SCHEDULE
14C INFORMATION
Information
Statement Pursuant to
Section
14(c)
of the
Securities Exchange Act of 1934
(Amendment
No. 2)
Check
the
appropriate box:
[x]
Preliminary Information Statement
[
]
Confidential, for Use of the Commission Only (as permitted by
Rule
14c-5(d)(2)
)
[
]
Definitive Information Statement
United
Heritage Corporation
(Name
of
Registrant As Specified In Charter)
Payment
of Filing Fee (Check the appropriate box):
[x]
No
fee required.
[
] Fee
computed on table below per Exchange Act
Rules
14c-5(g)
and
0-11
.
1)
Title
of each class of securities to which transaction applies:
2)
Aggregate number of securities to which transaction applies:
3)
Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
4)
Proposed maximum aggregate value of transaction:
5)
Total
fee paid:
[
] Fee
paid previously with preliminary materials.
[
] Check
box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form
or
Schedule and the date of its filing.
1)
Amount
Previously Paid:
2)
Form,
Schedule or Registration Statement No.:
3)
Filing
Party:
4)
Date
Filed:
Note:
Where
any
item, other than Item 4, calls for information with respect to any matter
to be
acted upon at the meeting or, if no meeting is being held, by written
authorization or consent, such item need be answered only with respect
to
proposals to be made by the registrant. Registrants and acquirees that
meet the
definition of "small business issuer" under
Rule
12b-2
of the
Exchange Act shall refer to the disclosure items in Regulation S-B and
not
Regulation S-K . If there is no comparable disclosure item in Regulation
S-B,
small business issuers need not provide the information requested. Small
business issuers shall provide the financial information in
Item
310
of
Regulation S-B in lieu of any financial statements required by Item 1 of
Rule
14c-101.
UNITED
HERITAGE CORPORATION
Suite
200, One Energy Square
4925
Greenville Avenue
Dallas,
Texas 75206
Telephone
(214) 800-2663
April
____, 2008
To
our
shareholders:
Enclosed
please find an information statement providing information to you regarding
certain corporate actions taken by our board of directors and a shareholder
holding a majority of the votes necessary to approve the actions taken. These
actions include the following:
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•
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an
approval of the issuance of warrants to DK True Energy Development
and RTP
Secure Energy Corp.;
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•
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an
approval of the issuance of warrants to Applewood Energy, Inc. and
GWB
Petroleum Consultants Ltd.;
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•
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an
approval of the issuance of warrants to Richardson & Patel LLP as
partial compensation for legal services rendered to
us;
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•
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an
approval of the issuance of common stock and warrants to a placement
agent
as compensation for services to be rendered to
us;
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•
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an
approval of the issuance of warrants to Blackwood Capital Limited
as
compensation for services rendered and to be rendered to
us;
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•
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an
approval of the United Heritage Corporation 2008 Equity Incentive
Plan;
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•
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an
approval of the issuance of warrants included in an offering of units
consisting of common stock and warrants which was made by us in
November 2007;
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•
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an
approval of the issuance of units consisting of shares of our common
stock
and warrants to purchase our common stock in a private offering of
our
securities to accredited investors;
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•
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an
approval of the issuance of common stock and warrants to Blackwood
Ventures LLC pursuant to an agreement to convert
debt;
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•
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an
approval of the issuance of 666,667 shares of common stock subscribed
for
by accredited investors in a private offering undertaken in January
2008;
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•
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an
approval of the issuance of common stock and warrants to the estate
of
Walter G. Mize in exchange for the relinquishment of a put right;
and
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•
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an
approval to change the company’s domicile from Utah to Delaware, which
will include changing the company’s name to Glen Rose Petroleum
Corporation.
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The
written consent of a shareholder holding a majority of the votes necessary
to
approve the actions taken assures that such actions will occur without your
vote. Your vote is not required to approve any of these actions, and the
enclosed information statement is not a request for your vote or a proxy
statement. This information statement is being provided only to inform you
of
the actions that have been taken.
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Very
truly yours,
UNITED
HERITAGE CORPORATION
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By:
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/s/
Joseph F. Langston Jr.
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Joseph
F. Langston Jr., President and Chief Financial
Officer
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I
NDEX
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Information
about the Voting Rights of our Shareholders and Information About
the
Consenting Shareholder
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2
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No
Rights of Appraisal
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2
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Interests
of Certain Persons in Matters Discussed in this Information
Statement
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2
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Change
of Control
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2
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Non-Compliance
with Nasdaq Rules
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3
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Security
Ownership of Certain Beneficial Owners and Management
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4
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Notice
to Shareholders of Actions Approved
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5
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Introduction
to Items 1 through 11
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5
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Item
1. Warrants to be Issued Pursuant to a Consulting Agreement with
DK True
Energy Development Ltd. and RTP Secure Energy Corp.
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8
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Item
2. Common Stock and Warrants to be Issued Pursuant to Consulting
Agreements with Applewood Energy, Inc. and GWB Petroleum
Consultants
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9
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Item
3. Issuance of a Warrant to Richardson & Patel LLP in Exchange for
Legal Services
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11
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Item
4. Issuance of Securities to a Placement Agent in Exchange for
Placement
Agent Services
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11
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Item
5. Issuance of Warrants to Blackwood Capital Limited in Exchange
for
Services
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12
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Item
6. Approval of the United Heritage Corporation 2008 Equity Incentive
Plan
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13
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Item
7. Approval of the Issuance of Shares and Warrants Included in
an Offering
Made in November 2007
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17
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Item
8. Approval of the Issuance of Units Consisting of Common Stock
and
Warrants to Accredited Investors
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17
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Item
9. Approval of the Issuance of Common Stock and Warrants to Blackwood
Ventures LLC Pursuant to an Agreement to Convert Debt
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18
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Item
10. Approval of the Issuance of 666,667 Shares of Common Stock
to
Accredited Investors
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18
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Item
11. Approval of the Issuance of Common Stock and Warrants to
the Estate of
Walter G. Mize in Exchange for the Relinquishment of A Put
Right
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19
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Item
12. Approval of a Change of the Company’s Domicile from Utah to
Delaware
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19
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Management’s
Discussion and Analysis or Plan of Operation
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28
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Index
to Financial Statements
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F-1
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Annex
1 — Written Consent of the Majority Shareholder of United
Heritage Corporation
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38
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Annex
2 — United Heritage Corporation 2008 Equity Incentive
Plan
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40
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Annex
3 — Agreement and Plan of Merger
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50
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Annex
4 — Articles of Merger (Utah)
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54
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Annex
5 — Certificate of Merger (Delaware)
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60
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INFORMATION
STATEMENT OF
UNITED
HERITAGE CORPORATION
Suite
200, One Energy Square
4925
Greenville Avenue
Dallas,
Texas 75206
Telephone
(214) 800-2663
WE
ARE NOT ASKING YOU FOR A PROXY AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
This
information statement is first being furnished on or about April ___, 2008
to
the holders of record as of the close of business on March 7, 2008 (the “Notice
Date”) of the common stock of United Heritage Corporation (referred to in this
information statement as “we”, “us”, “our” or “United Heritage”).
Our
Board
of Directors and the holder of a majority of our common stock consented in
writing to the actions described in this information statement. Together, such
approval and consent constitutes the approval and consent of a majority of
the
total number of shares of outstanding common stock required by the Utah Revised
Business Corporation Act and our articles of incorporation to approve the
actions described in this information statement. Accordingly, the actions will
not be submitted to our remaining shareholders for a vote. This information
statement is being furnished to shareholders to provide them with certain
information concerning the actions in accordance with the requirements of the
Securities Exchange Act of 1934 and the regulations promulgated thereunder,
including Regulation 14C.
The
date
of this information statement is April ____, 2008.
We
will
pay all costs associated with the distribution of this information statement,
including the costs of printing and mailing. We will reimburse brokerage firms
and other custodians, nominees and fiduciaries for reasonable expenses incurred
by them in sending this information statement to the beneficial owners of our
common stock.
We
will
only deliver one information statement to multiple shareholders sharing an
address unless we have received contrary instructions from one or more of the
shareholders. We will promptly deliver a separate copy of this information
statement to a shareholder at a shared address to which a single copy of the
document was delivered upon oral or written request to:
United
Heritage Corporation
Attn:
Corporate Secretary
Suite
200, One Energy Square
4925
Greenville Avenue
Dallas,
Texas 75206
Telephone
(214) 800-2663
Information
About the Voting Rights of Our Shareholders and Information About the Consenting
Shareholder
We
are a
“controlled company” as that term is defined by section 4350(c)(5) of the Nasdaq
Marketplace Rules. A controlled company is a company of which more than 50%
of
the voting power is held by an individual, a group or another company. As of
the
Notice Date, approximately 53.7% of our outstanding common stock is owned by
Blackwood Ventures LLC, sometimes referred to in this information statement
as
“Blackwood” or the “consenting shareholder”.
Pursuant
to our bylaws and the Utah Revised Business Corporation Act, a vote by the
holders of at least a majority of our outstanding capital stock is required
to
effect the actions described below. Each share of common stock is entitled
to
one vote.
As
of the
Notice Date, we had 7,246,850 shares of common stock issued and outstanding.
Therefore, as of the Notice Date, 3,623,426 shares were required to pass the
actions that required the approval of the holders of our common
stock.
Pursuant
to section 16-10a-704 of the Utah Revised Business Corporation Act, the
consenting shareholder voted in favor of the actions described below in a
written consent dated February 29, 2008. On February 29, 2008, the consenting
shareholder was entitled to vote 3,887,999 shares of our 7,246,850 shares of
common stock issued and outstanding on that date, which represented
approximately 53.7% of the common stock that was issued and outstanding on
that
date.
No
Rights of Appraisal
Shareholders
do not have the right to dissent or to seek appraisal of their shares of common
stock in conjunction with any of the items discussed in this information
statement.
Interests
of Certain Persons in Matters Discussed in This Information
Statement
By
approving the items in this information statement, Blackwood has approved the
issuance of securities to itself, as discussed at item 9 below, and to DK True
Energy Development Ltd. and Blackwood Capital Limited, both of which are
managing members of Blackwood. These transactions are discussed at item 1 and
item 5 below. Blackwood has also approved the issuance of securities to
Applewood Energy, Inc. and GWB Petroleum Consultants. These entities are
controlled, respectively, by Mr. Paul D. Watson, our chief executive officer
and
chairman of our board of directors, and by Mr. Geoffrey W. Beatson, our vice
president of engineering and production and chief operating
officer.
Change
of Control
On
September 26, 2007 Mr. Walter G. Mize, formerly our largest shareholder, entered
into a Restated Stock Sale Agreement which was effective as of September 18,
2007 with Blackwood, pursuant to which Blackwood purchased from Mr. Mize (i)
3,759,999 shares of our common stock, (ii) a warrant for the purchase of 953,333
shares of our common stock at an exercise price of $3.15 per share, (iii) a
warrant for the purchase of 1,000,000 shares of our common stock at an exercise
price of $3.36 per share, and (iv) a warrant for the purchase of 953,333 shares
of our common stock at an exercise price of $3.75 per share. The purchase price
for the securities was $5,017,000. Blackwood purchased the securities by
transferring to Mr. Mize $375,000 in cash and two promissory notes, one in
the
face amount of $3,767,000 and the second in the face amount of $875,000. The
funds transferred to Mr. Mize from Blackwood to purchase the securities were
Blackwood’s personal funds. The members of Blackwood are Blackwood Capital Ltd.,
DK True Energy Development Ltd., Emes Capital Partners LLC, Rabbi Tzvi Eichen,
Berg Family Trust, Howard Berg Defined Benefit Plan, Howard Berg and Avi
Masliansky. The managing members of Blackwood are DK True Energy Development
Ltd., Emes Capital Partners LLC and Blackwood Capital Limited. Dr. David Kahn
controls DK True Energy Development Ltd. On November 28, 2007 we entered into
a
consulting agreement with DK True Energy Development Ltd., as discussed at
item
1 below. Messrs. Walter Reissman and Frank Magliato control Emes Capital
Partners LLC. Blackwood Capital Ltd. is owned by a family trust the
beneficiaries of which are the members of the Taylor-Kimmins family and is
managed by Mr. Andrew Taylor-Kimmins. Blackwood Capital Ltd. has entered into
a
Consulting Agreement with United Heritage Corporation, as discussed in item
5
below and, in the past, was a consultant to Lothian Oil Inc. Other than the
foregoing, neither Blackwood nor any of its affiliates has, or had within the
past two years, a prior relationship with United Heritage Corporation, our
affiliates, Lothian Oil Inc. or its affiliates.
On
March
11, 2008, Blackwood purchased an additional 566,038 shares of our common stock.
As of April 16, 2008, we had 7,812,888 shares of common stock outstanding.
If
all of the
shares
of
common stock, including those represented by warrants or options, were issued
as
a result of the approval of items 1 through 11 by the consenting
shareholder
,
we
would have a total of 30,455,969 shares of common stock outstanding. Of this
amount, Blackwood would own 7,655,028 shares, or approximately 25.1%, of our
common stock, DK True Energy Development Ltd. would own 5,250,000 shares, or
approximately 17.2% of our common stock and Blackwood Capital Limited would
own
1,500,000 shares, or approximately 5% of our common stock. Collectively, then,
these entities would own a total of 14,405,028 shares, or approximately 47.3%
of
our outstanding common stock.
Non-Compliance
with Nasdaq Rules
On
July
19, 2007 we received a letter from the Nasdaq Stock Market (“Nasdaq”) which
indicated that we did not comply with Marketplace Rule 4310(c)(3) which requires
us to have a minimum of $2,500,000 in shareholders’ equity or $35,000,000 market
value of listed securities or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years.
We
had
until August 3, 2007 to provide Nasdaq with a specific plan to achieve and
sustain compliance with The Nasdaq Capital Market Listing Requirements. We
submitted a plan on August 2, 2007 and Nasdaq granted us an extension of time
to
regain compliance. We were required to evidence compliance on the filing of
our
next periodic report or be subject to delisting.
On
November 14, 2007 we filed our quarterly report on Form 10-QSB for the quarter
ended September 30, 2007, which showed that we were not in compliance with
Marketplace Rule 4310(c)(3).
On
November 30, 2007 we received a letter from Nasdaq noting our failure to regain
compliance by September 30, 2007 and indicating that trading of our common
stock
was to be suspended at the opening of business on December 11, 2007 unless
we
appealed the determination. We appealed the determination and a hearing took
place before the Nasdaq Hearings Panel (the “Panel”) on January 17, 2008. As of
December 31, 2007, as reported in our Quarterly Report on Form 10-QSB for the
quarter then ended, our shareholders’ equity amount complies with Marketplace
Rule 4310(c)(3) and we believe that we now have the capacity to maintain
compliance with this requirement. On March 17, 2008 we received a letter from
the Panel indicating that the Panel has determined to continue the listing
of
our common stock, subject to the condition that our Annual Report on Form 10-K
for the fiscal year ended March 31, 2008 demonstrates compliance with the $2.5
million minimum shareholders’ equity requirement. If we fail to demonstrate
shareholders’ equity of $2.5 million or greater, the Panel will promptly conduct
a hearing with respect to the failure and our securities may be immediately
delisted from The Nasdaq Stock Market. If we fail to comply with any requirement
for continued listing other than shareholders’ equity, we will be provided with
written notice of the deficiency and an opportunity to present a definitive
plan
to regain compliance. The Panel will thereafter render a determination with
respect to our continued listing.
On
January 31, 2008 we received a letter from Nasdaq indicating that, for a period
of 30 consecutive business days, the bid price of our common stock closed below
the minimum $1.00 per share requirement for continued inclusion under
Marketplace Rule 4310(c)(4). According to the letter, we have until July 29,
2008 to regain compliance.
If
we
cannot demonstrate compliance by July 29, 2008, Nasdaq staff will determine
whether we meet The Nasdaq Capital Market initial listing criteria as set forth
in Marketplace Rule 4310(c), except for the bid price requirement. If we meet
the initial listing criteria, we will be granted an additional 180 calendar
day
compliance period. If we are not eligible for an additional compliance period,
our securities will be delisted. We may appeal this determination.
We
believe, although we cannot guarantee, that during the next 12 months our
operating results should improve and that this improvement may generate interest
in our common stock, which may have an appreciative effect on our stock
price.
We
do not
believe that any of the items discussed in this information statement will
affect our ability to achieve compliance with Marketplace Rule
4310(c)(4).
Security
Ownership of Certain Beneficial Owners and Management
The
following table shows beneficial ownership as of April 16,, 2008 of shares
of
our common stock by all five percent shareholders, executive officers and
directors.
We
have
determined beneficial ownership in accordance with the rules of the Securities
and Exchange Commission. Under these rules, beneficial ownership generally
includes voting or investment power over securities. The number of shares shown
as beneficially owned in the tables below are calculated pursuant to Rule
13d-3(d)(1) of the Securities Exchange Act of 1934. Under Rule 13d-3(d)(1),
shares not outstanding that are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the
purpose of calculating the number and percentage owned by such person, but
not
deemed outstanding for the purpose of calculating the percentage owned by each
other person listed. Except as otherwise indicated, we believe that the
beneficial owners listed below, based on the information furnished by these
owners, have sole investment and voting power with respect to the securities
indicated as beneficially owned by them, subject to applicable community
property laws. As of April 16, 2008, there were 7,812,888 shares of common
stock
issued and outstanding.
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Name
and Address of Beneficial Owner
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Amount and Nature of
Beneficial Owner
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Percent of Class
(1)
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Blackwood
Ventures LLC
230 Park Avenue, 10th Floor
New York, New York
10169
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7,360,703
(2
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)
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67.4
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%
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Paul
D. Watson, chief executive officer and director
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0
(3
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)
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Joseph
F. Langston Jr., president,
chief financial officer and
director
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45,000
(4
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)
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*
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All
officers and directors as a group
(5 persons)
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45,000
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*
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*
Less
than 1%.
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(1)
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Based
on 7,812,888 shares of common stock issued and outstanding as
of April 16, 2008.
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(2)
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Blackwood
Ventures LLC owns 4,454,037 shares of our common stock and warrants
that
allow it to purchase a total of 2,906,666 shares of common stock.
The
warrants were acquired from Mr. Walter Mize, who acquired them from
Lothian Oil Inc. The warrants were issued on October 7, 2005, are
immediately exercisable and have five year terms. This number also
includes 128,000 shares of common stock issued to Blackwood Ventures
LLC
as a result of its agreement to accept units comprised of 128,000
shares
of common stock and a warrant to purchase 209,012 shares of common
stock
at an exercise price of $1.40 per share in exchange for debt totaling
$96,000. This number does not include the warrant included in the
units or
an additional 48,750 shares of common stock and a warrant to purchase
36,563 shares of common stock at an exercise price of $1.40 per share
in
exchange for debt totaling $39,000. These securities will not be
issued
until 20 days following the date we mail this information statement
to our
shareholders. Voting and investment control over the shares held
by
Blackwood Ventures LLC is exercised by Mr. Andrew Taylor-Kimmins,
Dr.
David Kahn and Mr. Walter Reissman,
collectively.
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(3)
|
In
November 2007 we entered into a Consulting Agreement with Applewood
Energy, Inc., an entity controlled by Mr. Watson. Pursuant to that
agreement, we agreed to issue to Applewood Energy, Inc. shares of
our
common stock having a value of $60,000. We have not yet issued these
shares.
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(4)
|
In
October 2007 Mr. Langston agreed to be interim president and director
for
$7,500 per month, payable $2,500 in cash and the balance in common
stock
at an agreed-upon value of $0.75 per share. We are required to issue
20,000 shares of our common stock to Mr. Langston in exchange for
the
services he rendered pursuant to this agreement, although the shares
have
not yet been issued. As of January 1, 2008, Mr. Langston agreed to
be
president, chief financial officer and a director in exchange for
compensation consisting of cash, common stock and options to purchase
common stock. None of the compensation to be paid with common stock
or
options has yet been paid. The 45,000 shares included in the table
above
were purchased in the market by Mr. Langston. 17,000 shares were
purchased
for his adult child and 28,000 shares were purchased for a retirement
account. Mr. Langston disclaims ownership in the securities purchased
for
his child.
|
Notice
to Shareholders of Actions Approved
The
following actions are based upon the unanimous consent of our board of directors
and upon the consent of the consenting shareholder. A copy of the resolution
executed by the consenting shareholder is attached to this information statement
as Annex 1.
Introduction
to Items 1 Through 11
We
are
required by Nasdaq Marketplace Rule 4350(i)(1)(A) to obtain shareholder approval
of any equity compensation arrangement pursuant to which an employee or
consultant will acquire our securities. We are required by Nasdaq Marketplace
Rule 4350(i)(1)(D) to obtain shareholder approval in connection with a
transaction other than a public offering involving the sale, issuance or
potential issuance of our common stock (or securities convertible into or
exercisable into our common stock) equal to 20% or more of our common stock
or
20% or more of the voting power outstanding before the issuance if the
securities are sold for less than the greater of book or market value of our
common stock.
Items
1
through 6 required approval under Nasdaq Marketplace Rule 4350(i)(1)(A) and
items 7 through 11 required approval under Nasdaq Marketplace Rule
4310(i)(1)(D).
The
following table provides you with information regarding the number of shares
of
common stock or warrants to purchase common stock that will or may be issued
as
a result of the approval of items 1 through 11 by the consenting
shareholder.
|
Item
|
|
Name
|
|
Type
of
Security
|
|
Number
of
Shares
That
May Be Issued
|
|
Purpose of
Issuance
|
|
Total of All
Shares
of
Common Stock
That May Be Issued
|
|
|
1
|
|
DK
True Energy Development Ltd./RTP Secure Energy Corp.
|
|
Warrant
to purchase
common
stock
|
|
0
|
(1)
|
Compensation
for services rendered/compensation for meeting milestones
|
|
0
|
|
|
2
|
|
Applewood
Energy, Inc.
(2)
|
|
Common
stock
|
|
97,827
|
(5)
|
Signing
inducement/annual bonus compensation
|
|
|
|
|
|
|
|
|
Warrant
to purchase
common
stock
|
|
1,600,000
|
|
Compensation
for meeting milestones
|
|
1,697,827
|
|
|
2
|
|
GWB
Petroleum Consultants Ltd.
(3)
|
|
Common
stock
|
|
160,000
|
(5)
|
Annual
bonus
compensation
|
|
|
|
|
|
|
|
|
Warrant
to purchase
common
stock
|
|
1,000,000
|
|
Compensation
for meeting milestones
|
|
1,160,000
|
|
|
3
|
|
Richardson
& Patel LLP
(4)
|
|
Common
stock
|
|
296,856
|
|
Payment
for legal services rendered
|
|
|
|
|
|
|
|
|
Warrant
to purchase
common
stock
|
|
222,642
|
|
Payment
for legal services rendered
|
|
519,498
|
|
|
4
|
|
Placement
Agent
|
|
Common
stock
|
|
482,800
|
(6)
|
Payment
for placement agent services
|
|
|
|
|
|
|
|
|
|
|
115,338
|
(7)
|
Monthly
retainer in the amount of $15,000
(six
months)
|
|
598,138
|
|
|
5
|
|
Blackwood
Capital
Limited
(8)
|
|
Warrant
to purchase
common
stock
|
|
1,500,000
|
|
Payment
for services rendered
|
|
1,500,000
|
|
|
6
|
|
United
Heritage Corporation 2008 Equity Incentive Plan
|
|
Common
stock and options to purchase
common
stock
|
|
5,000,000
|
|
Awards
to employees and others for services
(9)
|
|
5,000,000
|
|
|
7
|
|
Warrants
to be issued to investors
|
|
Warrants
to purchase common stock
|
|
1,306,325
|
|
Capital
raising
transaction
|
|
1,306,325
|
|
|
8
|
|
Common
stock and warrants to be issued to investors
|
|
Common
stock
|
|
8,998,200
|
(10)
|
|
|
8,998,200
|
(9)
|
|
9
|
|
Blackwood
Ventures LLC
|
|
Common
stock
|
|
48,750
|
|
Payment
of debt
|
|
|
|
|
|
|
|
|
Warrant
to purchase
common
stock
|
|
36,563
|
|
|
|
85,313
|
|
|
10
|
|
Common
stock to be issued to investors
|
|
Common
stock
|
|
666,667
|
|
Capital
raising
transaction
|
|
666,667
|
|
|
11
|
|
Estate
of Walter G. Mize
(11)
|
|
Common
stock
|
|
1,111,113
|
|
Cancellation
of
put
right
|
|
1,111,113
|
|
|
Total
number of additional shares issuable
|
|
22,643,081
|
|
|
|
(1)
|
The
warrant granted to DK True Energy Development Ltd. and RTP Secure
Energy
Corp. may be exercised only on a cashless basis. By exercising on
a
cashless basis the warrantholder authorizes us to withhold from issuance
the number of shares of common stock that would otherwise be issuable
upon
the exercise of the warrant which, when multiplied by the fair market
value of the common stock as of the date of exercise, is equal to
the
aggregate exercise price. According to the warrant agreements, the
fair
market value of the common stock on the date of exercise is computed
by
averaging the last reported sale price of the common stock over the
30
trading day period preceding the exercise date. The following example
is
for illustrative purposes only: assuming that all vesting conditions
were
met and that DK True Energy Development Ltd. and RTP Secure Energy
Corp.
exercised all of the warrants on February 19, 2008, using the 30-day
trading average of the last sale price of the common stock for the
period
from January 4, 2008 through February 15, 2008 (which would be $0.835),
we
would not be required to issue any shares of common stock to the
warrantholders. Instead, in order to pay the exercise price, DK True
Energy Development Ltd. would be required to transfer to us 6,601,796
shares of our common stock (all 5,250,000 shares of common stock
represented by the warrant plus an additional 1,351,796 shares) and
RTP
Secure Energy Corp. would be required to transfer to us 4,715,569
shares
of common stock (all 3,750,000 shares of common stock represented
by the
warrant plus an additional 965,569 shares). We will not be required
to
issue any shares of common stock in exchange for exercise of the
warrant
until the fair market value of our common stock exceeds $1.05 per
share,
the exercise price of the warrant shares. The person with voting
and
investment control over the securities issued to DK True Energy
Development Ltd., and the beneficial owner of the securities, is
Dr. David
Kahn. The person with voting and investment control over the securities
issued to RTP Secure Energy Corp., and the beneficial owner of the
securities, is Mr. Raymond T.
Pirraglia.
|
|
|
(2)
|
Applewood
Energy, Inc. is a personal services corporation. Our chief executive
officer, Paul D. Watson, is the sole shareholder and officer. Mr.
Watson
has voting and investment control over the securities issued to Applewood
Energy, Inc. and is the beneficial owner of the
securities.
|
|
|
(3)
|
GWB
Petroleum Consultants Ltd. is a personal services corporation.
Our vice
president of engineering and production and chief operating officer,
Geoffrey Beatson, is the sole shareholder and officer. Mr. Beatson
has
voting and investment control over the securities issued to GWB
Petroleum
Consultants Ltd. and is the beneficial owner of the
securities.
|
|
|
(4)
|
Erick
Richardson has voting and investment control over the securities
issued to
Richardson & Patel LLP. The securities are beneficially owned by the
partners of Richardson & Patel
LLP.
|
|
|
(5)
|
The
number of shares has been computed using the per share price of $1.84,
the
closing price of our common stock on November 28, 2007, the date
on which
the agreements were signed. We have included in this computation
the
number of shares of common stock that we will be required to issue
(using
the closing price on November 28, 2007 for purposes of this illustration)
at the conclusion of the first and second years of the consulting
agreements we entered into with Applewood Energy, Inc. and GWB Petroleum
Consultants Ltd. These agreements are more fully discussed in the
section
titled “Item 2 – Common Stock and Warrants to be Issued Pursuant to
Consulting Agreements with Applewood Energy, Inc. and GWB Petroleum
Consultants Ltd.”
|
|
|
(6)
|
This
example is for illustrative purposes only. If the offering discussed
in
proposal 10 had closed on February 13, 2008, the placement agent
would
receive 482,800 shares of our common stock as a portion of its fee.
Please
see the discussions of item 4 and item 8 for further information
on the
fee to be paid to the placement agent and the manner in which it
would be
computed.
|
|
|
(7)
|
This
example is for illustrative purposes only. A description of our proposed
agreement with a placement agent to be identified and approved by
our
board of directors is included in the discussion of item 4. For purposes
of this table, we have assumed that the monthly retainer fee over
the term
of the agreement would be paid with our common stock having a volume
weighted average price of $0.7803.
|
|
|
(8)
|
Blackwood
Capital Limited, DK True Energy Development Ltd. and Emes Capital
Partners
LLC are the managing members of Blackwood Ventures LLC. Blackwood
Ventures
LLC is our largest shareholder. Andrew Taylor-Kimmins has voting
and
investment control over the securities issued to Blackwood Capital
Limited, and a
family
trust, the beneficiaries of which are the members of the Taylor-Kimmins
family, are the beneficial owners of the
securities.
|
|
|
(9)
|
We
intend to issue an option from the United Heritage Corporation 2008
Equity
Incentive Plan to our president and chief financial officer, Joseph
F.
Langston Jr., to purchase 1,500,000 shares of our common stock upon
the
attainment of certain milestones. We also intend to issue to Mr.
Langston
80,000 shares of our common stock from the United Heritage Corporation
2008 Equity Incentive Plan as an inducement to enter into an employment
agreement and we are entitled to pay Mr. Langston his annual salary
of
$60,000 with shares of our common stock, which we would issue from
the
United Heritage Corporation 2008 Equity Incentive Plan. If we chose
to pay
Mr. Langston with our common stock, based on the per share price
of our
common stock on January 15, 2008, the date of our agreement with
him, we
would be required to issue to him an additional 73,170 shares of
common
stock.
|
|
|
(10)
|
This
example is for illustrative purposes only. If the offering had
closed on
February 15, 2008, we would have been required to issue 5,998,800
shares
of common stock and warrants for the purchase of 2,999,400 shares
of
common stock based on the terms of the offering. This is more
fully
explained in the discussion of item 8 below. As of the date of
this
information statement, the offering had not yet
closed.
|
|
|
(11)
|
Mary
Ann Mize is the representative of the Estate of Walter Mize and
has voting
and investment control over the securities issued to the Estate
of Walter
Mize. The securities are beneficially owned by the beneficiaries
of the
Estate of Walter Mize.
|
ITEMS
1 THROUGH 6 — APPROVAL OF THE ISSUANCE OF SECURITIES AS REQUIRED BY
NASDAQ MARKETPLACE RULE SECTION 4350(i)(1)(A).
Reason
for Obtaining Shareholder Approval
As
discussed in more detail below, we propose to issue our common stock or warrants
to purchase our common stock to certain consultants in exchange for services
to
be rendered to us. Because of the dilution that these compensation arrangements
will cause to existing shareholders, Nasdaq Marketplace Rule 4350(i)(1)(A)
requires us to obtain shareholder approval of any equity compensation
arrangement pursuant to which an employee or consultant will acquire our
securities. One of the consultants who will receive our securities is DK True
Energy Development Ltd. DK True Energy Development Ltd. is a member of Blackwood
Ventures LLC, a shareholder that controls approximately 53.7% of our issued
and
outstanding common stock.
The
last
sale price of our common stock on the trading day immediately prior to the
Notice Date was $0.63.
Securities
Issuances That Have Been Approved:
|
|
Item 1.
|
Warrants
to be Issued Pursuant to a Consulting Agreement with DK True Energy
Development Ltd. and RTP Secure Energy
Corp.
|
The
discussion that follows is only a brief description of the transaction and
is
qualified in its entirety by reference to the Consulting Agreement between
us
and DK True Energy Development Ltd. and RTP Secure Energy Corp. and the warrants
issued pursuant to that agreement, which are attached as exhibits to our Current
Report on Form 8-K filed with the Securities and Exchange Commission on December
3, 2007 and available for review at
www.sec.gov.
On
November 27, 2007 our board of directors approved, and on November 28, 2007
we
entered into, a 12 month Consulting Agreement (the “DK/RTP Consulting
Agreement”) with DK True Energy Development Ltd. and RTP Secure Energy Corp.
(the “Consultants”). The Consultants are to provide services to us which
include, but are not limited to, reservoir analysis and geological and
engineering expertise.
DK
True
Energy Development Ltd. is a company controlled by Dr. David Kahn. Dr. Kahn
is a
reservoir engineer with 20 years experience in heavy oil projects with Texaco
and Baker Hughes and, more recently, was a principal in development stage heavy
oil companies that engaged in merger and acquisition transactions with Megawest
Energy Inc. and Pearl Exploration and Production Ltd., a Canadian-based oil
and
gas company.
RTP
Secure Energy is a consulting company controlled by Mr. Raymond T. Pirraglia.
Mr. Pirraglia, a business attorney with over 25 years experience, has worked
with oil and gas companies in mergers, acquisitions and other transactions
in
recent years. He has been a principal with Dr. Kahn in the development,
acquisition and disposition of certain heavy oil assets and
companies.
In
lieu
of cash compensation, the Consultants have agreed to accept warrants to purchase
up to a total of 9,000,000 shares of our common stock at an exercise price
of
$1.05 per share, exercisable after December 31, 2007 and only on a cashless
basis. In order to determine the number of shares that would be issued, the
warrant holder must multiply the difference between the fair market value of
the
common stock and the warrant exercise price times the number of shares to be
purchased and divide the product by the fair market value of the common stock.
The fair market value of the common stock is computed by taking the average
of
the closing bid and asked prices of the common stock quoted in the
Over-The-Counter Market or the last reported sale price of the common stock
or
the closing price quoted on the Nasdaq Capital Market or on any exchange on
which the common stock is listed for the 30 trading days prior to the date
of
the company’s receipt of the warrant. The warrants will have a term of 5 years.
The parties have allocated the warrants so that DK True Energy Development
Ltd.
will have the right to purchase 5,250,000 shares of our common stock and RTP
Secure Energy will have the right to purchase 3,750,000 shares of our common
stock. Blackwood Ventures LLC, has executed a voting agreement to approve the
Consultants’ warrants. The right to purchase 1,147,500 shares of our common
stock will vest 20 days following the date that this information statement
is
sent to our shareholders; the right to purchase 2,452,500 shares of common
stock
will vest when we announce that we are implementing a development program based
on the results of a pilot program completed for the Wardlaw field; and the
right
to purchase 5,400,000 shares of our common stock will vest at the rate
of
675,000
shares when we produce an average of 250 barrels of oil per day over 30 days
(“bopd30av”), 500 bopd30av, 750 bopd30av, 1,000 bopd30av, 1,250 bopd30av, 1,500
bopd30av, 1750 bopd30av and 2,000 bopd30av. The warrant will be fully vested
when production reaches 2,000 bopd30av.
Notwithstanding
the foregoing, the Consultants’ warrants will vest entirely upon a change of
control transaction, including an agreement for the sale or disposition of
more
than 50% of our interest in the Wardlaw field.
The
DK/RTP Consulting Agreement requires the Consultants to undertake the risk
of
performing services for us in exchange solely for warrants for the purchase
of
restricted shares of our common stock. Because the agreement does not require
any cash payment be made to the Consultants and because the majority of
the
warrants will vest only upon the attainment of certain performance targets,
our
board of directors believed that the agreement was fair to us and, on that
basis, approved it. Our board of directors believes that the terms of the
DK/RTP
Consulting Agreement are more favorable to us than any agreement we would
have
made with an unaffiliated third party, since it is unlikely that we would
be
able to obtain comparable services on these terms. The DK/RTP Consulting
Agreement was unanimously approved on November 27, 2007 by the members
of our
board of directors, none of whom was interested in the
transaction.
|
|
Item 2.
|
Common
Stock and Warrants to be Issued Pursuant to Consulting Agreements
with
Applewood Energy, Inc. and GWB Petroleum
Consultants.
|
The
discussion that follows is only a brief description of the transactions and
is
qualified in its entirety by reference to the Independent Consulting Services
Agreement between us and Applewood Energy, Inc. (“Applewood”) and the
Independent Consulting Services Agreement between us and GWB Petroleum
Consultants ltd. (“GWB”), which are attached as exhibits to our Current Report
on Form 8-K filed with the Securities and Exchange Commission on December 4,
2007 and available for review at
www.sec.gov.
On
November 27, 2007 our board of directors approved, and on November 28, 2007
we
entered into, an Independent Consulting Services Agreement with Applewood (the
“Applewood Consulting Agreement”). The effective date of the Applewood
Consulting Agreement was November 1, 2007.
Pursuant
to the Applewood Consulting Agreement, Applewood, a personal services
corporation, agreed to provide to us the services of Mr. Paul D. Watson, its
sole shareholder. We entered into this agreement with Applewood rather than
with
Mr. Watson individually at the request of Mr. Watson. Mr. Watson currently
provides services to us as our chief executive officer and as the chairman
of
our board of directors.
Mr.
Watson, age 56, was appointed to our board of directors and as our chief
operating officer on November 27, 2007. On January 14, 2008, Mr. Watson
relinquished his position as chief operating officer and was appointed as our
chief executive officer and as chairman of the board of directors. Mr. Watson
provides services to us on a full time basis, although he devotes approximately
one hour per month to Applewood Energy, Inc. Mr. Watson is an oil and gas
consultant, developer, acquirer and financier with 34 years experience at public
and private natural resources and energy companies worldwide. From May 2004
through October 2007 he was the vice president of exploration and a member
of
the board of directors at Energy 51 Ltd./Watch Resources Ltd., a Canadian energy
corporation. Prior to joining Energy 51 Ltd./Watch Resources Ltd., Mr. Watson
was the vice president of exploration at Trafina Energy from July 2000 to May
2004. Mr. Watson has also served as a consultant to numerous energy companies,
including Kelman Technologies, Inc., of which he is a director, Reliance
Engineering Group, Inc. and Reflect Technology, Inc. Mr. Watson began his career
as a junior geologist in 1973 after earning his Bachelor of Science degree
in
geology at the University of Alberta, Edmonton, Alberta, Canada.
As
compensation for Mr. Watson’s services, we agreed to issue to Applewood shares
of our common stock having a value of $60,000 and to pay cash compensation
of
$5,000 per month. We began paying the monthly cash compensation in December
2007. We have not yet issued the shares of common stock. The Applewood
Consulting Agreement requires us to use the closing price of our common stock
on
the date the agreement was executed to compute the number of shares to be
issued. On November 28, 2007 the closing price of our common stock was $1.84,
therefore we are required to issue to Applewood 32,609 shares of our common
stock. Upon completion of the first and second years of the Applewood Consulting
Agreement and provided it is not terminated in accordance with its terms, we
have agreed to pay Applewood a bonus equal to the amount of the annual
compensation. The bonus will be paid with our common stock. Furthermore, upon
the achievement of certain milestones related to the development of oil
production on the Wardlaw field, Applewood will also receive a warrant to
purchase a total of 1,600,000 shares of our common stock. The warrant will
have
a term of five years and will vest as follows: (i) the right to purchase 400,000
shares of common stock at an exercise price of $2.00 per share will vest upon
completion of a successful pilot; (ii) the right to purchase 400,000 shares
of
common stock at an exercise price of $2.00 per share will vest when the 30
day
average for production reaches 1,000 barrels of oil equivalent per day
(“boe/d”); (iii) the right to purchase 400,000 shares of common stock at an
exercise price of $2.50 per share will vest when the 30 day average for
production reaches 2,000 boe/d; and (iv) the right to purchase 400,000 shares
of
common stock having an exercise price of $3.00 per share will vest when the
30
day average for production reaches 3,000
boe/d.
