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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004 Commission file number: 000-30841
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UNITED ENERGY CORP.
(Exact name of registrant as specified
in its charter)
NEVADA 22-3342379
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 MEADOWLANDS PARKWAY, #20
SECAUCUS, NEW JERSEY 07094
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(Address of principal (Zip Code)
executive offices)
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Registrant's telephone number, including area code: (201) 842-0288
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value Over-the-Counter (OTC) Bulletin Board
$.01 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the common equity held by non-affiliates
of the registrant was $15,552,137 as of June 16, 2004.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Rule 12b-2). Yes _ No X
The number of shares outstanding of the registrant's common equity as
of June 16, 2004 was 22,180,270 shares.
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THE FOLLOWING DOCUMENT IS INCORPORATED BY REFERENCE INTO PART III OF
THIS FORM 10-K:
Proxy Statement to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934 with respect to the 2004 annual meeting of
stockholders.
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UNITED ENERGY CORP.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS..............................................................1
ITEM 2. PROPERTIES............................................................5
ITEM 3. LEGAL PROCEEDINGS.....................................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.........................................................6
ITEM 6. SELECTED FINANCIAL DATA...............................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION................................10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK..............................................................16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...............................16
ITEM 9A. CONTROLS AND PROCEDURES..............................................16
PART III
ITEMS 10, 11, 12 13 AND 14....................................................18
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K..........................................................18
PART I
ITEM 1. BUSINESS
OVERVIEW
We develop and distribute environmentally friendly specialty chemical
products with applications in several industries and markets. Our current line
of products includes:
o KH-30 paraffin dispersant for the oil industry and related products
KH-30S and KX-91;
o Uniproof specialty-coated proofing paper for the printing industry;
and
o following additional testing, "Slick Barrier" underwater protective
coatings for use in marine applications.
Through our wholly-owned subsidiary, Green Globe Industries, Inc., we
provide the U.S. military with a variety of environmentally friendly,
non-hazardous, biodegradable solvents and cleaners under our trade name
"Qualchem." Green Globe is a qualified supplier for the U.S. military and has
sales contracts currently in place.
We have developed and patented a system referred to as our "S2 system,"
to work with our environmentally-friendly paraffin dispersants products. This
patented technology produces high volumes of steam and heat at variable
pressures and temperatures to completely dissolve most deposits of paraffin and
asphaltene within oil wells, pipelines or storage tanks. The S2 system apparatus
is portable, compact and easy to use. We are further developing the process to
enhance and support sales of KH-30 and its related products for the oil industry
and for other potential applications.
A key component of our business strategy is to pursue collaborative
joint working and marketing arrangements with established international oil and
oil service companies. We intend to enter into these relationships to more
rapidly and economically introduce our KH-30 product line to the worldwide
marketplace for refinery, tank and pipeline cleaning services. We are currently
negotiating potential working arrangements with several companies, including
Altena Cleaning B.V., one of Europe's leading refinery cleaning organizations,
and Petroleos de Venezuela S.A., the state-owned oil company, and have set up
small sales offices in The Netherlands and Venezuela to assist with proposed
joint projects.
We provide specialty chemical and graphic arts products to our
customers and generated revenues of $972,051 for the fiscal year ended March 31,
2004 and $2,232,626 for the fiscal year ended March 31, 2003. As of March 31,
2004, we employed nine persons and use the services of five other individuals
under consulting or product/production cooperation arrangements.
ORGANIZATIONAL HISTORY
We were originally incorporated in Nevada in 1971 as Aztec Silver
Mining Co. We engaged in the manufacturing and distribution of printing
equipment from 1995 through 1998. During that period, we began to develop
specialty chemical products for use in the printing industry. In March 1998, we
discontinued our printing equipment operations and changed our business focus to
the development of specialty chemical products.
BUSINESS OPERATIONS AND PRINCIPAL PRODUCTS
KH-30, KH-30S AND KX-91 CHEMICALS
KH-30 is a mixture of modified oils, dispersants and oil-based
surfactants designed to control paraffin and asphaltene deposits in oil wells.
When applied in accordance with our recommended procedures, KH-30 has resulted
in substantial production increases of between two and five times in
paraffin-affected oil and gas wells by
-1-
allowing for a faster penetration of paraffin and asphaltene deposits. KH-30
disperses and suspends paraffin and asphaltene in a free-flowing state and
prevents solids from sticking to each other or to oil well equipment. KH-30 is
patented in the United States, Australia, Russia, Nigeria, Venezuela, Vietnam
and the OAPI (the Africa Intellectual Property Organization, which includes the
countries of Burkina-Faso, Benin, Central African Republic, Congo, Ivory Coast,
Cameroon, Gabon, Guinea, Guinea-Bissau, Mali, Mauritania, Niger, Senegal, Chad
and Togo). We have 12 additional country patent applications pending in most of
the major oil-producing countries around the world (including the European Union
and Canada).
Although we believe that the application of KH-30 on a continuous basis
will result in higher production and lower lease operating costs in oil wells,
the introduction of KH-30 into the oil and gas producing industry has been
difficult. Many entrenched players such as the "hot oilers" and the major oil
service companies who benefit from high mark-ups on their proprietary products
have no incentive to promote the use of KH-30. Moreover, oil production
engineers are reluctant to risk damage to a well from a product that does not
have the endorsement and backing of a major enterprise. Consequently, the pace
of introduction of KH-30 has been much slower than we initially anticipated. We
believe that this situation has begun to change as a result of our marketing
efforts with several oil service companies and well owners beginning to use our
products after successful trials.
To increase sales of our KH-30 product we are currently expanding our
marketing efforts by producing a marketing brochure and supplemental sales
material. We have also developed two products, KH-30S and KX-91, as extensions
of our original KH-30. We expect to continue developing additional applications
for our KH-30 product.
KX-91 is a patent-pending chemical blend specifically developed for the
rapid removal of paraffin and asphaltene deposits from oil wells. It has been
effective for the removal of heavy deposits due to its wetting ability,
dispersability and solvency. KX-91 works to rapidly dissolve deposits at low
concentrations with limited contact time and can perform in extreme (-400F to
2300F) temperature ranges. It also has low emulsifying tendencies with brine
water. In laboratory tests, KX-91 has been effective at low concentrations to
enhance the flow of very heavy crude oil (low API gravity).
KH-30S is a proprietary chemical composition, specifically developed as
a drag reducer to reduce flow impairment caused by paraffin and asphaltene
depositions and high viscosity crude oil. KH-30S lowers the viscosity of very
heavy crude oil (low API gravity) with flow enhancement in pipelines and oil
wells at low concentrations. It provides an inhibitive thin barrier film on
various metal surfaces and exhibits good compatibility with most commonly used
materials of construction.
UNIPROOF PROOFING PAPER
We have developed a photo-sensitive coating that is applied to paper to
produce what is known in the printing industry as proofing paper or "blue line"
paper. We developed this formulation over several years of testing. The
formulation is technically in the public domain as being within the scope of an
expired patent of duPont. However, the exact formulation utilized by us, to the
best of our knowledge, has not been duplicated by other companies and we protect
it as a trade secret.
We introduced our proofing paper product in June 1999. Sales of
Uniproof proofing paper totaled $481,636 for the fiscal year ended March 31,
2004, $1,692,735 for the fiscal year ended March 31, 2003 and $1,033,574 for the
fiscal year ended March 31, 2002.
SLICK BARRIER
Slick Barrier is an underwater protective coating which prevents the
adherence of barnacles to boat hulls. The product is environmentally friendly
and biodegradable, which we believe to be particularly appealing in fresh water
marine applications. The product is currently being tested on pleasure boats
throughout the United States and Europe. A patent application for "Slick
Barrier" was filed in 2003, and we are applying for trademark protection both
nationally and internationally. We expect to release this product in 2005,
although no specific date has been set.
-2-
GREENGLOBE INDUSTRIES
In November 1998, we acquired all of the outstanding shares of Green
Globe in exchange for 30,000 shares of our common stock. Green Globe is operated
as a separate subsidiary and sells its products under the tradename
Qualchem.(TM) The acquisition of Green Globe has given us access to the
chemistry and product lines of Green Globe which include environmentally
friendly paint strippers and cleaners, many of which have been qualified for use
by the U.S. military. Of particular note in the Green Globe line was the
development of dual package cleaning and drying "wipes" which produce a clear,
non-reflective coating on glasses, computer screens and instrument panels. The
wipes were developed, and have received U.S. military approval, for the cleaning
of the instrument panels of combat aircraft.
MANUFACTURING AND SALES
All of the raw materials necessary for the manufacture of our products
are generally available from multiple sources, although we have negotiated
favorable arrangements with our current suppliers and would have to repeat the
process if one or more of our current suppliers were no longer to be able to
supply these raw materials to us. We do not own any special manufacturing
facilities. Our chemical products are generally manufactured by contract
blenders at a number of different locations. This method of manufacturing has
reduced the need for us to invest in facilities and to hire the employees to
staff them. Chemical blenders are relatively easy to replace and are bound by
confidentiality agreements, where appropriate, which obligate them not to
disclose or use our proprietary information.
We are not responsible for any environmental expenditures with respect
to the manufacturing of our products. First, the chemical products that we use
are generally "environmentally friendly" products in that they are low in
toxicity and rank high in biodegradability. Further, any environmental issues
involved in manufacturing are the responsibility of the blending facilities,
provided they receive adequate and accurate information from us as to the
components of the chemicals involved.
Currently, the photosensitive coating for our Uniproof proofing paper
is applied by an independent coater which is bound by a confidentiality
agreement that obligates it not to disclose or use our confidential information.
We believe this facility has the capacity to meet our production needs for the
foreseeable future and also meets all environmental manufacturing regulations
now or expected to be enacted. We believe that the services of this facility can
be duplicated by others. We believe the need for a contract with the coater is
obviated by the coater's clear economic benefit from continuing to provide
services to us. We are more concerned about a precipitous event, such as damage
to the coater's facility, which could result in an interruption of Uniproof
production. We believe that alternate coating sources do exist and that the
coater could be replaced, although with at least some interruption in production
flow.
We sell our Uniproof proofing paper to three customers. The largest,
The Alameda Company of Anaheim, California, accounted for approximately 93% of
our graphic arts sales and 46.3% of our total customer sales for the fiscal year
ended March 31, 2004. In fiscal 2003, Alameda accounted for approximately 78% of
graphic arts sales and 59% of total customer sales and, in fiscal 2002,
accounted for approximately 97% of graphic arts sales and 74% of total customer
sales. Alameda did not place a paper order with us from July 2003 to March 2004,
but did place a significant paper order with us in April 2004. Revenue from
Alameda is expected to continue to decline as a percentage of our total
revenues. A decision by Alameda to discontinue its relationship with us could
result in a significant loss of revenue to us.
Another Uniproof paper purchaser accounted for approximately 6.4% of
our total customer sales in the fiscal year ended March 31, 2004, but has not
been a significant customer since. The General Services Administration and
Defense Supply Center, which purchased our QualChem aircraft cleaning products
and paint removers, accounted together for approximately 6.1% of our total
customer sales in the fiscal year ended March 31, 2004. In the fiscal year ended
March 31, 2004, two oil field service companies, which purchased our KH-30 and
KX-91 oil well cleaning products, accounted for approximately 10.2% and 4.3%,
respectively, of our total customer sales.
