10KSB 1 heartland10ksb032604.htm HEARTLAND 10-SBK 03-26-04 Heartland 10-SBK 03-26-04

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB
(Mark One)
 
 [X]

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended  December 31, 2003

   
 [  ]

 TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

           
For the transition period from [   ]to[   ]
 
Commission file number  333-93383
Heartland Oil and Gas Corp.
(formerly Adriatic Holdings Limited)
(name of small business issuer in its charter)
Nevada
(State or other jurisdiction of incorporation or organization)
 
91-1918326
(I.R.S. Employer Identification No.)
Suite 1925, 200 Burrard Street
Vancouver, British Columbia, Canada
(Address of principal executive offices)
 
V6C 3L6
(Zip Code)
 
Issuer's telephone number (604) 693-0177
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Nil
 
Name of each exchange on which registered
Nil
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001
(Title of class)

Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        Yes [X]     No [ ]
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.     [ ]
 
State Issuer's revenues for its most recent fiscal year:     $nil
 
   
 
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days:
 
22,710,021 common shares at $2.90(1) = $65,859,060.90
(1) Average of bid and ask closing prices on March 10, 2004
 
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
 
State the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date.
 
24,391,321 common shares and 995,305 preferred stock issued and outstanding as of March 23, 2004
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

 
 
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PART I
Item 1. Description of Business.
This annual report contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled "Risk Factors", that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
 
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
In this annual report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to "CDN$" refer to Canadian dollars and all references to "common shares" refer to the common shares in our capital stock.
 
As used in this annual report, the terms "we", "us", "our", and "Heartland" mean Heartland Oil and Gas Corp., unless otherwise indicated.
 
Business Development During Last Three Years
 
General Overview
 
We are an exploration stage oil and gas company engaged in the exploration for and development of Coal Bed Methane in the “Soldier Creek Prospect” located in the Forest City Basin of northeast Kansas. Our “Soldier Creek” project encompasses approximately 240,000 acres of prospective frontier coal bed methane lands. Our subsidiary, Heartland Oil and Gas Inc., holds the interests in the leases and operates the project.
 
Corporate History
 
Our company, Heartland Oil and Gas Corp., was incorporated in the State of Nevada on July 9, 1998, under the name Adriatic Holdings Ltd.
 
On September 17, 2002 we acquired all of the issued and outstanding stock of Heartland Oil and Gas Inc., a private Nevada Corporation, from its stockholders in exchange for 12,212,429 shares of our common stock. As a result, the former stockholders of Heartland Oil and Gas Inc. own a majority of our outstanding stock. Therefore, for accounting purposes, Heartland Oil and Gas Inc. was deemed to have acquired Adriatic Holdings Ltd. Heartland Oil and Gas Inc. survives as our wholly-owned subsidiary. Heartland Oil and Gas Inc. is an oil and gas exploration company that has interests in leases covering approximately 240,000 acres in central Kansas where 7 test wells have been drilled. We have a 100% working interest in all of these leases. Our net revenue interest in these leases is 84.5%, so as a result our net acreage is approximately 178,295 acres. Our “working interest” consists of our share of gross production, revenues, burdens, field operating costs and gathering and processing fees before deduction of royalties. Our “net revenue interest” means our working interest less the royalties that are payable.
 
 
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As part of the share exchange we changed our name, effective November 4, 2002, to “Heartland Oil and Gas Corp.”, and increased the authorized common stock of our company from 25,000,000 to 100,000,000 with a par value of $0.001 per share.
 
We have not been involved in any bankruptcy, receivership or similar proceeding.
 
Our Current Business
 
On April 10, 2002 we entered into a letter of intent to acquire all of the shares of Heartland Oil and Gas Inc., a private Nevada corporation. On July 31, 2002 we entered into a formal Share Exchange Agreement with Heartland Oil and Gas Inc. and its shareholders. On September 17, 2002 we acquired all of the issued and outstanding stock of Heartland Oil and Gas Inc. from its stockholders in exchange for 12,212,429 shares of our common stock. As a result, the former stockholders of Heartland Oil and Gas Inc. own a majority of our outstanding stock. Therefore, for accounting purposes, Heartland Oil and Gas Inc. was deemed to have acquired Adriatic Holdings Ltd. Heartland Oil and Gas Inc. survives as our wholly-owned subsidiary.
 
We are an exploration stage oil and gas company engaged in the exploration for and development of Coal Bed Methane in the “Soldier Creek Prospect” located in the Forest City Basin of northeast Kansas. Pursuant to several Oil and Gas Leases entered into with various parties, our “Soldier Creek” project encompasses approximately 240,000 acres of prospective frontier coal bed methane lands. Heartland Oil and Gas Inc. holds the interests in the leases for the lands and operates the project. The expiration dates for the leases range from dates in 2004 through 2009. Certain of the leases may be extended upon the exercise of options on the leases. For the year ending December 31, 2004 we will be required to pay approximately $258,000 on the current leases. There are no lease option payments due in 2005 and for the year ending December 31, 2006 we will be required to pay approximately $355,076 on the current leases. In addition, we are obligated to pay delay rentals on certain leases of approximately $16,000 in 2004, 2005 and 2006.
 
Heartland Oil and Gas Inc. signed a letter agreement dated August 25, 2000 with Topeka-Atchinson Gas & Illuminating LLC, whereby Heartland Oil and Gas Inc. engaged Topeka-Atchinson Gas & Illuminating LLC to identify three exploration areas within the Forest City Basin and to provide a detailed budget for the anticipated cost of a one-well exploration program for each exploration area and a four-well pilot program. In consideration Heartland Oil and Gas Inc. advanced a non-refundable deposit of $20,000 to Topeka-Atchinson Gas & Illuminating LLC. The letter agreement provided for:
 
- within 60 days of receipt of the deposit, Heartland Oil and Gas Inc. was to advise of its intention to proceed with the exploration program;
 
- if Heartland Oil and Gas Inc. elected to proceed with the exploration program, then within 60 days from the date of the start of the last desorption test from coal, Heartland Oil and Gas Inc. could elect to proceed further with an initial 3-well exploration program; and
 
- within 60 days from the completion of drilling in the three exploration areas, Heartland Oil and Gas Inc. has the election to proceed with a pilot program or to drill a further test well in an additional exploration area.
 
Topeka-Atchinson Gas & Illuminating LLC is entitled to receive a 3% gross over-riding royalty, on an 8/8th basis, on all oil and gas leases acquired by Heartland Oil and Gas Inc. within certain areas in the Forest City Basin.
 
The Soldier Creek area was chosen when a privately funded, proprietary analysis of historical drilling logs from previous drilling of deeper hydrocarbon targets revealed the existence of significant coal beds to the North and West of where coal bed methane production was currently being successfully developed. This analysis also indicated that the coal bed thickness at Soldier Creek was more than four times greater than the coal beds being exploited nearby. The logs used to map the thickness of these coal beds are not capable of indicating the productivity from the coal beds. Further adding to the area’s potential, was its proximity to a ready market and gas pipelines.
 
 
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We commenced our exploration program consisting of three wells including our Engelke 16-18 well. The Engelke well was drilled by Heartland Oil and Gas Inc. in the fall of 2001 and encountered 57 feet of coal. Two of the three wells were logged and tested for permeability and all three were cased as potential coal bed producers. To test for permeability, we hired Production Enhancement & Reservoir Management, LLC to conduct injection falloff tests on selected coal seam intervals in the two wells. At the Engelke 16-18 well two separate injection falloff tests were conducted. The first test consisted of three seams near the bottom of the well; a 3 foot thick seam at 2,378 feet, a 2 foot seam at 2,406 feet, and a 3 foot seam at 2,429 feet. The second test targeted a single coal seam 4 feet thick at 1,832 feet. In each test the coal seam was perforated and fresh water was injected at high pressure and the pressure was then allowed to falloff. A pressure modeling program was then used to estimate the coal seam permeability to water. This resulted in an estimated permeability of 12.68 millidarcies (md) for the lower coals and 22.5 md for the upper coal.
 
At the Trout 10-2 well, two falloff tests were conducted. In the first test, 3 coal seams near the bottom of the well were tested; a 3 foot seam at 1,491 feet, a 2 foot seam at 1,500 feet and a 3 foot seam at 1,510 feet. The coal seam permeability to water was estimated at 40.14 md. It was noted that the permeability in this well could be as high as 105.3 md. In the second test, a single coal seam 3 foot thick at 1,039 feet was tested and permeability was found to be 0.187 md.
 
No flow tests were conducted as part of the injection falloff testing. The report provided by the contractor concluded that the coal seams in these wells will require hydraulic fracturing for commercial coalbed methane development.
 
During September and October 2001 Heartland Oil and Gas Inc. drilled the three test wells to test the relative coal thickness, permeability, porosity and gas content. Coal thickness and porosity are estimated from well logs and permeability is estimated through injection fall off tests. Gas content is estimated through desorption and adsorption tests on coal cores. In order to conduct a desorption test, coal core samples are saved in airtight canisters at the well site, are opened in the lab and the amount of gas that may be recovered from the coal at various pressures is measured. These tests are done using a constant temperature as close to reservoir temperature as possible. An estimate must also be made for the amount of gas lost before the coal samples were put into the canisters prior to testing.
 
Adsorption tests measure the ultimate amount of gas the coal can hold. These tests measure the amount of gas that the coal can hold by injecting gas into the coal at increasing pressures. These tests are also run at reservoir temperature. The adsorption test typically shows a higher gas content than that measured in the desorption test, suggesting that the coals are somewhat under saturated with gas compared to the maximum amount of gas they could hold. If so, the pressure must be lowered to that corresponding to the gas content from the desorption test, which is typically done by producing water from the coal. Most coal bed methane wells need some dewatering in order to produce as gas.
 
The coal thickness, permeability, porosity and gas content data from the various wells drilled was sent to an independent laboratory for input into a coalgas simulator program, designed to estimate the amount of coal bed methane and water that may be recoverable from the wells.
 
With the results from our economic modeling, we decided to begin aggressively acquiring acreage, concentrating on the North Engelke area, which mapping shows to be the thickest part of the basin. Coal thicknesses here are up to 4 times thicker than in the Cherokee basin to the south, where there are active coal bed methane operations. Many of the coals in the Cherokee basin are present at Engelke, but Engelke also has many more coal seams. As of March 26, 2004 we have leases totalling 240,000 acres. Of the 240,000 acres under lease, approximately 215,000 are in the Engelke area. We have a 100% working interest in all of these leases. The net revenue interest of these leases if 84.5%, so our net acreage is approximately 181,675 acres in the Engelke area.
 
In July, 2003 we undertook the drilling of a four well pilot program surrounding the Engelke 16-18 well, the westernmost of our three initial test wells. In October, 2003 we purchased an existing wellbore in the Engelke area and converted it to a water disposal well by removing the existing tubing in the well and then perforating a deeper formation.
 
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In November, 2003 we completed the five wells in the Engelke pilot program. We selected various coal seams in the Lower Cherokee section, in the lower part of the coal sequence, for the first completions. Eight seams, totalling approximately 16 feet of coal, were perforated, acidized and hydraulically fractured. Down-hole pumps were installed in each well and initial dewatering of the wells began in late November, 2003. As of March 26, 2004 all 5 wells were continuing to pump water with no gas production.
 
In deciding to expand our Soldier Creek Prospect, we considered the following factors:
 
•Major gas lines exist (El Paso owned ANR Pipeline Co. runs directly through our gas leases) and many have available capacity translating to access to markets.
 
•The Forest City area’s flat, sparsely populated marginal ranch or farmland makes transportation and access less expensive, minimizing surface access costs.
 
•Known gas coals that are already established from conventional drilling, thereby reducing exploration and development risk. Our mapping of the existing wells in this area shows the presence of a number of coals in the shallow part of the basin. Drilling records, when available, often show gas as these coals are penetrated.
 
•The abundance of depleted wells often simplifies and reduces cost of water disposal from dewatering coals, as wastewater is re-injected into depleted wells.
 
•As full-scale development is implemented, drilling, completing, and operating costs are anticipated to drop, further enhancing the project’s economics.
 
