EXHIBIT 10.5

 

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION IN
RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO,
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

 

 

2005 SERIES B SECURED CONVERTIBLE NOTE DUE [____________], 2010

 

OF

 

UNITED ENERGY CORPORATION

 

 

Note No.: [____]

Original Principal Amount: $[__________]

Issuance Date: [___________], 2005

 

This note (“Note”) is one of a duly authorized issue of Notes of United Energy
Corporation, a corporation duly organized and existing under the laws of the
State of Nevada (the “Company”), designated as the Company's 2005 Series B
Secured Convertible Notes Due [____________], 2010 (“Maturity Date”) in an
aggregate principal amount (when taken together with the original principal
amounts of all other Notes) of $[____________] (together, the “Notes”).

FOR VALUE RECEIVED, the Company hereby promises to pay to the order of
[_________________________] or its registered assigns or successors-in-interest
(“Holder”) the principal sum of $[__________], together with all accrued but
unpaid interest thereon, if any, on the Maturity Date, to the extent such
principal amount and interest has not been repaid or converted into the
Company's Common Stock, $0.01 par value per share (the “Common Stock”), in
accordance with the terms hereof. Interest on the unpaid and unconverted
principal balance hereof shall accrue at the rate of six percent (6%) per annum
from the date of original issuance hereof (the “Issuance Date”). Payments on the
Note shall be made in accordance with Section 1 hereof. Interest on this Note
shall accrue daily commencing on the Issuance Date and shall be computed on the
basis of a 360-day year, 30-day months and actual days elapsed and shall be
payable in accordance with Section 1 hereof. Notwithstanding anything contained
herein, this Note shall bear interest on the due and unpaid Principal Amount
from and after the occurrence and during the continuance of an Event of Default
at the rate (the “Default Rate”) equal to the lower of thirteen percent (13%)
per annum or the highest rate permitted by law. Unless otherwise agreed or
required by applicable law, payments will be applied first to any unpaid
collection costs, then to unpaid interest and fees and any remaining amount to
principal.

 

 

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Except as otherwise provided herein, all payments of principal and interest on
this Note shall be made in lawful money of the United States of America by wire
transfer of immediately available funds to such account as the Holder may from
time to time designate by written notice in accordance with the provisions of
this Note or by Company check. Whenever any amount expressed to be due by the
terms of this Note is due on any day which is not a Business Day (as defined
below), the same shall instead be due on the next succeeding day which is a
Business Day.

Capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Purchase Agreement dated on or about March 18, 2005 pursuant to
which the Notes are subject to issuance (the “Purchase Agreement”). For purposes
hereof the following terms shall have the meanings ascribed to them below:

“Approved Stock Plan” shall mean any employee benefit plan, stock incentive plan
or other similar plan or arrangement which has been approved by the Board of
Directors of the Company or any authorized committee thereof, pursuant to which
the Company's securities may be issued to any employee, officer, consultant or
director for services provided to the Company.

“Bankruptcy Event” means any of the following events: (a) the Company commences
a case or other proceeding under any bankruptcy, reorganization, arrangement,
adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or
similar law of any jurisdiction relating to the Company; (b) there is commenced
against the Company any such case or proceeding that is not dismissed within 60
days after commencement; (c) the Company is adjudicated insolvent or bankrupt or
any order of relief or other order approving any such case or proceeding is
entered; (d) the Company suffers any appointment of any custodian or the like
for it or any substantial part of its property that is not discharged or stayed
within 60 days; (e) the Company makes a general assignment for the benefit of
creditors; (f) the Company fails to pay, or states that it is unable to pay or
is unable to pay, its debts generally as they become due; (g) the Company calls
a meeting of its creditors with a view to arranging a composition, adjustment or
restructuring of its debts; or (h) the Company, by any act or failure to act,
expressly indicates its consent to, approval of or acquiescence in any of the
foregoing or takes any corporate or other action for the purpose of effecting
any of the foregoing.

“Business Day” shall mean any day other than a Saturday, Sunday or a day on
which commercial banks in the City of New York are authorized or required by law
or executive order to remain closed.