-3-
Except for these current and former customers, no other single entity
has accounted for more than 10% of our sales during any of the fiscal years
ended March 31, 2002 and 2003 and the nine months ended December 31, 2003.
All of our products are sold in U.S. dollars and, therefore, we have
had no foreign currency fluctuation risk.
Our current operations do not require a substantial investment in
inventory other than minimum commitments to our distributors. However, we
anticipate that any growth in our business will require us to maintain higher
levels of inventory.
Our order backlog at March 31, 2004 was insignificant as we generally
ship product as orders are received.
MARKETING AND DISTRIBUTION
We have engaged the services of independent contractors to market our
KX-30 and KX-91 oil dispersant products. These contractors work under various
non-exclusive commission and distribution agreements and have substantial
contacts among oil well owners and major oil companies in the United States,
Mexico, South America, Africa, Europe and the Middle East. These contractors
earn a commission based upon the sales value of the products that they sell.
These independent contractors use our marketing materials, brochures and website
to interest clients and to describe the attributes of our products.
Although we have not achieved the volume of sales we had anticipated
for the oil dispersant products, there have been significant barriers to entry
in this market. Most of these potential customers require substantial testing of
our product to prove its efficacy at cleaning wells, tanks and flow lines. In
many cases, additional laboratory testing is required to prove that our chemical
products are compatible with refinery systems and will not interfere with
certain chemical processes and safety requirements of the potential clients.
This process of testing has taken a great deal longer than was originally
anticipated. We believe that we have made significant inroads and expect a
higher volume of sales in the third quarter of the fiscal year ending March 31,
2005.
RESEARCH AND DEVELOPMENT
KH-30, KX-91 and KH-30S chemical products for the oil industry and
Uniproof proofing paper are developed and ready for market. Slick Barrier is in
testing. All of these products are the result of research and development
expenditures paid to vendors, excluding allocation of internal costs, estimated
to be $229,219, $181,370 and $58,300 for the fiscal years ended March 31, 2004,
2003 and 2002, respectively. We have had available the services of one research
chemist and one analytical chemist, as well as one petroleum engineer, to lead
in the development of our products. A significant amount of market adaptation
has taken place in the field involving the development of application procedures
for products. We do not anticipate having to make significant research and
development expenditures on existing products in the future. However, we do
expect to continue to develop new products to complement our existing product
lines.
COMPETITION
We compete directly or indirectly with other producers of specialty
chemical products with similar uses, most of which are more established
companies and have greater resources than we have. Generally, we attempt to
compete by offering what we hope to be lower prices and better service. However,
our KH-30, KX-91 and KH-30S products for the oil industry are often more
expensive, and with these products we attempt to compete by emphasizing product
effectiveness and environmental safety.
For our Uniproof proofing paper, our principal competition is E.I.
duPont de Nemours & Co., which controls in excess of 95% of the United States
proofing paper market estimated to be $80 million to $100 million per year.
Currently, we have been able to compete with duPont in terms of what we believe
to be better prices and service. We believe the market will continue to welcome
an alternative to duPont and we plan to continue our current marketing
practices.
-4-
PROPRIETARY TECHNOLOGIES
With respect to our formulations which are proprietary, we have
patented our KH-30 oil well cleaner patented in the United States, Australia,
Russia, Nigeria, Venezuela, Vietnam and OAPI. We also have 12 additional country
patent applications pending in most of the major oil-producing countries around
the world (including the European Union and Canada). We believe our patent is
strong and will help our competitive position. However, we are aware that others
may try to imitate our product or invalidate our patents. We have in the past
vigorously enforced our trade secrets such as the one relating to our Uniproof
proofing paper, and intend to continue to do so in the future. However, we
recognize that intellectual property rights provide less than complete
protection. We believe that no other company is currently producing a product
similar to KH-30.
In addition to applying for patent protection on our KH-30 product, we
have also registered "KH-30" as a trademark. Trademark protection has also been
obtained for the "Uniproof" name for our proofing paper. We anticipate applying
for both patent and trademark protection for our other products in those
jurisdictions where we deem such protection to be beneficial.
EMPLOYEES
As of March 31, 2004, we employed nine persons and had available the
services of five other individuals under consulting or product/production
cooperation arrangements. The latter arrangement is meant to include a situation
where a chemist, engineer or significant marketing person is engaged by an
organization under contract with us to manufacture or market one or more of our
products.
None of our employees is represented by a union. We consider our
relations with our employees to be good.
ITEM 2. PROPERTIES
We lease 9,600 square feet of office space at 600 Meadowlands Parkway,
#20, Secaucus, New Jersey 07094. Under the terms of the lease, which runs
through June 2007, the monthly rent is $8,635 through June 2004, then the
monthly rent increases to $9,035 for the remainder of the lease. In addition, we
lease office space of approximately 1,350 square feet in Midland, Texas as a
regional sales office at a rate of $759 per month. This lease runs through
September 2005.
We use independent non-affiliated contract chemical blending and
manufacturing facilities in various locations around the United States for the
manufacture of our products. We contract the production of our products to
independent manufacturers and blenders and our products are therefore produced
at the manufacturing facilities of those entities. We do not own any
manufacturing facilities.
ITEM 3. LEGAL PROCEEDINGS
In July 2002, an action was commenced against us in the Court of Common
Pleas of South Carolina, Pickens County, brought by Quantum International
Technology, LLC and Richard J. Barrett. Plaintiffs allege that they were
retained as a sales representative of ours and in that capacity made sales of
our products to the United States government and to commercial entities.
Plaintiffs further allege that we failed to pay to plaintiffs agreed commissions
at the rate of 20% of gross sales of our products made by plaintiffs. The
complaint seeks an accounting, compensatory damages in the amount of all unpaid
commissions plus interest thereon, punitive damages in an amount treble the
compensatory damages, plus legal fees and costs. Plaintiffs maintain that they
are entitled to receive an aggregate of approximately $350,000 in compensatory
and punitive damages, interest and costs. In June 2003, the action was
transferred from the court in Pickens County to a Master in Equity sitting in
Greenville, South Carolina and was removed from the trial docket. The action, if
tried, will be tried without a jury. No trial date has yet been scheduled. We
believe we have meritorious defenses to the claims asserted in the action and
intend to vigorously defend the case. The outcome of this matter cannot be
determined at this time.
No other legal proceedings are currently pending or threatened against
us.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of our fiscal year ended March 31, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
As of June 16, 2004, there were 460 record holders of our common stock
and there were 22,180,270 shares of our common stock outstanding. We have not
previously declared or paid any dividends on our common stock and do not
anticipate declaring any dividends in the foreseeable future.
The following table shows the high and low bid prices of our common
stock as quoted on the OTC Bulletin Board and the "Pink Sheets," as described
below, by quarter during each of our last two fiscal years ended March 31, 2003
and 2002 and for each quarter after March 31, 2003. From May 3, 2000 to April
25, 2002, our shares were quoted on the Pink Sheets. Beginning April 26, 2002,
our stock has been quoted on the OTC Bulletin Board. These quotes reflect
inter-dealer prices, without retail markup, markdown or commissions and may not
represent actual transactions. The information below was obtained from those
organizations, for the respective periods.
Fiscal Year
ended March 31 Quarter High Low
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2003 First Quarter (April-June 2002) $3.85 $1.60
Second Quarter (July-September 2002) 2.40 1.20
Third Quarter (October-December 2002) 3.20 1.30
Fourth Quarter (January-March 2003) 2.10 1.28
2004 First Quarter (April-June 2003) $1.43 $ .98
Second Quarter (July-September 2003) 2.30 .80
Third Quarter (October-December 2003) 1.75 .27
Fourth Quarter (January-March 2004) 1.08 .40
2005 First Quarter (through June 16) $1.08 $.52
The high and low bid prices for shares of our common stock on June 16,
2004, were $1.02 and $.93 per share, respectively, based upon bids that
represent prices quoted by broker-dealers on the OTC Bulletin Board. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commissions, and may not represent actual transactions. The aggregate market
value of our stock held by non-affiliates on June 16, 2004 was $15,552,137
(using the closing price of $.95 per share).
DIVIDEND POLICY
While there are no restrictions on the payment of dividends, we have
not declared or paid any cash or other dividends on shares of our common stock
in the last two years, and we presently have no intention of paying any cash
dividends in the foreseeable future. Our current policy is to retain earnings,
if any, to finance the expansion of our business. The future payment of
dividends will depend on the results of operations, financial condition, capital
expenditure plans and other factors that we deem relevant and will be at the
sole discretion of our board of directors.
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EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding the status of our
existing equity compensation plans at March 31, 2004.
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES COMPENSATION PLANS
TO BE ISSUED UPON WEIGHTED-AVERAGE (EXCLUDING SECURITIES
EXERCISE OF EXERCISE PRICE OF REFLECTED IN THE
OUTSTANDING OPTIONS, OUTSTANDING OPTION, SECOND
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN)
------------- ------------------- ------------------- -------------------
Equity compensation plans approved by 2,205,000 $1.32 1,795,000
security holders
Equity compensation plans not approved by 4,225,000 $1.70 --
security holders
Total 6,430,000 1,795,000
RECENT SALES OF UNREGISTERED SECURITIES
On March 24, 2004, we entered into a $1,750,000 financing transaction
with Laurus Master Fund, Ltd., a financial institution specializing in funding
small and micro-capitalization companies. Under the financing agreements, we
issued a $1,750,000 secured convertible term note at a fixed conversion price of
$1.00 per share to Laurus. The loan has a term of three years and accrues
interest at the greater of the prime rate of interest, currently 4% per year (as
published in The Wall Street Journal), or 4% per year. Interest is payable
monthly in arrears commencing on May 1, 2004, and on the first day of each
consecutive calendar month after that date. Monthly amortization payments
commence on October 1, 2004, at the rate of $58,333. The proceeds of the
financing are being used for working capital.
The interest rate of the note is subject to reduction in .25%
increments on a month-by-month basis if specified conditions are met, including
that the common stock underlying the conversion of the convertible term note and
the warrant issued to Laurus are registered with the SEC and whether and to what
extent the average price of our common stock exceeds the fixed conversion price.
Laurus has the option to convert all or a portion of the term loan into
shares of our common stock at any time, subject to specified limitations, at a
fixed conversion price of $1.00 per share. The term loan is secured by a first
priority security interest in our assets. In connection with the term loan,
Laurus was paid a fee of $61,250 and received a seven-year warrant to purchase
up to 300,000 shares of our common stock at prices ranging from $1.25 per share
to $1.75 per share. All stock conversion prices and exercise prices are subject
to adjustment for stock splits, stock dividends and similar events.
The secured convertible term note and common stock purchase warrant
issued by us to Laurus were not registered under the Securities Act of 1933 in
reliance upon the exemption from registration provided by Section 4(2) of that
Act and Regulation D promulgated under that Act, which exempts transactions by
an issuer not involving any public offering.
