10KSB 1 doc1.txt 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 March 31, 2002 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from____________to_____________. Commission File Number 0-9997 UNITED HERITAGE CORPORATION (Exact name of registrant as specified in its charter) UTAH 87-0372864 --------------------------------------------------------------------- (State of Incorporation) (IRS Employer Identification No.) 2 North Caddo Street, P.O. Box 1956, Cleburne, Texas 76033-1956 ---------------------------------------- (Address of principal executive offices) (817) 641-3681 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class On which registered ------------------------------ ------------------------- Common Stock, $0.001 par value Boston Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X State issuer's revenues for the most recent fiscal year: $1,037,141 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 specific date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) $2,220,528 as of June 18, 2002. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of June 18, 2002, 10,264,059 shares of Common Stock were outstanding. CONTENTS
Page Forward-Looking Statements i Glossary of Oil and Gas Terms ii PART 1 Item 1 Business 1 Item 2 Properties 8 Item 3 Legal Proceedings 9 Item 4 Submission of matters to a Vote of Security Holders 9 Part II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6 Selected Financial Data 10 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8 Financial Statements and Supplementary Data 14 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 Part III Item 10 Directors and Executive Officers of the Registrant 14 Item 11 Executive Compensation 15 Item 12 Security Ownership of Certain Beneficial Owners and Management 16 Item 13 Certain Relationships and Related Transactions 17 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 18 Consolidated Financial Statements F-1
i FORWARD-LOOKING STATEMENTS This report by United Heritage Corporation (the "Company") contains forward-looking statements. These are statements regarding financial and operating performance and results and other statements that are not historical facts. The words "expect," "project," "estimate," "believe," "anticipate," "intend," "plan," "forecast," and similar expressions are intended to identify forward-looking statements. Certain important risks could cause results to differ materially than those anticipated by some of the forward-looking statements. Some, but not all, of the important risks that could cause actual results to differ materially from those suggested by the forward-looking statements include, among other things: - Events that deprive the Company of the services of its Chairman of the Board, Chief Executive Officer and largest shareholder, Walter G. Mize, or that deprive the Company of certain benefits provided by Mr. Mize and his affiliates; - Shifts in consumer buying habits; - Changes in prices or the available supply of suitable meat for use in the Company's food products; - The occurrence of cash flow shortages that the Company cannot fund through advances by its largest shareholder or other sources; - The inability of the Company to find an acceptable transaction or association which will allow it to develop or dispose of portions of its business; - Reductions in purchases by the Company's principal customer of food products; - Adverse changes in the prices for oil and gas; - Inaccuracy in the estimates of the Company's oil and gas reserves; - Ineffectiveness of the recovery methods that the Company plans to use in its oil and gas operations; - Other uncertainties, all of which are difficult to predict and many of which are beyond the control of the Company. The Company does not intend to update forward-looking statements. -i- GLOSSARY OF OIL AND GAS TERMS A-S-P Alkaline-Surfactant-Polymer method of recovery BBL Barrels BOE Barrels of Oil Equivalent BOPD Barrels of Oil per Day MCF Thousand Cubic Feet MCFGPD Thousand Cubic Feet of Gas Per Day MMCF Million Cubic Feet Net The sum of the fractional working interests owned by the Company in gross acres. Gross The number of acres in which the Company owns a working interest. Pay A formation capable of producing oil or gas. PSI Pounds per square inch ii PART I As used herein, reference to the "Company," "management," "we" and "our" refer to United Heritage Corporation. ITEM 1. BUSINESS GENERAL United Heritage Corporation is a Utah corporation that was formed in 1981. The Company operates its businesses through its wholly owned subsidiaries, National Heritage Sales Corporation ("National"), UHC Petroleum Corporation ("Petroleum"), UHC Petroleum Services Corporation ("Services"), and UHC New Mexico Corporation ("New Mexico") (collectively, the "Subsidiaries") DESCRIPTION OF BUSINESS The Subsidiaries conduct business in two segments. National supplies meat and poultry products to retail food stores for sale to consumers. Petroleum, New Mexico and Services are engaged in activities related to the oil and gas industry. Petroleum is the holder of oil and gas interests in South Texas that produce from the Val Verde Basin. New Mexico holds properties in the southeastern New Mexico portion of the Permian Basin. Services acts as the field operator for the oil and gas properties located in Texas. For convenience, a glossary of some of the terms and acronyms used in the petroleum industry appears on page ii. PRODUCTS AND OPERATION ------------------------ FOOD PRODUCTS. Since June 2000, National has been marketing a line of premium meat and poultry products under the brand Heritage Lifestyle (TM) Products. These products were developed by National in response to trends it believes are occurring in the food industry, namely, that busy consumers want pre-seasoned, pre-packaged, ready to cook food products and that retail food stores want products that are case ready and require less in-store labor. Currently, the Heritage Lifestyle products are sold in California, Nevada, Texas, Oklahoma, Louisiana, Arizona and Utah. Heritage Lifestyle Products include the following prepackaged, fully seasoned products that are sold from the self-service meat counter in retail food stores: Lite Beef - 50% Less Fat & 1/3 Fewer Calories. National believes that consumers are demanding more healthful food products as they learn more about the importance of diet in a healthy lifestyle. For example, the U.S. Surgeon General has recommended that consumers lower the percentage of calories from fat in their diets and the U.S. Department of Agriculture recommends that Americans eat at least two to three servings of animal or plant protein per day. National believes that Heritage Lifestyle Lite Beef offers an attractive alternative to those individuals who enjoy eating beef, but want less fat, fewer calories, quicker cooking times and no compromise in flavor. The beef is tested for fat and calories under USDA guidelines. In order for it to be labeled Lite Beef, the product must be at least 50% less fat and one-third fewer calories than typical USDA graded Choice beef. UDSA Choice Beef - Heritage Lifestyle Choice Beef is marketed toward the discriminating beef connoisseur. The beef is hand selected by a representative paid by National who looks for superior quality Choice 1 meats. Grading of meat (Prime, Choice and Select) is done by the USDA. Most of the graded beef sold in supermarkets is USDA Choice or USDA Select, which is lower in fat content and calories and less expensive then USDA Prime. Chicken - Heritage Lifestyle Chicken is marketed as a gourmet, low fat, high flavor alternative to unflavored chicken pieces. Two boneless, skinless breast selections are pre-seasoned and sold under the names Santa Fe Brand Grill, for those pieces seasoned in the southwestern style and Four Seasons, for herbal seasoned pieces. National also markets thigh meat under the name China Wok Stir Fry that, as the name suggests, is flavored with an Asian style marinade. Pork - Pork products are marketed under the names Heritage Lifestyle Pork, Chop House Special Pork, Blue Ribbon Pork Roast and Hunan Brand Pork Stir Fry. These products are of similar quality to the beef and chicken products. During the year ended March 31, 2001, National introduced eight new items that are in the "family pack" or the "value pack" category. These items are attractively priced and include enough of National's beef, chicken or pork products to feed a group or a family of six to 10 people. National employs quality control representatives to purchase meats that comply with the standards it sets. The meat is purchased from independent slaughterhouses and delivered to independent processors that marinate, package and freeze the food products in accordance with National's requirements. National currently uses the services of two processors, however, there are a number of processors that could provide these services if the need arose. National seeks to limit its investment in inventory by matching production to customer orders. Accordingly, National does not have a significant backlog of orders. During the fiscal year ended March 31, 2002 Mark Church was appointed as National's President and Chief Executive Officer. Mr. Church has extensive experience in the retail food store industry. National's products are sold primarily by independent sales representatives. National utilizes newspaper advertising and point-of-sale information material in connection with retail sales in grocery stores. National uses the services of food brokers to place its food products in those geographic areas that are far enough from National's operations to make use of a broker cost-effective. During the fiscal year ended March 31, 2002, Albertson's, Inc. accounted for 94.67% of the Company's sales of its food products. National owns the trademark consisting of the words and logo "Heritage Lifestyle Lite Beef", which is registered with the United States Patent and Trademark Office. While National has not registered other marks that it uses, it believes that it has established brand identity for its food products by using the mark "Heritage Lifestyle". The transition from the sale of fresh meat products to pre-packaged, pre-seasoned marinated products required National to invest in new equipment, to train personnel, to develop new packaging and labeling and to establish a customer base for the products. As a result, sales for the year ending March 31, 2002 declined substantially from sales for the year ending March 31, 2001. Meat and poultry products are available from several suppliers, both locally and nationally. Some of the larger meat suppliers are Excel, IBP, 2 Daniels Meats and Express Beef. If National were to lose a supplier, it believes that other suppliers with comparable products will be available from which to purchase its products. National has not invested in research and development activities during the past two fiscal years. National does not incur costs for compliance with environmental laws. National has two employees, both of whom are shared with the Company. National's offices are located in the Company's headquarters at 2 North Caddo Street, Cleburne, Texas. The facilities are provided to National on a rent-free basis. The facilities are in good condition and are adequate for the business conducted by National. The Company believes that the food products business and the oil and gas business are not compatible, and that this incompatibility results in under-valuation of both companies by the investing public. The Company's Board of Directors has authorized its President to conduct a study of the advantages and disadvantages associated with spinning-off National or finding a buyer for it. The Company is continuing to examine these alternatives, and has not yet made a final decision as to whether or not it will keep National as a subsidiary. OIL AND GAS. Petroleum, New Mexico and Services conduct oil and gas operations. The following table shows the total net oil and gas production from Texas and New Mexico for the fiscal years ended March 31, 2002 ("Fiscal 2002"), March 31, 2001 ("Fiscal 2001") and March 31, 2000 ("Fiscal 2000").
AREA FISCAL 2002 FISCAL 2001 FISCAL 2000 -------- ----------- ----------- ----------- Texas Oil 2,841 BBL 3,739 BBL 5,723 BBL Gas - - - New Mexico Oil 18,773 BBL - - Gas 221,573 MCF - -
__________________________ (1) Oil production is shown in barrels (BBL), and natural gas production is shown in thousand cubic feet (MCF). The following table illustrates the average sales price and the average production (lifting) costs per barrel and per thousand cubic feet for each of the three most recent fiscal years.
