TABLE OF CONTENTS
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
TABLE OF CONTENTS
$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
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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.
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TABLE OF CONTENTS
|
|
|
|
|
|
|
|
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
35
TABLE OF CONTENTS
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.
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TABLE OF CONTENTS
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.
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TABLE OF CONTENTS
UNITED HERITAGE CORPORATION
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
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-26
|
|
F-1
TABLE OF CONTENTS
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, 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.
F-2
TABLE OF CONTENTS
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.
F-3
TABLE OF CONTENTS
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.
F-4
TABLE OF CONTENTS
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.
F-5
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Nine Months Ended December 31, 2007 – (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in Capital
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
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.
F-6
TABLE OF CONTENTS
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).
F-7
TABLE OF CONTENTS
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.
F-8
TABLE OF CONTENTS
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
F-9
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 7 — Note Payable to Related Party – (continued)
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.
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.
F-10
TABLE OF CONTENTS
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
|
|
|
—
|
|
F-11
TABLE OF CONTENTS
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 Warrants Issuance Quarter Ended 12/31/07
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
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
|
|
|
|
|
|
F-12
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 12 — Stock Warrants – (continued)
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”.
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
|
|
$
|
—
|
|
|
$
|
—
|
|
F-13
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
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”).
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,
F-14
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 16 — Consulting Agreements – (continued)
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.
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.
F-15
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
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.
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
F-16
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 18 — Subsequent Events – (continued)
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.
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.
F-17
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Note 18 — Subsequent Events – (continued)
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.
F-18
TABLE OF CONTENTS
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
F-19
TABLE OF CONTENTS
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.
F-20
TABLE OF CONTENTS
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.
F-21
TABLE OF CONTENTS
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.
F-22
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended March 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-in Capital
|
|
Accumulated
Deficit
|
|
Other
|
|
|
|
Shares
|
|
Amount
|
|
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.
F-23
TABLE OF CONTENTS
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.
F-24
TABLE OF CONTENTS
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.
F-25
TABLE OF CONTENTS
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.
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.
F-26
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
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.
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
F-27
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
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.
F-28
TABLE OF CONTENTS
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.
F-29
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
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:
|
|
|
|
|
|
|
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.
F-30
TABLE OF CONTENTS
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
F-31
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies – (continued)
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.
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.
F-32
TABLE OF CONTENTS
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
|
|
F-33
TABLE OF CONTENTS
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.
F-34
TABLE OF CONTENTS
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
F-35
TABLE OF CONTENTS
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.
F-36
TABLE OF CONTENTS
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;
|
F-37
TABLE OF CONTENTS
UNITED HERITAGE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Stock Warrants – (continued)
|
|
(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.
|
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
|
)
|
F-38
TABLE OF CONTENTS
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.
F-39
TABLE OF CONTENTS
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.
F-40
TABLE OF CONTENTS
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
|
)
|
F-41
TABLE OF CONTENTS
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:
|
/s/ Andrew Taylor-Kimmins
Andrew Taylor-Kimmins,
Authorized Signatory
|
A1-1
TABLE OF CONTENTS
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.
A2-1
TABLE OF CONTENTS
“
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
A2-2
TABLE OF CONTENTS
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;
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(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.
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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.
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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
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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.
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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
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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
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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.
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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”).
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(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.
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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.
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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
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By:
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Paul D. Watson, Chief Executive Officer
Glen Rose Petroleum Corporation,
a Delaware Corporation
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By:
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Paul D. Watson, Chief Executive Officer
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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
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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
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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”).
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(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.
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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.
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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
|
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By:
|
Paul D. Watson, Chief Executive Officer
|
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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.
|
|
By:
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Paul D. Watson
Chief Executive Officer
|
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