-7-
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
FISCAL YEAR ENDED MARCH 31,
CONSOLIDATED --------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2004 2003 2002 2001 2000
---------------------------- ---- ---- ---- ---- ----
Operating Revenues .............................. $972,051 $2,232,626 $1,387,851 $3,482,915 $2,585,556
Cost of goods sold............................... 488,385 1,332,791 756,391 2,325,652 1,368,727
Gross profit..................................... 483,666 899,835 631,460 1,157,263 1,216,829
Selling, general and administrative.............. 2,674,968 3,627,983 1,763,446 1,052,790 1,099,705
Executive services contributed by management..... -- -- 187,500 250,000 250,000
Interest income (expense), net................... 2,082 57,629 (4,408) (10,236) (2,424)
Net loss......................................... (2,569,098) (2,829,000) (1,364,576) (404,316) (152,765)
Retained deficit beginning....................... (7,973,994) (5,144,994) (3,780,418) (3,376,102) (3,223,337)
Retained deficit ending.......................... (10,543,092) (7,973,994) (5,144,994) (3,780,418) (3,376,102)
Loss per share................................... (0.12) (0.13) (0.09) (0.03) (0.01)
AS OF MARCH 31,
CONSOLIDATED --------------------------------------------------------------
BALANCE SHEET DATA 2004 2003 2002 2001 2000
------------------ ---- ---- ---- ---- ----
Total working capital (deficiency)............... $983,047 $2,346,175 $(81,712) $172,118 $318,651
Total assets..................................... 3,191,461 3,682,947 1,037,972 1,411,699 1,314,843
Total liabilities................................ 2,369,485 736,387 903,212 1,016,763 765,591
Total long term debt............................. 1,120,133 -- -- -- --
Total stockholder's equity....................... 821,976 2,946,560 134,760 394,936 549,252
Total shares outstanding......................... 22,180,270 22,180,270 16,180,270 15,830,270 15,830,270
-8-
The following is a summary of our quarterly operations for the years
ended March 31, 2004 and 2003.
UNAUDITED QUARTERLY FINANCIAL DATA
CONSOLIDATED STATEMENTS
OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2004
--------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
----------- ----------- ----------- ----------- -----------
Operating revenues.................... $ 628,741 $ 66,401 $ 91,120 $ 185,789 $ 972,051
Cost of goods sold.................... 325,922 32,404 38,054 92,005 488,385
Gross profit.......................... 302,819 33,997 53,066 93,784 483,666
Selling, general and administrative... 673,604 793,221 558,453 649,690 2,674,968
Oil well operating and maintenance cost 57,995 32,872 11,795 -- 102,662
Depreciation, amortization and depletion 37,283 37,673 39,447 41,036 155,439
Interest (income) expense, net........ (3,738) (1,829) (666) 4,151 (2,082)
Impairment loss....................... -- -- -- 121,777 121,777
Net loss.............................. (462,325) (827,940) (555,963) (722,870) (2,569,098)
Retained deficit, beginning........... (7,973,994) (8,436,319) (9,264,259) (9,820,222) (7,973,994)
Retained deficit, ending.............. (8,436,319) (9,264,259) (9,820,222) (10,543,092) (10,543,092)
Per share information:
Loss per share - basic and diluted ... $ (0.02) $ (0.04) $ (0.03) $ (0.03) $ (0.12)
Weighted average shares outstanding... 22,180,270 22,180,270 22,180,270 22,180,270 22,180,270
UNAUDITED QUARTERLY FINANCIAL DATA
CONSOLIDATED STATEMENTS
OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2003
--------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER FISCAL YEAR
----------- ----------- ----------- ----------- -----------
Operating revenues.................... $ 738,997 $ 625,612 $ 792,092 $ 75,925 $ 2,232,626
Cost of goods sold.................... 532,622 320,498 431,383 48,288 1,332,791
Gross profit.......................... 206,375 305,114 360,709 27,637 899,835
Selling, general and administrative... 428,196 1,058,976 901,681 1,239,130 3,627,983
Depreciation, amortization and depletion 9,792 23,245 24,780 25,664 83,481
Interest (income) expense, net....... (15,900) (19,056) (15,106) (7,567) (57,629)
Legal settlement...................... -- -- -- (75,000) (75,000)
Net loss.............................. (215,713) (758,051) (550,646) (1,304,590) (2,829,000)
Retained deficit, beginning........... (5,144,994) (5,360,707) (6,118,758) (6,669,404) (5,144,994)
Retained deficit, ending.............. (5,360,707) (6,118,758) (6,669,404) (7,973,994) (7,973,994)
Per share information:
Loss per share - basic and diluted.... $ (0.01) $ (0.03) $ (0.02) $ (0.06) $ (0.13)
Weighted average shares outstanding... 19,279,171 22,180,270 22,180,270 22,180,270 21,456,982
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ITEM 7. 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 Report beginning on page F-1.
OVERVIEW
Our business plan from fiscal 2001 through fiscal 2004 was to use
Uniproof proofing paper sales to provide the cash flow to support worldwide
marketing efforts for our KH-30 and related oil well cleaner products and, to
a lesser extent, the other environmentally friendly specialty chemical products
developed by us. Today, we are focused almost exclusively on our specialty
chemical products business.
On March 24, 2004, we completed the sale of a secured convertible term
note in the principal amount of $1,750,000. In connection with the sale of the
note, we issued to the selling shareholder a common stock purchase warrant
covering 300,000 shares and paid a fee to the selling shareholder of $61,250. We
received net proceeds of $1,590,250, after expenses, from the consummation of
the sale.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related
to product returns, bad debts, inventories, intangible assets, long-lived assets
and contingencies and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
REVENUE RECOGNITION
Our primary source of revenue is from sales of our products. We
recognize revenue upon shipment and transfer of title.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We monitor our accounts and note receivable balances on a monthly basis
to ensure they are collectible. On a quarterly basis, we use our historical
experience to determine our accounts receivable reserve. Our allowance for
doubtful accounts is an estimate based on specifically identified accounts, as
well as general reserves. We evaluate specific accounts where we have
information that the customer may have an inability to meet its financial
obligations. In these cases, management uses its judgment, based upon the best
available facts and circumstances, and records a specific reserve for that
customer against amounts due to reduce the receivable to the amount that is
expected to be collected. These specific reserves are re-evaluated and adjusted
as additional information is received that impacts the amount reserved. We also
establish a general reserve for all customers based upon a range of percentages
applied to aging categories. These percentages are based on historical
collection and write-off experience. If circumstances change, our estimate of
the recoverability of amounts due to us could be reduced or increased by a
significant amount. A change in estimated recoverability would be accounted for
in the period in which the facts that give rise to the change become known.
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RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED MARCH 31, 2004 TO FISCAL YEAR ENDED MARCH 31,
2003
Sales. Sales decreased to $972,051 for the year ended March 31, 2004
from $2,232,626 for the year ended March 31, 2003. The $1,260,575, or 56%,
decrease in sales was due principally to a 71% decrease in sales of our Uniproof
proofing paper due to a lower level of orders from our primary customer. Sales
for our specialty chemical products including KH-30 and KX-91, and our Green
Globe / Qualchem product line decreased by 8%. The decrease was related to a 62%
decline in the level of U.S. Military sales during the year. This was partially
offset by a 54% increase in sales of our KH-30 family of products reflecting a
higher order level. We believe that last fiscal year the U.S. Government stocked
up on orders and then cut its orders during the 2004 fiscal year due to other
military priorities. Our three largest customers accounted for 63% of revenues
for the year ended March 31, 2004 compared with 84% for the comparable period in
2003.
Cost of Goods Sold. Cost of goods sold decreased to $488,385, or 50% of
sales, for the year ended March 31, 2004 from $1,332,791, or 60% of sales, for
the year ended March 31, 2003. The decrease in cost of goods sold was primarily
due to the reduced volume of Uniproof proofing paper sales and the change in the
mix of products sold reflecting margins on Uniproof paper sales compared to the
prior fiscal year.
Selling, General and Administrative Expenses. General and
administrative expenses decreased to $2,674,968, or 275% of sales, for the year
ended March 31, 2004 from $3,627,983, or 162% of sales, for the year ended March
31, 2003. The decrease in general and administrative expenses are primarily
related to lower salaries and benefits due to the departure of certain
executives, lower legal and accounting fees and the reduction in certain
marketing expenses that were incurred to develop product branding, logos,
brochures and a website in 2002.
Oil Well Operating and Maintenance Cost - net. During the year ended
March 31, 2004, our wells produced oil which generated $34,636 in revenues and
incurred operating costs and maintenance and repair costs of $137,298. In April
2004, we sold the oil well leases located in Laramie County, Wyoming for
$15,000, and a 4.5% royalty on all future oil sales from these wells.
Depreciation, Amortization and Depletion. Depreciation, amortization
and depletion increased to $155,439 for the year ended March 31, 2004 from
$83,481 for the year ended March 31, 2003 reflecting additions to fixed assets
for laboratory analytical equipment, manufacture of additional S2 system
equipment units and capitalized legal costs related to patent filings for our S2
system and KH-30 and related products.
Interest Income, Net of Interest Expense. We had net interest income of
$2,082 for the year ended March 31, 2004 compared with net interest income of
$57,629 in the corresponding period in 2003. The decrease was due primarily to
lower investment earnings on the reduced remaining funds raised from our private
placement in May 2002.
Impairment loss. During the year ended March 31, 2004, we tested our
goodwill by estimating its fair value using a discounted cash flow analysis. As
a result, we recorded a goodwill impairment charge of $51,310 related to the
Green Globe segment. We also reviewed the carrying value of the oil well leases
held by United Oil Corp. We estimated that the carrying value of the oil leases
should be adjusted due to the sale of the oil well leases in April 2004. As a
result, we recorded an oil lease impairment loss of $70,467.
Legal Settlement. For the year ended March 31, 2003, we reached an
agreement to settle and discontinue a lawsuit. In the settlement, we agreed to
pay an aggregate of $75,000 in three installments. No legal settlements were
made during the year ended March 31, 2004.
Net Loss. For the year ended March 31, 2004, we incurred a net loss of
$2,569,098, or $0.12 per share, as compared to a net loss of $2,829,000 for the
year ended March 31, 2003, or $0.13 per share. The decrease in the loss was the
result of a lower level of general and administrative expenses. The average
number of shares of common stock used in calculating earnings per share
increased to 22,180,270 shares from 21,456,982 shares.
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COMPARISON OF FISCAL YEAR ENDED MARCH 31, 2003 TO FISCAL YEAR ENDED MARCH 31,
2002
Sales. Sales increased to $2,232,626 for the year ended March 31, 2003
from $1,387,851 for the year ended March 31, 2002. The $844,775, or 60%,
increase in sales was due principally to a 60% increase in sales of our Uniproof
proofing paper due to a general increase in orders and the addition of a new
customer for the Uniproof product. Sales for our specialty chemical products
including our KH-30 and KX-91 and our Green Globe / Qualchem product line
increased by 62% as our orders increased as a result of our marketing activity
and the U.S. Government replenished stocks of our military products as a result
of the higher level of U.S. Military sales activity during the year. Our three
largest customers accounted for 84% of revenues for the year ended March 31,
2003 compared with 86% for the comparable period in 2002.