Fiscal 2002 Fiscal 2001 Fiscal 2000 --------------- ------------ ------------ Items (1) Oil Gas Oil Gas Oil Gas ----------------------------------- Texas Avg. Sales Price/Unit $ 13.85 - $21.61 - $14.01 - Avg. Prod. Cost/Unit $ 14.01 - $15.96 - $11.09 - New Mexico Avg. Sales Price/Unit $ 17.96 $2.94 Avg. Prod. Cost/Unit2 $6.33 -
_________________________ 3 (1) Averages shown are computed per BBL of oil and per MCF of natural gas. (2) Average production (lifting) costs are represented in BOE for New Mexico production. The following table illustrates the results of the drilling activity during each of the three most recent fiscal years:
FISCAL 2002 FISCAL 2001 FISCAL 2000 -------------------- -------------------- -------------------- NET DRY NET DRY NET DRY WELLS DRILLED PRODUCTIVE HOLES PRODUCTIVE HOLES PRODUCTIVE HOLES ------------------------- -------------------- New Mexico Exploratory - - 5 - - - Development - - - - - - Texas Exploratory - - - - - - Development 4 - - - 7 - TOTAL Exploratory - - 5 - - - Development 4 - - - 7 -
OIL AND GAS RESERVES. The following table illustrates estimates of the oil and gas reserves at March 31, 2002:
Oil (Bbls) Gas (Mcf) PROVED RESERVES March 31, 1999 - - Extensions, additions and discoveries 22,471,358 - Production (5,723) - ---------------- ---------- March 31, 2000 22,465,635 - Extensions, additions and discoveries 4,151,429 - Production (3,739) - ---------------- ---------- March 31, 2001 26,613,325 - Extensions, additions and discoveries 4,846,677 5,023,955 Revisions of previous estimates (3,782,371) Production (21,614) (221,573) ---------------- ---------- March 31, 2002 27,656,017 4,802,382 ================ ========== PROVED DEVELOPED RESERVES March 31, 2000 912,666 - March 31, 2001 1,591,744 - March 31, 2002 6,401,169 4,802,382
Guidelines established by the Securities and Exchange Commission were utilized to prepare these reserve estimates. Estimates of oil and gas reserves and their values require numerous engineering assumptions as to the productive capacity and production rates of existing geological formations and require the use of certain Securities and Exchange Commission guidelines as to assumptions regarding costs to be incurred in developing and producing reserves and prices to be realized from the sale of future production. Accordingly, estimates of reserves and their values are inherently imprecise and are subject to constant revision and changes. These amounts should not be construed as representing the actual quantities of future production or cash flows to be realized from the Company's oil and gas properties or the fair 4 market value of these properties. Certain additional unaudited financial information regarding the Company's reserves, including the estimated present value of future net cash flows, is set forth in Note 14 of the Notes to Consolidated Financial Statements included at Item 8 of this Form 10-K. The Company has no oil and gas reserves or production subject to long-term supply or similar agreements. Estimates of the Company's total proved oil and gas reserves have not been filed with or included in reports to any federal authority or agency other than the Securities and Exchange Commission. The following table illustrates the gross and net productive oil and gas wells in which Petroleum and New Mexico had an interest at March 31, 2002.
Productive Wells Gross Net ----- --- Area Oil Gas Oil Gas ---- --- --- --- --- New Mexico 278 0 278 0 Texas 132 0 132 0 ---- --- --- --- --- TOTAL 410 0 410 0 ==== === === === ===
The following table illustrates the gross and net acres of developed and undeveloped gas and oil leases held by Petroleum and New Mexico at March 31, 2002.
Developed Acres Undeveloped Acres Area Gross Net Gross Net ----- ----- ------ ------ --- New Mexico 6,260 6,260 13,740 13,740 Texas 142 142 10,360 10,360 TOTAL 6,402 6,402 24,100 24,100
TEXAS. Petroleum acquired its South Texas properties in a series of transactions completed in February 1997. The properties are located in the Val Verde Basin and consist of approximately 10,500 gross acres. The field has 132 gross and net productive oil wells on 142 gross and net developed acres. The Company is currently producing from wells in this field using Moyno pumps and the Klaeger Oil Retrieval System, a mobile swabbing unit. "Swabbing" is a process using a rubber and wire tool that contracts going down the well and expands as it is pulled upward by the swab line and lifts fluid out of the well casing or tubing. A swab, when pulled rapidly, exerts a suction that draws oil into the well bore. Petroleum is seeking an "industry partner" to drill the "Deep-Gas Prospect" (8,500 to 10,200) in the south Texas field or a buyer to purchase all or part of the deep rights owned by Petroleum. Also, Petroleum is seeking development funds or a partner for the shallow Glen Rose development. Petroleum is considering selling all or part of the Glen Rose development. On April 20, 2002, Petroleum received an engineering study from TEC Engineering Group of its south Texas oil field, which showed proved reserves of 22,827,688 net barrels. This study is based on a study prepared by J.R. Butler & Company that has been accepted by TEC Engineering Group and other reservoir engineers. The study indicated in excess of 168 million barrels of oil remaining in place. Note 14 to the financial statements estimates a value of these proven reserves net of future production costs, future development cost, future income tax expense, and less a 10% annual discount for estimated timing of cash flows of $90,437,000. 5 NEW MEXICO. New Mexico acquired its oil and gas properties in June 1999. The properties are located in the Permian Basin of New Mexico and consist of approximately 20,000 gross acres. These properties have 278 gross and net productive oil wells on 6,260 gross and net developed acres. Undeveloped gross and net acres are 13,740 based on 20 acre well spacing. By itself, the Cato San Andres Unit has 202 gross and net productive oil wells. Expenditures were used to repair roads, batteries, disposal systems, and wells in preparation for anticipated production. New Mexico owns four casing swabbing units, which are being utilized in the existing fields. Monthly oil and gas production from New Mexico as of March 31, 2002 was 14.6 MMCF of gas and 1,138 BBL of oil. In October 2001, New Mexico received an engineering study from Pecos Petroleum Engineering, Inc. of Roswell, New Mexico. This study indicated 91,573,828 barrels remaining in place in the Cato San Andres unit. When this amount is added to the barrels remaining in place in the Tom Tom and Tomahawk fields, the total amount of barrels remaining in place is 107,134,252. In 1988 Robin B. LeBleu, petroleum engineer, prepared an engineering report for Kelt Energy, Inc., the previous operator of the Cato San Andres Unit. New Mexico has received this report. The report was prepared on the results of a pilot water flood in the northeast portion of the Cato San Andres Unit, and was conducted in an effort to provide estimates of the amount of recoverable oil within the unit utilizing the secondary recovery method of water flooding. Mr. LeBleu estimated the total remaining recoverable oil from current production methods (primary) and water flooding (secondary) to be 22,101,000 net barrels. No substantial production has occurred in the field since the report was prepared, but the report is considered relevant. New Mexico is seeking a current report estimating "proved reserves" to update the report prepared by Mr. LeBleu. During the year ended March 31, 2002, New Mexico, through its in-house personnel, estimated proved reserves of 4,828,329 net barrels. Management intends to test the producing wells in New Mexico. New Mexico also intends to expand its swabbing area on a well-by-well basis. New Mexico does not intend to drill any additional "infill" wells in the immediate future or to initiate any extensive re-work or re-completion programs. This may allow the Company to accumulate cash and pay down debt from existing production. New Mexico has employed the services of CH4 Petroleum Consultants, L.L.C., which is comprised of a petroleum geologist, a reservoir petroleum engineer and a geophysicist. These individuals have analyzed all of the available data on the Cato San Andres unit and, on New Mexico's behalf, are seeking ways to develop this property including pairing with industry partners, raising development funds and exploring CO2 flood potential. New Mexico has also authorized CH4 Petroleum Consultants, L.L.C. to find buyers for all or part of the property. No assurance can be made that CH4 Petroleum Consultants, L.L.C. will be successful in finding ways to develop or sell the property. SERVICES. Services was formed to act as the operating company for Petroleum's South Texas leases. Its operations are not expected to contribute significantly to the Company's consolidated earnings. Purchasers of crude oil are abundant and neither Petroleum nor New Mexico is dependent on any one purchaser, although both have been selling crude oil to Plains Marketing L.P. since production began. New Mexico also produces natural gas, which is sold to Versado Gas Processors, L.L.C., a division of Dynegy. New Mexico is dependent on this purchaser because Dynegy owns the pipeline and the gas compressor. 6 Neither Petroleum nor New Mexico is a party to any licenses, franchises, concessions or royalty agreements. COMPETITION ----------- FOOD PRODUCTS. The food products industry is dominated by large, well-established companies that have large consumer recognition, large sales forces and extensive marketing budgets. National seeks to compete with these companies by providing quality specialty products. National is at a competitive disadvantage in the food products industry, not only with regard to the price of its products in comparison to other meat and poultry products, but because it has limited funds to devote to advertising. At this time, National does not represent a significant competitive presence in the industry. OIL AND GAS. The oil and gas industry is highly competitive and has few barriers to entry. The Company competes with other oil and gas companies and investors in searching for, and obtaining, future desirable prospects, in securing contracts with third parties for the development of oil and gas properties, in securing contracts for the purchase or rental of drilling rigs and other equipment necessary for drilling operations, and in purchasing equipment necessary for the completion of wells, as well as in the marketing of any oil and gas which may be discovered. Many of our competitors are larger than us and have substantially greater access to capital and technical resources than we do, giving them a significant competitive advantage. REGULATION ---------- FOOD PRODUCTS. National's food products are subject to various laws and regulations administered by the USDA and various other state and local governmental agencies relating to the quality of food products, sanitation and other matters. We believe that National and the independent slaughterhouses and processors used by it comply with these laws and regulations in all material respects. OIL AND GAS. Oil and gas operations are subject to various