The warrant was issued on December 31, 2007. The value of the warrant is
$1,176,000. The value of the warrant was computed using the Black Scholes Option
Pricing Model using the following assumptions: market price of $1.65; strike
price from $2.00 to $3.00; risk free rate between 3.37% and 3.05%; no dividend
rate; an expected term of nine months to 25 months; and a volatility rate of
148.1% to 93.6%.
Also
approved on November 27, 2007 and entered into on November 28, 2007 was an
Independent Consulting Services Agreement with GWB (the “GWB Consulting
Agreement”).
Pursuant
to the GWB Consulting Agreement, GWB, which is also a personal services
corporation, agreed to provide to us the services of Mr. Geoffrey W. Beatson,
its sole shareholder. We entered into this agreement with GWB rather than with
Mr. Beatson individually at the request of Mr. Beatson. Mr. Beatson will provide
services as our vice president of engineering and production.
Mr.
Beatson, aged 48, has more than two decades’ experience in the oil and gas
industry. From August 2005 to December 2007, Mr. Beatson was the vice president
of engineering and operations at Energy 51/Watch Resources Ltd. where he
developed innovative techniques to produce heavy oil and presented his findings
at the Lloydminster heavy oil conference in 2007. Prior to accepting the
position at Energy 51/Watch Resources Ltd., Mr. Beatson was the vice president
of engineering with Bunker Energy, Inc. where, between December 2003 and August
2005, he performed reservoir studies, production optimization, drilling and
completion program design and implementation. From 1996 to December 2003, Mr.
Beatson was the British Columbia team leader, then chief reservoir engineer
then
director of engineering and economics, at Encal Energy Ltd. From November 1994
until December 1995, Mr. Beatson was the senior business development engineer
at
Anderson Exploration Ltd., where he evaluated potential properties and corporate
acquisition targets. Mr. Beatson earned his A.P.E.G.G.A. Management Development
Certificate, his Certified Administrative Manager Certificate and his Bachelor
of Science degree in mechanical engineering at the University of Calgary,
Alberta in 1983.
As
compensation for Mr. Beatson’s services, and because GWB did not elect to accept
our common stock as a portion of the compensation it receives for Mr. Beatson’s
services, we agreed to pay GWB $550 per day until January 1, 2008 at which
time
the compensation was increased to $12,000 per month. We began paying the monthly
cash compensation in December 2007. Upon completion of the first and second
years of the GWB Consulting Agreement and provided it is not terminated in
accordance with the terms thereof, we have agreed to pay GWB a bonus. The bonus
will be paid with our common stock. The bonus will equal the amount of GWB’s
annual cash compensation. Like the Applewood Consulting Agreement, upon the
achievement of certain milestones related to the development of oil production
on the Wardlaw field, GWB will also receive a warrant to purchase a total of
1,000,000 shares of our common stock. The warrant will have a term of five
years
and will vest as follows: (i) the right to purchase 250,000 shares of common
stock at an exercise price of $2.00 per share will vest upon completion of
a
successful pilot; (ii) the right to purchase 250,000 shares of common stock
at
an exercise price of $2.00 per share will vest when the 30 day average for
production reaches 1,000 boe/d; (iii) the right to purchase 250,000 shares
of
common stock at an exercise price of $2.50 per share will vest when the 30
day
average for production reaches 2,000 boe/d; and (iv) the right to purchase
250,000 shares of common stock having an exercise price of $3.00 per share
will
vest when the 30 day average for production reaches 3,000 boe/d. The value
of
the warrant is $735,000. The value of the warrant was computed using the Black
Scholes Option Pricing model using the following assumptions: market price
of
$1.65; strike price from $2.00 to $3.00; risk free rate between 3.49% and 3.05%;
no dividend rate; an expected term of nine months to 25 months; and a volatility
rate of 148.1% to 93.6%.
The
terms
of the Applewood Consulting Agreement and the GWB Consulting Agreement were
negotiated between us and Messrs. Watson and Beatson at arms length. Messrs.
Watson and Beatson were not affiliated with us when we entered into these
agreements.
Overall
Effects of Items 1 and 2
By
issuing common stock and warrants to the consultants, we are able to obtain
services that are critical to the development of the Wardlaw field without
having to spend significant amounts of cash. Furthermore, we believe that
ownership of our securities will align the interests of the consultants with
our
shareholders.
However,
by issuing the common stock and the warrants to purchase our common stock,
our
remaining shareholders will be diluted by the issuance of a substantial number
of additional shares.
As
to the
warrants issued to DK True Energy Development Ltd. and RTP Secure Energy Corp.,
which may be exercised only on a cashless basis, assuming that all vesting
conditions were met and that DK True
Energy
Development Ltd. and RTP Secure Energy Corp. exercised all of the warrants
on
February 19, 2008, using the 30 trading-day average of the last sale price
of
the common stock for the period from January 4, 2008 through February 15, 2008
(which would be $0.835), we would not be required to issue any shares of common
stock to these consultants. Instead, in order to pay the exercise price, DK
True
Energy Development Ltd. would be required to transfer to us 6,601,796 shares
of
our common stock (all 5,250,000 shares of common stock represented by the
warrant plus an additional 1,351,796 shares) and RTP Secure Energy Corp. would
be required to transfer to us 4,715,569 shares of common stock (all 3,750,000
shares of common stock represented by the warrant plus an additional 965,569
shares).
As
to the
shares of common stock and warrants issued to Applewood and GWB, assuming that
all vesting conditions are met and that Applewood and GWB exercise all of the
warrants, we would be required to issue a total of 1,632,609 shares of common
stock pursuant to the Applewood Consulting Agreement and 1,000,000 shares of
common stock pursuant to the GWB Consulting Agreement.
|
|
Item 3.
|
Issuance
of a Warrant to Richardson & Patel LLP in Exchange for Legal
Services.
|
On
December 19, 2007, we entered into an Agreement to Convert Debt with Richardson
& Patel, LLP pursuant to which Richardson & Patel LLP agreed to accept
(i) 296,856 shares of our common stock and (ii) a warrant for the purchase
of
222,642 shares of our common stock in full payment of $237,485.15 in legal
services previously rendered. The warrant has an exercise price of $1.40 per
share, a term of seven years and a cashless exercise provision, at the holders’
election, such that fewer than 222,642 shares may be issued upon full exercise.
The debt was converted at the rate of $0.80 per share. On December 18, 2007,
the
closing price of our common stock was $0.92.
Overall
Effect of Item 3
As
a
public company we rely heavily on services provided to us by our legal counsel.
By issuing common stock and warrants to our attorneys, we are able to obtain
these services while conserving our cash.
However,
as indicated by the discussion of items 1 and 2 above, by issuing our common
stock and/or warrants to purchase our common stock in exchange for services,
the
common stock of our remaining shareholders will be significantly diluted. If
Richardson & Patel, LLP elects to exercise the warrant for cash, we will be
required to issue an additional 222,642 shares of common stock although we
will
receive $311,699 in proceeds from the exercise.
|
|
Item 4.
|
Issuance
of Securities to a Placement Agent in Exchange for Placement Agent
Services.
|
We
intend
to engage the services of a placement agent to assist us with raising capital
as
and when we need it. Our board of directors has approved a term of such
agreement not to exceed six months and that the engagement may be exclusive
during this period. Our board of directors and our consenting shareholder have
approved the issuance of common stock and warrants to purchase common stock
to a
placement agent to be determined by our board of directors on the terms
described below.
In
the
event that the placement agent is successful in placing our securities, we
may
pay up to 8% of the gross proceeds up to $5,000,000 and up to 4% of the gross
proceeds in excess of $5,000,000 and to issue to the placement agent warrants
to
purchase shares of our common stock in an amount up to 8% of the number of
shares of common stock actually issued in the offering, or in the case of
convertible preferred stock, up to 8% of the number of shares of common stock
into which the preferred stock so issued is initially convertible, or in the
case of convertible debentures up to 8% of the number of shares of common stock
into which the debentures are initially convertible. If we were to issue
non-convertible subordinated debt during the term of the placement agent
agreement, we may pay the placement agent up to 8% of the amount funded to
us.
Furthermore, if we issue equity interests along with the subordinated debt,
the
placement agent may also receive up to 8% of the equity securities issued to
the
holders of the subordinated debt. The warrants may include piggy-back
registration rights covering the common stock to be issued upon their exercise.
The per share exercise price of any warrants issued to the placement agent
will
be no less than equal 100% of the price of the common stock issued in the
offering, or in the case of convertible preferred stock or convertible
debentures, the initial conversion price of
such
convertible securities. The exercise price and the number of shares of common
stock issuable upon exercise of the warrants would be subject to customary
adjustment in the case of stock splits, combinations and recapitalizations.
The
warrants may also have a cashless exercise provision.
Our
board
of directors has also approved that we may pay a placement agent a monthly
retainer in an amount up to $15,000. The placement agent may elect to have
the
retainer paid with shares of our common stock valued at the volume weighted
average price of our common stock for the five trading days preceding the end
of
the applicable month of service. As an example, if the placement agent had
provided services to us during January 2008 and had elected to receive the
monthly retainer in shares of our common stock, we would have been required
to
issue 19,223 shares of common stock based on the volume weighted average price
of $0.7803 for the five trading days preceding January 31, 2008.
Overall
Effect of Item 4
Like
items 1, 2 and 3, an agreement with a placement agent may require us to issue
our common stock and warrants to the placement agent in exchange for placement
agent services provided to us. Depending on the amount of the offerings that
we
undertake or the average volume weighted average price of our common stock,
the
number of shares and warrants we would be required to issue could be
significant, which would have a dilutive effect on our
shareholders.
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Item 5.
|
Issuance
of Warrants to Blackwood Capital Limited in Exchange for
Services.
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|
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On January
15, 2008 we
entered into a Consulting Agreement with Blackwood Capital Limited,
which
is a managing member of our controlling shareholder. Blackwood Capital
Limited began providing services to us beginning on September 1, 2007.
The
services provided to us by Blackwood Capital Limited include assisting
us
with preparing business plans and projections, analyzing our financial
data, advising us on our capital structure and on alternative structures
for raising capital, reviewing our managerial needs and advising us
with
respect to retaining the services of managerial candidates, advising
us on
public relations. We may, in the future, also receive services from
Blackwood Capital Limited relating to acquisitions or mergers or
undertaking a public offering. Blackwood Capital Limited introduced
us to
Paul Watson, our chief executive officer, Joseph F. Langston Jr., our
chief financial officer, Geoffrey Beatson, who provides consulting
services to us through GWB Petroleum Consultants, Dr. David Kahn, who
provides consulting services to us through DK True Energy Development
Ltd., and Raymond T. Pirraglia, who provides consulting services to
us
through RTP Secure Energy Corp. Our consulting agreement with Blackwood
Capital Limited has a term of one year, but may be terminated by either
party on 45 days notice. A termination will not release us from the
payment of the compensation called for by the agreement. In payment
for
the services rendered to us, and as an inducement to render further
services to us, we agreed to issue to Blackwood Capital Limited a warrant
for the purchase of 1,500,000 shares of our common stock at an exercise
price of $1.05 per share. The term of the warrant is four years and
the
warrant has a cashless exercise provision, at the holder’s election, such
that fewer than 1,500,000 shares may be issued upon full exercise.
On
January 15, 2008, the closing price of our common stock was $0.82.
The
Consulting Agreement also requires us to pay to Blackwood Capital Limited,
from September 1, 2007 through the term of the agreement, cash
compensation of $15,000 per month.
|
Our
board
of directors unanimously determined that the services provided to us by
Blackwood Capital Limited constitute a significant contribution to our
company
and that it would be in the best interests of our shareholders that such
services continue. Our board of directors determined that the compensation
terms
provided in our consulting agreement with Blackwood Capital Limited are
as
favorable as, or more favorable than, the terms we would have received
from an
unaffiliated third party providing similar services. The Consulting Agreement
with Blackwood Capital Limited was unanimously approved on January 15,
2008 by
the members of our board of directors, none of whom was interested in the
transaction.
Overall
Effect of Item 5
Our
agreement with Blackwood Capital Limited will require us to issue a warrant
for
1,500,000 shares of our common stock in exchange for services provided to us.
If
the warrant is fully exercised for cash, the common stock of our remaining
shareholders will be diluted by that number of shares. However, if Blackwood
Capital Limited fully exercises the warrant, we will receive $1,575,000 in
proceeds.
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Item 6.
|
Approval
of the United Heritage Corporation 2008 Equity Incentive
Plan.
|
In
January 2008, our board of directors approved and adopted the United Heritage
Corporation 2008 Equity Incentive Plan (the “Plan”). We have reserved 5,000,000
shares of common stock for awards that will be granted from the Plan. The awards
are subject to adjustment in the event of stock dividends, recapitalizations,
stock splits, reverse stock splits, subdivisions, combinations,
reclassifications or similar changes in our capital structure. The Plan became
effective upon adoption by the board, and, unless earlier terminated in
accordance with the terms and provisions thereof, will remain in effect for
a
period of ten years from the date of adoption. As of March 6, 2008, the last
trading day immediately prior to the Notice Date, the shares of common stock
reserved for the Plan had a market value of $0.63 per share.
Purpose
The
purpose of the Plan is to enable us to offer our officers, directors, employees,
agents and consultants (each, individually, a “Participant” and, collectively
the “Participants”), equity-based incentives in the company, thereby attracting,
retaining and motivating highly qualified Participants and strengthening the
mutuality of interests between these Participants and our shareholders.
Generally, grants under the Plan are nontransferable and are exercisable during
the lifetime of a Participant only by the Participant.
What
follows is a summary of the material terms of the Plan. The Plan itself contains
considerably more detail than the summary set forth below, which does not
purport to be a complete description of the terms and conditions of the Plan,
and which is qualified in its entirety by reference to the actual Plan, a copy
of which is annexed to this information statement as Annex 2.
Administration
The
Plan
will be administered by our board, or a committee made up of two or more members
of our board, who will have full power to, among other things:
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|
(i)
|
Construe
and interpret the Plan and any agreement or instrument entered
into
pursuant to the Plan;
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(ii)
|
amend
or terminate the Plan,
provided
,
however
,
the board will not amend the Plan in any manner that requires shareholder
approval, without such approval;
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(iii)
|
prescribe,
amend, and rescind rules or regulations relating to the Plan or
any awards
granted under the Plan;
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(iv)
|
select
eligible Participants to receive awards under the
Plan;
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|
|
(v)
|
determine
the form, terms and conditions of the awards to be granted under
the Plan;
and
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|
(vi)
|
make
all other determinations, or take such other actions, as may be
necessary
or advisable for the administration of the
Plan.
|
Eligibility
Among
the
Participants eligible to receive grants under the plan, only employees,
including officers and directors who are also employees, are eligible to receive
incentive stock options. As of February 19, 2008, we had two full-time and
two
part-time employees, three non-employee directors and various consultants who
are retained on an as-needed basis.
Stock
Option Awards
Under
the
terms of the Plan, the board may grant stock option awards qualifying as
incentive stock options (“ISOs”) under Section 422 of the Internal Revenue Code
of 1986, as amended (the “Code”), and nonqualified stock options (“NQSO”) (each,
individually, an “Option Award”, and, collectively, “Option Awards”). All Option
Awards will be evidenced by an award agreement in such form and containing
such
terms and conditions as the board may approve from time to time in its
discretion (an “Option Award Agreement”). The term of an Option Award will be
fixed by the board, but will not exceed a period of ten years from the date
of
grant (or five years in the case of an ISO granted to a person beneficially
owning shares representing 10% or more of the total combined voting power of
all
classes of our stock (a “10% Shareholder”). Notwithstanding the foregoing, the
term of an Option Award is subject to adjustment on the basis of a Participant’s
termination of service. The exercise price for any Option Award will not be
less
than 85% of the fair market value of our common stock on the date of grant
(or
not less than 100% of the fair market value of our common stock on the date
of
grant in the case of an ISO granted to a 10% Shareholder). The fair market
value
will be the closing price of our common stock on the applicable market on which
it is listed or quoted on the date of grant.
Payment
for shares of common stock purchased upon exercise of an Option Award must
be
made in full at the time of purchase. Payment may be made in cash or, where
expressly approved by the board, by (i) cancellation of indebtedness owed by
us
to the Participant; (ii) surrender of shares owned for at least six months
on
the date of transfer; (iii) surrender of shares that were obtained in the public
market; (iv) waiver of compensation due or accrued for services rendered; (v)
under certain limited circumstances, through “same day sale” or “margin”
commitments from the Participant and an NASD member broker-dealer, whereby
the
Participant irrevocably elects to exercise the Option Award and sell a portion
of the underlying shares of common stock to pay the exercise price, and the
broker-dealer irrevocably commits upon receipt of the shares of common stock
to
forward the exercise price to us; or (vi) by any combination of these payment
methods.
Stock
Awards
Under
the
terms of the Plan, the board may grant stock awards (each, individually, a
“Stock Award”, and, collectively, “Stock Awards”). A Stock Award is an offer by
the company to sell to eligible persons shares of our common stock that may
or
may not be subject to restrictions, such as completion of a specified number
of
years of service or of certain specified performance goals. The board will
determine to whom such an offer will be made, the number of shares of common
stock the person may purchase, the price to be paid, the restrictions to which
the shares will be subject, if any, and all other terms and conditions as the
board may impose. All Stock Awards will be evidenced by a Stock Award Agreement,
and the purchase price for any Stock Award will not be less than 85% of the
fair
market value of our common stock on the date of grant (or not less than 100%
of
the fair market value of our common stock on the date of grant in the case
of
Stock Awards to 10% Shareholders).
Payment
for shares of common stock purchased upon exercise of a Stock Award must be
made
in full at the time of purchase. Payment for Stock Awards may be made in the
same manner as payment upon exercise of an Option Award.
Stock
Bonuses
Under
the
terms of the Plan, the board may grant stock bonuses (each, individually, a
“Stock Bonus” and, collectively, “Stock Bonuses”). A Stock Bonus is an award of
shares of common stock for extraordinary services rendered to us. A Stock Bonus
may be conditioned upon the satisfaction of certain specified performance goals.
All Stock Bonuses will be evidenced by a Stock Bonus Award
Agreement.
The
earned portion of any Stock Bonus may be paid currently or on a deferred basis,
as agreed by the Participant and the company, and with interest or dividend
equivalents, if any, being paid in cash, shares of common stock or a combination
thereof, and either as a lump sum payment or in installments.
Federal
Income Tax Consequences
What
follows is a general discussion of material United States federal income tax
consequences associated with our granting of Option Awards under the Plan.
This
discussion is based on the Code and Treasury Department regulations promulgated
thereunder, any or all of which may materially change at any time, possibly
on a
retroactive basis. This discussion does not consider the potential effects,
adverse or beneficial, of any proposed changes in the governing tax law. This
discussion does not purport to be complete, and does not address the United
States federal tax consequences that may apply upon the death of a Participant,
nor does it address any state, local or non-United States tax consequences
that
may be associated with participation in the Plan.
Incentive
Stock Options
Generally
a Participant incurs no United States federal income tax liability upon the
issuance, or, generally, upon the exercise of an ISO.
A
Participant will incur United States federal income tax liability upon
disposition of the shares of common stock acquired upon exercise of an ISO.
This
income will be taxed at the applicable capital gains rate if the disposition
occurs after the expiration of the statutory holding periods (the “Statutory
Holding Periods”). If the disposition occurs prior to the expiration of the
Statutory Holding Periods, the Participant will generally recognize ordinary
income in an amount equal to the difference between the exercise price and
the
lesser of (i) the fair market value of the common stock on the date of exercise,
and (ii) the price at which the common stock is sold. Generally, the Statutory
Holding Periods expire two years after the date of grant of the ISO and one
year
after the date of acquisition of the common stock pursuant to exercise of the
ISO.
If
the
sale price of the common stock is greater than its fair market value on the
date
of exercise, the Participant will recognize a capital gain equal to the excess
of the sale price over the exercise price and will be taxed at the applicable
capital gains rate. If the sale price of the common stock is less than its
fair
market value on the date of exercise, the Participant will recognize a capital
loss equal to the excess of the exercise price over the sale price. Such capital
gain or loss will be treated as a long-term or short-term capital gain or loss
depending upon whether the holding period applicable to long-term capital assets
has been satisfied (the “Holding Period”).
A
Participant may have United States federal income tax consequences upon exercise
of an ISO if the aggregate fair market value of the shares of common stock
subject to ISOs that first become exercisable by a Participant in any one
calendar year exceeds $100,000. If this occurs, the excess shares will be
treated as though they are a NQSO rather than ISOs. Upon exercise of an Award
with respect to these shares, the Participant will have such tax consequences
as
are described below with respect to the exercise of NQSOs.
Nonqualified
Stock Option
A
Participant incurs no United States federal income tax liability upon the
issuance of NQSOs. Generally, in the tax year in which a Participant exercises
NQSOs, the Participant recognizes ordinary income in the amount by which the
fair market value of the shares of common stock at the time of exercise exceeds
the exercise price for such shares.
Depending
upon whether a Participant satisfies the Holding Period, disposition of the
common stock acquired through the exercise of a NQSO generally will result
in a
short-term or long-term capital gain or loss equal to the difference between
the
amount realized on such disposition and the fair market value of such shares
when the NQSO was exercised.
Tax
Consequences to the Company
Generally,
there will be no United States federal income tax consequences to the Company
upon issuance of an ISO or NQSO. However, to the extent that a Participant
recognizes ordinary income on an ISO, or NQSO, as described above, we generally
will have a deduction in the same amount,
provided
,
however
, we
satisfy applicable federal income tax reporting requirements or the Participant
reports such income on their federal income tax return.
We
are
required to withhold Federal Insurance Contributions Act (FICA), Medicare and
federal income taxes from Participants who dispose of shares of common stock
acquired upon exercise of an ISO prior to the expiration of the Statutory
Holding Periods. We are also subject to FUTA, FICA and Medicare taxes on amounts
Participants recognize as ordinary income.
We
are
committed to making the following awards from the Plan to our executive
officers, directors or director-nominees, associates of our executive officers,
directors or director-nominees, any other person who is to receive at least
5%
of the of the awards and all employees as a group. For purposes of completing
the table below, unless otherwise stated, we have calculated awards that are
to
be given in the future at a per share price of $0.63, which was the last sale
price on the trading day immediately prior to the Notice Date.
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Name
and Position
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|
Dollar
Value of Award
|
|
Number
of Options or Shares
(1)
|
|
Joseph
F. Langston Jr., president, chief financial officer, secretary, and
director-nominee
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|
$60,000
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|
Compensation
of $60,000 per year to be paid in cash or stock, at the option of
the
company. Computed using January 14, 2008, the last sale price on
the last
trading day immediately prior to the date of our agreement with Mr.
Langston, if we paid Mr. Langston only in common stock we would be
required to issue 74,074 shares.
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$60,000
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80,000
shares to be issued as an inducement to enter into an employment
agreement. On the date of the agreement, we used $0.75 per share
as the
value of the common stock.
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|
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$60,000
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Renewal
bonus
(1)
having a value equal to Mr. Langston’s annual compensation, payable with
shares of the company’s common stock. Computed using the price of $0.81
per share, the last sale price on January 14, 2008, the last trading
day
immediately prior to the date of our agreement with Mr. Langston,
we would
be required to issue 74,074 shares.
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|
|
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$297,000
(2)
|
|
An
option to purchase 1,500,000 shares of the company’s common stock, vesting
in increments of 300,000 shares as certain performance targets are
met.
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|
Partners
of Richardson & Patel LLP
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|
$273,108
(3)
|
|
296,856
shares of common stock.
|
|
Current
executive officers as a group
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|
1
|
|
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|
Current
directors who are not executive officers, as a group
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|
N/A
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N/A
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All
employees who are not executive officers, as a group
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N/A
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N/A
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(1)
|
If,
at the end of the term of Mr. Langston’s employment agreement we ask him
to continue to provide services, we will issue the common stock to
him. We
refer to this as a “renewal bonus”.
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|
(2)
|
The
value of these options was computed using the Black Scholes Option
Pricing
Model using the following assumptions: market price of $0.82; strike
price
from $1.50 to $3.00; risk free rate between 3.05% and 2.53%; no dividend
rate; an expected term of five months to 24.5 months; and a volatility
rate of 148.1% to 93.6%.
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|
(3)
|
Based
on the last sale price on December 18, 2007, the last trading date
immediately prior to the date of the Agreement to Convert Debt
discussed
in item 3 above.
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|
Item
7.
|
Approval
of the Issuance of Warrants Included in an Offering Made in November
2007.
|
The
discussion that follows is only a brief description of the transaction and
the
discussion of the warrants is qualified in its entirety by reference to the
form
of warrant issued to the investors, which is attached as an exhibit to our
Current Report on Form 8-K filed with the Securities and Exchange Commission
on
December 3, 2007 and available for review at
www.sec.gov.
We
are in
need of working capital to continue our business and, in particular, to develop
the Wardlaw field. On November 27, 2007 we completed a sale of units having
a
total gross value of $600,000 in a private placement to accredited investors.
Each unit was comprised of (i) 32,000 shares of our common stock and (ii) a
5
year callable warrant to purchase up to 52,253 shares of our common stock,
subject to certain vesting requirements, at an exercise price of $1.40 per
share. The warrant agreement has a cashless exercise provision, at the election
of the holder, such that fewer shares than the face amount of the warrants
may
be issued upon full exercise. The warrant agreement provides that the warrant
may not be exercised until the issuance of the warrants in the offering is
approved by our shareholders. We sold a total of 21 units at a price of $24,000
per unit for net cash proceeds of approximately $503,909. We also converted
debt
in the amount of $96,000 owed to Blackwood Ventures LLC, our largest
shareholder, into four units. We were indebted to Blackwood Ventures LLC because
it advanced payment to certain of our vendors when we did not have cash
available to pay them. The per share price of the common stock included in
the
units was less than the per share book or market value of our common stock
on
the date of sale. No underwriting discounts or commissions were paid in
connection with the offering. We are obligated to register the shares underlying
the warrants, subject to compliance with rule 415 promulgated under the
Securities Act of 1933.
Overall
Effect of Item 7
On
November 27, 2007 we had a total of 6,446,850 shares of common stock
outstanding. The total number of shares of common stock included within the
units was 800,000 shares or approximately 12.4% of the number of shares of
common stock outstanding on November 27, 2007. Because the number of shares
of
common stock included in the units was less than 20% of our outstanding common
stock, those shares have been issued to the investors. However, the warrants
represent an additional 1,306,325 shares of common stock, or approximately
20.2%
of the common stock outstanding on November 27, 2007. Therefore, included in
the
warrants is a provision that the warrants may not be exercised until we receive
shareholder approval of the issuance as required by Nasdaq Marketplace Rule
4350(i)(1)(D).
By
issuing the common stock and warrants described above, we were able to raise
a
portion of the funds we need to begin the development of the Wardlaw field.
However, the issuance of 800,000 shares of common stock had the immediate effect
of diluting the stock ownership of our common shareholders and, assuming the
exercise for cash of all the warrants we issued in this offering, the ownership
of their common shares would be further diluted by the issuance of an additional
1,306,325 shares of common stock. We would receive $1,828,855 in proceeds if
all
of the warrants are exercised for cash.
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|
Item
8.
|
Approval
of the Issuance of Units Consisting of Common Stock and Warrants
to
Accredited
Investors.
|
The
Following Discussion Does Not Constitute an Offer of the Securities To Be
Sold.
In
January 2008 our board of directors resolved to raise in a private placement
up
to $4 million in gross proceeds through the sale of units to accredited
investors, as that term is defined in rule 501 of Regulation D promulgated
under
the Securities Act of 1933, as amended. The units will consist of one share
of
our common stock and a warrant to purchase one-half share of our common stock.
The price per unit will be set on the date of closing and will be computed
as no
less than 80% of the average closing price of the common stock over at least
the
20 trading days prior to the closing. The warrants will have a term of up to
3
years. The warrant exercise price will be up to 200% of the offering price.
By
way of example, on February 15, 2008 we had 7,246,850 shares of common stock
outstanding and the average sale price of our common stock over the 20 trading
days prior to that date was $0.8335. If the offering had closed on February
15,
2008, we would have issued units totaling 5,998,800 shares of common stock
and
warrants for the purchase of 2,999,400 shares of common stock at a price of
$0.6668 per unit.
We
intend
to begin the offering 21 days after we mail this information statement to our
shareholders. We intend to use the proceeds of the offering to develop the
Wardlaw field and for other working capital purposes.
Overall
Effect of Item 8
As
noted
elsewhere in this information statement, we are in need of working capital
and
we have decided to raise funds by selling our securities. The securities that
we
sell will have the effect of diluting the common stock ownership of our existing
shareholders. We expect this dilution to be significant.
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|
Item
9.
|
Approval
of the Issuance of Shares and Warrants to Blackwood Ventures LLC
Pursuant
to an Agreement to Convert
Debt.
|
The
discussion that follows is only a brief description of the transaction and
is
qualified in its entirety by reference to the Agreement to Convert Debt between
us and Blackwood Ventures LLC and the form of warrant to be issued to Blackwood
Ventures LLC pursuant to such agreement, which are attached as exhibits to
our
Current Report on Form 8-K filed with the Securities and Exchange Commission
on
December 26, 2007 and available for review at
www.sec.gov.
On
December 19, 2007, we entered into an Agreement to Convert Debt with Blackwood
Ventures LLC, our largest shareholder, pursuant to which Blackwood Ventures
LLC
agreed to accept (i) 48,750 shares of our common stock, representing a
price of
$0.80 per share, and (ii) a warrant to purchase 36,563 shares of our common
stock at an exercise price of $1.40 per share in return for the cancellation
of
$39,000 of debt owed by us to Blackwood resulting from its prior discharge
of
certain of our accounts payable. The warrant will have a term of seven
years. On
December 18, 2007, the last trading day immediately prior to the execution
of
the Agreement to Convert Debt, the last sale price of our common stock
was
$0.92. We believe that the terms of the Agreement to Convert Debt are as
favorable to us as any agreement we would have entered into with an unaffiliated
third party. The shares we will issue to Blackwood Ventures LLC will be
restricted securities, so they will not be immediately available for resale.
Due
to the risk Blackwood Ventures LLC undertook in agreeing to accept the
restricted common stock, we agreed to issue the common stock at a discount
to
the market price. These terms are consistent with terms we would offer
to
unaffiliated purchasers of our securities in private offerings. The Agreement
to
Convert Debt was unanimously approved on December 18, 2007 by the members
of our
board of directors, none of whom was interested in the
transaction.
Reason
for the Approval
Nasdaq
Marketplace Rule 4350(i)(1)(D) requires us to obtain shareholder approval in
connection with a transaction other than a public offering involving the sale,
issuance or potential issuance of our common stock (or securities convertible
into or exercisable into our common stock) equal to 20% or more of our common
stock or 20% or more of the voting power outstanding before the issuance if
the
securities are sold for less than the greater of book or market value of our
common stock.
Although
the shares of common stock and warrants to be issued to Blackwood Ventures
LLC
pursuant to the Agreement to Convert Debt do not constitute 20% of our
outstanding shares, we are seeking shareholder approval of this issuance in
the
event that The Nasdaq Stock Market determines that this transaction should
be
combined with the private offering that we completed on November 27,
2007.
Overall
Effect of Item 9
By
paying
the debt we owed to Blackwood Ventures LLC with common stock and warrants,
we
were able to conserve our cash. However, this issuance, like the issuances
of
securities discussed above in items 7 and 8, has the effect of diluting the
common stock ownership of our existing shareholders.
|
|
Item
10.
|
Approval
of the Issuance of 666,667 Shares of Common Stock to Accredited
Investors.
|
In
January 2008 our board of directors resolved to raise funds for our operations
through an offering made to accredited investors. We sold a total of 666,667
shares of our common stock at a price of $0.75 per share for gross proceeds
of
$500,000. These funds will be used for working capital. No proceeds from this
offering have been distributed to us due to the requirement that we obtain
shareholder approval for the offering. We do not expect that there will be
brokers’ fees, commissions or other deductions from the gross proceeds. The
proceeds will be distributed to us 21 days after we mail this information
statement to our shareholders.
Overall
Effect of Item 10
As
noted
elsewhere in this information statement, we are in need of working capital
and
we have decided to raise funds by selling our securities. The securities
that we
sell will have the effect of diluting the common stock ownership of our existing
shareholders.
|
Proposal 11.
|
Approval
of the Issuance of Common Stock and Warrants to the Estate of Walter
G.
Mize in Exchange for the Relinquishment of a Put
Right.
|
The
estate of Mr. Walter G. Mize, who was formerly our largest shareholder, holds
an
option that includes a “put”. The put is a provision requiring the company to
purchase the option for the difference
between
$4.00 per share and the original exercise price, $1.50 per share. The put
may be
exercised by Mr. Mize’s estate during the period from April 1, 2008 to April 10,
2008. The value associated with the put right totals $833,335 based on Mr.
Mize’s right to purchase 333,334 shares of our common stock at an exercise price
of $1.50 per share.
We
would
like to eliminate the liability associated with the put right. Prior to his
death, Mr. Mize agreed to accept units consisting of 1,111,113 shares of
common
stock and warrants to purchase a total of 555,556 shares of common stock
in
exchange for the put right. The warrants will have a term of three years
and an
exercise price of $1.50 per share. Based on the value of the put right, the
conversion rate is $0.75 per unit. This agreement is conditioned upon the
outcome of a hearing before the Nasdaq Listing Qualifications Panel regarding
the continued listing of our common stock on the Nasdaq Capital Market. If
we
are successful in the hearing and our common stock continues to be listed
on the
Nasdaq Capital Market, then the put right will be converted into the units
discussed above. However, if we are not able to maintain our listing as a
result
of the decision by the Nasdaq Listing Qualifications Panel, Mr. Mize’s estate
will have the right, but not the obligation, to convert the put right into
units. This right to convert will expire 90 days from the date that Mr. Mize’s
estate is notified of decision of the Nasdaq Listing Qualifications
Panel.
We were
successful in the hearing, therefore the put right will be converted into
units.
Mr. Mize was not an affiliate when this agreement was entered into.
Overall
Effect of Item 11
While
this transaction will have the effect of diluting the common stock ownership
of
our existing shareholders, it will also reduce our liabilities by the value
of
the put right. If Mr. Mize’s estate exercised the warrants, we would receive
proceeds of $833,334.
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Item 12.
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Approval
of a Change of the Company’s Domicile from Utah to
Delaware
and a Change of the Company’s Name from United Heritage Corporation to
Glen Rose Petroleum Corporation
.
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In
January 2008 our board of directors determined that it would be in the
best
interests of our company and our shareholders to reincorporate in Delaware.
In
order to accomplish this reincorporation, we intend to form a corporation
in
Delaware called Glen Rose Petroleum Corporation (“Glen Rose”).
Once the
reincorporation is complete, our name will change to Glen Rose Petroleum
Corporation.
In
conjunction with the reincorporation in Delaware our board of directors
unanimously adopted and approved an Agreement and Plan of Merger of United
Heritage Corporation, a Utah corporation, and Glen Rose Petroleum Corporation
(the “Reincorporation Merger Agreement”). A copy of the Reincorporation Merger
Agreement is attached to this information statement as Annex 3. The purpose
of
the Reincorporation Merger Agreement is to change the domicile of our company
from Utah to Delaware. The Reincorporation Merger Agreement will be entered
into
as soon as practicable after the annual meeting of shareholders. A copy
of the
articles of merger to be filed by the company with the Secretary of State
of
Utah is attached as Annex 4. A copy of the certificate of merger to be
filed by
Glen Rose is attached as Annex 5.
Reason
for Reincorporation in Delaware
Delaware
is recognized as a leader in adopting, construing and implementing
comprehensive, flexible corporate laws that are responsive to the legal and
business needs of the corporations organized there. The Delaware Court of
Chancery and the Delaware Supreme Court regularly oversee complex corporate
issues and, as a result, a well-established body of case law construing Delaware
law has developed over the past several years, providing businesses with
a
greater degree of predictability than the corporate law of most other
jurisdictions.
We
also
believe that as a Delaware corporation we would be better able to continue
to
attract and retain qualified directors and officers than we would be able
to do
as a Utah corporation. We expect that many such qualified individuals may
already have experience providing services to companies incorporated in
Delaware, since Delaware is the jurisdiction of choice for many corporations.
Furthermore, Delaware’s extensive body of case law can provide officers and
directors with a comprehensive guide to the potential risks and liabilities
of
serving in those capacities, which Utah law is not currently able to
do.
Anti-Takeover
Implications
Delaware,
like many other states, permits a corporation to include in its certificate
of
incorporation or bylaws, or to otherwise adopt, measures designed to reduce
a
corporation’s vulnerability to unsolicited takeover attempts. Our board of
directors is not proposing the reincorporation in Delaware to prevent a change
in
control
and is not aware of any present attempt by any person to acquire control
or to
obtain representation on our board of directors that could be prevented by
reincorporating in Delaware. Our board of directors has no current plans
to
implement any defensive strategies to enhance its ability to negotiate with
an
unsolicited bidder.
No
Change in Business or Management
Our
reincorporation in Delaware will only change our legal domicile. It will
not
result in any change to our business or management or to our assets, liabilities
or net worth (other than as a result of costs incident to the reincorporation
merger). While we may relocate our headquarters or change the number of our
employees, we will not do so as a result of the reincorporation.
Regulatory
Approval
Except
for compliance with state and federal securities laws and the filing of the
articles of merger with the Delaware Secretary of State and the certificate
of
merger with the Utah Secretary of State, we are not aware of any federal
or
state regulatory requirements that must be complied with or approvals that
must
be obtained in connection with the reincorporation merger.
Glen
Rose Petroleum Corporation
Glen
Rose
will be incorporated in Delaware exclusively for the purpose of merging with
us
to effect our reincorporation in Delaware. Glen Rose will be our wholly-owned
subsidiary prior to the reincorporation merger. The address and telephone
number
of Glen Rose’s principal executive office will be the same as our current
address and telephone number. Before the reincorporation, Glen Rose will
have no
material assets or liabilities and will not have carried on any business.