“Change in Control Transaction” will be deemed to exist if (i) there occurs any
consolidation, merger or other business combination of the Company with or into
any other corporation or other entity or person (whether or not the Company is
the surviving corporation), or any other corporate reorganization or transaction
or series of related transactions in which in any of such events the voting
stockholders of the Company prior to such event cease to own fifty percent (50%)
or more of the voting power, or corresponding voting equity interests, of the
surviving corporation after such event (including without limitation any “going
private” transaction under Rule 13e-3 promulgated pursuant to the Exchange Act
or tender offer by the Company under Rule 13e-4 promulgated pursuant to the
Exchange Act for twenty percent (20%) or more of the Company's Common Stock),
(ii) any person (as defined in Section 13(d) of the

 

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Exchange Act), together with its affiliates and associates (as such terms are
defined in Rule 405 under the Act), beneficially owns or is deemed to
beneficially own (as described in Rule 13d-3 under the Exchange Act without
regard to the 60-day exercise period) in excess of fifty percent (50%) of the
Company's voting power, (iii) there is a replacement of more than one-half of
the members of the Company’s Board of Directors which is not approved by those
individuals who are members of the Company's Board of Directors on the date
thereof, (iv) in one or a series of related transactions, there is a sale or
transfer of all or substantially all of the assets of the Company, determined on
a consolidated basis, or (v) the Company enters into any agreement providing for
an event set forth in (i), (ii), (iii) or (iv) above.

“Conversion Price” shall equal [the Conversion Price of the Preferred Stock as
of the date of issuance of this Note] (which Conversion Price shall be subject
to adjustment as set forth herein).

“Convertible Securities” means any convertible securities, warrants, options or
other rights to subscribe for or to purchase or exchange for, shares of Common
Stock.

“Effective Date” means the date on which a Registration Statement covering all
the Underlying Shares and other Registrable Securities (as defined in the
Registration Rights Agreement) is declared effective by the SEC.

“Effective Registration” shall mean (i) the resale of all Registrable Securities
(as defined in the Registration Rights Agreement) is covered by an effective
registration statement in accordance with the terms of the Registration Rights
Agreement which registration statement is not subject to any suspension or stop
order; (ii) the resale of such Registrable Securities may be effected pursuant
to a current and deliverable prospectus that is not subject at the time to any
blackout or similar circumstance; and (iii) the requisite number of shares of
Common Stock shall have been duly authorized and reserved for issuance as
required by the terms of the Purchase Agreement and this Note.

 

“Excluded Issuances” shall mean shares of Common Stock (a) deemed to have been
issued by the Company in connection with an Approved Stock Plan (regardless of
the applicable exercise or conversion price); (b) deemed to have been issued
upon issuance of the Notes or the Warrants, issued upon conversion of the Notes
or exercise of the Warrants or otherwise issued in connection with the
transactions contemplated in the Purchase Agreement (including any securities of
the Company issued or issuable to the Collateral Agent or any of its affiliates
in connection with consulting services to be provided to the Company);
(c) issued upon exercise of Options or Convertible Securities which are
outstanding on the date immediately preceding the Issuance Date, provided that
such issuance of shares of Common Stock upon exercise of such Options or
Convertible Securities is made pursuant to the terms of such Options or
Convertible Securities in effect on the date immediately preceding the Issuance
Date, such Options or Convertible Securities are not amended after the date
immediately preceding the Issuance Date other than with respect to Options
originally issued pursuant to an Approved Stock Plan and the purchase or
exercise price provided for in any such Options, the additional consideration,
if any, payable upon the issue, conversion, exchange or exercise of any such
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable or exercisable for Common Stock does not change
at any time after the Issuance Date; (d) issued to the public

 

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pursuant to an underwritten offering registered pursuant to the Securities Act
(but in all events excluding offerings pursuant to "equity lines" or similar
products); (e) issued pursuant to a Strategic Financing; or (f) issued or deemed
to be issued by the Company with the prior approval of the Required Holders.

 

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

 

“Issuance Date” shall mean the date of this Note.

“Options” shall mean any rights, warrants or options to subscribe for or
purchase common stock or Convertible Securities of the Company.

“Payment Date” shall mean the first Trading Day of each January, April, July and
October. The first Payment Date under this Note shall be the first Trading Day
of July 2004.

“Principal Amount” shall refer to (i) the original principal amount of this
Note, plus (ii) all accrued but unpaid interest hereunder and any default
payments owing under the Agreements but not previously paid or added to the
Principal Amount, less (iii) all amounts of principal previously repaid or
converted.

“Principal Market” shall mean a principal market or exchange on which the Common
Stock is then listed for trading.

“Registration Statement” shall have the meaning set forth in the Registration
Rights Agreement.

“Required Holders” means the Holders of not less than 50% in aggregate principal
amount of the Notes then outstanding exclusive of any Notes then owned by either
the Company or any of its Affiliates.

 

“Securities Act” shall mean the Securities Act of 1933, as amended.

 

“Shareholder Approval” means the approval of the stockholders of the Company at
a duly convened meeting of stockholders of the Company, for the issuance of all
Securities as defined in the Purchase Agreement.

 

“Strategic Financing” shall mean the issuance of Common Stock or Options or
Convertible Securities of the Company in connection with any acquisition by the
Company, by whatever means, of any business, assets or technologies, or to any
strategic investor, vendor, customer, lease or similar arrangement, the primary
purpose of which is not to raise equity capital.