types of regulation by state and federal agencies. Legislation affecting the oil and gas industry is under constant review for amendment or expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. The regulatory burden on the oil and gas industry increases the cost of doing business and, consequently, affects the profitability of New Mexico and Petroleum. Gas Price Controls. Prior to January 1993, certain natural gas sales were subject to regulation by the Federal Energy Regulatory Commission under the Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 ("NGPA"). The NGPA prescribed maximum lawful prices for natural gas sales effective December 1, 1978. Effective January 1, 1993, natural gas prices were completely deregulated, and any sales of natural gas by Petroleum or New Mexico will be made at market prices. Oil Price Controls. Sales of crude oil, condensate and gas liquids are not regulated and are made at market prices. State Regulation of Oil and Gas Production. States in which Petroleum and New Mexico conduct their oil and gas activities regulate the production and sale of natural gas and crude oil, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas resources. In addition, most states 7 regulate the rate of production and may establish maximum daily production allowables for wells on a market demand or conservation basis. Environmental Regulations. The activities of Petroleum and New Mexico are subject to federal and state laws and regulations governing environmental quality and pollution control. These regulations have a material effect on the operations of Petroleum and New Mexico, but the cost of such compliance has not been material to date. However, we believe that the oil and gas industry may experience increasing liabilities and risks under the Comprehensive Environmental Response, Compensation and Liability Act, as well as other federal, state and local environmental laws, as a result of increased enforcement of environmental laws by various regulatory agencies. As an "owner" or "operator" of property where hazardous materials may exist or be present, Petroleum and New Mexico, like all others in the petroleum industry, could be liable for fines and/or "clean-up" costs, regardless of whether the release of a hazardous substance was due to their conduct. EMPLOYEES The Company and its Subsidiaries share the use of nine full time employees. FINANCIAL INFORMATION BY SEGMENT Revenues and net income by segment are presented below for the last three fiscal years and identifiable assets are shown by segment at the end of each of the three fiscal years:
Fiscal 2002 Fiscal 2001 Fiscal 2000 ------------- ------------- ------------- Revenue: Food products $ 533,768 $ 1,917,192 $ 3,164,627 Corporate (Parent) 162 8,886 9,012 Oil and Gas 503,373 82,900 87,421 Net Income (Loss): Food Products (577,562) (247,721) 239,650 Corporate (Parent) (712,718) (607,845) (303,253) Oil and Gas (84,033) 241 16,045 Identifiable Assets (as of year end): Food Products 499,061 531,666 138,265 Corporate (Parent) 70,745 92,656 154,061 Oil and Gas 30,662,757 30,445,583 27,802,345
ITEM 2. PROPERTIES The Company operates out of offices provided by Walter G. Mize, Chairman of the Board, President and Chief Executive Officer of the Company. The facilities are located at 2 North Caddo Street, Cleburne, Texas. Mr. Mize provides the office space and equipment without charge to us. These facilities are in good condition and are adequate for the business we conduct. Petroleum leases an oil field in Edwards County, Texas consisting of approximately 10,500 acres (gross and net) producing from the Val Verde Basin. New Mexico's fields consist of approximately 20,000 leasehold acres (gross and net) in southeastern New Mexico in the Permian Basin field. 8 ITEM 3. LEGAL PROCEEDINGS The Company had no material litigation pending at March 31, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the Company was held on March 25, 2002. The stockholders voted on the following matters: (1) electing the directors of the Company to serve for the ensuing year and (2) approving the appointment of Weaver and Tidwell, L.L.P., as the independent auditors of the Company for the fiscal year ending March 31, 2002. The results of the voting for the election of directors were as follows: Name of nominee For Withheld --------------- --------- -------- Walter G. Mize 9,754,927 36,121 Harold L. Gilliam 9,734,523 56,525 Joe Martin 9,734,326 56,722 C. Dean Boyd 9,734,141 56,907 Theresa D. Turner 9,734,214 56,834 Mark Church 9,738,507 52,541 The results of the voting for approving the appointment of Weaver & Tidwell, L.L.P., or such other firm appointed by the Board of Directors prior to the meeting, as the independent auditors of the Company for the fiscal year ending March 31, 2002 were as follows: For Against Abstain --------- ------- ------- 9,741,441 46,137 3,470 --------- ------- ------- All proposals were approved by the vote of the shareholders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS MARKET INFORMATION The principal market for the Company's common stock is the over-the-counter market on the National Association of Securities Dealers Automated quotation system ("NASDAQ"), trading under the symbol "UHCP." The Company's common stock is also listed on the Boston Stock Exchange ("BSE"), trading under the symbol "UHC." The following table sets forth, for the periods indicated, the high and low bid price per share of the Company's common stock as reported on NASDAQ. The NASDAQ quotations reflect prices quoted by the market makers of the Company's common stock, without retail markup, markdown, or commissions, and may not necessarily represent actual transactions. 9
HIGH LOW ---- --- FISCAL YEAR ENDED MARCH 31, 2002 --------------------------------- First Quarter $ 1.80 $1.02 Second Quarter 1.16 .55 Third Quarter 1.50 .88 Fourth Quarter 1.53 .95 FISCAL YEAR ENDED MARCH 31, 2001 ---------------------------------- First Quarter $ 6.88 $2.75 Second Quarter 3.06 2.25 Third Quarter 2.38 1.00 Fourth Quarter 2.16 1.13
SHAREHOLDERS As of June 18, 2002, there were approximately 2,292 record holders of the Company's common stock. DIVIDENDS The Company has never declared any dividends and does not anticipate declaring a cash dividend in the foreseeable future. Pursuant to Section 16-10a-640 of the Utah Business Corporation Act, the Company may not pay dividends if, after giving effect to the distribution, (a) the Company would not be able to pay its debts as they become due in the usual course of business, or (b) the Company's total assets would be less than the sum of its total liabilities plus, unless the articles of incorporation permit otherwise, the amount that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. RECENT UNREGISTERED SALES OF SECURITIES In December 2001 the Company began a private offering of its common stock to accredited investors. The offering was made through the Company's director, President and Chief Executive Officer, Walter G. Mize. We offered the common stock at a price of $1 per share. To date, we sold a total of 585,813 shares of common stock in the offering from the 1,750,000 shares we offered. The offering will continue until all the shares are sold or until the Company terminates the offering. ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ended March 31, 2002, is derived from the consolidated financial statements of the Company. The data is qualified in its entirety and should be read in conjunction with the consolidated financial statements and related notes contained elsewhere herein. The Company had a one-for-ten reverse stock split on October 1, 1999. Common stock shares and per-share amounts have been retroactively restated to reflect the reverse stock split. 10
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 03/31/02 03/31/01 03/31/00 03/31/99 03/31/98 INCOME DATA: Revenues $ 1,037,141 $ 2,000,092 $ 3,252,048 $ 4,372,146 $ 2,933,610 Income (Loss) $(1,374,313) $ (855,325) $ (47,558) $ 183,457 $ (387,230) Income (Loss) Per Share $ (.13) $ (.08) $ (.00) $ .02 $ (.04) Weighted Average Number of Shares 10,217,541 10,166,739 9,905,048 9,743,118 9,652,442 BALANCE SHEET DATA: Working Capital (deficit) $(2,222,644) $(2,052,859) $ 165,840 $ 468,107 $ 1,535,155 Total Assets $31,232,563 $31,069,905 $28,094,671 $28,748,105 $26,435,500 Current Liabilities $ 2,733,977 $ 2,704,062 $ 150,457 $ 194,408 $ 67,276 Long-Term Debt $ 2,000,573 $ 1,057,500 $ - $ - $ - Shareholders' Equity $26,498,013 $27,308,343 $27,944,214 $26,553,697 $26,368,224
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Our revenues for Fiscal 2002 were $1,037,141, compared to revenues of $2,000,092 for Fiscal 2001 and $3,252,048 for Fiscal 2000. The decreases in sales revenue for Fiscal 2002 and Fiscal 2001 were due primarily to decreased sales of food products. Total operating expenses of $2,148,865 reflect a decrease in Fiscal 2002 as compared to $2,810,501 in Fiscal 2001 due to the decreased volume of food products sales. The decrease of total operating expenses in Fiscal 2001 from $3,308,618 in Fiscal 2000 was also caused by decreased food products sales. The net loss for Fiscal 2002 was $1,374,313, compared to the Fiscal 2001 loss of $855,325 and the Fiscal 2000 loss of $47,558. The Fiscal 2002 decline was the result of a decreased volume of food products sales and increased oil and gas operating costs and related depletion expense. The Fiscal 2001 loss compared to the Fiscal 2000 loss was due primarily to a decease in food products sales and increased selling and general and administrative expenses. FOOD PRODUCTS SEGMENT Revenues generated by National (the "Food Products Segment") were $533,768 for Fiscal 2002, representing 51.4% of total Company revenue and reflecting a decrease from Fiscal 2001 amounts. Revenue for Fiscal 2002 reflects a volume decline as compared to Fiscal 2001. Food products revenues for Fiscal 2001 of $1,917,192 showed a decrease from Fiscal 2000 revenues of $3,164,627 which was also due to decreased sales volume. In April 2001, National employed Mark Church as President of National's operations. Mr. Church's employment was part of an initiative by the Company to revitalize National's existing customers and to obtain new customers. The cost of processed food products was greater than revenues for Fiscal 2002. This was caused primarily by the low volume of sales and an inventory writedown of $65,000. For Fiscal 2001 and Fiscal 2000, these costs were 84% of revenues. 