Upon
completion of the reincorporation merger, your rights as a shareholder of
Glen
Rose will be governed by Delaware corporate law and the certificate of
incorporation and the bylaws of Glen Rose will be its governing
documents.
The
Reincorporation Merger Agreement
The
Reincorporation Merger Agreement provides that we will merge with and into
Glen
Rose, with Glen Rose being the surviving corporation. Under the Reincorporation
Merger Agreement, Glen Rose will assume all of our assets and liabilities,
including obligations under our outstanding indebtedness and contracts, and
we
will cease to exist as a corporate entity. Our board of directors and our
officers will become the board of directors and officers of Glen Rose for
identical terms of office. Our subsidiaries will become the subsidiaries
of Glen
Rose.
At
the
effective time of the reincorporation merger, each outstanding share of our
common stock will automatically be converted into one share of common stock
of
Glen Rose. Shareholders will not have to exchange their existing stock
certificates for stock certificates in Glen Rose, although if a shareholder
so
requests, Glen Rose will issue new certificates to anyone who holds our stock
certificates, provided that the holder has surrendered the certificates
representing our shares in accordance with the terms of the Reincorporation
Merger Agreement. Any request for new certificates will be subject to normal
requirements including proper endorsement, signature guarantee, if required,
and
payment of applicable fees or taxes, if any.
Subject
to the differences in the laws of Delaware and Utah, and except as may be
otherwise discussed herein, the rights of our shareholders with respect to
the
particular class or series of securities held by such shareholder will remain
the same following the reincorporation merger and will entitle the holder
to
voting rights, dividend rights and liquidation rights equivalent to the rights
attached to the respective class or series of securities prior to the effective
time of the reincorporation merger.
Following
the reincorporation merger, our employee benefit plans, including any stock
option and other equity-based plans, will be continued by Glen Rose. Each
stock
option or other equity-based award issued and outstanding pursuant to these
plans will be converted automatically into a stock option or other equity-based
award with respect to the same number of shares of common stock of Glen Rose,
upon the same terms and subject to the same conditions as set forth in the
applicable plan under which the award was granted and in the agreement
reflecting the award.
Trading
Glen Rose Common Stock
After
the
reincorporation merger, those persons who were formerly our shareholders
may
continue to sell or transfer stock certificates or securities bearing the
name
“United Heritage Corporation”. Glen Rose will issue new certificates
representing shares of Glen Rose common stock for transfers occurring after
the
effective date of the reincorporation merger.
Shareholders
whose shares of our common stock were freely tradable before the reincorporation
merger will own shares of Glen Rose that are freely tradable after the
reincorporation merger. Similarly, any shareholders holding securities with
transfer restrictions before the reincorporation merger will hold shares
of Glen
Rose that have the same transfer restrictions after the reincorporation merger.
For purposes of computing the holding period under Rule 144 of the Securities
Act of 1933, as amended, shares issued pursuant to the reincorporation merger
will be deemed to have been acquired on the date the holder thereof originally
acquired our shares.
After
the
reincorporation merger, Glen Rose will be a publicly held corporation, with
its
common stock trading on the Nasdaq Capital Market or other inter-dealer
quotation system or national securities exchange. Glen Rose will also file
reports with the Securities and Exchange Commission.
Significant
Differences Between the Corporate Laws of Utah and
Delaware
The
corporate laws of Utah and Delaware differ in many respects. Although all
the
differences are not set forth in this information statement, the differences
that could materially affect the rights of shareholders are discussed
below.
Shareholder
Approval of Certain Business Combinations
In
recent
years, a number of states have adopted special laws designed to make certain
kinds of “unfriendly” corporate takeovers, or other transactions involving a
corporation and one or more of its significant shareholders, more
difficult.
Under
the
Utah Control Shares Acquisitions Act, shares acquired in a “control share
acquisition” by a single shareholder or group of shareholders that give the
shareholder or group more than 20% of the voting power of certain public
Utah
corporations cease to have voting rights until a resolution allowing the
shares
to be voted is approved by a majority of the outstanding shares of the
corporation (excluding shares held by officers, directors and the acquirer).
The
Utah Control Shares Acquisitions Act applies only to a corporation formed
under
the laws of the State of Utah that has all of the following:
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100
or more shareholders;
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its
principal office or place of business, or substantial assets, located
in
Utah; and
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any
of (i) more than 10% of its shareholders resident in Utah, (ii)
more than
10% of its shares owned by Utah residents or (iii) 10,000 shareholders
that are Utah residents.
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We
do not
have our principal office, any place of business, or substantial assets in
the
State of Utah. Accordingly, the protections and restrictions of the Control
Shares Acquisitions Act does not presently apply to us or to holders of our
common stock.
Section
203 of the Delaware General Corporate Law prohibits a corporation from engaging
in a “business combination” with an “interested shareholder” for three years
following the date that the person becomes an interested shareholder. The
three
year moratorium imposed on business combinations by Section 203 does not
apply
if:
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prior
to the date on which the shareholder becomes an interested shareholder
the
board of directors approves either the business combination or
the
transaction which resulted in the person becoming an interested
shareholder;
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the
interested shareholder owns 85% of the corporation’s voting stock upon
consummation of the transaction which made him an interested shareholder;
or
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the
business combination is approved by the board of directors and
approved at
a shareholder meeting by the holders of two-thirds of the voting
stock not
owned by the interested
shareholder.
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Section
203 only applies to Delaware corporations that have a class of voting stock
that
is listed on a national securities exchange or held of record by more than
2,000
shareholders. However, a corporation may elect not to be governed by Section
203
by a provision in its certificate of incorporation or its bylaws. The
certificate of incorporation of Glen Rose includes a provision electing not
to
be governed by Section 203. Accordingly, following consummation of the
reincorporation merger, the board of directors will not have the power to
reject
certain business combinations with interested shareholders based on Section
203.
Indemnification
and Limitation of Liability
Utah
and
Delaware have similar laws respecting indemnification by a corporation of
its
officers, directors, employees and other agents. The laws of both states
also
permit corporations to adopt a provision in the corporation’s charter
eliminating the liability of a director to the corporation or its shareholders
for monetary damages for breach of the director’s fiduciary duty of care. There
are nonetheless differences between the laws of the two states respecting
indemnification and limitation of liability. In general, Delaware law is
somewhat broader in allowing corporations to indemnify and limit the liability
of corporate agents.
Utah
law
does not permit the elimination of a director’s monetary liability where
liability is based on:
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a
financial benefit received by a director to which the director
is not
entitled;
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an
intentional infliction of harm on the corporation or its
shareholders;
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an
unlawful distribution; or
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an
intentional violation of criminal
law.
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Delaware
law does not permit the elimination of a director’s monetary liability
for:
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breaches
of the director’s duty of loyalty to the corporation or its
shareholders;
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acts
or omissions not in good faith or involving intentional misconduct
or
knowing violations of law;
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the
payment of unlawful dividends or unlawful stock repurchases or
redemptions; or
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transactions
in which the director received an improper personal
benefit.
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Utah
law
allows a corporation to indemnify a director or former director who is made
a
party to a proceeding against liability incurred in the proceeding if his
conduct was in good faith, he reasonably believed that his conduct was in,
or
not opposed to, the corporation’s best interests and, in the case of a criminal
proceeding, he had no reasonable cause to believe that his conduct was unlawful.
A corporation may not indemnify a director in connection with a proceeding
by or
in the right of the corporation in which the director was judged liable to
the
corporation or in connection with any other proceeding charging that the
director derived an improper personal benefit, whether or not involving action
in his official capacity, in which proceeding he was judged liable on the
basis
that he derived an improper personal benefit. In Utah, unless limited by
its
articles of incorporation, a corporation must indemnify a director or an
officer
who was successful, on the merits or otherwise, in defense of any proceeding,
to
which he was a party because he is or was a director of the corporation,
against
reasonable expenses incurred by him in connection with the proceeding or
claim
with respect to which he has been successful. Utah law allows a corporation
to
advance reasonable expenses incurred by a director who is a party to a
proceeding if the director furnishes the corporation with a written affirmation
of his good faith belief that he has met the applicable standard of conduct
described above, if he furnishes to the corporation a written undertaking,
executed personally or on his behalf, to repay the advance if it is ultimately
determined that he did not meet the standard of conduct and there are no
facts
then known that would preclude indemnification. The determination as to whether
or not the director is entitled to indemnity or to an advance must be made
by a
majority vote of the directors at which a quorum is present, so long as no
member of the quorum is a party to the proceeding, or if such a quorum cannot
be
obtained, by a majority vote of a committee of the board of directors, which
committee shall consist of two or more directors who are not parties to the
proceeding, or by special legal counsel or by the shareholders by a majority
of
the votes entitled to be cast at a meeting. A director or officer who is
or was
a party to a proceeding may apply
for
indemnification to the court conducting the proceeding or to any other court
of
competent jurisdiction. A corporation may indemnify and advance expenses
to an
officer, employee, fiduciary or agent of the corporation to the same extent
as a
director.
Delaware
law permits indemnification of any person who was or is a party or threatened
to
be made a party to any action, suit or proceeding so long as the person acted
in
good faith and in a manner the person reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. No person may be indemnified in an action brought on behalf
of the
corporation by a third party if that person is judged to be liable to the
corporation unless the Court of Chancery or the court in which the action
or
suit was brought determines that, despite the adjudication of liability and
in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity. A corporation must indemnify a present or former director
or officer of a corporation who has been successful on the merits or otherwise
in a defense of any action, suit or proceeding. Whether or not a person has
acted in good faith and in a manner reasonably believed to be in, or not
opposed
to, the best interests of the corporation will be determined by a majority
vote
of the directors who are not parties to such action, suit or proceeding,
even
though less than a quorum, or by a committee of such directors designated
by a
majority vote of the directors, even though less than a quorum, or by
independent legal counsel in a written opinion or by the
shareholders.
Utah
law
expressly states that provisions relating to the indemnification of, or advances
for expenses to be made to, directors that are contained in a corporation’s
articles of incorporation or bylaws, in a resolution of its shareholders
or
board, or in a contract other than an insurance policy, is valid only if
and to
the extent that the provisions are not inconsistent with Utah law.
In
Delaware, indemnification and the advancement of expenses provided by or
granted
pursuant to Delaware law is not deemed to be exclusive of any other rights
to
which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of shareholders or disinterested directors
or
otherwise.
Both
Utah
law and Delaware law permit the purchase of insurance for the benefit of
any
person who is or was a director, officer, employee or agent of the corporation
or is serving at the request of the corporation as a director, officer, employee
or agent of another corporation.
Dividends
and Repurchase of Shares
Utah
law
dispenses with the concepts of par value of shares as well as statutory
definitions of capital and surplus. The concepts of par value, capital and
surplus exist under Delaware law.
Under
Utah law, a corporation may not make any distribution or repurchase its shares
if, after giving effect to the distribution or repurchase:
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the
corporation would not be able to pay its debts as they become due
in the
normal course; or
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its
total assets would be less than the sum of its total liabilities
plus the
amount, if any, payable upon liquidation to holders of any preferred
stock
with distribution rights superior to the rights of holders of common
stock.
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Delaware
law permits a corporation to declare and pay dividends out of surplus or,
if
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or for the preceding fiscal year as long as the
amount
of capital of the corporation following the declaration and payment of the
dividend is not less than the aggregate amount of the capital represented
by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that
a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and the redemption or repurchase would not impair
the capital of the corporation.
To
date,
we have not paid any cash dividends on our outstanding shares of common stock
and we do not anticipate doing so in the foreseeable future.
Voting
and Shareholder Approval Requirements
In
Utah,
each share of voting stock is entitled to one vote and each fractional share
is
entitled to a fractional vote. Directors are elected by a plurality of the
votes
cast. Cumulative voting for directors is not permitted unless the articles
of
incorporation provide for cumulative voting. With the exception of action
to be
taken on a plan of merger or share exchange or voting on an amendment to
the
corporation’s articles of incorporation, Utah law generally requires the holders
of a majority of the shares of voting stock to approve the action. Action
to be
taken on a plan of merger or share exchange must be approved by each voting
group entitled to vote separately on the plan by a majority of all the votes
entitled to be cast on the plan by the voting group. In general, a class
or
series of stock is entitled to vote separately (or together with similarly
affected shares of different series of the same class) if the proposed
transaction would change the rights, preferences or limitations of the
respective class or series. If shareholder voting is required to approve
an
amendment to the articles of incorporation, then the holders of the outstanding
shares of a class are entitled to vote as a separate voting group. If a proposed
amendment would affect a series of a class of shares, the shares of that
series
are entitled to vote as a separate voting group on the proposed amendment.
However, if a proposed amendment entitles two or more series of a class of
shares to vote as separate voting groups, and the amendment would affect
the two
or more series in the same or a substantially similar way, then the shares
of
all the series so affected must instead vote together as a single voting
group
on the amendment.
In
Delaware, each share of voting stock is entitled to one vote, unless the
certificate of incorporation provides for more or less than one vote per
share.
Like Utah, directors are elected by a plurality of the votes cast. Delaware
law
also allows cumulative voting for directors if the certificate of incorporation
so provides. With the exception of voting on an amendment to the certificate
of
incorporation and voting on the election of directors, all shareholder actions,
including the approval of a merger or consolidation, require the affirmative
vote of the majority of shares present at the meeting and entitled to vote
on
the subject matter. In order to amend a certificate of incorporation, the
holders of the outstanding shares of a class are entitled to vote as a class
on
a proposed amendment, whether or not they are entitled to vote thereon by
the
certificate of incorporation, if the amendment would increase or decrease
the
aggregate number of authorized shares of such class, increase or decrease
the
par value of the shares of such class, or alter or change the powers,
preferences, or special rights of the shares of such class so as to affect
them
adversely. If any proposed amendment would alter or change the powers,
preferences, or special rights of one or more series of any class so as to
affect them adversely, but does not so affect the entire class, then only
the
shares of the series so affected by the amendment shall be considered a separate
class for the purposes of voting.
Neither
Utah law nor Delaware law requires a shareholder vote of the surviving
corporation in a merger if:
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the
merger agreement does not amend the existing certificate of
incorporation;
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each
share of the stock of the surviving corporation outstanding immediately
before the merger is an identical outstanding share after the merger;
and
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either
no shares of common stock of the surviving corporation and no securities
convertible into common stock are to be delivered under the plan
of
merger, or the authorized unissued shares or the treasury shares
of common
stock of the surviving corporation to be delivered under the plan
of
merger plus those initially issuable upon conversion of any other
securities to be delivered under the plan do not exceed 20% of
the shares
of common stock outstanding immediately prior to the
merger.
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Utah
law
and Delaware law are also substantially similar when the merger involves
a
parent owning at least 90% of a subsidiary. In that case, no vote of the
shareholders of either corporation is required unless the subsidiary will
be the
surviving corporation, in which case the vote of the shareholders of the
parent
must be obtained.
Under
Utah law, a sale of all or substantially all of the assets of a corporation
must
be approved by each voting group entitled to vote on the
transaction.
Under
Delaware law, a sale of all or substantially all of the assets of a corporation
must be approved solely by the holders of a majority of the outstanding voting
shares of the corporation.
Unless
otherwise provided in the articles of incorporation or the Utah statutes,
any
action which may be taken at any annual or special meeting of shareholders
may
be taken without a meeting and without prior notice, if one or more consents
in
writing, setting forth the action so taken, is signed by the holders of
outstanding shares having not less than the minimum number of votes that
would
be necessary to authorize or take the action at a meeting at which all shares
entitled to vote thereon were present and voted. Unless the written consents
of
all shareholders entitled to vote have been obtained, notice of any shareholder
approval without a meeting shall be given at least ten days before the
consummation of the transaction, action, or event authorized by the shareholder
action to those shareholders entitled to vote who have not consented in writing;
and to those shareholders not entitled to vote but to whom Utah law requires
that notice of the proposed action be given. Prompt notice of the taking
of the
corporate action without a meeting by less than unanimous written consent
shall
be given to those shareholders who have not consented in writing and who,
if the
action had been taken at a meeting, would have been entitled to notice of
the
meeting if the record date for such meeting had been the date that written
consents signed by a sufficient number of holders to take the action were
delivered to the corporation. Under Utah law, a corporation in existence
prior
to July 1, 1992 may not take action by the written consent of fewer than
all of
the shareholders entitled to vote with respect to the subject matter of the
action, until the date a resolution providing otherwise is approved either
by a
consent in writing, setting forth the proposed resolution, signed by all
of the
shareholders entitled to vote with respect to the subject matter of the
resolution; or at a duly convened meeting of shareholders, by the vote of
the
same percentage of shareholders of each voting group as would be required
to
include the resolution in an amendment to the corporation's articles of
incorporation. Delaware law does not have such a provision. We received
shareholder approval to act by written consent at our annual meeting held
on
December 19, 2005.
Unless
otherwise provided in the certificate of incorporation, shareholders in Delaware
may take any action at any annual or special meeting of shareholders or any
action which may be taken at any annual or special meeting of the shareholders,
may be taken without a meeting, without prior notice and without a vote,
if a
consent or consents in writing, setting forth the action so taken, is signed
by
the holders of outstanding stock having not less than the minimum number
of
votes that would be necessary to authorize or take such action at a meeting
at
which all shares entitled to vote thereon were present and voted. No written
consent will be effective to take the corporate action unless, within 60
days of
the earliest dated consent delivered to the corporation, written consents
signed
by a sufficient number of holders to take action are delivered to the
corporation.
Dissenters’
or Appraisal Rights
Under
Utah law, a shareholder has a right to dissent from and obtain payment of
the
fair value of shares held by him in the event of a consummation of a plan
of
merger to which the corporation is a party if shareholder approval is required
for the merger (including if the corporation is a subsidiary that merged
with
its parent), consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, consummation
of a
sale, lease exchange or other disposition of all or substantially all of
the
property of the corporation for which a shareholder vote is required and
consummation of a sale, lease, exchange or other disposition of all or
substantially all of the property of an entity controlled by a corporation
if
the shareholders of the corporation were entitled to vote on the consent
of the
corporation to the disposition. A shareholder may also dissent and obtain
payment of the fair value of his shares in the event of any other corporate
action to the extent the articles of incorporation, bylaws or a resolution
of
the board of directors so provides. However, a shareholder may not dissent
and
obtain payment of the fair value of his shares if the shares are listed on
a
national securities exchange registered under the Securities Exchange Act
of
1934 or on the National Market System of the National Association of Securities
Dealers Automated Quotation System or were held of record by more than 2,000
shareholders. This limitation does not apply if the shareholders will receive
for their shares anything other than shares of the corporation surviving
the
consummation of the plan of merger or share exchange, shares of a corporation
which at the effective date of the merger or share exchange will be listed
on a
national securities exchange registered under the Securities Exchange Act
of
1934 or on the National Market System of the National Association of Securities
Dealers Automated Quotation System or if the shares will be held of record
by
more than 2,000 shareholders, cash in lieu of fractional shares or any
combination of shares and cash. The shareholder who wishes to asset dissenters’
rights must cause the corporation to receive, before the vote is taken, written
notice of his intent to demand payment for his shares if the proposed action
is
effectuated and may not vote any of his shares in
favor
of
the proposed action. In order to be entitled to payment, the shareholder
must
have been a shareholder with respect to the shares for which payment is demanded
as of the date the proposed corporate action creating dissenters’ rights is
approved by the shareholders.
Under
Delaware law, unless the certificate of incorporation provides for appraisal
rights upon the sale of all or substantially all of its assets, a shareholder
only has appraisal rights in the event of a merger or consolidation and only
so
long as the shares are not either listed on a national securities exchange
or
held of record by more than 2,000 shareholders. Like Utah, this limitation
does
not apply if the shareholder will receive for his shares anything other than
shares of the corporation surviving the consummation of the merger or
consolidation, shares of a corporation which at the effective date of the
merger
or consolidation will be listed on a national securities exchange or held
of
record by more than 2,000 shareholders, cash in lieu of fractional shares
or any
combination of shares and cash. The shareholder must hold his shares on the
date
that he makes a demand for appraisal, must continuously hold his shares through
the effective date of the merger or consolidation and may not have voted
in
favor of, or consented to, the merger or consolidation. Any shareholder electing
to demand appraisal must deliver to the corporation, before the vote is taken,
a
written demand for appraisal of his shares.
Delaware
law and Utah law also provide an exemption to a corporation surviving a merger
if no vote of the shareholders of the surviving corporation is required to
approve the merger.
Directors
In
Utah,
before any shares are issued, a corporation's board of directors may consist
of
one or more individuals. After shares are issued and for as long as a
corporation has fewer than three shareholders entitled to vote for the election
of directors, its board of directors may consist of a number of individuals
equal to or greater than the number of those shareholders. If a corporation
has
more than three shareholders, it must have at least three
directors.
Delaware
law requires a corporation to have at least one director who is a natural
person.
Under
Utah law, the articles of incorporation may provide for staggering the terms
of
directors by dividing the total number of directors into two or three groups,
with each group containing 1/2 or 1/3 of the total, as near as may be. In
that
event, the terms of directors in the first group expire at the first annual
shareholders' meeting after their election, the terms of directors in the
second
group expire at the second annual shareholders' meeting after their election,
and the terms of directors in the third group, if any, expire at the third
annual shareholders' meeting after their election. Upon the expiration of
the
initial staggered terms directors shall be elected for terms of two years
or
three years, as the case may be, to succeed those whose terms
expire.
Like
Utah, Delaware law allows the directors of a corporation, by the certificate
of
incorporation or by an initial bylaw, or by a bylaw adopted by a vote of
the
shareholders, to be divided into one, two or three classes; the term of office
of those of the first class expires at the first annual meeting held after
such
classification becomes effective; of the second class one year thereafter;
of
the third class two years thereafter; and at each annual election held after
such classification becomes effective, directors will be chosen for a full
term
to succeed those whose terms expire.
Inspection
of Records
Under
Utah law, directors or shareholders may inspect certain corporate records
for
any purpose as long as the directors or shareholders give the corporation
written notice five business days in advance. Other records, including the
shareholder list and minutes from meetings of the board of directors may
be
inspected only for a purpose reasonably related to the shareholder’s or
director’s interest.
In
contrast, Delaware law allows shareholders and directors to inspect the
corporation’s records and shareholder list for purposes reasonably related to
the person’s interests as a shareholder or director upon written
demand.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion and analysis of our financial condition, plan of operation
and liquidity should be read in conjunction with our unaudited consolidated
condensed financial statements and the notes thereto and our audited financial
statements and the notes thereto.
Overview
We
are an
independent producer of natural gas and crude oil based in Midland, Texas.
We
produce from property we lease in the Wardlaw field in Edwards County, Texas
(the “Wardlaw Field”). We acquired our Texas property, which includes 130
potentially productive wellbores (of which approximately 44 wells are capable
of
producing), in February 1997. Our plan has been to develop this property
by
reworking many of the existing wells and drilling additional wells, however,
the
revenues we earn do not presently provide us with sufficient capital to
implement our development plan.
From
November 2005 until it declared bankruptcy on June 13, 2007 (the “Lothian
Bankruptcy”), Lothian Oil Inc. (“Lothian”), formerly our largest shareholder,
provided us with the funds to operate. Lothian acquired its shares of our
common
stock on October 7, 2005, a portion of which were purchased from Walter G.
Mize
(“Mize”), our former chief executive officer and chairman of the board of
directors, and persons associated or affiliated with Mize, in consideration
of
an aggregate principal amount of $10,651,000 evidenced by a promissory note
(the
“Lothian Note”).
Following
a default under the terms of the Lothian Note, on July 31, 2007, Mize entered
into a settlement agreement with Lothian, dated July 26, 2007 (the “Mize
Agreement”), and pursuant to which, in exchange for a payment of $250,000 from
Mize to Lothian and forgiveness by Mize of debt totaling $5,318,149.18, Lothian
transferred to Mize 3,759,999 shares of common stock and warrants to purchase
up
to an additional 2,906,666 shares of common stock (collectively, the “Mize
Securities”), constituting all of the shares of our common stock and warrants to
purchase shares of our common stock then held by Lothian.
On
July
31, 2007, we entered into an agreement, dated July 26, 2007, entitled “Agreement
to Settle Intercompany Debt and other Claims” with Lothian (the “Lothian
Agreement”), to which the execution of the Mize Agreement was a condition
precedent, and pursuant to the terms of which Lothian agreed, among other
things, to forgive a $1,800,000 claim asserted against us (the “Claim”).
Included in the Claim amount was $753,296 in principal and approximately
$71,254
in accrued interest related to a loan we received from Lothian for development
of our Wardlaw Field.
In
consideration of Lothian’s forgiveness of the Claim, we agreed to deliver to
Lothian any funds in excess of $100,000 that we received from Cano Petroleum,
Inc. (“Cano”) in connection with an asset purchase and sale agreement (the “Cano
Agreement”), pursuant to which we agreed to sell all of the assets of UHC New
Mexico Corporation, our wholly owned subsidiary (“UHC New Mexico”), to Cano
Petro of New Mexico, Inc.(“Cano New Mexico”), in consideration of $7 million
dollars in cash and 404,204 restricted shares of Cano common stock (the “Cano
Securities”), and in accordance with the terms of which Cano New Mexico held
back $800,000 from the cash proceeds of the purchase price (the “Holdback
Amount”) to satisfy potential environmental and title claims and payables
related to the purchased assets (the preceding transaction is hereinafter
referred to as the “Asset Sale”). The holdback period ended 120 days following
the date of the Asset Sale, which was March 30, 2007. During the holdback
period, Cano New Mexico disbursed $258,000 to us, which we used to satisfy
the
payables related to the purchased assets. Cano New Mexico kept the remaining
balance of the Holdback Amount to satisfy title deficiencies and environmental
remediation costs. We do not anticipate the receipt of any of the remaining
balance of the Holdback Amount.
Immediately
following the Asset Sale, UHC New Mexico used $4,398,000 of the cash proceeds
to
repay a portion of the principal of a $6,554,000 loan outstanding and owed
to
Lothian (the “Lothian Loan”), and pledged the Cano Securities to secure the
remaining balance thereof. On June 6, 2007 we entered into an agreement with
UHC
New Mexico and Lothian pursuant to which we transferred the Cano Securities
to
Lothian in full satisfaction of the remaining balance on the Lothian
Loan.
On
September 26, 2007 Mize, entered into a restated stock sale agreement (the
“Blackwood Agreement”), effective as of September 18, 2007, with Blackwood,
pursuant to which Blackwood purchased all of the Mize Securities for an
aggregate purchase price of $5,017,000, consisting of $375,000 in cash and
two
promissory
notes in the principal amount of $3,767,000 and $875,000, respectively. As
a
result of this transaction, Blackwood now owns approximately 66.9% of our
voting
securities on a fully diluted basis (the “Change in Control”).
Following
the Change in Control, on October 8, 2007, Messrs. C. Scott Wilson, Thomas
Kelly, Raoul Baxter and Kenneth Levy resigned from our board of directors
and
Messrs. Joseph F. Langston, Jr. (“Langston”), Theodore D. Williams and Paul K.
Hickey were appointed in their place. Messrs. Williams and Hickey were also
appointed as members of our Audit Committee in place of Messrs. Kelly and
Baxter.
On
October 8, 2007, Messrs. Wilson and Levy were also terminated from their
positions as our chief executive officer and chief financial officer,
respectively, and Langston was appointed as our interim chief executive officer,
interim president and interim chairman of the board of directors and as our
chief financial officer and treasurer.
On
November 26, 2007, Messrs. Mize, C. Dean Boyd, Joe Martin, Charles Garrett
and
Bill Wilkins resigned from our board of directors.
On
November 28, 2007 we entered into a 12 month consulting agreement (the
“Consulting Agreement”) with DK True Energy Development Ltd., a member of
Blackwood, our largest shareholder, and RTP Secure Energy Corp. (together,
the
“Consultants”). A discussion of the material terms of the Consulting Agreement
is included in the discussion of item 1 at page
7.
On
November 28, 2007, we entered into a consulting agreement with Applewood
Energy,
Inc., (“Applewood”), effective as of November 1, 2007 (the “Applewood
Agreement”). A discussion of the material terms of the Applewood Agreement is
included in the discussion of item 2 at page 8.
On
November 28, 2007 we entered into a consulting agreement with GWB Petroleum
Consultants Ltd. (“GWB”), effective as of November 1, 2007 (the “GWB
Agreement”). A discussion of the material terms of the GWB Agreement is included
in the discussion of item 2 at page 8.
On
November 28, 2007 we completed the sale and issuance of units having a total
gross value of $600,000 in a private placement to accredited investors. A
discussion of the material terms of this offering is included in the discussion
of item 7 at page 16.
On
December 19, 2007, we entered into an agreement to convert debt with our
legal
counsel, Richardson & Patel, LLP. A discussion of the material terms of this
agreement is included in the discussion of item 3 at page 10.
On
December 19, 2007, we entered into an agreement to convert debt with Blackwood.
A discussion of the material terms of this agreement is included in the
discussion of item 5 at page 11.
Going
Concern Status
Our
financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities
in the
ordinary course of business. We have incurred substantial losses from our
operations and we have a working capital deficit which raises substantial
doubt
as to our ability to continue as a going concern. We had net loss of $ 484,843
for the nine months ended December 31, 2007 and a net loss of $11,435,134
for
the fiscal year ended March 31, 2007, and, as of the same periods, we had
an
accumulated deficit of $43,483,989 and $42,999,146, respectively. Unless
we are
able to obtain the financing we need to develop our properties, there can
be no
assurance that we will be able to continue as a going concern.
Critical
Accounting Policies and Estimates
Our
critical accounting policies, including the assumptions and judgments underlying
those policies, are more fully described in the notes to our audited financial
statements contained in our annual report on Form 10-KSB for the fiscal years
ended March 31, 2007 and 2006. We have consistently applied these policies
in
all material respects. These policies are not guarantees of future performance
and involve risks and uncertainties. Actual results may differ materially
from
the assumptions or estimates we use when applying these policies. Set forth
below are the accounting policies that we believe most critical to an
understanding of our financial condition and liquidity.
Oil
and Gas Properties
Proved
Reserves
Proved
reserves are defined by the SEC as those volumes of crude oil, condensate,
natural gas liquids and natural gas that geological and engineering data
demonstrate with reasonable certainty are recoverable from known reservoirs
under existing economic and operating conditions. Proved developed reserves
are
volumes expected to be recovered through existing wells with existing equipment
and operating methods. Although our engineers are knowledgeable of and follow
the guidelines for reserves established by the SEC, the estimation of reserves
requires our engineers to make a significant number of assumptions based
on
professional judgment. Reserves estimates are updated at least annually and
consider recent production levels and other technical information about each
well. Estimated reserves are often subject to future revision, which could
be
substantial, based on the availability of additional information including
reservoir performance, new geological and geophysical data, additional drilling,
technological advancements, price changes and other economic factors. Changes
in
oil and gas prices can lead to a decision to start-up or shut-in production,
which can lead to revisions to reserve quantities. Reserve revisions in turn
cause adjustments in the depletion rates utilized by us. We cannot predict
what
reserve revisions may be required in future periods.
Depletion
rates are determined based on reserve quantity estimates and the capitalized
costs of producing properties. As the estimated reserves are adjusted, the
depletion expense for a property will change, assuming no change in production
volumes or the costs capitalized. Estimated reserves are used as the basis
for
calculating the expected future cash flows from a property, which are used
to
determine whether that property may be impaired. Reserves are also used to
estimate the supplemental disclosure of the standardized measure of discounted
future net cash flows relating to oil and gas producing activities and reserve
quantities disclosure in Note 20 to our audited consolidated financial
statements for the fiscal year ended March 31, 2007, which are included in
our
annual report on Form 10-KSB for that fiscal year. Changes in the estimated
reserves are considered changes in estimates for accounting purposes and
are
reflected on a prospective basis.
We
employ
the full cost method of accounting for our oil and gas production assets,
which
are located in the southwestern United States. Under the full cost method,
all
costs associated with the acquisition, exploration and development of oil
and
gas properties are capitalized and accumulated in cost centers on a
country-by-country basis. The sum of net capitalized costs and estimated
future
development and dismantlement costs for each cost center is depleted on the
equivalent unit-of-production basis using proved oil and gas reserves as
determined by independent petroleum engineers.
Net
capitalized costs are limited to the lower of unamortized cost net of related
deferred tax or the cost center ceiling. The cost center ceiling is defined
as
the sum of: (i) estimated future net revenues, discounted at 10% per annum,
from
proved reserves, based on un-escalated year-end prices and costs; (ii) the
cost
of properties not being amortized; (iii) the lower of cost or market value
of
unproved properties included in the costs being amortized; and (iv) income
tax
effects related to differences between the book and tax basis of the oil
and gas
properties.
The
ceiling test is affected by a decrease in net cash flow from reserves due
to
higher operating or finding costs or reduction in market prices for natural
gas
and crude oil. These changes can reduce the amount of economically producible
reserves. If the cost center ceiling falls below the capitalized cost for
the
cost center, we would be required to report an impairment of the cost center’s
oil and gas assets at the reporting date.
Impairment
of Properties
We
will
continue to monitor our long-lived assets recorded in oil and gas properties
in
the consolidated balance sheet to ensure they are fairly presented. We must
evaluate our properties for potential impairment when circumstances indicate
that the carrying value of an asset could exceed its fair value. A significant
amount of judgment is involved in performing these evaluations since the
results
are based on estimated future events. Such events include a projection of
future
oil and natural gas sales prices, an estimate of the ultimate amount of
recoverable oil and gas reserves that will be produced from a field, the
timing
of future production, future production costs, and future inflation. The
need to
test a property for impairment can be based on several factors, including
a
significant reduction in sales prices for oil and/or gas, unfavorable adjustment
to reserves, or other changes to contracts, environmental regulations or
tax
laws. All of these factors must be considered when testing a property’s carrying
value for impairment. We cannot predict whether impairment charges may be
required in the future.
Revenue
Recognition
Oil
and
gas production revenues are recognized at the point of sale. Production not
sold
at the end of the fiscal year is included as inventory.
Income
Taxes
Included
in our net deferred tax assets are approximately $15.3 million of future
tax
benefits from prior unused tax losses. Realization of these tax assets depends
on our achieving sufficient future taxable income prior to the expiration
of the
future tax benefits, of which there can be no assurance. In addition, as
a
result of our Change in Control, our annual use of net operating losses will
be
limited, therefore, we have provided an allowance for the full amount of
our net
deferred tax asset.
Accounting
Estimates
Our
financial statements have been prepared in accordance with United States
generally accepted accounting principles. These principles require our
management to make certain estimates, judgments and assumptions that affect
the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. In particular, there is
significant judgment required to estimate oil and gas reserves, asset retirement
obligations and impairment of the unproved properties. These estimates are
based
on our historical experience and various other assumptions that we believe
to be
reasonable under the circumstances, and are evaluated on an on going basis.
Actual results may differ materially from these estimates under different
assumptions or conditions.
Off-Balance
Sheet Arrangements
We
currently have no off-balance sheet arrangements, special purpose entities
or
financing partnerships that have or are reasonably likely to have a current
or
future effect on our financial condition, change in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures
or
capital resources.
Results
of Operations
Three
and Nine Months Ended December 31, 2007 as Compared to the Three and Nine
Months
Ended December 31, 2006
The
following selected financial data for the three and nine months ended December
31, 2007 as compared to the three and nine months ended December 31, 2006
are
derived from our unaudited consolidated condensed financial statements and
is
qualified in its entirety by and should be read in conjunction with such
financial statements and related notes contained therein.
|
|
|
Three Months Ended
December 31
|
|
Nine Months Ended
December 31
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
Income
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,311
|
|
$
|
253,904
|
|
$
|
26,266
|
|
$
|
909,995
|
|
|
Depreciation
and depletion
|
|
|
338
|
|
|
156,621
|
|
|
1,014
|
|
|
503,293
|
|
|
Total
operating costs and expenses
|
|
|
1,771,166
|
|
|
735,914
|
|
|
2,538,208
|
|
|
2,624,662
|
|
|
Loss
from operations
|
|
|
(1,746,855
|
)
|
|
(482,010
|
)
|
|
(2,511,942
|
)
|
|
(1,714,667
|
)
|
|
Income
tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net
income (loss)
|
|
$
|
(1,744,076
|
)
|
$
|
(627,150
|
)
|
$
|
(484,843
|
)
|
$
|
(2,010,414
|
)
|
|
Basic
and diluted loss per share
|
|
$
|
(0.26
|
)
|
$
|
(0.10
|
)
|
$
|
(0.07
|
)
|
$
|
(0.32
|
)
|
|
Weighted
average number of shares
|
|
|
6,778,886
|
|
|
6,446,850
|
|
|
6,557,931
|
|
|
6,446,850
|
|
Oil
and Gas Results
Our
revenues decreased $229,593, or approximately 91%, from $253,904 for the
three
months ended December 31, 2006, to $24,311 for the three months ended December
31, 2007. Our revenues decreased $883,729, or approximately 97%, from $909,995
for the nine months ended December 31, 2006, to $26,266 for the nine months
ended December 31, 2007. This decrease in revenues was primarily attributable
to
our sale of the assets of UHC New Mexico (the “UHC Sale”), which had previously
accounted for a significant portion of our production and sale of oil and
all of
our production and sale of natural gas. Currently, the only remaining field
owned by Company, the Wardlaw Field in Edwards County, Texas, is producing
less
than 10 barrels of oil per day.
Our
total
operating costs and expenses increased $1,035,252, or approximately 141%,
from
$735,914 for the three months ended December 31, 2006, to $1,771,166 for
the
three months ended December 31, 2007. Our total operating costs and expenses
decreased $86,454, or approximately 3%, from $2,624,662 for the nine months
ended December 31, 2006, to $2,538,208 for the nine months ended December
31,
2007. This decrease in our operating expenses was primarily attributable
to
decreases in production and operating costs, and depreciation and depletion
expense as a result of the UHC Sale. Our remaining general and administrative
expenses were primarily attributable to continued expenses from the Lothian
Bankruptcy, as well as additional expenses incurred in relation to our Change
in
Control and our associated change in members of management and of our board
of
directors, offset by the approximate $1.2 million expense from the warrants
issued during the three months ended December 31, 2007.
Our
production and operating expenses decreased $385,064, or approximately 95%,
from
$406,736 for the three months ended December 31, 2006, to $21,672 for the
three
months ended December 31, 2007. Our production and operating expenses decreased
$958,569, or approximately 92%, from $1,040,920 for the nine months ended
December 31, 2006, to $82,351 for the nine months ended December 31, 2007.