Cost of Sales. Cost of sales increased to $1,332,791, or 60% of sales,
for the year ended March 31, 2003 from $756,391, or 55% of sales, for the year
ended March 31, 2002. The higher cost of sales reflected the increased levels of
sales and the higher percentage of cost of sales in fiscal 2003 was primarily
due the increased cost of production for the Uniproof paper which was only
partially offset by higher margins on specialty chemical products.
Selling, General and Administrative Expenses. General and
administrative expenses increased to $3,627,983, or 162% of sales, for the year
ended March 31, 2003 from $1,763,446, or 127% of sales, for the year ended March
31, 2002. The increase in general and administrative expenses are primarily
related to the salaries, the cost of compensation from options and benefits of
new staff added beginning in May 2002, non-recurring marketing expenses related
to developing promotional brochures, logos and product branding, design and
implementation costs of a new website, certain legal and accounting services and
KH-30 customer trials on wells and storage tanks, and increased level of travel
related to meetings with potential customers.
Executive Services Contributed by Management. The year ended March 31,
2001 included an expense of $250,000 related to imputed but unpaid salaries for
services contributed by senior management. In 2002, such amount was $187,500
representing the first three quarters of the year. In the fourth quarter of
fiscal year 2002, each of the two officers received options for the value of
their services and one of the officers began to draw a salary. In the year ended
2003, the amount of imputed salaries was $0, as the executives were paid a
regular salary.
Depreciation and Amortization. Depreciation and amortization increased
to $83,481 for the year ended March 31, 2003 from $20,031 for the year ended
March 31, 2002 reflecting additions to fixed assets for laboratory analytical
equipment, manufacture of additional S2 system equipment units and capitalized
legal costs related to patent filings for our S2 system and KH-30 and related
products.
Interest Income, Net of Interest Expense. We had net interest income of
$57,629 for the year ended March 31, 2003 compared with net interest expense of
$4,408 in the corresponding period in 2002. The increase was due primarily to
the investment earnings on the remaining funds raised from our private placement
in May 2002.
Legal Settlement. During the year ended March 31, 2002, we settled
another litigation matter in the amount of $20,651. For the year ended March 31,
2003, we reached an agreement to settle and discontinue a lawsuit. In the
settlement, we agreed to pay an aggregate of $75,000 in three installments.
Net Loss. For the year ended March 31, 2003, we incurred a net loss of
$2,829,000, or $0.13 per share, as compared to a loss of $1,364,576 for the year
ended March 31, 2002, or $0.09 per share. The increased loss is primarily a
result of higher expenses for the year. The average number of shares used in
calculating earnings per share increased 5,434,657 to 21,456,982 shares
primarily as a result of 6,000,000 shares issued in connection with our private
placement in May 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, operations have been financed primarily through loans,
equity contributions from directors and executive officers and from third
parties supplemented by funds generated by our business. As of March 31, 2004,
we had $1,518,025 in cash and cash equivalents.
-12-
Net Cash Used in Operating Activities. During the fiscal
year ended March 31, 2004, net cash used in operating activities was $1,913,167
compared with $2,998,776 for the fiscal year ended March 31, 2003. This was
primarily a result of the lower expense levels during the year.
Net Cash Used in Investing Activities. During the fiscal year ended
March 31, 2004, net cash used in investing activities decreased to $280,000
compared with $444,494 for the year ended March 31, 2003. The decrease was
primarily a result of a reduced level of expenditures for purchase of fixed
assets to support operations and capitalized legal fees required to file patent
applications for our KH-30, KX-91 and S2 system.
Net Cash Provided by Financing Activities. Net cash generated from
financing activities decreased to $1,590,250 resulting from the net proceeds
from sale of a secured convertible term note on March 24, 2004 in the amount of
$1,750,000 which was partially offset by $159,750, as discussed below, of
financing costs paid. This compares to cash provided from financing activities
of $5,365,800 for the year ended March 31, 2003 resulting from net proceeds from
our private placement in May 2002.
On March 24, 2004, pursuant to a Securities Purchase Agreement dated as
of the same date, we completed the sale of a secured convertible term note in
the principal amount of $1,750,000. The note, which has a term of three years
and accrues interest at the greater of the prime rate of interest (as published
in The Wall Street Journal) or 4% per annum, is convertible into shares of our
common stock at a conversion price of $1.00 per share.
In connection with the sale of the note, we paid the purchaser of the
note a fee of $61,250 and issued the purchaser a seven-year common stock
purchase warrant to purchase up to 300,000 shares of our common stock at prices
ranging from $1.25 per share to $1.75 per share. Also, in connection with the
sale of the note, we agreed to register for resale the shares of common stock
into which the note is convertible and the warrant is exercisable.
During the past two fiscal years ended March 31, 2004 and 2003, we have
recorded aggregate losses from operations of $5,398,098 and have incurred total
negative cash flows from operations of $4,911,943 for the same two-year period.
The report of the independent registered public accounting firm with respect to
our financial statements included in this Report includes a "going concern"
qualification, indicating that our recurring losses and negative cash flows from
operations raise substantial doubt about our ability to continue as a going
concern. Our consolidated financial statements do not include any adjustment
that might result from the outcome of this uncertainty.
Our continued existence is dependent upon several factors, including
increased sales volumes, collection of existing receivables and the ability to
achieve profitability from the sale of our product lines. In order to increase
our cash flow, we are continuing our efforts to stimulate sales and cut back
expenses not directly supporting our sales and marketing efforts.
CONTRACTUAL OBLIGATIONS
Below is a table which presents our contractual obligations commitments
at March 31, 2004:
Less than After
Contractual Obligations Total 1 Year 1-3 Years 4-5 Years 5 Years
--------------------------------------------------------------------------------------------
Convertible Note $1,750,000 $349,998 $699,996 $700,006 $ -
Operating leases 381,603 128,303 219,540 33,760 -
Total contractual
Cash obligations $2,131,603 $478,301 $919,536 $733,766 $ -
REPORTING BY SEGMENTS
We are primarily a specialty chemicals company because of our
determination in fiscal 1998 to close our printing equipment division and focus
primarily on the sale of our 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. During the past three fiscal years, we have
derived additional revenues by acting as a graphic arts products distributor.
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The following table shows the proportion of total revenues by segment
in each of the last three fiscal years:
SPECIALTY
FISCAL YEAR GRAPHIC ARTS CHEMICALS
----------- ------------ ---------
2002................................ $1,061,317 $326,534
2003................................ 1,700,738 531,888
2004................................ 486,075 486,976
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 June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Exit
or Disposal Activities." SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized at their fair values
when the liabilities are incurred. Under previous guidance, liabilities for
certain exit costs were recognized at the date that management committed to an
exit plan, which is generally before the actual liabilities are incurred. SFAS
No. 146 is effective prospectively for exit or disposal activities initiated
after December 31, 2002. This statement had no effect on our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement amends the
disclosure and certain transition provisions of Statement 123, "Accounting for
Stock-Based Compensation." Its disclosure provisions, which apply to all
entities with employee stock-based compensation, are effective for fiscal years
ending after December 15, 2002. SFAS 148:
o requires all entities with stock-based employee compensation
arrangements to provide additional disclosures in their summary of
significant accounting policies note for entities that use the
intrinsic value method of APB No. 25, "Accounting for Stock Issued
to Employees", to account for employee stock compensation for any
period presented, their accounting policies note should include a
tabular presentation of pro forma net income and earnings per share
using the fair value method.
o permits entities changing to the fair value method of accounting for
employee stock compensation to choose from one of three transition
methods - the prospective method, the modified prospective method,
or the retroactive restatement method. The prospective transition
method, however, will not be available for entities that initially
apply the fair value method in fiscal years beginning after December
15, 2003.
o requires interim-period pro forma disclosures if stock-based
compensation is accounted for under the intrinsic value method in
any period presented. We do not expect the adoption of this
statement to have a material impact on our consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantors"
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guaranties of Indebtedness of Others." This interpretation
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elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. The disclosure provisions of this
interpretation were effective for our March 31, 2003 consolidated financial
statements. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after March 31, 2003. This interpretation had no effect on our
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. In December 2003,
the FASB issued a revision to Interpretation No. 46 to clarify some of the
provisions of Interpretation No. 46, and to exempt certain entities from its
requirements. The provisions of the interpretation need to be applied in the
first reporting period that ends after December 15, 2004, except for entities
that are considered to be special-purpose entities which need to be applied as
of December 31, 2003. This interpretation is not expected to have any effect on
our consolidated financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46R (revised
December 2003), Consolidation of Variable Interest Entities (VIE'S), which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, which was issued in January
2003. We will be required to adopt FIN 46R in the first fiscal period ending
after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and
noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. It is not anticipated that the effect of this
interpretation, if any, on our consolidated financial statements would be
material.
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 Report
will in fact occur.
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ITEM 7A. 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
As described above, we issued a $1,750,000 secured convertible term
note to Laurus Master Fund, Ltd. on March 24, 2004 to support our working
capital needs. The term 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 $17,500 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this
Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 13, 2003, we dismissed Grant Thornton, LLP as our independent
public accountants. Grant Thornton had been previously engaged as the principal
accountants to audit our financial statements. We engaged the firm of Imowitz
Koenig & Co., LLP, New York, New York, effective August 13, 2003, to act as our
independent auditors for the fiscal year ended March 31, 2004.
Grant Thornton's report on our financial statements for the past two
years did not contain an adverse opinion or a disclaimer of opinion, and the
report was not qualified or modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was approved by our
board of directors.
During our two most recent fiscal years, and the subsequent interim
periods, prior to August 13, 2003, there were no disagreements with Grant
Thornton on any matter of accounting principles or practices, financial
statement disclosure, auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Grant Thornton would have caused it to make
reference to the subject matter of the disagreement in connection with its
reports.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Report, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls"). This evaluation (the "Controls Evaluation")
was done under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO") and Interim Chief Financial
Officer (CFO). Rules adopted by the SEC require that in this section of the
Report we present the conclusions of our CEO and CFO about the effectiveness of
our Disclosure Controls based on and as of the date of the Controls Evaluation.
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CEO AND CFO CERTIFICATIONS
Appearing as Exhibits 31.1 and 31.2 to this Report are "Certifications"
of the CEO and the CFO. The Certifications are required pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This
section of this Report is the information concerning the Controls Evaluation
referred to in the Section 302 Certifications and this information should be
read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
DISCLOSURE CONTROLS
Disclosure Controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in our reports filed under
the Exchange Act, such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including,
without limitation, the CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including, without limitation, the CEO and CFO, does
not expect that the Disclosure Controls will prevent all error and fraud. A
control system no matter how well conceived and operated can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by (i) the
individual acts of certain persons, (ii) the collusion of two or more people, or
(iii) management override of the controls and procedures. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. As
such, over time controls may become inadequate because of changes in conditions
or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.
SCOPE OF THE CONTROLS EVALUATION
The CEO/CFO evaluation of our Disclosure Controls included a review of
the controls' objectives and design, the controls' implementation by our company
and the effect of the controls on the information generated for use in this
Report. In the course of the Controls Evaluation, management sought to identify
data errors, controls problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being undertaken. This
type of evaluation will be done on a quarterly basis so that the conclusions
concerning controls effectiveness can be reported in our future Quarterly
Reports on Form 10-QSB and Annual Reports on Form 10-KSB. The overall goals of
these various review and evaluation activities are to monitor our Disclosure
Controls and to make modifications, as necessary. In this regard, our intent is
that the Disclosure Controls will be maintained as dynamic controls systems that
change (including with improvements and corrections) as conditions warrant.