11 Selling expenses for Fiscal 2002 of $280,108 decreased from Fiscal 2001 due to decreased sales volume. Selling expenses for Fiscal 2001, of $334,842 were higher than Fiscal 2000 of $111,284 due to introduction of new products. The Food Products Segment reported a loss of $577,562 for Fiscal 2002, as compared to the Fiscal 2001 loss of $247,721. Fiscal 2000 had a profit of $239,650 from this segment. The profit changes from year to year are directly affected by the changes in meat volume during each fiscal period and the increased marketing and promotion costs of new products described above in Item 1. OIL AND GAS SEGMENT Oil and gas sales during Fiscal 2002 were $503,373 as compared to sales of $82,900 during Fiscal 2001 and $87,421 for Fiscal 2000. The 2002 increase is due to an increased volume of production and sales. Production and operating expense were $421,314 for Fiscal 2002, which reflects an increase from Fiscal 2001 operating expenses of $72,647. Depletion expense for Fiscal 2002 was $53,446 compared to $9,962 for Fiscal 2001 due to an increase in depletable assets in Fiscal 2002, primarily related to the New Mexico fields. The oil and gas segment reported a loss of $84,033 for Fiscal 2002 as compared to a profit of $241 for Fiscal 2001. The loss for Fiscal 2002 was due primarily to increased production costs and administrative overhead costs. IMPACT OF INFLATION Meat sales prices are based on a multiple of current meat costs (raw material) and are adjusted weekly with the meat industry; therefore, the cost of raw materials (meat) has little impact on gross profit (percentage). Meat prices can have a significant impact on sales and, consequently, net profits. Oil and gas prices may or may not change with inflation pressures due to other influencing factors, such as OPEC and domestic exploration policies. CORPORATE General and administrative expenses of $793,012 for Fiscal 2002 were higher as compared to $758,518 for Fiscal 2001, and $444,630 for Fiscal 2000, as a result of increased corporate costs and professional fees. Interest income was $162 in Fiscal 2002, as compared to $8,886 for 2001 and $9,012 in Fiscal 2000. The decrease reflected lower levels of cash and cash equivalents. Interest expense increased significantly to $262,751 in Fiscal 2002, as compared to $53,802 in Fiscal 2001. This was due to increased borrowings for operating purposes. LIQUIDITY AND CAPITAL RESOURCES 12 LIQUIDITY Current assets of the Company decreased from $651,203 at March 31, 2001, to $511,333 at March 31, 2002, and current liabilities increased from $2,704,062 at March 31, 2001, to $2,733,977 at March 31, 2002. The working capital of the Company was a deficit of $2,222,644 at March 31, 2002, an increase as compared to the 2001 deficit of $2,052,859, primarily from decreased receivables from customers for 2002. Equity capital decreased by $810,330 during Fiscal 2002. Stockholders' equity was $26,498,013 at March 31, 2002, as compared to $27,308,343 at March 31, 2001. The decrease was primarily due to the Fiscal 2002 loss of $1,374,313 offset by $373,333 of capital raised by the sale of common stock. The total assets of the Company were $31,232,563 at March 31, 2002, as compared to $31,069,905 for the previous year end. The small increase in total assets results primarily from the increased investment in oil and gas activities. CASH FLOW The Company's operations used $913,422 of cash flow in Fiscal 2002, as compared to $494,117 used in Fiscal 2001. The decrease in cash flow in both Fiscal 2002 and 2001 is primarily the result of lower overall sales volume and increased general and administrative expenses. Cash of $278,882, $2,679,804 and $509,186 was used by investing activities during Fiscal 2002, 2001 and 2000, respectively, primarily related to capital expenditures for the oil and gas properties in each year. In Fiscal 2002 cash of $818,971 was provided by borrowing and $373,333 was provided by a sale of common stock. Cash of $3,057,500 was provided by financing activities in Fiscal 2001 from proceeds of loans. $186,216 was provided by financing activities in Fiscal 2000 from the issuance of common stock in connection with exercise of stock options. We foresee that continued development of New Mexico's oil and gas properties will require additional capital expenditures. Also, the Company continues to emphasize National's operations. We expect that cash flow from operations will not fund all of the expenses associated with operations. Although we believe that our lines of credit will be available to cover the shortfall, the Company is continuing to seek other alternatives, such as strategic partnering or a sale of assets, to assist with the funding of the Subsidiaries' operations. CAPITAL RESOURCES In March 2000, we negotiated a $2.0 million revolving credit facility from First Savings Bank of Arlington, Texas, and the first advance was drawn in April 2000. At the end of Fiscal 2002, this facility was fully drawn. The credit facility had an original term from April 25, 2000 to April 25, 2001 and was extended until April 25, 2002, unless sooner demanded. The Company is currently in discussions with the lender regarding further extension of the due date of this debt. Interest accrues at 1.0% above the prime interest rate reported in The Wall Street Journal. The Company's largest shareholder has provided collateral for this loan. In early 2001, we received a revolving credit line, bearing interest at 10% per annum from Almac Financial Corporation, a corporation owned by our largest shareholder, Walter G. Mize. Subsequently, the line of credit was increased from $1.0 million to $3.0 million, and the line was secured by substantially all of the assets of the Company and its Subsidiaries. As of March 31, 2002 we had drawn $1,876,470 under the line of credit. This line of credit matures on April 15, 2004. 13 There are no additional material commitments for capital expenditures as of March 31, 2002. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required to be included in this Item 8 are set forth in Item 14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has had no changes in accountants and no disagreements with its accountants on accounting and disclosure to report under this Item 9. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In the table below, information is given with respect to the directors and executive officers of the Company. Mr. Coker was elected to the Board of Directors at the March 25, 2002 board meeting.
NAME, AGE OF NOMINEE AND YEARS SERVED AS PRINCIPAL OCCUPATION FOR PAST DIRECTOR FIVE YEARS: OTHER DIRECTORSHIPS -------- -------------------------------- Walter G. Mize Mr. Mize has served as Chairman of the Board, President and Chief Executive Age 64 Officer of the Company since September 1987. He has also served as President Director Since 1987 Chairman of the Board and Chief Executive Officer of UHC Petroleum Corporation and National Heritage Sales Corporation; as President of UHC Petroleum Services Corporation since January 1997; and as President of UHC New Mexico Corporation since June 1999. He has been engaged in oil and gas exploration and development, cattle ranching, real estate development, banking and various other investment activities for over thirty years. Harold L. Gilliam Mr. Gilliam has served as Secretary, Treasurer and Chief Financial Officer of Age 55 the Company since November 1990. He has been a partner in the firm of Director Since 1990 Gilliam, Wharram & Co., P.C., Certified Public Accountants, located in Cleburne, Texas, since August 1987, and has been a Certified Public Accountant in the state of Texas since 1972. Joe Martin Dr. Martin is an optometrist partner in the Cleburne Eye Clinic, located in Age 57 Cleburne, Texas, and has been an optometrist for over twenty-five years. Director Since 1988 C. Dean Boyd Mr. Boyd is the principal of his own consulting firm. He was Senior Vice Age 55 President, Senior Loan Officer of First National Bank of Longmont, Longmont, Director Since 1988 Colorado from January, 1999 to December, 2001. He previously served as President of Colorado Community First National Bank, located in Louisville, Colorado from February 1997 to January 1999; and as President of Community First National Bank, located in Fraser, Colorado, from 1988 to February 1997. Mr. Boyd has been a Certified Public Accountant in the state of Colorado since 1972. 14 Theresa D. Turner Ms. Turner has been President of Colorado Community First National Bank, Age 42 located in Fraser, Colorado, since February 1997. She previously served as Director Since 1992 Senior Vice President of that bank from January 1993 to February 1997, and in various other capacities since 1985. Mark Church Mr. Church has been President of National since April 2001. From 1999 to the Age 50 present, he has been the owner and manager of M.C. Development, LLC, a food Director in 2002 products consulting firm. From 1969 to 1999, he was employed by Lucky Stores, where he was Vice President of Meat and Seafood at the time of his departure. Larry G. Coker Mr. Coker has been a practicing attorney in the state of Texas since 1990. Age 44 Prior to 1990 Mr. Coker was a petroleum engineer for Exxon Company, USA. Director in 2002
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's executive officers, directors, and person who own more than ten percent (10%) of a registered class of the Company's equity securities to file reports of ownership with the Securities and Exchange Commission. Based upon a review of Forms 4 and amendments thereto furnished to the Company during the fiscal year ended March 31, 2002, and Forms 5 and amendments thereto furnished to the Company with respect to the fiscal year ended March 31, 2002, management of the Company has determined that, during such fiscal year, no directors, officers or ten percent (10%) beneficial owners of common stock of the Company failed to file on a timely basis with the Securities and Exchange Commission one or more required report on Form 4 or 5 regarding transactions in the securities of the Company. ITEM 11. EXECUTIVE COMPENSATION During the last three fiscal years, neither we nor any of our Subsidiaries paid any cash compensation to the Company's Chief Executive Officer, and no executive officer of the Company received compensation in excess of $100,000. The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer for the last three fiscal years. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------------- ------------------- NAME AND SECURITIES UNDERLYING PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) ------------------ ----- ----------- --------- ----------- Walter G. Mize Fiscal 2002 $ 0 $ 0 0 Chairman of the Board, Fiscal 2001 $ 0 $ 0 0 President and Chief Fiscal 2000 $ 0 $ 0 0 Executive Officer Mark Church Fiscal 2002 $ 0(1) $ 0 510,000(3) President, Fiscal 2001 $ 0 $ 0 0 Subsidiary Fiscal 2000 $ 0 $ 0 0 (1) While Mr. Church was not paid a salary during the 2002 fiscal year, his wholly owned company, M.C. Development LLC earns commissions on sales of National's products. (2) On April 1, 2001 Mr. Church was granted an option to purchase 510,000 shares of the Company's common stock at a purchase price of $1.50 per share. The right to purchase 360,000 shares was vested on April 1, 2002. The right to purchase the remaining 150,000 shares vests on April 1, 2003.
15 OPTION/SAR GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS The following table provides information with respect to the named executive officers concerning the grant of stock options during the last fiscal year. NUMBER OF % OF TOTAL SECURITIES OPTIONS/SARS UNDERLYING GRANTED TO EXERCISE OR OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED FISCAL YEAR ($/SH) DATE ---- ------- ----------- ------ ---- Walter G. Mize - - - Harold L. Gilliam - - - - Mark Church 510,000(1) 100% $1.50 April 1, 2006 (1) Of this amount, the option may be exercised immediately to purchase 360,000 shares of common stock. The right to purchase the remaining common stock vests on April 1, 2003.