Our
depreciation and depletion decreased by $156,283, or approximately 99%, from
$156,621 for the three months ended December 31, 2006, to $338 for the three
months ended December 31, 2007. Our depreciation and depletion decreased
by
$502,279, or approximately 99%, from $503,293 for the nine months ended December
31, 2006, to $1,014 for the nine months ended December 31, 2007. General
and
administrative expenses increased $1,464,221, or approximately 849%, from
$172,557 for the three months ended December 31, 2006, to $1,636,778 for
the
three months ended December 31, 2007. General and administrative expenses
increased $917,664, or approximately 46%, from $1,080,449 for the nine months
ended December 31, 2006, to $1,998,113 for the nine months ended December
31,
2007, this increase is primarily attributable to stock compensation expenses.
Our bad debt expense increased from $0 for the three and nine months ended
December 31, 2006, to $41,406 and $243,814, respectively, for the three and
nine
months ended December 31, 2007. This increase in our bad debt expense was
attributable to amounts owed to us from the UHC Sale that were ultimately
not
collected during the three and nine months ended December 31, 2007, and for
which we had no comparable expense for the three and nine months ended December
31, 2006. Our option put rights expense increased from $0 for the three and
nine
months ended December 31, 2006, to $69,728 and $209,184, respectively, for
the
three and nine months ended December 31, 2007. This increase in our option
put
rights expense is attributable to the fact that we entered into amendments
to
option agreements with certain of our former employees and consultants during
the three and nine months ended December 31, 2007, and we had no comparable
expense for the three and nine months ended December 31, 2006.
Our
loss
from operations increased $1,264,845, or approximately 260%, from $482,010
for
the three months ended December 31, 2006, to $1,746,855 for the three months
ended December 31, 2007. Our loss from operations increased $797,275, or
approximately 47%, from $1,714,667 for the nine months ended December 31,
2006,
to $2,511,942 for the nine months ended December 31, 2007. This change in
our
loss from operations is primarily attributable to an increase in legal and
consulting expenses incurred in relation to our Change in Control, and more
importantly the charge related to compensatory options awarded management
and
consultants.
Our
other
income (expense) included income from a gain on our forgiveness of a debt
of
$1,780,710 during the nine months ended December 31, 2007, which was
attributable to Lothian’s forgiveness of the Claim pursuant to the terms of the
Lothian Agreement, and for which there was no comparable income for the nine
months ended December 31, 2006. We experienced income from a gain on the
sale of
investments of
$303,155
for the nine months ended December 31, 2007, which was attributable to the
transfer of the Cano Securities to Lothian as full payment for the Lothian
Loan,
and for which there was no comparable income for the nine months ended December
31, 2006. We also experienced income from a gain on the sale of property
and
equipment of $13,351 for the nine months ended December 31, 2007, for which
there was no comparable income for the nine months ended December 31, 2007.
Offsetting our other income was an interest expense, which decreased $142,919,
or approximately 98%, from $145,140 for the three months ended December 31,
2006, to $2,221 for the three months ended December 31, 2007. Our interest
expense decreased $225,630, or approximately 76%, from $295,747 for the nine
months ended December 31, 2006, to $70,117 for the nine months ended December
31, 2007. This decrease in our interest expense is primarily attributable
to our
payment of the Lothian Loan.
Our
net
loss decreased $1,116,926 or approximately 178%, from $627,150 for the three
months ended December 31, 2006, to $1,744,076 for the three months ended
December 31, 2007. Our net loss decreased $1,525,571, or approximately 76%,
from
$2,010,414 for the nine months ended December 31, 2006, to a net loss of
$484,843 for the nine months ended December 31, 2007. This decrease in our
net
loss is primarily attributable to Lothian’s forgiveness of the Claim pursuant to
the terms of the Lothian Agreement, offset by an expense of approximately
$1.2
million related to compensatory warrants issued.
Liquidity
and Capital Resources
Liquidity
Our
revenues have not been adequate to support our operations and we do not expect
that this will change in the near future. In the past, we have relied primarily
on loans from Lothian to finance our operations.
On
November 28, 2007 we completed the sale and issuance of units having a total
gross value of $600,000 in a private placement to accredited investors (the
“November Offering”). Each unit was comprised of (i) 32,000 shares of our common
stock, par value $0.001 per share, and (ii) a 5 year callable warrant to
purchase up to 52,253 shares of our common stock, subject to certain vesting
requirements, at an exercise price of $1.40 per share. The warrants may not
be
exercised until we obtain shareholder approval of their issuance. We sold
and
issued a total of 21 units at a price of $24,000 per unit, for net cash proceeds
of approximately $504,000. We also converted debt in the amount of $96,000
owed
to Blackwood, our largest shareholder, into 4 units. The per share price
of the
common stock included in the units was less than the per share book or market
value of our common stock on the date of sale. No underwriting discounts
or
commissions were paid in connection with the November Offering. We are obligated
to register the shares underlying the warrants, subject to compliance with
rule
415 promulgated under the Securities Act.
In
addition, on December 19, 2007, we issued 345,606 shares of common stock
and
259,205 stock purchase warrants, exercisable at $1.05 per share, for the
conversion of accounts payable totaling $276,139.
Our
current assets decreased by $ 1,910,435 or approximately 86%, from $2,208,668
for March 31, 2007, to $298,233 at December 31, 2007. The decrease in our
current assets was due primarily to a reduction of cash in the amount of
$1,442,412, from $1,671,672 at March 31, 2007 to $229,260 at December 31,
2007,
which occurred as a result of the repayment of a loan made to us by Lothian
and
the reduction of accounts receivable in the amount of $451,614, from $470,670
at
March 31, 2007 to $19,056 at December 31, 2007, which occurred as a result
of
the sale of New Mexico’s assets. We also experienced an increase of $5,784 in
inventory, from $31,417 at March 31, 2007 to $37,201 at December 31, 2007
and a
reduction in the amount of $22,193 of prepaid expenses, from $34,909 at March
31, 2007 to $12,716 at December 31, 2007. The reduction in prepaid expenses
resulted from amortization of our prepaid Nasdaq listing fee.
Current
liabilities also increased from $3,427,471 at March 31, 2007 to $3,432,158
at
December 31, 2007, an increase of $4,687 or approximately less than 1%. The
increase in current liabilities was due primarily to the liability associated
with certain options that included a put right. This liability was offset
by a
decrease in interest accrued on the debt owed to Lothian, which at March
31,
2007 was $451,485 and at December 31, 2007 was $0, a decrease of $797,088
in
accounts payable to Lothian, which at March 31, 2007 were $797,088 and at
December 31, 2007 were $0 and a decrease in payables of $1,693,110, from
$1,835,148 at March 31, 2007 to $142,038 at December 31, 2007, that resulted
from the sale of New Mexico’s assets and
use
of
the sales proceeds to satisfy related payables. Working capital was a deficit
of
$3,133,925 at December 31, 2007 as compared to a working capital deficit
of
$1,218,803 at March 31, 2007, an increase of $1,915,122 or approximately
157%.
The increase in our working capital deficit resulted primarily from the accrued
put liability of $2,936,370 becoming current during the nine month period
ended
December 31, 2007.
Shareholders’
equity increased $1,900,569, from $803,977 at March 31, 2007, to $2,704,546
at
December 31, 2007, as a result of the forgiveness of debt by Lothian Oil,
as
well as the $600,000 in gross proceeds we received from the November Offering
and an accounts payable conversion concluded during the quarter.
There
was
a decline of $3,760,181 or approximately 37.6% in our total assets, from
$9,983,559 at March 31, 2007 to $6,223,378 at December 31, 2007. Aside from
the
decrease in current assets, the decrease in total assets resulted from the
transfer of our common stock in Cano Petroleum Inc., which had a fair value
of
$1,827,000 at March 31, 2007, to Lothian as a partial repayment of the Cato
Unit
Loan and we sold most of our property and equipment, which had a value of
$83,304 at March 31, 2007 when we sold our New Mexico property. At December
31,
2007 our property and equipment had a value of $10,362.
Cash
Flow
Our
operations used $1,352,432 of cash in the nine months ended December 31,
2007.
Cash was used primarily for accounts payable and accrued expenses, which
totaled
$875,568 offset, in part, by accounts receivable of $355,614.
Cash
of
$8,751 was used in investing activities during the nine months ended December
31, 2007. In comparison, during the nine months ended December 31, 2006 we
used
$5,873,242 in cash to improve our oil and gas properties and
equipment.
During
the three months ended December 31, 2007, we obtained loan proceeds from
Lothian
totaling $153,218, and we used cash in the amount of $331,989 to repay advances
made to us by Lothian. For the three months ended December 31, 2006, we obtained
loan proceeds from Lothian totaling $5,389,502. We also received cash proceeds
of $504,360 from the November offering during the three months ended December
31, 2007.
At
December 31, 2007 we had cash on hand in the amount of $229,260 as compared
to
$171,388 at December 31, 2006.
The
sale
price of oil produced by our Wardlaw Field increased by $1.53 a barrel, or
approximately 4%, from $36.80 a barrel for the nine months ended December
31,
2006, to $38.33 a barrel for the nine months ended December 31, 2007. Production
costs for the nine months ended December 31, 2007 increased $114.68, or
approximately 381%, from $30.11 a barrel for the nine months ended December
31,
2006, to $144.79 a barrel for the year ended March 31, 2007.
Without
activity in the Wardlaw Field, we believe that our expenses will decrease
significantly, however, we have a funded plan to begin reworking the existing
well bores, drill three test wells, and to commence a pilot flooding program
consisting of four injection wells and nine producing well during the next
twelve months. There can be no assurance of success, and unless production
and
sales of oil and gas significantly increase, we may not be able to attain
profitability, or even be able to continue as a going concern.
Except
as
otherwise discussed above, we know of no trends, events or uncertainties
that
have, or are reasonably likely to have, a material impact on our short-term
or
long-term liquidity or on our net sales or revenues from continuing operations.
We do not currently have any commitments for capital expenditures for the
next
twelve months.
Fiscal
Year Ended March 31, 2007 as Compared to the Fiscal Year Ended March 31,
2006
The
following selected financial data for the two years ended March 31, 2007
and
March 31, 2006 is derived from our consolidated financial statements. The
data
is qualified in its entirety and should be read in conjunction with the
consolidated financial statements and related notes contained elsewhere
herein.
|
|
|
Year Ended
March 31, 2007
|
|
Year Ended
March 31, 2006
|
|
|
Income
Data:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,014,734
|
|
$
|
601,685
|
|
|
Income
Profit (Loss)
|
|
$
|
(11,435,134
|
)
|
|
(17,371,395
|
)
|
|
Income
Profit (Loss)
|
|
|
|
|
|
|
|
|
Per
Share
|
|
$
|
(1.77
|
)
|
$
|
(2.98
|
)
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
|
6,446,758
|
|
|
5,830,188
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
Working
Capital (deficit)
|
|
$
|
(1,218,803
|
)
|
$
|
(1,765,656
|
)
|
|
Total
Assets
|
|
$
|
9,983,559
|
|
$
|
15,461,605
|
|
|
Current
Liabilities
|
|
$
|
3,427,471
|
|
$
|
1,998,447
|
|
|
Long-Term
Debt
|
|
$
|
2,941,983
|
|
$
|
1,413,003
|
|
|
Shareholders’
Equity
|
|
$
|
803,977
|
|
$
|
11,783,643
|
|
Combined
Results
Our
revenues for the 2007 fiscal year were $1,014,734, an increase of $413,049
or
approximately 69%, as compared to revenues of $601,685 for the 2006 fiscal
year.
The increase in sales revenue for the 2007 fiscal year was due primarily
to
increased volume of oil sold.
Total
operating expenses of $5,867,952 reflects a decrease of $19,990,051, or
approximately 77%, for the 2007 fiscal year as compared to operating expenses
of
$25,858,003 for the 2006 fiscal year. The significant operating expenses
reported for the 2006 fiscal year resulted from the inclusion of $23,199,110
in
impairment of our oil and gas properties, which was not taken in 2007. The
impairment was taken in conjunction with the re-evaluation of our reserves.
General and administrative expenses decreased slightly by $22,464, or
approximately 2%, from $1,339,920 in the 2006 fiscal year to $1,317,456 in
the
2007 fiscal year. We also incurred a put option expense of $2,727,186 during
the
fiscal year ended March 31, 2007. We had no similar expense during the fiscal
year ended March 31, 2006. Interest expense was $456,683 in the 2007 fiscal
year, as compared to $221,445 in the 2006 fiscal year. The increase during
the
2007 fiscal year was due primarily to the increase in the amount of money
loaned
to us by Lothian for development of our properties.
Our
net
loss for the 2007 fiscal year was $11,435,134, a decrease of $5,936,261 or
approximately 34%, as compared to a net loss of $17,371,395 for the 2006
fiscal
year. We reported a significant decrease in net loss because we had no
impairment charge in the 2007 fiscal year, as compared to the impairment
charge
of $23,199,110 we included in the 2006 fiscal year.
Food
Products Activity
Our
subsidiary, National Heritage Sales Corporation, had $0 product sales during
the
2007 fiscal year, as compared to sales for the 2006 fiscal year of $8,694.
National is no longer selling meat and poultry products and has sold its
assets.
We do not intend to re-enter this market and we will no longer have results
related to this activity to report.
Oil
and Gas Activity
Oil
and
gas sales during the 2007 fiscal year were $1,014,734, an increase of $421,743
or approximately 71%, as compared to sales of $592,991 during the 2006 fiscal
year. The volume of production sold during the 2007 fiscal year was greater
than
the volume of production sold during the 2006 fiscal year, however,
significantly higher production costs offset the increased volumes and slightly
higher product prices. The increased
costs
from the 2006 fiscal year were primarily the result of higher field labor,
salt
water disposal and high service company costs related to increased activity
on
the Texas and New Mexico properties. Production is expected to remain limited
on
our Texas property, the only property we currently own, due to a lack of
operating and investment capital that, prior to its bankruptcy, had been
provided to us by Lothian. Receivables due to the Asset Sale comprised 99%
of
our total receivable balance at March 31, 2007. Receivables from a single
oil
and gas customer comprised 55% of our trade receivable balance at March 31,
2006. No allowance for doubtful accounts has been included in our financial
statements since recorded amounts are determined to be fully collectible,
based
on management’s review of customer accounts, historical experience and other
pertinent factors. During the fiscal year ended March 31, 2007, we recorded
oil
and gas sales to only two customers. Buyers of crude oil are plentiful and
can
be easily replaced.
Production
and operating expenses were $1,320,401 during the 2007 fiscal year as compared
to $259,290 in production and operating expenses during the 2006 fiscal year,
an
increase of $1,061,111 or approximately 401%. This significant increase in
production and operating expenses was the result of higher salt water disposal
charges and charges for field labor. Depreciation and depletion expense for
the
2007 fiscal year was $490,507 as compared to depreciation and depletion expense
of $1,027,155 for the 2006 fiscal year, a decrease of $536,648 or approximately
52%. The decreased depreciation and depletion expense resulted primarily
from
the reduction of proved properties due to the impairment of assets in the
2006
fiscal year.
Liquidity
and Capital Resources
Liquidity
Our
sales
revenues have not been adequate to support our operations and we do not expect
that this will change in the near future. In the past, we relied primarily
on
loans from Lothian to finance our operations. Lothian declared bankruptcy
on
June 13, 2007 and we do not believe that it is capable of providing additional
funding to us. We currently have no other sources of capital. We are operating
on a day-to-day basis and we will continue operating in this manner for as
long
as Lothian provides us with the funds to do so.
Our
current assets increased by $1,975,877 or approximately 849%, from $232,791
at
March 31, 2006 to $2,208,668 at March 31, 2007. The increase in our current
assets was due primarily to cash and receivables related to the Asset Sale.
Current liabilities increased from $1,998,447 at March 31, 2006, to $3,427,471
at March 31, 2007, an increase of $1,429,024 or approximately 72%. The increase
in current liabilities was due to increased accounts payable and accrued
interest on the related party notes payable. Working capital was a deficit
of
$1,218,803 at March 31, 2007 as compared to the March 31, 2006 deficit of
$1,765,656, a decrease of $546,853 or approximately 31%. The decreased deficit
was due primarily to the Asset Sale.
Due
to
the loss incurred on the sale of our New Mexico properties and the expense
related to the put provision included in certain stock option agreements,
equity
capital decreased by $10,979,666, or approximately 93%, during the 2007 fiscal
year. Shareholders’ equity was $11,783,643 at March 31, 2006, as compared to
$803,977 at March 31, 2007.
Total
assets were $9,983,559 at March 31, 2007, a decrease of $5,478,046 as compared
to $15,461,605 for the 2006 fiscal year. The decrease in total assets resulted
primarily from the sale of our New Mexico property.
Cash
Flow
Our
operations used $575,885 of cash in the 2007 fiscal year as compared to $67,729
used in the 2006 fiscal year. The cash flow deficits are due to the operating
losses incurred.
Cash
of
$642,211 was provided by investing activities during the 2007 fiscal year
and
cash of $1,908,815 was used in investing activities for the 2006 fiscal year.
Net cash provided from investing activities for the 2007 fiscal year consisted
of the proceeds from the sale of our New Mexico properties, which totaled
$6,613,947. Cash of $5,971,736 was used for capital expenditures for our
oil and
gas properties and for the purchase of equipment. During the 2006 fiscal
year,
cash flows used in investing activities related primarily to capital
expenditures for our oil and gas properties.
In
the
2007 fiscal year, cash of $6,338,904 was provided by borrowings from Lothian.
Payments totaling $4,809,924 were made to Lothian from the proceeds we received
when we sold New Mexico’s assets. During
the
2006
fiscal year, cash in the amount of $5,249,753 from financing activities came
from the exercise of warrants, the sale of our common stock to Lothian and
loans
from Lothian. Of this amount, $3,203,994 was used for the repayment of a
loan
from Almac Financial Corporation.
At
March
31, 2007 we had cash of $1,671,672.
INDEX
TO FINANCIAL STATEMENTS
|
Consolidated
Condensed Balance Sheets at December 31, 2007 (Unaudited) and March
31,
2007 (Audited)
|
F-2
|
|
Consolidated
Condensed Statements of Income (Unaudited) for the Three and Nine
Months
Ended December 31, 2007 and December 31, 2006
|
F-4
|
|
Consolidated
Condensed Statements of Cash Flows (Unaudited) for the Nine Months
Ended
December 31, 2007 and December 31, 2006
|
F-5
|
|
Notes
to Consolidated Condensed Financial Statements
|
F-7
|
|
Report
of Independent Registered Public Accounting Firm
|
F-19
|
|
Consolidated
Balance Sheets at March 31, 2007 and 2006
|
F-20
|
|
Consolidated
Statements of Operations for the Years Ended March 31, 2007 and
2006
|
F-22
|
|
Consolidated
Statements of Changes in Shareholders’ Equity or the Years Ended March 31,
2007 and 2006
|
F-23
|
|
Consolidated
Statements of Cash Flows for the Years Ended March 31, 2007 and
2006
|
F-24
|
|
Notes
to Consolidated Financial Statements
|
F-25
|
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
|
|
December 31, 2007
|
|
March 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
229,260
|
|
$
|
1,671,672
|
|
|
Accounts
receivable
|
|
|
19,056
|
|
|
470,670
|
|
|
Inventory
|
|
|
37,201
|
|
|
31,417
|
|
|
Prepaid
expenses
|
|
|
12,716
|
|
|
34,909
|
|
|
Total
current assets
|
|
|
298,233
|
|
|
2,208,668
|
|
|
INVESTMENT
in Cano Petroleum common stock, at fair value (restricted)
|
|
|
—
|
|
|
1,827,000
|
|
|
OIL
AND GAS PROPERTIES, accounted for using the full cost method, net
of
accumulated depletion and depreciation of $0 at December 31 and March
31,
2007
|
|
|
|
Proved
|
|
|
—
|
|
|
—
|
|
|
Unproved
|
|
|
5,914,783
|
|
|
5,864,587
|
|
|
|
|
|
5,914,783
|
|
|
5,864,587
|
|
|
PROPERTY
AND EQUIPMENT, at cost equipment, furniture and fixtures
|
|
|
8,751
|
|
|
74,244
|
|
|
Vehicles
|
|
|
6,752
|
|
|
158,452
|
|
|
|
|
|
15,503
|
|
|
232,696
|
|
|
Less
accumulated depreciation
|
|
|
(5,141
|
)
|
|
(149,392
|
)
|
|
|
|
|
10,362
|
|
|
83,304
|
|
|
TOTAL
ASSETS
|
|
$
|
6,223,378
|
|
$
|
9,983,559
|
|
See
notes to the consolidated condensed financial statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Continued)
|
|
|
December 31, 2007
|
|
March 31,
2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
142,038
|
|
$
|
1,835,148
|
|
|
Accounts
payable, related party
|
|
|
10,000
|
|
|
797,088
|
|
|
Accrued
expenses
|
|
|
343,750
|
|
|
343,750
|
|
|
Accrued
interest, related party
|
|
|
—
|
|
|
451,485
|
|
|
Accrued
put option liability
|
|
|
2,936,370
|
|
|
—
|
|
|
Total
current liabilities
|
|
|
3,432,158
|
|
|
3,427,471
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Asset
retirement obligation
|
|
|
86,674
|
|
|
82,942
|
|
|
Note
payable, related parties
|
|
|
—
|
|
|
2,941,983
|
|
|
Accrued
put option liability
|
|
|
—
|
|
|
2,727,186
|
|
|
Total
liabilities
|
|
|
3,518,832
|
|
|
9,179,582
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 5,000,000 shares authorized, none
issued
|
|
|
—
|
|
|
—
|
|
|
Common
stock, $.001 par value, 125,000,000 shares authorized; 7,592,456
and
6,446,850 shares issued and outstanding, respectively:
|
|
|
7,593
|
|
|
6,447
|
|
|
Additional
paid-in capital
|
|
|
46,180,942
|
|
|
43,796,676
|
|
|
Accumulated
deficit
|
|
|
(43,483,989
|
)
|
|
(42,999,146
|
)
|
|
Total
shareholders’ equity
|
|
|
2,704,546
|
|
|
803,977
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$
|
6,223,378
|
|
$
|
9,983,559
|
|
See
notes to the consolidated condensed financial statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
OPERATING
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas sales
|
|
$
|
24,311
|
|
|
253,904
|
|
$
|
26,266
|
|
$
|
909,995
|
|
|
TOTAL
OPERATING REVENUES
|
|
|
24,311
|
|
|
253,904
|
|
|
26,266
|
|
|
909,995
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
and operating
|
|
|
21,672
|
|
|
406,736
|
|
|
82,351
|
|
|
1,040,920
|
|
|
Depreciation
and depletion
|
|
|
338
|
|
|
156,621
|
|
|
1,014
|
|
|
503,293
|
|
|
Accretion
of asset retirement obligation
|
|
|
1,244
|
|
|
—
|
|
|
3,732
|
|
|
—
|
|
|
General
and administrative
|
|
|
1,636,778
|
|
|
172,557
|
|
|
1,998,113
|
|
|
1,080,449
|
|
|
Bad
debt expense
|
|
|
41,406
|
|
|
—
|
|
|
243,814
|
|
|
—
|
|
|
Put
option expense
|
|
|
69,728
|
|
|
—
|
|
|
209,184
|
|
|
—
|
|
|
TOTAL
OPERATING COSTS AND EXPENSES
|
|
|
1,771,166
|
|
|
735,914
|
|
|
2,538,208
|
|
|
2,624,662
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,746,855
|
)
|
|
(482,010
|
)
|
|
(2,511,942
|
)
|
|
(1,714,667
|
)
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on forgiveness of debt
|
|
|
—
|
|
|
—
|
|
|
1,780,710
|
|
|
—
|
|
|
Gain
on sale of investments
|
|
|
—
|
|
|
—
|
|
|
303,155
|
|
|
—
|
|
|
Gain
on sale of property and equipment
|
|
|
5,000
|
|
|
—
|
|
|
13,351
|
|
|
—
|
|
|
Interest
expense
|
|
|
(2,221
|
)
|
|
(145,140
|
)
|
|
(70,117
|
)
|
|
(295,747
|
)
|
|
Income
(loss) before income tax
|
|
|
(1,744,076
|
)
|
|
(627,150
|
)
|
|
(484,843
|
)
|
|
(2,010,414
|
)
|
|
INCOME
TAX BENEFIT
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
NET
INCOME (LOSS)
|
|
$
|
(1,744,076
|
)
|
|
(627,150
|
)
|
$
|
(484,843
|
)
|
$
|
(2,010,414
|
)
|
|
Income
(loss) per share (basic)
|
|
$
|
(0.26
|
)
|
|
(0.10
|
)
|
$
|
(0.07
|
)
|
$
|
(0.32
|
)
|
|
Weighted
average number of shares (basic)
|
|
|
6,778,886
|
|
|
6,446,850
|
|
|
6,557,931
|
|
|
6,446,850
|
|
See
notes to the consolidated condensed financial statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Nine Months Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(484,843
|
)
|
$
|
(2,010,414
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and depletion
|
|
|
1,014
|
|
|
503,293
|
|
|
Accretion
of asset retirement obligation
|
|
|
3,732
|
|
|
—
|
|
|
Gain
on sale of investments
|
|
|
(303,155
|
)
|
|
—
|
|
|
Gain
on forgiveness of debt
|
|
|
(1,780,710
|
)
|
|
—
|
|
|
Gain
on sale of property and equipment
|
|
|
(13,351
|
)
|
|
—
|
|
|
Realization
of stock options and warrants issued
|
|
|
1,519,242
|
|
|
341,601
|
|
|
Put
option expense
|
|
|
209,184
|
|
|
—
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
355,614
|
|
|
(49,659
|
)
|
|
Inventory
|
|
|
(5,784
|
)
|
|
(14,659
|
)
|
|
Other
current assets
|
|
|
22,193
|
|
|
39,467
|
|
|
Deferred
tax
|
|
|
—
|
|
|
—
|
|
|
Accounts
payable and accrued expenses
|
|
|
(875,568
|
)
|
|
1,768,769
|
|
|
Net
cash (used in) provided by operating activities
|
|
|
(1,352,432
|
)
|
|
578,762
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Additions
to oil and gas properties
|
|
|
—
|
|
|
(5,732,183
|
)
|
|
Additions
to equipment
|
|
|
(8,751
|
)
|
|
(141,059
|
)
|
|
Net
cash used in investing activities
|
|
|
(8,751
|
)
|
|
(5,873,242
|
)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from borrowings, related party
|
|
|
153,218
|
|
|
5,389,502
|
|
|
Issuance
of common stock
|
|
|
504,360
|
|
|
—
|
|
|
Payments
on note payable, related party
|
|
|
(331,989
|
)
|
|
—
|
|
|
Net
cash provided by financing activities
|
|
|
325,589
|
|
|
5,389,502
|
|
|
(Decrease)
increase in cash and cash equivalents
|
|
|
(1,035,594
|
)
|
|
95,002
|
|
|
Cash
at beginning of period
|
|
|
1,671,672
|
|
|
76,366
|
|
|
Cash
at end of period
|
|
$
|
229,260
|
|
$
|
171,388
|
|
|
NON-CASH
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Investment
applied to note payable and accrued interest-related party
|
|
|
2,130,155
|
|
|
—
|
|
|
Proceeds
from sale of equipment applied to accounts payable-related
party
|
|
|
94,030
|
|
|
—
|
|
|
Conversion
of accounts payable to equity
|
|
|
361,464
|
|
|
—
|
|
See
notes to the consolidated condensed financial statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Nine
Months Ended December 31, 2007
(Unaudited)
|
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Total
|
|
|
Balance
March 31, 2007
|
|
$
|
6,446,850
|
|
$
|
6,447
|
|
$
|
43,796,676
|
|
$
|
(42,999,146
|
)
|
$
|
803,977
|
|
|
Stock
options for services
|
|
|
—
|
|
|
—
|
|
|
314,367
|
|
|
—
|
|
|
314,367
|
|
|
Issuance
of common stock for conversion of debt
|
|
|
473,606
|
|
|
474
|
|
|
361,464
|
|
|
—
|
|
|
361,938
|
|
|
Issuance
of common stock for cash
|
|
|
672,000
|
|
|
672
|
|
|
503,560
|
|
|
—
|
|
|
504,232
|
|
|
Warrants
issued for service
|
|
|
—
|
|
|
—
|
|
|
1,204,875
|
|
|
—
|
|
|
1,204,875
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(484,843
|
)
|
|
|
|
|
Balance
December 31, 2007
|
|
$
|
7,592,456
|
|
$
|
7,593
|
|
$
|
46,180,942
|
|
$
|
(43,483,989
|
)
|
$
|
2,704,546
|
|
See
notes to the consolidated condensed financial statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
1 — Basis of Presentation
The
accompanying unaudited consolidated condensed financial statements of United
Heritage Corporation, a Utah corporation (the “Company”), have been prepared in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include
all
of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated condensed
financial statements.
In
the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended December 31, 2007 are not
necessarily indicative of the results that may be expected for the fiscal
year
ending March 31, 2008. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company’s Annual
Report on Form 10-KSB for the year ended March 31, 2007.
The
Company’s financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities
in the
ordinary course of business. The Company has incurred substantial losses
from
operations and has a working capital deficit which raises substantial doubt
as
to its ability to continue as a going concern. The Company had a net loss
of
$484,843 for the nine months ended December 31, 2007 and a net loss of
$11,435,134 for the fiscal year ended March 31, 2007 and, as of the same
periods, the Company had an accumulated deficit of $43,483,989 and $42,999,146,
respectively. During the quarter ended December 31, 2007, the Company raised
gross proceeds of approximately $504,000 in cash in additional equity
financings, and approximately $362,000 in debt conversion of debt to equity,
however, there can be no assurance that the Company will be able to continue
to
obtain the financing it needs to develop its properties and alleviate doubt
as
to the Company’s ability to continue as a going concern.
Note
2 — New Accounting Standards
Financial
Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. FAS 19-1,
Accounting
for Suspended Well Costs,
amends
Statement of Financial Accounting Standards (“SFAS”) Statement No. 19,
Financial
Accounting and Reporting by Oil and Gas Producing Companies,
to
provide revised guidance concerning the criteria for continued capitalization
of
exploratory costs when wells have found reserves that cannot yet be classified
as proved. FSP FAS No. 19-1 provides circumstances that would permit the
continued capitalization of exploratory well costs beyond one year, other
than
when additional exploration wells are necessary to justify major capital
expenditures and those wells are under way or firmly planned for the near
future. Generally, the statement allows exploratory well costs to continue
to be
capitalized when the well has found a sufficient quantity of reserves to
justify
its completion as a producing well and the enterprise is making sufficient
progress assessing the reserves and the economic and operating viability
of the
project. The Company utilizes the full cost method to account for its oil
and
gas properties. As a result, the impact of FSP FAS No. 19-1 is expected to
be
minimal.
Effective
April 1, 2006, the Company adopted SFAS No. 123(R),
Share-Based
Payment,
using
the modified prospective transition method. SFAS No. 123(R) requires
equity-classified share-based payments to employees, including grants of
employee stock options, to be valued at fair value on the date of grant and
to
be expensed over the applicable vesting period. Under the modified prospective
transition method, share-based awards granted or modified on or after April
1,
2006 are recognized in compensation expense over the applicable vesting period.
Also, any previously granted awards that are not fully vested as of April
1,
2006 are recognized as compensation expense over the remaining vesting period.
No retroactive or cumulative effect adjustments were required upon the Company’s
adoption of SFAS No. 123(R).
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
2 — New Accounting
Standards – (continued)
Prior
to
adopting SFAS No. 123(R), the Company accounted for its employee stock options
using the intrinsic-value based method prescribed by Accounting Principles
Board
(“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations. This method required compensation expense to be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
In
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48,
Accounting
for Uncertainty in Income Taxes — An Interpretation of FASB Statement
No. 109.
This
interpretation provides guidance for recognizing and measuring uncertain
tax
positions, as defined in SFAS No. 109,
Accounting
for Income Taxes.
FIN No.
48 prescribes a threshold condition that a tax position must meet for any
of the
benefit of the uncertain tax position to be recognized in the financial
statements. Guidance is also provided regarding derecognition, classification
and disclosure of these uncertain tax positions. FIN No. 48 is effective
for
fiscal years beginning after December 15, 2006. The adoption of FIN No. 48
on
April 1, 2007 did not have a material impact on the Company’s consolidated
financial position, results of operations, or cash flows due to the significant
net operating loss carryforwards of the Company.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
which
establishes an approach requiring the quantification of financial statement
errors based on the effect of the error on each of the Company’s financial
statements and the related financial statement disclosures. This model is
commonly referred to as a “dual approach” because it requires quantification of
errors under both the “iron curtain” and “roll-over” methods. The roll-over
method focuses primarily on the impact of a misstatement on the income
statement, including the reversing effect of prior year misstatements; however,
its use can lead to the accumulation of misstatements in the balance sheet.
The
iron curtain method focuses primarily on the effect of correcting the period
end
balance sheet with less emphasis on the reversing effects of prior year errors
on the income statement. The Company applied the provisions of SAB No. 108
in
connection with the preparation of the Company’s annual financial statements for
the year ending March 31, 2007. The use of the dual approach did not have
a
material impact on the Company’s consolidated financial position, results of
operations, or cash flows.
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements,
which
addresses how companies should measure fair value when companies are required
to
use a fair value measure for recognition or disclosure purposes under generally
accepted accounting principles (“GAAP”). As a result of SFAS No. 157, there is
now a common definition of fair value to be used throughout GAAP. SFAS No.
157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those years. Although the
disclosure requirements may be expanded where certain assets or liabilities
are
fair valued such as those related to stock compensation expense and hedging
activities, the Company does not expect the adoption of SFAS No. 157 to have
a
material impact on the Company’s consolidated financial position, results of
operations, or cash flows.
In
February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities,
which
provides entities with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that
choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective as of the beginning of the first
fiscal
year that begins after November 15, 2007. The Company is currently evaluating
the impact that SFAS No. 159 will have on its consolidated financial
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
3 — Securities
At
March
31, 2007, securities consisted of the following:
|
|
|
Amortized Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
(Loss)
|
|
Estimated Fair Value
|
|
|
Restricted
Common Stock
|
|
$
|
1,827,000
|
|
|
|
|
|
|
|
$
|
1,827,000
|
|
|
Total
|
|
$
|
1,827,000
|
|
|
|
|
|
|
|
$
|
1,827,000
|
|
These
securities were restricted shares of Cano Petroleum, Inc. common stock with
an
estimated fair value that approximated cost. On June 6, 2007 these securities
were exchanged for forgiveness of the balance of principal and interest due
to
Lothian Oil Inc. for the Cato Unit Loan, as more fully described in Note
7. A
gain of $303,155 was recognized upon the transfer to Lothian Oil
Inc.
Note
4 — Inventory
Inventory
consists of oil in tanks of $37,201 and $31,417 at December 31, 2007 and
March
31, 2007, respectively.
Note
5 — Oil and Gas Properties
Capitalized
costs related to oil and gas producing activities and related accumulated
depletion, depreciation and amortization are as follows:
|
|
|
December
31,
2007
|
|
March
31,
2007
|
|
|
Capitalized
costs of oil and gas properties:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
—
|
|
$
|
—
|
|
|
Unproved
|
|
|
5,914,783
|
|
|
5,864,587
|
|
|
|
|
|
5,914,783
|
|
|
5,864,587
|
|
|
Less
accumulated depletion, depreciation, and amortization
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
5,914,783
|
|
$
|
5,864,587
|
|
Note
6 — Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of accounts receivable. Concentrations of credit risk
with respect to accounts receivable consist principally of oil and gas
purchasers. The majority of the accounts receivable balance relates to the
post-closing adjustments from the sale of the Company’s New Mexico properties.
No allowance for doubtful accounts has been provided because management has
determined the recorded amounts were fully collectible.
Note
7 — Note Payable to Related Party
Loans
from Lothian Oil Inc.
The
Company had a $4,000,000 loan agreement with Lothian Oil Inc. (“Lothian”),
previously its majority shareholder (the “Cato Unit Loan”). The Cato Unit Loan
was subsequently increased to $8,000,000 during the year ended March 31,
2007.
Advances to the Company under this agreement were $2,182,843 as of March
31,
2007. The agreement, dated October 7, 2005, provided for draws as needed
for the
development of the Cato San Andres Unit in New Mexico. The note bore interest
at
1% over the Citibank prime rate (8.25% at March 31, 2007) and was secured
by a
deed of trust and assignment of production, among other provisions. Loan
advances were repayable monthly from 70% of the oil and gas proceeds produced
by
the Cato San Andres Unit. The note was due and payable on October 7, 2015
and
was subordinated to the Sterling Bank agreement discussed below. The loan
was
reduced by $4,397,760 from the proceeds of the sale of the Cato
San
Andres Unit and the Tom Tom and Tomahawk Field on March 30, 2007. After the
sale
of these properties, the Cato Unit Loan was then secured by 404,204 shares
of
restricted Cano Petroleum, Inc. (“Cano Petroleum”) common stock. Effective June
6, 2007, Lothian accepted the restricted Cano Petroleum common stock as full
payment of the loan and accrued interest which resulted in a gain of $303,155
on
the extinguishment of the debt.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
7 — Note Payable to Related
Party – (continued)
The
Company also had an additional $2,500,000 loan agreement with Lothian (the
“Wardlaw Loan”). Advances to the Company under this agreement were $0 and
$759,140 as of December 31, 2007 and March 31, 2007, respectively. The
agreement, dated as of March 31, 2006, provided for draws as needed for the
development of the Wardlaw field in Texas (the “Wardlaw Field”). The note bore
interest at 1% over the Citibank prime rate (8.25% at March 31, 2007) and
was
secured by a deed of trust and assignment of production, among other provisions.
Loan advances are repayable monthly from 70% of the oil and gas proceeds
produced by the Wardlaw Field. The note was due and payable on March 31,
2016.
On July 31, 2007 the Company entered into an agreement with its largest
shareholder, Lothian. Pursuant to the terms of this agreement, Lothian forgave
$1,800,000 that it asserted the Company owed to it, which amount included
$753,296 in principal and $71,254 in accrued interest associated with the
Wardlaw Loan. In exchange for the debt forgiveness, the Company agreed to
deliver to Lothian any funds in excess of $100,000 that it received from
Cano
Petroleum in connection with the sale of the assets of UHC New Mexico
Corporation. The Company does not anticipate that it will receive any funds
in
excess of $100,000 from Cano Petroleum in connection with that
sale.
Note
8 — Net Loss Per Common Share
Basic
earnings (loss) per share of common stock is based on the weighted average
number of shares outstanding during the periods ended December 31, 2007 and
December 31, 2006. Diluted earnings per share have not been presented since
the
inclusion of potential common shares would be antidilutive. All outstanding
options and warrants are priced above the closing price of the Company’s common
stock at December 31, 2007, and likewise are not included in potential common
shares outstanding.
Note
9 — Income Taxes
As
of
March 31, 2007, the Company had net operating loss carryovers of approximately
$15,300,000 available to offset future income for income tax reporting purposes,
which will ultimately expire in 2026, if not previously utilized.
