, other assumptions may be utilized
when SFAS No. 123R is adopted. 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, 2005 and 2004 does not include 8,580,000, and 6,430,000 stock options and warrants since the inclusion of the outstanding stock options and warrants would be antidilutive. F-13 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 had three customers which accounted for 87% and 50% of the total accounts receivable at March 31, 2005 and 2004 respectively. One company accounted for 14% and 50%, the second accounted for 56% and 0%, and the last accounted for 17% and 0% at March 31, 2005 and 2004 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%, was to be paid in 12 monthly installments 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 $30,226, which reduced the note. Principal payments in the amount of $53,808 have also been received. In addition, the Company increased the reserve by $1,350 to $31,350. No interest has been paid to date. On March 28, 2004, the customer agreed to a balance of $95,000, which was to be paid $5,000 per month. During the year ended March 31, 2005, the customer made seven monthly payments. The balance at March 31, 2005 is $60,000, prior to the reserve of $31,350. Significant Customers The Company's revenues from major customers, as a percentage of revenues, for the years ended March 31, 2005 and 2004, are as follows: 2005 2004 Customer A 3% 10% Customer B 30% 46% Customer C 39% 0% Vendors The Company purchased supplies from major venders for the years ended March 31, 2005 and 2004, as follows: 2005 2004 Vendor A 21% 27% Vendor B 12% 8% Vendor C 11% 0% 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 short-term maturity of these instruments. Reclassification Certain amounts from the prior year consolidated financial statement have been reclassified to conform to current year presentation with no effect on net income. F-14 3. INVENTORY 4. RELATED PARTY TRANSACTIONS The Company had an amount due to Robert Seaman, a major shareholder and former director of the Company. The amount due as of March 31, 2005 and 2004 is $244,141. This amount is unsecured, non-interest 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. During
January and February 2005, the Company’s Chairman of the Board, Ron Wilen, loaned
the Company $133,600. The loan was unsecured, non interest bearing and due upon
demand. This loan was repaid in April 2005. 5. CONVERTIBLE DEBT On March 24, 2004, the Company issued a secured convertible term note (the “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 5.75% per year at March 31, 2005 (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 commenced on October 1, 2004, at the rate of $58,333. The holder of the Term 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. On March 18, 2005, in connection with the financing discussed in Note 7, the fixed conversion price was adjusted to $0.80. The Company’s obligations under the Term Note are secured by a first priority security interest in the Company’s assets. As of March 31, 2005, the holder of the Term Note converted $150,000 in principal into 150,000 shares of common stock. In addition, the holder of the Term Note received $12,497 of interest in shares of common stock. Between
April 1 and June 1, 2005, the holder of the Term Note converted $117,800 in principal into 147,250 shares of common stock. During
December 2004, the Company defaulted on the Term Note by failing to pay principal
of $24,999. The Company also failed to pay principal of $116,666 for January
and February 2005. On February 28, 2005, the Company entered into an Amendment
and Waiver agreement (the “Amendment”) with the holder of the Term
Note. The amendment included a waiver by the holder of the Term Note of all
Events of Default. In consideration for the waiver, the Company, (i) paid the
holder unpaid interest, (ii) prepaid $37,777 of additional interest and (iii)
issued a seven year warrant to purchase 300,000 shares of Common Stock with
an exercise price ranging from $1.25 to $1.75. In addition, the holder agreed
to defer the principal payments scheduled to be paid from December 2004 through
May 2005 until the date of Maturity. (See Note 7). F-15
6. COMMITMENTS AND CONTINGENCIES Litigation Sales Commission Claim In
July 2002, an action was commenced against the Company in the Court of Common
Pleas of South Carolina, Pickens County, brought by Quantum International Technology,
LLC and Richard J. Barrett. Plaintiffs allege that they were retained as a sales
representative by the Company and in that capacity made sales of its products
to the United States government and to commercial entities. Plaintiffs further
allege that the Company failed to pay to plaintiffs agreed commissions at the
rate of 20% of gross sales of its 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. The Company believes it has 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. Lease Commitments The Company leases office facilities, equipment and autos under operating leases expiring on various dates through 2009. Certain leases contain renewal options. The following is a schedule of future minimum lease payments under operating leases having remaining terms in excess of one year as of March 31, 2005. Operating Year Leases 2006 137,028 2007 119,956 2008 45,966 2009 2,482 Total
minimum lease payments $
305,432 Operating
lease expense was $129,806 and $131,509 for the years ended March 31, 2005 and
2004, respectively. 7. STOCKHOLDERS’ EQUITY On
February 28, 2005, the Company entered into an amended agreement on the convertible
term note (see note 5). 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 $1.25 to $1.75. The warrants are fully exercisable for seven years from
the date of issuance. The estimated fair value of the warrants of $165,210 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, 2005, was $158,423. As of March 31, 2005, these warrants were unexercised
and outstanding. F-16 On
March 18, 2005, the Company entered into a securities purchase agreement (the
“Agreement”) with two private investors to issue shares of its common
stock and warrants. The Agreement provides for two types of units, designated
as Series A and Series B. The Series A Units each consist of 100,000 shares
of its common stock and a Series A Warrant to purchase 50,000 shares of its
common stock at $1.00 per share, subject to adjustment. The Series A Warrants
expire five (5) years from the date they are issued. The purchase price for
each Series A Unit is $80,000. The Agreement provides for the sale of up to
twenty (20) Series A Units. The
Series B Units each consist of ten (10) shares of a new class of preferred stock
that are convertible into 80,000 shares of our common stock in the aggregate,
subject to adjustment, and a Series B Warrant to purchase 40,000 shares of the
Company’s common stock at $1.50 per share. The Series B Warrants expire five (5)
years from the date they are issued. The purchase price for each Series B Unit
is $80,000. The agreement provides for the sale of up to forty-two (42) Series
B Units. On
March 18, 2005, the contract date, the Company issued 8 Series A Units or 800,000
shares of its common stock for a purchase price of $640,000. Subsequent closings
under the Agreement are contingent upon orders from its customers, at the rate
of one unit for each $100,000 of orders. The remaining Series A units must be
must be purchased first, followed by Series B units. The investors have the
right to purchase additional units at any time. The obligation of the investors
to purchase units expires on March 17, 2006. The
Agreement requires the Company to obtain shareholder approval for the authorization
of the preferred stock within 75 days, or by June 1, 2005. The Agreement provides
that the exercise price of the warrants is to be reduced by $0.01 for each day
that the approval is delayed, but not below $0.05 per share. As of June 1, 2005,
the Company had not obtained the consent from the holders of a majority of its
outstanding shares. During the year ended March 31, 2005, the Company issued an aggregate of 112,500 shares of common stock in exchange for consulting and legal services. These issuances were recorded as an increase to equity and consulting and legal expenses for the fair value of the shares of common stock on their respective grant dates. During the year ended March 31, 2004, in connection with the convertible term note (see note 5), 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, 2005 was $185,979. As of March 31, 2005, these warrants were unexercised and outstanding. During the year ended March 31, 2004, 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 $153,144 was recorded as a deferred financing cost and is being amortized over the life of the note. The unamortized amount as of March 31, 2005 was $101,116. As of March 31, 2005, these warrants were unexercised and outstanding. 8. INCOME TAXES Deferred
income taxes are provided for the temporary difference between the financial
reporting basis and tax basis of the Company's assets and liabilities including
those assets and liabilities recorded in connection with acquisitions. Deferred
tax assets and liabilities result principally from recording certain expenses
or income in the financial statements in a different period from recognition
for income tax purposes. As of March 31, 2005, the Company had a net operating
loss carryforward for tax purposes of approximately $10,429,000, which is available
to reduce its future taxable income, and expires at various dates through 2024.