•The area also contains a number of black shales, which are not included in the reserve and economic calculations but which may add to the amount of recoverable gas.
 
The Coal Bed Methane Industry
 
During the past decade coal bed methane has emerged as a viable source of natural gas compared to the late 1980s when there was no significant production outside of the still dominant San Juan Basin, in northwestern New Mexico, and the Black Warrior Basin in Alabama and Mississippi. As noted in USGS Fact Sheet FS-123-00 of October 2000, coal bed methane production accounted for 7% of US natural gas production or approximately 3.6 billion cubic feet (Bcf) of gas per day or an annual 1.35 trillion cubic feet (Tcf) of gas from over 14,000 producing wells.
 
We believe the success of coal bed methane developments has been largely the result of improved drilling and completion techniques, better hydraulic fracture designs and significant cost reductions as a result of highly dependable gas content and coal bed methane reservoir performance analysis. Also aiding this sector’s growth is the apparent shortage of quality domestic conventional exploration and development projects. In comparison, according to USGS Fact Sheet FS-123-00 of October 2000, total “unconventional” coal bed methane resource across America’s 25 basins (lower US) is estimated to be roughly 700 trillion cubic feet (Tcf) of which 14% or 100 Tcf is considered technically recoverable with existing technology. Technically recoverable gas volumes do not necessarily qualify as proved reserves and we do not have any proved coal bed methane reserves at this time. We also believe that propelling the coal bed methane production growth is its relatively low finding and development costs. Coal bed methane fields are often found where deeper conventional oil and gas reservoirs have already been developed, therefore, considerable exploration-cost-reducing geologic information is often readily available. This available geological information, combined with coal bed methane reservoirs’ comparatively shallow locations, reduces finding and developing costs.
 
Coal Bed Methane
 
Natural gas normally consists of 80% or more methane with the balance comprising such hydrocarbons as butane, ethane and propane. In some cases it may contain minute quantities of highly poisonous hydrogen sulfide, referred to as “sour gas”. Coal bed methane is, generally, a sweet gas consisting of 95% methane and thus is normally of
 
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pipeline quality. Coal bed methane is considered an unconventional natural gas resource because it does not rely on ‘conventional’ trapping mechanisms, such as a fault or anticline, or stratigraphic traps. Instead coal bed methane is “adsorbed” or attached to the molecular structure of the coals - an efficient storage mechanism as coal bed methane coals can contain as much as seven times the amount of gas typically stored in a conventional natural gas reservoir such as sandstone or shale. The adsorbed coal bed methane is kept in place as a result of a pressure equilibrium often from the presence of water. Thus the production of coal bed methane in many cases requires the dewatering of the coals to be exploited. This process usually requires the drilling of adjacent wells and from 6 to 36 months to complete. Coal bed methane production typically has a low rate of production decline and an economic life typically from 10 to 20 years.
 
The principal sources of coal bed methane are either biogenic, producing a dry gas which is generated from bacteria in organic matter, typically at depths less than 1000 feet, or thermogenic, which is a deeper wet gas, formed when organic matter is broken down by temperature and pressure.
 
The three main factors that determine whether or not gas can be economically recovered from coal beds are: the gas content of the coals; the permeability or flow characteristics of the coals; and, the thickness of the coal beds. Gas content is measured in terms of standard cubic feet (Scf) per ton and varies widely from 430 Scf per ton in the deep (2,000 to 3,500 feet) San Juan, New Mexico thermogenic coals, and only 60 Scf per ton for the shallow (300 to 700 feet deep) Powder River, Wyoming biogenic coals. The San Juan coals are considered to have the industry’s highest permeability. Relatively high permeability, which can affect the ability of gas to easily travel to the borehole, is an important factor for the success of a coal bed methane well, but is not absolutely required. The thickness of coal beds from which coal bed methane is economically being produced varies from as little as a few feet in some areas of the gas rich (300 Scf) Raton Basin to as much as 75 net feet of coal bed thickness at the relatively gas poor Powder River.
 
Competitors
 
Three of the largest coal bed methane producers in America’s lower 48 states are BP Amoco, Burlington Resources and Phillips Petroleum, all producing most of their production from the now-in-decline San Juan basin. Though it ranks fourth in terms of natural gas production, the leading coal bed methane participant in terms of growth and technology is, in our view, Devon Energy. Devon is aggressively expanding coal bed methane production in the Powder River Basin located in Wyoming and Montana and Raton Basin located in Colorado and has coal bed methane production in the San Juan Basin located in New Mexico and Wind River Basin located in Wyoming. Devon is also developing the coal bed methane potential of southeastern Kansas where it has amassed over 400,000 acres. Its project is centered in Cherokee Basin, that is the southern end of the coal bed methane fairway.
 
Other companies are also active in the coal bed methane fairway, including Anadarko Petroleum Corporation, JM Huber Corporation, Evergreen Resources, Inc. and Whiting Petroleum.
 
Governmental Regulations
 
Our oil and gas operations are subject to various United States federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment. To date, expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of our company. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.
 
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Research and Development
 
Our business plan is focused on a strategy for maximizing the long-term exploration and development of our Soldier Creek Prospect, Kansas USA. To date, execution of our business plan has largely focused on acquiring prospective Coal Bed Methane leases and drilling three initial test wells on this acreage from which to establish a going forward exploration and development plan.
 
As of December 31, 2003 we have spent approximately $4,270,000 on our Soldier Creek Prospect.
 
Employees
 
Currently there are no full time employees and two part-time employees who are also officers of our company. We do not expect any material changes in the number of employees over the next 12 month period. We do and will continue to outsource contract employment as needed. However, if we are successful in our initial and any subsequent drilling programs we may retain additional employees.
 
RISK FACTORS
 
Much of the information included in this annual report includes or is based upon estimates, projections or other "forward-looking statements". Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein. We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements.
 
Such estimates, projections or other "forward-looking statements" involve various risks and uncertainties as outlined below. We caution readers of this annual report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other "forward-looking statements". In evaluating us, our business and any investment in our business, readers should carefully consider the following factors.
 
We have had negative cash flows from operations.
 
To date we have had negative cash flows from operations and we have been dependent on sales of our equity securities and debt financing to meet our cash requirements and have incurred losses totalling approximately $1,700,000 as of December 31, 2003. As of December 31, 2003 we had working capital of $7,806,122 as a result of recent financing activities. We do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates. In particular, additional capital may be required in the event that:
 
- drilling and completion costs for further wells increase beyond our expectations; or
 
- we encounter greater costs associated with general and administrative expenses or offering costs.
 
The occurrence of any of the aforementioned events could adversely affect our ability to meet our business plans.
 
We will depend almost exclusively on outside capital to pay for the continued exploration and development of our properties. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet these continuing development costs or, if the capital is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
 
 
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If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment.
 
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our operations.
 
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new products and continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.
 
If we issue additional shares in the future this may result in dilution to our existing stockholders.
 
Our Certificate of Incorporation authorizes the issuance of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. Our board of directors have the authority to issue additional shares up to the authorized capital stated in the certificate of incorporation. Our board of directors may choose to issue some or all of such shares to acquire one or more businesses or to provide additional financing in the future. The issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares from the selling shareholders, your proportionate ownership interest and voting power will be decreased accordingly. Further, any such issuance may result in a change of control of our corporation.
 
We have a history of losses and fluctuating operating results.
 
Since inception through December 31, 2003, we have incurred aggregate losses of approximately $1,700,000. Our loss from operations for the fiscal year ended December 31, 2003 was $1,247,295. There is no assurance that we will operate profitably or will generate positive cash flow in the future. In addition, our operating results in the future may be subject to significant fluctuations due to many factors not within our control, such as the unpredictability of when customers will purchase our services, the size of customers’ purchases, the demand for our services, and the level of competition and general economic conditions. If we cannot generate positive cash flows in the future, or raise sufficient financing to continue our normal operations, then we may be forced to scale down or even close our operations. Until such time as we generate revenues, we expect an increase in development costs and operating costs. Consequently, we expect to incur operating losses and negative cash flow until our properties enter commercial production.
 
Our stock is a penny stock. Trading of our stock may be restricted by the SEC’s penny stock regulations which may limit a stockholder’s ability to buy and sell our stock.
 
Our stock is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer
 
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quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
 
NASD sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
 
In addition to the “penny stock” rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
 
Trading on the OTC Bulletin Board may be sporadic because it is not a stock exchange, and stockholders may have difficulty reselling their shares.
 
Our common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with the company’s operations or business prospects. Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like Nasdaq or a stock exchange like Amex.
 
We have a limited operating history and if we are not successful in continuing to grow our business, then we may have to scale back or even cease our ongoing business operations.
 
We have no history of revenues from operations and have no significant tangible assets. We have yet to generate positive earnings and there can be no assurance that we will ever operate profitably. Our company has a limited operating history and must be considered in the development stage. The success of the company is significantly dependent on a successful acquisition, drilling, completion and production program. Our company’s operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company.
 
A majority of our directors and officers are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers.
 
We do not currently maintain a permanent place of business within the United States. In addition, a majority of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the
 
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 United States. The foregoing risks also apply to those experts identified in this prospectus that are not residents of the United States.
 
Because of the early stage of development and the nature of our business, our securities are considered highly speculative.
 
Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of its development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration stage only and are without known reserves of oil and gas. Accordingly, we have not generated any revenues nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations.
 
As our properties are in the exploration and development stage there can be no assurance that we will establish commercial discoveries on our properties.
 
Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few properties that are explored are ultimately developed into producing oil and/or gas wells. Our properties are in the exploration and development stage only and are without proven reserves of oil and gas. We may not establish commercial discoveries on any of our properties.
 
The potential profitability of oil and gas ventures depends upon factors beyond the control of our company
 
The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events may materially affect our financial performance.
 
Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in our company not receiving an adequate return on invested capital.
 
Competition in the oil and gas industry is highly competitive and there is no assurance that we will be successful in acquiring the leases.
 
The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed. Our budget anticipates our acquisition of additional acreage in the Forest City basin. This acreage may not become available or if it is available for leasing, that we may not be successful in acquiring the leases. There are other competitors that have operations in the Forest City basin and the presence of these competitors could adversely affect our ability to acquire additional leases.
 
  11  
 
 
The marketability of natural resources will be affected by numerous factors beyond our control which may result in us not receiving an adequate return on invested capital to be profitable or viable.
 
The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable.
 
Oil and gas operations are subject to comprehensive regulation which may cause substantial delays or require capital outlays in excess of those anticipated causing an adverse effect on our company.
 
Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which it may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations.
 
Exploration and production activities are subject to certain environmental regulations which may prevent or delay the commencement or continuance of our operations.
 
In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry.
 
We believe that our operations comply, in all material respects, with all applicable environmental regulations.
 
Our operating partners maintain insurance coverage customary to the industry; however, we are not fully insured against all possible environmental risks.
 
Exploratory drilling involves many risks and we may become liable for pollution or other liabilities which may have an adverse effect on our financial position.
 
Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labour, and other risks are involved. We may become subject to liability for pollution or hazards against which it cannot adequately insure or which it may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations.
 
  12  
 
 
Any change to government regulation/administrative practices may have a negative impact on our ability to operate and our profitability.
 
The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business.
 
The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably.
 
Item 2. Description of Property.
 
Our executive and head offices are located at Suite 1925, 200 Burrard Street, Vancouver, British Columbia, V6C 3L6. The offices are approximately 2,935 square feet in size and are leased on an annual basis, expiring February 29, 2008, at an annual rent of approximately CDN$58,700. Our current premises are adequate for our current operations and we do not anticipate that we will require any additional premises in the foreseeable future.
 
Our Soldier Creek project currently encompasses approximately 240,000 acres of prospective frontier coal bed methane lands located in the Forest City Basin of northeast Kansas. As at the date hereof we had a total of 240,000 acres of undeveloped land under lease, of which 215,000 acres were concentrated in Nemaha County, Brown County and the northern part of Jackson County, Kansas.
 