 

“Trading Day” shall mean a day on which there is trading on the Principal
Market.

The following terms and conditions shall apply to this Note:

Section 1.

Payments of Principal and Interest.

 

 

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(a)   Interest Only Payments. On each Payment Date beginning three months from
the issuance date and continuing through and including [_________], 2010 and
continuing on each three month anniversary thereafter, the Company shall pay to
the Holder all interest accrued but unpaid as of such Payment Date on the entire
Principal Amount of this Note (“Interest Amount”), in accordance with this
Section 1.

(b)   Quarterly Payments. On each such Payment Date, the Company shall repay
one-twentieth (1/20) of the original Principal Amount, together with interest
accrued but unpaid on that Payment Date (collectively, “Quarterly Amount”), in
accordance with this Section 1.

(c)   Cash or Common Stock. Subject to the terms hereof, at the election of the
holder, the Company shall satisfy payment of the Interest Amount in full on each
of the Payment Dates either in cash or in shares of Common Stock (but not both).
The holder shall notify the Company of its election to be paid in cash ten days
prior to the Payment Date. Failing such notice, the Interest Amount shall be
paid in Shares of Common Stock. If the Company is required to pay any Interest
Amount in cash on a Payment Date, then on such Payment Date the Company shall
pay to the Holder an amount equal to such Interest Amount in satisfaction of
such obligation. If the Interest Amount is required to be paid in shares of
Common Stock, the number of such shares to be issued for such Payment Date shall
be the number determined by dividing (x) the Interest Amount by (y) the
Conversion Price as of such Payment Date. Such shares shall be issued and
delivered within ten (10) Trading Days following such Payment Date and shall be
duly authorized, validly issued, fully paid, non-assessable and free and clear
of all encumbrances. If any Holder does not receive the requisite number of
shares of Common Stock in the form required above within such five Trading Day
period, the Holder shall have the option of either (a) requiring the Company to
issue and deliver all or a portion of such shares of Common Stock, or (b)
canceling such election to pay such Interest Amount in Common Stock (in whole or
in part), in which case the Company shall immediately pay in cash the full such
Interest Amount due hereunder or such portion as the Holder specifies is to be
paid in cash instead of Common Stock.

(d)   No Payment in Stock. Notwithstanding anything to the contrary herein, the
Company shall be prohibited from paying the Interest Amount in shares of Common
Stock (and must deliver cash in respect thereof) on the applicable Payment Date
if (i) at any time on or after the issuance date there fails to exist, on the
applicable Payment Date, an Effective Registration, or (ii) the Company at any
time is subject to any Bankruptcy Event, unless otherwise waived in writing by
the Holder in whole or in part at the Holder’s option.

(e)   Ownership/Issuance Limitations. Notwithstanding anything to the contrary
herein, the Company shall be prohibited from paying the Interest Amount in
shares of Common Stock (and must deliver cash in respect thereof) on the
applicable Payment Date to the extent, and only to the extent, that such payment
in shares of Common Stock would result in the Holder hereof exceeding the
limitations contained in Section 10 below. In such event, then the Company on
the Payment Date shall pay such portion of the Interest Amount in shares of
Common Stock as may be effected without exceeding such limitations, and at the
option of the Holder either the Payment Date for the balance of the Interest
Amount shall be extended until such time as such stock payment can be made
without violating Section 10, or such balance shall be paid in cash.

 

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(f)          Certain Additional Payments by the Company. Any payment by the
Company to the Holder hereunder, whether for principal, interest or otherwise,
shall not be subject to any deduction, withholding or offset for any reason
whatsoever except to the extent required by law, and the Company represents that
to its best knowledge no deduction, withholding or offset is so required for any
tax or any other reason.

 

Section 2.        Senior Position/Subsequent Debt. The Notes are and shall be
senior to all other indebtedness of the Company. So long as any Principal Amount
of Notes is outstanding, the Company shall not directly or indirectly, without
the consent of the Required Holders, incur or permit to exist any indebtedness
which is senior to the Notes, or incur, assume or permit to exist any lien,
mortgage, security interest or encumbrance (other than statutory liens imposed
by law incurred in the ordinary course of business for sums not yet delinquent
or being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in respect
thereof) on any of its assets, except for capital leases, financing for
equipment and purchase money security interests.

 

Section 3.

Conversion.