CONCLUSIONS
Based upon the Controls Evaluation, our CEO and CFO have concluded,
subject to the limitations noted above, that as of the end of the period covered
by this Report, our Disclosure Controls are effective to provide reasonable
assurance that information required to be disclosed in our reports filed under
the Exchange Act, such as this Report, is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
-17-
There have been no changes in our internal controls over financial
reporting during the fiscal quarter ended March 31, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
PART III
ITEMS 10, 11, 12, 13 AND 14.
Part III (Items 10 through 14) is omitted since we expect to file with
the U.S. Securities and Exchange Commission within 120 days after the close of
the fiscal year ended March 31, 2004, a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934 which involves the
election of directors. If for any reason such a statement is not filed within
such a period, this Report will be appropriately amended.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2): The response to this portion of Item 15 is submitted as
a separate section of this Report beginning on page F-1.
(a)(3) Exhibits:
Exhibit Number and Description
------------------------------
3.1 Articles of Incorporation of United Energy Corp.(1)
3.2 Amendment to the Articles of Incorporation.(2)
3.3 By-Laws of United Energy Corp.(1)
4.1 Articles of Incorporation: Articles Fourth, Fifth and Seventh.(1)
4.2 By-Laws: Article I: Sections: Six, Seven, Eight, Nine, Ten;
Article II:
Section Nine: Article IV: Section Two.(1)
4.3 Form of Stock Certificate of United Energy Corp.(1)
4.4 Secured Convertible Term Note dated March 24, 2004.(4)
10.1 Distribution Agreement and Option Agreement with International
Research and
Development, dated August 25, 1999.(1)
10.2 2001 Equity Incentive Plan, as amended on May 29, 2002.(5)
10.3 Securities Purchase Agreement, dated March 24, 2004, between
United Energy Corp. and Laurus Master Fund, Ltd.(4)
10.4 Secured Convertible Term Note, dated March 24, 2004.(4)
10.5 Security Agreement, dated March 24, 2004, between United Energy
Corp. and Laurus Master Fund, Ltd.(4)
10.6 Registration Rights Agreement, dated March 24, 2004, between
United Energy Corp. and Laurus Master Fund, Ltd.(4)
10.7 Common Stock Purchase Warrant, dated March 24, 2004.(4)
16.1 Letter re Change in Certifying Accountant.(3)
22.1 List of Subsidiaries.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) under the Exchange Act.
31.2 Certification of Interim Chief Financial Officer pursuant to
Rule 13a-14(a) under the Exchange Act.
32.1 Certification of Chief Executive Officer and Interim Chief
Financial Officer pursuant to Rule 13a-14(b) under the
Exchange Act and 18 U.S.C. Section 1350.
-18-
- ----------
(1) Incorporated by reference from the exhibits filed with the Form 10 on
June 20, 2000.
(2) Incorporated by reference from the exhibits filed with the Form 10-Q
for the period ended September 30, 2001.
(3) Incorporated by reference from the exhibits filed with the Form 8-K
filed on June 3, 2002.
(4) Incorporated by reference from the exhibits filed with the Form 8-K
filed on March 30, 2004.
(5) Incorporated by reference from the exhibits filed with the Schedule 14A
for the year ended March 31, 2003.
(6) Incorporated by reference from the exhibits filed with the Registration
Statement on Form SB-2 (No. 333-115484).
(b) Reports on Form 8-K.
During the three months ended March 31, 2004, we filed the following
Current Report on Form 8-K:
o Form 8-K dated March 24, 2004 (filed on March 30, 2004), which
described our private placement of a secured convertible term note
and common stock purchase warrant to Laurus Master Fund, Ltd.
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNITED ENERGY CORP.
Date: June 29, 2004 By: /s/ Ronald Wilen
----------------------------------
Ronald Wilen
Chief Executive Officer
By: /s/ James McKeever
----------------------------------
James McKeever
Interim Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Ronald Wilen
- ------------------------ Chief Executive Officer and Director June 29, 2004
Ronald Wilen (principal executive officer)
/s/ James McKeever
- ------------------------ Interim Chief Financial Officer June 29, 2004
James McKeever (principal financial and accounting
officer)
- ------------------------ Director June 29, 2004
Louis Bernstein
/s/ Andrea Pampanini
- ------------------------ Director June 29, 2004
Andrea Pampanini
/s/ Martin Rappaport
- ------------------------ Director June 29, 2004
Martin Rappaport
UNITED ENERGY CORP. AND SUBSIDIARIES
FORM 10-K
ITEMS 8 AND 14(A)(1) AND (2)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of United Energy Corp. and its
subsidiaries required to be included in Items 8 and 14(a) (1) are listed below:
Page
----
Reports of independent registered public accounting firms............... F-2,F-3
Consolidated balance sheets as of March 31, 2004 and March 31, 2003..... F-4
For the periods ended March 31, 2004, 2003 and 2002:
Consolidated statements of operations.......................... F-5
Consolidated statements of stockholders' equity (deficit)...... F-6
Consolidated statements of cash flows.......................... F-7
Notes to consolidated financial statements..............................F-8-F-21
Schedule II - Schedule of Valuation and Qualifying Accounts............. F-22
Other than Schedule II, the financial statement schedules of United
Energy Corp. and its subsidiaries to be included in Item 14(a)(2) are omitted
because the conditions requiring their filing do no exist or because the
required information is given in the financial statements, including the notes
thereto.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of United Energy Corporation:
We have audited the accompanying consolidated balance sheet of United Energy
Corporation (a Nevada corporation) and subsidiaries as of March 31, 2004 and the
related consolidated statements of income, cash flows and stockholders' equity
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Energy Corporation and subsidiaries as of March 31, 2004 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred recurring losses and negative cash flows
from operations. These matters raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
We have also audited the schedule II for the year ended March 31, 2004. In our
opinion, this schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information therein.
/s/ IMOWITZ, KOENIG & CO., LLP
- ------------------------------
New York, New York
May 11, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of United Energy Corporation:
We have audited the accompanying consolidated balance sheets of United Energy
Corporation (a Nevada corporation) and subsidiaries as of March 31, 2003 and
2002 and the related consolidated statements of income, cash flows and
stockholders' equity for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Energy Corporation and subsidiaries as of March 31, 2003 and 2002 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited the schedule II for the years ended March 31, 2003 and
2002. In our opinion, this schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information therein.
/s/ GRANT THORNTON LLP
- ----------------------
New York, New York
May 27, 2003
F-3
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
MARCH 31, MARCH 31,
2004 2003
--------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,518,025 $ 2,120,942
Accounts receivable, net of allowance for doubtful 393,941 496,715
accounts of $45,736 and $48,113 respectively
Inventory, net of allowance of $16,290 and 176,487 211,344
$16,290, respectively
Note receivable, net of reserve of $31,350 and 63,650 149,034
$30,000, respectively
Prepaid expenses and other current assets 80,296 104,527
------------ --------------
Total current assets 2,232,399 3,082,562
PROPERTY AND EQUIPMENT, net 243,313 268,597
OTHER ASSETS:
Goodwill, net 17,509 68,819
Patents, net of accumulated amortization of $67,032 309,424 229,508
and $44,253, respectively
Loans receivable 1,538 2,076
Deposits 76,385 31,385
Deferred financing costs, net of accumulated
amortization of $2,000 and $0, respectively 310,893 -
------------ -------------
Total assets $ 3,191,461 $ 3,682,947
============ =============
The accompanying notes are an integral part of these consolidated balance sheets
F-4
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2003
MARCH 31, MARCH 31,
2004 2003
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 276,115 $ 158,048
Accrued expenses 379,098 334,198
Convertible term note payable 349,998 -
Due to related parties 244,141 244,141
------------- ------------
Total current liabilities 1,249,352 736,387
LONG TERM LIABILITIES:
Convertible term note payable 1,120,133 -
------------- ------------
Total liabilities 2,369,485 736,387
------------- ------------
COMMITMENTS AND CONTINGINCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock: $0.01 par value 100,000,000 shares
authorized; 22,180,270 shares issued and outstanding 221,802 221,802
as of March 31, 2004 and 2003
Additional paid-in capital 11,143,266 10,698,752
Accumulated deficit (10,543,092) (7,973,994)
------------- ------------
Total stockholders' equity 821,976 2,946,560
------------- ------------
Total liabilities and stockholders' equity $ 3,191,461 $ 3,682,947
============= ============
The accompanying notes are an integral part of these consolidated balance sheets
F-5
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
---- ---- ----
REVENUES, net $ 972,051 $ 2,232,626 $ 1,387,851
COST OF GOODS SOLD 488,385 1,332,791 756,391
----------- ------------ -----------
Gross profit 483,666 899,835 631,460
----------- ------------ -----------
OPERATING EXPENSES:
Selling, general and administrative 2,674,968 3,627,983 1,763,446
Oil well operating and maintenance cost, net 102,662 - -
Executive services contributed by management - - 187,500
Depreciation, amortization and depletion 155,439 83,481 20,031
----------- ------------ -----------
Total operating expenses 2,933,069 3,711,464 1,970,977
----------- ------------ -----------
Loss from operations (2,449,403) (2,811,629) (1,339,517)
----------- ------------ -----------
OTHER INCOME (EXPENSE), net:
Interest income 8,765 59,377 1,792
Interest expense (6,683) (1,748) (6,200)
Impairment loss (121,777) - -
Legal settlement - (75,000) (20,651)
----------- ------------ -----------
Total other income (expense), net (119,695) (17,371) (25,059)
----------- ------------ -----------
Net loss $(2,569,098) $ (2,829,000) $(1,364,576)
=========== ============ ===========
BASIC AND DILUTED LOSS PER SHARE:
Total basic and diluted loss per share $ (0.12) $ (0.13) $ (0.09)
=========== ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES,
OUTSTANDING, basic and diluted 22,180,270 21,456,982 16,022,325
=========== ============ ===========
The accompanying notes are an integral part of these consolidated balance sheets
F-6
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2003, AND 2002
Additional Stock
Common Stock Pain-In Subscription Accumulated
Shares Amount Capital Receivable Deficit Total
------ ------ ------- ---------- ------- -----
BALANCE, April 1, 2001 15,830,270 $158,302 $4,042,052 $(25,000) $(3,780,418) $394,936
Common stock issued for
conversion of loan due
to shareholder 250,000 2,500 347,500 -- -- 350,000
Write-off of subscription
receivable -- -- (25,000) 25,000 -- --
Common stock issued for
services received 100,000 1,000 110,000 -- -- 111,000
Options granted in
consideration for
consulting services -- -- 455,900 -- -- 455,900
Executive services contributed
by management -- -- 187,500 -- -- 187,500
Net loss -- -- -- -- (1,364,576) (1,364,576)
---------- ------- --------- -------- ---------- -----------
BALANCE, March 31, 2002 16,180,270 161,802 5,117,952 -- (5,144,994) 134,760
Common stock issued for
Private placement 6,000,000 60,000 5,940,000 -- -- 6,000,000
Options granted in -- -- 125,000 -- -- 125,000
consideration for services
Private placement costs -- -- (484,200) -- -- (484,200)
Net loss -- -- -- -- (2,829,000) (2,829,000)
---------- ------- --------- -------- ---------- -----------
BALANCE, March 31, 2003 22,180,270 221,802 10,698,752 -- (7,973,994) 2,946,560
Options granted in
consideration
for services -- -- 9,700 -- -- 9,700
Warrants granted in
consideration
for convertible term note -- -- 281,670 -- -- 281,670
Warrants granted in
consideration
for finance services -- -- 153,144 -- -- 153,144
Net loss -- -- -- -- (2,569,098) (2,569,098)
---------- -------- ----------- -------- ------------ -----------
BALANCE, March 31, 2004 22,180,270 $221,802 $11,143,266 -- $(10,543,092) $821,976
========== ======== =========== ======== ============ ===========
The accompanying notes are an integral part of these consolidated statements.