We had no productive wells as at the date hereof and no developed acreage. In September and October of 2001, Heartland Oil and Gas Inc. drilled three coal bed methane stratigraphic/exploration wells on its property. All three wells have been cased pending completion. In July 2003 we drilled four more coal bed methane stratigraphic/exploration wells on our property. These four additional wells have been cased and are awaiting results from testing. “Cased” means that metal casing has been cemented in place in the well to protect the well from fluids, pressures and/or wellbore stability problems in the wells, in anticipation of testing and/or production. In November 2003, five of the wells located in the Engelke area were fracture stimulated and pumps were installed to begin dewatering the coals. At December 31, 2003 all of these wells were continuing to produce water.
 
Item 3. Legal Proceedings.
 
We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
 
Item 4. Submissions of Matters to a Vote of Security Holders.
 
On December 8, 2003, we held a special meeting for the purposes of approving the amendment to our Articles of Incorporation for the amendment of our authorized share capital to authorize the issuance of up to 5,000,000 shares of preferred stock, par value of $0.001 per share. The amendment was approved by a quorum of shareholders with 9,330,600 votes casted in favor, nil votes casted against and nil votes abstained.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
 
Our common stock is traded on the National Association of Securities Dealers OTC Bulletin Board under the symbol "HOGC" Between March 7, 2002 and November 3, 2002 our common stock traded under the symbol "ADRH". The following quotations obtained from Bloomberg reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission an may not represent actual transactions.
 
 
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The high and low bid prices of our common stock for the periods indicated below are as follows:

OTC Bulletin Board (1) (2)
Quarter Ended
High
Low
January 1, 2004 to March 9, 2004
$4.55
$2.85
December 31, 2003
$5.17
$3.48
September 30, 2003
$5.70
$3.90
June 30, 2003
$3.96
$1.65
March 31, 2003
$2.50
$1.96
December 31, 2002
$2.20
$1.57
September 30, 2002
$2.00
$1.40
 
(1)   Our common stock began being quoted for trading on the OTC Bulletin Board on March 7, 2002.
 
(2)   Over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.
 
Our common shares are issued in registered form. Registrar and Transfer Company of 10 Commerce Drive, Cranford, New Jersey, USA 07016-9814 (Telephone: (800) 866-1340; Facsimile: (908) 497-2310) is the registrar and transfer agent for our common shares.
 
On March 23, 2004, the shareholders’ list of our common shares showed 122 registered shareholders and 24,391,321 shares outstanding.
 
We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Although there are no restrictions that limit the ability to pay dividends on our common shares, our intention is to retain future earnings for use in our operations and the expansion of our business.
 
Recent Sales of Unregistered Securities
 
On May 2, 2003, we issued 6,000 shares of common stock to a non-U.S. person upon exercise of stock options previously granted to him. The shares were issued in an offshore transaction relying on Regulation S under the Securities Act of 1933.
 
On May 23, 2003, we issued 15,000 shares of common stock to a non-U.S. person upon exercise of stock options previously granted to him. The shares were issued in an offshore transaction relying on Regulation S under the Securities Act of 1933.
 
On June 30, 2003, we issued 6,000 shares of common stock to a non-U.S. person upon exercise of stock options previously granted to him. The shares were issued in an offshore transaction relying on Regulation S under the Securities Act of 1933.
 
On October 13, 2003, we issued 8,000 shares of common stock to a non-U.S. person upon exercise of stock options previously granted to him. The shares were issued in an offshore transaction relying on Regulation S under the Securities Act of 1933.
 
On December 1, 2003, we issued 25,000 shares of common stock to a non-U.S. person upon exercise of stock options previously granted to him. The shares were issued in an offshore transaction relying on Regulation S under the Securities Act of 1933.
 
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Item 6. Management's Discussion and Analysis or Plan of Operation.
 
The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly in the section entitled "Risk Factors" beginning on page 8 of this annual report.
 
Our consolidated audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
 
Overview
 
We are an exploration stage oil and gas company and carry out our operations through our wholly owned subsidiary, Heartland Oil and Gas Inc. We are currently engaged in the exploration for and development of coal bed methane in the Soldier Creek Prospect located in the Forest City Basin of northeast Kansas. We do not have any revenues other than interest income, as we are in the development stage. Our only recent activity was on September 17, 2002 when we acquired all of the shares of Heartland Oil and Gas Inc. We exchanged one share of Adriatic Holdings Ltd. for one share of Heartland Oil and Gas Inc. A total of 12,212,429 shares of Adriatic Holdings Ltd. were issued in exchange for the shares of Heartland Oil and Gas Inc. Heartland and Oil and Gas Inc. has approximately 240,000 acres under lease in central Kansas where it has drilled 7 exploratory gas wells.
 
Plan of Operations
 
For the next 12 months we plan to continue drilling a series of pilot programs in our Soldier Creek acreage area, consisting of drilling up to 18 further new wells. Fifteen of the wells will be completed for potential coal bed methane and 3 of the wells will be completed as salt water disposal wells. As we will be in a test period initially, gathering systems and pipeline tie-ins will be undertaken at the completion of the drilling program.
 
We also intend to undertake additional completion operations in the Engelke area, including additional hydraulic fracturing of existing coals and perforating and fracturing new coals in the wells.
 
Pursuant to several oil and gas leases entered into with various parties, our Soldier Creek project encompasses approximately 240,000 acres of prospective frontier coal bed methane lands. Heartland Oil and Gas Inc. holds the interests in the leases for the lands and operates the project. The expiration dates for the leases range from dates in 2004 through 2009. Certain of the leases may be extended upon the exercise of options on the leases. For the year ending December 31, 2004 we will be required to pay approximately $258,532 on the leases. There are no lease option payments due in 2005 and for the year ending December 31, 2006 we will be required to pay approximately $355,076 on the leases. In addition, we are obligated to pay delay rentals on certain leases of approximately $16,000 in each of the years 2004, 2005 and 2006.
 
We may require additional funds to implement our growth strategy in our gas exploration operations. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There is still no assurance that we will be able to maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Further, we may continue to be unprofitable.
 
In order to proceed with our plans we raised funds by way of a private placement of equity securities in our company pursuant to exemptions from registration provided by Regulation S under the Securities Act of 1933. The offering consisted of units at a price of $1.40 per unit. Each unit consisted of one common share $0.001 par value and one warrant exercisable at $1.75 expiring August 30, 2004. In May, 2003 we closed the private placement having issued 1,000,000 units for gross proceeds of $1,400,000. The net proceeds received will be used as working capital to allow us to continue our ongoing lease acquisition program and to expand on the exploration and development of our Soldier Creek Prospect.
 
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In June, 2003, we sold an aggregate of 602,836 of our shares of our common stock and share purchase warrants to acquire an additional 301,418 shares of our common stock in a private placement for gross proceeds of approximately $1,700,000. The share purchase warrants have an exercise price of $3.38 and expire three years from the date of issuance.
 
On August 19, 2003, we sold an aggregate of $8,815,024 of our shares of our common stock and share purchase warrants to acquire additional shares of our common stock in a private placement. The private placement involved the issuance of 2,754,695 shares of our common stock and share purchase warrants to acquire an additional 1,377,348 shares of our common stock. The share purchase warrants have an exercise price of $3.84 and expire on August 19, 2006.
 
Our net cash provided by financing activities during the year ended December 31, 2003 was $10,658,421.
 
On January 13, 2004 we closed a private placement for the issuance and sale of 995,306 units at a purchase price of $3.20 per unit for total aggregate proceeds of $3,184,979. Each unit is comprised of one share of Series A Preferred Convertible Stock and one stock purchase warrant to purchase one-half of one share of common stock for the additional consideration of $3.84 per share for a period of three years. Each preferred share is to be convertible into one common share for no additional consideration. The preferred shares will not bear interest.
Over the next twelve months we intend to use all available funds to continue our ongoing lease acquisition program and to expand on the exploration and development of our Soldier Creek Prospect, as follows:
 

 Estimated Funding Required During the Next Twelve Months

  
   
General and Administrative
$750,000
Acreage
 
 
Rentals and Option Payments
280,000
 
 
 
Operations
 
 
Drill and complete 15 new wells
4,500,000
 
Drill and equip 3 new disposal wells
510,000
 
Additional completion operations at Engelke
500,000
 
Gathering and Pipelines
1,775,000
 
Lease Operating Expense
950,000
 
Corporate and Severance Taxes
888,000
 
 
 
Working Capital
347,000
Total
$10,500,000
 
As at December 31, 2003, we had $500,363 in current liabilities. Our financial statements report a net loss of $1,219,393 for the year ended December 31, 2003 compared to a net loss of $428,554 the year ended December 31, 2002. Our accumulated loss increased to $1,701,538 during the period from inception to December 31, 2003 as we reported a net loss for the year ended of $1,219,393. Our losses increased primarily as a result of stock-based compensation expenses and increased expenses associated with professional fees and administration activities. Stock-based compensation for the year ended December 31, 2003 was $455,375, as compared to $219,600 for the year ended December 31, 2002.
 
Our total liabilities as of December 31, 2003 were $500,363, as compared to total liabilities of $748,733 as of December 31, 2002. The decrease was due to the conversion of outstanding convertible debentures in the amounts of $450,016 and $242,690, inclusive of accrued interest.
 
We have suffered recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital. In this regard we have raised additional capital through the equity offerings noted above.
 
 
  16  
 
 
The continuation of our business is dependent upon obtaining further financing, a successful program of acquisition and exploration, and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
 
There are no assurances that we will be able to obtain further funds required for our continued operations. As noted herein, we are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.
 
New Accounting Pronouncements
 
A reporting issue has arisen regarding the application of certain provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, we have included the costs of such mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 142 requires oil and gas companies to classify costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, we would be required to reclassify approximately $2,372,337 at December 31, 2003 and $917,003 at December 31, 2002 out of oil and gas properties and into a separate intangible asset line item. Our cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full-cost accounting rules.
 
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Such standard requires any gain or loss on extinguishments of debt to be presented as a component of continuing operations (unless specific criteria are met) whereas SFAS No. 4 required that such gains and losses be classified as an extraordinary item in determining net income. Upon adoption of SFAS No. 145, we will reclassify any extraordinary gains and losses on the extinguishments of debt recorded in prior periods to continuing operations. The adoption of SFAS 145 did not have a material effect on our financial position or results of operations.
 
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Such standard requires costs associated with exit or disposal activities (including restructurings) to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. The provisions of this standard are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material effect on our financial position or results of operations.

On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation--Transition and Disclosure.” This standard amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This standard also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of SFAS No. 148 are required to be included in the summary of significant accounting policies.
 
In May, 2003, SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", was issued. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial
 
  17  
 
 
instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Generally, a financial instrument, whether in the form of shares or otherwise, that is mandatorily redeemable, i.e. that embodies an unconditional obligation requiring the issuer to redeem it by transferring its shares or assets at a specified or determinable date (or dates) or upon an event that is certain to occur, must be classified as a liability (or asset in some circumstances). In some cases, a financial instrument that is conditionally redeemable may also be subject to the same treatment. This Statement does not apply to features that are embedded in a financial instrument that is not a derivative (as defined) in its entirety. For public entities, this Statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 did not effect the Company's financial position or results of operations.
 
Application of Critical Accounting Policies
 
Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.
 
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. We have chosen to account for stock-based compensation Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”) and have adopted the disclosure only provisions of SFAS 123. Accordingly, compensation for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee is required to pay for the stock.
 
We account for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 (“EITF 96-18”), “Accounting for Equity Instruments that are issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or Services”.
 
We utilize the full cost method to account for our investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. For the years ending December 31, 2003 and 2002, we did not capitalize interest costs relating to unproved properties. As of December 31, 2003, we have no properties with proven reserves. When we obtain proven oil and gas reserves capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects including capitalized interest, if any, are not amortized until proved reserves associated with the projects can be determined. If the future development of unproved properties are determined uneconomical the amount of such properties is added to the capitalized cost to be amortized. As of December 31, 2003, all of our oil and gas properties were unproved and were excluded from amortization. At December 31, 2003, none of our unproved oil and gas properties were considered impaired.
 
The capitalized costs included in the full cost pool are subject to a “ceiling test”, which limits such costs to the aggregate of the estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions. No impairment existed as of December 31, 2003 and 2002.
 