Note
10 — Estimates
The
preparation of condensed consolidated financial statements as of the period
ended December 31, 2007 in conformity with United States GAAP require management
to make estimates and assumptions that effect the reported amounts of assets
and
liabilities, disclosure of contingent assets and liabilities, and the reported
amounts of revenues and expenses during the reporting period. For example,
estimates of oil and gas reserves, asset retirement obligations and impairment
on unproved properties held by the Company are particularly sensitive, and
actual results could differ materially from any estimates contained in the
Company’s condensed consolidated financial statements.
Note
11 — Stock Options
Directors
of the Company adopted the 1998 Stock Option Plan effective July 1, 1998
(the
“1998 Plan”). The 1998 Plan and its subsequent amendment set aside 66,667 shares
of authorized but unissued common stock for issuance under the Plan. Options
may
be granted to directors, officers, consultants, and/or employees of the Company
and/or its subsidiaries. Options granted under the Plan are exercisable over
a
period to be determined when granted, but may be affected by the termination
of
employment. As a result of a grant in January 2006 to the Company’s then chief
executive officer, discussed in more detail below, options to purchase 66,667
shares are outstanding under this plan.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
11 — Stock Options – (continued)
The
2000
Stock Option Plan of United Heritage Corporation was effective on June 5, 2000
and included 1,666,667 shares of authorized but unissued common stock (the
“2000
Plan”). Options may be granted to directors, officers, consultants, and/or
employees of the Company and/or its subsidiaries. Options granted under the
2000
Plan are exercisable over a period to be determined when granted, but may be
affected by the termination of employment. On December 31, 2007, there were
19
awards outstanding under the 2000 Plan for the right to purchase a total of
1,658,333 shares.
On
May
30, 2003 the Company granted 1,051,667 options under the 2000 Plan. The options
were granted to directors, employees and others. The options vest over a
two-year period with terms of three to five years. The exercise price is $1.50
per share. During the fiscal year ended March 31, 2006, the Company granted
an
option for 40,000 shares to a member of the Board of Directors for and in
consideration of services provided to the Company. The option was issued at
$2.91 per share for a term of five years with vesting over a three-year
period.
On
May
24, 2005, the Company granted options to certain members of the Board of
Directors for and in consideration of services provided to the Company, as
shown
in the table below. The options were issued at $1.50 for a term of three
years.
On
January 3, 2006, the Company granted options to purchase 500,000 shares to
the
Company’s then chief executive officer for and in consideration of services
provided to the Company. The options were issued at $1.05 per share for a term
of three years with one-third of the options being exercisable immediately
and
one-third exercisable in each of the following two years. The fair value of
each
option was determined to be $2.50. All of the options vested on the date that
the chief executive officer separated from service.
There
were no options granted during the three or nine months ended December 31,
2007.
The
following table summarizes pertinent information with regard to the 1998 Plan
and 2000 Plan for the nine months ended December 31, 2007:
|
|
|
Option and Rights
|
|
Weighted Average
Exercise Price
|
|
|
Outstanding
at beginning of year, April 1, 2007
|
|
|
1,725,000
|
|
$
|
3.40
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,725,000
|
|
$
|
1.40
|
|
|
Exercisable
at December 31, 2007
|
|
|
1,725,000
|
|
$
|
1.40
|
|
The
weighted average contractual life of options outstanding at December 31, 2007
was 3.33 years. The weighted average contractual life of exercisable options
was
$3.33 at December 31, 2007.
The
following is a summary of the Company’s nonvested options for 2007:
|
Nonvested,
at April 1, 2007
|
|
|
180,000
|
|
|
Granted
|
|
|
—
|
|
|
Vested
|
|
|
180,000
|
|
|
Forfeited
|
|
|
—
|
|
|
Nonvested,
at December 31, 2007
|
|
|
—
|
|
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
11 — Stock Options – (continued)
During
the third quarter the remaining unvested options vested upon the option holder’s
separation from service in October 2007. The weighted average grant date fair
value of options that vested during the nine months ended December 31, 2007
was
$1.19. The weighted average grant date fair value of unvested options
outstanding at April 1, 2006 was $2.44.
The
option agreements related to the options with $1.50 and $2.91 exercise prices
were modified to extend the expiration date to March 31, 2009, add a put feature
where the option holder can put the option back to the Company for the
difference between $4.00 per share and the purchase price between April 1,
2008
and April 10, 2008 and add a call feature whereby the Company can call the
option for the difference between $7.50 and the purchase price. Since the put
feature does not subject the holder to the normal risks of share ownership,
the
options are classified as liability awards and recorded at fair value. A
liability of $2,936,370 is recorded at December 31, 2007 and corresponding
expense of $69,728 and $209,184 has been recorded for the three and nine months
ended December 31, 2007, respectively.
Note
12 — Stock Warrants
The
Company entered into a stock warrant agreement effective January 12, 2004.
Pursuant to the agreement, the Company issued warrants to purchase 500,000
shares of common stock in connection with a private placement. Warrants issued
under the agreement have a term of 10 years.
The
Company entered into stock warrant agreements effective April 2004 in connection
with the issuance of convertible promissory notes. Pursuant to the agreement,
the Company issued warrants to purchase 1,766,667 shares of common stock.
Warrants issued under the agreement have a term of 10 years.
On
December 19, 2005, the Company’s shareholders approved the issuance of warrants
to purchase 2,906,666 shares of common stock to Lothian. The warrants are
exercisable upon issuance and have a term of five years and were issued as
follows:
|
|
(1)
|
Warrant
for the purchase of 953,333 shares with an exercise price of $3.15
per
share;
|
|
|
(2)
|
Warrant
for the purchase of 1,000,000 shares with an exercise price of $3.36
per
share;
|
|
|
(3)
|
Warrant
for the purchase of 953,333 shares with an exercise price of $3.75
per
share.
|
Half
of
the 1,766,667 warrants issued during the fiscal year ended March 31, 2005 are
exercisable at $2.25 and $3.00, respectively, and have a remaining contractual
life of 2 years. The warrants issued in the fiscal year ended March 31, 2006
include those issued to Lothian Oil Inc. and warrants for the purchase of 50,234
shares of common stock with an exercise price of $1.50 per share issued for
legal services rendered to the Company.
The
common stock and warrants owned by Lothian were transferred to Walter G. Mize
(“Mize”) on July 31, 2007 and, thereafter, from Mize to Blackwood Ventures LLC
(“Blackwood”) on September 26, 2007, as more fully described in Note
17.
During
the quarter ended December 31, 2007, there were 10,306,325 warrants issued,
as
more fully described in Notes 15 and 16.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
12 — Stock
Warrants – (continued)
United
Heritage Corporation Warrants Issuance Quarter Ended
12/31/07
|
IssuanceDate
|
|
Warrant Holder
|
|
Warrants
|
|
Exercise Price
|
|
|
11/28/2007
|
|
|
DK
True Energy Development Ltd. &RTP
Secure
Energy Corp.
|
|
|
9,000,000
|
|
$
|
1.05
|
|
|
11/28/2007
|
|
|
Private
Placement
|
|
|
1,306,325
|
|
$
|
1.40
|
|
|
|
|
|
Total
|
|
|
10,306,325
|
|
|
|
|
The
following schedule summarizes pertinent information with regard to the stock
warrants for the nine months ended December 31, 2007:
|
|
|
Shares
Outstanding
|
|
Weighted Average
Exercise Price
|
|
|
Outstanding
at beginning of year, April 1, 2007
|
|
|
5,085,334
|
|
$
|
3.08
|
|
|
Granted
|
|
|
10,306,325
|
|
|
1.09
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
—
|
|
|
Outstanding
at December 31, 2007
|
|
|
15,391,659
|
|
$
|
1.75
|
|
|
Exercisable
|
|
|
5,085,334
|
|
$
|
3.08
|
|
An
expense of $1,204,875, related to the compensatory warrants issued to DK True
Energy Development Ltd. and RTP Secure Energy Corp., was recorded in the three
and nine months ended December 31, 2007. An additional compensation expense
of
approximately $8.2 million will be recorded over the vesting term of such
warrants.
In
addition, the Company, as part of an independent consulting services agreement,
has agreed to issue a warrant to purchase up to 1,600,000 shares of common
stock
to Applewood Energy Inc., and a warrant to purchase up to 1,000,000 shares
of
common stock to GWB Petroleum Consultants, Ltd., as more fully described in
Note
16 — Consulting Agreements. The Company has also agreed to issue a
warrant to purchase up to 1,500,000 shares of common stock to Joseph Langston,
and a warrant to purchase up to 1,500,000 shares of common stock to Blackwood
Capital Limited, as more fully described in Note 18 — Subsequent
Events — Consultants. Each of the above-referenced warrants will be
issued upon receipt of shareholder approval in accordance with applicable
federal securities laws and in compliance with Nasdaq Marketplace Rule 4350
(“Rule 4350”).
Note
13 — Preferred Stock
The
Company’s Articles of Incorporation authorize the issuance of 5,000,000 shares
of preferred stock, $0.0001 par value per share and allow the Board of
Directors, without shareholder approval and by resolution, to designate the
preferences and rights of the preferred stock. On February 22, 2006, the
Company’s Board of Directors unanimously adopted and approved a “Certificate of
Designation, Preferences and Rights of Series A Preferred Stock of United
Heritage Corporation” and a “Certificate of Designation, Preferences and Rights
of Series B Preferred Stock of United Heritage Corporation”.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
13 — Preferred
Stock – (continued)
The
Certificates of Designation created 133,334 shares of Series A Preferred Stock,
30,303 shares of Series B-1 Preferred Stock and 45,455 shares of Series B-2
Preferred Stock. The Certificates of Designation were filed with the Secretary
of State of the State of Utah on May 17, 2006, however, no preferred shares
have
been issued as of December 31, 2007.
Note
14 — Supplemental Disclosures of Cash Flows
Information
|
|
|
Nine Months Ended
December 31,
|
|
|
|
|
2007
|
|
2006
|
|
|
Cash
paid during the three months for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
$
|
26,698
|
|
|
Taxes
|
|
$
|
—
|
|
$
|
—
|
|
Note
15 — Issuance of Common Stock
On
November 28, 2007 the Company completed the sale and issuance of units having
a
total gross value of $600,000 in a private placement to accredited investors
(the “November Offering”). Each unit was comprised of (i) 32,000 shares of the
Company’s common stock, par value $0.001 per share, and (ii) a 5 year callable
warrant to purchase up to 52,253 shares of the Company’s common stock, subject
to certain vesting requirements, at an exercise price of $1.40 per share. The
warrants may not be exercised until the Company obtains shareholder approval
of
their issuance. The Company sold and issued a total of 21 units at a price
of
$24,000 per unit, for net cash proceeds of approximately $504,000. The Company
also converted debt in the amount of $96,000 owed to Blackwood, its largest
shareholder, into 4 units. The per share price of the common stock included
in
the units was less than the per share book or market value of the Company’s
common stock on the date of sale. No underwriting discounts or commissions
were
paid in connection with the November Offering. The Company is obligated to
register the shares underlying the warrants, subject to compliance with Rule
415
promulgated under the Securities Act of 1933, as amended.
Note
16 — Consulting Agreements
On
November 28, 2007 the Company entered into a 12 month consulting agreement
(the
“Consulting Agreement”) with DK True Energy Development Ltd., a member of
Blackwood, the Company’s largest shareholder, and RTP Secure Energy Corp.
(together, the “Consultants”). In accordance with the terms of the Consulting
Agreement, the Consultants are to provide the Company with, among other things,
reservoir analysis, and geological and engineering expertise, as required and
reasonably requested by the Company from time to time, as well as to assist
the
Company with respect to: (i) reviewing technical data and providing advice
regarding the development of the Wardlaw Field; (ii) identifying and introducing
the Company to management candidates, including prospective members of the
board
of directors and officers; (iii) interacting with the Company’s potential
investors; and (iv) assisting and advising the Company with respect to
developing a pilot program and a full development plan for the full production
of the Wardlaw Field.
In
lieu
of cash compensation, the Consultants will receive 5-year warrants to purchase
up to a total of 9,000,000 shares of common stock, at an exercise price of
$1.05
per share, exercisable after December 31, 2007 and only on a cashless basis
(such that fewer than 9,000,000 shares will be issued). The Consultants’
warrants are subject to shareholder approval in accordance with applicable
federal securities laws and in compliance Rule 4350. The Company’s majority
shareholder, Blackwood, has executed a voting agreement to approve the
Consultants’ warrants. The Consultants’ warrants will vest, in the aggregate, as
follows: (i) 1,147,500 warrant shares will vest upon effective shareholder
approval; (ii) 2,452,500 warrant shares will vest upon the Company’s
announcement that it is moving forward with a development program based on
the
results of the pilot program of the Wardlaw Field; and (iii) 5,400,000 warrant
shares will vest at the rate of 675,000 shares for each increase of an average
of 250 barrels of oil per day produced by the Company in any calendar month
following the warrant issue date. Notwithstanding the foregoing, the
Consultants’ warrants will vest entirely upon a change of control transaction,
including an agreement for the sale or disposition of more than 50% of the
Company’s interest in the Wardlaw Field. The Company is obligated to use its
best efforts to file a registration statement with the Securities and Exchange
Commission (the “SEC”) within 180 days providing for the resale of an aggregate
of 6,500,000 of the Consultants’ warrant shares, subject to Rule 415 under the
Securities Act of 1933, as amended (the “Securities Act”).
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
16 — Consulting
Agreements – (continued)
Officers
and Directors
On
November 28, 2007, the Company entered into a consulting agreement with
Applewood Energy, Inc., (“Applewood”), effective as of November 1, 2007 (the
“Applewood Agreement”), pursuant to which Applewood agreed to provide the
Company, for a period of two years from the effective date, the services of
Mr.
Paul D. Watson (“Watson”), as Chief Operating Officer and a member of board of
directors.
As
compensation for the services to be rendered under the terms of the Applewood
Agreement, the Company agreed to issue Applewood shares of common stock having
a
value of $60,000 and pay cash compensation of $5,000 per month. Upon completion
of the first and second years of the Applewood Agreement, the Company will
pay
Applewood a bonus, in shares of common stock, equal to the amount of Applewood’s
annual compensation. Upon the achievement of certain milestones, Applewood
will
be entitled receive warrants to purchase shares of the Company’s common stock as
follows: (i) the right to purchase 400,000 shares of common stock at an exercise
price of $2.00 per share vesting upon completion of a successful pilot; (ii)
the
right to purchase 400,000 shares of common stock at an exercise price of $2.00
per share when the Company’s 30 day average production reaches 1,000 barrels of
oil equivalent per day (“BOE/D”); (iii) the right to purchase 400,000 shares of
common stock at an exercise price of $2.50 per share vesting when the Company’s
30 day average production reaches 2,000 BOE/D; and (iv) the right to purchase
400,000 shares of common stock having an exercise price of $3.00 per shares
when
the Company’s 30 day average production reaches 3,000 BOE/D. Before the Company
can issue the shares of common stock for the bonus and the warrants, it must
seek approval from its shareholders pursuant to Rule 4350.
In
the
event of a business combination or change of control, as they are defined in
the
Applewood Agreement, all unvested warrants issued to Applewood will immediately
vest and Applewood will have the right to receive, upon exercise of its warrants
and payment of the exercise price, subject in all cases to completion of a
successful pilot, the kind and amount of shares of capital stock or other
securities or property which it would have been entitled to receive upon or
as a
result of such combination or change of control had the warrants been exercised
immediately prior to such event. In the event of a business combination or
change of control which results in the termination of the Applewood Agreement,
Applewood will receive a 12 month severance package payable upon the effective
date of the transaction and only as to the cash portion of Applewood’s annual
compensation.
On
November 28, 2007, the Company entered into a consulting agreement with GWB
Petroleum Consultants Ltd. (“GWB”), effective as of November 1, 2007 (the “GWB
Agreement”), pursuant to which GWB agreed to provide the Company, for a period
of two years from the effective date, the services of Mr. Geoffrey W. Beatson
(“Beatson”) as Vice President of Engineering and Production.
As
compensation for the services to be rendered under the terms of the GWB
Agreement, the Company agreed to pay GWB $550 per day until January 1, 2008,
and
thereafter $12,000 per month. Upon completion of the first and second years
of
the GWB Agreement, the Company will pay GWB a bonus, in shares of its common
stock, equal to the amount of GWB’s annual cash compensation. Upon the
achievement of certain milestones, GWB will also receive warrants to purchase
shares of the Company’s common stock as follows: (i) the right to purchase
250,000 shares of common stock at an exercise price of $2.00 per share vesting
upon completion of a successful pilot; (ii) the right to purchase 250,000 shares
of common stock at an exercise price of $2.00 per share when the Company’s 30
day average production reaches 1,000 BOE/D; (iii) the right to purchase 250,000
shares of common stock at an exercise price of $2.50 per share vesting when
the
Company’s 30 day average production reaches 2,000 BOE/D; and (iv) the right to
purchase 250,000 shares of common stock having an exercise price of $3.00 per
shares when the Company’s 30 day average production reaches 3,000
BOE/D.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
16 — Consulting
Agreements – (continued)
In
the
event of a business combination or change of control, as they are defined in
the
GWB Agreement, all unvested warrants issued to GWB will immediately vest and
GWB
will have the right to receive, upon exercise of its warrants and payment of
the
exercise price, subject in all cases to completion of a successful pilot, the
kind and amount of shares of capital stock or other securities or property
which
it would have been entitled to receive upon or as a result of such combination
or change of control had the warrants been exercised immediately prior to such
event. In the event of a business combination or change of control which results
in the termination of the GWB Agreement, GWB shall receive a 12 month severance
package payable upon the effective date of the transaction and only as to the
cash portion of GWB’s annual compensation.
Note
17 — Control Corporation
On
September 26, 2007, Walter G. Mize, formerly the Company’s largest shareholder,
entered into a Restated Stock Sale Agreement, which was effective as of
September 18, 2007, with Blackwood, pursuant to which Blackwood purchased from
Mize (i) 3,759,999 shares of common stock, (ii) a warrant for the purchase
of
953,333 shares of common stock at an exercise price of $3.15 per share, (iii)
a
warrant for the purchase of 1,000,000 shares of common stock at an exercise
price of $3.36 per share, and (iv) a warrant for the purchase of 953,333 shares
of our common stock at an exercise price of $3.75 per share. The aggregate
purchase price for the securities was $5,017,000. As a result of this
transaction, Blackwood now owns approximately 58.3% of the Company’s voting
securities. Blackwood purchased the securities by transferring to Mize $375,000
in cash and two promissory notes, one in the face amount of $3,767,000 and
the
second in the face amount of $875,000. The funds transferred to Mize from
Blackwood to purchase the securities were Blackwood’s personal
funds.
On
November 27, 2007, as part of the November Offering, the Company converted
$96,000 of debt owed to Blackwood into 4 units of its securities, comprised
of
an aggregate of 128,000 shares of common stock and five year warrants to
purchase up to an additional 209,012 shares of common stock, subject to certain
vesting requirements, at an exercise price of $1.40 per share, as more fully
described in Note 15.
On
December 19, 2007, the Company entered into an agreement to convert debt with
Blackwood (the “Agreement to Convert Debt”), pursuant to which Blackwood agreed
to accept (i) 48,750 shares of common stock, representing a price of $0.80
per
share, and (ii) a seven year warrant to purchase 36,563 shares of common stock
at an exercise price of $1.40 per share, in consideration of the cancellation
of
$39,000 of debt incurred by the Company in connection with Blackwood’s prior
discharge of certain of its accounts payable.
As
a
result of these transactions Blackwood beneficially owns 6,794,665 shares of
the
Company’s common stock, or approximately 66.9%, exclusive of the shares issuable
as part of the November Offering and the Agreement to Convert Debt which are
subject to shareholder approval at the Company’s annual meeting (the “Annual
Meeting”).
Note
18 — Subsequent Events
Officers
and Directors
On
January 14, 2008, Mr. Watson relinquished his appointment as the Company’s Chief
Operating Officer and was appointed Chief Executive Officer and chairman of
the
board of directors. As such the Company intends to amend the Applewood Agreement
to reflect this change. The Applewood Agreement will remain otherwise
unmodified.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
18 — Subsequent
Events – (continued)
On
January 15, 2008, Joseph Langston resigned as the Company’s interim Chairman of
the board of directors and interim Chief Executive Officer and Paul D. Watson
as
appointed Chairman of the board of directors and Chief Executive Officer in
his
place. On the same date, Mr. Langston was appointed as the Company’s President,
Chief Financial Officer and Secretary.
In
connection with the Company’s appointment of Mr. Langston as President, Chief
Financial Officer and Secretary the Company agreed to enter into a definitive
employment agreement with Mr. Langston, the material terms of which will
include: (i) an annual salary in the amount of $60,000 (the “Annual Salary”),
payable, at the option of the Company, in cash or shares of the Company’s common
stock, (ii) a signing bonus of 80,000 shares of the Company’s common stock (the
“Signing Bonus Shares”), (iii) reimbursement for any out-of-pocket expenses
incurred in connection with the execution of Mr. Langston’s duties as an
executive officer, (iv) an annual renewal bonus equal to 100% of the Annual
Salary payable in common stock at the prevailing market price, and (v) a warrant
to purchase: (a) 300,000 shares of common stock at a purchase price per share
of
$1.50 vesting upon completion of a successful financing in which the Company
raises in excess of $1 million, (b) 300,000 shares of common stock at a purchase
price per share of $2.00 vesting upon completion of a successful pilot for
development of the Company’s Wardlaw Field, (c) 300,000 shares of common stock
at a purchase price per share of $2.00 vesting when the Company’s 30-day average
production reaches 1,000 barrels of oil equivalent per day (“BOE/D”), (d)
300,000 shares of common stock at a purchase price per share of $2.50 vesting
when the Company’s 30-day average production reaches 2,000 BOE/D, and (e)
300,000 shares of common stock at a purchase price per share of $3.00 vesting
when the Company’s 30 day average production reaches 3,000 BOE/D. The Signing
Bonus Shares will not be accrued and issued until approved by the shareholders
at the Annual Meeting.
Consultants
On
January 15, 2008, the Company entered into a one-year consulting agreement
with
Blackwood Capital Limited (“BCL”), an entity which controls Blackwood, the
Company’s majority shareholder (the “BCL Agreement”), pursuant to which the
Company agreed to issue to BCL, for financial advisory services which have
been
rendered since September 1, 2007 and as an inducement to provide further
services, a four-year warrant to purchase 1,500,000 shares of the Company’s
common stock at a price of $1.05 per share (the “BCL Warrant”). In addition to
the BCL Warrant, the Company agreed to pay BCL a monthly consulting fee of
$15,000, to be calculated and paid from September 1, 2007 through the end of
the
term of the BCL Agreement. The BCL Warrant is subject to approval by the
Company’s shareholders, as required by Rule 4350. As of December 31, 2007, there
was no money owed to BCL under to the terms of the BCL Agreement.
Private
Placements
On
January 16, 2008, the Company entered into a six-month exclusive agreement
with
Chadbourn Securities (“Chadbourn”), pursuant to which Chadbourn agreed to act as
the Company’s placement agent in connection with a private placement of the
Company’s securities (the “Chadbourn Agreement”). According to the Chadbourn
Agreement, the Company will pay Chadbourn a monthly fee of $15,000, which
Chadbourn may elect to receive in the Company’s common stock valued at the
average volume weighted average price for the five trading days preceding the
end of the applicable month of service. In addition, if the Company places
any
equity or equity-linked securities during the term of the Chadbourn Agreement,
other than the securities issued pursuant to the 500K Private Placement (as
hereinafter defined), the Company will pay Chadbourn 8% of the gross proceeds
up
to $5,000,000 and 4% of the gross proceeds in excess of $5,000,000, along with
warrants to purchase 8% of the number of shares of common stock actually issued
in the private placement (or 8% of the number of shares of common stock into
which any preferred stock or convertible debentures so issued are initially
convertible). If the Company places non-convertible subordinated debt during
the
term of the Chadbourn Agreement, the Company will pay Chadbourn 8% of the amount
funded to the Company, and if the Company issues equity interests along with
such subordinated debt, Chadbourn will also receive 8% of the equity securities
issued to the lenders. If the Company places non-convertible senior debt during
the term of the Chadbourn Agreement, the Company will pay Chadbourn 2% of the
amount funded to the Company, and if the Company issues equity interests along
with such senior debt, Chadbourn will also receive 8% of the securities issued
to the lenders. Subject to approval by the Company’s shareholders, as required
by Rule 4350, at the Annual Meeting.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
18 — Subsequent
Events – (continued)
On
or
about January 17, 2008, the Company accepted binding subscriptions for the
purchase and sale to accredited investors of $500,000 of the Company’s common
stock at a price of $0.75 per share (the “$500K Private Placement”), including
subscriptions for $50,000 each from the Langston Family Limited Partnership
and
Applewood Energy, Inc., entities controlled by the Company’s Chief Executive
Officer and Chairman of its board of directors, Paul D. Watson, and the
Company’s President, Chief Financial Officer and Secretary, Joseph F. Langston,
Jr., respectively. The $500K Private Placement is subject to approval by the
Company’s shareholders, as required by Rule 4350, inasmuch as the $500K Private
Placement may be aggregated with certain private placement consummated by the
Company in November 2007.
Listing
Requirements
On
July
19, 2007 the Company received a letter from the Nasdaq Stock Market (“Nasdaq”)
indicating that it did not comply with Marketplace Rule 4310(c)(3) requiring
it
to have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market
value of listed securities or $500,000 of net income from continuing operations
for the most recently completed fiscal year or two of the three most recently
completed fiscal years (“Rule 4310(c)(3)”). The Company had until August 3, 2007
to provide Nasdaq with a specific plan to achieve and sustain compliance with
Rule 4310(c)(3). The Company submitted a plan on August 2, 2007 and Nasdaq
extended its time for compliance until the filing of its next periodic report.
On November 14, 2007 the Company filed a quarterly report on Form 10-QSB for
the
quarter ended September 30, 2007, indicating that it was not in compliance
with
Rule 4310(c)(3).
On
November 30, 2007 the Company received a letter from Nasdaq noting its failure
to regain compliance and indicating that trading of its common stock would
be
suspended at the opening of business on December 11, 2007 unless it appeal
the
determination. The Company appealed the determination to the Nasdaq Listing
Qualifications Panel (the “Panel”) and a hearing was held on January 17, 2008,
the outcome of which is currently pending.
On
January 31, 2008 the Company received a letter from Nasdaq indicating that,
for
a period of 30 consecutive business days, the bid price of its common stock
closed below the minimum $1.00 per share requirement for continued inclusion
under Marketplace Rule 4310(c)(4), and that the Company has until July 29,
2008
to regain compliance.
Debt
Conversions
On
January 15, 2008, the Company entered into an agreement to convert an $833,335
option put right held by Mize into 1,111,113 shares of the Company’s common
stock and a three-year warrant to purchase 555,556 shares of the Company’s
common stock at an exercise price of $1.50 per share. Mize’s obligation to
convert his put right into securities of the Company is conditioned on the
Company obtaining a favorable decision by the Panel as to the continued listing
of the Company’s common stock on the Nasdaq Capital Market. If the Company
receives an unfavorable decision as to its continued listing on the Nasdaq
Capital Market, Mize will have the right, but not the obligation, to convert
his
put right on the same terms described above for a period of 90 days from
receiving notice of such unfavorable decision. The option put right conversion
agreement with Mize is subject to approval by the Company’s shareholders, as
required by Rule 4350.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
United
Heritage Corporation
We
have
audited the accompanying consolidated balance sheets of United Heritage
Corporation and subsidiaries as of March 31, 2007 and 2006, and the related
consolidated statements of operations, changes in shareholders' equity and
cash
flows 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 audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of United Heritage
Corporation and subsidiaries as of March 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for the years then ended,
in
conformity with accounting principles generally accepted in the United States
of
America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company sold all of its proved reserves in 2006 and currently
does not have significant revenue producing assets. In addition, the Company
has
limited capital resources and it’s majority shareholder who was financing the
Company’s development filed for bankruptcy subsequent to March 31, 2007, all of
which raise substantial doubt about its ability to continue as a going concern.
Management’s plans in regard to these matters are also discussed in Note 2. The
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty.
As
discussed in Note 2 to the consolidated financial statements, in 2007 the
Company adopted Statement of Financial Accounting Standards No. 123(R), “Share
Based Payment.”
/s/
Weaver and Tidwell, L.L.P.
Fort
Worth, Texas
July
16,
2007
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March
31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,671,672
|
|
$
|
76,366
|
|
|
Accounts
receivable
|
|
|
5,602
|
|
|
60,269
|
|
|
Accounts
receivable – other
|
|
|
465,068
|
|
|
—
|
|
|
Inventory
|
|
|
31,417
|
|
|
48,626
|
|
|
Prepaid
expenses
|
|
|
34,909
|
|
|
47,530
|
|
|
Total
current assets
|
|
|
2,208,668
|
|
|
232,791
|
|
|
INVESTMENT
in Cano Petroleum common stock, at fair value (restricted)
|
|
|
1,827,000
|
|
|
—
|
|
|
OIL
AND GAS PROPERTIES, accounted for using the full cost method,
net
of accumulated depletion and depreciation of $0 for 2007 and $2,048,818
for 2006
|
|
|
|
|
|
|
|
|
Proved
|
|
|
—
|
|
|
9,353,037
|
|
|
Unproved
|
|
|
5,864,587
|
|
|
5,864,587
|
|
|
|
|
|
5,864,587
|
|
|
15,217,624
|
|
|
PROPERTY
AND EQUIPMENT, at cost
|
|
|
|
|
|
|
|
|
Equipment,
furniture and fixtures
|
|
|
74,244
|
|
|
74,244
|
|
|
Vehicles
|
|
|
158,452
|
|
|
57,603
|
|
|
|
|
|
232,696
|
|
|
131,847
|
|
|
Less
accumulated depreciation
|
|
|
149,392
|
|
|
120,657
|
|
|
|
|
|
83,304
|
|
|
11,190
|
|
|
Total
Assets
|
|
$
|
9,983,559
|
|
$
|
15,461,605
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March
31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,835,148
|
|
$
|
1,248,763
|
|
|
Accounts
payable, related party
|
|
|
797,088
|
|
|
405,000
|
|
|
Accrued
expenses
|
|
|
343,750
|
|
|
344,684
|
|
|
Accrued
interest, related party
|
|
|
451,485
|
|
|
—
|
|
|
Total
current liabilities
|
|
|
3,427,471
|
|
|
1,998,447
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
|
82,942
|
|
|
266,512
|
|
|
Note
payable, related parties
|
|
|
2,941,983
|
|
|
1,413,003
|
|
|
Accrued
put option liability
|
|
|
2,727,186
|
|
|
—
|
|
|
Deferred
tax liability
|
|
|
—
|
|
|
—
|
|
|
Total
liabilities
|
|
|
9,179,582
|
|
|
3,677,962
|
|
|
SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.0001 par value, 5,000,000 shares authorized,
none
issued
|
|
|
—
|
|
|
—
|
|
|
Common
stock, $.001 par value, 125,000,000 shares authorized, 6,446,758
issued
and outstanding
|
|
|
6,447
|
|
|
6,447
|
|
|
Additional
paid-in capital
|
|
|
43,796,676
|
|
|
43,341,208
|
|
|
Accumulated
deficit
|
|
|
(42,999,146
|
)
|
|
(31,564,012
|
)
|
|
Total
shareholders' equity
|
|
|
803,977
|
|
|
11,783,643
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$
|
9,983,559
|
|
$
|
15,461,605
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Years
Ended March 31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
OPERATING
REVENUES
|
|
|
|
|
|
|
|
|
Processed
meat products
|
|
$
|
—
|
|
$
|
8,694
|
|
|
Oil
and gas sales
|
|
|
1,014,734
|
|
|
592,991
|
|
|
Total
operating revenues
|
|
|
1,014,734
|
|
|
601,685
|
|
|
OPERATING
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
Processed
meat products
|
|
|
—
|
|
|
15,996
|
|
|
Production
and operating
|
|
|
1,320,401
|
|
|
259,290
|
|
|
Depreciation
and depletion
|
|
|
490,507
|
|
|
1,027,155
|
|
|
Accretion
of asset retirement obligation
|
|
|
12,402
|
|
|
16,532
|
|
|
General
and administrative
|
|
|
1,317,456
|
|
|
1,339,920
|
|
|
Put
option expense
|
|
|
2,727,186
|
|
|
—
|
|
|
Ceiling
test impairment of oil & gas properties
|
|
|
—
|
|
|
23,199,110
|
|
|
Total
operating costs and expenses
|
|
|
5,867,952
|
|
|
25,858,003
|
|
|
Loss
from operations
|
|
|
(4,853,218
|
)
|
|
(25,256,318
|
)
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Gain
on forgiveness of debt
|
|
|
—
|
|
|
116,457
|
|
|
Loss
on notes receivable
|
|
|
—
|
|
|
(87,500
|
)
|
|
Loss
on sale of oil and gas assets
|
|
|
(6,125,233
|
)
|
|
—
|
|
|
Interest
expense
|
|
|
(456,683
|
)
|
|
(221,445
|
)
|
|
Miscellaneous
income
|
|
|
—
|
|
|
27,486
|
|
|
Income
(loss) before income tax
|
|
|
(11,435,134
|
)
|
|
(25,421,320
|
)
|
|
INCOME
TAX (EXPENSE) BENEFIT
|
|
|
—
|
|
|
8,049,925
|
|
|
Net
income (loss)
|
|
$
|
(11,435,134
|
)
|
$
|
(17,371,395
|
)
|
|
Income
(loss) per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.77
|
)
|
$
|
(2.98
|
)
|
|
Weighted
average number of shares outstanding Basic and diluted
|
|
|
6,446,758
|
|
|
5,830,188
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years
Ended March 31, 2007 and 2006
|
|
|
Common Stock
|
|
Additional
Paid-in
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Other
|
|
|
Balance,
March 31, 2005 (Restated)
|
|
|
5,182,781
|
|
$
|
5,183
|
|
$
|
39,476,803
|
|
$
|
(14,192,617
|
)
|
$
|
(5,250
|
)
|
|
Stock
issued for services
|
|
|
33,333
|
|
|
33
|
|
|
105,324
|
|
|
—
|
|
|
—
|
|
|
Issuance
of stock to Lothian Oil Inc.
|
|
|
1,093,333
|
|
|
1,093
|
|
|
3,442,907
|
|
|
—
|
|
|
—
|
|
|
Issuance
of stock upon exercise of warrants
|
|
|
138,233
|
|
|
138
|
|
|
311,712
|
|
|
—
|
|
|
—
|
|
|
Stock
options for services non-employees
|
|
|
—
|
|
|
—
|
|
|
4,462
|
|
|
—
|
|
|
—
|
|
|
Realization
of deferred consulting fees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17,371,395
|
)
|
|
—
|
|
|
Balance,
March 31, 2006
|
|
|
6,446,758
|
|
|
6,447
|
|
|
43,341,208
|
|
|
(31,564,012
|
)
|
|
—
|
|
|
Stock
options for services of non-employees
|
|
|
—
|
|
|
—
|
|
|
455,468
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,435,134
|
)
|
|
—
|
|
|
Balance,
March 31, 2007
|
|
|
6,446,758
|
|
$
|
6,447
|
|
$
|
43,796,676
|
|
$
|
(42,999,146
|
)
|
$
|
—
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
Ended March 31, 2007 and 2006
|
|
|
2007
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,435,134
|
)
|
$
|
(17,371,395
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation,
depletion and amortization
|
|
|
490,507
|
|
|
1,027,155
|
|
|
Loss
on sale of oil and gas assets
|
|
|
6,125,233
|
|
|
—
|
|
|
Ceiling
test impairment of oil and gas properties
|
|
|
—
|
|
|
23,199,110
|
|
|
Realization
of stock options issued to non-employees
|
|
|
455,468
|
|
|
4,462
|
|
|
Put
option expense
|
|
|
2,727,186
|
|
|
—
|
|
|
Recognition
of services performed for stock
|
|
|
—
|
|
|
105,357
|
|
|
Deferred
compensation and consulting recognized in current year
|
|
|
—
|
|
|
5,250
|
|
|
Forgiveness
of debt
|
|
|
—
|
|
|
(116,457
|
)
|
|
Accretion
of asset retirement obligation
|
|
|
12,402
|
|
|
16,532
|
|
|
Write
off of note receivable
|
|
|
—
|
|
|
87,500
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(410,401
|
)
|
|
29,998
|
|
|
Inventory
|
|
|
17,209
|
|
|
(22,419
|
)
|
|
Prepaid
expenses
|
|
|
12,621
|
|
|
77,665
|
|
|
Deferred
tax
|
|
|
—
|
|
|
(8,049,925
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
1,429,024
|
|
|
939,438
|
|
|
Net
cash used in operating activities
|
|
|
(575,885
|
)
|
|
(67,729
|
)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of oil and gas interests
|
|
|
6,613,947
|
|
|
625,000
|
|
|
Additions
to oil and gas properties
|
|
|
(5,830,677
|
)
|
|
(2,533,815
|
)
|
|
Additions
to equipment
|
|
|
(141,059
|
)
|
|
—
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
642,211
|
|
|
(1,908,815
|
)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock warrants
|
|
|
—
|
|
|
311,850
|
|
|
Proceeds
from issuance of common stock to Lothian
|
|
|
—
|
|
|
3,444,000
|
|
|
Proceeds
from borrowings, related parties
|
|
|
6,338,904
|
|
|
1,493,903
|
|
|
Payments
on note payable, related party
|
|
|
(4,809,924
|
)
|
|
(3,203,994
|
)
|
|
Net
cash provided by financing activities
|
|
|
1,528,980
|
|
|
2,045,759
|
|
|
Net
increase in cash
|
|
|
1,595,306
|
|
|
69,215
|
|
|
Cash,
beginning of year
|
|
|
76,366
|
|
|
7,151
|
|
|
Cash,
end of year
|
|
$
|
1,671,672
|
|
$
|
76,366
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
—
|
|
$
|
712,030
|
|
|
Taxes
|
|
$
|
—
|
|
$
|
—
|
|
|
SUPPLEMENTAL
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Common
stock issued in exchange for services
|
|
$
|
—
|
|
$
|
105,357
|
|
|
Acquisition
of common stock in sale of oil and gas properties
|
|
$
|
1,827,000
|
|
$
|
—
|
|
|
Forgiveness
of debt
|
|
$
|
—
|
|
$
|
116,457
|
|
The
Notes to Consolidated Financial Statements are an integral part of these
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Restatement of Historical Financial
Statements
In
April
2006, the Company retained independent petroleum engineers to evaluate its
properties. Based on this review and internal assessments, the Company concluded
that a downward revision of its stated proved reserves, from 36,492,693 Boe
to
1,056,317 Boe, should have been reflected in the March 31, 2005 fiscal year
and
prior periods. The Company concluded that a revision of the historical proved
reserve estimates included in the historical supplemental oil and gas producing
disclosures was required. Quantities of estimated proved reserves are used
in
determining depletion and impairment based on the ceiling limitation. The
revisions of historical reserve estimates required the restatement of the
Company’s financial statements for the fiscal years ending March 31, 2000 to
March 31, 2005 and the first three quarters of March 31, 2006.