 

(a) Conversion Right. Subject to the terms hereof and restrictions and
limitations contained herein, the Holder shall have the right, at such Holder's
option, at any time, to convert the outstanding Principal Amount under this Note
in whole or in part (provided that in no event shall a conversion pursuant to
this Section 3(a) be for less than the lower of (i) the remaining Principal
Amount and all accrued and unpaid interest, or (ii) $50,000.00) at the then
applicable Conversion Price by delivering to the Company a fully executed notice
of conversion in the form of conversion notice attached hereto as Exhibit A (the
“Conversion Notice”), which may be initially transmitted by facsimile (provided
the original Conversion Notice and this Note is delivered to the Company within
3 Trading Days following such facsimile transmission). Notwithstanding anything
to the contrary herein, this Note and the outstanding Principal Amount and all
accrued but unpaid interest hereunder shall not be convertible into Common Stock
to the extent that such conversion would result in the Holder hereof exceeding
the limitations contained in, or otherwise violating the provisions of, Section
10 below. For clarification purposes, any partial conversions of the outstanding
Principal Amount under this Note pursuant to this Section 3(a) shall not affect
the Company’s obligation to repay the Quarterly Amount as it relates to the
remaining Principal Amount as provided in Section 1 above.

 

(b)

intentionally omitted

 

(c)

Common Stock Issuance upon Conversion.

(i)    Conversion Date Procedures. Upon conversion of this Note pursuant to
Section 3(a) above, the outstanding Principal Amount hereunder shall be
converted into such number of fully paid, validly issued and non-assessable
shares of Common Stock, free of any liens, claims and encumbrances as is
determined by dividing the outstanding Principal Amount being converted by the
Conversion Price. The date of any Conversion Notice hereunder shall be referred
to herein as the “Conversion Date”. If a conversion under this Note cannot be
effected in full in accordance with the terms hereof, or if the Holder is
converting less than all of the outstanding Principal Amount hereunder pursuant
to a Conversion Notice, the Company shall

 

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promptly deliver to the Holder (but no later than ten Trading Days after the
Conversion Date) a Note (containing the same terms as the Note herein) for such
outstanding Principal Amount as has not been converted if this Note has been
surrendered to the Company for partial conversion. The Holder shall surrender
this Note to the Company within 3 Trading Days of any conversion, in whole or in
part. The Company shall return a Note of lesser principal amount, having taken
the conversion amount out of the face amount of the surrender Note, if any.

(ii)     Stock Certificates or DWAC. Providing that an Effective Registration
Statement is effective, or providing the Conversion Notice is dated more than
two (2) years after the Issuance Date (provided the Holder is not then deemed an
affiliate of the Company in the case of reliance on the 2-year holding period),
the Company will deliver to the Holder not later than five (5) Trading Days
after the Conversion Date, a certificate or certificates which shall be free of
restrictive legends and trading restrictions, representing the number of shares
of Common Stock being acquired upon the conversion of this Note. In lieu of
delivering physical certificates representing the shares of Common Stock
issuable upon conversion of this Note, provided the Company's transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities
Transfer (“FAST”) program, upon request of the Holder, the Company shall use
commercially reasonable efforts to cause its transfer agent to electronically
transmit such shares issuable upon conversion to the Holder (or its designee),
by crediting the account of the Holder’s (or such designee’s) prime broker with
DTC through its Deposit Withdrawal Agent Commission system (provided that the
same time periods herein as for stock certificates shall apply). If in the case
of any conversion hereunder, such certificate or certificates are not delivered
to or as directed by the Holder by the fifth Trading Day after the Conversion
Date, the Holder shall be entitled by written notice to the Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return
this Note tendered for conversion. If the Company fails to deliver to the Holder
such certificate or certificates (or shares through DTC) pursuant to this
Section 3(c) (free of any restrictions on transfer or legends, if such shares
have been registered or if the Note has been held beyond two years from the
Issuance Date) in accordance herewith, prior to the sixth Trading Day after the
Conversion Date, the Company shall pay to the Holder, in cash, an amount equal
to .25% of the Principal Amount subject to such conversion for each trading day
thereafter until such certificate(s) or shares through DTC are delivered to the
Holder or until the conversation is rescinded by the Holder, whichever shall
first occur.

Section 4.

Conversion Price Adjustments.

(a)         Stock Dividends, Splits and Combinations. If the Company, at any
time while the Notes are outstanding (A) shall pay a stock dividend or otherwise
make a distribution or distributions on any equity securities (including
instruments or securities convertible into or exchangeable for such equity
securities) in shares of Common Stock, (B) subdivide outstanding Common Stock
into a larger number of shares, or (C) combine outstanding Common Stock into a
smaller number of shares, then the Conversion Price in effect immediately prior
to such event shall be adjusted to a number equal to such Conversation Price
multiplied by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding before such event and the denominator of which shall
be the number of shares of Common Stock outstanding after such event. Any
adjustment made pursuant to this section shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such

 

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dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision or combination.