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 the statement of operations.
 
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Revenue from sales or services will be recognized at the time the product is delivered or at the time the service is performed.
 
Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at transaction dates. Carrying values of monetary assets and liabilities are adjusted at each balance sheet date to reflect the exchange rate at that date. Non-monetary assets and liabilities are translated at the exchange rate on the original transaction date. Gains and losses from restatement of foreign currency monetary and non-monetary assets and liabilities are included in the statement of operations. Revenue and expenses are translated at the dates such items are recognized in the statement of operations.
 
Our financial instruments consist of cash, prepaid expenses and other liabilities. The carrying amounts of financial instruments approximate fair value due to their short maturities.
 
Financial instruments that potentially subject us to concentrations of credit risk consists primarily of cash in excess of the federally insured amount of $100,000. To date, we have not incurred a loss relating to this concentration of credit risk.
 
We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
 
Earnings per share requires presentation of both basic earnings per common share and diluted earnings per common share. Common stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive.
 
The preparation of the 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
 
Item 7. Financial Statements.
 
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
 
The Independent Auditor’s Report of Staley Okada & Partners, for the audited consolidated financial statements for the year ended December 31, 2003, dated March 22, 2004.
 
The Independent Auditor's Report of Spicer, Jeffries LLP, Independent Certified Public Accountants, for the audited consolidated financial statements for the year ended December 31, 2002 dated March 7, 2003.
 
Balance Sheets at December 31, 2003 and 2002.
 
Statements of Operations for the years ended December 31, 2003 and 2002 and for the period from inception (August 11, 2000) through December 31, 2003.
 
Statements of Changes in Stockholders' Equity for the years ended December 31, 2003 and 2002 and for the period from inception (August 11,2000) to December 31, 2000.
 
Statements of Cash Flows for the years ended December 31, 2003 and 2002 and for the period from inception (August 11, 2000) through December 31, 2003.
 
Notes to the Financial Statements.

 
  19  
 

INDEPENDENT AUDITORS' REPORT




To the Board of Directors and Stockholders
Heartland Oil and Gas Corp. and Subsidiary
(An Exploration Stage Company)


We have audited the consolidated balance sheet of Heartland Oil and Gas Corp. and Subsidiary (An Exploration Stage Company) as of December 31, 2003 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended and the December 31, 2003 amounts included in the cumulative amounts for the period from inception (August 11, 2000) to December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heartland Oil and Gas Corp. and Subsidiary (An Exploration Stage Company) as of December 31, 2003, and the results of their operations and their cash flows for the year then ended and the December 31, 2003 amounts included in the cumulative amounts for the period from inception (August 11, 2000) to December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.



/s/ STALEY OKADA & PARTNERS


Vancouver, Canada
March 22, 2004
 
  20  
 
 

INDEPENDENT AUDITORS' REPORT




To the Board of Directors and Stockholders
Heartland Oil and Gas Corp. and Subsidiary
(An Exploration Stage Company)


We have audited the consolidated balance sheet of Heartland Oil and Gas Corp. and Subsidiary (An Exploration Stage Company) as of December 31, 2002 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended and the December 31, 2002 amounts included in the cumulative amounts for the period from inception (August 11, 2000) to December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heartland Oil and Gas Corp. and Subsidiary (An Exploration Stage Company) as of December 31, 2002, and the results of their operations and their cash flows for the year then ended and the December 31, 2002 amounts included in the cumulative amounts for the period from inception (August 11, 2000) to December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.


/s/ SPICER JEFFRIES LLP


Greenwood Village, Colorado
March 7, 2003
 
  21  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

BALANCE SHEETS

 
December 31,2003
December 31,2002
 
 
 
ASSETS
 
 
 
 
 
CURRENT ASSETS
 
 
Cash and cash equivalents
$8,279,474      
$86,475      
Prepaid expenses
27,011      
4,341      
 
 
 
Total current assets
8,306,485      
90,816      
 
 
 
OIL AND GAS PROPERTIES, unproven (Note 7)
4,267,171      
2,150,084      
 
 
 
EQUIPMENT, net of accumulated amortization of $3,630 and $59, respectively
16,075      
3,041      
 
 
 
TOTAL ASSETS
$12,589,731      
$2,243,941      
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
CURRENT LIABILITIES
 
 
Accounts payable and accrued expenses
$493,336      
$64,256      
Due to related parties (Note 2)
7,027      
14,078      
Convertible debentures (Note 5)
-         
435,000      
 
 
 
Total current liabilities
500,363      
513,334      
 
 
 
LONG-TERM DEBT
 
 
Convertible debenture – related party (Note 5)
-         
235,399      
 
 
 
TOTAL LIABILITIES
500,363      
748,733      
 
 
 
STOCKHOLDERS’ EQUITY (Note 3 and 4)
 
 
Preferred stock -   $0.001 par value, 5,000,000 shares authorized,
   none issued and outstanding
 
-         
 
-         
Common stock -   $0.001 par value, 100,000,000 shares authorized,
 
 
   24,301,320 and 19,582,429 shares issued and
   outstanding, respectively
 
24,301      
 
19,582      
Additional paid-in capital
13,766,605      
1,957,771      
Deficit accumulated during the exploration stage
(1,701,538)      
(482,145)      
 
 
 
 
12,089,368      
1,495,208      
 
 
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$12,589,731      
$2,243,941      

The accompanying notes are an integral part of these statements.
 
 
  22  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

STATEMENTS OF OPERATIONS

 
Year Ended
December 31,
2003
Year Ended
December 31,
2002
Period from Inception
(August 11, 2000)
Through December 31,
2003
 
 
 
 
 
 
 
 
 
 
 
 
REVENUE
$-      
$-         
$-         
 
 
 
 
EXPENSES
 
 
 
Professional fees
203,423      
70,211      
282,345      
Management fees (Note 2)
48,000      
30,000      
94,000      
Interest expense
22,399      
31,943      
67,206      
Stock based compensation (Note 1)
455,375      
219,600      
674,975      
Travel and promotion
217,645      
29,889      
247,534      
Office rent
32,168      
-         
32,168      
Consulting
53,489      
18,758      
85,171      
General and administrative
214,796      
28,508      
247,396      
 
 
 
 
Total operating expenses
1,247,295      
428,909      
1,730,795      
 
 
 
 
Loss from operations
(1,247,295)      
(428,909)      
(1,730,795)      
 
 
 
 
OTHER INCOME
 
 
 
Interest income
27,902      
355      
29,257      
 
 
 
 
NET LOSS
$(1,219,393)      
$(428,554)      
$(1,701,538)      
 
 
 
 
BASIC AND DILUTED NET
 
 
 
LOSS PER COMMON SHARE
$(0.06)      
$(0.03)      
 
 
 
 
 
BASIC AND DILUTED
WEIGHTED AVERAGE
NUMBER OF COMMON
 
 
 
SHARES OUTSTANDING
21,752,375      
14,335,771      
 

The accompanying notes are an integral part of these statements
 
 
  23  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

PERIOD FROM INCEPTION (AUGUST 11, 2000) TO DECEMBER 31, 2003

 
Common Shares
Stock Amount
Additional
Paid-in Capital
Deficit Accumulated
During the
Exploration Stage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
INCEPTION, August 11, 2000
-         
$-         
$-         
$-       
 
 
 
 
 
Common stock issued at $0.005 per share
10,000,000      
10,000     
40,000      
-       
Common stock issued at $0.35 per share
1,332,429      
1,332       
465,018      
-       
Net loss
-         
-       
-         
(10,004)      
 
 
 
 
 
BALANCES, December 31, 2000
11,332,429      
11,332      
505,018      
(10,004)      
 
 
 
 
 
Net loss
-         
-        
-         
(43,587)       
 
 
 
 
 
BALANCES, December 31, 2001
11,332,429      
11,332      
505,018      
(53,591)       
 
 
 
 
 
Common stock issued at $0.50 per share
880,000      
880      
439,120      
-       
Recapitalization (Note 1)
7,090,000      
7,090      
402,313      
-       
Common stock issued at $1.40 per share
280,000      
280      
391,720      
-       
Issuance of stock warrants as compensation
-        
-       
219,600      
-       
Net loss
-         
-       
-   
(428,554)      
 
 
 
 
 
BALANCES, December 31, 2002
19,582,429      
19,582       
1,957,771      
(482,145)      
 
 
 
 
 
Common stock issued at $1.40 per share
720,000      
720       
1,007,280      
-       
Exercise of options at $0.50 per share
70,000      
70       
34,930      
-        
Conversion of debentures at $2.00
121,345  
121  
242,569 
-   
Conversion of debentures at $1.00
450,016  
450  
449,566 
-   
Common stock issued at $2.82 per share
602,835  
603  
1,699,392 
-   
Common stock issued at $3.20 per share
2,754,695  
2,755  
8,812,269 
 
Issuance of stock options as compensation
-   
-   
455,375 
-   
Less: share issue costs
-   
-   
(892,547) 
-   
Net loss
-        
-        
-   
(1,219,393)      
 
 
 
 
 
BALANCES, December 31, 2003
24,301,320 
$24,301 
$13,766,605 
$(1,701,538)  



The accompanying notes are an integral part of these statements.
 
 
  24  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Year Ended
December 31, 2003
Year Ended
December 31, 2002
Period from Inception
(August 11,2000)
Through December 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
CASH FLOWS FROM
OPERATING ACTIVITIES
 
 
 
Net loss
$(1,219,393)      
$(428,554)      
$(1,701,538)      
Adjustments to reconcile net loss to net cash
 
 
 
used in operating activities:
 
 
 
   Accrued interest on convertible debentures
22,307      
13,889      
49,061      
   Stock options issued as compensation
455,375      
219,600      
674,975      
   Depreciation and amortization
3,571      
59      
3,630      
   Decrease in exploration advance
-         
6,719      
-         
   Increase in prepaid expenses
(22,670)      
(2,698)      
(26,986)      
   Increase (decrease) in accounts payable
 
 
 
       and accrued expenses
429,080      
(67,965)      
722,782      
 
 
 
 
Net cash used in
 
 
 
   operating activities
(331,730)      
(258,950)      
(278,076)      
 
 
 
 
CASH FLOWS FROM
INVESTING ACTIVITIES
 
 
 
Purchase of computer equipment
(16,605)      
(3,100)      
(19,705)      
Acquisition and exploration of oil and
 
 
 
   gas properties
(2,117,087)      
(917,003)      
(4,267,171)      
 
 
 
 
Net cash used in
 
 
 
   investing activities
(2,133,692)      
(920,103)      
(4,286,876)      
 
 
 
 
CASH FLOWS FROM
FINANCING ACTIVITIES
 
 
 
Increase (decrease) in due to related parties
(7,051)      
30,675      
228,507      
Cash received on recapitalization
-         
15,896      
15,896      
Proceeds from issuance of common stock, net of offering costs
10,665,472      
832,000      
12,013,821      
Proceeds from long-term debt
-         
376,202      
586,202      
 
 
 
 
Net cash provided by
 
 
 
   financing activities
10,658,421      
1,254,773      
12,844,426      
 
 
 
 
NET INCREASE IN CASH AND CASH EQUIVALENTS
8,192,999     
75,720      
8,279,474      
 
 
 
 
CASH AND CASH EQUIVALENTS, beginning of period
86,475      
10,755      
-         
 
 
 
 
CASH AND CASH EQUIVALENTS, end of period
$8,279,474      
$86,475      
$8,279,474      

 
The accompanying notes are an integral part of these statements
 
 
  25  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)

 
Year Ended
December 31, 2003
Year Ended
December 31, 2002
Period from Inception
(August 11, 2000)
Through December 31, 2003
 
 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
 
 
 
 
 
 
 
Note payable converted to convertible debenture
$-         
$201,510      
$201,510      
 
 
 
 
Advances received on long-term debt relieved upon reverse acquisition
$-        
$586,202      
$586,202     
 
 
 
 
Conversion of convertible debentures including interest to common stock
$692,706      
$-         
$692,706      
 
 
 
 
The Company acquired 72 % of the capital stock of Adriatic Holdings Limited for
100% of the capital of Heartland Oil & Gas, Inc. in a reverse acquisition (See Note 1).
In connection with the reverse acquisition, liabilities were assumed as follows:
 
Fair value $454,401
Cash acquired 15,896
Liabilities assumed $438,505
 
 

 
The accompanying notes are an integral part of these statements
 
 
  26  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 -    ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Organization

On April 10, 2002, Adriatic Holdings Limited ("Adriatic") entered into a letter of intent to acquire all of the shares of Heartland Oil and Gas Inc., a Nevada corporation ("Heartland"). Heartland was incorporated in the State of Nevada on August 11, 2000 and its principal business activity consists of exploration and development of oil and gas properties in the United States to determine whether they contain economically recoverable resources. The Company is currently in the exploration stage and has not generated revenue from its operations. Effective September 17, 2002, the acquisition of Heartland by Adriatic was completed through the issuance of one share of Adriatic common stock for each share of Heartland outstanding. At the time of the acquisition, Adriatic had 7,090,000 shares of common stock outstanding. Adriatic issued 12,212,429 shares of common stock to the shareholders of Heartland, and as a result, the Company had 19,302,429 shares of common stock outstanding immediately after the acquisition. As part of the exchange agreement, Adriatic changed its name to Heartland Oil & Gas Corp.