In
addition to the restatements required as a result of the reserve revisions,
the
Company determined that approximately $76,822 of merger costs and $34,131 of
vehicle costs net of accumulated depreciation were inappropriately included
in
the Company’s proven properties in the March 31, 2005 financial statements and
prior years. The Company determined that a revision of the historical financial
statements for these reclassifications was required to determine the appropriate
depletion and impairment based on the ceiling limitation.
Reserve
Restatement
The
reserve restatement resulted in the following revisions to our estimated proved
reserves as of March 31, 2005:
|
|
|
March 31, 2005
|
|
|
|
|
As Reported
|
|
As Restated
|
|
|
Estimated
Proved Reserves (Unaudited)
|
|
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
35,225,600
|
|
|
567,189
|
|
|
Gas
(Mcf)
|
|
|
7,602,559
|
|
|
2,934,765
|
|
|
Oil
and Gas (Boe)
|
|
|
36,492,693
|
|
|
1,056,317
|
|
|
Estimated
Proved Developed Reserves (Unaudited)
|
|
|
|
|
|
|
|
|
Oil
(Bbls)
|
|
|
5,629,000
|
|
|
567,189
|
|
|
Gas
(Mcf)
|
|
|
2,538,000
|
|
|
2,934,765
|
|
|
Oil
and Gas (Boe)
|
|
|
6,052,000
|
|
|
1,056,317
|
|
The
cumulative impact of the restatement on the Company’s shareholders’ equity as of
March 31, 2005 was a reduction of approximately $1,800,873.
The
Company’s historical consolidated statements of operations for the year ended
March 31, 2005 and for each of the quarters in that year and the first three
quarters of the fiscal year ended March 31, 2006 reflect the effects of the
restatement on the calculation of historical depletion. The Company did not
amend the Annual Report filed on Form10-KSB for the year ended March 31, 2005
or
the Quarterly Reports filed on Form 10-QSB for any periods prior to March 31,
2006. The financial statements and related information contained in those
reports should no longer be relied upon. A summary of the effects of the
restatement on reported amounts for the year ended March 31, 2005 and the
quarters ended June 30, 2005, September 30, 2005 and December 31, 2005 is
presented below. The information presented represents only those statements
of
operations, balance sheet and cash flow statement line items affected by the
restatement.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Restatement of Historical Financial
Statements – (continued)
|
|
|
March
31, 2005
|
|
|
|
|
As Reported
|
|
As
Restated
|
|
|
Balance
Sheet:
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
$
|
48,374
|
|
$
|
125,195
|
|
|
Proved
oil and gas properties
|
|
|
38,565,819
|
|
|
2,301,263
|
|
|
Accumulated
depletion
|
|
|
204,706
|
|
|
1,026,934
|
|
|
Unproved
oil and gas properties
|
|
|
834,579
|
|
|
35,215,630
|
|
|
Vehicles
|
|
|
22,045
|
|
|
57,603
|
|
|
Accumulated
depreciation
|
|
|
85,637
|
|
|
115,384
|
|
|
Total
assets
|
|
|
39,683,457
|
|
|
37,882,584
|
|
|
Accumulated
deficit
|
|
|
(12,391,744
|
)
|
|
(14,192,617
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
|
39,683,457
|
|
|
37,882,584
|
|
|
|
|
Quarters
Ended (Unaudited)
|
|
|
|
|
June 30, 2005
|
|
September 30, 2005
|
|
December 31, 2005
|
|
|
|
|
As
Reported
|
|
As
Restated
|
|
As
Reported
|
|
As
Restated
|
|
As
Reported
|
|
As
Restated
|
|
|
Statement
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and depletion
|
|
$
|
11,734
|
|
$
|
64,005
|
|
$
|
14,187
|
|
$
|
389,435
|
|
$
|
21,269
|
|
$
|
234,880
|
|
|
Ceiling
test impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,199,110
|
|
|
—
|
|
|
—
|
|
|
Total
operating costs
and
expenses
|
|
|
271,475
|
|
|
323,746
|
|
|
418,970
|
|
|
23,993,328
|
|
|
354,531
|
|
|
568,142
|
|
|
Loss
from operations
|
|
|
(144,392
|
)
|
|
(196,663
|
)
|
|
(234,528
|
)
|
|
(23,808,886
|
)
|
|
(173,095
|
)
|
|
(386,706
|
)
|
|
Income
tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,049,925
|
|
|
—
|
|
|
—
|
|
|
Net
loss
|
|
|
(219,013
|
)
|
|
(271,284
|
)
|
|
(304,821
|
)
|
|
(15,865,481
|
)
|
|
(209,792
|
)
|
|
(423,403
|
)
|
|
Basic
and diluted loss
per
share
|
|
|
(0.04
|
)
|
|
(0.05
|
)
|
|
(0.06
|
)
|
|
(2.98
|
)
|
|
(0.03
|
)
|
|
(0.07
|
)
|
|
|
|
Quarters Ended (Unaudited)
|
|
|
|
|
June 30, 2005
|
|
September 30, 2005
|
|
December 31, 2005
|
|
|
|
|
As
Reported
|
|
As
Restated
|
|
As
Reported
|
|
As
Restated
|
|
As
Reported
|
|
As
Restated
|
|
|
Statement
of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(219,013
|
)
|
$
|
(271,284
|
)
|
$
|
(304,821
|
)
|
$
|
(15,865,481
|
)
|
$
|
(209,792
|
)
|
$
|
(423,403
|
)
|
|
Depreciation,
depletion
and
amortization
|
|
|
11,734
|
|
|
64,005
|
|
|
14,187
|
|
|
389,435
|
|
|
21,269
|
|
|
234,880
|
|
|
Ceiling
test impairment
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,199,110
|
|
|
—
|
|
|
—
|
|
|
Deferred
tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8,049,925
|
)
|
|
—
|
|
|
—
|
|
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation and Presentation
The
consolidated financial statements include the accounts of United Heritage
Corporation (the Company) and its wholly owned subsidiaries, UHC Petroleum
Corporation, UHC Petroleum Services Corporation, UHC New Mexico Corporation
and
National Heritage Sales Corporation.
All
intercompany transactions and balances have been eliminated upon
consolidation.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting
Policies – (continued)
Nature
of Operations
United
Heritage Corporation owns various oil and gas properties located in south Texas.
The Company began production of the Texas properties during the year ended
March
31, 2000. The Company continues to operate its oil and gas
properties.
Revenue
Oil
and
gas production revenues are recognized at the point of sale. Production not
sold
at the end of the fiscal year is included as inventory in the accompanying
financial statements. Revenue from the sale of meat products was recognized
when
products were delivered to customers.
Inventory
Inventory
consists of oil in tanks, which is valued at the lower of the cost to produce
the oil or the current available sales price.
Oil
and Gas Properties
The
Company follows the full cost method of accounting for oil and gas properties,
which are located in the southwestern United States. Accordingly, all costs
associated with acquisition, exploration and development of oil and gas reserves
are capitalized.
All
capitalized costs, including the estimated future costs to develop proved
reserves are amortized on the unit-of-production method using estimates of
proved reserves. Investments in unproved properties and major development
projects will not be amortized until proved reserves associated with the
projects can be determined or until impairment occurs. Oil and gas reserves
and
production are converted into equivalent units based upon estimated relative
energy content.
The
Company is currently participating in oil and gas exploitation and development
activities. As of March 31, 2007 the following associated property costs have
been excluded in computing amortization of the full cost pool, by the year
in
which such costs were incurred:
|
|
|
Total
|
|
2007
|
|
2006
|
|
Prior
|
|
|
Acquisition
costs
|
|
$
|
31,752,741
|
|
$
|
0
|
|
$
|
26,566
|
|
$
|
31,726,175
|
|
|
Exploration
costs
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
Development
costs
|
|
|
3,918,199
|
|
|
0
|
|
|
428,744
|
|
|
3,489,455
|
|
|
Sale
of deep rights
|
|
|
(625,000
|
)
|
|
0
|
|
|
(625,000
|
)
|
|
0
|
|
|
Unproved
impairment
|
|
|
(29,181,353
|
)
|
|
0
|
|
|
(29,181,353
|
)
|
|
0
|
|
|
|
|
$
|
5,864,587
|
|
$
|
0
|
|
$
|
(29,351,043
|
)
|
$
|
35,215,630
|
|
The
Company will begin to amortize the remaining acquisition costs when the project
evaluation is complete. This will be dependent upon the Company finding the
necessary financing.
Potential
impairment of producing properties and significant unproved properties and
other
plant and equipment are assessed periodically. If the assessment indicates
that
the properties are impaired, the amount of the impairment will be added to
the
capitalized costs to be amortized.
In
addition, the capitalized costs are subject to a “ceiling test”, which limits
such costs to the aggregate of the estimated present value using a 10% discount
rate (based on prices and costs at the balance sheet date) of future net
revenues from proved reserves based on current economic and operating
conditions, plus the lower of cost (net of impairments) or fair market value
of
unproved properties.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting
Policies – (continued)
As
discussed in Note 1, the Company retained outside independent petroleum
engineers to evaluate the properties of the Company as of March 31, 2006. Based
on this review and internal assessments, the Company concluded that a downward
revision for its unproved properties was required. As of March 31, 2006, the
Company impaired $29,181,353 of unproved properties and included these costs
in
the full cost pool subjecting these costs to the ceiling limitation and
depletion for the fiscal year ended March 31, 2006. The ceiling test resulted
in
a write-down during 2006 of $23,199,110. Depreciation and depletion increased
approximately $763,414 primarily due to the addition of these unproved
properties to the full cost pool. As of March 31, 2007 the Company determined
that no impairment of its unproved properties was required.
Sales
of
proved and unproved properties are accounted for as adjustments of capitalized
costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized
costs
with no loss recognized. During the year ended March 31, 2007 the Company sold
100% of its proved reserves for net proceeds of $8,440,947. The sale resulted
in
a loss of $6,125,233 which is reflected in the Statements of
Operations.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is provided over the estimated
useful lives of the assets primarily by the straight-line method as
follows:
|
Equipment,
furniture and fixtures
|
|
|
3 –
7 years
|
|
|
Vehicles
|
|
|
3 –
5 years
|
|
Earnings
(Loss) Per Common Share
Basic
earnings (loss) per common share are computed based on the weighted average
number of common shares outstanding for the period. Diluted earnings (loss)
per
common share are computed assuming all dilutive potential common shares were
issued. Dilutive potential common shares consist of stock options and warrants.
Diluted earnings per share have not been presented since the inclusion of
potential common shares would be antidilutive.
Cash
Flows Presentation
For
purposes of the statement of cash flows, the Company considers all highly liquid
investments purchased with maturities of three months or less to be cash
equivalents.
Advertising
The
Company expenses all advertising costs as incurred. No advertising cost was
incurred for the years ended March 31, 2007 or 2006.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements and the reported amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Estimates of oil and gas reserves, the asset retirement
obligation and impairment on unproved properties are inherently imprecise and
may change materially in the near term.
Financial
Instruments
Financial
instruments consist of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable and notes payable. Recorded values of cash,
receivables and payables approximate fair values due to short maturities of
the
instruments. Notes payable are to Lothian Oil Inc., the Company’s majority
shareholder, and the difference between fair value and recorded amount is not
material, based on the stated interest rates available to the
Company.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting
Policies – (continued)
Investment
Securities
Securities
are classified as held to maturity and carried at amortized cost when management
has the positive intent and ability to hold them until maturity. Securities
to
be held for indefinite periods of time are classified as available for sale
and
carried at fair value, with the unrealized holding gains and losses reported
as
a component of other comprehensive income, net of tax. Securities held for
resale in anticipation of short-term market movements are classified as trading
and are carried at fair value, with changes in unrealized holding gains and
losses included in income. Management determines the appropriate classification
of securities at the time of purchase.
Interest
income includes amortization of purchase premiums and discounts. Realized gains
and losses are derived from the amortized cost of the security sold. Declines
in
the fair value of held-to-maturity and available-for-sale securities below
their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses. In estimating other-than-temporary impairment losses,
management considers, among other things, (i) the length of time and the extent
to which the fair value has been less than cost, (ii) the financial condition
and near-term prospects of the issuer, and (iii) the intent and ability of
the
Company to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value.
At
March
31, 2007, the Company owned 404,204 shares of restricted common stock in Cano
Petroleum, Inc. which was classified as available for sale.
Stock-based
Employee Compensation
Effective
April 1, 2006, the Company adopted Statement of Financial Accounting Standard
No. 123(R),
Share-Based
Payment
, (“SFAS
No. 123(R)”), using the modified prospective transition method. SFAS No. 123(R)
requires equity-classified share-based payments to employees, including grants
of employee stock options, to be valued at fair value on the date of grant
and
to be expensed over the applicable vesting period. Under the modified
prospective transition method, share-based awards granted or modified on or
after April 1, 2006 are recognized in compensation expense over the applicable
vesting period. Also, any previously granted awards that are not fully vested
as
of April 1, 2006 are recognized as compensation expense over the remaining
vesting period. No retroactive or cumulative effect adjustments were required
upon the Company’s adoption of SFAS No. 123(R).
Prior
to
adopting SFAS No. 123(R), the Company accounted for its employee stock options
using the intrinsic-value based method prescribed by Accounting Principles
Board
Opinion No. 25,
Accounting
for Stock Issued to Employees
, (“APB
No. 25”) and related interpretations. This method required compensation expense
to be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price.
Had
the
Company elected the fair value provisions of SFAS No. 123(R), fiscal year 2006
net loss and net loss per share would have differed from the amounts actually
reported as shown in the following table.
The
fair
value of the options granted in the year ended March 31, 2006 was estimated
on
the date of grant using a Black-Scholes option pricing model and the following
assumptions: a risk-free rate of return of 3.00% to 4.37%; an expected life
of
three to ten years; expected volatility of 88% to 96%; and no expected
dividends.
Using
the
above assumptions, the fair value of the options granted to employees and
directors on a pro forma basis would result in additional compensation expense
of $359,571 for the year ended March 31, 2006. As such, pro forma net loss
per
share would be as follows for the years ended March 31, 2006:
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting
Policies – (continued)
|
|
|
Fiscal Year Ended
March 31, 2006
|
|
|
Net
loss, as reported
|
|
$
|
(17,371,395
|
)
|
|
Expense
recognized
|
|
|
343,750
|
|
|
Additional
compensation
|
|
|
(703,321
|
)
|
|
Pro
forma net loss
|
|
$
|
(17,730,966
|
)
|
|
Loss
per share as reported
|
|
$
|
(2.98
|
)
|
|
Pro
forma net loss per share
|
|
$
|
(3.04
|
)
|
Long-lived
Assets
Long-lived
assets to be held and used by the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset
may not be recoverable. The Company continuously evaluates the recoverability
of
its long-lived assets based on estimated future cash flows and the estimated
liquidation value of such long-lived assets, and provides for impairment if
such
undiscounted cash flows are insufficient to recover the carrying amount of
the
long-lived assets.
Income
Taxes
Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred taxes on temporary differences between the amount of taxable income
and pretax financial income and between the tax bases of assets and liabilities
and their reported amounts in the financial statements. Deferred tax assets
and
liabilities are included in the financial statements at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled as prescribed in FASB
Statement No. 109,
Accounting
for Income Taxes
. As
changes in tax laws or rate are enacted, deferred tax assets and liabilities
are
adjusted through the provision for income taxes.
Recently
Issued Accounting Standards Not Yet Adopted
FASB
Staff Position (FSP) FAS 19-1 amends SFAS statement No. 19 to provide revised
guidance concerning the criteria for continued capitalization of exploratory
costs when wells have found reserves that cannot yet be classified as proved.
FAS 19-1 provides circumstances that would permit the continued capitalization
of exploratory well costs beyond one year, other than when additional
exploration wells are necessary to justify major capital expenditures and those
wells are under way or firmly planned for the near future. Generally, the
statement allows exploratory well costs to continue to be capitalized when
the
well has found a sufficient quantity of reserves to justify its completion
as a
producing well and the enterprise is making sufficient progress assessing the
reserves and the economic and operating viability of the project.
In
February 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 155, “Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140.” SFAS No.
155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities,” and also resolves issues
addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement
133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 was
issued to eliminate the exemption from applying SFAS No. 133 to interests in
securitized financial assets so that similar instruments are accounted for
in a
similar fashion, regardless of the instrument’s form. The Company does not
believe that its financial position, results of operations or cash flows will
be
impacted by SFAS No. 155 as it does not currently hold any hybrid financial
instruments.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting
Policies – (continued)
In
June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement No. 109” (“FIN 48”). This
interpretation provides guidance for recognizing and measuring uncertain tax
positions, as defined in SFAS No. 109, “Accounting for Income Taxes.” FIN 48
prescribes a threshold condition that a tax position must meet for any of the
benefit of the uncertain tax position to be recognized in the financial
statements. Guidance is also provided regarding derecognition, classification
and disclosure of these uncertain tax positions. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of this Interpretation
is
not expected to have a material impact on the Company’s consolidated financial
position, results of operations, or cash flows.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”),
which establishes an approach requiring the quantification of financial
statement errors based on the effect of the error on each of the company’s
financial statements and the related financial statement disclosures. This
model
is commonly referred to as a “dual approach” because it requires quantification
of errors under both the “iron curtain” and “roll-over” methods. The roll-over
method focuses primarily on the impact of a misstatement on the income
statement, including the reversing effect of prior year misstatements; however,
its use can lead to the accumulation of misstatements in the balance sheet.
The
iron curtain method focuses primarily on the effect of correcting the period
end
balance sheet with less emphasis on the reversing effects of prior year errors
on the income statement. The Company will initially apply the provisions of
SAB
108 in connection with the preparation of the Company’s annual financial
statements for the year ending March 31, 2007. The use of the dual approach
is
not expected to have a material impact on the Company’s consolidated financial
position, results of operations, or cash flows.
In
September 2006, the FASB issued SFAS No. 157
,
”Fair
Value Measurements”, which addresses how companies should measure fair value
when companies are required to use a fair value measure for recognition or
disclosure purposes under generally accepted accounting principles (“GAAP”). As
a result of SFAS 157, there is now a common definition of fair value to be
used
throughout GAAP. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those
years. Although the disclosure requirements may be expanded where certain assets
or liabilities are fair valued such as those related to stock compensation
expense and hedging activities, the Company does not expect the adoption of
SFAS
157 to have a material impact on the Company’s consolidated financial position,
results of operations, or cash flows.
In
December 2006, the FASB issued FASB Staff Position FSP EITF 00-19-2,
Accounting
for Registration Payment Arrangements
. This
FASB Staff Position, or FSP, specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with FASB Statement No. 5,
Accounting
for Contingencies
. This
FSP also requires certain disclosures regarding registration payment
arrangements and liabilities recorded for such purposes. This FSP is immediately
effective for registration payment arrangements entered into or modified after
December 21, 2006. The guidance of this FSP is effective for fiscal years
beginning after December 15, 2006, and interim periods within those fiscal
years
for registration payment arrangements entered into prior to December 21, 2006.
This FSP requires adoption by reporting a change in accounting principle through
a cumulative-effect adjustment to the opening balance of our partners’ capital
accounts as of the first interim period of the year in which this FSP is
initially applied. The adoption of this FSP is not expected to materially affect
the Company’s financial position, results of operations or cash
flows.
In
February 2007, the FASB issued SFAS No. 159,
“The
Fair Value Option for Financial Assets and Financial
Liabilities”
which
provides entities with an option to report selected financial assets and
liabilities at fair value. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between entities
that
choose different measurement attributes for similar types of assets and
liabilities. This Statement is effective as of the beginning of the first fiscal
year that begins after November 15, 2007. The Company is currently evaluating
the impact that SFAS No. 159 will have on its consolidated financial
statements.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting
Policies – (continued)
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation. Such reclassifications had no impact on the reported prior year
net loss.
Note
3 — Going Concern
The
Company’s financial statements have been prepared on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in
the
ordinary course of business. The Company has incurred substantial losses from
operations and it has a working capital deficit which raises substantial doubt
about its ability to continue as a going concern. The Company sustained a net
loss of $11,435,134 for the fiscal year ended March 31, 2007 and it had an
accumulated deficit of $42,999,146 at March 31, 2007. The Company is currently
looking for financing to provide the needed funds for operations. However,
the
Company is not certain that it will be able to obtain the financing it needs
to
develop its properties and alleviate doubt about its ability to continue as
a
going concern.
Note
4 — Securities
At
March
31, 2007, securities consisted of the following:
|
|
|
Amortized Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
(Loss)
|
|
Estimated Fair Value
|
|
|
Restricted
Common Stock
|
|
$
|
1,827,000
|
|
|
|
|
|
|
|
$
|
1,827,000
|
|
|
Total
|
|
$
|
1,827,000
|
|
|
|
|
|
|
|
$
|
1,827,000
|
|
At
March
31, 2007 securities consisted of $1,827,000 of restricted common stock in Cano
Petroleum, Inc. with an estimated fair value that approximated
cost.
Note
5 — Reverse Stock Split
On
December 19, 2005, the Company’s shareholders approved a one-for-three reverse
stock split. The reverse stock split was effective December 22, 2005. The
Company retained the current par value of $.001 per share for all common shares.
All references in the financial statements and notes to the number of shares
outstanding, per share amounts, and stock option and warrant data have been
restated to reflect the reverse stock split for all periods
presented.
Note
6 — Asset Retirement Obligations
The
FASB
issued SFAS No. 143,
Accounting
for Asset Retirement Obligations,
which is
effective for fiscal years beginning after June 15, 2002. This statement,
adopted by the Company as of April 1, 2003, establishes accounting and reporting
standards for the legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction or development
and the normal operation of long-lived assets. It requires that the fair value
of the liability for asset retirement obligations be recognized in the period
in
which it is incurred. Upon initial recognition of the asset retirement
liability, an asset retirement cost is capitalized by increasing the carrying
amount of the long-lived asset by the same amount as the liability. In periods
subsequent to initial measurement, the asset retirement cost is allocated to
expense using a systematic method over the asset’s useful life. Changes in the
liability for the asset retirement obligation are recognized for (a) the passage
of time and (b) revisions to either the timing or the amount of the original
estimate of undiscounted cash flows.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
6 — Asset Retirement
Obligations – (continued)
A
reconciliation of the changes in the estimated asset retirement obligation
follows:
|
|
|
2007
|
|
2006
|
|
|
Beginning
asset retirement obligation
|
|
$
|
266,512
|
|
$
|
249,980
|
|
|
Additional
liability incurred
|
|
|
—
|
|
|
—
|
|
|
Liabilities
assumed by others
|
|
|
(125,455
|
)
|
|
—
|
|
|
Accretion
expense
|
|
|
12,402
|
|
|
16,532
|
|
|
Asset
retirement cost incurred
|
|
|
(70,517
|
)
|
|
—
|
|
|
Ending
asset retirement obligation
|
|
$
|
82,942
|
|
$
|
266,512
|
|
During
the years ended March 31, 2007 and 2006, accretion expense of $12,402 and
$16,532, respectively, was recognized and is reported in the consolidated
statements of operations. Asset retirement obligations at March 31, 2007 were
$82,942 related to the wells on the Texas properties.
Note
7 — Concentrations of Credit Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist of cash equivalents and trade receivables. During the years ended
March 31, 2007 and 2006, the Company maintained money market accounts with
a
bank, which at times exceeded federally insured limits.
Concentrations
of credit risk with respect to trade receivables consist principally of oil
and
gas companies operating within the United States.
Receivables
due to the sale of the Cato San Andres properties comprised 99% of the
receivable balance at March 31, 2007. Receivables from an oil and gas customer
at March 31, 2006 comprised 55% of the trade receivable balance. No allowance
for doubtful accounts has been provided since recorded amounts are determined
to
be fully collectible based upon management’s review of customer accounts,
historical experience and other pertinent factors.
Note
8 — Inventory
Inventory
consists of the following:
|
|
|
2007
|
|
2006
|
|
|
Oil
in tanks
|
|
$
|
31,417
|
|
$
|
48,626
|
|
|
|
|
$
|
31,417
|
|
$
|
48,626
|
|
Note
9 — Oil and Gas Properties and Operations
Capitalized
costs related to oil and gas producing activities and related accumulated
depletion, depreciation and amortization at March 31 are as
follows:
|
|
|
2007
|
|
2006
|
|
|
Capitalized
costs of oil and gas properties:
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
—
|
|
$
|
11,401,855
|
|
|
Unproved
|
|
|
5,864,587
|
|
|
5,864,587
|
|
|
|
|
|
5,864,587
|
|
|
17,266,442
|
|
|
Less
accumulated depletion, depreciation and amortization
|
|
|
—
|
|
|
2,048,818
|
|
|
|
|
$
|
5,864,587
|
|
$
|
15,217,624
|
|
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
9 — Oil and Gas Properties and
Operations – (continued)
Costs
incurred in oil and gas producing activities were as follows:
|
|
|
2007
|
|
2006
|
|
|
Property
acquisitions
|
|
|
|
|
|
|
|
|
Proved
|
|
$
|
—
|
|
$
|
—
|
|
|
Unproved
|
|
|
—
|
|
|
26,566
|
|
|
Exploration
|
|
|
—
|
|
|
—
|
|
|
Development
|
|
|
5,830,677
|
|
|
2,507,249
|
|
|
|
|
$
|
5,830,677
|
|
$
|
2,533,815
|
|
Results
of operations of oil and gas producing activities for the years ended March
31
are as follows:
|
|
|
2007
|
|
2006
|
|
|
Revenues
from oil and gas producing activities:
|
|
|
|
|
|
|
|
|
Sales
to unaffiliated parties Expenses
|
|
$
|
1,014,734
|
|
$
|
592,991
|
|
|
Production
and operating
|
|
|
1,320,401
|
|
|
259,290
|
|
|
Depreciation,
depletion and accretion
|
|
|
502,909
|
|
|
1,040,250
|
|
|
General
and administrative
|
|
|
300,952
|
|
|
191,150
|
|
|
Loss
on sale of oil and gas assets
|
|
|
6,125,233
|
|
|
—
|
|
|
Ceiling
test impairment of oil and gas properties
|
|
|
—
|
|
|
23,199,110
|
|
|
Total
expenses
|
|
|
8,249,495
|
|
|
24,689,800
|
|
|
Pretax
income (loss) from producing activities
|
|
|
(7,234,761
|
)
|
|
(24,096,809
|
)
|
|
Income
tax expense
|
|
|
—
|
|
|
—
|
|
|
Results
of oil and gas producing activities (excluding corporate overhead
and
interest costs)
|
|
$
|
(7,234,761
|
)
|
$
|
(24,096,809
|
)
|
Note
10 — Notes Payable, Related Parties
The
Company has a $4,000,000 loan agreement with Lothian, its majority shareholder.
The loan was subsequently increased to $8,000,000 during 2007. Advances to
the
Company under this agreement were $2,182,843 as of March 31, 2007 and $1,217,264
as of March 31, 2006. The agreement, dated October 7, 2005, provides for draws
as needed for the development of the Cato San Andres Unit in New Mexico. The
note bears interest at 1% over the Citibank prime rate (8.75% at March 31,
2007)
and is secured by a deed of trust and assignment of production, among other
provisions. Loan advances are repayable monthly from 70% of the oil and gas
proceeds produced by the Cato San Andres Unit. The note is due and payable
on
October 7, 2015 and is subordinated to the Sterling Bank agreement discussed
below. The loan was reduced by $4,397,760 from the proceeds of the sale of
the
Cato San Andres Unit and the Tom Tom and Tomahawk Field on March 30, 2007.
After
the sale of these properties, the loan was then secured by 404,204 shares of
restricted Cano Petroleum common stock. Effective June 2007, Lothian accepted
the Cano Petroleum common stock as full payment of the loan and accrued
interest.
The
Company has an additional $2,500,000 loan agreement with Lothian, its majority
shareholder. Advances to the Company under this agreement were $759,140 and
$195,739 as of March 31, 2007 and 2006, respectively. The agreement, dated
as of
March 31, 2006, provides for draws as needed for the development of the Wardlaw
Field in Texas. The note bears interest at 1% over the Citibank prime rate
(8.75% at March 31, 2006) and is secured by a deed of trust and assignment
of
production, among other provisions. Loan advances are repayable monthly from
70%
of the oil and gas proceeds produced by the Wardlaw Field. The note is due
and
payable on March 31, 2016. There were no payments made during the 2006 or 2007
fiscal years.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
10 — Notes Payable, Related
Parties - (continued)
Reducing
Revolving Line of Credit Agreement
The
Company, as a co-Borrower with its largest shareholder, entered into an Amended
and Restated reducing revolving line of credit agreement of up to $20 million
(“Credit Agreement”) with Sterling Bank as of March 31, 2006. The line was
substantially repaid on March 30, 2007. The Company was thereafter released
by
Sterling Bank as a co-borrower under the Credit Agreement.
Note
11 — Major Customers
During
March 31, 2007 and 2006, the Company only operated in oil and gas producing
activities.
The
Company recorded oil and gas sales to the following major customers for the
years ended March 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
Customer
A
|
|
$
|
799,332
|
|
|
78.8
|
%
|
$
|
230,144
|
|
|
38.8
|
%
|
|
Customer
B
|
|
|
215,402
|
|
|
21.2
|
%
|
|
362,847
|
|
|
61.2
|
%
|
|
|
|
$
|
1,014,734
|
|
|
100.0
|
%
|
$
|
592,991
|
|
|
100.0
|
%
|
Note
12 — Unregistered Sale of Equity Securities to Lothian Oil
Inc.
On
December 19, 2005, the Company’s shareholders approved the sale of 1,093,333
shares of the Company’s common stock, $0.001 par value, and warrants to purchase
an additional 2,906,666 shares of common stock to Lothian Oil Inc. Proceeds
from
the sale of these securities were used to repay a line of credit made to
the
Company by ALMAC Financial Corporation, a corporation wholly-owned by Walter
G.
Mize, formerly the largest shareholder of the Company. Any funds remaining
after
payment of the line of credit were used by the Company for working capital
purposes.
As
part
of the agreement, Lothian and the Company entered into a development and
operating agreement relative to certain properties belonging to the Company’s
wholly-owned subsidiaries, UHC Petroleum Corporation and UHC New Mexico
Corporation.
In
addition, Lothian purchased 2,666,667 restricted shares of Company common
stock
from Walter G. Mize, Chairman of the Board of Directors and formerly the
Company’s largest shareholder, President and Chief Executive Officer, and six
other shareholders for an aggregate purchase price of $10,651,000 or $3.99 per
share. Lothian paid the purchase price with a promissory note.
Note
13 — Stock Option Plans
Directors
of the Company adopted the 1995 Stock Option Plan effective September 11,
1995.
This Plan set aside 66,667 shares of the authorized but unissued common stock
of
the Company for issuance under the Plan. Options may be granted to directors,
officers, consultants, and/or employees of the Company and/or its
subsidiaries.
Options
granted under the Plan must be exercised within five years after the date
of
grant, but may be affected by the termination of employment. No options have
been granted since 1998 and none are outstanding.
Directors
of the Company adopted the 1998 Stock Option Plan effective July 1, 1998.
This
Plan and its subsequent amendment set aside 66,667 shares of the authorized
but
unissued common stock of the Company for issuance under the Plan. Options
may be
granted to directors, officers, consultants, and/or employees of the Company
and/or its subsidiaries. Options granted under the Plan are exercisable over
a
period to be determined when granted, but may be affected by the termination
of
employment. As a result of a grant in
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
13 — Stock Option Plans – (continued)
January
2006 to the Company’s chief executive officer, discussed in more detail below,
options to purchase 66,667 shares are outstanding under this plan.
Directors
of the Company adopted the 2000 Stock Option Plan effective June 5, 2000.
This
Plan set aside 1,666,667 shares of the authorized but unissued common stock
of
the Company for issuance under the Plan. Options may be granted to directors,
officers, consultants, advisors, and/or employees of the Company and/or its
subsidiaries. Options granted under the Plan must be exercised within the
number
of years determined by the Stock Option Committee and allowed in the Stock
Option Agreement. The Stock Option Agreement may provide that a period of
time
must elapse after the date of grant before the options are exercisable. The
options may not be exercised as to less than 100 shares at any one
time.
On
May
30, 2003 the Company granted 1,051,667 options under the 2000 Stock Option
Plan.
The options were granted to directors, employees and others. The options
vest
over a two-year period with terms of three to five years. The exercise price
is
$1.50 per share. During fiscal year 2006, the Company granted an option for
40,000 shares to a member of the Board of Directors for and in consideration
of
services provided to the Company. The option was issued at $2.91 per share
for a
term of five years with vesting over a three-year period.
On
May
24, 2005, the Company granted options to certain members of the Board of
Directors for and in consideration of services provided to the Company, as
shown
in the table below. The options were issued at $1.50 for a term of three
years.
On
January 3, 2006, the Company granted options to purchase 500,000 shares to
the
Company’s chief executive officer for and in consideration of services provided
to the Company. The options were issued at $1.05 per share for a term of
three
years with one-third of the options being exercisable immediately and one-third
exercisable in each of the following two years. The fair value of each option
was determined to be $2.50.
The
following schedule summarizes pertinent information with regard to the Plans
for
the years ended March 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
Shares
Outstanding
|
|
Weighted
Average
Exercise
Price
|
|
|
Beginning
of year
|
|
|
1,725,000
|
|
$
|
1.40
|
|
|
1,051,667
|
|
$
|
1.50
|
|
|
Granted
|
|
|
0
|
|
|
|
|
|
673,333
|
|
|
1.25
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
0
|
|
|
0
|
|
|
Forfeited
|
|
|
0
|
|
|
|
|
|
0
|
|
|
0
|
|
|
Expired
|
|
|
0
|
|
|
|
|
|
0
|
|
|
0
|
|
|
End
of year
|
|
|
1,725,000
|
|
$
|
1.40
|
|
|
1,725,000
|
|
$
|
1.40
|
|
Options
granted to non-employees under the above three plans resulted in compensation
expense of $4,462 for the year ended March 31, 2006. The intrinsic value
of
options issued in 2006 resulted in expense of $343,750 being accrued in the
accompanying financial statements. At March 31, 2007 there is no intrinsic
value
associated with the outstanding or exercisable options as the Company’s stock
price is lower than the exercise price of the options.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
13 — Stock Option Plans – (continued)
The
following table summarizes information for options outstanding as of March
31,
2007:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Exercise
Price
|
|
Number
|
|
Weighted
Average
Remaining
Life-
Years
|
|
Weighted
Average
Exercise Price
|
|
Number
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Life
Years
|
|
|
$1.50
|
|
|
1,185,000
|
|
|
2.17
|
|
$
|
1.50
|
|
|
1,185,000
|
|
$
|
1.50
|
|
|
2.17
|
|
|
2.91
|
|
|
40,000
|
|
|
2.17
|
|
|
2.91
|
|
|
26,667
|
|
|
2.91
|
|
|
2.17
|
|
|
1.05
|
|
|
500,000
|
|
|
8.76
|
|
|
1.05
|
|
|
333,333
|
|
|
1.05
|
|
|
8.76
|
|
|
$1.05 –
$2.91
|
|
|
1,725,000
|
|
|
4.08
|
|
$
|
1.36
|
|
|
1,545,000
|
|
$
|
1.43
|
|
|
3.59
|
|
At
March
31, 2007 and 2006, nonvested options were comprised of the
following:
|
|
|
Number
of Shares
|
|
Weighted Average
Grant
Date
Fair
Value
|
|
|
Nonvested
March 31, 2005
|
|
|
—
|
|
|
—
|
|
|
Granted
|
|
|
673,333
|
|
|
2.15
|
|
|
Vested
|
|
|
313,334
|
|
|
1,81
|
|
|
Expired/forfeited
|
|
|
—
|
|
|
—
|
|
|
Nonvested,
March 31, 2006
|
|
|
359,999
|
|
|
2.44
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
Vested
|
|
|
179,999
|
|
|
2.44
|
|
|
Expired/forfeited
|
|
|
—
|
|
|
—
|
|
|
Nonvested,
March 31, 2007
|
|
|
180,000
|
|
|
2.44
|
|
As
of
March 31, 2007, approximately $439,000 of total unrecognized compensation
cost
related to nonvested share-based compensation arrangements is to be recognized
over the next year.
The
option agreements related to the options with $1.50 and $2.91 exercise prices
were modified to extend the expiration date to March 31, 2009, add a put
feature
where the option holder can put the option back to the Company for the
difference between $4.00 per share and the purchase price between April 1,
2008
and April 10, 2008 and add a call feature whereby the Company can call the
option for the difference between $7.50 and the purchase price. Since the
put
feature does not subject the holder to the normal risks of share ownership,
the
options are classified as liability awards and recorded at fair value. A
liability and corresponding expense of $2,727,186 has been recorded in the
accompanying financial statements.
Note
14 — Stock Warrants
The
Company entered into a stock warrant agreements effective January 12, 2004.
Pursuant to the agreements, the Company issued 500,000 warrants to purchase
common stock in connection with a private placement. Warrants issued under
the
agreements must be exercised by March 15, 2014.
The
Company entered into a stock warrant agreements effective April 2004 in
connection with the offering of convertible promissory notes. Pursuant to
the
agreements, the Company issued 1,766,667 warrants to purchase common stock.
Warrants issued under the agreements must be exercised by March 15,
2014.
On
December 19, 2005, the Company’s shareholders approved the issuance of warrants
to purchase an additional 2,906,666 shares of Common Stock to Lothian Oil
Inc.