(b)        Distributions. If the Company, at any time while the Notes are
outstanding, shall distribute to all holders of Common Stock evidences of its
indebtedness or assets or cash or rights or warrants to subscribe for or
purchase any security of the Company, then concurrently with such distributions
to holders of Common Stock, the Company shall distribute to holders of the Notes
the amount of such indebtedness, assets, cash or rights or warrants which the
holders of Notes would have received had all their Notes been converted into
Common Stock at the Conversion Price immediately prior to the record date for
such distribution.

(c) Antidilution Adjustment of Conversion Price upon Issuance of Common Stock.
If and whenever in the period commencing after the Issuance Date and ending 24
months thereafter (the “Antidilution Period”), the Company issues or sells, or
in accordance with this Section 4 is deemed to have issued or sold, any shares
of Common Stock, with the exception of Excluded Issuances, for a consideration
per share (the "New Securities Issuance Price") less than the Conversion Price
in effect immediately prior to such time (each such sale or issuance, a
"Dilutive Issuance"), then concurrent with such Dilutive Issuance, the
Conversion Price then in effect shall be reduced to an amount equal to the New
Securities Issuance Price. If the Company, in the period following the
Antidilution Period and ending upon full payment of the Note, intends to issue
or sell shares for a New Securities Issuance Price which would result in a
Dilutive Issuance (other than Excluded Issuances), it shall first give notice to
the Holder of such intended sale and/or issuance and the terms thereof, and the
Holder shall have the right by giving notice to the Company within ten (10) days
thereafter, to purchase a portion of such securities under the same terms, which
portion shall be based upon the Holder’s proportionate shareholding of the
Company, as if each Holder had converted the Principal Amount of the then
outstanding Notes immediately prior to such sale or issuance.

For purposes of determining the adjusted Conversion Price under this Section 4
during the Antidilution Period, the following shall be applicable:

(i)          Issuance of Options. If the Company in any manner grants or sells
any Options (other than Excluded Issuances) and the lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such Option
or upon conversion, exchange or exercise of any Convertible Securities issuable
upon exercise of such Option is less than the Conversion Price in effect
immediately prior to such Dilutive Issuance, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section 4(c)(i), the "lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such Option
or upon conversion, exchange or exercise of any Convertible Securities issuable
upon exercise of such Option" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion, exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Conversion
Price shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of

 

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such Options or upon the actual issuance of such Common Stock upon conversion,
exchange or exercise of such Convertible Securities.

(ii)         Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities (other than Excluded Issuances) and
the lowest price per share for which one share of Common Stock is issuable upon
such conversion, exchange or exercise thereof is less than the Conversion Price
in effect immediately prior to such Dilutive Issuance, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance of sale of such Convertible Securities for
such price per share. For the purposes of this Section 4(c)(ii), the "lowest
price per share for which one share of Common Stock is issuable upon such
conversion, exchange or exercise" shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion, exchange or exercise of such
Convertible Security. No further adjustment of the Conversion Price shall be
made upon the actual issuance of such Common Stock upon conversion, exchange or
exercise of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which adjustment
of the Conversion Price had been or is to be made pursuant to other provisions
of this Section 6(a), no further adjustment of the Conversion Price shall be
made by reason of such issue or sale.

(iii)        Change in Option Price or Rate of Conversion. If the purchase or
exercise price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable or exercisable for Common Stock changes at any time (other than
Excluded Issuances, in each case), the Conversion Price in effect at the time of
such change shall be adjusted to the Conversion Price which would have been in
effect at such time had such Options or Convertible Securities provided for such
changed purchase price, additional consideration or changed conversion rate, as
the case may be, at the time initially granted, issued or sold. For purposes of
this Section 4(c)(iii), if the terms of any Option or Convertible Security that
was outstanding as of the Issuance Date are changed in the manner described in
the immediately preceding sentence, then such Option or Convertible Security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. On the
expiration of any Option or Convertible Security not exercised, the applicable
Conversion Price then in effect shall forthwith be increased to the Conversion
Price that would have been in effect at the time of such expiration had such
Stock Purchase Rights or Convertible Securities never been issued. No adjustment
shall be made if such adjustment would increase the applicable Conversion Price
by an amount in excess of the adjustment originally made to the Conversion Price
in respect of the issue, sale or grant of the applicable Option or Convertible
Security. Notwithstanding anything to the contrary herein, in no event shall an
adjustment to the Conversion Price be made retroactively with respect to any
portion of the Note converted to Common Stock or repaid in Common Stock prior to
the actual date of the dilutive issuance or change. In addition, to clarify for
purposes of this Section 4, if an Option or Convertible Security has a price
reset or similar provision that would cause the price to adjust based on a
future event or contingency, then the "lowest price per share for which one
share of Common Stock is issuable upon the exercise of any such Option or upon
conversion, exchange or exercise of any Convertible Securities issuable

 

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upon exercise of such Option" shall not become such adjusted price unless and
until the happening of such event or contingency that actually gives effect to
the adjustment.