The acquisition of Heartland by Adriatic is considered a reverse acquisition and accounted for under the purchase method of accounting. Under reverse acquisition accounting, Heartland is considered the acquirer for accounting and financial reporting purposes, and acquired the assets and assumed the liabilities of Adriatic. Assets acquired and liabilities assumed are reported at their historical amounts.

The consolidated financial statements include the accounts of Adriatic since the date of the reverse acquisition (September 17, 2002) and the historical accounts of its wholly owned subsidiary, Heartland Oil and Gas Inc. (collectively, the "Company"). All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has suffered recurring losses from operations and has accumulated a deficit of $1,701,538 since its inception on August 11, 2000. The Company has raised approximately $10,665,000 during 2003 and as mentioned in Note 9 to the financial statements, the Company has raised an additional $3,184,976 in 2004. The Company has sufficient working capital to fund its current operations through 2004. Since inception, the Company has funded operations through the issuance of capital stock and debt. Management's plan is to continue raising additional funds through future equity or debt financing until it achieves profitable operations from its oil and gas drilling activities.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and has adopted the disclosure only provisions of SFAS 123. Accordingly, compensation cost for stock options is measured at intrinsic value, which is the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee is required to pay for the stock.

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services".

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 
 
  27  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
NOTE 1 -   ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Oil and Gas Properties

The Company utilizes the full cost method to account for its investment in oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including such costs as leasehold acquisition costs, capitalized interest costs relating to unproved properties, geological expenditures, tangible and intangible development costs including direct internal costs are capitalized to the full cost pool. As of December 31, 2003, the Company has no properties with proven reserves. When the Company obtains proven oil and gas reserves, capitalized costs, including estimated future costs to develop the reserves and estimated abandonment costs, net of salvage, will be depleted on the units-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects including capitalized interest, if any, are not amortized until proved reserves associated with the projects can be determined. If the future exploration of unproved properties are determined uneconomical the amount of such properties are added to the capitalized cost to be amortized. As of December 31, 2003, and 2002 all of the Company's oil and gas properties were unproved and were excluded from amortization. At December 31, 2003 and 2002, none of the Company’s unproved oil and gas properties were considered impaired.

The capitalized costs included in the full cost pool are subject to a "ceiling test", which limits such costs to the aggregate of the estimated present value, using a ten percent discount rate, of the future net revenues from proved reserves, based on current economic and operating conditions. No impairment existed as of December 31, 2003 and 2002.

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 the statement of operations.

Revenue Recognition

Revenue from sales or services will be recognized at the time the product is delivered or at the time the service is performed.

Foreign Currency Translation

Transaction amounts denominated in foreign currencies are translated at exchange rates prevailing at transaction dates. Carrying values of monetary assets and liabilities are adjusted at each balance sheet date to reflect the exchange rate at that date. Non-monetary assets and liabilities are translated at the exchange rate on the original transaction date. Gains and losses from restatement of foreign currency monetary and non-monetary assets and liabilities are included in the statement of operations. Revenue and expenses are translated at the dates such items are recognized in the statement of operations.

Fair Value of Financial Instruments

Substantially all of the Company's assets and liabilities are carried at fair value or contracted amounts that approximate fair value. Estimates of fair value are made at a specific point in time, based on relative market information and information about the financial instrument, specifically, the value of the underlying financial instrument. Assets that are recorded at fair value consist largely of cash and other assets, which are carried at contracted amounts that approximate fair value. Oil and gas properties are valued as discussed above. The Company's liabilities consist of short-term liabilities and notes payable recorded at contracted amounts that approximate fair value.
 
 
  28  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
NOTE 1 -   ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash in excess of the federally insured amount of $100,000. To date, the Company has not incurred a loss relating to this concentration of credit risk.

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Loss Per Share

Earnings per share requires presentation of both basic earnings per common share and diluted earnings per common share. Due to the Company recognizing losses to date, common stock equivalents have not been included in the weighted average calculation since their effect would be anti-dilutive.

Use of Estimates

The preparation of the 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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Recent Accounting Pronouncements

A reporting issue has arisen regarding the application of certain provisions of SFAS No. 141 and SFAS No. 142 to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires registrants to classify the costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs, and provide specific footnote disclosures. Historically, Heartland has included the costs of such mineral rights associated with extracting oil and gas as a component of oil and gas properties. If it is ultimately determined that SFAS No. 142 requires oil and gas companies to classify costs of mineral rights held under lease or other contractual arrangement associated with extracting oil and gas as a separate intangible assets line item on the balance sheet, Heartland would be required to reclassify approximately $2,372,337 at December 31, 2003 and $917,003 at December 31, 2002 from oil and gas properties and into a separate intangible assets line item. Heartland’s cash flows and results of operations would not be affected since such intangible assets would continue to be depleted and assessed for impairment in accordance with full-cost accounting rules.
 
 
  29  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
 
 
NOTE 1 -   ORGANIZATION, OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Such standard requires any gain or loss on extinguishments of debt to be presented as a component of continuing operations (unless specific criteria are met) whereas SFAS No. 4 required that such gains and losses be classified as an extraordinary item in determining net income. Upon adoption of SFAS No. 145, the Company will reclassify any extraordinary gains and losses on the extinguishments of debt recorded in prior periods to continuing operations. The adoption of SFAS 145 did not have a material effect on the Company’s financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Such standard requires costs associated with exit or disposal activities (including restructurings) to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS No. 146 nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. The provisions of this standard are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a material effect on the Company’s financial position or results of operations.

On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This standard amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This standard also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure requirements of SFAS No. 148 are required to be included in the summary of significant accounting policies.

In May, 2003, SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, was issued. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. Generally, a financial instrument, whether in the form of shares or otherwise, that is mandatorily redeemable, i.e. that embodies an unconditional obligation requiring the issuer to redeem it by transferring its shares or assets at a specified or determinable date (or dates) or upon an event that is certain to occur, must be classified as a liability (or asset in some circumstances). In some cases, a financial instrument that is conditionally redeemable may also be subject to the same treatment. This Statement does not apply to features that are embedded in a financial instrument that is not a derivative (as defined) in its entirety. For public entities, this Statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS 150 did not effect the Company’s financial position or results of operations.
 
 
  30  
 

 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 2 -   RELATED PARTY TRANSACTIONS

Amounts due to related parties at December 31, 2003 and 2002 are as follows:

 
December 31, 2003
 
December 31, 2002
 
 
 
 
Advances payable to officers and directors, non-interest bearing,
 
 
 
unsecured and no due date
$ 7,027      
 
$ 14,078      

During the years ended December 31, 2003 and 2002, the Company paid certain officers and directors management and consultant fees of $101,000 and $30,000, respectively.


NOTE 3 -   STOCK OPTIONS

On December 3, 2001, the Company's Board of Directors adopted the 2002 Officer, Director, Consultant and Advisor Stock Compensation Plans (the "Plan"), stock option plans. The aggregate number of shares of common stock that may be granted by the Company will not exceed a maximum of 1,600,000 shares during the period of the Plan. The Plan shall terminate upon the earlier of December 31, 2012 or the issuance of all shares granted under the Plan. The option prices per share are determined by the Board of Directors when the stock option is granted.

If for any reason a recapitalization, sale or merger of the Company occurs, all shares subject to the stock option Plan shall be immediately adjusted proportionally. The Board of Directors may amend the Plan at any time. Certain amendments require stockholders' approval.

Information with respect to all options is as follows:

 
Compensation Plan
Other Options
and Warrants
Exercise Price Range
Weighted Average
Exercise Price
Weighted Average
Remaining Life
 
 
 
 
 
 
Available
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2001
500,000      
-         
$0.35    
$ 0.35    
4.92 years      
Granted
670,000      
280,000      
0.50 – 1.75    
0.87    
 
 
 
 
 
 
 
Balance at December 31, 2002
1,170,000      
280,000      
0.35 – 1.75    
0.69   
3.58 years      
Granted
100,000      
2,970,127      
0.50 – 3.84    
2.73   
 
Exercised
(70,000)      
-         
0.50    
0.50   
 
 
 
 
 
 
 
Balance at December 31, 2003
1,200,000      
3,250,127      
$0.35 – 3.84   
$2.10   
2.05 years      
 
 
  31  
 
 
HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 3 -   STOCK OPTIONS (continued)

 
Compensation Plan
Other Options
and Warrants
Exercise Price Range
Weighted Average
Exercise Price
Weighted Average
Remaining Life
 
 
 
 
 
 
Exercisable
 
 
 
 
 
 
 
 
 
 
 
Number of options exercisable
 
 
 
 
 
at December 31, 2002
680,000      
280,000      
$0.35 – 0.50  
$0.79 
3.58 years     
 
 
 
 
 
 
Number of options exercisable
 
 
 
 
 
at December 31, 2003
972,500      
3,250,127      
$0.35 – 0.50 
$2.18 
1.95 years     

At December 31, 2003 and 2002 respectively, 400,000 and 500,000 share options were available for future grant under the Plan.

The Company measures compensation cost under APB 25 based on the intrinsic value of the options at the grant date. The options which vested in 2003 and 2002 had an exercise price range of $0.50 to $2.00 when the market value of the underlying common stock ranged from $1.72 to $2.83 which resulted in compensation cost recognized by the Company of $455,375 and $219,600 for the years ended December 31, 2003 and 2002.

Had the Company measured compensation cost based on the fair value of the options at the grant date for 2003 and 2002 consistent with the method prescribed by SFAS 123, the Company's net loss and loss per common share would have been increased to the pro forma amounts indicated below:

 
Year Ended
December 31, 2003
 
Year Ended
December 31, 2002
 
 
 
 
Net loss, as reported
$ (1,219,393)
 
$ (428,554)
 
 
 
 
Add: Stock-based employee compensation expense included in reported
 
 
 
net income, net of related tax effects
455,375
 
219,600
 
 
 
 
Deduct: Total stock-based employee compensation expense determined
 
 
 
under fair value based method for all awards, net of related tax effects
(593,380)
 
(297,874)
 
 
 
 
Pro forma net loss
$ (1,357,398)
 
$ (506,828)
 
 
 
 

 
Year Ended
December 31, 2003
 
Year Ended
December 31, 2002
 
 
 
 
Net loss per share:
 
 
 
Basic and diluted loss per common share
 
 
 
As reported
$ (0.06)
 
$ (0.03)
Pro forma
(0.06)
 
(0.03)
 
 
  32  
 
 

HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 3 -   STOCK OPTIONS (continued)

The fair value of each option grant was estimated at the date of the grant using the Black-Scholes option pricing model with the following assumptions for 2003 and 2002: risk-free interest rate of 2.8% (2002 – 1.66%); no dividend yield; expected lives of 4 to 5 years; and volatility of 76% (2002 – 75%).