OPTION EXERCISES AND HOLDINGS The following table provides information with respect to the named executive officers concerning the exercise of stock options during the last fiscal year and unexercised stock options held as of the end of the last fiscal year under our 2000 Stock Option Plan: VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT VALUE FY-END (#) FY-END SHARES ACQUIRED REALIZE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE ------------------- --------------- --- ------------- ------------- Walter G. Mize - - - - Harold L. Gilliam - - - - Mark Church - - 360,000/150,000 -
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT MANAGEMENT The following table shows beneficial ownership of shares of our Common Stock by all five percent (5.0%) shareholders, current directors and current executive officers, as individuals and together as a group, at March 31, 2002. 16
Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Owner Of Class(1) ------------------------------- --------------------- ----------- Walter G. Mize 7,648,500 shares 74.5% 2 North Caddo Street Cleburne, Texas 76033-1956 Harold L. Gilliam 4,500 shares (2) Gilliam, Wharram & Co. 107 Westmeadow Dr. Cleburne, Texas 76033 Joe Martin 11,000 shares 0.1% Cleburne Eye Clinic 110 W. Henderson Cleburne, Texas 76033 C. Dean Boyd 8,550 shares (2) 1258 Clubhouse Drive Broomfield, Colorado 80020 Theresa D. Turner 6,500 shares (2) P.O. Box 1283 Winter Park, Colorado 80482 Mark Church 1,000 shares (3) (2) 8401 White Oak Ave., Ste 109 Rancho Cucamonga, CA 91730 Larry G. Coker 2,000 shares (2) 530 Bedford Road, Suite 112 Bedford, Texas 76022 All directors and executive 7,682,050 shares 74.8% officers as a group (7 persons)
(1) Based on 10,264,059 shares of Common Stock issued and outstanding as of June 18, 2002. (2) Less than 0.1% (3) As described in Item 13, Mr. Church executed a contract with us in April 2001 that will result in the grant of options to him to purchase our common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As described further in Item 7, we received a line of credit of up to $3.0 million from Almac Financial Corporation, a corporation related to Walter G. Mize. The line of credit is secured by substantially all of the assets of the Company and the Subsidiaries. We believe that this line of credit is on terms at least as favorable to the Company as it could obtain from a lender not related to the Company. During the fiscal year ended March 31, 2002 the Company received the use of office space and equipment from Walter G. Mize without charge. Mr. Mize is under no obligation to provide the use of the office space or equipment to the Company. In April 2001, we entered into contracts with Mark Church and a company controlled by him to provide certain executive and marketing services to National. Under these contracts, Mr. Church received an option to purchase 510,000 shares of the Company's common stock. Also, his company will receive commissions on sales of food products made by National. 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(A) Documents Filed As Part Of Report 1. FINANCIAL STATEMENTS The following financial statements of the Company are required to be included in Item 8 and are filed under Item 14 at the page indicated: Independent Auditor's Report F-1 Consolidated Balance Sheets at March 31, 2002 and 2001 F-2 Consolidated Statements of Operations for the years ended March 31, 2002, 2001, and 2000 F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended March 31, 2002, 2001, and 2000 F-5 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001, and 2000 F-6 Notes to Consolidated Financial Statements F-8 2. FINANCIAL STATEMENT SCHEDULES No schedules are required because they are inapplicable or the information is otherwise shown in the financial statement or notes. 3. EXHIBITS 3.1 Articles of Incorporation, as amended on December 5, 1997. (1) 3.2 Bylaws. (2) 10.1 Employment Agreement with Mark Church(4) 10.2 Amended and Restated Letter Agreement between National Heritage Sales Corporation and M.C. Development LLC dated April 1, 2001 (4) 21 Subsidiaries of the Company (3) 23 Consent of Weaver and Tidwell, L.L.P. (4) 24 Power of Attorney.(4) 18 (1) Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 and incorporated by reference herein. (2) Filed with the Company's Registration Statement No. 33-43564 on Form S-1 and incorporated by reference herein. (3) Filed with the Company's Annual Report for the year ended March 31, 2002. (4) Filed with this report. ______________ (b) REPORTS ON FORM 8-K On January 9,2002 the Company disclosed that it had received an engineering study relating to its oil producing property in New Mexico. No financial statements were included with the report. (c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K The exhibits listed in Part IV, Item 14(a)(3) of this report, and not previously filed are included after "Signatures," below. (d) FINANCIAL STATEMENT SCHEDULED REQUIRED BY REGULATION S-X.
19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: June 27, 2002 UNITED HERITAGE CORPORATION By: Walter G. Mize _________________________________________ Walter G. Mize, Chairman of the Board, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated below on this 27th day of June, 2002. SIGNATURE, TITLE /s/ Walter G. Mize ________________________________ Walter G. Mize Chairman of the Board and Chief Executive Officer *s/Harold L. Gilliam ---------------------------------- Harold L. Gilliam Secretary, Treasurer, Chief Financial Officer (Principal Accounting Officer) * s/Joe Martin ---------------------------------- Dr. Joe Martin Director * s/C. Dean Boyd ---------------------------------- C. Dean Boyd Director * s/Theresa D. Turner ----------------------------------- Theresa D. Turner Director * s/Mark Church ------------------------------------ Mark Church Director *s/Larry G. Coker ------------------------------------- Larry G. Coker Director *By: /s/ Walter G. Mize ____________________________________ Walter G. Mize, as Attorney-in-Fact for each of the persons indicated 20 C O N T E N T S Page INDEPENDENT AUDITOR'S REPORT F-1 FINANCIAL STATEMENTS Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Shareholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-8 UNITED HERITAGE CORPORATION AND SUBSIDIARIES FINANCIAL REPORT MARCH 31, 2002 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders United Heritage Corporation We have audited the accompanying consolidated balance sheets of United Heritage Corporation and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended March 31, 2002. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Heritage Corporation and subsidiaries as of March 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred substantial losses and has a working capital deficit, all of which raise substantial doubt about the company's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. WEAVER AND TIDWELL, L.L.P. Fort Worth, Texas June 7, 2002 F-1 UNITED HERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND 2001
2002 2001 ----------- ----------- ASSETS CURRENT ASSETS Trade accounts receivable $ 97,249 $ 228,753 Inventory 155,240 221,947 Prepaid expenses 258,844 200,503 ----------- ----------- Total current assets 511,333 651,203 OIL AND GAS PROPERTIES, accounted for using the full cost method, net of accumulated depletion and depreciation of $70,698 for 2002 and $17,252 for 2001 Proved 29,717,499 26,646,871 Unproved 834,579 3,679,771 ----------- ----------- 30,552,078 30,326,642 PROPERTY AND EQUIPMENT, at cost Equipment, furniture and fixtures 279,118 155,015 Vehicles 56,720 56,720 ----------- ----------- 335,838 211,735 Less accumulated depreciation 166,686 119,675 ----------- ----------- 169,152 92,060 ----------- ----------- TOTAL ASSETS $31,232,563 $31,069,905 =========== ===========
F-2 UNITED HERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MARCH 31, 2002 AND 2001
2002 2001 ------------------ ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Checks issued in excess of bank balances $ 1,488 $ 122,341 Line of credit 2,000,000 2,000,000 Accounts payable 524,588 534,258 Accrued expenses 207,901 47,463 ------------------- ------------------ Total current liabilities 2,733,977 2,704,062 LONG-TERM LIABILITIES Note payable, related party 2,000,573 1,057,500 ------------------- ------------------ Total liabilities 4,734,550 3,761,562 SHAREHOLDERS' EQUITY Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued - - Common stock, $.001 par value, 125,000,000 shares authorized, issued and outstanding 2002 - 10,264,059 2001 - 10,215,059 10,264 10,215 Common stock subscribed, 2002 419,813 shares 373,333 - Additional paid-in capital 35,404,092 35,463,437 Accumulated deficit (9,195,776) (7,821,463) ------------------- ------------------ 26,591,913 27,652,189 Deferred compensation and consulting (93,900) (343,846) ------------------- ------------------ 26,498,013 27,308,343 ------------------- ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,232,563 $ 31,069,905 =================== ==================
F-3 UNITED HERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000 ----------------- --------------- ---------------- OPERATING REVENUES Processed meat products $ 533,768 $ 1,917,192 $ 3,164,627 Oil and gas sales 503,373 82,900 87,421 ----------------- --------------- ---------------- Total operating revenues 1,037,141 2,000,092 3,252,048 OPERATING COSTS AND EXPENSES Processed meat products 553,975 1,605,018 2,663,295 Production and operating 421,314 72,647 63,474 Selling 280,108 334,842 111,284 Depreciation and depletion 100,456 39,476 25,935 General and administrative 793,012 758,518 444,630 ----------------- --------------- ---------------- Total operating costs and expenses 2,148,865 2,810,501 3,308,618 ----------------- --------------- ---------------- Loss from operations (1,111,724) (810,409) (56,570) OTHER INCOME (EXPENSE) Interest income 162 8,886 9,012 Interest expense (262,751) (53,802) - ----------------- --------------- ---------------- Loss before income tax (1,374,313) (855,325) (47,558) INCOME TAX - - - ----------------- --------------- ---------------- Net loss ($1,374,313) ($855,325) ($47,558) ================= =============== ================ Loss per share: Basic ($0.13) ($0.08) ($0.00) ================= =============== ================ Weighted average number of shares outstanding Basic 10,217,541 10,166,739 9,905,048 ================= =============== ================
F-4 UNITED HERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED MARCH 31, 2002, 2001 AND 2000
Common Additional Common Stock Stock Paid-in Accumulated Shares Amount Subscribed Capital Deficit Other ---------------- ---------- ----------- ------------ ----------- ----------- Balance, March 31, 1999 9,747,062 $ 9,747 $ - $ 33,462,530 ($6,918,580) $ - Stock issued upon exercise of stock options 74,500 75 - 186,175 - - Stock issued pursuant to contingent shares 5,204 5 - (5) - - Stock issued for assets 202,500 203 - 1,209,332 - - Rounding adjustment (257) (1) - - - Repurchase of fractional shares 34 - - (34) - - Stock issued in exchange for future services 82,500 83 - 358,042 - (358,125) Realization of deferred consulting costs - - - - - 42,325 Net loss - - - - (47,558) - ---------------- ----------- --------- ------------ ----------- ----------- Balance, March 31, 2000 10,111,543 10,112 - 35,216,040 (6,966,138) (315,800) Stock issued pursuant to contingent shares 103,516 103 - (103) - - Deferred consulting costs - - - 247,500 - (247,500) Realization of deferred consulting costs - - - - - (219,454) Net loss - - - - (855,325) - ---------------- ------------ ---------- ------------ ------------ ------------- Balance, March 31, 2001 10,215,059 10,215 - 35,463,437 (7,821,463) (343,846) Cash received for stock subscribed, net of private placement costs of $46,480 - - 373,333 - - - Stock issued for services 49,000 49 - 34,176 - - Deferred consulting costs - - - 96,000 - (96,000) Reversal of deferred consulting costs - - - (189,521) - 189,521 Realization of deferred consulting costs - - - - - 156,425 Net loss - - - - (1,374,313) - ---------------- ----------- ---------- ------------ ----------- -------------- Balance, March 31, 2002 10,264,059 $ 10,264 $373,333 $ 35,404,092 ($9,195,776) ($93,900) ================ =========== ========== ============ ============ =============