$106,000 is expiring in 2015, $820,000 is expiring in 2016, $889,000 is expiring
in 2017, $736,000 is expiring in 2018, $100,000 is expiring in 2020, $782,000
is expiring in 2021, $2,692,000 is expiring in 2022, $2,404,000 is expiring
in 2023 and $1,900,000 is expiring in 2024. 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-17 Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. The annual limitation may result in the expiration of net operating loss carryforwards before utilization. 9. EMPLOYEE BENEFITS PLAN Stock Option Plans In
August 2001, the Company’s stockholders approved the 2001 Equity Incentive
Plan (the “2001 Plan”), which provides for the grant of stock options
to purchase up to 2,000,000 shares of common stock to any employee, non-employee
director, or consultant at the Board’s discretion. Under the 2001 Plan,
these options may be exercised for a period up to ten years from the date of
grant. Options issued to employees are exercisable upon vesting, which can range
between the dates 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 545,000 shares of common stock for future grant as of March 31, 2005 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: 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 $1.20 and $1.32 for the years ended March 31, 2005 and 2004, respectively. Summary Stock Option Activity The following table summarizes stock option information with respect to all stock options for the year ended March 31, 2005 and 2004: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Options outstanding March 31, 2003 2,445,020 $1.38 Granted 475,000 $1.10 Cancelled (715,020) $1.28 Options outstanding March 31, 2004 2,205,000 $1.32 8.32 Granted 1,250,000 $1.00 Options outstanding March 31, 2005 3,455,000 $1.20 7.98 F-18 As of March 31, 2005, there were 2,921,442 options exercisable with weighted average exercise price of $1.20 per share. Options outstanding at March 31, 2005 have an exercise price ranging between $0.70 to $2.00. 10. SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by management in deciding how to allocate resources and in assessing performance.
F-19 The
Company's total revenues, income from operations and identifiable assets by segment for the year ended March 31, 2005
are as follows: The
Company's total revenues, income from operations and identifiable assets by
segment for the year ended March 31, 2004, are as follows: F-20 Geographic Information 2005 2004 U.S. $ $ Venezuela 729,575 -- Netherlands 50,200 98,850 Other 132,675 23,180 Totals $
$
11. Subsequent Events On
April 27, 2005, the Company entered into a consulting agreement to provide advisory
and business development services. In consideration for these services, the
Company issued warrants to purchase 500,000 shares of its common stock at an
exercise price of $1.34. The Company also issued warrants to purchase an additional
500,000 shares of its common stock at an exercise price of $2.00 per share.
The warrants are fully exercisable for ten years. The initial 100,000 warrants
vest immediately. The estimated fair value of the warrants of $129,720 will
be recorded as consulting expense during the first quarter of the year ended
March 31, 2006. The remainder of the warrants will vest, if it all, in increments
of 100,000 warrants for each $5,000,000 of net revenues recognized as a result
of business generated through contacts that the consultant brings to the Company.
F-21 APPENDIX A AMENDMENT TO THE UNITED ENERGY CORP. ARTICLES OF INCORPORATION CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION OF UNITED ENERGY CORP. The undersigned, Brian F. King, being the Chief Executive Officer of
United Energy Corp., a Nevada corporation, acting pursuant to Section 78.385 of
the Nevada Revised Statutes, does hereby certify to the following: That at a meeting of the Board of Directors held on March 16, 2005, at
which all directors were present and acting throughout, the following resolution
was duly adopted: RESOLVED, that the shareholders of the Company be asked to consent to the
following amendment to the Company’s Articles of Incorporation and the
recommendation of this Board to approve said amendment be delivered to
stockholders of record as of June 9, 2005, as required by law. (Revised) FOURTH: The Corporation shall be authorized to issue up to ONE
HUNDRED MILLION (100,000,000) shares of common stock, par value ONE CENT ($0.01)
per share and up to ONE HUNDRED THOUSAND (100,000) shares of preferred stock in
one or more series, with such voting powers, designations, preferences,
limitations, restrictions and relative rights as may be established by
resolution of the Board of Directors from time to time. That those stockholders representing a majority of the voting power of
the Company as of the record date of June 9, 2005, have, by written consent,
approved the foregoing amendment; to wit, 23,652,517 shares were outstanding as
of June 9, 2005 and stockholders holding in the aggregate 11,839,971 shares of
stock consented in writing to the foregoing amendment. Dated this 9th day
of June, 2005 /s/ Brian F. King Brian F. King Chief Executive Officer IN WITNESS WHEREOF, I, Brian F. King,
have executed this Certificate of Amendment to the Articles of Incorporation
in duplicate this 9th day of June 2005, and say: 1. That I am the duly elected Chief Executive Officer and Secretary of
United Energy Corp. 2. That I have read the above and foregoing Certificate of Amendment to the
Articles of Incorporation; know the contents thereof and that the same are true
to the best of my knowledge and belief, exempting as to matters alleged on
information and belief as to those matters, I believe them to be
true. /s/ Brian F. King Brian F. King Subscribed and sworn to before me this ___ day of June,
2005 ______________________________________________________ My Commission Expires ____________, 20__ APPENDIX B CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK OF UNITED ENERGY CORP. (pursuant to NRS 78.1955) United Energy Corp. (the “Company”), a corporation organized and existing under the Private Corporations
Law of the State of Nevada, does hereby certify that, pursuant to authority
conferred upon the Board of Directors of the Company by the Certificate of
Incorporation, as amended, of the Company, and pursuant to NRS Section
78.1955 of the Private
Corporations Law of Nevada, the Board of Directors of the Company at a meeting
duly held, adopted resolutions (i) authorizing a series of the Company’s authorized
preferred stock, par value $0.01 per share, and (ii) providing for the designations,
preferences and
relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of Four Hundred Twenty (420) shares of
Series A Convertible Preferred Stock of the Company, as follows: RESOLVED, that the Company is authorized to issue 420 shares of Series A Convertible Preferred Stock
(the “Preferred Shares”), par
value $0.01 per share, which shall have the following powers, designations,
preferences and other special rights: (1) Dividends. The holders of the Preferred Shares
shall be entitled to receive dividends (“Dividends”) at a rate of 6.0% of the Stated Value
(as defined below) per annum, due and payable out of any assets or funds legally
available therefore on each June 30 and December 30 that such Preferred Share is
outstanding (each, a “Dividend Date”). Such Dividends shall be cumulative and shall accrue daily from the
Issuance Date (as defined below). If a Dividend Date is not a Business Day (as
defined below), then the Dividend shall be due and payable on the Business Day
immediately following such Dividend Date. Accrued dividends, if not paid on the
Dividend Date, shall thereafter accrue additional dividends in respect thereof,
compounded annually, at the rate of 6% per annum. Subject to the provisions of Section 5, the holder of a Preferred Share