NOTE 4 -   STOCKHOLDERS' EQUITY

On September 11, 2000, the Company completed a private placement of 10,000,000 common shares at a price of $0.005 per share for proceeds of $50,000. On October 20, 2000 and November 21, 2000 the Company completed additional private placements of 356,429 and 976,000 common shares at $0.35 per share for proceeds of $466,350.

In April 2002, prior to the reverse acquisition with Adriatic (see Note 1), the Company completed a private placement of 880,000 shares of common stock at a $0.50 per share for proceeds of $440,000. On September 17, 2002, the Company completed its reverse acquisition with Adriatic by Adriatic issuing 12,212,429 to the shareholders of Heartland.

In October 2002, the Company commenced a private placement of units (one common share and one common stock purchase warrant exercisable at a price of $1.75 per share until August 30, 2004) at a price of $1.40 per unit. As of December 31, 2002, the Company sold 280,000 units for proceeds of $392,000.

During the year ended December 31, 2003 the following transactions occurred:

·In March 2003, the Company sold 690,000 units at $1.40 for proceeds of $966,000.

·The Company sold 30,000 units at $1.40 for proceeds of $42,000 in May 2003. This sale concluded the “Regulation S” private placement of 1,000,000 units at $1.40 per unit.

·The Company issued 121,345 units at a price of $2.00 for the conversion of $242,690 (including interest of $20,242) outstanding on a convertible debenture. Each unit consists of one share of common stock and one common stock purchase warrant, exercisable at $2.00 per share expiring on December 31, 2004.

·In June 2003, the Company issued 602,835 units at $2.82 per unit for proceeds of approximately $1,700,000 from a private placement. Each unit consisted of one share of common stock and one-half share purchase warrant exercisable at $3.38 per warrant expiring on June 23, 2006.

·A convertible debenture for $450,016 (including interest of $15,016) was converted into 450,016 units at a price of $1.00 per unit on June 30, 2003. Each unit consists of one share of common stock and one common stock purchase warrant, exercisable at $1.00 per share expiring on December 31, 2004.

·In August 2003 the Company issued 2,754,695 units at $3.20 per unit for proceeds of $8,815,024 pursuant to a private placement. Each unit consists of one share of common stock and one-half share purchase warrant exercisable at $3.84 per warrant expiring on August 19, 2006.

·During the year ended December 31, 2003 the Company issued 70,000 shares at $0.50 per share for proceeds of $35,000 from the exercise of stock options.

As of December 31, 2003, none of the warrants had been exercised.
 
 
  33  
 

 HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 4 -   STOCKHOLDERS' EQUITY (continued)

On August 20, 2003, the Company announced that it had entered into agreements in principle relating to the issuance and sale of 995,305 units at a purchase price of $3.20 per unit for total aggregate proceeds of $3,184,979. Each unit is comprised of one share of Series A Preferred convertible shares and one stock purchase warrant to purchase one-half of one share of common stock for the additional consideration of $3.84 per share. Each preferred share is convertible into one common share for no additional consideration. The closing of the preferred share offering was subject to the Company entering into definitive agreements and amending its authorized capital to create the class of preferred shares, which received shareholder approval (See Note 9).


NOTE 5 -   CONVERTIBLE DEBENTURES AND LONG-TERM DEBT

On May 6, 2002, Adriatic issued a convertible debenture to an unrelated party in the amount of $435,000, bearing interest at 7%, and principal and interest due December 1, 2003. The convertible debenture was convertible at the option of the debenture holder into units (consisting of one share of common stock and one warrant to purchase one share of common stock) at $1.00 per unit. This debenture was considered to have an embedded beneficial conversion feature because the conversion price was less than the quoted market price at the time of the issuance. Accordingly, the beneficial conversion feature was valued separately and the intrinsic value, essentially interest, was recorded as a charge to operations in the amount of $108,750 with a corresponding credit to additional paid-in capital. This transaction occurred before the acquisition of Heartland by Adriatic and therefore, is not included in the accompanying statements of operations.

On June 30, 2003 the Company issued 450,016 units (one share of common stock and one common stock purchase warrant) at a price of $1.00 per unit for the conversion of $450,016 (including interest of $15,016) outstanding on the convertible debenture.

In October 2002, the Company converted a $200,000 note payable plus accrued interest into a convertible debenture in the amount of $222,448 bearing interest at 7% per annum and is due on December 31, 2004. The debenture is convertible at $2.00 per unit (one share of common stock and one common stock purchase warrant, exercisable at $2.00 per share), at the option of the holder, at any time commencing on January 1, 2003 until maturity.

On June 30, 2003 the Company issued 121,345 units (one share of common stock and one common stock purchase warrant) at $2.00 per unit for the conversion of $242,690 (including interest of $20,242) outstanding on this convertible debenture.


NOTE 6 -   INCOME TAXES

As of December 31, 2003, the Company had approximately $1,295,000 in pretax U.S. federal and state net operating loss carryforwards, expiring through the 2023. A portion of such net operating loss carryforwards were incurred prior to the September 17, 2002, the reverse acquisition date of the Company, and as such, management of the Company anticipates limitations to the use of these carryforwards under Internal Revenue Code Section 382.
 
 
  34  
 

 HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 6 -   INCOME TAXES (continued)

The Company provides for deferred taxes arising from temporary differences in the book and tax carrying amounts of assets and liabilities. Temporary differences arise primarily from differences in reporting stock based compensation and intangible drilling and completion costs.

The deferred tax assets that result from such operating loss carryforwards and temporary differences of approximately $760,000 and $256,000 at December 31, 2003 and 2002, respectively, have been fully reserved for in the accompanying consolidated financial statements as follows. For the years ended December 31, 2003 and 2002, the valuation allowance established against the deferred tax assets increased by 504,000 and $215,000, respectively.

 
Year Ended
December 31, 2003
 
Year Ended
December 31, 2002
 
 
 
 
Deferred tax liabilities:
$ -   
 
$ -  
 
 
 
 
Deferred tax assets:
 
 
 
Net operating loss deduction
$ 500,000
 
$ 125,000
Stock based compensation
260,000
 
131,000
Total deferred tax assets
760,000
 
256,000
Valuation allowance
(760,000)  
 
   (256,000)
 
 
 
 
 
$ -  
 
$ - 
 
 
 
 

Reconciliation of the differences between the statutory tax rate and the effective tax rate is as follows:

 
Year Ended
December 31, 2003
 
Year Ended
December 31, 2002
 
 
 
 
Federal statutory tax (benefit) rate
(34%)
 
(34%)
 
 
 
 
State taxes, net of federal tax (benefit) rate
(4.57%)
 
(4.57%)
 
 
 
 
Effective tax rate
(38.5%)
 
(38.5%)
 
 
 
 
Valuation allowance
(38.5%)
 
(38.5%)
 
 
 
 
Effective income tax rate
-
 
- 
 
 
  35  
 

HEARTLAND OIL & GAS CORP.
AND SUBSIDIARY
(An Exploration Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 7 -   OIL AND GAS PROPERTIES, UNPROVED

The expiration dates of the Company's oil and gas leases range from dates in 2004 through 2007. Certain oil and gas leases may be extended by another one or two terms by the execution of options on these leases. In addition, the Company is required to pay delay rentals on certain leases. For the years ending December 31, 2004, 2005 and 2006, approximately $16,000 per year will be required to be paid on these leases.


The total costs incurred and excluded from amortization are summarized as follows:

 
Acquisition Costs
Exploration Costs
Total
Costs incurred during periods ended:
 
 
 
December 31, 2003
$ 839,081
$ 1,278,006
$2,117,087
December 31, 2002
917,003
-   
917,003
December 31, 2001
506,253
591,875
1,098,128
December 31, 2000
110,000
24,953
134,953
Totals
$ 2,372,337
$ 1,894,834
$ 4,267,171

At December 31, 2003, all of the Company’s oil and gas properties are considered unproven. Based on the status of the Company’s exploration activities, including the drilling of exploratory test wells, management has determined that no impairment has occurred.


NOTE 8-   COMMITMENTS

The Company leases a facility in Vancouver, British Columbia under a non-cancelable operating lease. The lease commenced on February 1, 2004 and will expire on February 29, 2008. As of December 31, 2003, future minimum lease payments are as follows:

Year
Amount
2004
$ 41,486
2005
45,258
2006
45,258
2007
45,258
2008
7,543
 
$184,803


The Company paid $32,168 for rent expense for the year ended December 31, 2003.


NOTE 9-   EVENT SUBSEQUENT TO BALANCE SHEET DATE

During January and February of 2004 the Company completed an offering of its Series A Preferred Convertible Stock. The shares were issued along with a stock purchase warrant to purchase one half of one share of common stock at an exercise price of $3.84 per share. The Series A Preferred Stock is convertible into one share of common stock at no additional consideration. The Company received proceeds of $3,184,979 pursuant to this offering.
 
 
  36  
 

Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
Not applicable.
 
Item 8A. Controls and Procedures
 
As required by Rule 13a-15 under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures as of the end of the period covered by this annual report, being December 31, 2003. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's president and chief executive officer. Based upon that evaluation, our company's president and chief executive officer concluded that our company's disclosure controls and procedures are effective. There have been no significant changes in our company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to management, including our company's president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.
PART III
 
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.
 
All directors of our company hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. The officers of our company are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.
Our directors, executive officers and other significant employees, their ages, positions held and duration each person has held that position, are as follows:


Name
Position Held with theCompany
Age
Date First Elected or Appointed
Richard Coglon
President and Director
43
September 18, 2002
Robert Knight
Chief Financial Officer, Secretary and Director
47
September 1, 1998
Donald Sharpe
Director
46
September 18, 2002
Randall Buchamer
Director
46
October 24, 2002
Michael Bodino
Director
34
October 16, 2003

Business Experience
 
The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he or she was employed.
 
  37  
 
 
Richard Coglon - President and Director
 
Mr. Coglon has been the President and a director of our company since September 18, 2002. He has also been the President, Secretary-Treasurer and a director of our subsidiary, Heartland Oil and Gas Inc. since August 11, 2000. Mr. Coglon graduated from the University of Alberta in 1982 with a Bachelor of Commerce. In 1983 he then attended the University of Victoria and received his Bachelor of Laws degree in 1986. Mr. Coglon was called to the Bar in British Columbia, Canada in 1987 and began his specialty in the areas of corporate finance and securities law. On January 1, 2003 Mr. Coglon ceased the active practice of law to concentrate on the business of Heartland and his other business ventures.
 
In 1995 Mr. Coglon co-founded Velvet Exploration Ltd., as a start-up oil exploration and production company. Velvet was eventually listed on the Toronto Stock Exchange and ultimately sold in August of 2001 in a “friendly takeover transaction” with El Paso Energy for approximately $450 Million. Mr. Coglon also serves as a director of Bradner Ventures Ltd. a NASD (OTCBB) company.
 
Robert Knight - Chief Financial Officer, Secretary, Treasurer and Director
 
Mr. Knight has served as the Secretary-Treasurer and a director of our company since July 1998. Mr. Knight served as President of our company from 1998 until September 2002. Mr. Knight has served as a director of Invisa Inc. since September 1998 and as the President and Secretary-Treasurer from September 1998 to January 2000. Mr. Knight has served as President, Secretary-Treasurer and Director of Navitrak International Corporation (fka Blackstone Holdings Ltd.) since November 2003. Mr. Knight served as President, Secretary-Treasurer and director of Retinapharma International Inc., from March 14, 2000 until December 2003. From September 1, 1998 to June 12, 1999 he served as President, Secretary-Treasurer and director of Silverwing Systems Corporation. From September 1, 1998 Mr. Knight served as President and director of Centaur BioResearch, Inc. From June 24, 1997 to February 1, 1999, he was the President and director of ANM Holdings Corporation. Additionally, Mr. Knight has served as a director of FlashPoint International, Inc. since October 2001. Mr. Knight has 20 years of experience in the public company arena and corporate finance. In all of these positions, Mr. Knight had the responsibility to manage all of the affairs of each of these companies; to ensure the operation of the business, interact with legal counsel and auditors, and the preparation of all documents to be filed with any regulatory bodies.
 
Mr. Knight completed a Masters in Business Administration, December 31, 1998 from Herriot-Watt University.
 