F-5 UNITED HERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2002, 2001 AND 2000
2002 2001 2000 ----------------- ------------- ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($1,374,313) ($855,325) ($47,558) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and depletion 100,456 39,476 25,935 Recognition of services performed for stock 34,225 - - Deferred compensation and consulting recognized in current year 156,425 219,454 42,325 Changes in assets and liabilities: Accounts receivable 131,504 (163,547) (4,397) Inventory 66,707 (154,650) 59,029 Other current assets (58,341) (133,130) (32,798) Checks issued in excess of bank balances (120,853) 122,341 - Accounts payable and accrued expenses 150,768 431,264 (43,950) ----------------- ------------- ------------------ Net cash used in operating activities (913,422) (494,117) (1,414) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, including interest capitalized, 2002 $45,588 2001 $103,555 (278,882) (2,679,804) (509,186) Payment from issuance of note receivable - - (173,135) Collection of note receivable - - 173,135 ----------------- ------------- ------------------ Net cash used in investing activities (278,882) (2,679,804) (509,186) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans 818,971 3,057,500 - Repurchase of fractional shares - - (34) Proceeds from private placement 373,333 Proceeds from issuance of common stock - - 186,250 ----------------- ------------- ------------------ Net cash provided by financing activities 1,192,304 3,057,500 186,216 ----------------- ------------- ------------------ Net decrease in cash and cash equivalents - (116,421) (324,384) Cash and cash equivalents, beginning of year - 116,421 440,805 ----------------- ------------- ------------------ Cash and cash equivalents, end of year $ - $ - $ 116,421 ================= ============= ==================
F-6 UNITED HERITAGE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2002, 2001 AND 2000 (CONTINUED)
2002 2001 2000 ----------- ----------- ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ 112,117 $ 137,828 $ - ============ ============ ============ Taxes $ - $ - $ - SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for assignment of all interest in oil and gas properties and equipment $ - $ - $ 1,209,535 ============ ============ ============ Common stock issued in exchange for future services $ - $ - $ 358,125 ============ ============ ============ Common stock issued in exchange for future consulting services $ - $ 247,500 $ - ============ ============ ============ Common stock issued in exchange for services $ 34,225 $ - $ - ============ ============ ============ Warrants issued in exchange for services $ 96,000 $ - $ - ============ ============ ============ Equipment acquired by assumption of liability $124,102 $ - $ - ============ ============ ============ In May 1999, and April and May 2000, the Company issued 5,204 and 103,516 shares of common stock, respectively, pursuant to contingent provisions of a private placement in December 1997. In April 2001, the Company cancelled a consulting agreement pursuant to an employment agreement being executed. This cancellation reduced deferred compensation and additional paid-in capital $189,521, respectively.
F-7 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND PRESENTATION The consolidated financial statements include the accounts of United Heritage Corporation (the Company) and its wholly owned subsidiaries, National Heritage Sales Corporation, UHC Petroleum Corporation, UHC Petroleum Services Corporation and UHC New Mexico Corporation. All intercompany transactions and balances have been eliminated upon consolidation. NATURE OF OPERATIONS United Heritage Corporation distributes meat products primarily on the west coast of the United States of America. The Company also owns various oil and gas properties located in Texas and New Mexico. The Company began production of the Texas properties during the year ended March 31, 2000 and began production of its New Mexico properties during the year ended March 31, 2002. The Company continues to explore and develop its oil and gas properties. REVENUE Revenue from the sale of meat products is recognized when products are delivered to customers. Oil and gas production revenues are recognized at the point of sale. INVENTORY Inventory consists of meat purchased for resale and oil in tanks, both of which are valued at the lower of cost (first-in, first-out) or market. OIL AND GAS PROPERTIES The Company follows the full cost method of accounting for oil and gas properties, which are located in the southwestern United States. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves are capitalized. All capitalized costs, including the estimated future costs to develop proved reserves are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects will not be amortized until proved reserves associated with the projects can be determined or until impairment occurs. Oil and gas reserves and production are converted into equivalent units based upon estimated relative energy content. F-8 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED OIL AND GAS PROPERTIES - CONTINUED The Company is currently participating in oil and gas exploration and development activities in New Mexico. As of March 31, the following associated property costs have been excluded in computing amortization of the full cost pool:
2002 2001 -------- ---------- Acquisition costs $834,579 $1,209,535 Exploration costs - 2,366,681 Capitalized interest - 103,555 -------- ---------- $834,579 $3,679,771 ======== ==========
The Company will begin to amortize the remaining acquisition costs when the project evaluation is complete, which is currently estimated to be during the fiscal year ending March 31, 2003. Potential impairment of producing properties and significant unproved properties and other plant and equipment are assessed periodically. If the assessment indicates that the properties are impaired, the amount of the impairment will be added to the capitalized costs to be amortized. In addition, the capitalized costs are subject to a "ceiling test", which limits such costs to the aggregate of the estimated present value, using a 10% discount rate (based on prices and costs at the balance sheet date), of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost (net of impairments) or fair market value of unproved properties. Future well abandonment costs are not expected to be significant and, accordingly, no provision has been recorded in the financial statements. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the assets primarily by the straight-line method as follows: Equipment, furniture and fixtures 3-7 years Vehicles 3-5 years EARNINGS (LOSS) PER COMMON SHARE Basic earnings (loss) per common share are computed based on the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per common share are computed assuming all dilutive potential common shares were issued. Diluted earnings per share have not been presented since the inclusion of potential common shares would be antidilutive. F-9 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED CASH FLOWS PRESENTATION For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with maturities of three months or less to be cash equivalents. ADVERTISING The Company expenses all advertising costs as incurred. Expense for the years ended March 31, 2002, 2001 and 2000 were $14,261, $127,381 and $11,960, respectively. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS Financial instruments of the Company consist of cash and cash equivalents, accounts receivable, accounts payable and notes payable. Recorded values of cash, receivables and payables approximate fair values due to short maturities of the instruments. STOCK-BASED EMPLOYEE COMPENSATION The Company accounts for stock based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", which requires compensation cost to be measured at the date of grant based on the intrinsic value of the options granted. The intrinsic value of an option is equal to the difference between the market price of the common stock on the date of grant and the exercise price of the option. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", which provides for an alternative measure of compensation cost based on the fair value of the options granted. The fair value of an option is based on the intrinsic value as well as the time value of the option. The Company has adopted the disclosure provisions of SFAS No. 123. LONG-LIVED ASSETS Long-lived assets to be held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continuously evaluates the recoverability F-10 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED LONG-LIVED ASSETS - CONTINUED of its long-lived assets based on estimated future cash flows and the estimated liquidation value of such long-lived assets, and provides for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived assets. NOTE 2. GOING CONCERN The financial statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. The Company has incurred substantial losses from operations and has a working capital deficit. The appropriateness of using the going concern basis is dependent upon the Company's ability to retain existing financing and to achieve profitable operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Management of the Company is currently attempting to raise equity capital with a private placement of common stock and is exploring other methods of financing operations including additional borrowing from a related party financing company, potential joint venture partners and selling portions or all of certain properties and/or subsidiary companies. In addition, as disclosed in Note 7, the Company has increased its borrowing capacity with a related party financing company to $3,000,000 and has extended the line of credit maturity date to April 2004. The Company is also reducing overhead in its oil and gas and meat sales segments and in its corporate headquarters. The Company expects that these actions will allow it to continue and eventually achieve its business plan. NOTE 3. CONCENTRATIONS OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash equivalents and trade receivables. During the years ended March 31, 2002 and 2001, the Company maintained money market accounts with a bank, which at times exceeded federally insured limits. Cash equivalents held in money market accounts at March 31, 2002 and 2001 were $923 and $5,314, respectively. Concentrations of credit risk with respect to trade receivables consist principally of food industry customers operating within the United States and oil and gas customers. At March 31, 2002, receivables from an oil and gas customer and a food industry customer comprised 17% and 46%, respectively, of the trade receivable balance. Receivables from an oil and gas customer and a food industry customer at March 31, 2001 comprised 43% and 30%, respectively, of the trade receivable balance. No allowance for doubtful accounts has been provided since recorded amounts are determined to be fully collectible. F-11 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. INVENTORY