may elect to have all or any portion of accrued but not paid Dividends paid in
shares of Common Stock by notifying the Company of its election in the form of
notice attached hereto as Exhibit I (the “Dividend Election Notice”). If the holder elects to have the Dividend paid in shares of Common
Stock, the number of such shares to be issued for such Dividend shall be the
number determined by dividing (x) the Dividend by (y) the Conversion Price as of
the date of such election. Such shares shall be issued and delivered on or
before the third Business Day B-2 following the date of receipt by the Company of the facsimile or other
copy of such Dividend Election Notice in accordance with the procedures set
forth in Section 2(d)(ii), and shall be duly authorized, validly issued, fully
paid, non-assessable and free and clear of all encumbrances. If any holder does
not receive the requisite number of shares of Common Stock in the form required
above within such three Business Day period, the holder shall be entitled to the
relief as provided in Section (2)(d)(v)(A) and (B). (2) Conversion of Preferred Shares. Preferred Shares
shall be convertible into shares of the Company’s common stock, par value $0.01
per share (the “Common Stock”),
on the terms and conditions set forth in this Section 2. (a) Certain Defined Terms. For purposes of this
Certificate of Designations, the following terms shall have the following
meanings: (i) “Business Day” means any
day other than Saturday, Sunday or other day on which commercial banks in the
city of New York are authorized or required by law to remain closed. (ii) “Closing Sale Price”
means, for any security, the closing sale price per such security as reported by
the Principal Market on the trading day immediately preceding the date on which
such value is being determined. (ii) “Conversion Amount”
means the Stated Value. (iii) “Conversion Price” means,
with respect to any Preferred Share as of any Conversion Date or other date of
determination, [$1.00] [subject to adjustment per
Section 4.2(a)(i) of the Securities Purchase Agreement], subject to adjustment as provided herein. (iv) “Issuance Date” means,
with respect to each Preferred Share, the date of issuance of the applicable
Preferred Share. (v) “Person” means an
individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof. (vi) “Principal Market” means,
with respect to any security, the principal securities exchange or trading
market for such security. (vii) “SEC” means the United
States Securities and Exchange Commission. (viii) “Securities Purchase Agreement” means that certain Securities Purchase Agreement dated as of March 18,
2005, between the Company, and the initial holders of the Preferred Shares
relating to the issuance of securities of the Company including shares of the
Company’s Series A Convertible Preferred Stock. B-3 (ix) “Stated
Value” means $8,000. (x) “Warrants” means the
warrants issued pursuant to the Securities Purchase Agreement. (b) Holder’s Conversion Right. Subject to the
provisions of Section 5, at any time or times on or after the Issuance Date, any
holder of Preferred Shares shall be entitled to convert any whole or fractional
number of Preferred Shares into fully paid and nonassessable shares of Common
Stock in accordance with Section 2(d), at the Conversion Rate (as defined
below). The Company shall not issue any fraction of a share of Common Stock upon
any conversion. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one Preferred Share by a holder thereof
shall be aggregated for purposes of determining whether the conversion would
result in the issuance of a fraction of a share of Common Stock. If, after the
aforementioned aggregation, the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round such fraction of a
share of Common Stock up or down to the nearest whole share. (c) Conversion Rate. The number of shares of Common
Stock issuable upon conversion of each Preferred Share pursuant to Section 2(b)
shall be determined according to the following formula (the “Conversion Rate”): Conversion Amount Conversion Price (d) Mechanics of Conversion. The conversion of
Preferred Shares shall be conducted in the following manner: (i) Holder’s Delivery Requirements. To convert
Preferred Shares into shares of Common Stock on any date (the “Conversion Date”), the holder thereof shall (A)
transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59
p.m., Eastern Time on such date, a copy of a fully executed notice of conversion
in the form attached hereto as Exhibit II (the “Conversion Notice”)
to the Company and (B) if required by Section 2(d)(vi), surrender to a common
carrier for delivery to the Company as soon as practicable following such date
the original certificates representing the Preferred Shares being converted (or
an indemnification undertaking with respect to such shares in the case of their
loss, theft or destruction) (the “Preferred Stock
Certificates”). (ii) Company’s Response. Upon receipt by the Company
of a copy of a Conversion Notice, the Company (A) shall immediately send, via
facsimile, a confirmation of receipt of such Conversion Notice to such holder
and the Company’s designated transfer agent (the “Transfer Agent”), which confirmation shall
constitute an instruction to the Transfer Agent to process such Conversion
Notice in accordance with the terms herein and (B) on or before the second
Business Day following the date of receipt by the Company of the facsimile or
other copy of such Conversion Notice (the “Share Delivery
Date”), (I) issue and deliver to the address as
specified in the Conversion Notice, a certificate, registered in the name
B-4 of the holder or its designee, for the number of shares of Common Stock
to which the holder shall be entitled, or (II) provided the Transfer Agent is
participating in The Depository Trust Company (“DTC”) Fast Automated Securities Transfer Program,
upon the request of the holder, credit such aggregate number of shares of Common
Stock to which the holder shall be entitled to the holder’s or its designee’s
balance account with DTC through its Deposit Withdrawal Agent Commission system.
If the number of Preferred Shares represented by the Preferred Stock
Certificate(s) submitted for conversion is greater than the number of Preferred
Shares being converted, then the Company shall, as soon as practicable and in no
event later than three (3) Business Days after receipt of the Preferred Stock
Certificate(s) (the “Preferred Stock Delivery
Date”) and at its own expense, issue and deliver to the
holder a new Preferred Stock Certificate representing the number of Preferred
Shares not converted. (iii) Dispute Resolution. In the case of a dispute as
to the arithmetic calculation of the Conversion Rate, the Company shall instruct
the Transfer Agent to issue to the holder the number of shares of Common Stock
that is not disputed and shall submit the disputed arithmetic calculations to
the holder via facsimile within one (1) Business Day of receipt of such holder’s
Conversion Notice. If such holder and the Company are unable to agree upon the
arithmetic calculation of the Conversion Rate within three (3) Business Days of
such disputed or arithmetic calculation being submitted to the holder, then the
Company shall within one (1) Business Day submit via facsimile the disputed
arithmetic calculation of the Conversion Rate to the Company’s independent,
outside accountant. The Company shall cause the accountant to perform the
determinations or calculations and notify the Company and the holder of the
results no later than three (3) Business Days from the time it receives the
disputed determinations or calculations. Such accountant’s determination or
calculation, as the case may be, shall be binding upon all parties absent
error. (iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date. (v) Company’s Failure to Timely Convert.