(iv)        Calculation of Consideration Received. In case any Option is issued
in connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, then solely
for purposes of this Section 4, the Options will be deemed to have been issued
for a consideration equal to the exercise price of such Option. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the gross amount received by the Company therefor. If any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of marketable securities, in which case the amount of
consideration received by the Company will be the arithmetic average of the
Closing Sale Prices of such securities during the ten (10) consecutive trading
days ending on the date of receipt of such securities. The fair value of any
consideration other than cash or securities will be determined jointly by the
Company and Required Holders in good faith. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event requiring
valuation (the "Valuation Event"), the fair value of such consideration will be
determined within five Business Days after the tenth (10th) day following the
Valuation Event by an independent, reputable appraiser selected by the Company
and the Required Holders. The determination of such appraiser shall be deemed
binding upon all parties absent manifest error and the fees and expenses of such
appraiser shall be borne equally by the Company and the Required Holders.

(d)        Rounding of Adjustments. All calculations under this Section 4 or
Section 1 shall be made to the nearest cent or the nearest 1/100th of a share,
as the case may be.

(e)        Notice of Adjustments. Whenever any Conversion Price is adjusted as
provided herein, the Company shall promptly deliver to each holder of the Notes,
a notice setting forth the Conversion Price after such adjustment and setting
forth a brief statement of the facts requiring such adjustment, provided that
any failure to so provide such notice shall not affect the automatic adjustment
hereunder.

(f)      Change in Control Transactions. In case of any Change in Control
Transaction, the Holder shall have the right thereafter to convert this Note
(unless and until the Note has already been redeemed pursuant to the terms of
this Note), in whole or in part, at the then applicable Conversion Price into
the shares of stock and other securities, cash and/or property receivable upon
or deemed to be held by holders of Common Stock following such Change in Control
Transaction, and the Holder shall be entitled upon such event to receive such
amount of securities, cash or property as the shares of the Common Stock of the
Company into which this Note could have been converted immediately prior to such
Change in Control Transaction would have been entitled if such conversion were
permitted, subject to such further applicable adjustments set forth in this
Section 4. The terms of any such Change in Control Transaction shall include
such terms so as to continue to give to the Holders the right to receive the
amount of securities, cash and/or property upon any conversion or redemption
following such Change in Control Transaction to which a holder of the number of
shares of Common Stock

 

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deliverable upon such conversion would have been entitled in such Change in
Control Transaction, and interest payable hereunder shall be in cash or such new
securities and/or property, at the Holder’s option. This provision shall
similarly apply to successive reclassifications, consolidations, mergers, sales,
transfers or share exchanges.

(g) Notice of Certain Events. If:

A.

the Company shall declare a dividend (or any other distribution) on its Common
Stock; or

 

B.

the Company shall declare a special nonrecurring cash dividend on or a
redemption of its Common Stock; or

 

C.

the Company shall authorize the granting to all holders of the Common Stock
rights or warrants to subscribe for or purchase any shares of capital stock of
any class or of any rights; or

 

D.

the approval of any stockholders of the Company shall be required in connection
with any reclassification of the Common Stock of the Company, any consolidation
or merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, of any compulsory share of
exchange whereby the Common Stock is converted into other securities, cash or
property; or

 

E.

the Company shall authorize the voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company,

 

F.

the Company shall issue securities constituting a Dilutive Issuance,

 

then the Company shall cause to be filed at each office or agency maintained for
the purpose of conversion of this Note, and shall cause to be mailed to the
Holder at its last address as it shall appear upon the books of the Company, on
or prior to the date notice to the Company's stockholders generally is given, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution, redemption, rights or warrants, or if a record is
not to be taken, the date as of which the holders of Common Stock of record to
be entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification, securities
issuance, consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange.

Section 5.         Reservation and Issuance of Underlying Securities. The
Company covenants that it will at all times reserve and keep available out of
its authorized and unissued Common Stock solely for the purpose of issuance upon
conversion of this Note (including repayments in stock),

 

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free from preemptive rights or any other actual contingent purchase rights of
persons other than the holders of the Notes, not less than such number of shares
of Common Stock as shall (subject to any additional requirements of the Company
as to reservation of such shares set forth in the Purchase Agreement) be
issuable (taking into account the adjustments under this Section 4 but without
regard to any ownership limitations contained herein) upon the conversion of
this Note hereunder in Common Stock (including repayments in stock). The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly authorized, validly issued, fully paid and nonassessable.

Section 6.        No Fractions. Upon a conversion hereunder the Company shall
not be required to issue stock certificates representing fractions of shares of
Common Stock, but may if otherwise permitted, make a cash payment in respect of
any final fraction of a share based on the closing price of a share of Common
Stock at such time. If the Company elects not, or is unable, to make such a cash
payment, the Holder shall be entitled to receive, in lieu of the final fraction
of a share, one whole share of Common Stock.