Donald Sharpe - Director
 
Mr. Sharpe has been a director of our company since September 18, 2002. Mr. Sharpe graduated from the University of British Columbia with a Bachelor of Science degree in Geophysics in 1981 and joined Suncor Inc. in August of that year. From 1981 to 1987 Mr. Sharpe trained and worked as an exploration geophysicist, gaining experience in all parts of the exploration and development cycle throughout the Western Canadian Sedimentary Basin.
 
In 1987, Mr. Sharpe moved into the then new field of gas marketing where he was responsible for the direct marketing of Suncor’s gas to industrial, commercial and utility customers in the United States and Eastern Canada. In this position, Mr. Sharpe negotiated and completed gas contracts with some of North America’s biggest industrial customers. The position required negotiating skills, an understanding of the North American pipeline infrastructure, and an appreciation for the dynamics of natural gas supply and demand. Mr. Sharpe continued his formal education and received a Certificate in Business Management from the University of Calgary in 1989.
 
In 1990, Mr. Sharpe returned to exploration at Suncor in the position of group leader for British Columbia exploration. In this position, Mr. Sharpe managed a team of professionals in land, geology and geophysics and was responsible for the planning, budgeting and execution of the team’s exploration program. Mr. Sharpe continued his education and graduated from the Banff School of Advanced Management in 1991.
 
  38  
 
 
In 1994, Mr. Sharpe left Suncor and returned to Vancouver to found and run a number of public companies. Operating under the umbrella of D. Sharpe Management Inc., Mr. Sharpe has consulted to, managed and served as a director of a number of start-up oil and gas companies including Patriot Petroleum Corp. and Gemini Energy Inc., Velvet Exploration Inc., Netco Energy Inc. and Nation Energy Ltd.
 
Mr. Sharpe is a member of the Association of Professional Engineers, Geologists and Geophysicists of Alberta and the Canadian Society of Exploration Geophysicists.
 
Michael Bodino – Director
 
Mr. Bodino has been a director of our company since October 16, 2002. Mr. Bodino is currently a senior vice president and senior exploration and production research analyst with Sterne, Agee & Leach Inc. of New Orleans, Louisianna. In this capacity Mr. Bodino is responsible for developing and implementing corporate development strategies including mergers, acquisitions, and other financial advisory services; developing investment banking opportunities within the energy sector; and research. From 1993 to 1999 Mr. Bodino had served as a research analyst for San Jacinto Securities, Inc., of Dallas, Texas. From 1999 to 2003 Mr. Bodino was a director of Energy Investment Banking for Hibernia Southeast Capital Inc. of New Orleans, Louisiana.
 
Mr. Bodino holds an MBA in finance from Texas Christian University and a B.S., Bachelor of Science in Economics from Louisiana State University in Shreveport. Mr. Bodino is a member of the William Conner Foundation, a member of the National Association of Petroleum Investment Analysts (NAPIA).
 
Randall Buchamer - Director
 
Mr. Buchamer has been a director of our company since October 24, 2002. Mr. Buchamer has been the Chief Executive Officer of Voice Mobility Inc., a unified communications company, since August 21, 2001 and was the Chairman of Voice Mobility Inc. until January, 2003. Mr. Buchamer was a self-employed business consultant from April 2000 to August 2001. Mr. Buchamer has been a director of User Friendly Media from September 2000. From March 1999 to April 2000 Mr. Buchamer was the Managing Director, Operations of The Jim Pattison Group and was responsible for supporting the operations of the companies owned by The Jim Pattison Group. Prior to joining The Jim Pattison Group, Mr. Buchamer was the Vice-President and Chief Operating Officer for Mohawk Oil from March 1988 to March 1999.
 
Mr. Buchamer holds an Executive Management Development Degree (Condensed EMBA) from Simon Fraser University and attended the University of Illinois, Chicago taking Business Administration (Marketing and Finance).
 
Messrs. Coglon and Sharpe are significant employees and the loss of either of these employees would have an adverse impact on our future developments and could impair our ability to succeed.
 
Family Relationships
 
There are no family relationships among our directors or officers.
 
Involvement in Certain Legal Proceedings
 
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
 
1.   any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
 
2.   any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
 
  39  
 
 
3.   being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
 
4.   being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
 
Audit Committee Financial Expert
 
Our Board of Directors has determined that it does not have a member of its audit committee that qualifies as an “audit committee financial expert” as defined in Item 401(e) of Regulation S-B, and is “independent” as the term is used in Tem 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended.
 
We believe that the members of our Board of Directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.
 
Compliance with Section 16(a) of the Securities Exchange Act of 1934
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the Securities and Exchange Commission regulations to furnish our company with copies of all Section 16(a) reports they file.
 
To the best of our knowledge, all executive officers, directors and greater than 10% shareholders filed the required reports in a timely manner.
 
Code of Ethics
 
Effective March 25, 2004, our company's board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our company's president (being our principal executive officer) and our company's secretary (being our principal financial and accounting officer and controller), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
 
(1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
 
(2) full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
 
(3) compliance with applicable governmental laws, rules and regulations;
 
(4) the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
 
(5) accountability for adherence to the Code of Business Conduct and Ethics.
 
Our Code of Business Conduct and Ethics requires, among other things, that all of our company's personnel shall be accorded full access to our president and secretary with respect to any matter which may arise relating to the Code
 
  40  
 
 
of Business Conduct and Ethics. Further, all of our company's personnel are to be accorded full access to our company's board of directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our president or secretary.
 
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal , provincial and state securities laws. Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our company's president or secretary. If the incident involves an alleged breach of the Code of Business Conduct and Ethics by the president or secretary, the incident must be reported to any member of our board of directors. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company's Code of Business Conduct and Ethics by another.
 
Our Code of Business Conduct and Ethics is filed herewith with the Securities and Exchange Commission as Exhibit 14.1 to this annual report. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: Heartland Oil and Gas Corp., Suite 1925, 200 Burrard Street, Vancouver, British Columbia, Canada V6C 3L6.
 
Item 10. Executive Compensation.
 
Particulars of compensation awarded to, earned by or paid to:
 
(a)   our chief executive officer;
 
(b)   each of our four most highly compensated executive officers who were serving as executive officers at the end of the most recently completed fiscal year and whose total salary and bonus exceeds $100,000 per year; or
 
(c)   any additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as an executive officer of our company at the end of the most recently completed fiscal year;
 
(the "Named Executive Officers") are set out in the summary compensation table below.

SUMMARY COMPENSATION TABLE
 
 
Annual Compensation
Long Term Compensation (1)
 
 
 
 
 
 
Awards
Payouts
 
Name and Principal
Position
Year
Salary (US$)
Bonus (US$)
Other Annual
Compensation
(US$) (1)
Securities
Underlying Options/
SARs Granted
Restricted Shares or
Restricted Share
Units
LTIP Payouts
(US$)
All Other
Compensation
Richard Coglon President(2)
 2003
 $42,000
 Nil
 Nil
 N/A
 Nil
 Nil
 Nil
   2002  $8,000(3)  Nil  Nil  500,000(5)  Nil  Nil  Nil
   2001  $12,000(4)  Nil  Nil  N/A  Nil  Nil  Nil
Robert Knight
Chief Financial Officer(6)
2003
$15,000
Nil
Nil
100,000(8)
Nil
Nil
Nil
   2002  $15,000(7)  Nil  Nil  50,000(8)  Nil  Nil  Nil
   2001  Nil  Nil  Nil  Nil  Nil  Nil  Nil
 
  41  
 
 
(1) The value of perquisites and other personal benefits, securities and property for the Named Executive Officers that do not exceed the lesser of $50,000 or 10% of the total of the annual salary and bonus is not reported herein.
 
(2) Mr. Coglon has served as our President since September 18, 2002.
 
(3) Upon becoming our President, Mr. Coglon received $2,000 per month for providing management services to our company until June 2003. He now is under contract and receives $5,000 per month.
 
(4) Mr. Coglon received $1,000 per month for providing management services to our subsidiary, Heartland Oil and Gas Inc.
 
(5) Richard Coglon received 500,000 options at $0.35 on December 2, 2002 pursuant to the Additional 2002 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan.
 
(6) Mr. Knight has served as our Chief Executive Officer from July 9, 1998 to September 17, 2002 at which time he was appointed to the position of Chief Financial Officer.
 
(7) Mr. Knight received $1,250 per month for providing management services to our company.
 
(8) Mr. Knight received 50,000 options at $0.50 in December 2002 and 100,000 options: 50,000 options at $0.50 and 50,000 at $2.00 in June 2003 pursuant to the 2001 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan and the 2003 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan as compensation for serving as our Chief Financial Officer.
 
The following table sets forth for each of the Named Executive Officers certain information concerning stock options granted to them during fiscal 2002. We have never issued stock appreciation rights.
 
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR

Name
Number of Securities
Underlying Options/
SARs Granted (#)
% of Total Options/
SARs Granted to
Employees in Fiscal Year(1)
Exercise Price
($/Share)
Expiration Date
Robert Knight
Chief Financial Officer
100,000
100%
$0.50 and $2.00(2)
June 5, 2008
 
(1) The denominator (of 100,000) was arrived at by calculating the net total number of new options awarded during the year.
 
(2) In June 2003, Mr. Knight received 100,000 options of which 50,000 are exercisable at $0.50 and 50,000 are exercisable at $2.00 pursuant to the 2001 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan and the 2003 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan.
 
The following table sets forth for each Named Executive Officer certain information concerning the number of shares subject to both exercisable and unexercisable stock options as of December 31, 2003. No named Executive Officer exercised options during fiscal 2003.
 
 
  42  
 
 
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES

Name
Shares Acquired on
Exercise (#)
Aggregate
Value Realized
Number of Securities Underlying
Unexercised Options/SARs at
FY-End (#)
Exercisable / Unexercisable
Value of Unexercised In-the -Money Options/SARs
at FY-end ($)
Exercisable / Unexercisable(1)
 
 
 
Exercisable
Unexercisable
Exercisable
Unexercisable
Richard Coglon
Nil
Nil
500,000
0
$1,725,000
$0
Robert Knight
Nil
Nil
112,500
37,500
$315,000
$105,000
 
(1) The values for “in-the-money” options are calculated by determining the difference between the fair market value of the securities underlying the options as of December 31, 2003 ($3.80 per share on NASD OTCBB) and the exercise price of the individual’s options.
 
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
 
There are no employment agreements between us or any of our subsidiaries and the Named Executive Officers.
 
Our company has no plans or arrangements in respect of remuneration received or that may be received by Named Executive Officers of our company in fiscal 2003 to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $100,000 per Named Executive Officer.
 
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Our Directors do not receive salaries or fees for serving as directors, nor do they receive any compensation for attending meetings of the Board of Directors or serving on committees of the Board of Directors. We may, however, determine to compensate our directors in the future. Directors are entitled to reimbursement of expenses incurred in attending meetings. In addition, our directors are entitled to participate in our stock option plan.
 
During the year ended December 31, 2003 we paid $42,000 to Richard Coglon for the services he provided to our company in his capacity as President and a director of our company. We also paid $15,000 to Robert Knight for the services he provided to our company in his former capacity as the President and his current capacity as Chief Financial Officer, Secretary, Treasurer and a director of our company.
 
Donald Sharpe, a director of our company, earns consulting fees through D. Sharpe Management Inc., a company wholly-owned and controlled by him. We paid D. Sharpe Management Inc. $2,000 per month for consulting services, which was increased to $5,000 per month commencing July 1, 2003. As well, he retains a 1% non-convertible overriding royalty on production from leases acquired by our company in Forest City Basin.
 
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers.
 
During the year ended December 31, 2001 we established a stock option plan pursuant to which 500,000 common shares were reserved for issuance. During the year ended December 31, 2002 we established a stock option plan pursuant to which 600,000 shares were reserved for issuance and an additional 2002 stock option plan pursuant to which 500,000 shares were reserved for issuance.
 
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Stock options become exercisable at dates determined by the Board of Directors at the time of granting the option and have initial terms of five years.
 