(A) Cash Damages. If within three (3) Business Days
after the Company’s receipt of the facsimile copy of a Conversion Notice the
Company shall fail to issue a certificate to a holder or credit such holder’s
balance account with DTC for the number of shares of Common Stock to which such
holder is entitled upon such holder’s conversion of Preferred Shares or to issue
a new Preferred Stock Certificate representing the number of Preferred Shares to
which such holder is entitled pursuant to Section 2(d)(ii), in addition to all
other available remedies which such holder may pursue hereunder, the Company
shall pay to such holder for each date after the Share Delivery Date such
conversion is not timely effected and/or each date after the Preferred Stock
Delivery Date such Preferred Stock Certificate is not delivered in an amount
equal to 0.5% of the sum of (a) the product of (I) the number of shares of
Common Stock not issued to the holder on or prior to the Share Delivery Date and
to which such holder is entitled and (II) the Closing Sale Price of the Common
Stock on the Share Delivery Date, and (b) in the event the Company has failed to
deliver a Preferred Stock Certificate to the B-5 holder on or prior to the Preferred Stock Delivery Date, the product of
(y) the number of shares of Common Stock issuable upon conversion of the
Preferred Shares represented by such Preferred Stock Certificate, as of the
Preferred Stock Delivery Date and (z) the Closing Sale Price of the Common Stock
on the Preferred Stock Delivery Date. If the Company fails to pay the additional
damages set forth in this Section 2(d)(v) within five (5) Business Days of the
date incurred, then the holder entitled to such payments shall have the right at
any time, so long as the Company continues to fail to make such payments, to
require the Company, upon written notice, to immediately issue, in lieu of such
cash damages, the number of shares of Common Stock equal to the quotient of (X)
the aggregate amount of the damages payments described herein divided by (Y) the
Conversion Price in effect on such Conversion Date as specified by the holder in
the Conversion Notice. The foregoing notwithstanding, the damages set forth in
this Section 2(d)(v)(A) shall be stayed with respect to the number of shares of
Common Stock and, if applicable, the Preferred Stock Certificate for which there
is a good faith dispute being resolved pursuant to, and within the time periods
provided for in Section 2(d)(iii), pending the resolution of such
dispute. (B) Void Conversion Notice; Adjustment to Conversion Price. If for any reason a holder has not received all of the shares of Common
Stock prior to the tenth (10th) Business Day after the Share Delivery Date with
respect to a conversion of Preferred Shares, then the holder, upon written
notice to the Company, with a copy to the Transfer Agent, may void its
Conversion Notice with respect to, and retain or have returned, as the case may
be, any Preferred Shares that have not been converted pursuant to such holder’s
Conversion Notice. (vi) Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of Preferred Shares in accordance
with the terms hereof, the holder thereof shall not be required to physically
surrender the certificate representing the Preferred Shares to the Company
unless the full number of Preferred Shares represented by the certificate are
being converted. The holder and the Company shall maintain records showing the
number of Preferred Shares so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the holder and the
Company, so as not to require physical surrender of the certificate representing
the Preferred Shares upon each such conversion. In the event of any dispute or
discrepancy, such records of the Company shall be controlling and determinative
in the absence of manifest error. Notwithstanding the foregoing, if Preferred
Shares represented by a certificate are converted as aforesaid, the holder may
not transfer the certificate representing the Preferred Shares unless the holder
first physically surrenders the certificate representing the Preferred Shares to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the holder a new certificate of like tenor, registered as the holder
may request, representing in the aggregate the remaining number of Preferred
Shares represented by such certificate. The holder and any assignee, by
acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares, the
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated of the face thereof. Each certificate for
Preferred Shares shall bear the following legend: ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF
THE COMPANY’S CERTIFICATE OF B-6 DESIGNATIONS, PREFERENCES AND RIGHTS OF THE PREFERRED SHARES REPRESENTED
BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(vi) THEREOF. THE NUMBER OF PREFERRED
SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF PREFERRED
SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(vi) OF THE CERTIFICATE
OF DESIGNATIONS, PREFERENCES AND RIGHTS. (e) Taxes. The Company shall pay any and all taxes
other than capital gain taxes or other income taxes that may be payable with
respect to the issuance and delivery of Common Stock upon the conversion of
Preferred Shares. (f) Adjustments to Conversion Price. The Conversion
Price will be subject to adjustment from time to time as provided in this
Section 2(f). (i) Adjustment of Conversion Price upon Issuance of Common
Stock. If and whenever on or after the date hereof, the
Company issues or sells, or in accordance with this Section 2(f) is deemed to
have issued or sold, any shares of Common Stock (including the issuance or sale
of shares of Common Stock owned or held by or for the account of the Company,
but excluding (a) the Excluded Securities (as defined below) and (b) shares of
Common Stock deemed to have been issued by the Company in connection with an
Approved Stock Plan (as defined below) or upon conversion of the Preferred
Shares or exercise of the Warrants) for a consideration per share (the "New Share Consideration")
less
than a price (the “Applicable Price”) equal to the Conversion Price in effect immediately prior to such
time, then immediately after such issue or sale, the Conversion Price then in
effect shall be adjusted to an amount equal to the New Share Consideration. For
purposes of determining the adjusted Conversion Price under this Section
2(f)(i), the following shall be applicable: (A) Issuance of Options. If the Company in any manner
grants or sells any Options (as defined below) and the lowest price per share
for which one share of Common Stock is issuable upon the exercise of any such
Option or upon conversion or exchange of any Convertible Securities (as defined
below) issuable upon exercise of such Option is less than the Applicable Price,
then such share of Common Stock shall be deemed to be outstanding and to have
been issued and sold by the Company at the time of the granting or sale of such
Option for such price per share. For purposes of this Section 2(f)(i)(A), the
“lowest price per share for which one share of Common Stock is issuable upon the
exercise of any such Option or upon conversion or exchange of any Convertible
Securities issuable upon exercise of such Option” shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to any one share of Common Stock upon granting or sale of
the Option, upon exercise of the Option and upon conversion or exchange of any
Convertible Security issuable upon exercise of such Option. No further
adjustment of the Conversion Price shall be made upon the actual issuance of
such Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities. B-7 (B) Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities and the lowest
price per share for which one share of Common Stock is issuable upon such
conversion or exchange thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the issuance of sale of such Convertible
Securities for such price per share. For the purposes of this Section
2(f)(i)(B), the “lowest price per share for which one share of Common Stock is
issuable upon such conversion or exchange” shall be equal to the sum of the
lowest amounts of consideration (if any) received or receivable by the Company
with respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange of such Convertible
Security. No further adjustment of the Conversion Price shall be made upon the
actual issuance of such Common Stock upon conversion or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the
Conversion Price had been or are to be made pursuant to other provisions of this
Section 2(f)(i), no further adjustment of the Conversion Price shall be made by
reason of such issue or sale. (C) Change in Option Price or Rate of Conversion. If
the purchase or exercise price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock changes at any time, the
Conversion Price in effect at the time of such change shall be adjusted to the
Conversion Price which would have been in effect at such time had such Options
or Convertible Securities provided for such changed purchase price, additional
consideration or changed conversion rate, as the case may be, at the time
initially granted, issued or sold. For purposes of this Section 2(f)(i)(C), if
the terms of any Option or Convertible Security that was outstanding as of the
date of issuance of the Preferred Shares are changed in the manner described in
the immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. No adjustment
shall be made if such adjustment would result in an increase of the Conversion
Price then in effect. (D) Calculation of Consideration Received. In case
any Option is issued in connection with the issue or sale of other securities of
the Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $0.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the net amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of marketable securities, in which case the amount of
consideration received by the Company will be equal to the arithmetic average of
the Closing Sale Prices of such marketable securities for the ten (10)
consecutive trading days immediately preceding the date of receipt. If any
Common Stock, Options or Convertible Securities are issued to the owners of the
non-surviving entity in connection with any merger in B-8 which the Company is the surviving entity, the amount of consideration