Section 7.   Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the conversion of this Note (including repayment in stock)
shall be made without charge to the holder hereof for any issue or transfer tax
or other incidental expense in respect of the issuance of such certificate, all
of which taxes and expenses shall be paid by the Company, and such certificates
shall be issued in the name of the Holder or in such name or names as may be
directed by the Holder; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
Holder, this Note when surrendered for conversion shall be accompanied by an
assignment form; and provided further, that the Company shall not be required to
pay any tax or taxes which may be payable in respect of any such transfer.

Section 8.        Cancellation. After all of the Principal Amount (including
accrued but unpaid interest and default payments at any time owed on this Note)
have been paid in full or converted into Common Stock, this Note shall
automatically be deemed canceled and the Holder shall promptly surrender the
Note to the Company at the Company’s principal executive offices.

Section 9. Notices Procedures. Any and all notices or other communications or
deliveries to be provided by the Holder hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by confirmed facsimile, or by a nationally recognized overnight courier service
to the Company at the facsimile telephone number or address of the principal
place of business of the Company as set forth in the Purchase Agreement. Any and
all notices or other communications or deliveries to be provided by the Company
hereunder shall be in writing and delivered personally, by facsimile, or by a
nationally recognized overnight courier service addressed to the Holder at the
facsimile telephone number or address of the Holder appearing on the books of
the Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed delivered (i) upon receipt, when delivered
personally, (ii) when sent by facsimile, upon receipt if received on a Business
Day prior to 5:00 p.m. (Eastern Time), or on the first Business Day following
such receipt if received on a Business Day after 5:00 p.m. (Eastern Time) or
(iii) upon receipt, when deposited with a nationally recognized overnight
courier service.

 

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Section 10.

Conversion Limitations.

9.9% Limitation. Notwithstanding anything to the contrary contained herein, the
number of shares of Common Stock that may be acquired by the Holder upon any
conversion pursuant to the terms hereof, other than the Mandatory Conversion
(which shall be given effect regardless of the limits otherwise imposed by this
Section 10, unless waived in writing by the Company) shall not exceed a number
that, when added to the total number of shares of Common Stock deemed
beneficially owned by such Holder (other than by virtue of the ownership of
securities or rights to acquire securities (including the Notes and Warrants)
that have limitations on the Holder’s right to convert, exercise or purchase
similar to the limitation set forth herein), together with all shares of Common
Stock deemed beneficially owned at such time (other than by virtue of the
ownership of securities or rights to acquire securities that have limitations on
the right to convert, exercise or purchase similar to the limitation set forth
herein) by the holder’s “affiliates” at such time (as defined in Rule 144 of the
Act) (“Aggregation Parties”) that would be aggregated for purposes of
determining whether a group under Section 13(d) of the Securities Exchange Act
of 1934 as amended, exists, would exceed 9.9% of the total issued and
outstanding shares of the Common Stock (the “Restricted Ownership Percentage”),
unless, at the time such additional shares of Common Stock may be acquired by
the Holder upon any conversion pursuant to the terms hereof, Holder has already
exceeded the Restricted Ownership Percentage. Each holder shall have the right
(w) at any time and from time to time to reduce its Restricted Ownership
Percentage immediately upon notice to the Company and (x) (subject to waiver) at
any time and from time to time, to increase its Restricted Ownership Percentage
immediately in the event of the announcement as pending or planned, of a Change
in Control Transaction.

Section 11.

Defaults and Remedies.

 

(a)        Events of Default.       An “Event of Default” is: (i) a default in
payment of any amount due hereunder which default continues uncured for more
than 5 Trading Days after the due date thereof; (ii) a default in the timely
issuance of Underlying Shares upon and in accordance with terms hereof, within
ten Trading Days following a Conversion Date; (iii) failure by the Company for
ten Trading Days after written notice has been received by the Company to comply
with any material provision of any of the Notes, the Purchase Agreement, the
Registration Rights Agreement, the Security Agreement, any other Security
Document or the Warrants (including without limitation the failure to issue the
requisite number of shares of Common Stock upon conversion hereof and the
failure to redeem Notes upon the Holder’s request following a Change in Control
Transaction); (iv) a material breach by the Company of its covenants,
representations or warranties in the Purchase Agreement, Registration Rights
Agreement, the Security Agreement, any other Security Document or Warrants that
remains uncured 10 Trading Days following receipt by the Company of written
notice of such breach; (v) if the Company is subject to any Bankruptcy Event;
(vi) a violation of section 2 hereof; or (vii) in the event Shareholder Approval
shall not have occurred on or before June 1, 2004, provided in the event the SEC
shall have elected to review the Company’s submission regarding such Shareholder
Approval, the foregoing date shall be August 1, 2004.