F-7
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,569,098) (2,829,000) (1,364,576)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation, amortization and depletion 159,241 83,481 20,031
Impairment loss 121,777 - -
Non-cash consulting expense - - 111,000
Options granted in consideration for services 9,700 125,000 455,900
Executive service contributed by management - - 187,500
Changes in operating assets and liabilities
Decrease (increase) in accounts receivable, net 102,774 (427,645) 752,329
Decrease (increase) in inventory, net 34,857 76,513 (166,104)
Decrease in note receivable, net 85,384 - -
Decrease (increase) in prepaid expenses 24,231 19,423 (5,649)
Increase in deposits (45,000) (29,723) (277)
Increase in related party payable - 102,654 -
Increase (decrease) in accounts payable and accrued expenses 162,967 (119,479) (25,028)
---------- ---------- --------
Net cash used in operating activities (1,913,167) (2,998,776) (34,874)
---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments/receipts for loans receivable-net 538 (8,699) -
Payments for acquisition of property and equipment-net (177,843) (321,090) (13,409)
Payments for patent (102,695) (114,705) -
---------- ---------- --------
Net cash used in investing activities (280,000) (444,494) (13,409)
---------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible term note 1,750,000 - -
Payment of financing costs (159,750) - -
Payments on line of credit - (150,000) -
Proceeds from line of credit - - 150,000
Payment of private placement costs - (484,200) -
Proceeds from issuance of common stock - 6,000,000 -
---------- ---------- --------
Net cash provided by financing activities 1,590,250 5,365,800 150,000
---------- ---------- --------
Net (decrease) increase in cash and cash equivalents (602,917) 1,922,530 101,717
CASH AND CASH EQUIVALENTS, beginning of period 2,120,942 198,412 96,695
---------- ---------- --------
CASH AND CASH EQUIVALENTS, end of period 1,518,025 2,120,942 198,412
========== ========== ========
F-8
UNITED ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004, 2003 AND 2002
2004 2003 2002
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period
Interest $ 2,882 $ 2,361 $ 6,266
Income taxes $ 2,154 $ 800 $ 720
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of warrants with convertible term loan $ 281,670 $ - $ -
Issuance of warrants for financing costs $ 153,143 $ - $ -
Conversion of account receivable into note
receivable $ - $ 179,034 $ -
Conversion of accounts due to a shareholder into
common stock $ - $ - $ 350,000
The accompanying notes are an integral part of these consolidated statements.
F-9
UNITED ENERGY CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004, 2003 AND 2002
1. DESCRIPTION OF BUSINESS AND BUSINESS PLAN
United Energy Corp. ("United Energy" or the "Company") considers its
primary business focus to be the development, manufacture and sale of
environmentally friendly specialty chemical products, in particular its KH-30
and KX-91 oil well cleaners and KH-30S drag reducer products.
Green Globe is operated as a separate subsidiary of United Energy and sells
its products under the tradename Qualchem(TM). Green Globe gives United Energy
access to the chemistry and product lines of Green Globe which include
environmentally friendly paint strippers and cleaners, many of which have been
qualified for use by the U.S. Military. Green Globe developed a dual package of
cleaning and drying "wipes" which produce a clear, non-reflective coating on
glasses, computer screens and instrument panels. The "wipes" were developed for,
and have received U.S. Military approval for, the cleaning of the instrument
panels of combat aircraft.
United Energy's chemists have also developed an environmentally friendly
fire-retardant agent named FR-15. FR-15 begins as a concentrate which can be
mixed with varying amounts of water, depending on the anticipated use. FR-15
mixture also resists re-ignition once a fire has been extinguished. This product
can also be used to reduce odors, such as those from decomposing garbage, and
for soil remediation following petroleum-based contamination. Our FR-15 product
has been developed and successfully tested by several municipal fire
departments. Underwriters Laboratories ("UL") did not have an approved test for
FR-15 as a dispersant. A reformulation of FR-15 was developed to pass the UL
fire extinguisher test. The reformulated product is being resubmitted for
testing and certification by Underwriters Laboratories ("UL"). We expect that
sales of FR-15 will commence when the product receives UL certification.
United Energy also produces a specialty chemical product called
UNIPROOF(R), which is a photosensitive coating that is applied to paper to
produce what is known in the printing industry as proofing paper or "blue line"
paper.
Slick Barrier is an underwater protective coating which prevents the
adherence of barnacles to boat hulls. The product is another in the Company's
line of environmental products in that it is environmentally friendly and
biodegradable, which the Company believes to be particularly appealing in fresh
water marine applications. The product is still being tested on pleasure boats
throughout the United States and Europe. We expect to begin sales of the product
by the beginning of 2005 . A patent application on this product is in process.
During the past two fiscal years ended March 31, 2004 and 2003, we have
recorded aggregate losses from operations of $5,398,098 and have incurred total
negative cash flows from operations of $4,911,943 for the same 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.
Our continued existence is dependent upon several factors, including
increased sales volumes, collection of existing receivables and the ability to
achieve profitability from the sale of our product lines. In order to increase
our cash flow, we are continuing our efforts to stimulate sales and cut back
expenses not directly supporting our sales and marketing efforts.
F-10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of United Energy
Corp. and its 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.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation has been calculated
over the estimated useful lives of the assets ranging from 3 to 15 years.
Leasehold improvements are amortized over the lives of the respective leases (15
years), which are shorter than the useful life. The cost of maintenance and
repairs is expensed as incurred.
F-11
Depreciation and amortization expense for the years ended March 31, 2004, 2003
and 2002 was $132,660, $69,376, and $3,660, respectively.
Property and equipment consists of the following at March 31, 2004 and 2003:
2004 2003
----- ----
Furniture and fixtures................................................. $ 68,036 $ 67,094
Machinery and equipment................................................ 366,098 233,585
Vehicles............................................................... 78,986 35,548
Leasehold improvements................................................. 26,203 25,253
------------- -------------
.................................................................. 539,323 361,480
Less- Impairment loss.................................................. (70,467) --
Less- Accumulated depreciation and amortization........................ (225,543) (92,883)
------------- --------------
Property and equipment, net............................................ $ 243,313 $ 268,597
============= ==============
GOODWILL
The Company capitalized goodwill related to the acquisition of Green Globe
in September of 1998. Goodwill represents cost in excess of fair value on the
net assets acquired. Goodwill was amortized over a 15 year period using a
straight line amortization method until the adoption of SFAS No. 142 "Goodwill
and Other Intangible Assets," on April 1, 2002. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum life).
Effective April 1, 2002, the Company adopted the provisions of SFAS No. 142,
which had no material effect on its results of operations and financial
position.
As required by SFAS 142, the Company completed its transitional impairment
testing of intangible assets. Under SFAS 142, the goodwill impairment exists if
the net book value of a reporting unit exceeds its estimated fair value. The
impairment testing is performed in two steps: (i) the Company determines
impairment by comparing fair value of a reporting unit with its carrying value,
and (ii) if there is an impairment, the Company measures the amount of
impairment loss by comparing the implied fair value of goodwill with the
carrying amount of that goodwill.
As of March 31, 2004 the Company completed its annual impairment testing of
goodwill. The Company estimated the fair value of its goodwill by using
discounted cash flow analysis. As a result of the impairment tests, the Company
recorded a goodwill impairment charge of $51,310 related to the Green Globe
segment, during the year ended March 31, 2004.
Goodwill consists of the following at March 31, 2004 and 2003:
2004 2003
---- ----
Goodwill............................................................... $ 86,523 $ 86,523
Less: Impairment loss.................................................. 51,310 -
Less: Accumulated amortization......................................... 17,704 17,704
------------- --------------
Goodwill, net.......................................................... $ 17,509 $ 68,819
============= ==============
PATENTS
The Company capitalizes legal costs incurred to obtain patents.
Amortization begins when the patent is approved using the straight-line basis
over the estimated useful life of 15 years.
ACQUISITION OF OIL WELL LEASES
On April 4, 2003, the Company purchased oil leases for six oil wells in
Laramie County, Wyoming (the "Wyoming Wells") for an aggregate purchase price of
$97,616. In addition to operating the wells, the Company used the wells to test
its products. During the year ended March 31, 2004, the Wyoming Wells produced
oil which generated $34,636 in revenues and incurred operating costs and
start-up maintenance and repair costs of $137,298.
F-12
The Company has capitalized $17,352 for the oil leases and $68,571 for
equipment, net of depreciation, amortization and depletion at March 31, 2004.
The Company recorded an asset retirement obligation of $30,000 to cover the cost
of capping the wells in accordance with SFAS No. 143, "Accounting for Asset
Retirement Obligations." The Company maintains a refundable, interest-bearing
deposit of $75,000 with the State of Wyoming to cover the costs of eventual
capping the wells in the event they are no longer operated or abandoned.
As of March 31, 2004 the company reviewed the carrying value of the oil
well leases held by United Oil Corp. The Company estimated that the carrying
value of the oil leases should be adjusted due to the sale of the oil well
leases in April 2004(see subsequent events footnote). As a result the Company
recorded an oil leases' impairment loss of $70,467 which has been included as a
cumulative effect of an accounting change in the accompanying consolidated
statement of income for the year ended March 31, 2004.
ACCOUNTING FOR 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, 2004, the Company has stock based compensation plans, which
are described more fully in Note 10. As permitted by SFAS No.123, Accounting for
Stock Based Compensation, the Company accounts for stock-based compensation
arrangements with employees in accordance with provisions of Account Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Compensations expense for stock options issued to employees is based on the
difference on the date of grant, between the fair value of the Company's stock
and the exercise price of the option. Stock based employee compensation cost for
the years ended March 31, 2004, 2003 and 2002 was $0, $125,000 and $0,
respectively. The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of SFAS No.123 and Emerging
Issues Task Force (EITF) Issue No.96-18, "Accounting for Equity Instruments That
Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Stock based
compensation for non-employees was $9,700, $0 and $455,900 for the years ended
March 31, 2004, 2003 and 2002.