The warrants are exercisable upon issuance and have a term of five years
and
were issued as follows:
|
|
(1)
|
Warrant
for the purchase of 953,333 shares with an exercise price of $3.15
per
share;
|
|
|
(2)
|
Warrant
for the purchase of 1,000,000 shares with an exercise price of
$3.36 per
share;
|
|
|
(3)
|
Warrant
for the purchase of 953,333 shares with an exercise price of $3.75
per
share.
|
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
14 — Stock Warrants – (continued)
The
following schedule summarizes pertinent information with regard to the stock
warrants for the years ended March 31:
|
|
|
2007
|
|
2006
|
|
|
|
|
Shares
Outstanding
|
|
Weighted Average
Exercise Price
|
|
Shares
Outstanding
|
|
Weighted Average
Exercise Price
|
|
|
Beginning
of year
|
|
|
5,085,334
|
|
$
|
3.08
|
|
|
2,266,667
|
|
$
|
2.64
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
2,956,900
|
|
|
3.39
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
(138,233
|
)
|
|
2.25
|
|
|
Forfeited
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
End
of year
|
|
|
5,085,334
|
|
$
|
3.08
|
|
|
5,085,334
|
|
$
|
3.08
|
|
|
Exercisable
|
|
|
5,085,334
|
|
$
|
3.08
|
|
|
5,085,334
|
|
$
|
3.08
|
|
The
warrants issued in fiscal 2006 include those issued to Lothian Oil Inc. and
50,234 warrants issued for legal services exercisable at $1.50 per share
to
satisfy liabilities. No warrants were issued in 2007. No warrants were issued
in
2007.
The
following table summarizes information for warrants outstanding as of March
31,
2007:
|
|
|
Warrants
Outstanding
|
|
Warrants
Exercisable
|
|
|
Exercise
Price Range
|
|
Number
|
|
Weighted
Average
Remaining
Life-Years
|
|
Weighted
Average
Exercise Price
|
|
Number
|
|
Weighted
Average
Exercise Price
|
|
|
$2.25 – $3.00
|
|
|
2,178,668
|
|
|
7.00
|
|
$
|
2.62
|
|
|
2,178,668
|
|
$
|
2.62
|
|
|
$3.15 – $3.75
|
|
|
2,906,666
|
|
|
3.72
|
|
|
3.42
|
|
|
2,906,666
|
|
|
3.42
|
|
|
$2.25 – $3.75
|
|
|
5,085,334
|
|
|
5.13
|
|
$
|
3.08
|
|
|
5,085,334
|
|
$
|
3.08
|
|
During
the years ended March 31, 2007 and 2006, the Company did not record any expenses
for services rendered related to warrants issued under the
agreements.
Note
15 — Income Taxes
Deferred
income tax assets and liabilities are computed annually for differences between
financial statement and tax bases of assets and liabilities that will result
in
taxable or deductible amounts in the future based on enacted tax laws and
rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is
the tax payable or refundable for the period plus or minus the change during
the
period in deferred tax assets and liabilities.
The
Company’s federal tax provision consists of the following:
|
|
|
2007
|
|
2006
|
|
|
Current
|
|
$
|
—
|
|
$
|
—
|
|
|
Adjustments
of beginning of year valuation allowance
|
|
|
—
|
|
|
(3,099,000
|
)
|
|
Deferred
|
|
|
3,729,296
|
|
|
(4,950,925
|
)
|
|
Valuation
allowance
|
|
|
(3,729,296
|
)
|
|
—
|
|
|
Federal
|
|
$
|
—
|
|
$
|
(8,049,925
|
)
|
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
15 — Income Taxes – (continued)
The
effective tax rate on the net loss before income taxes differs from the U.S.
statutory rate as follows:
|
|
|
2007
|
|
2006
|
|
|
U.S.
statutory rate
|
|
|
34
|
%
|
|
34
|
%
|
|
Valuation
allowance
|
|
|
(34
|
)%
|
|
—
|
|
|
Other
|
|
|
—
|
|
|
(2
|
)%
|
|
Effective
tax rate
|
|
|
—
|
|
|
32
|
%
|
At
March
31, the deferred tax asset and liability balances are as follows:
|
|
|
2007
|
|
2006
|
|
|
Deferred
tax asset
|
|
|
|
|
|
|
Net
operating loss
|
|
$
|
5,207,899
|
|
$
|
3,089,263
|
|
|
Accrued
put option
|
|
|
927,243
|
|
|
—
|
|
|
Accrued
expenses
|
|
|
145,075
|
|
|
207,489
|
|
|
|
|
|
6,280,217
|
|
|
3,296,752
|
|
|
Deferred
tax liability – oil and gas properties
|
|
|
(680,865
|
)
|
|
(1,426,696
|
)
|
|
Net
deferred tax asset
|
|
|
5,599,352
|
|
|
1,870,056
|
|
|
Valuation
allowance
|
|
|
(5,599,352
|
)
|
|
(1,870,056
|
)
|
|
Deferred
tax asset (liability)
|
|
$
|
—
|
|
$
|
—
|
|
The
net
change in the valuation allowance for 2007 was an increase of $3,729,296
and
2006 had a decrease of $1,228,944. The deferred tax asset is due primarily
to
the net operating loss carryover and the accrued put option expense. The
deferred tax liability results from difference in the basis of oil and gas
properties for tax and financial reporting purposes.
The
Company has a net operating loss carryover of approximately $15.3 million
available to offset future income for income tax reporting purposes, which
will
ultimately expire in 2027, if not previously utilized. Due to the change
in
control in 2006, the use of the net operating loss each year will be limited
based on applicable Internal Revenue Code provisions.
Note
16 — Stock Bonus Plan
The
Company has a stock bonus plan, which provides incentive compensation for
its
directors, officers, and key employees. The Company has reserved 30,000 shares
of common stock for issuance under the plan. As of March 31, 2007, 27,800
shares
had been issued in accordance with the plan. No shares were issued under
the
plan in 2007.
Note
17 — Contingencies
The
Company is involved in various claims incidental to the conduct of our business.
Based on consultation with legal counsel, we do not believe that any claims,
either individually or in the aggregate, to which the Company is a party
will
have a material adverse effect on our financial condition or results of
operations.
Note
18 — 2002 Consultant Equity Plan
In
August
2002, the Company adopted “The 2002 Consultant Equity Plan,” whereby 333,333
shares of unissued common stock were reserved for issuance to consultants,
independent contractors and advisors in exchange for bona fide services rendered
not in connection with a capital raising transaction. All shares reserved
under
the plan have been issued as of March 31, 2006.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
19 — Subsequent Event
On
June
13, 2007 Lothian Oil Inc., the Company’s largest shareholder, filed a petition
under Chapter 11 of the U.S. Bankruptcy Code. In the past, the Company relied
on
Lothian Oil Inc. to provide funds for its operations. The Company does not
know
what effect this action will have on its ability to continue its
operations.
Note
20 — Supplementary Financial Information For Oil and Gas Producing
Activities (Unaudited)
Proved
Reserves
Independent
petroleum engineers have estimated the Company’s proved oil and gas reserves,
all of which are located in the United States. Proved reserves are the estimated
quantities that geologic and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are the quantities
expected to be recovered through existing wells with existing equipment and
operating methods. Due to the inherent uncertainties and the limited nature
of
reservoir data, such estimates are subject to change as additional information
becomes available.
The
reserves actually recovered and the timing of production of these reserves
may
be substantially different from the original estimate. Revisions result
primarily from new information obtained from development drilling and production
history and from changes in economic factors.
|
|
|
Oil
(Bbls)
|
|
Gas
(Mcf)
|
|
|
March
31, 2005 (Restated)
|
|
|
567,189
|
|
|
2,934,765
|
|
|
Extensions,
additions and discoveries
|
|
|
—
|
|
|
—
|
|
|
Revisions
of previous estimates
|
|
|
(67
|
)
|
|
(222,358
|
)
|
|
Production
|
|
|
(7,380
|
)
|
|
(110,336
|
)
|
|
March
31, 2006
|
|
|
559,742
|
|
|
2,602,071
|
|
|
Extensions,
additions and discoveries
|
|
|
—
|
|
|
—
|
|
|
Revisions
of previous estimates
|
|
|
—
|
|
|
—
|
|
|
Oil
and gas asset sales
|
|
|
(543,661
|
)
|
|
(2,534,085
|
)
|
|
Production
|
|
|
(16,081
|
)
|
|
(67,986
|
)
|
|
March
31, 2007
|
|
|
—
|
|
|
—
|
|
Proved
Developed Reserves
|
March
31, 2006
|
|
|
559,742
|
|
|
2,602,071
|
|
|
March
31, 2007
|
|
|
0
|
|
|
0
|
|
Standardized
Measure
The
standardized measure of discounted future net cash flows (“standardized
measure”) and changes in such cash flows are prepared using assumptions required
by the Financial Accounting Board. Such assumptions include the use of year-end
prices for oil and gas and year-end costs for estimated future development
and
production expenditures to produce year-end estimated proved reserves.
Discounted future net cash flows are calculated using a 10% rate. Estimated
future income taxes are calculated by applying year-end statutory rates to
future pre-tax net cash flows, less the tax basis of related assets and
applicable tax credits.
The
standardized measure does not represent management’s estimate of the Company’s
future cash flows or the value of proved oil and gas reserves. Probable and
possible reserves, which may become proved in the future, are excluded from
the
calculations. Furthermore, year-end prices used to determine the standardized
measure of discounted cash flows, are influenced by seasonal demand and other
factors and may not be the most representative in estimating future revenues
or
reserve data.
UNITED
HERITAGE CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
20 — Supplementary Financial Information For Oil and Gas Producing
Activities (Unaudited) – (continued)
Standardized
Measure of Discounted Future Net Cash Flows Relating to Proved
Reserves
|
|
|
March 31, 2007
|
|
March 31, 2006
|
|
|
Future
cash inflows
|
|
$
|
—
|
|
$
|
40,126,480
|
|
|
Future
costs:
|
|
|
|
|
|
|
|
|
Production
|
|
|
—
|
|
|
(15,824,512
|
)
|
|
Development
|
|
|
—
|
|
|
(6,922,896
|
)
|
|
Future
net cash flows before income tax
|
|
|
—
|
|
|
17,379,072
|
|
|
Future
income tax
|
|
|
—
|
|
|
—
|
|
|
Future
net cash flows
|
|
|
—
|
|
|
17,379,072
|
|
|
10%
annual discount
|
|
|
—
|
|
|
(9,271,088
|
)
|
|
Standardized
measure of discounted future net cash flows
|
|
$
|
—
|
|
$
|
8,107,984
|
|
Changes
in Standardized Measure of Discounted Future Net Cash
Flows
|
|
|
March 31, 2007
|
|
March 31, 2006
|
|
|
Sales
of oil and gas net of production costs
|
|
$
|
305,667
|
|
$
|
(333,701
|
)
|
|
Net
changes in prices and production and development costs
|
|
|
—
|
|
|
32,496
|
|
|
Sale
of reserves in place
|
|
|
(6,114,000
|
)
|
|
—
|
|
|
Revision
of quantity estimates and timing
|
|
|
—
|
|
|
(435,706
|
)
|
|
Accretion
of discount
|
|
|
—
|
|
|
891,817
|
|
|
Incurred
development costs
|
|
|
(3,110,449
|
)
|
|
—
|
|
|
Net
change in income taxes
|
|
|
—
|
|
|
—
|
|
|
Other
|
|
|
810,798
|
|
|
(965,094
|
)
|
|
Net
decrease
|
|
$
|
(8,107,984
|
)
|
$
|
(810,188
|
)
|
ANNEX
1
WRITTEN
CONSENT
OF
THE
MAJORITY
SHAREHOLDER
OF
UNITED
HERITAGE CORPORATION
a
Utah Corporation
The
undersigned, being the majority shareholder (“Majority Shareholder”) of United
Heritage Corporation, a Utah corporation (the “Corporation”), acting pursuant to
the authority granted by Section 16-10a-704 of the Utah Revised Business
Corporations Act and the By-Laws of this Corporation, does hereby adopt the
following resolutions by written consent as of February 29, 2008.
APPROVAL
OF THE UNITED HERITAGE CORPORATION PRELIMINARY
INFORMATION
STATEMENT AND ITEMS 1 THROUGH 12 THEREIN
WHEREAS,
the
Majority Shareholder has reviewed the Corporation’s preliminary information
statement (the “Information Statement”) attached to this written consent as
Annex 1; and
WHEREAS,
the
Majority Shareholder has determined that the issuance of the common stock,
warrants and options and the adoption of the United Heritage Corporation 2008
Equity Incentive Plan, all as described in Items 1 through 11 of the Information
Statement, are in the best interests of this Corporation and its shareholders;
and
WHEREAS,
the
Majority Shareholder has determined that approval of the merger and the
Reincorporation Merger Agreement, as described in Item 12 of the Information
Statement, for the purpose of establishing the Corporation’s domicile in
Delaware and changing the Corporation’s name to Glen Rose Petroleum Corporation
is in the best interests of this Corporation and its shareholders;
NOW,
THEREFORE, BE IT RESOLVED
, that
the Majority Shareholder ratifies, affirms and approves the Information
Statement in substantially the form presented to the Majority Shareholder and
approved by these resolutions, but with such changes in it as the Corporation’s
executive officers shall determine to be appropriate; and be it
further
RESOLVED,
that the
Majority Shareholder ratifies, affirms and approves the United Heritage
Corporation 2008 Equity Incentive Plan, as discussed in Item 6 of the
Information Statement; and be it further
RESOLVED,
that the
Majority Shareholder ratifies, affirms and approves the issuance of the common
stock, warrants and options discussed in Items 1 through 5 and 7 through 11
of
the Information Statement; and be it further
RESOLVED,
that the
Majority Shareholder ratifies, affirms and approves the merger and the
Reincorporation Merger Agreement, as discussed in Item 12 of the Information
Statement, for the purpose of changing the Corporation’s domicile from Utah to
Delaware and changing the Corporation’s name to Glen Rose Petroleum Corporation;
and it was further
RESOLVED
, that
any action or actions heretofore taken by the executive officers of the
Corporation for and on behalf of the Corporation in connection with the
foregoing resolutions are hereby ratified, affirmed and approved by the Majority
Shareholder.
This
written consent shall be added to the corporate records of the Corporation
and
made a part thereof, and the resolutions set forth above shall have the same
force and effect as if adopted at a meeting duly noticed and held.
SIGNATURE
APPEARS BELOW
Dated
as
of February 29, 2008
|
|
MAJORITY
SHAREHOLDER:
|
|
|
BLACKWOOD
VENTURES LLC
|
|
|
Blackwood
Capital Ltd., Managing Member
|
|
|
By:
|
|
|
|
|
Andrew
Taylor-Kimmis, Authorized Signatory
|
ANNEX
2
UNITED
HERITAGE CORPORATION
2008
EQUITY INCENTIVE PLAN
As
Adopted by the Board of Directors on February 29, 2008
1.
PURPOSE.
The
purpose of this Plan is to provide incentives to attract, retain and motivate
eligible persons whose present and potential contributions are important to
the
success of the Company and its Subsidiaries by offering them an opportunity
to
participate in the Company’s future performance through awards of Options, the
right to purchase Common Stock and Stock Bonuses. Capitalized terms not defined
in the text are defined in Section 2.
2.
DEFINITIONS.
As
used
in this Plan, the following terms will have the following meanings:
“
AWARD
”
means
any award under this Plan, including any Option, Stock Award or Stock
Bonus.
“
AWARD
AGREEMENT
”
means,
with respect to each Award, the signed written agreement between the Company
and
the Participant setting forth the terms and conditions of the
Award.
“
BOARD
”
means
the Board of Directors of the Company.
“
CAUSE
”
means
any cause, as defined by applicable law, for the termination of a Participant’s
employment with the Company or a Parent or Subsidiary of the
Company.
“
CODE
”
means
the Internal Revenue Code of 1986, as amended.
“
COMPANY
”
means
United Heritage Corporation, a Utah corporation, or any successor
corporation.
“
DISABILITY
”
means
a
disability, whether temporary or permanent, partial or total, as determined
by
the Board.
“
EXCHANGE
ACT
”
means
the Securities Exchange Act of 1934, as amended.
“
EXERCISE
PRICE
”
means
the price at which a holder of an Option may purchase the Shares issuable upon
exercise of the Option.
“
FAIR
MARKET VALUE
”
means,
as of any date, the value of a share of the Company’s Common Stock determined as
follows:
(a)
if
such Common Stock is publicly traded and is then listed on a national securities
exchange, its closing price on the date of determination if at least one hundred
shares were traded on such date, otherwise the closing price on the last
preceding date on which at least one hundred shares were traded, on the
principal national securities exchange on which the Common Stock is listed
or
admitted to trading;
(b)
if
such Common Stock is quoted on the NASDAQ National Market or the NASDAQ Capital
Market, its closing price on the NASDAQ National Market or the NASDAQ Capital
Market, respectively, on the date of determination;
(c)
if
neither of the foregoing is applicable, by the Board in good faith.
“
INSIDER
”
means
an officer or director of the Company or any other person whose transactions
in
the Company’s Common Stock are subject to Section 16 of the Exchange
Act.
“
OPTION
”
means
an award of an option to purchase Shares pursuant to Section 6.
“
PARENT
”
means
any corporation (other than the Company) in an unbroken chain of corporations
ending with the Company if each of such corporations other than the Company
owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
“
PARTICIPANT
”
means
a
person who receives an Award under this Plan.
“
PERFORMANCE
FACTORS
”
means
the factors selected by the Board, in its sole and absolute discretion, to
determine whether the performance goals applicable to Awards have been
satisfied, including, without limitation, the following factors:
(a)
Net
revenue and/or net revenue growth;
(b)
Earnings before income taxes and amortization and/or earnings before income
taxes and amortization growth;
(c)
Operating income and/or operating income growth;
(d)
Net
income and/or net income growth;
(e)
Earnings per share and/or earnings per share growth;
(f)
Total
stockholder return and/or total stockholder return growth;
(g)
Return on equity;
(h)
Operating cash flow return on income;
(i)
Adjusted operating cash flow return on income;
(j)
Economic value added; and
(k)
Individual business objectives.
“
PERFORMANCE
PERIOD
”
means
the period of service determined by the Board, not to exceed five years, during
which years of service or performance is to be measured for Stock Awards or
Stock Bonuses, if such Awards are restricted.
“
PLAN
”
means
this United Heritage Corporation 2008 Equity Incentive Plan, as amended from
time to time.
“
PURCHASE
PRICE
”
means
the price at which the Participant of a Stock Award may purchase the
Shares.
“
SEC
”
means
the Securities and Exchange Commission.
“
SECURITIES
ACT
”
means
the Securities Act of 1933, as amended.
“
SHARES
”
means
shares of the Company’s Common Stock reserved for issuance under this Plan, as
adjusted pursuant to Sections 3 and 19, and any successor security.
“
STOCK
AWARD
”
means
an award of Shares pursuant to Section 7.
“
STOCK
BONUS
”
means
an award of Shares, or cash in lieu of Shares, pursuant to Section
8.
“
SUBSIDIARY
”
means
any corporation (other than the Company) in an unbroken chain of corporations
beginning with the Company if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the
total
combined voting power of all classes of stock in one of the other corporations
in such chain.
“
TERMINATION
”
or
“
TERMINATED
”
means,
for purposes of this Plan with respect to a Participant, that the Participant
has for any reason ceased to provide services as an employee, officer, director,
consultant, independent contractor or advisor to the Company or a Parent or
Subsidiary of the Company. An employee will not be deemed to have ceased to
provide services in the case of (i) sick leave, (ii) military leave, or (iii)
any other leave of absence approved by the Company, provided that such leave
is
for a period of not more than 90 days, unless reemployment upon the expiration
of such leave is guaranteed by contract or statute or unless provided otherwise
pursuant to a formal policy adopted from time to time by the Company and issued
and promulgated to employees in writing. In the case of any employee on an
approved leave of absence, the Board may make such provisions respecting
suspension of vesting of the Award while on leave from the employ of the Company
or a Subsidiary as it may deem appropriate, except that in no event may an
Option be exercised after the expiration of the term set forth in the Option
agreement. The Board will have sole discretion to determine whether a
Participant has ceased to provide services and the effective date on which
the
Participant ceased to provide services (the “Termination
Date”).
3.
SHARES SUBJECT TO THE PLAN.
3.1
Number
of Shares Available.
Subject
to Sections 3.2 and 19, the total aggregate number of Shares reserved and
available for grant and issuance pursuant to this Plan shall be 5,000,000 Shares
and will include Shares that are subject to: (a) issuance upon exercise of
an
Option but cease to be subject to such Option for any reason other than exercise
of such Option; (b) an Award granted hereunder but forfeited or repurchased
by
the Company at the original issue price; and (c) an Award that otherwise
terminates without Shares being issued. At all times the Company shall reserve
and keep available a sufficient number of Shares as shall be required to satisfy
the requirements of all outstanding Options granted under this Plan and all
other outstanding but unvested Awards granted under this Plan.
3.2
Adjustment
of Shares.
In the
event that the number of outstanding shares is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the Company
without consideration, then (a) the number of Shares reserved for issuance
under
this Plan, (b) the Exercise Prices of and number of Shares subject to
outstanding Options, and (c) the number of Shares subject to other outstanding
Awards will be proportionately adjusted, subject to any required action by
the
Board or the stockholders of the Company and compliance with applicable
securities laws;
provided,
however
, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will
be
rounded up to the nearest whole Share, as determined by the Board.
4.
ELIGIBILITY.
ISOs
(as
defined in Section 6 below) may be granted only to employees (including officers
and directors who are deemed to be employees) of the Company or of a Parent
or
Subsidiary of the Company. All other Awards may be granted to officers,
directors, employees, agents and consultants of the Company or any Parent or
Subsidiary of the Company, provided such consultants, independent contractors
and advisors render bona-fide services not in connection with the offer and
sale
of securities in a capital-raising transaction or promotion of the Company’s
securities. A person may be granted more than one Award under this
Plan.
5.
ADMINISTRATION.
5.1
Board.
The Plan
shall be administered and interpreted by the Board.
5.2
Board
Authority.
The
Board will have the authority to:
(a)
construe and interpret this Plan, any Award Agreement and any other agreement
or
document executed pursuant to this Plan;
(b)
prescribe, amend and rescind rules and regulations relating to this Plan or
any
Award;
(c)
select persons to receive Awards;
(d)
determine the form, terms and conditions of Awards;
(e)
determine the number of Shares or other consideration subject to
Awards;
(f)
determine whether Awards will be granted singly, in combination with, in tandem
with, in replacement of, or as alternatives to, other Awards under this Plan
or
any other incentive or compensation plan of the Company or any Parent or
Subsidiary of the Company;
(g)
grant
waivers of Plan or Award conditions;
(h)
determine the vesting, exercisability and payment of Awards;
(i)
correct any defect, supply any omission or reconcile any inconsistency in this
Plan, any Award or any Award Agreement;
(j)
determine whether an Award has been earned;
(k)
amend
or terminate the Plan,
provided,
however,
the
Board will not amend the Plan in any manner that requires shareholder approval
without such approval; and
(l)
make
all other determinations necessary or advisable for the administration of
this
Plan.
5.3
Board
Discretion.
Any
determination made by the Board with respect to any Award will be made at
the
time of grant of the Award or, unless in contravention of any express term
of
this Plan or Award, at any later time, and such determination will be final
and
binding on the Company and on all persons having an interest in any Award
under
this Plan. The Board may delegate to one or more officers of the Company the
authority to grant an Award under this Plan to Participants who are not Insiders
of the Company. No member of the Board shall be personally liable for any
action
taken or decision made in good faith relating to this Plan, and all members
of
the Board shall be fully protected and indemnified to the fullest extent
permitted under applicable law by the Company in respect to any such action,
determination, or interpretation.
6.
OPTIONS.
The
Board
may grant Options to eligible persons and will determine whether such Options
will be Incentive Stock Options within the meaning of the Code (“ISO”) or
Nonqualified Stock Options (“NQSOs”), the number of Shares subject to the
Option, the Exercise Price of the Option, the period during which the Option
may
be exercised, and all other terms and conditions of the Option, subject to
the
following:
6.1
Form
of Option Grant.
Each
Option granted under this Plan will be evidenced by an Award Agreement which
will expressly identify the Option as an ISO or an NQSO (hereinafter referred
to
as the “Stock Option Agreement”), and will be in such form and contain such
provisions (which need not be the same for each Participant) as the Board
may
from time to time approve, and which will comply with and be subject to the
terms and conditions of this Plan.
6.2
Date
of Grant.
The date
of grant of an Option will be the date on which the Board makes the
determination to grant such Option, unless otherwise specified by the Board.
The
Stock Option Agreement and a copy of this Plan will be delivered to the
Participant within a reasonable time after the granting of the
Option.
6.3
Exercise
Period.
Options
may be exercisable within the times or upon the events determined by the
Board
as set forth in the Stock Option Agreement governing such Option;
provided,
however,
that no
Option will be exercisable after the expiration of ten (10) years from the
date
the Option is granted; and provided further that no ISO granted to a person
who
directly or by attribution owns more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of any Parent
or
Subsidiary of the Company (“Ten Percent Stockholder”) will be exercisable after
the expiration of five (5) years from the date the ISO is granted. The Board
also may provide for Options to become exercisable at one time or from time
to
time, periodically or otherwise, in such number of Shares or percentage of
Shares as the Board determines,
provided,
however,
that in
all events a Participant will be entitled to exercise an Option at the rate
of
at least 20% per year over five years from the date of grant, subject to
reasonable conditions such as continued employment; and further provided
that an
Option granted to a Participant who is an officer or director may become
fully
exercisable at any time or during any period established by the
Company.
6.4
Exercise
Price.
The
Exercise Price of an Option will be determined by the Board when the Option
is
granted and may not be less than 85% of the Fair Market Value of the Shares
on
the date of grant; provided that: (a) the Exercise Price of an ISO will be
not
less than 100% of the Fair Market Value of the Shares on the date of grant;
and
(b) the Exercise Price of any Option granted to a Ten Percent Stockholder
will
not be less than 110% of the Fair Market Value of the Shares on the date
of
grant. Payment for the Shares purchased must be made in accordance with Section
9 of this Plan.
6.5
Method
of Exercise.
Options
may be exercised only by delivery to the Company of a written stock option
exercise agreement (the “Exercise Agreement”) in a form approved by the Board,
(which need not be the same for each Participant), stating the number of
Shares
being purchased, the restrictions imposed on the Shares purchased under such
Exercise Agreement, if any, and such representations and agreements regarding
the Participant’s investment intent and access to information and other matters,
if any, as may be required or desirable by the Company to comply with applicable
securities laws, together with payment in full of the Exercise Price for
the
number of Shares being purchased.
6.6
Termination.
Notwithstanding the exercise periods set forth in the Stock Option Agreement,
exercise of an Option will always be subject to the following:
(a)
If
the Participant’s service is Terminated for any reason except death or
Disability, then the Participant may exercise such Participant’s Options only to
the extent that such Options would have been exercisable upon the Termination
Date, but must be exercised no later than three (3) months after the Termination
Date (or such longer time period not exceeding five (5) years as may be approved
by the Board, with any exercise beyond three (3) months after the Termination
Date deemed to be an NQSO).
(b)
If
the Participant’s service is Terminated because of the Participant’s death or
Disability (or the Participant dies within three (3) months after a Termination
other than for Cause or because of Participant’s Disability), then the
Participant’s Options may be exercised only to the extent that such Options
would have been exercisable by the Participant on the Termination Date and
must
be exercised by the Participant (or the Participant’s legal representative) no
later than twelve (12) months after the Termination Date (or such longer
time
period not exceeding five (5) years as may be approved by the Board, with
any
such exercise beyond (i) three (3) months after the Termination Date when
the
Termination is for any reason other than the Participant’s death or Disability,
or (ii) twelve (12) months after the Termination Date when the Termination
is
for Participant’s death or Disability, deemed to be an NQSO).
(c)
Notwithstanding the provisions in paragraph 6.6(a) above, if the Participant’s
service is Terminated for Cause, neither the Participant, the Participant’s
estate nor such other person who may then hold the Option shall be entitled
to
exercise any Option with respect to any Shares whatsoever, after Termination,
whether or not after Termination the Participant may receive payment from
the
Company or a Subsidiary for vacation pay, for services rendered prior to
Termination, for services rendered for the day on which Termination occurs,
for
salary in lieu of notice, or for any other benefits. For the purpose of this
paragraph, Termination shall be deemed to occur on the date when the Company
dispatches notice or advice to the Participant that his or her service is
Terminated.
6.7
Limitations
on Exercise.
The
Board may specify a reasonable minimum number of Shares that may be purchased
on
any exercise of an Option, provided that such minimum number will not prevent
the Participant from exercising an Option for the full number of Shares for
which it is then exercisable.
6.8
Limitations
on ISO.
The
aggregate Fair Market Value (determined as of the date of grant) of Shares
with
respect to which ISO are exercisable for the first time by a Participant
during
any calendar year (under this Plan or under any other incentive stock option
plan of the Company, Parent or Subsidiary of the Company) will not exceed
$100,000. If the Fair Market Value of Shares on the date of grant with respect
to which ISO are exercisable for the first time by a Participant during any
calendar year exceeds $100,000, then the Options for the first $100,000 worth
of
Shares to become exercisable in such calendar year will be ISO and the Options
for the amount in excess of $100,000 that become exercisable in that calendar
year will be NQSOs. In the event that the Code or the regulations promulgated
thereunder are amended after the Effective Date of this Plan to provide for
a
different limit on the Fair Market Value of Shares permitted to be subject
to
ISO, such different limit will be automatically incorporated herein and will
apply to any Options granted after the effective date of such
amendment.
6.9
Modification,
Extension or Renewal.
The
Board may modify, extend or renew outstanding Options and authorize the grant
of
new Options in substitution therefore, provided that any such action may
not,
without the written consent of a Participant, impair any of such Participant’s
rights under any Option previously granted. Any outstanding ISO that is
modified, extended, renewed or otherwise altered will be treated in accordance
with Section 424(h) of the Code. The Board may reduce the Exercise Price
of
outstanding Options without the consent of Participants affected by a written
notice to them;
provided,
however,
that the
Exercise Price may not be reduced below the minimum Exercise Price that would
be
permitted under Section 6.4 of this Plan for Options granted on the date
the
action is taken to reduce the Exercise Price.
6.10
No
Disqualification.
Notwithstanding any other provision in this Plan, no term of this Plan relating
to ISO will be interpreted, amended or altered, nor will any discretion or
authority granted under this Plan be exercised, so as to disqualify this
Plan
under Section 422 of the Code or, without the consent of the Participant
affected, to disqualify any ISO under Section 422 of the Code.
7.
STOCK AWARD.
A
Stock
Award is an offer by the Company to sell to an eligible person Shares that
may
or may not be subject to restrictions. The Board will determine to whom an
offer
will be made, the number of Shares the person may purchase, the price to
be paid
(the “Purchase Price”), the restrictions to which the Shares will be subject, if
any, and all other terms and conditions of the Stock Award, subject to the
following:
7.1
Form
of Stock Award.
All
purchases under a Stock Award made pursuant to this Plan will be evidenced
by an
Award Agreement (the “Stock Purchase Agreement”) that will be in such form
(which need not be the same for each Participant) as the Board will from
time to
time approve, and will comply with and be subject to the terms and conditions
of
this Plan. The offer of a Stock Award will be accepted by the Participant’s
execution and delivery of the Stock Purchase Agreement and payment for the
Shares to the Company in accordance with the Stock Purchase
Agreement.
7.2
Purchase
Price.
The
Purchase Price of Shares sold pursuant to a Stock Award will be determined
by
the Board on the date the Stock Award is granted and may not be less than
85% of
the Fair Market Value of the Shares on the grant date, except in the case
of a
sale to a Ten Percent Stockholder, in which case the Purchase Price will
be 100%
of the Fair Market Value. Payment of the Purchase Price must be made in
accordance with Section 9 of this Plan.
7.3
Terms
of Stock Awards.
Stock
Awards may be subject to such restrictions as the Board may impose. These
restrictions may be based upon completion of a specified number of years
of
service with the Company or upon completion of the performance goals as set
out
in advance in the Participant’s individual Stock Purchase Agreement. Stock
Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Stock Award subject to restrictions,
the
Board shall: (a) determine the nature, length and starting date of any
Performance Period for the Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine
the
number of Shares that may be awarded to the Participant. Prior to the transfer
of any Stock Award, the Board shall determine the extent to which such Stock
Award has been earned. Performance Periods may overlap and Participants may
participate simultaneously with respect to Stock Awards that are subject
to
different Performance Periods and have different performance goals and other
criteria.
7.4
Termination
During Performance Period.
If a
Participant is Terminated during a Performance Period for any reason, then
such
Participant will be entitled to payment (whether in Shares, cash or otherwise)
with respect to the Stock Award only to the extent earned as of the date
of
Termination in accordance with the Stock Purchase Agreement, unless the Board
determines otherwise.
8.
STOCK BONUSES.
8.1
Awards
of Stock Bonuses.
A Stock
Bonus is an award of Shares for extraordinary services rendered to the Company
or any Parent or Subsidiary of the Company. A Stock Bonus will be awarded
pursuant to an Award Agreement (the “Stock Bonus Agreement”) that will be in
such form (which need not be the same for each Participant) as the Board
will
from time to time approve, and will comply with and be subject to the terms
and
conditions of this Plan. A Stock Bonus may be awarded upon satisfaction of
such
performance goals as are set out in advance in the Participant’s individual
Award Agreement (the “Performance Stock Bonus Agreement”). Stock Bonuses may
vary from Participant to Participant and between groups of Participants,
and may
be based upon the achievement of the Company, Parent or Subsidiary and/or
individual performance factors or upon such other criteria as the Board may
determine.
8.2
Terms
of Stock Bonuses.
The
Board will determine the number of Shares to be awarded to the Participant.
If
the Stock Bonus is being earned upon the satisfaction of performance goals
pursuant to a Performance Stock Bonus Agreement, then the Board will: (a)
determine the nature, length and starting date of any Performance Period
for
each Stock Bonus; (b) select from among the Performance Factors to be used
to
measure the performance, if any; and (c) determine the number of Shares that
may
be awarded to the Participant. Prior to the payment of any Stock Bonus, the
Board shall determine the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares
may be
fixed or may vary in accordance with such performance goals and criteria
as may
be determined by the Board. The Board may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Board deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
8.3
Form
of Payment.
The
earned portion of a Stock Bonus may be paid to the Participant by the Company
either currently or on a deferred basis, as agreed by the Participant and
the
Company, with such interest or dividend equivalent, if any, as the Board
may
determine. Payment of an interest or dividend equivalent (if any) may be
made in
the form of cash or whole Shares or a combination thereof, either in a lump
sum
payment or in installments, as the Board will determine.
9.
PAYMENT FOR SHARE PURCHASES.
Payment
for Shares purchased pursuant to this Plan must be made in cash (by check)
or,
where expressly approved for the Participant by the Board and where permitted
by
law:
(a)
by
cancellation of indebtedness of the Company to the Participant;
(b)
by
surrender of shares that either: (1) have been owned by the Participant for
more
than six (6) months and have been paid for within the meaning of SEC Rule
144;
or (2) were obtained by the Participant in the public market;
(c)
by
waiver of compensation due or accrued to the Participant for services
rendered;
(d)
with
respect only to purchases upon exercise of an Option, and provided that a
public
market for the Company’s stock exists:
|
|
(1)
|
through
a “same day sale” commitment from the Participant and a broker-dealer that
is a member of the National Association of Securities Dealers (an
“NASD
Dealer”) whereby the Participant irrevocably elects to exercise the Option
and to sell a portion of the Shares so purchased to pay for the
Exercise
Price, and whereby the NASD Dealer irrevocably commits upon receipt
of
such Shares to forward the Exercise Price directly to the Company;
or
|
|
|
(2)
|
through
a “margin” commitment from the Participant and a NASD Dealer whereby the
Participant irrevocably elects to exercise the Option and to pledge
the
Shares so purchased to the NASD Dealer in a margin account as security
for
a loan from the NASD Dealer in the amount of the Exercise Price,
and
whereby the NASD Dealer irrevocably commits upon receipt of such
Shares to
forward the Exercise Price directly to the Company;
or
|
(e)
by
any combination of the foregoing.
10.
WITHHOLDING TAXES.
10.1
Withholding
Generally.
Whenever
Shares are to be issued in satisfaction of Awards granted under this Plan,
the
Company may require the Participant to remit to the Company an amount sufficient
to satisfy federal, state and local withholding tax requirements prior to
the
delivery of any certificate or certificates for such Shares. Whenever, under
this Plan, payments in satisfaction of Awards are to be made in cash, such
payment will be net of an amount sufficient to satisfy federal, state, and
local
withholding tax requirements.
10.2
Stock
Withholding.
When,
under applicable tax laws, a participant incurs tax liability in connection
with
the exercise or vesting of any Award that is subject to tax withholding and
the
Participant is obligated to pay the Company the amount required to be withheld,
the Board may allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be
issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to
be
withheld is to be determined. All elections by a Participant to have Shares
withheld for this purpose will be made in accordance with the requirements
established by the Board and will be in writing in a form acceptable to the
Board.
11.
PRIVILEGES OF STOCK OWNERSHIP.
11.1
Voting
and Dividends.
No
Participant will have any of the rights of a stockholder with respect to
any
Shares until the Shares are issued to the Participant. After Shares are issued
to the Participant, the Participant will be a stockholder and will have all
the
rights of a stockholder with respect to such Shares, including the right
to vote
and receive all dividends or other distributions made or paid with respect
to
such Shares; provided, that if such Shares are issued pursuant to a Stock
Award
with restrictions, then any new, additional or different securities the
Participant may become entitled to receive with respect to such Shares by
virtue
of a stock dividend, stock split or any other change in the corporate or
capital
structure of the Company will be subject to the same restrictions as the
Stock
Award; provided, further, that the Participant will have no right to retain
such
stock dividends or stock distributions with respect to Shares that are
repurchased at the Participant’s Purchase Price or Exercise Price pursuant to
Section 13.
11.2
Financial
Statements.
The
Company will provide publicly available financial information,, including
financial statements to each Participant prior to such Participant’s purchase of
Shares under this Plan, and to each Participant annually during the period
such
Participant has Awards outstanding;
provided,
however,
the
Company will not be required to provide such financial statements to
Participants whose services in connection with the Company assure them access
to
equivalent information.
12.
NON-TRANSFERABILITY.
Awards
of
Shares granted under this Plan, and any interest therein, will not be
transferable or assignable by the Participant, and may not be made subject
to
execution, attachment or similar process, other than by will or by the laws
of
descent and distribution. Awards of Options granted under this Plan, and
any
interest therein, will not be transferable or assignable by the Participant,
and
may not be made subject to execution, attachment or similar process, other
than
by will or by the laws of descent and distribution, by instrument to an inter
vivos or testamentary trust in which the options are to be passed to
beneficiaries upon the death of the trustor, or by gift to “immediate family” as
that term is defined in 17 C.F.R. 240.16a-1(e). During the lifetime of the
Participant an Award will be exercisable only by the Participant. During
the
lifetime of the Participant, any elections with respect to an Award may be
made
only by the Participant unless otherwise determined by the Board and set
forth
in the Award Agreement with respect to Awards that are not ISOs.
13.
RESERVED.
14.
CERTIFICATES.