therefor will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or Convertible Securities, as the case may be. The fair value of
any consideration other than cash or securities will be determined jointly by
the Company and the holders of a majority of the Preferred Shares then
outstanding. If such parties are unable to reach agreement within ten (10) days
after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Business Days after the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the holders of a majority of the Preferred
Shares then outstanding. The determination of such appraiser shall be deemed
binding upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne equally by the Company and the holders of the Preferred
Shares. (E) Record Date. If the Company takes a record of the
holders of Common Stock for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be. (F) Certain Definitions. For purposes of this Section
2(f)(i), the following terms have the respective meanings set forth
below: (I) “Approved Stock Plan”
shall mean any employee benefit plan which has been approved by the Board of
Directors of the Company, pursuant to which the Company’s securities may be
issued to any employee, officer or director for services provided to the
Company. (II) “Convertible Securities”
means any stock or securities (other than Options) directly or indirectly
convertible into or exchangeable for Common Stock. (III) “Options” means any
rights, warrants or options to subscribe for or purchase Common Stock or
Convertible Securities. (IV) “Excluded Securities”
means (A) provided such security is issued at a price which is greater than or
equal to the greater of (a) 90% of the Applicable Price and (b) the arithmetic
average of the Closing Sale Prices of the Common Stock for the ten (10)
consecutive trading days immediately preceding the date of issuance, any of the
following (i) any issuance by the Company of securities in connection with a
strategic partnership or a joint venture (the primary purpose of which is not to
raise equity capital) and (ii) any issuance by the Company of securities as
consideration for a merger or consolidation or the acquisition of a business,
product, license, or other assets of another person or entity, (B) any warrants
or options outstanding as of the Issuance Date which have not been modified or
B-9 amended since the Issuance Date and (C) options to purchase shares of
Common Stock, provided (I) such options are issued after the Issuance Date to
employees of the Company within 30 days of such employee starting their
employment with the Company, (II) an aggregate of no more than 150,000 options
are issued in reliance on this exclusion and (III) the exercise price of such
options is not less than 75% of the market price of the Common Stock on the date
of issuance of such options. (ii) Adjustment of the Conversion Price upon Subdivision or Combination of
Common Stock. If the Company at any time subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Conversion Price in effect immediately prior to such subdivision
will be proportionately reduced. If the Company at any time combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination will be
proportionately increased. (iii) Holder’s Right of Alternative Conversion Price Following Issuance of
Convertible Securities. If the Company in any manner
issues or sells any Options or Convertible Securities after the Issuance Date
that are convertible into or exchangeable or exercisable for Common Stock at a
price which may vary with the market price of the Common Stock, including by way
of one or more resets to the conversion, exchange or exercise price of such
Convertible Security or Option (the formulation for such variable price being
herein referred to as, the “Variable
Price”), the Company shall provide written notice
thereof via facsimile and overnight courier to each holder of the Preferred
Shares (“Variable Notice”) on the
date of issuance of such Convertible Securities. From and after the date the
Company issues any such Convertible Securities with a Variable Price, a holder
of Preferred Shares shall have the right, but not the obligation, in its sole
discretion to substitute the Variable Price for the Conversion Price upon
conversion of any Preferred Shares by designating in the Conversion Notice
delivered upon conversion of such Preferred Shares that solely for purposes of
such conversion the holder is relying on the Variable Price rather than the
Conversion Price then in effect. A holder’s election to rely on a Variable Price
for a particular conversion of Preferred Shares shall not obligate the holder to
rely on a Variable Price for any future conversions of Preferred
Shares. (iv) Other Events. If any event occurs of the type
contemplated by the provisions of this Section 2(f) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company’s Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided that no such adjustment will increase the Conversion Price as
otherwise determined pursuant to this Section 2(f). (v) Notices. B-10 (A) Immediately upon any adjustment of the Conversion Price, the Company will
give written notice thereof to each holder of Preferred Shares, setting forth in
reasonable detail, and certifying, the calculation of such
adjustment. (B) The Company will give written notice to each holder of Preferred Shares
at least ten (10) Business Days prior to the date on which the Company closes
its books or takes a record (I) with respect to any dividend or distribution
upon the Common Stock, (II) with respect to any pro rata subscription offer to
holders of Common Stock or (III) for determining rights to vote with respect to
any Organic Change (as defined below), dissolution or liquidation, provided that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to such holder. (C) The Company will also give written notice to each holder of Preferred
Shares at least ten (10) Business Days prior to the date on which any Organic
Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder. (3) Intentionally Omitted. (4) Other Rights of Holders. (a) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Company’s assets to another Person or other transaction which is effected in
such a way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to or
in exchange for Common Stock is referred to herein as “Organic Change.” Prior to the consummation of any
(i) sale of all or substantially all of the Company’s assets to an acquiring
Person or (ii) other Organic Change following which the Company is not a
surviving entity, the Company will secure from the Person purchasing such assets
or the successor resulting from such Organic Change (in each case, the
“Acquiring Entity”) a written
agreement (in form and substance reasonably satisfactory to the holders of at
least two-thirds (2/3) of the Preferred Shares then outstanding) to deliver to
each holder of Preferred Shares in exchange for such shares, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in form
and substance to the Preferred Shares, including, without limitation, having a
stated value and liquidation preference equal to the Stated Value and the
Liquidation Preference of the Preferred Shares held by such holder, and
reasonably satisfactory to the holders of a at least two-thirds (2/3) of the
Preferred Shares then outstanding. Prior to the consummation of any other
Organic Change, the Company shall make appropriate provision (in form and
substance reasonably satisfactory to the holders of at least two-thirds (2/3) of
the Preferred Shares then outstanding) to insure that each of the holders of the
Preferred Shares will thereafter have the right to acquire and receive in lieu
of or in addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder’s
Preferred Shares such shares of stock, securities or assets that would have been
issued or payable in such Organic Change with respect to or in exchange for the
number of shares of Common Stock which would have been acquirable and receivable
upon the conversion of such holder’s Preferred Shares as of the date of
B-11 such Organic Change (without taking into account any limitations or
restrictions on the convertibility of the Preferred Shares). (c) Purchase Rights. If at any time the Company
grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the “Purchase
Rights”), then the holders of Preferred Shares will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Preferred Shares (without taking into account any limitations
or restrictions on the convertibility of the Preferred Shares) immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights. (5) Limitations on Conversion. The Company shall not
effect any conversion of Preferred Shares (including payment of Dividends in
Common Stock) and no holder of Preferred Shares shall have the right to convert
any Preferred Shares (including payment of Dividends in Common Stock) in excess
of that number of Preferred Shares (or payment of Dividends in Common Stock)
which, upon giving effect to such conversion, would cause the aggregate number
of shares of Common Stock beneficially owned by the holder and its affiliates to
exceed 9.99% of the shares of the Common Stock outstanding immediately after
giving effect to such conversion. For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by a holder and its
affiliates shall include the number of shares of Common Stock issuable upon
conversion or exercise of the Preferred Shares with respect to which the
determination of such sentence is being made, but shall exclude the number of
shares of Common Stock which would be issuable (i) upon conversion or exercise
of the remaining unconverted or unexercised Preferred Shares beneficially owned
by such holder and its affiliates and (ii) upon conversion or exercise of the
unconverted or unexercised portion of any other securities of the Company
beneficially owned by such holder and its affiliates subject to a limitation on
conversion or exercise analogous to the limitation contained in this
paragraph. Except as set forth in the preceding sentence, for
purposes of this paragraph beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For purposes of this paragraph, in determining the number of