The following table illustrated the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to all stock based compensation:
F-13
Years ended March 31,
2004 2003 2002
Net Loss
As reported (2,569,098) (2,829,000) (1,364,576)
Add:
Stock based compensation expenses included in
reported net loss 9,700 125,000 455,900
Deduct:
Total stock based employee compensation expense
determined under fair value based method for all
awards (1,361,668) (1,194,605) (869,187)
Pro forma (3,921,066) (3,898,605) (1,777,863)
Basic and diluted loss per common share
As reported (0.12) (0.13) (0.09)
Pro forma (0.18) (0.18) (0.11)
PER SHARE DATA
SFAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS"). The standard requires the presentation of basic EPS and
diluted EPS. Basic EPS is calculated by dividing income/loss available to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is calculated by dividing income/loss
available to common shareholders by the weighted average number of common shares
outstanding adjusted to reflect potentially dilutive securities. Diluted loss
per share for the years ended March 31, 2004, 2003 and 2002 does not include
6,430,000, 6,195,020 and 1,860,000 stock options and warrants since the
inclusion of the outstanding stock options and warrants would be antidilutive.
CONCENTRATIONS OF RISK
Cash and Cash Equivalents
The Company maintains cash balances at financial institutions insured up to
$100,000 by the Federal Deposit Insurance Corporation. Balances exceeded these
insured amounts during the year.
Accounts and Notes Receivable
The Company has one customer which accounted for 50% and 87% of the total
accounts receivable at March 31, 2004 and 2003 respectively. Credit losses, if
any, have been provided for in the consolidated financial statements and are
based on management's expectations.
At March 31, 2003, the company converted an accounts receivable balance of
$179,034 to a one year note receivable. The note accrues interest at the rate of
4.5% and is paid down in 12 monthly payments and provides for a security
interest in the inventory held by this customer. During the year ended March 31,
2004, the customer returned goods in the amount of $30,225, which reduced the
note. Principal payments in the amount of $53,807 have also been paid. No
interest has been paid to date. On March 28, 2004, the customer agreed to a
balance of $95,000, which they will pay $5,000 per month.
Significant Customers
The Company's revenues from major customers, as a percentage of revenues,
for the years ended March 31, 2004, 2003 and 2002, are as follows:
F-14
2004 2003 2002
Customer A ................................................... 10% 0% 0%
Customer B ................................................... 0% 4% 12%
Customer C ................................................... 46% 59% 74%
Customer D ................................................... 0% 15% 0%
Customer E ................................................... 4% 10% 0%
Vendors
The Company has one vendor, which accounts for over 26%, 36% and 38% of the
Company's supplies purchases for the years ended March 31, 2004, 2003 and 2002,
respectively. The Company believes it can obtain the products from other vendors
on terms suitable to the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable,
note and loan receivable, inventory, accounts payable and accrued expenses
approximate their fair values due to the short-term maturity of these
instruments.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued FASB Interpretation No. 46R (revised
December 2003), Consolidation of Variable Interest Entities ("VIE'S"), which
addresses how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, which was issued in January
2003. The Company will be required to adopt FIN 46R in the first fiscal period
ending after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities
and noncontrolling interests of the VIE initially would be measured at their
carrying amounts with any difference between the net amount added to the balance
sheet and any previously recognized interest being recognized as the cumulative
effect of an accounting change. It is not anticipated that the effect of this
interpretation, if any, on the Company's Consolidated Financial Statements would
be material.
3. INVENTORY
Inventory consists of the following as of March 31, 2004 and 2003: 2004
2003
Paper.................................................................. $ 4,416 $ 19,957
Blended chemical....................................................... 104,668 111,544
Raw materials.......................................................... 67,403 79,843
------------- -------------
Total inventory........................................................ $ 176,487 $ 211,344
============= =============
4. REVOLVING LINE OF CREDIT
The Company had a revolving line of credit which allowed the Company to
borrow up to $1,000,000 from Fleet Bank. Borrowings under the credit line bore
interest at prime. Interest was payable monthly. The Company re-paid the line of
credit in full in May 2002 with the proceeds received from the private placement
and the credit line was closed.
F-15
5. RELATED PARTY TRANSACTIONS
The Company had an amount due to Robert Seaman, a major shareholder and
former director of the Company. Amounts due to a related party as of March 31,
2004 and 2003 is $244,141. These amounts are unsecured, 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.
6. CONVERTIBLE DEBT
On March 24, 2004, the Company issued a secured convertible term note in
the amount of $1,750,000, which has a term of three years and accrues interest
at the greater of the prime rate of interest, currently 4% per year (as
published in the Wall Street Journal), or 4% per year. Interest is payable
monthly in arrears commencing on May 1, 2004, and on the first day of each
consecutive calendar month after that date. Monthly amortization payments
commence on October 1, 2004, at the rate of $58,333.
The holder of the note has the option to convert all or a portion of the
note (including principal, interest and penalties) into shares of common stock
at any time, subject to specified limitations, at a fixed conversion price of
$1.00 per share. The conversion price is subject to adjustment for stock splits,
stock dividends and similar events. The Company's obligations under the note are
secured by a first priority security interest in the Company's assets.
Convertible term note $1,750,000
Discount on convertible term note (279,869)
----------
Current portion (349,998)
----------
Long-Term Debt $1,120,133
==========
Estimated maturities on long-term debt are as follows:
2004 $699,996
2005 420,137
7. COMMITMENTS AND CONTINGENCIES
LITIGATION
Sales Commission Claim
In July 2002, an action was commenced against us in the Court of Common
Pleas of South Carolina, Pickens County, brought by Quantum International
Technology, LLC and Richard J. Barrett. Plaintiffs allege that they were
retained as a sales representative of ours and in that capacity made sales of
our products to the United States government and to commercial entities.
Plaintiffs further allege that we failed to pay to plaintiffs agreed commissions
at the rate of 20% of gross sales of our products made by plaintiffs. The
complaint seeks an accounting, compensatory damages in the amount of all unpaid
commissions plus interest thereon, punitive damages in an amount treble the
compensatory damages, plus legal fees and costs. Plaintiffs maintain that they
are entitled to receive an aggregate of approximately $350,000 in compensatory
and punitive damages, interest and costs. In June 2003, the action was
transferred from the court in Pickens County to a Master in Equity sitting in
Greenville, South Carolina and was removed from the trial docket. The action, if
tried, will be tried without a jury. No trial date has yet been scheduled. We
believe we have meritorious defenses to the claims asserted in the action and
intend to vigorously defend the case. The outcome of this matter cannot be
determined at this time.
F-16
Texas Oil Field Accident
On October 29, 2002, an accident occurred at an oil well site near Odessa,
Texas, where the Company's equipment and products were being used in the
treatment of an oil well. Three lawsuits were commenced against the Company in
Texas state court in Crane County, arising from this incident and one additional
claim, though not formally commenced, was asserted. The insurance companies
involved have settled all of the claims and the Company has paid only $15,000 in
legal out of pocket fees relating to these claims.
Litigation Concerning a Former Employee
On or about May 16, 2003, the Company commenced an action against Jon
Hebert, a former employee of the Company in the United States District Court for
the District of New Jersey, seeking preliminary and permanent injunctive and
other relief for violations by Mr. Hebert of employment and non-disclosure
agreements between him and the Company, resulting in alleged disclosures by
Hebert of the Company's confidential and proprietary information and wrongful
solicitation of the Company's customers. The Company alleged that sales of
products manufactured or distributed by Hebert's new employer may, in addition,
infringe the Company's patents. After a hearing on the Company's motion for a
preliminary injunction, the Court denied the motion, but ordered expedited
proceedings in the matter.
On or about May 27, 2003, Mr. Hebert's current employer, Fluid Sciences,
L.L.C., commenced two actions against the Company and one of its wholly-owned
subsidiaries, Nor Industries, Inc. One of the actions was commenced in the 15th
Judicial District Court, Lafayette Parish, Louisiana. This action sought a
declaratory judgment that the agreements between the Company and Mr. Hebert are
not enforceable against Fluid Sciences, L.L.C as a matter of Louisiana's public
policy and laws. In addition, the action sought judgment that the Company's
efforts to enforce its agreements with Mr. Hebert are in restraint of trade and
constitute unfair competition entitling Fluid Sciences, L.L.C. to injunctive
relief and damages.
On or about May 27, 2003, a second action was commenced in the United
States District Court for the Western District of Louisiana, entitled Fluid
Sciences, L.L.C. v. United Energy Corp. and Nor Industries, Inc. The complaint
in this action alleged that Fluid Sciences was entitled to a declaratory
judgment that its products do not infringe the patents of the Company. The
parties to the Herbert action and the Fluid Sciences actions settled and
discontinued all of those actions without any further costs to the parties.
Included in the settlements were agreements from Fluid Sciences, L.L.C. and Jon
Herbert that, among other things, there will be no further violations of any
Company patents.
SMK Industries, Inc. v. Nor Graphics, Inc.
In its Form 10-K for the fiscal year ended March 31, 2002, the Company
reported an action commenced against it in 1997 by SMK Industries seeking
damages for breach of contract of approximately $120,000. On June 18, 2003, the
Company and plaintiff reached an agreement to settle and discontinue the
lawsuit. The Company paid $75,000.
LEASE COMMITMENTS
The Company leases office facilities, equipment and autos under operating
leases expiring on various dates through 2007. Certain leases contain renewal
options. The following is a schedule by years, of future minimum lease payments
under operating leases having remaining terms in excess of one year as of March
31, 2004.
Operating
Year Leases
---- ---------
2005 128,303
2006 116,550
2007 102,990
2008 33,760
--------
Total minimum lease payments $381,603
========
F-17
The expenses for all operating leases were $131,509, $120,214 and $107,304
for the years ended March 31, 2004, 2003 and 2002, respectively.
8. STOCKHOLDERS' EQUITY
In connection with the convertible term note (see note 6), the Company
issued warrants to purchase up to 300,000 shares of the Company's common stock
at an exercise price per share ranging from $1.00 to $1.50. The warrants are
fully exercisable for seven years from the date of issuance. The estimated fair
value of the warrants of $281,670 was recorded as a discount to the convertible
term note and is being amortized to interest expense over the life of the note.
The unamortized amount as of March 31, 2004 was $279,869. As of March 31, 2004,
these warrants were unexercised and outstanding.
The Company issued warrants in exchange for services provided in connection
with the issuance of the convertible term note to purchase up to 175,000 shares
of the Company's common stock at an exercise price per share of $1.50. The
warrants are fully exercisable for five years from the date of issuance. The
estimated fair value of $153,143 was recorded as a deferred financing cost and
is being amortized over the life of the note. The unamortized amount as of March
31, 2004 was $152,164. As of March 31, 2004, these warrants were unexercised and
outstanding.
On May 14, 2002, the Company issued, in a private placement, an aggregate
of 6,000,000 shares of its common stock at an aggregate price of $6,000,000. In
connection with the common stock issuance, the Company issued warrants to
purchase 3,000,000 of the Company's common stock at an exercise price of $2 per
share exercisable for a five year period. The Company incurred $484,000 in
issuance expenses in connection with the financing. In addition, the Company
issued 750,000 additional warrants to purchase 750,000 of the Company's common
stock at an exercise price of $0.60 per share with a five year term but not
exercisable during the first two years from the grant date for relinquishing
rights of immediate exercise of 500,000 warrants issued in connection with the
private placement.