The fair value of each option granted in 2003 was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend yield; volatility of 75%; risk-free interest rate of 76% and an expected life of four to five years.
 
We have no plans or arrangements in respect of remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control, where the value of such compensation exceeds $60,000 per executive officer.
 
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
 
Item 11. Security Ownership of Certain Beneficial Owners and Management.
 
The following table sets forth, as of March 23 2004, certain information with respect to the beneficial ownership of our common shares by each shareholder known to us to be the beneficial owner of 5% of our common shares, and by each of our officers and directors. Each person has sole voting and investment power with respect to the common shares, except as otherwise indicated. Beneficial ownership consists of a direct interest in the common shares, except as otherwise indicated.

Name and Address of Beneficial Owner
Amount and Nature of
Beneficial Ownership
Percentage
of Class
(1)
Richard L. Coglon
5548 Parthenon Place
West Vancouver, BC Canada V7W 2V7
850,000 (2)(3)
3.44%
Donald Sharpe
Suite 1925, 200 Burrard Street
Vancouver, BC, Canada V6C 3L6
582,500(4)
2.37%
Robert Knight
114 W. Magnolia Street, Suite 446
Bellingham, WA 98225
144,300 (5)
*
Randall Buchamer
Suite 1925, 200 Burrard Street
Vancouver, BC V6C 3L6
54,500 (6)
*
Michael Bodino
Suite 1925, 200 Burrard Street
Vancouver, BC V6C 3L6
50,000 (7)
*
Directors and Executive Officers as a Group
1,681,300
6.65%
 
*Less than 1%.
 
(1)   Based on 24,391,321 shares of common stock issued and outstanding as of March 23, 2004. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
 
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Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
 
(2)   Includes options to acquire an aggregate of 470,000 shares of common stock, exercisable within sixty days.
 
(3)   The 350,000 shares of common stock held by Richard Coglon are the subject of a divorce judgement whereby Mr. Coglon’s ex-wife is entitled to claim one-half ownership. This judgement is under appeal.
 
(4)   Includes options to acquire an aggregate of 232,500 shares of common stock, exercisable within sixty days.
 
(5)   50,000 of these shares of common stock are held by Knight Financial Ltd., a company wholly-owned by Robert Knight. Also includes options to acquire an aggregate of 82,500 shares of common stock exercisable within sixty days.
 
(6)   Includes options to acquire an aggregate of 50,000 shares of common stock exercisable within sixty days.
 
(7)   Includes options to acquire an aggregate of 50,000 shares of common stock exercisable within sixty days.
 
Equity Compensation Plan Information
 
As at December 31, 2003 we have three compensation plans in place, entitled 2001 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan, 2002 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan and the Additional 2002 Officer, Director, Employee, Consultant and Advisor Stock Compensation Plan. These plans have not been approved by our security holders.
 
Number of Securities to be issued upon exercise of outstanding options
Weighted-Average exercise price of outstanding options
Number of securities remaining available for further issuance
1,200,000(1)
$2.10
400,000
 
(1)   Total number of options granted pursuant to all three of our compensation plans as of December 31, 2003.
Changes in Control
 
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change in control of our company.
 
Item 12. Certain Relationships and Related Transactions.
 
Other than as disclosed below, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest.
 
Over the year ended December 31, 2003, our company incurred consulting and management fee expenses in the amount of $57,000. The consulting and management fee expenses were charged by Richard Coglon and Robert Knight, directors of our company. Pursuant to a consulting agreement with our company dated July 1, 2003, Richard Coglon receives $5,000 per month for the services he provides to our company. Pursuant to an oral consulting agreement with our company Mr. Knight currently receives $1,250 per month for the services he provides to our company. Pursuant to a consulting agreement with our company dated July 1, 2003, D. Sharpe Management Inc., a company wholly-owned by Donald Sharpe, a director of our company, receives $5,000 per month for consulting services.
 
In October 2002 we converted a note payable to one of our shareholders in the amount of $200,000 plus accrued interest to a convertible debenture in the amount of $222,448 bearing interest at 7% per annum. This convertible
 
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debenture was due on December 31, 2004 but was converted on June 30, 2003 into shares of common stock and share purchase warrants.
 
 
Reports on Form 8-K
 
On July 7, 2003 we filed a Current Report on Form 8-K with the Securities and Exchange Commission announcing an application to list on The American Stock Exchange and the completion of a $2,500,000 private placement.
 
Exhibits Required by Item 601 of Regulation S-B

Exhibit
Number
Description
3.1
Articles of Incorporation (1)
3.2
Bylaws of Adriatic Holdings Ltd. (1)
3.3
Certificate of Amendment to Articles of Incorporation effective November 4, 2002 (2)
3.4
Certificate of Designation for shares of Series A Convertible Preferred Stock, effective December 18, 2003 (9)
10.1
Share Exchange Agreement between Adriatic Holdings Ltd., Heartland Oil and Gas Inc. and the shareholders of Heartland Oil and Gas Inc., dated July 31, 2002 (3)
10.2
Form of Oil and Gas Lease (4)
10.3
Managing Dealers Agreement, dated June 19, 2003, between Heartland Oil and Gas Corp. and C.K. Cooper and Company, Inc.(5)
10.4
Managing Dealers Agreement, dated July 29, 2003 between Heartland Oil and Gas Corp. and C.K. Cooper and Company, Inc. (8)
10.5
Form of Subscription Agreement in connection with private placements on June 24 and June 30, 2003 (5)
10.6
Form of Subscription Agreement in connection with private placement on August 19, 2003 (6)
10.7
Consulting Agreement dated July 1, 2003, between Heartland Oil and Gas Corp. and Donald Sharpe (8)
10.8
Consulting Agreement dated July 1, 2003, between Heartland Oil and Gas Corp. and Richard Coglon (8)
10.9
Letter Agreement between Topeka-Atchison Gas & Illuminating LLC with Heartland Oil and Gas Inc., dated August 25, 2000 (8)
10.10
Form of Oil and Gas Lease with Option (7)
10.11*
Form of Subscription Agreement in connection with the private placement of preferred stock
14.1*
Code of Business Conduct and Ethics
21.1
Heartland Oil and Gas Inc., a company incorporated pursuant to the laws of the State of Nevada
31.2*
Section 302 Certification under Sarbanes-Oxley Act of 2002 for Robert Knight
32.2*
Section 906 Certification under Sarbanes-Oxley Act of 2002 for Richard Coglon

*Filed herewith.

 
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(1)   Incorporated by reference to the company’s Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 23, 2001.

(2)    Incorporated by reference to the company’s Form 10-QSB filed with the Securities and Exchange Commission on November 14, 2002.

(3)   Incorporated by reference to the company’s Form 8-K filed with the Securities and Exchange Commission on October 2, 2002.

(4)   Incorporated by reference to the company’s Form 10-KSB filed with the Securities and Exchange Commission on April 1, 2003.

(5)   Incorporated by reference to the company’s Form 10-QSB filed with the Securities and Exchange Commission on July 28, 2003.

(6)   Incorporated by reference to the company’s Form 8-K filed with the Securities and Exchange Commission on August 21, 2003.

(7)   Incorporated by reference to the company’s Form 10-KSB/A filed with the Securities and Exchange Commission on October 22, 2003.

(8)   Incorporated by reference to the company’s Form SB-2 Registration Statement filed with the Securities and Exchange Commission on August 29, 2003, as amended.

(9)   Incorporated by reference to the company’s Form SB-2 Registration Statement filed with the Securities and Exchange Commission on February 17, 2004.

Item 14. Principal Accountant Fees and Services

Audit Fees

Our board of directors had appointed Spicer Jeffries LLP as independent auditors to audit our financial statements for the current fiscal year. The aggregate fees billed by Spicer Jeffries LLP for professional services rendered for the audit of our annual financial statements included in this Annual Report on Form 10-KSB for the fiscal years ended December 31, 2003 and December 31, 2002 were $15,000 and $12,000, respectively.

 
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Audit Related Fees

For the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate fees billed for assurance and related services by Spicer Jeffries LLP relating to our quarterly financial statements which are not reported under the caption "Audit Fees" above, were $8,513 and $5,700 respectively.

Tax Fees
 
For the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate fees billed for tax compliance, by Spicer Jeffries LLP were $1,850.
 
All Other Fees
 
For the fiscal years ended December 31, 2003 and December 31, 2002, the aggregate fees billed by Spicer Jeffries LLP for other non-audit professional services, other than those services listed above, totaled $3,750 and $1,400, respectively. Substantially all the 2003 fees related to the review of registration statements submitted to the Securities and Exchange Commission, while substantially all of the 2002 fees related to assistance in responding to queries on our financial statements by the Securities and Exchange Commission.
 
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before Spicer Jeffries LLP is engaged by us or our subsidiaries to render any auditing or permitted non-audit related service, the engagement be:

·approved by our audit committee; or

·entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

The audit committee pre-approves all services provided by our independent auditors. The pre-approval process has just been implemented in response to the new rules. Therefore, the audit committee does not have records of what percentage of the above fees were pre-approved. However, all of the above services and fees were reviewed and approved by the audit committee either before or after the respective services were rendered.

The audit committee has considered the nature and amount of the fees billed by Spicer Jeffries LLP, and believes that the provision of the services for activities unrelated to the audit is compatible with maintaining Spicer Jeffries LLP independence.
 
 
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
HEARTLAND OIL AND GAS CORP.
 
/s/Richard Coglon
_______________________________________________
By: Richard Coglon, President and Director
(Principal Executive Officer)
March 29, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
/s/Richard Coglon
_________________________________________
Richard Coglon, President and Director
(Principal Executive Officer)
March 29, 2004

/s/Robert Knight
_______________________________________________
Robert Knight, Secretary, Treasurer and Director
(Principal Financial Officer and Principal Accounting Officer)
March 29, 2004
/s/Donald Sharpe
_________________________________________
Donald Sharpe, Director
March 29, 2004
 
/s/Randall Buchamer
_________________________________________
Randall Buchamer, Director
Mach 29, 2004
 
/s/Michael Bodino
_______________________________________________
Michael Bodino, Director
March 29, 2004

 
 
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CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Heartland Oil and Gas Corp.

We consent to the use of our audit report dated March 22, 2004 on the consolidated balance sheets of Heartland Oil and Gas Corp. as of December 31, 2003 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended, for incorporation by reference in Heartland Oil and Gas Corp.'s Registration Statements on Form S-8, which report appears in the December 31, 2003 annual report on Form 10-KSB of Heartland Oil and Gas Corp.

/s/Staley Okada and Partners

Chartered Accountants
Vancouver, Canada
March 29, 2004
 
 
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Richard Coglon, President of Heartland Oil and Gas Corp., certify that:
1.   I have reviewed this annual report on Form 10-KSB of Heartland Oil and Gas Corp.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4.   The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)   Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5.   The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: March 29, 2004

/s/Richard Coglon
 
Richard Coglon, President and Chief Executive Officer
(Principal Executive Officer)
 
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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert Knight, Chief Financial Officer of Heartland Oil and Gas Corp., certify that:
1.   I have reviewed this annual report on Form 10-KSB of Heartland Oil and Gas Corp.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4.   The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)   Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5.   The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.

Date: March 29, 2004

/s/Robert Knight
Robert Knight, Chief Financial Officer
(Principal Financial Officer)
 
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


The undersigned, Richard Coglon, President and Chief Executive Officer of Heartland Oil and Gas Corp., and Robert Knight, Chief Financial Officer of Heartland Oil and Gas Corp., each hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   the Annual Report on Form 10-KSB of Heartland Oil and Gas Corp. for the year ended December 31, 2003 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Heartland Oil and Gas Corp.

Dated: March 29, 2004
 
 
 
 
 
 
 
 
 
 
  /s/Richard Coglon
 
 
 
Richard Coglon
 
 
President and Chief Executive Officer,
 
 
Heartland Oil and Gas Corp.
 
 
 
 
 
 
 
 
  /s/Robert Knight
 
 
 
Robert Knight
 
 
Chief Financial Officer,
 
 
Heartland Oil and Gas Corp.


A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Heartland Oil and Gas Corp. and will be retained by Heartland Oil and Gas Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
 
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