outstanding shares of Common Stock, a holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form 10-Q or Form 10-K, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of any holder, the
Company shall within one (1) Business Day confirm orally and in writing to any
such holder the number of shares Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including the
Preferred Shares, by such holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported. (6) Reservation of Shares. B-12 (a) Reservation. The Company shall, so long as any of
the Preferred Shares are outstanding, take all action necessary to reserve and
keep available out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares, such number of
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Preferred Shares (including payment of accrued and
unpaid Dividends in Common Stock) then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 100% of the
number of shares of Common Stock for which the Preferred Shares are at any time
convertible (without regard to any limitations on conversions) (the
“Required Reserve Amount”). The
initial number of shares of Common Stock reserved for conversions of the
Preferred Shares and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Preferred Shares based on the number
of Preferred Shares held by each holder at the time of issuance of the Preferred
Shares or increase in the number of reserved shares, as the case may be. In the
event a holder shall sell or otherwise transfer any of such holder’s Preferred
Shares, each transferee shall be allocated a pro rata portion of the number of
reserved shares of Common Stock reserved for such transferor. Any shares of
Common Stock reserved and allocated to any Person which ceases to hold any
Preferred Shares shall be allocated to the remaining holders of Preferred
Shares, pro rata based on the number of Preferred Shares then held by such
holders. (b) Insufficient Authorized Shares. If at any time
while any of the Preferred Shares remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to satisfy
its obligation to reserve for issuance upon conversion of the Preferred Shares
at least a number of shares of Common Stock equal to the Required Reserve Amount
(an “Authorized Share Failure”),
then the Company shall immediately take all action necessary to increase the
Company’s authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Preferred Shares then
outstanding. Without limiting the generality of the foregoing sentence, as soon
as practicable after the date of the occurrence of an Authorized Share Failure,
but in no event later than 60 days after the occurrence of such Authorized Share
Failure, the Company shall (A) hold a meeting of its stockholders or (B) obtain
a majority written consent of its stockholders, for the authorization of an
increase in the number of authorized shares of Common Stock. In connection with
such meeting, the Company shall provide each stockholder with a proxy statement
and shall use its best efforts to solicit its stockholders’ approval of such
increase in authorized shares of Common Stock and to cause its board of
directors to recommend to the stockholders that they approve such
proposal. (7) Voting Rights. Holders of Preferred Shares shall
have no voting rights, except as required by law, and as expressly provided in
this Certificate of Designations. (8) Liquidation, Dissolution, Winding-Up. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of the Preferred Shares shall be entitled to receive in
cash out of the assets of the Company, whether from capital or from earnings
available for distribution to its stockholders (the “Liquidation Funds”), before any amount shall be
paid to the holders of any of the capital stock of the Company of any class
junior in rank to the Preferred Shares in respect of the preferences as to the
distributions and B-13 payments on the liquidation, dissolution and winding up of the Company,
an amount per Preferred Share equal to the sum of (a) the Stated Value and (b)
the accrued but not paid Dividends for such Preferred Share (such sum being
referred to as the “Liquidation
Preference”); provided that, if the Liquidation Funds
are insufficient to pay the full amount due to the holders of Preferred Shares
and holders of shares of other classes or series of preferred stock of the
Company that are of equal rank with the Preferred Shares as to payments of
Liquidation Funds (the “Pari Passu Shares”), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Liquidation Funds equal to the full amount of
Liquidation Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designations, Preferences and
Rights, as a percentage of the full amount of Liquidation Funds payable to all
holders of Preferred Shares and Pari Passu Shares. In addition to the receipt of
the Liquidation Preference, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, the holders of the
Preferred Shares shall be entitled to receive Liquidation Funds distributed to
holders of Common Stock, after the Liquidation Preference has been paid, to the
same extent as if such holders of Preferred Shares had converted the Preferred
Shares into Common Stock (without regard to any limitations on conversions
herein or elsewhere) and had held such shares of Common Stock on the record date
for such distribution of the remaining Liquidation Funds. The purchase or
redemption by the Company of stock of any class, in any manner permitted by law,
shall not, for the purposes hereof, be regarded as a liquidation, dissolution or
winding up of the Company. Neither the consolidation or merger of the Company
with or into any other Person, nor the sale or transfer by the Company of less
than substantially all of its assets, shall, for the purposes hereof, be deemed
to be a liquidation, dissolution or winding up of the Company. No holder of
Preferred Shares shall be entitled to receive any amounts with respect thereto
upon any liquidation, dissolution or winding up of the Company other than the
amounts provided for herein; provided that a holder of Preferred Shares shall be
entitled to all amounts previously accrued with respect to amounts owed
hereunder. (9) Preferred Rank. All shares of Common Stock shall
be of junior rank to all Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution and winding up of
the Company. The rights of the shares of Common Stock shall be subject to the
preferences and relative rights of the Preferred Shares. Without the prior
express written consent of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares, the Company shall not hereafter authorize or
issue additional or other capital stock that is of senior or equal rank to the
Preferred Shares in respect of the preferences as to distributions and payments
upon the liquidation, dissolution and winding up of the Company. Without the
prior express written consent of the holders of not less than two-thirds (2/3)
of the then outstanding Preferred Shares, the Company shall not hereafter
authorize or make any amendment to the Company’s Certificate of Incorporation or
bylaws, or file any resolution of the board of directors of the Company with the
Nevada Secretary of State or enter into any agreement containing any provisions,
which would adversely affect or otherwise impair the rights or relative priority
of the holders of the Preferred Shares relative to the holders of the Common
Stock or the holders of any other class of capital stock. In the event of the
merger or consolidation of the Company with or into another corporation, the
Preferred Shares shall maintain their relative powers, designations and
preferences provided for herein and no merger shall result inconsistent
therewith. B-14 (10) Participation. Subject to the rights of the
holders, if any, of the Pari Passu Shares, the holders of the Preferred Shares
shall, as holders of Preferred Stock, be entitled to such dividends paid and
distributions made to the holders of Common Stock to the same extent as if such
holders of Preferred Shares had converted the Preferred Shares into Common Stock
(without regard to any limitations on conversion herein or elsewhere) and had
held such shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made concurrently
with the dividend or distribution to the holders of Common Stock. (11) Restriction on Redemption. Until all of the
Preferred Shares have been converted and all accrued Dividends have been paid as
provided herein, the Company shall not, directly or indirectly, redeem its
capital stock (other than the Preferred Shares) without the prior express
written consent of the holders of not less than two-thirds (2/3) of the then
outstanding Preferred Shares. (12) Vote to Change the Terms of Preferred Shares. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
this Certificate of Designations or the Company’s Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares and (b) the issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement. (13) Lost or Stolen Certificates. Upon receipt by the
Company of evidence reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of any Preferred Stock Certificates representing the
Preferred Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company in customary form and,
in the case of mutilation, upon surrender and cancellation of the Preferred
Stock Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares into
Common Stock. (14) Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of
Designations shall be cumulative and in addition to all other remedies available
under this Certificate of Designations, at law or in equity (including a decree
of specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving rise to
such remedy and nothing herein shall limit a holder’s right to pursue actual
damages for any failure by the Company to comply with the terms of this
Certificate of Designations. The Company covenants to each holder of Preferred
Shares that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the holder thereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or
the performance thereof). The Company B-15 acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of the Preferred Shares and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in
the event of any such breach or threatened breach, the holders of the Preferred
Shares shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required. (15) Specific Shall Not Limit General; Construction.