All
certificates for Shares or other securities delivered under this Plan will
be
subject to such stop transfer orders, legends and other restrictions as the
Board may deem necessary or advisable, including restrictions under any
applicable federal, state or foreign securities law, or any rules, regulations
and other requirements of the SEC or any stock exchange or automated quotation
system upon which the Shares may be listed or quoted.
15.
ESCROW; PLEDGE OF SHARES.
To
enforce any restrictions on a Participant’s Shares, the Board may require the
Participant to deposit all certificates representing Shares, together with
stock
powers or other instruments of transfer approved by the Board appropriately
endorsed in blank, with the Company or an agent designated by the Company
to
hold in escrow until such restrictions have lapsed or terminated, and the
Board
may cause a legend or legends referencing such restrictions to be placed
on the
certificates.
16.
EXCHANGE AND BUYOUT OF AWARDS.
The
Board
may, at any time or from time to time, authorize the Company, with the consent
of the respective Participants, to issue new Awards in exchange for the
surrender and cancellation of any or all outstanding Awards. The Board may
at
any time buy from a Participant an Award previously granted with payment
in
cash, Shares or other consideration, based on such terms and conditions as
the
Board and the Participant may agree.
17.
SECURITIES LAW AND OTHER REGULATORY COMPLIANCE.
An
Award
will not be effective unless such Award is in compliance with all applicable
federal and state securities laws, rules and regulations of any governmental
body, and the requirements of any stock exchange or automated quotation system
upon which the Shares may then be listed or quoted, as they are in effect
on the
date of grant of the Award and also on the date of exercise or other issuance.
Notwithstanding any other provision in this Plan, the Company will have no
obligation to issue or deliver certificates for Shares under this Plan prior
to:
(a) obtaining any approvals from governmental agencies that the Company
determines are necessary or advisable; and/or (b) completion of any registration
or other qualification of such Shares under any state or federal law or ruling
of any governmental body that the Company determines to be necessary or
advisable. The Company will be under no obligation to register the Shares
with
the SEC or to effect compliance with the registration, qualification or listing
requirements of any state securities laws, stock exchange or automated quotation
system, and the Company will have no liability for any inability or failure
to
do so.
18.
NO OBLIGATION TO EMPLOY.
Nothing
in this Plan or any Award granted under this Plan will confer or be deemed
to
confer on any Participant any right to continue in the employ of, or to continue
any other relationship with, the Company or any Parent or Subsidiary of the
Company or limit in any way the right of the Company or any Parent or Subsidiary
of the Company to terminate Participant’s employment or other relationship at
any time, with or without cause.
19.
CORPORATE TRANSACTIONS.
19.1
Assumption
or Replacement of Awards by Successor.
In the
event of (a) a dissolution or liquidation of the Company, (b) a merger or
consolidation in which the Company is not the surviving corporation (other
than
a merger or consolidation with a wholly-owned subsidiary, a reincorporation
of
the Company in a different jurisdiction, or other transaction in which there
is
no substantial change in the stockholders of the Company or their relative
stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on
all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such
merger
(other than any stockholder that merges, or which owns or controls another
corporation that merges, with the Company in such merger) cease to own their
shares or other equity interest in the Company, (d) the sale of substantially
all of the assets of the Company, or (e) the acquisition, sale, or transfer
of
more than 50% of the outstanding shares of the Company by tender offer or
similar transaction, any or all outstanding Awards may be assumed, converted
or
replaced by the successor corporation (if any), which assumption, conversion
or
replacement will be binding on all Participants. In the alternative, the
successor corporation may substitute equivalent Awards or provide substantially
similar consideration to Participants as was provided to stockholders (after
taking into account the existing provisions of the Awards). The successor
corporation may also issue, in place of outstanding Shares of the Company
held
by the Participant, substantially similar shares or other property subject
to
repurchase restrictions no less favorable to the Participant. In the event
such
successor corporation (if any) refuses to assume or substitute Awards, as
provided above, pursuant to a transaction described in this Subsection 19.1,
(i)
the vesting of any or all Awards granted pursuant to this Plan will accelerate
upon a transaction described in this Section 19 and (ii) any or all Options
granted pursuant to this Plan will become exercisable in full prior to the
consummation of such event at such time and on such conditions as the Board
determines. If such Options are not exercised prior to the consummation of
the
corporate transaction, they shall terminate at such time as determined by
the
Board.
19.2
Other
Treatment of Awards.
Subject
to any greater rights granted to Participants under the foregoing provisions
of
this Section 19, in the event of the occurrence of any transaction described
in
Section 19.1, any outstanding Awards will be treated as provided in the
applicable agreement or plan of merger, consolidation, dissolution, liquidation,
or sale of assets.
19.3
Assumption
of Awards by the Company.
The
Company, from time to time, also may substitute or assume outstanding awards
granted by another company, whether in connection with an acquisition of
such
other company or otherwise, by either; (a) granting an Award under this Plan
in
substitution of such other company’s award; or (b) assuming such award as if it
had been granted under this Plan if the terms of such assumed award could
be
applied to an Award granted under this Plan. Such substitution or assumption
will be permissible if the holder of the substituted or assumed award would
have
been eligible to be granted an Award under this Plan if the other company
had
applied the rules of this Plan to such grant. In the event the Company assumes
an award granted by another company, the terms and conditions of such award
will
remain unchanged (except that the exercise price and the number and nature
of
Shares issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects
to
grant a new Option rather than assuming an existing option, such new Option
may
be granted with a similarly adjusted Exercise Price.
20.
ADOPTION AND STOCKHOLDER APPROVAL.
This
Plan
will become effective on the date on which it is adopted by the Board (the
“Effective Date”). Upon the Effective Date, the Board may grant Awards pursuant
to this Plan. The Company intends to seek stockholder approval of the Plan
within twelve (12) months after the date this Plan is adopted by the Board;
provided,
however,
if the
Company fails to obtain stockholder approval of the Plan during such 12-month
period, pursuant to Section 422 of the Code, any Option granted as an ISO
at any
time under the Plan will not qualify as an ISO within the meaning of the
Code
and will be deemed to be an NQSO.
21.
TERM OF PLAN/GOVERNING LAW.
Unless
earlier terminated as provided herein, this Plan will terminate ten (10)
years
from the date this Plan is adopted by the Board or, if earlier, the date
of
stockholder approval. This Plan and all agreements thereunder shall be governed
by and construed in accordance with the laws of the State of Texas.
22.
AMENDMENT OR TERMINATION OF PLAN.
The
Board
may at any time terminate or amend this Plan in any respect, including without
limitation amendment of any form of Award Agreement or instrument to be executed
pursuant to this Plan;
provided,
however,
that the
Board will not, without the approval of the stockholders of the Company,
amend
this Plan in any manner that requires such stockholder approval.
23.
NONEXCLUSIVITY OF THE PLAN.
Neither
the adoption of this Plan by the Board, the submission of this Plan to the
stockholders of the Company for approval, nor any provision of this Plan
will be
construed as creating any limitations on the power of the Board to adopt
such
additional compensation arrangements as it may deem desirable, including,
without limitation, the granting of stock options and bonuses otherwise than
under this Plan, and such arrangements may be either generally applicable
or
applicable only in specific cases.
24.
ACTION BY BOARD.
Any
action permitted or required to be taken by the Board or any decision or
determination permitted or required to be made by the Board pursuant to this
Plan shall be taken or made in the Board’s sole and absolute
discretion.
ANNEX
3
AGREEMENT
AND PLAN OF MERGER
THIS
AGREEMENT AND PLAN OF MERGER (hereinafter referred to as this “Agreement”) dated
as of _____________ ___, 2008, is made and entered into by and between United
Heritage Corporation, a Utah corporation (the “Parent”) and Glen Rose Petroleum
Corporation, a Delaware corporation (the “Subsidiary”).
RECITALS:
A.
The
Parent is a corporation organized and existing under the laws of the State
of
Utah.
B.
The
Subsidiary is a corporation organized and existing under the laws of the
State
of Delaware and is a wholly-owned subsidiary of the Parent.
C.
The
Parent and the Subsidiary and their respective boards of directors deem it
advisable and to the advantage, welfare, and best interests of the corporations
and their respective shareholders to merge Parent with and into Subsidiary
pursuant to the provisions of the Utah Revised Business Corporation Act (the
“Utah Act”) and the Delaware General Corporation Law (the “Delaware Law”) upon
the terms and conditions hereinafter set forth.
NOW
THEREFORE, in consideration of the premises, the mutual covenants herein
contained and other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Parent
shall
be merged into the Subsidiary (the “Merger”) upon the terms and conditions
hereinafter set forth.
ARTICLE
I
PRINCIPAL
TERMS OF THE MERGER
SECTION
1.1.
Merger.
On the
Effective Date (as defined in Section 4.1 hereof), the Parent shall be merged
with and into the Subsidiary, the separate existence of the Parent shall
cease
and the Subsidiary (sometimes hereinafter referred to as the “Surviving
Corporation”) shall operate under the name “Glen Rose Petroleum Corporation” by
virtue of, and shall be governed by, the laws of the State of Delaware. The
address of the registered office of the Surviving Corporation in the State
of
Delaware will be Parasec, 40 East Division Street, Suite A, Dover, Delaware
19901.
SECTION
1.2.
Certificate
of Incorporation of the Surviving Corporation.
The
Certificate of Incorporation of the Surviving Corporation shall be the
Certificate of Incorporation of the Subsidiary as in effect on the date hereof
(without change, unless and until amended in accordance with applicable
law).
SECTION
1.3.
Bylaws
of the Surviving Corporation.
The
Bylaws of the Surviving Corporation shall be the Bylaws of the Subsidiary
as in
effect on the date hereof without change unless and until amended or repealed
in
accordance with applicable law.
SECTION
1.4.
Directors
and Officers.
At the
Effective Date of the Merger, the directors and officers of the Subsidiary
in
office at the Effective Date of the Merger shall become the directors and
officers, respectively, of the Surviving Corporation, each of such directors
and
officers to hold office, subject to the applicable provisions of the Certificate
of Incorporation and Bylaws of the Surviving Corporation and the Delaware
Law,
until his or her successor is duly elected or appointed and
qualified.
ARTICLE
II
CONVERSION,
CERTIFICATES AND PLANS
SECTION
2.1.
Conversion
of Shares.
At the
Effective Date of the Merger, each of the following transactions shall be
deemed
to occur simultaneously:
(a)
Common
Stock.
Each
share of the Parent’s common stock, $0.001 par value per share (the “Parent’s
Common Stock”), issued and outstanding immediately prior to the Effective Date
of the Merger shall, by virtue of the Merger and without any action on the
part
of the holder thereof, be converted into and become one validly issued, fully
paid and nonassessable share of the Surviving Corporation’s common stock, $.001
par value per share (the “Surviving Corporation’s Common Stock”).
(b)
Series
A Convertible Preferred Stock.
Each
share of the Parent’s Series A Convertible Preferred stock, $0.0001 par value
per share (the “Parent’s Series A Convertible Preferred Stock”), issued and
outstanding immediately prior to the Effective Date of the Merger shall,
by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into and become one validly issued, fully paid and nonassessable
share of the Surviving Corporation’s Series A Convertible Preferred Stock,
$0.0001 par value per share. The Parent represents that no shares of the
Parent’s Series A Convertible Preferred Stock have been issued or are
outstanding.
(c)
Series
B Convertible Preferred Stock.
Each
share of the Parent’s Series B Convertible Preferred stock, $0.0001 par value
per share (the “Parent’s Series B Convertible Preferred Stock”), issued and
outstanding immediately prior to the Effective Date of the Merger shall,
by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into and become one validly issued, fully paid and nonassessable
share of the Surviving Corporation’s Series B Convertible Preferred Stock,
$0.001 par value per share. The Parent represents that no shares of the Parent’s
Series B Convertible Preferred Stock have been issued or are
outstanding.
(d)
Options
and Warrants.
Each
option or warrant to acquire shares of the Parent’s Common Stock, Series A
Preferred Stock or Series B Preferred Stock outstanding immediately prior
to the
Effective Date of the Merger shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and become an
equivalent option or warrant to acquire, upon the same terms and conditions,
the
number of shares of the Surviving Corporation’s Common Stock, which is equal to
the number of shares of the Parent’s Common Stock that the optionee or warrant
holder would have received had the optionee or warrant holder exercised such
option or warrant, as the case may be, in full immediately prior to the
Effective Date of the Merger (whether or not such option or warrant was then
exercisable) and the exercise price per share under each of said options
or
warrants shall be equal to the exercise price per share thereunder immediately
prior to the Effective Date of the Merger, unless otherwise provided in the
instrument granting such option or warrant.
(e)
Other
Rights.
Any
other right, by contract or otherwise, to acquire shares of the Parent’s Common
Stock outstanding immediately prior to the Effective Date of the Merger shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become a right to acquire, upon the same terms
and conditions, the number of shares of the Surviving Corporation’s Common Stock
which is equal to the number of shares of the Parent’s Common Stock that the
right holder would have received had the right holder exercised such right
in
full immediately prior to the Effective Date of the Merger (whether or not
such
right was then exercisable) and the exercise price per share under each of
said
rights shall be equal to the exercise price per share thereunder immediately
prior to the Effective Date of the Merger, unless otherwise provided in the
agreement granting such right.
(f)
Cancellation
of Subsidiary Shares Held by Parent.
Each
share of the Subsidiary’s common stock issued and outstanding immediately prior
to the Effective Date of the Merger and held by the Parent shall be canceled
without any consideration being issued or paid therefor.
SECTION
2.2.
Stock
Certificates.
At and
after the Effective Date, all of the outstanding certificates that, prior
to
that date, represented shares of the Parent’s Common Stock shall be deemed for
all purposes to evidence ownership of and to represent the number of shares
of
the Surviving Corporation’s Common Stock into which such shares of the Parent’s
Common Stock are converted as provided herein. At and after the Effective
Date,
all of the outstanding certificates that, prior to that date, represented
shares
of a series of the Parent’s Preferred Stock shall be deemed for all purposes to
evidence ownership of and to represent the number of shares of the Surviving
Corporation’s Preferred Stock into which such shares of the Parent’s Preferred
Stock are converted as provided herein. The registered owner on the books
and
records of the Parent of any such outstanding stock certificate for the Parent’s
Common Stock or the Parent’s Preferred Stock shall, until such certificate is
surrendered for transfer or otherwise accounted for to the Surviving Corporation
or its transfer agent, be entitled to exercise any voting and other rights
with
respect to, and to receive any dividend and other distributions upon, the
shares
of the Surviving Corporation’s Common Stock or the Surviving Corporation’s
Preferred Stock evidenced by such outstanding certificate as provided
above.
SECTION
2.3.
Employee
Benefit and Compensation Plans.
At the
Effective Date of the Merger, each employee benefit plan, incentive compensation
plan and other similar plans to which the Parent is then a party shall be
assumed by, and continue to be the plan of, the Surviving Corporation. To
the
extent any employee benefit plan, incentive compensation plan or other similar
plan of the Parent provides for the issuance or purchase of, or otherwise
relates to, the Parent’s Common Stock, after the Effective Date of the Merger
such plan shall be deemed to provide for the issuance or purchase of, or
otherwise relate to, the same class and series of the Surviving Corporation’s
common stock.
ARTICLE
III
TRANSFER
AND CONVEYANCE OF
ASSETS
AND ASSUMPTION OF LIABILITIES
SECTION
3.1.
Effects
of the Merger.
At the
Effective Date of the Merger, the Merger shall have the effects specified
in the
Utah Act, the Delaware Law and this Agreement. Without limiting the generality
of the foregoing, and subject thereto, at the Effective Date of the Merger,
the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises, of a public as well as a private nature, and shall be subject
to all
the restrictions, disabilities and duties of each of the parties to this
Agreement; the rights, privileges, powers and franchises of the Parent and
the
Subsidiary, and all property, real, personal and mixed, and all debts due
to
each of them on whatever account, shall be vested in the Surviving Corporation;
and all property, rights, privileges, powers and franchises, and all and
every
other interest shall be thereafter the property of the Surviving Corporation,
as
they were of the respective constituent entities, and the title to any real
estate whether by deed or otherwise vested in the Parent and the Subsidiary
or
either of them, shall not revert to be in any way impaired by reason of the
Merger; but all rights of creditors and all liens upon any property of the
parties hereto shall be preserved unimpaired, and all debts, liabilities
and
duties of the respective constituent entities shall thenceforth attach to
the
Surviving Corporation, and may be enforced against it to the same extent
as if
said debts, liabilities and duties had been incurred or contracted by
it.
SECTION
3.2.
Additional
Actions.
If, at
any time after the Effective Date of the Merger, the Surviving Corporation
shall
consider or be advised that any further assignments or assurances in law
or any
other acts are necessary or desirable (a) to vest, perfect or confirm, of
record
or otherwise, in the Surviving Corporation, title to and possession of any
property or right of the Parent acquired or to be acquired by reason of,
or as a
result of, the Merger, or (b) otherwise to carry out the purposes of this
Agreement, the Parent and its proper officers and directors shall be deemed
to
have granted to the Surviving Corporation an irrevocable power of attorney
to
execute and deliver all such proper deeds, assignments and assurances in
law and
to do all acts necessary or proper to vest, perfect or confirm title to and
possession of such property or rights in the Surviving Corporation and otherwise
to carry out the purposes of this Agreement. The proper officers and directors
of the Surviving Corporation are fully authorized in the name of the Parent
or
otherwise to take any and all such action.
ARTICLE
IV
APPROVAL
BY SHAREHOLDERS; AMENDMENT; EFFECTIVE DATE
SECTION
4.1.
Approval.
This
Agreement and the Merger contemplated hereby are subject to approval by the
requisite vote of shareholders in accordance with applicable Utah law. As
promptly as practicable after approval of this Agreement by shareholders
in
accordance with applicable law, duly authorized officers of the respective
parties shall make and execute Articles of Merger and a Certificate of Merger
and shall cause such documents to be filed with the Secretary of State of
Utah
and the Secretary of State of Delaware, respectively, in accordance with
the
laws of the States of Utah and Delaware. The effective date (the “Effective
Date”) of the Merger shall be the date on which the Merger becomes effective
under the laws of Utah or the date on which the Merger becomes effective
under
the laws of Delaware, whichever occurs later.
SECTION
4.2.
Amendments.
The
Board of Directors of the Parent may amend this Agreement at any time prior
to
the Effective Date, provided that an amendment made subsequent to the approval
of the Merger by the shareholders of the Parent shall not (1) alter or change
the amount or kind of shares to be received in exchange for or on conversion
of
all or any of the shares of the Parent’s Common Stock, (2) alter or change
any
term
of the Certificate of Incorporation of the Subsidiary, or (3) alter or change
any of the terms and conditions of this Agreement if such alteration or change
would adversely affect the holders of the Parent’s Common Stock.
ARTICLE
V
MISCELLANEOUS
SECTION
5.1.
Termination.
This
Agreement may be terminated and the Merger abandoned at any time prior to
the
filing of this Agreement with the Secretary of State of Utah and the Secretary
of State of Delaware, whether before or after shareholder approval of this
Agreement, by the consent of the Board of Directors of the Parent and the
Subsidiary.
SECTION
5.2.
Counterparts.
This
Agreement may be executed in any number of counterparts, each of which shall
be
considered to be an original instrument.
SECTION
5.3.
Descriptive
Headings.
The
descriptive headings are for convenience of reference only and shall not
control
or affect the meaning or construction of any provision of this
Agreement.
SECTION
5.4.
Governing
Law.
This
Agreement shall be construed in accordance with the laws of the State of
Delaware, except to the extent the laws of the State of Utah apply to the
Merger.
IN
WITNESS WHEREOF, the undersigned officers of each of the parties to this
Agreement, pursuant to authority duly given by their respective boards of
directors, have caused this Agreement to be duly executed on the date set
forth
above.
|
UNITED
HERITAGE CORPORATION,
|
|
a
Utah corporation
|
|
|
|
By:
|
|
|
|
Paul
D. Watson, Chief Executive Officer
|
|
|
|
|
GLEN
ROSE PETROLEUM CORPORATION,
|
|
a
Delaware Corporation
|
|
|
|
|
By:
|
|
|
|
Paul
D. Watson, Chief Executive
Officer
|
ANNEX
4
ARTICLES
OF MERGER
OF
UNITED
HERITAGE CORPORATION
A
Utah Corporation
(the
non-surviving corporation)
and
GLEN
ROSE PETROLEUM CORPORATION
A
Delaware Corporation
(the
surviving corporation)
ARTICLE
I
– Surviving Corporation
The
name
of the subsidiary corporation, which is the corporation surviving the merger
(“Merger”), is Glen Rose Petroleum Corporation (the “Subsidiary”). The
Subsidiary is a foreign corporation incorporated on ____________, 2008 and
existing pursuant to the provisions of the Delaware General Corporation
Law.
ARTICLE
II – Non-Surviving Corporations
The
name
of the parent corporation, which is the non-surviving corporation, is United
Heritage Corporation, a Utah corporation (the “Parent”). The Parent is a
domestic corporation incorporated on April 30, 1981 and existing pursuant
to the
provisions of the Utah Revised Business Corporation Act.
ARTICLE
III – Agreement and Plan of Merger
The
Agreement and Plan of Merger containing such information as is required by
16-10a-1101 of the Utah Revised Business Corporation Act is set forth in
Exhibit
A, attached hereto and made a part hereof.
ARTICLE
IV – Amendment to Articles of Incorporation
The
Certificate of Incorporation of the Subsidiary shall, on the Merger becoming
effective, be and constitute the Certificate of Incorporation of the surviving
corporation.
ARTICLE
V
– Manner of Adoption and Vote of Surviving Corporation
Pursuant
to 16-10a-1104(3) of the Utah Revised Business Corporation Act, a vote of
the
shareholders of the Subsidiary is not required with respect to the
Merger.
ARTICLE
VI – Manner of Adoption and Vote of Non-Surviving Corporation
The
designation of the voting group of the Parent that voted on the Agreement
and
Plan of Merger was Common Stock. No shares of Preferred Stock are issued
and
outstanding.
The
number of outstanding shares of the Parent’s Common Stock and the number of
votes entitled to be cast by the holders of such shares, as of ____________,
2008, was __________. The number of undisputed votes of the Parent’s Common
Stock voting group cast for the Agreement and Plan of Merger was _____________.
The number of votes cast for the Agreement and Plan of Merger by the only
voting
group entitled to vote was sufficient for approval by that voting
group.
ARTICLE
VII – Ownership of Parent
Immediately
prior to the Merger, the Parent owned at least 90% of the outstanding shares
of
each class of the Subsidiary.
ARTICLE
VIII – Effective Date of Merger
The
effective date of the Merger shall be the date upon which articles of merger
or
a certificate of merger giving effect to the Agreement and Plan of Merger
shall
be duly executed and acknowledged by the Subsidiary, and thereafter (a)
delivered to the Secretary of State of the State of Delaware, for filing,
as
provided in Delaware Law, and (b) delivered to the Utah Department of Commerce,
Division of Corporations and Commercial Code, as provided in Utah law. The
Merger shall become effective upon the later to occur of (a) or (b) above.
The
effective date of the Merger complies with 16-10a-1104(5) of the Utah Revised
Business Corporation Act.
In
witness whereof, the undersigned, being the Chief Executive Officer of the
Subsidiary, which is the surviving corporation, executes these Articles of
Merger subject to penalties of perjury that the statements contained herein
are
true on this _____ day of _________ 2008.
Paul
D.
Watson, Chief Executive
Officer
EXHIBIT
A
AGREEMENT
AND PLAN OF MERGER
THIS
AGREEMENT AND PLAN OF MERGER (hereinafter referred to as this “Agreement”) dated
as of _____________ ___, 2008, is made and entered into by and between United
Heritage Corporation, a Utah corporation (the “Parent”) and Glen Rose Petroleum
Corporation, a Delaware corporation (the “Subsidiary”).
RECITALS:
A.
The
Parent is a corporation organized and existing under the laws of the State
of
Utah.
B.
The
Subsidiary is a corporation organized and existing under the laws of the
State
of Delaware and is a wholly-owned subsidiary of the Parent.
C.
The
Parent and the Subsidiary and their respective boards of directors deem it
advisable and to the advantage, welfare, and best interests of the corporations
and their respective shareholders to merge Parent with and into Subsidiary
pursuant to the provisions of the Utah Revised Business Corporation Act (the
“Utah Act”) and the Delaware General Corporation Law (the “Delaware Law”) upon
the terms and conditions hereinafter set forth.
NOW
THEREFORE, in consideration of the premises, the mutual covenants herein
contained and other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree that the Parent
shall
be merged into the Subsidiary (the “Merger”) upon the terms and conditions
hereinafter set forth.
ARTICLE
I
PRINCIPAL
TERMS OF THE MERGER
SECTION
1.1.
Merger.
On the
Effective Date (as defined in Section 4.1 hereof), the Parent shall be merged
with and into the Subsidiary, the separate existence of the Parent shall
cease
and the Subsidiary (sometimes hereinafter referred to as the “Surviving
Corporation”) shall operate under the name “Glen Rose Petroleum Corporation” by
virtue of, and shall be governed by, the laws of the State of Delaware. The
address of the registered office of the Surviving Corporation in the State
of
Delaware will be Parasec, 40 East Division Street, Suite A, Dover, Delaware
19901.
SECTION
1.2.
Certificate
of Incorporation of the Surviving Corporation.
The
Certificate of Incorporation of the Surviving Corporation shall be the
Certificate of Incorporation of the Subsidiary as in effect on the date hereof
(without change, unless and until amended in accordance with applicable
law).
SECTION
1.3.
Bylaws
of the Surviving Corporation.
The
Bylaws of the Surviving Corporation shall be the Bylaws of the Subsidiary
as in
effect on the date hereof without change unless and until amended or repealed
in
accordance with applicable law.
SECTION
1.4.
Directors
and Officers.
At the
Effective Date of the Merger, the directors and officers of the Subsidiary
in
office at the Effective Date of the Merger shall become the directors and
officers, respectively, of the Surviving Corporation, each of such directors
and
officers to hold office, subject to the applicable provisions of the Certificate
of Incorporation and Bylaws of the Surviving Corporation and the Delaware
Law,
until his or her successor is duly elected or appointed and
qualified.
ARTICLE
II
CONVERSION,
CERTIFICATES AND PLANS
SECTION
2.1.
Conversion
of Shares.
At the
Effective Date of the Merger, each of the following transactions shall be
deemed
to occur simultaneously:
(a)
Common
Stock.
Each
share of the Parent’s common stock, $0.001 par value per share (the “Parent’s
Common Stock”), issued and outstanding immediately prior to the Effective Date
of the Merger shall, by virtue of the Merger and without any action on the
part
of the holder thereof, be converted into and become one validly issued, fully
paid and nonassessable share of the Surviving Corporation’s common stock, $.001
par value per share (the “Surviving Corporation’s Common Stock”).
(b)
Series
A Convertible Preferred Stock.
Each
share of the Parent’s Series A Convertible Preferred stock, $0.0001 par value
per share (the “Parent’s Series A Convertible Preferred Stock”), issued and
outstanding immediately prior to the Effective Date of the Merger shall,
by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into and become one validly issued, fully paid and nonassessable
share of the Surviving Corporation’s Series A Convertible Preferred Stock,
$0.0001 par value per share. The Parent represents that no shares of the
Parent’s Series A Convertible Preferred Stock have been issued or are
outstanding.
(c)
Series
B Convertible Preferred Stock.
Each
share of the Parent’s Series B Convertible Preferred stock, $0.0001 par value
per share (the “Parent’s Series B Convertible Preferred Stock”), issued and
outstanding immediately prior to the Effective Date of the Merger shall,
by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into and become one validly issued, fully paid and nonassessable
share of the Surviving Corporation’s Series B Convertible Preferred Stock,
$0.001 par value per share. The Parent represents that no shares of the Parent’s
Series B Convertible Preferred Stock have been issued or are
outstanding.
(d)
Options
and Warrants.
Each
option or warrant to acquire shares of the Parent’s Common Stock, Series A
Preferred Stock or Series B Preferred Stock outstanding immediately prior
to the
Effective Date of the Merger shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and become an
equivalent option or warrant to acquire, upon the same terms and conditions,
the
number of shares of the Surviving Corporation’s Common Stock, which is equal to
the number of shares of the Parent’s Common Stock that the optionee or warrant
holder would have received had the optionee or warrant holder exercised such
option or warrant, as the case may be, in full immediately prior to the
Effective Date of the Merger (whether or not such option or warrant was then
exercisable) and the exercise price per share under each of said options
or
warrants shall be equal to the exercise price per share thereunder immediately
prior to the Effective Date of the Merger, unless otherwise provided in the
instrument granting such option or warrant.
(e)
Other
Rights.
Any
other right, by contract or otherwise, to acquire shares of the Parent’s Common
Stock outstanding immediately prior to the Effective Date of the Merger shall,
by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become a right to acquire, upon the same terms
and conditions, the number of shares of the Surviving Corporation’s Common Stock
which is equal to the number of shares of the Parent’s Common Stock that the
right holder would have received had the right holder exercised such right
in
full immediately prior to the Effective Date of the Merger (whether or not
such
right was then exercisable) and the exercise price per share under each of
said
rights shall be equal to the exercise price per share thereunder immediately
prior to the Effective Date of the Merger, unless otherwise provided in the
agreement granting such right.
(f)
Cancellation
of Subsidiary Shares Held by Parent.
Each
share of the Subsidiary’s common stock issued and outstanding immediately prior
to the Effective Date of the Merger and held by the Parent shall be canceled
without any consideration being issued or paid therefor.
SECTION
2.2.
Stock
Certificates.
At and
after the Effective Date, all of the outstanding certificates that, prior
to
that date, represented shares of the Parent’s Common Stock shall be deemed for
all purposes to evidence ownership of and to represent the number of shares
of
the Surviving Corporation’s Common Stock into which such shares of the Parent’s
Common Stock are converted as provided herein. At and after the Effective
Date,
all of the outstanding certificates that, prior to that date, represented
shares
of a series of the Parent’s Preferred Stock shall be deemed for all purposes to
evidence ownership of and to represent the number of shares of the Surviving
Corporation’s Preferred Stock into which such shares of the Parent’s Preferred
Stock are converted as provided herein. The registered owner on the books
and
records of the Parent of any such outstanding stock certificate for the Parent’s
Common Stock or the Parent’s Preferred Stock shall, until such certificate is
surrendered for transfer or otherwise accounted for to the Surviving Corporation
or its transfer agent, be entitled to exercise any voting and other rights
with
respect to, and to receive any dividend and other distributions upon, the
shares
of the Surviving Corporation’s Common Stock or the Surviving Corporation’s
Preferred Stock evidenced by such outstanding certificate as provided
above.
SECTION
2.3.
Employee
Benefit and Compensation Plans.
At the
Effective Date of the Merger, each employee benefit plan, incentive compensation
plan and other similar plans to which the Parent is then a party shall be
assumed by, and continue to be the plan of, the Surviving Corporation. To
the
extent any employee benefit plan, incentive compensation plan or other similar
plan of the Parent provides for the issuance or purchase of, or otherwise
relates to, the Parent’s Common Stock, after the Effective Date of the Merger
such plan shall be deemed to provide for the issuance or purchase of, or
otherwise relate to, the same class and series of the Surviving Corporation’s
common stock.
ARTICLE
III
TRANSFER
AND CONVEYANCE OF ASSETS AND ASSUMPTION OF LIABILITIES
SECTION
3.1.
Effects
of the Merger.
At the
Effective Date of the Merger, the Merger shall have the effects specified
in the
Utah Act, the Delaware Law and this Agreement. Without limiting the generality
of the foregoing, and subject thereto, at the Effective Date of the Merger,
the
Surviving Corporation shall possess all the rights, privileges, powers and
franchises, of a public as well as a private nature, and shall be subject
to all
the restrictions, disabilities and duties of each of the parties to this
Agreement; the rights, privileges, powers and franchises of the Parent and
the
Subsidiary, and all property, real, personal and mixed, and all debts due
to
each of them on whatever account, shall be vested in the Surviving Corporation;
and all property, rights, privileges, powers and franchises, and all and
every
other interest shall be thereafter the property of the Surviving Corporation,
as
they were of the respective constituent entities, and the title to any real
estate whether by deed or otherwise vested in the Parent and the Subsidiary
or
either of them, shall not revert to be in any way impaired by reason of the
Merger; but all rights of creditors and all liens upon any property of the
parties hereto shall be preserved unimpaired, and all debts, liabilities
and
duties of the respective constituent entities shall thenceforth attach to
the
Surviving Corporation, and may be enforced against it to the same extent
as if
said debts, liabilities and duties had been incurred or contracted by
it.
SECTION
3.2.
Additional
Actions.
If, at
any time after the Effective Date of the Merger, the Surviving Corporation
shall
consider or be advised that any further assignments or assurances in law
or any
other acts are necessary or desirable (a) to vest, perfect or confirm, of
record
or otherwise, in the Surviving Corporation, title to and possession of any
property or right of the Parent acquired or to be acquired by reason of,
or as a
result of, the Merger, or (b) otherwise to carry out the purposes of this
Agreement, the Parent and its proper officers and directors shall be deemed
to
have granted to the Surviving Corporation an irrevocable power of attorney
to
execute and deliver all such proper deeds, assignments and assurances in
law and
to do all acts necessary or proper to vest, perfect or confirm title to and
possession of such property or rights in the Surviving Corporation and otherwise
to carry out the purposes of this Agreement. The proper officers and directors
of the Surviving Corporation are fully authorized in the name of the Parent
or
otherwise to take any and all such action.
ARTICLE
IV
APPROVAL
BY SHAREHOLDERS; AMENDMENT; EFFECTIVE DATE
SECTION
4.1.
Approval.
This
Agreement and the Merger contemplated hereby are subject to approval by the
requisite vote of shareholders in accordance with applicable Utah law. As
promptly as practicable after approval of this Agreement by shareholders
in
accordance with applicable law, duly authorized officers of the respective
parties shall make and execute Articles of Merger and a Certificate of Merger
and shall cause such documents to be filed with the Secretary of State of
Utah
and the Secretary of State of Delaware, respectively, in accordance with
the
laws of the States of Utah and Delaware. The effective date (the “Effective
Date”) of the Merger shall be the date on which the Merger becomes effective
under the laws of Utah or the date on which the Merger becomes effective
under
the laws of Delaware, whichever occurs later.
SECTION
4.2.
Amendments.
The
Board of Directors of the Parent may amend this Agreement at any time prior
to
the Effective Date, provided that an amendment made subsequent to the approval
of the Merger by the shareholders of the Parent shall not (1) alter or change
the amount or kind of shares to be received in exchange for or on conversion
of
all or any of the shares of the Parent’s Common Stock, (2) alter or change
any
term
of the Certificate of Incorporation of the Subsidiary, or (3) alter or change
any of the terms and conditions of this Agreement if such alteration or change
would adversely affect the holders of the Parent’s Common Stock.
ARTICLE
V
MISCELLANEOUS
SECTION
5.1.
Termination.
This
Agreement may be terminated and the Merger abandoned at any time prior to
the
filing of this Agreement with the Secretary of State of Utah and the Secretary
of State of Delaware, whether before or after shareholder approval of this
Agreement, by the consent of the Board of Directors of the Parent and the
Subsidiary.
SECTION
5.2.
Counterparts.
This
Agreement may be executed in any number of counterparts, each of which shall
be
considered to be an original instrument.
SECTION
5.3.
Descriptive
Headings.
The
descriptive headings are for convenience of reference only and shall not
control
or affect the meaning or construction of any provision of this
Agreement.
SECTION
5.4.
Governing
Law.
This
Agreement shall be construed in accordance with the laws of the State of
Delaware, except to the extent the laws of the State of Utah apply to the
Merger.
IN
WITNESS WHEREOF, the undersigned officers of each of the parties to this
Agreement, pursuant to authority duly given by their respective boards of
directors, have caused this Agreement to be duly executed on the date set
forth
above.
|
UNITED
HERITAGE CORPORATION,
|
|
a
Utah corporation
|
|
|
|
|
By:
|
|
|
|
Paul
D. Watson, Chief Executive Officer
|
|
|
|
GLEN
ROSE PETROLEUM CORPORATION,
|
|
a
Delaware Corporation
|
|
|
|
|
By:
|
|
|
|
Paul
D. Watson, Chief Executive
Officer
|
ANNEX
5
CERTIFICATE
OF MERGER
OF
GLEN
ROSE PETROLEUM CORPORATION
A
Delaware Corporation
(the
surviving corporation)
and
UNITED
HERITAGE CORPORATION
A
Utah Corporation
(the
non-surviving corporation)
Pursuant
to Title 8, Section 252 of the Delaware General Corporation Law, the undersigned
corporation executed the following Certificate of Merger:
FIRST:
The name
of the surviving corporation is Glen Rose Petroleum Corporation, a Delaware
corporation, and the name of the corporation being merged into this surviving
corporation is United Heritage Corporation, a Utah corporation.
SECOND:
The
Agreement and Plan of Merger has been approved, adopted, certified, executed
and
acknowledged by each of the constituent corporations pursuant to Title 8,
Section 252 of the General Corporation Law of the State of
Delaware.
THIRD:
The name
of the surviving corporation is Glen Rose Petroleum Corporation, a Delaware
corporation.
FOURTH:
The
Certificate of Incorporation of the surviving corporation shall be its
Certificate of Incorporation.
FIFTH:
The
authorized stock and par value of the non-Delaware corporation is 125,000,000
shares of common stock, $0.001 par value and 5,000,000 shares of Preferred
Stock, $0.0001 par value of which 176,000 shares constitute Series A Preferred
Stock, 40,000 shares constitute Series B-1 Preferred Stock and 60,000 shares
constitute Series B-2 Preferred Stock.
SIXTH:
The
effective date of the Merger shall be the date upon which articles of merger
or
a certificate of merger giving effect to the Agreement and Plan of Merger
shall
be duly executed and acknowledged by Glen Rose Petroleum Corporation, and
thereafter (a) delivered to the Secretary of State of the State of Delaware,
for
filing, as provided in Delaware Law, and (b) delivered to the Utah Department
of
Commerce, Division of Corporations and Commercial Code, as provided in Utah
law.
The Merger shall become effective upon the later to occur of (a) or (b)
above.
SEVENTH:
The
Agreement and Plan of Merger is on file at Suite 200, One Energy Square,
4825
Greenville Avenue, Dallas, Texas 75206, an office of the surviving
corporation.
EIGHTH:
A copy
of the Agreement and Plan of Merger will be furnished by the surviving
corporation on request, without cost to any stockholder of the constituent
corporations.
IN
WITNESS WHEREOF,
the
surviving corporation, Glen Rose Petroleum Corporation, has caused this
certificate to be signed by an authorized officer, this ______ day of
____________ 2008.
|
|
|
|
|
Paul
D. Watson, Chief Executive
Officer
|
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