(b)        Remedies.     If an Event of Default occurs and is continuing with
respect to any of the Notes, the Required Holders may declare all of the then
outstanding Principal Amount of this Note and all other Notes held by the
Holders, including any interest due thereon,

 

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to be due and payable immediately (“Event of Acceleration”). The Company shall
pay interest on such amount in cash at the Default Rate to the Holder if such
amount is not paid within 7 Trading Days thereafter. The remedies under this
Note shall be cumulative.

Section 12.

General.

(a)       Payment of Expenses. The Company agrees to pay all reasonable,
documented charges and expenses, including attorneys' fees and expenses, which
may be incurred by the Holder in successfully enforcing this Note and/or
collecting any amount due under this Note.

(b)     Savings Clause. In case any provision of this Note is held by a court of
competent jurisdiction to be excessive in scope or otherwise invalid or
unenforceable, such provision shall be adjusted rather than voided, if possible,
so that it is enforceable to the maximum extent possible, and the validity and
enforceability of the remaining provisions of this Note will not in any way be
affected or impaired thereby. In no event shall the amount of interest paid
hereunder exceed the maximum rate of interest on the unpaid principal balance
hereof allowable by applicable law. If any sum is collected in excess of the
applicable maximum rate, the excess collected shall be applied to reduce the
principal debt. If the interest actually collected hereunder is still in excess
of the applicable maximum rate, the interest rate shall be reduced so as not to
exceed the maximum allowable under law.

(c)  Amendment. Neither this Note nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the
Company and the Holder, provided, this Note and all the other Notes issued
pursuant to the Purchase Agreement (but not less than all such Notes
outstanding) may be amended from time to time upon the written consent of the
Company and the Required Holders.

(d)      Assignment, etc. The Holder may assign or transfer this Note to any
transferee (other than to competitors or vendors of the Company). The Holder
shall notify the Company of any such assignment or transfer promptly. This Note
shall be binding upon the Company and its successors and shall inure to the
benefit of the Holder and its successors and assigns.

(e)        No Waiver. No failure on the part of the Holder to exercise, and no
delay in exercising any right, remedy or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the Holder of any
right, remedy or power hereunder preclude any other or future exercise of any
other right, remedy or power. Each and every right, remedy or power hereby
granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.

(f)

Governing Law; Jurisdiction.

(i)          Governing Law. This note will be governed by and construed in
accordance with the laws of the State of New York without regard to any
conflicts of laws provisions thereof that would otherwise require the
application of the law of any other jurisdiction.

 

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(ii)         No Jury Trial. The Company hereto knowingly and voluntarily waives
any and all rights it may have to a trial by jury with respect to any litigation
based on, or arising out of, under, or in connection with, this Note.

(g)         Replacement Notes. This Note may be exchanged by Holder at any time
and from time to time for a Note or Notes with different denominations
representing an equal aggregate outstanding Principal Amount, as reasonably
requested by Holder, upon surrendering the same. No service charge will be made
for the first such registration or exchange; thereafter, the Holder shall
reimburse the Company for its reasonable document fees and expenses (including
transfer agent and legal fees and expenses). In the event that Holder notifies
the Company that this Note has been lost, stolen or destroyed, a replacement
Note identical in all respects to the original Note (except for registration
number and Principal Amount, if different than that shown on the original Note),
shall be issued to the Holder, provided that the Holder executes and delivers to
the Company an agreement reasonably satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with the Note.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed on the
day and in the year first above written.

 

 

United Energy Corporation

 

 

By:

 

Name:

Title:

 

 

 

Attest:

 

 

Sign:

Print Name:

 

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EXHIBIT A

 

FORM OF CONVERSION NOTICE

 

(To be executed by the Holder

in order to convert a Note)

 

Re:

Note (this “Note”) issued by United Energy Corporation to _____________________
on or about ____________, 2005 in the original principal amount of $___________.

 

The undersigned hereby elects to convert the aggregate outstanding Principal
Amount (as defined in the Note) indicated below of this Note into shares of
Common Stock, $0.01 par value per share (the “Common Stock”), of United Energy
Corporation (the “Company”) according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
holder for any conversion, except for such transfer taxes, if any.

 

Conversion information:

                                          
                                          
                                        

 

_________________________________________________

Date to Effect Conversion

 

_________________________________________________

Aggregate Principal Amount of Note Being Converted

 

_________________________________________________

Number of Shares of Common Stock to be Issued

 

_________________________________________________

Applicable Conversion Price

 

_________________________________________________

Signature

 

_________________________________________________

Name

 

_________________________________________________

Address

 

 

 

 

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