No specific provision contained in this Certificate of Designations shall limit
or modify any more general provision contained herein. This Certificate of
Designations shall be deemed to be jointly drafted by the Company and all
Purchasers and shall not be construed against any person as the drafter
hereof. (16) Failure or Indulgence Not Waiver. No failure or
delay on the part of a holder of Preferred Shares in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege.
(17) Notice. Whenever notice is required to be given
pursuant to this Certificate of Designations, unless otherwise provided herein,
such notice shall be given in accordance with Section 9.4 of the Securities
Purchase Agreement. B-16 IN WITNESS WHEREOF, the Company has caused this
Certificate of Designations to be signed by its President, and by its Secretary,
as of the [_] day of [__________], 2005. UNITED ENERGY CORP. By: _________________________ Name: ____________________________ Its: President By: _________________________ Name: ____________________________ Its: Secretary State of ________________ ) ) ss County of ______________ ) On [___________] [_], 2005, personally appeared before me, a Notary
Public, [_________________] and [_________________], who acknowledged that they
executed the above instrument. _________________________________ Notary Public B-17 EXHIBIT I UNITED ENERGY CORP. DIVIDEND ELECTION NOTICE Reference is made to the Certificate of Designations, Preferences and
Rights of United Energy Corp. for its Series A
Convertible Preferred Stock (the “Certificate of Designations”). In accordance with
and pursuant to the Certificate of Designations, the undersigned hereby elects
to have accrued and unpaid dividends on the shares of Series A Convertible Preferred Stock, (the
“Preferred Shares”), paid in
shares of Common Stock, par value $0.01 per share (the “Common Stock”), of the Company, as of the date
specified below. Date of Election: __________________________________ Amount of Dividends to be Paid: __________________________________ Stock certificate no(s). of Preferred Shares: __________________________________ Please confirm the following information: Conversion Price: ___________________________________ Number of shares of Common Stock to be issued: __________________________________ Please issue the Common Stock in the following name and to the following
address: Issue to: ___________________________________________________________________ Facsimile Number: ___________________________________________________________________ Authorization: ____________________________________________________________________________ By: ____________________________ Title: ____________________________ Dated: ___________________________________________________________________ Account Number (if electronic
book entry transfer): _________________________________________________________________ Transaction Code Number (if
electronic book entry transfer): __________________________________________________________ B-18 ACKNOWLEDGMENT The Company hereby acknowledges this Dividend Election Notice and hereby
directs its TRANSFER AGENT to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated
___________ ___, ____ from the Company and acknowledged and agreed to by
[TRANSFER AGENT]. UNITED ENERGY CORP. By: ____________________________________ Name: ______________ Title: ____________ B-19 EXHIBIT II UNITED ENERGY CORP. CONVERSION NOTICE Reference is made to the Certificate of Designations, Preferences and
Rights of United Energy Corp. for its Series A
Convertible Preferred Stock (the “Certificate of Designations”). In accordance with
and pursuant to the Certificate of Designations, the undersigned hereby elects
to convert the number of shares of Series A
Convertible Preferred Stock, par value $0.01 per share
(the “Preferred Shares”), of
United Energy Corp., a Nevada corporation (the “Company”), indicated below into shares of Common
Stock, par value $0.01 per share (the “Common
Stock”), of the Company, as of the date specified
below. Date of Conversion: _____________________________________ Number of Preferred Shares to be converted: _____________________________________ Stock certificate no(s). of Preferred Shares to be
converted: _____________________________________ Please confirm the following information: Conversion Price: _____________________________________ Number of shares of Common Stock to be issued: _____________________________________ Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address: Issue to: ___________________________________________________________________ Facsimile Number: ___________________________________________________________________ Authorization: ____________________________________________________________________________ By: ____________________________ Title: ____________________________ Dated: ___________________________________________________________________ Account Number (if electronic
book entry transfer): _________________________________________________________________ Transaction Code Number (if
electronic book entry transfer): __________________________________________________________ B-20 ACKNOWLEDGMENT The Company hereby acknowledges this Conversion Notice and hereby directs
[TRANSFER AGENT] to issue the above indicated number of shares of Common Stock
in accordance with the Transfer Agent Instructions dated ___________ ___, ____
from the Company and acknowledged and agreed to by [TRANSFER AGENT]. UNITED ENERGY CORP. By: ____________________________________ Name: ______________ Title: ____________ B-21
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
March
31,
2005
March
31,
2004
ASSETS
CURRENT
ASSETS:
Cash
and cash equivalents
$
365,610
$
1,518,025
Accounts
receivable, net of allowance for doubtful
accounts
of $22,192 and $45,736 respectively
783,004
393,941
Inventory,
net of allowance of $16,290 and
$16,290,
respectively
135,960
176,487
Note
receivable, net of reserve of $31,350 and
$31,350,
respectively
28,650
63,650
Prepaid
expenses and other current assets
120,574
80,296
Total
current assets
1,433,798
2,232,399
PROPERTY
AND EQUIPMENT, net
165,587
243,313
OTHER ASSETS:
Goodwill,
net
15,499
17,509
Patents,
net of accumulated amortization of
$92,486
and $67,032, respectively
295,603
309,424
Loans
receivable
137
1,538
Deposits
1,385
76,385
Deferred
financing costs, net of accumulated
amortization
of $104,303 and $2,000, respectively
206,590
310,893
Total
assets
$
2,118,599
$
3,191,461
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2004
March 31,
2005
March 31,
2004
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
LIABILITIES:
Accounts
payable
$
258,940
$
276,115
Accrued
expenses
96,106
379,098
Convertible
term note payable
583,330
349,998
Due
to related parties
377,741
244,141
Total
current liabilities
1,316,117
1,249,352
LONG TERM
LIABILITIES:
Convertible
term note payable
672,268
1,120,133
Total
liabilities
1,988,385
2,369,485
STOCKHOLDERS'
EQUITY:
Common
stock: $0.01 par value 100,000,000 shares