Inventory consists of the following: 2002 2001 -------- -------- Meat held for resale $122,858 $202,808 Oil in tanks 32,382 19,139 -------- -------- $155,240 $221,947 ======== ========
NOTE 5. OIL AND GAS PROPERTIES AND OPERATIONS Capitalized costs related to oil and gas producing activities and related accumulated depletion, depreciation and amortization at March 31, 2002 and 2001 are as follows:
2002 2001 ----------- ----------- Capitalized costs of oil and gas properties: Proved $29,788,197 $26,664,123 Unproved 834,579 3,679,771 ----------- ----------- 30,622,776 30,343,894 Less accumulated depletion, depreciation, and amortization 70,698 17,252 ----------- ----------- $30,552,078 $30,326,642 =========== ===========
Costs incurred in oil and gas producing activities were as follows:
2002 2001 2000 -------- ---------- ---------- Property acquisitions Unproved $ - $ - $1,209,535 Exploration 116,115 2,457,083 57,250 Development 162,767 179,742 397,828 -------- ---------- ---------- $278,882 $2,636,825 $1,664,613 ======== ========== ==========
F-12 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5. OIL AND GAS PROPERTIES AND OPERATIONS - CONTINUED Results of operations of oil and gas producing activities for the years ended March 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000 ------------- ------- ------- Revenues from oil and gas producing activities: Sales to unaffiliated parties $ 503,373 $82,900 $87,421 Expenses Production and operating 421,314 72,647 63,474 General and administrative 112,646 50 612 Depreciation and depletion 53,446 9,962 7,290 ------------- ------- ------- Total expenses 587,406 82,659 71,376 ------------- ------- ------- Pretax income (loss) from producing activities (84,033) 241 16,045 Income tax expense - - - ------------- ------- ------- Results of oil and gas producing activities (excluding corporate overhead and interest costs) ($84,033) $ 241 $16,045 ============= ======= =======
NOTE 6. LINE OF CREDIT In April 2001, the Company obtained a $2,000,000 revolving line of credit from a banking institution. The credit facility bears interest at 1% above the Wall Street Journal prime rate per annum (4.75% at March 31, 2002) and is due on demand. At March 31, 2002 the Company had drawn $2,000,000 against the credit facility. The credit line matured on April 25, 2002 and is past due. The Company is negotiating new terms with the lender although there can be no assurance that the Company will be successful. The Company's largest shareholder has provided collateral for this loan. Interest cost for the year ended March 31, 2002 and 2001 was $79,916 and $140,919, respectively. NOTE 7. NOTE PAYABLE, RELATED PARTY The Company has a $3,000,000 revolving line of credit, secured by substantially all of the assets of the Company, bearing interest at 10%, due April 15, 2004, from ALMAC Financial Corporation, a corporation owned by a major shareholder. At March 31, 2002 the Company had drawn $1,876,470 under the line of credit. Interest cost for the year ended March 31, 2002 and 2001 was $182,537 and $16,438, respectively. In addition, the Company has a $124,103 long-term account payable due to ALMAC, bearing no interest, due April 15, 2003. F-13 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. BUSINESS SEGMENTS AND MAJOR CUSTOMERS At March 31, 2002, 2001 and 2000, the Company operates in two business segments, the sale of processed meat products and oil and gas producing activities. Factors used by management in determining reportable segments are by business area. Revenue recognition and other accounting policies by segment are consistent with those for the consolidated entity disclosed in Note 1. SEGMENT INFORMATION:
2002 2001 ----------------------------------------------------- ---------------------------- Oil and Gas Meat Total Oil and Gas Meat ----------------- ----------------- ---------------- ------------ --------------- Revenues from external customers $ 503,373 $ 533,768 $ 1,037,141 $ 82,900 $ 1,917,192 Interest revenue - 1 1 - 13 Depletion, depreciation and amortization 53,446 34,481 87,927 9,962 11,898 Segment profit (loss) (84,033) (577,562) (661,595) 241 (247,721) Segment assets 30,662,757 499,061 31,161,818 30,445,583 531,666 Expenditures for segment assets 278,882 124,103 402,985 2,636,825 13,508 RECONCILIATIONS: REVENUES 2002 ----------------- Total revenues for reportable segments $ 1,037,141 Other revenues - ----------------- Total consolidated revenues $ 1,037,141 ================= PROFIT OR LOSS Total profit (loss) for reportable segments ($661,595) Other profit or loss (712,718) ----------------- Income (loss) before income taxes ($1,374,313) ================= ASSETS Total assets for reportable segments $ 31,161,818 Other assets 70,745 ----------------- Consolidated total $ 31,232,563 =================
2001 2000 ---------------- ------------------------------------- Total Oil and Gas Meat Total ---------------- ------------ ---------- ----------- Revenues from external customers $ 2,000,092 $ 87,421 $3,164,627 $ 3,252,048 Interest revenue 13 - 8 8 Depletion, depreciation and amortization 21,860 7,290 4,796 12,086 Segment profit (loss) (247,480) 16,045 239,650 255,695 Segment assets 30,977,249 27,802,345 138,265 27,940,610 Expenditures for segment assets 2,650,333 1,657,323 25,535 1,682,858 RECONCILIATIONS: REVENUES 2001 2000 ----------------- --------------- Total revenues for reportable segments $ 2,000,092 $ 3,252,048 Other revenues - - ----------------- ---------------- Total consolidated revenues $ 2,000,092 $ 3,252,048 ================= ================ PROFIT OR LOSS Total profit (loss) for reportable segments ($247,480) $ 255,695 Other profit or loss (607,845) (303,253) ----------------- ---------------- Income (loss) before income taxes ($855,325) ($47,558) ================= ================ ASSETS Total assets for reportable segments $ 30,977,249 $ 27,940,610 Other assets 92,656 154,061 ----------------- ---------------- Consolidated total $ 31,069,905 $ 28,094,671 ================= ================
OTHER SIGNIFICANT ITEMS: 2002 2001 2000 -------------------------------- ----------------------------------- ----------------------- Segment Consolidated Segment Consolidated Segment Totals Adjustments Totals Totals Adjustments Totals Totals Adjustments -------- ------------ -------- ---------- ------------ ---------- ---------- ------------ Interest revenue $ 1 $ 161 $ 162 $ 13 $ 8,873 $ 8,886 $ 8 $ 9,004 Interest expense 297 262,454 262,751 - 53,802 53,802 - - Expenditures for assets 402,985 - 402,985 2,650,333 19,509 2,669,842 1,682,858 28,572 Depletion, depreciation and amortization 87,927 12,529 100,456 21,860 17,616 39,476 12,086 13,849 2000 ---------- Consolidated Totals ---------- Interest revenue $ 9,012 Interest expense - Expenditures for assets 1,711,430 Depletion, depreciation and amortization 25,935
Adjustments to reconcile total segment interest revenue and expense, and depreciation and amortization to consolidated totals are attributed to corporate headquarters, which is not included in segment information. F-14 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8. BUSINESS SEGMENTS AND MAJOR CUSTOMERS - CONTINUED The Company recorded meat sales to the following major customers for the years ended March 31:
2002 2001 2000 ------------------ -------------------- -------------------- Amount Percent Amount Percent Amount Percent -------- -------- ---------- -------- ---------- -------- Customer A $507,445 94.7% $1,124,732 58.7% $2,748,581 86.9% Customer B - - 468,410 24.4% - - -------- -------- ---------- -------- ---------- -------- $507,445 94.7% $1,593,142 83.1% $2,748,581 86.9% ======== ======== ========== ======== ========== ========
The Company recorded oil and gas sales to the following major customers for the years ended March 31: 2002 2001 2000 ----------------- ---------------- ----------------- Amount Percent Amount Percent Amount Percent -------- -------- ------- ------- ------- -------- Customer A $321,745 64.0% $ - - $ - - % Customer B 181,628 36.0% - - - - -------- -------- ------- ------- ------- -------- $503,373 100.0% $ - - $ - - % ======== ======== ======= ======= ======= ========
NOTE 9. STOCK OPTION PLANS Directors of the Company adopted the 1995 Stock Option Plan effective September 11, 1995. This Plan set aside 200,000 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the Company and/or its subsidiaries. Options granted under the Plan must be exercised within five years after the date of grant, but may be affected by the termination of employment. The following schedule summarizes pertinent information with regard to the 1995 Plan for the years ended March 31, 2002, 2001 and 2000: 2002 2001 2000 --------------------- ------------------------- --------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Outstanding Price Outstanding Price Outstanding Price ------------ ------ ----------------- ------ -------------- ------ Beginning of year - $ - 20,000 $ 2.50 94,500 $ 2.50 Granted - - - - - - Exercised - - - - (74,500) 2.50 Forfeited - - - - - - Expired - - (20,000) 2.50 - - ------------ ------ ----------------- ------ -------------- ------ End of year - $ - - $ - 20,000 $ 2.50 ============ ====== ================= ====== ============== ====== Exercisable - $ - - $ - 20,000 $ 2.50 ============ ====== ================= ====== ============== ====== Weighted average fair value of options granted $ - $ - $ - ====== ====== ======
F-15 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. STOCK OPTION PLANS - CONTINUED Directors of the Company adopted the 1998 Stock Option Plan effective July 1, 1998. This Plan and its subsequent amendment set aside 200,000 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, and/or employees of the company and/or its subsidiaries. Options granted under the Plan are exercisable over a period to be determined when granted, but may be affected by the termination of employment. No options have been granted since 1998 and none are outstanding. Directors of the Company adopted the 2000 Stock Option Plan effective June 5, 2000. This Plan set aside 5,000,000 shares of the authorized but unissued common stock of the Company for issuance under the Plan. Options may be granted to directors, officers, consultants, advisors, and/or employees of the company and/or its subsidiaries. Options granted under the Plan must be exercised within the number of years after the date of granting of such options as determined by the Stock Option Committee and allowed in the Stock Option Agreement, in the amounts and time periods allowed in the Stock Option Agreement, which may provide that a period of time must elapse after the date of grant before such options are exercisable; provided, however, that the options may not be exercised as to less than 100 shares at any one time. The following schedule summarizes pertinent information with regard to the 2000 Plan for the years ended March 31, 2002 and 2001:
2002 2001 ------------------------------- ----------------------- Weighted Weighted Average Average Shares Exercise Shares Exercise Outstanding Price Outstanding Price -------------- --------------- ----------- --------- Beginning of year 300,000 $ 2.50 - $ - Granted 510,000 1.50 Exercised - - - - Forfeited (300,000) (2.50) - - Expired - - - - -------------- ----------- End of year 510,000 $ 1.50 300,000 $ 2.50 ============== =============== =========== ====== Exercisable - $ 1.50 ============== =============== Weighted average fair value of options granted $ 1.35 $ 0.82 ============== ========
Options granted to non-employees under the above three plans resulted in compensation costs charged to expense of $152,425, $219,454 and $42,325 for the years ended March 31, 2002, 2001 and 2000, respectively. F-16 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9. STOCK OPTION PLANS - CONTINUED The options granted in 2002 were to an employee and the market price at the date of grant was in excess of the exercise price resulting in compensation costs charged to expense of $100,800 for the year ended March 31, 2002. The Company will accrue additional compensation cost of $42,000 in the year ending March 31, 2003 as the remaining options vest and become exercisable. Unexercised options expire on April 1, 2006. Since the Company did not grant options to employees in 2001 and 2000, there is no pro forma effect to disclose for those years in relation to compensation expense using the fair value method prescribed by SFAS No. 123. The fair value of the options granted in 2002 was estimated on the date of grant using a Black-Sholes option pricing model and the following assumptions: a risk-free rate of return of 6.0%; an expected life of three years; expected volatility of 122.33%; and no expected dividends. Using the above assumptions, the fair value of the options granted in 2002 on a pro forma basis would result in additional compensation expense of $385,200. As such, pro forma net loss and net loss per share would be as follows for the year ended March 31, 2002: Net loss as reported ($1,374,313) Additional compensation 385,200 ------------- Pro forma net loss ($1,759,513) ============= Loss per share as reported ($ 0.13) ============= Pro forma loss per share ($ 0.17) ============= NOTE 10. STOCK WARRANTS Directors of the Company entered into a stock warrant agreement effective August 16, 1996. Pursuant to the agreement, the Company issued 130,000 warrants to purchase common stock as consideration for consulting services to be performed. Warrants issued under the agreement must be exercised within five years after the date of grant. During the year ended March 31, 1999, the consulting agreement was cancelled but the warrants remained outstanding until March 31, 2002. Directors of the Company entered into a stock warrant agreement effective November 1, 2001. Pursuant to the agreement, the Company issued 150,000 warrants to purchase common stock as consideration for consulting services to be performed. Warrants issued under the agreement must be exercised within three years after the date of grant. F-17 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. STOCK WARRANTS - CONTINUED The following schedule summarizes pertinent information with regard to the stock warrants for the years ended March 31, 2002, 2001 and 2000:
2002 2001 2000 --------------------------------- --------------------- -------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Outstanding Price Outstanding Price Outstanding Price ---------------- ----------------- ------------ ------- ----------- ------- Beginning of year 130,000 $ 9.40 130,000 $ 9.40 130,000 $ 9.40 Granted 150,000 1.50 - - - - Exercised - - - - - - Forfeited - - - - - - Expired (130,000) (9.40) - - - - ---------------- ----------------- ------------ ------ ----------- -------- End of year 150,000 $ 1.50 130,000 $ 9.40 130,000 $ 9.40 ================ ================= ============ ====== =========== ======== Exercisable - $ - 130,000 $ 9.40 130,000 $ 9.40 ================ ================= ============ ====== =========== ======== Weighted average fair value of warrants issued $ 0.64 $ - $ - ================= ====== ========
All 150,000 warrants are exercisable at $1.50 per share and the remaining contractual life is 2.5 years as of March 31, 2002. During the years ended March 31, 2002, 2001 and 2000, the Company recorded $16,000, $0 and $0, for services rendered related to warrants issued under the agreements. The fair value of each warrant grant is estimated on the date of grant using a Black-Sholes option pricing model and the following assumptions: a risk-free rate of return of 6.0%; an expected life of three years; expected volatility of 134.9%; and no expected dividends. The selling agent for the 1997 private placement was paid a commission of $100,000 plus warrants to purchase 182,400 shares of common stock at exercise prices ranging from $7.50 to $20.00 per share. The warrants issued to the selling agent expired in August 2001. NOTE 11. INCOME TAXES Deferred income tax assets and liabilities are computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. F-18 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. INCOME TAXES - CONTINUED The Company federal tax provision consists of the following: 2002 2001 2000 ------- ------- ------ Current $ - $ - $ - Deferred - - - $ - $ - $ - ======= ======= ======= At March 31, the deferred tax asset and liability balances are as follows:
2002 2001 --------------- -------------- Deferred tax asset Oil and gas properties $ 8,049,925 $ 8,049,925 Net operating loss 2,376,260 1,946,955 --------------- -------------- 10,426,185 9,996,880 Deferred tax liability - - --------------- -------------- Net deferred tax asset 10,426,185 9,996,880 Valuation allowance (10,426,185) (9,996,880) --------------- -------------- $ - $ - =============== ==============
The net change in the valuation allowance for 2002 and 2001 is an increase of $429,305 and $321,315, respectively. The deferred tax asset is due to the net operating loss carryover and difference in the basis of oil and gas properties for tax and financial reporting purposes. The Company has a net operating loss carryover of approximately $6,989,000 available to offset future income for income tax reporting purposes, which will ultimately expire between 2011 and 2019, if not previously utilized. NOTE 12. STOCK BONUS PLAN The Company has a stock bonus plan, which provides incentive compensation for its directors, officers, and key employees. The administration of the plan is done by the Company's stock option committee. The Company has reserved 30,000 shares of common stock for issuance under the plan. As of March 31, 2002, 27,800 shares had been issued in accordance with the plan. F-19 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13. SHAREHOLDERS' EQUITY The Company effected a one-for-ten reverse common stock split on October 1, 1999. All common stock shares and per share amounts have been retroactively restated to reflect this reverse stock split. Effective January 2, 2002, the Company entered into a "private placement" to sell up to 1,750,000 shares of its common stock. As of March 31, 2002, the Company has received cash for 419,813 shares of common stock subscribed of $373,333, net of private placement costs of $46,480. NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) PROVED RESERVES Independent petroleum engineers have estimated the Company's proved oil and gas reserves, all of which are located in the United States. Proved reserves are the estimated quantities that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equipment and operating methods. Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as additional information becomes available. The reserves actually recovered and the timing of production of these reserves may be substantially different from the original estimate. Revisions result primarily from new information obtained from development drilling and production history and from changes in economic factors.
Oil (Bbls) Gas (Mcf) ----------------- ------------ March 31, 1999 - - Extensions, additions and discoveries 22,471,358 - Production (5,723) - ----------------- ------------ March 31, 2000 22,465,635 - Extensions, additions and discoveries 4,151,429 - Production (3,739) - ----------------- ------------ March 31, 2001 26,613,325 - Extensions, additions and discoveries 4,846,677 5,023,955 Revisions of previous estimates (3,782,371) - Production (21,614) (221,573) ----------------- ------------ March 31, 2002 27,656,017 4,802,382 ================= ============
F-20 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) - CONTINUED PROVED DEVELOPED RESERVES March 31, 2000 912,666 - ============ =========== March 31, 2001 1,591,744 - ============ =========== March 31, 2002 6,401,169 4,802,382 ============ =========== STANDARDIZED MEASURE The standardized measure of discounted future net cash flows ("standardized measure") and changes in such cash flows are prepared using assumptions required by the Financial Accounting Standards Board. Such assumptions include the use of year-end prices for oil and gas and year-end costs for estimated future development and production expenditures to produce year-end estimated proved reserves. Discounted future net cash flows are calculated using a 10% rate. Estimated future income taxes are calculated by applying year-end statutory rates to future pre-tax net cash flows, less the tax basis of related assets and applicable tax credits. The standardized measure does not represent management's estimate of the Company's future cash flows or the value of proved oil and gas reserves. Probable and possible reserves, which may become proved in the future, are excluded from the calculations. Furthermore, year-end prices used to determine the standardized measure of discounted cash flows, are influenced by seasonal demand and other factors and may not be the most representative in estimating future revenues or reserve data. STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED RESERVES
March 31, 2002 March 31, 2001 March 31, 2000 --------------------- --------------------- ------------------ Future cash inflows $ 481,901,000 $ 448,168,000 $ 499,411,000 Future costs: Production (172,267,000) (157,380,000) (141,028,000) Development (6,380,000) (5,138,000) (5,138,000) --------------------- --------------------- ------------------ Future net cash flows before income tax 303,254,000 285,650,000 353,245,000 Future income tax (101,015,000) (96,117,000) (117,523,000) --------------------- --------------------- ------------------ Future net cash flows 202,239,000 189,533,000 235,722,000 10% annual discount (111,802,000) (96,578,000) (71,060,000) --------------------- --------------------- ------------------ Standardized measure of discounted future net cash flows $ 90,437,000 $ 92,955,000 $ 164,662,000 ===================== ===================== ==================
F-21 UNITED HERITAGE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14. SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) - CONTINUED CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
March 31, 2002 March 31, 2001 March 31, 2000 ------------------- ----------------- ------------------ Sales of oil and gas net of production costs ($82,000) ($10,000) ($24,000) Net changes in prices and production costs (903,000) (93,431,000) - Extensions, additions and discoveries 46,224,000 - 246,780,000 Revision of quantity estimates and timing (28,095,000) (9,684,000) - Accretion of discount 9,296,000 16,466,000 - Net change in income taxes (3,421,000) 14,952,000 (82,094,000) ------------------- ----------------- ------------------ Net decrease ($23,019,000) ($71,707,000) $ 164,662,000 =================== ================= ==================
F-22