As part of the private placement transaction, the Company began the process
of identifying and making employment offers to a new management team to focus on
sales and marketing of KH-30 and other products. Three of four of the new
management team accepted employment starting in May 2002. Agreements with each
of these executives have been cancelled as of March 31, 2004, and no new
agreements are in place.
During year ended March 31, 2002, the Company issued an aggregate of
100,000 shares of common stock in exchange for consulting services. These
issuances were recorded as an increase to equity and consulting expense for the
fair value of the shares of common stock on their respective grant dates.
Until December 31, 2001, the CEO and CFO provided services to the Company
for which they had not received any compensation. The financial statements
through that date reflect a charge and associated credit to shareholders' equity
reflecting the fair value of such contributed services. Both these individuals
received option and/or cash compensation commencing in the fourth quarter and
accordingly the Company ceased reflecting the value of contributed services as
of January 1, 2002
9. INCOME TAXES
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities
including those assets and liabilities recorded in connection with acquisitions.
Deferred tax assets and liabilities result principally from recording certain
expenses or income in the financial statements in a different period from
recognition for income tax purposes. As of March 31, 2004, the Company had a net
operating loss carryforward for tax purposes of approximately $8,540,000, which
is available to reduce its future taxable income and expires at various dates
through 2023. $106,000 expiring in 2015, $820,000 expiring in 2016, $889,000
expiring in 2017, $736,000 expiring in 2018, $100,000 expiring in 2020, $782,000
expiring in 2021, $2,692,000 expiring in 2022 and $2,415,000 expiring in 2023. A
full valuation allowance has been established against the deferred tax assets,
which are mainly related to the net loss carryforward, due to the uncertainties
surrounding the utilization of the carryforward and limitations resulting from a
change in control. There are no other significant timing differences.
F-18
Utilization of the net operating loss carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. The annual limitation
may result in the expiration of net operating loss carryforwards before
utilization.
10. EMPLOYEE BENEFITS PLAN
Stock Option Plans
In August 2001, the Company's stockholders approved, the 2001 Equity
Incentive Plan (the "2001 Plan"), which provides for the grant of stock options
to purchase up to 2,000,000 shares of common stock to any employee, non-employee
director, or consultant at the Board's discretion. Under the 2001 Plan, these
options may be exercised for a period up to ten years from the date of grant.
Options issued to employees are exercisable upon vesting, which can range
between the date of the grant to up to 5 years.
An amendment and restatement of the 2001 Equity Incentive Plan increasing
the number of shares for a total of 4,000,000 was approved by the Board of
Directors on May 29, 2002 and was approved by the shareholders at the annual
meeting.
Under the 2001 Plan, options are granted to non-employee directors upon
election at the annual meeting of stockholders at a purchase price equal to the
fair market value on the date of grant. In addition, the non-employee director
stock options shall be exercisable in full twelve months after the date of grant
unless determined otherwise by the compensation committee.
There were stock options to purchase 1,795,000 shares of common stock for
future grant as of March 31, 2004 under the 2001 equity incentive plan.
Fair Value of Stock Options
For disclosure purposes under SFAS No. 123, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option valuation
model with the following weighted-average assumptions:
2004 2003
---- ----
Expected life (in years)........................ 10% 10%
Risk-free interest rate......................... 4.54% 4.73%
Volatility...................................... 138.00 105.45
Dividend yield.................................. 0% 0%
Utilizing these assumptions, the weighted average fair value of options granted
with an exercise price equal to their fair market value at the date of the grant
is $1.32 and $1.78 for the years ended March 31, 2004 and 2003, respectively.
F-19
Summary Stock Option Activity
The following table summarizes stock option information with respect to all
stock options for the year ended March 31, 2004 and 2003:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE REMAINING
NUMBER OF EXERCISE CONTRACTUAL
SHARES PRICE LIFE (YEARS)
Options outstanding April 1, 2002.................... - -
Granted 1,110,000 $1.10
--------- -----
Options outstanding March 31, 2002 1,110,000 $1.10
Granted..................................... 2,142,500 $1.70
Cancelled................................... (807,480) $1.90
--------- -----
Options outstanding March 31, 2003................... 2,445,020 $1.38 9.10
====
Granted..................................... 475,000 $1.10
Cancelled (715,020) $1.28
--------- -----
Options outstanding March 31, 2004................. 2,205,000 $1.32 8.32
========= ===== ====
As of March 31, 2004, there were 1,881,459 options exercisable with
weighted average exercise price of $1.28 per share. Options outstanding at March
31, 2004 have an exercise price ranging between $0.70 to $2.00.
11. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public companies report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by management in
deciding how to allocate resources and in assessing performance.
F-20
The Company's total revenues, income from operations and identifiable
assets by segment for the year ended March 31, 2004, are as follows:
GRAPHIC SPECIALTY
ARTS CHEMICALS CORPORATE TOTAL
---- --------- --------- -----
Revenues ....................................... $ 486,075 $ 485,976 $ -- $ 972,051
============= ============= ============= =============
Gross profit..................................... $ 244,328 $ 239,338 $ -- $ 483,666
Sales, general and administrative expenses....... 146,351 1,270,148 1,258,469 2,674,968
Oil well operating and maintenance costs-net..... -- 102,662 -- 102,662
Depreciation, amortization and depletion......... -- 137,889 17,550 155,439
Impairment loss.................................. -- 121,777 -- 121,777
Interest expense (income)........................ 6,683 -- (8,765) (2,082)
------------- ------------- ------------- --------------
Income (loss) from continuing operations......... $ 91,294 $ ( 1,393,138) $ ( 1,267,254) $ (2,569,098)
============= ============= ============= =============
Cash and cash equivalents........................ $ -- $ -- $ 1,518,025 $ 1,518,025
Accounts receivable.............................. 229,997 163,944 -- 393,941
Inventory........................................ 42,452 134,035 -- 176,487
Note receivable.................................. 63,650 -- -- 63,650
Loan receivable.................................. -- -- 1,538 1,538
Prepaid expenses................................. -- -- 80,296 80,296
Fixed assets..................................... -- 211,492 31,821 243,313
Goodwill ........................................ -- 17,509 -- 17,509
Patent ........................................ -- 309,424 -- 309,424
Deferred note costs.............................. -- -- 310,893 310,893
Deposits ........................................ -- 75,000 1,385 76,385
------------- ------------- ------------- --------------
Total assets..................................... $ 336,099 $ 911,404 $ 1,943,958 $ 3,191,461
============= ============= ============= =============
Capital expenditures............................. $ -- $ 175,953 $ 1,890 $ 177,843
============= ============= ============= =============
The Company's total revenues, income from operations and identifiable assets by segment for the year ended
March 31, 2003, are as follows:
GRAPHIC SPECIALTY
ARTS CHEMICALS CORPORATE TOTAL
---- --------- --------- -----
Revenues ........................................ $ 1 ,700,738 $ 531,888 $ -- $ 2,232,626
============= ============= ============= =============
Gross profit..................................... $ 604,503 $ 295,332 $ -- $ 899,835
Sales, general and administrative expenses....... 203,921 1,902,206 1,521,856 3,627,983
Depreciation, amortization and depletion......... -- 72,490 10,991 83,481
Interest expense (income)........................ 1,748 -- (59,377) (57,629)
Legal settlement................................. -- -- 75,000 75,000
------------- ------------- ------------- ---------------
Income (loss) from continuing operations......... $ 398,834 $( 1,679,364) $ ( 1,548,470) $ (2,829,000)
============== ============= ============= =============
Cash and cash equivalents........................ $ -- $ -- $ 2,120,942 $ 2,120,942
Accounts receivable.............................. 449,046 47,669 -- 496,715
Inventory........................................ 62,669 148,675 -- 211,344
Note receivable.................................. 149,034 -- -- 149,034
Loan receivable.................................. -- -- 2,076 2,076
Prepaid expenses................................. -- -- 104,527 104,527
Fixed assets..................................... -- 221,116 47,481 268,597
Goodwill ........................................ -- 68,819 -- 68,819
Patent ........................................ -- 229,508 -- 229,508
Deposits ........................................ -- 30,000 1,385 31,385
------------- ------------- ------------- --------------
Total assets..................................... $ 660,749 $ 745,787 $ 2,276,411 $ 3,682,947
============== ============= ============= =============
Capital expenditures............................. $ -- $ 263,693 $ 57,397 $ 321,090
============== ============= ============= =============
F-21
The Company's total revenues and loss from operations by segment for the year ended March 31, 2002, are as follows:
GRAPHIC SPECIALTY
ARTS CHEMICALS CORPORATE TOTAL
Revenues......................................... $ 1,061,317 $ 326,534 $ -- $ 1,387,851
============== ============= ============= =============
Gross profit .................................... $ 496,385 $ 135,075 $ -- $ 631,460
Sales, general and administrative expenses ...... 241,097 274,802 1,247,547 1,763,446
Depreciation and amortization .................. -- 19,053 978 20,031
Interest expense (income) ....................... 6,200 -- (1,792) 4,408
Legal settlement................................. -- 20,651 -- 20,651
Executive services contributed by management..... -- -- 187,500 187,500
------------- ------------- ------------- ---------------
Income (loss) from continuing operations......... $ 249,088 $ ( 179,431) $ (1,434,233) $ (1,364,576)
============= ============= ============== ==============
Geographic Information
Revenues
2004 2003 2002
U.S. 850,021 2,193,101 1,387,851
Non-U.S. 122,030 39,525 -
------- ------ ---------
Totals 972,051 2,232,626 1,387,851
======= ========= =========
12. SUBSEQUENT EVENT FOOTNOTE
In April 2004, the Company sold the oil well leases located in Laramie
County, Wyoming for $15,000, and a 4.5% royalty on all future oil sales from
these wells. The Company is also in the process of receiving the refund of the
$75,000 deposit from the State of Wyoming.
F-22
SCHEDULE II
UNITED ENERGY CORP.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF YEAR
------- -------- ---------- -----------
For the fiscal year ended March 31, 2004:
Allowance for doubtful accounts......... $ 48,113 $ -- $ 2,377 $ 45,736
------------- -------------- -------------- -------------
Reserve for Note Receivable............. $ 30,000 $ 1,350 $ -- $ 31,350
------------- -------------- -------------- -------------
For the fiscal year ended March 31, 2003:
Allowance for doubtful accounts......... $ 4,795 $ 48,113 $ 4,795 $ 48,113
------------- -------------- -------------- -------------
Reserve for note receivable............. $ -- $ 30,000 $ -- $ 30,000
------------- -------------- -------------- -------------
For the fiscal year ended March 31, 2002:
Allowance for doubtful accounts......... $ 71,656 $ 4,795 $ 71,656 $ 4,795
------------- -------------- -------------- -------------
For the fiscal year ended March 31, 2004:
Reserve for inventory obsolescence...... $ 16,290 $ -- $ -- $ 16,290
------------- -------------- -------------- -------------
For the fiscal year ended March 31, 2003:
Reserve for inventory obsolescence...... $ 16,290 $ -- $ -- $ 16,290
------------- -------------- -------------- -------------
For the fiscal year ended March 31, 2002:
Reserve for inventory obsolescence...... $ -- 16,290 $ -- $ 16,290
------------- -------------- -------------- -------------
F-23