authorized;
23,255,267 and 22,180,270 shares
232,552
221,802
issued
and outstanding as of March 31, 2005
and
March 31, 2004
Additional
paid-in capital
12,308,963
11,143,266
Stock
subscription receivable
(13,333
)
—
Accumulated
deficit
(12,397,968
)
(10,543,092
)
Total
stockholders' equity
130,214
821,976
Total
liabilities and stockholders' equity
$
2,118,599
$
3,191,461
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2005 AND 2004
2005
2004
REVENUES,
net
$
1,850,954
$
972,051
COST OF GOODS
SOLD
759,064
516,647
Gross
profit
1,091,890
455,404
OPERATING
EXPENSES:
Selling,
general and administrative
2,581,033
2,674,968
Oil
well operating and maintenance cost-net
—
102,662
Impairment
loss
2,010
121,777
Depreciation,
amortization and depletion
84,401
127,177
Total
operating expenses
2,667,444
3,026,584
Loss
from operations
(1,575,554
)
(2,571,180
)
OTHER INCOME
(EXPENSE), net:
Interest
income
7,796
8,765
Interest
expense
(287,118
)
(6,683
)
Total
other (expense) income, net
(279,322
)
2,082
Net
loss
$
(1,854,876
)
$
(2,569,098
)
BASIC AND
DILUTED LOSS PER SHARE:
Total
basic and diluted loss per share
$
(0.08
)
$
(0.12
)
WEIGHTED
AVERAGE NUMBER OF SHARES,
OUTSTANDING,
basic and diluted
22,365,901
22,180,270
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2005 AND 2004
Common
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Stock Subscription Receivable
Total
Shares
Amount
BALANCE,
April 1, 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
Warrants
granted in lieu of
accrued
expenses
—
—
75,000
—
—
75,000
Common
stock issued in
consideration
for services
112,500
1,125
84,375
—
—
85,500
Warrants
granted in consideration
for
services
—
—
48,240
—
—
48,240
Common
stock issued in
conversion
of note payable
150,000
1,500
148,500
—
—
150,000
Common
stock issued in
consideration
for interest
expense
12,497
125
12,372
—
—
12,497
Warrants
granted in consideration
for
convertible term note
—
—
165,210
—
—
165,210
Common
stock issued for
private
placement
800,000
8,000
632,000
—
(13,333
)
626,667
Net
loss
—
—
—
(1,854,876
)
—
(1,854,876
)
BALANCE,
March 31, 2005
23,255,267
232,552
12,308,963
(12,397,968
)
(13,333
)
130,214
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005 AND 2004
2005
2004
CASH
FLOWS FROM OPERATING ACTIVITIES:
Net
loss
$
(1,854,876
)
$
(2,569,098
)
Adjustments
to reconcile net loss to net cash used in
operating
activities
Depreciation,
amortization and depletion
322,630
159,241
Impairment
loss
2,010
121,777
Stock
granted in consideration for services
85,500
—
Warrants
granted in consideration for services
48,240
—
Stock
granted in consideration for interest expense
12,497
—
Options
granted in consideration for services
—
9,700
Changes in
operating assets and liabilities
(Increase)
decrease in accounts receivable, net
(389,063
)
102,774
Decrease
in inventory
40,527
34,857
Decrease
in note receivable
35,000
85,384
(Increase)
decrease in prepaid expenses
(40,279
)
24,231
Decrease
(increase) in deposits
75,000
(45,000
)
(Decrease)
increase in accounts payable and accrued
expenses
(225,167
)
162,967
Net
cash used in operating activities
(1,887,981
)
(1,913,167
)
CASH FLOWS
FROM INVESTING ACTIVITIES:
Receipts
from loans receivable-net
1,401
538
Proceeds
from sale of fixed asset
15,000
—
Payments
for acquisition of property and equipment-net
(29,469
)
(177,843
)
Payments
for patent
(11,633
)
(102,695
)
Net
cash used in investing activities
(24,701
)
(280,000
)
CASH FLOWS
FROM FINANCING ACTIVITIES:
Proceeds
from convertible term note
—
1,750,000
Proceeds
from related party payable
133,600
Payments
of finance costs
—
(159,750
)
Proceeds
from issuance of common stock
626,667
—
Net
cash provided by financing activities
760,267
1,590,250
Net
decrease in cash and cash equivalents
(1,152,415
)
(602,917
)
CASH AND
CASH EQUIVALENTS, beginning of period
1,518,025
2,120,942
CASH AND
CASH EQUIVALENTS, end of period
$
365,610
$
1,518,025
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2005 AND 2004
2005
2004
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW
INFORMATION:
Cash
paid during the period
Interest
$
92,885
$
2,882
Income
taxes
$
1,520
$
2,154
Discount
on convertible term loan
$
165,210
$
281,670
Debt
financing costs
$
—
$
153,143
Conversion
of note payable into common stock
$
150,000
$
—
Conversion
of accrued expenses due to a former
employee
into warrants
$
75,000
$
—
2005
2004
Furniture
and fixtures
$
74,379
$
68,036
Machinery
and equipment
288,450
366,098
Vehicles
82,139
78,986
Leasehold
improvements
26,203
26,203
471,171
539,323
Less- Impairment
loss
—
(70,467
)
Less- Accumulated
depreciation and amortization
(305,584
)
(225,543
)
Property
and equipment, net
$
165,587
$
243,313
2005
2004
Goodwill
$
86,523
$
86,523
Less: Impairment
loss
53,320
51,310
Less: Accumulated
amortization
17,704
17,704
Goodwill,
net
$
15,499
$
17,509
Net
loss as reported
$
(1,854,876
)
$
(2,569,098
)
Add:
Stock based
compensation expenses included in
reported
net loss
208,740
9,700
Deduct:
Total stock
based employee compensation expense
determined
under fair value based method for all awards
(690,488
)
(1,361,668
)
Pro forma
$
(2,336,624
)
$
(3,921,066
)
Basic and
diluted loss per common share
As reported
$
(0.08
)
$
(0.12
)
Pro forma
$
(0.10
)
$
(0.18
)
2005
2004
Paper
$
—
$
4,416
Blended chemical
80,380
104,668
Raw materials
55,580
67,403
Total inventory
$
135,960
$
176,487
Convertible
term note
$
1,600,000
Discount
on convertible term note
(344,402
)
1,255,598
Current
portion
(583,330
)
Long-Term
Debt
$
672,268
Estimated
maturities on long-term debt are as follows:
2005
$
583,330
2006
$
672,268
2005
2004
Expected
life (in years)
10
10
Risk-free
interest rate
4.54
%
4.54
%
Volatility
135.00
138.00
Dividend
yield
0
%
0
%
Graphic
Arts Specialty
Chemicals Corporate
Total
Revenues
549,462
$
1,301,492
$
—
$
1,850,954
Gross profit
$
238,146
$
853,744
$
—
$
1,091,890
Sales, general
and administrative expenses
143,942
1,431,225
1,005,866
2,581,033
Depreciation,
amortization and depletion
—
74,535
9,866
84,401
Impairment
loss
—
2,010
—
2,010
Interest
expense (income)
—
—
279,322
279,322
Income (loss)
from continuing operations
$
94,204
$
(654,026
)
$
(1,295,054
)
$
(1,854,876
)
Cash and
cash equivalents
$
—
$
—
$
365,610
$
365,610
Accounts
receivable
140,617
642,387
—
783,004
Inventory
20,080
115,880
—
135,960
Note receivable
28,650
—
—
28,650
Loan receivable
—
—
137
137
Prepaid expenses
—
—
120,574
120,574
Fixed assets
—
143,633
21,954
165,587
Goodwill
—
15,499
—
15,499
Patent
—
295,603
—
295,603
Deferred
financing costs
—
—
206,590
206,590
Deposits
—
—
1,385
1,385
Total assets
$
189,347
$
1,213,002
$
716,250
$
2,118,599
Capital expenditures
$
—
$
23,018
$
6,451
$
29,469
Graphic
Arts Specialty
Chemicals Corporate
Total
Revenues
$
486,075
$
485,976
$
—
$
972,051
Gross profit
$
244,328
$
211,076
$
—
$
455,404
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
—
109,627
17,550
127,177
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
financing 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