FORM 51-901F
QUARTERLY REPORT
Incorporated as part of: ________X____________Schedule A
______________________ Schedules B & C
ISSUER DETAILS:
NAME OF ISSUER
Derek Oil and Gas Corporation
ISSUER'S ADDRESS
#1550 - 355 Burrard Street
Vancouver, B.C. V6C 2G8
ISSUER TELEPHONE NUMBER
(604) 331-1757
CONTACT PERSON
Frank Hallam
CONTACT'S POSITION
Director
CONTACT TELEPHONE NUMBER
(604) 331-1757
CONTACT E-MAIL ADDRESS
invest@derekresources.com
WEBSITE ADDRESS
www.derekresources.com
FOR QUARTER ENDED
April 30, 2003
DATE OF REPORT
April 30, 2003
CERTIFICATE
THE SCHEDULE(S) REQUIRED TO COMPLETE THIS QUARTERLY REPORT ARE ATTACHED AND THE DISCLOSURE CONTAINED THEREIN HAS BEEN APPROVED BY THE BOARD OF DIRECTORS. A COPY OF THIS QUARTERLY REPORT WILL BE PROVIDED TO ANY SHAREHOLDER WHO REQUESTS IT. PLEASE NOTE THAT THIS FORM IS INCORPORATED AS PART OF BOTH THE REQUIRED FILING OF SCHEDULE A AND SCHEDULES B & C.
“Barry C.J. Ehrl” Barry Ehrl 2003/09/16
DIRECTOR'S SIGNATURE
DIRECTOR'S NAME DATE SIGNED
(YY/MM/DD)
“Frank Hallam” Frank R. Hallam 2003/09/16
DIRECTOR'S SIGNATURE
DIRECTOR'S NAME
DATE SIGNED
(YY/MM/DD)
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars).
PricewaterhouseCoopers LLP
Chartered Accountants
PricewaterhouseCoopers Place
250 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 3S7
Telephone +1 (604) 806 7000
Facsimile +1 (604) 806 7806
Independent Auditors’ Report
To the Shareholders of
Derek Oil and Gas Corporation
We have audited the consolidated balance sheets ofDerek Oil and Gas Corporation(formerly Derek Resources Corporation) (an exploration stage company) as at April 30, 2003 and 2002 and the consolidated statements of loss, shareholders’ equity and cash flows for the years ended April 30, 2003, 2002 and 2001. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at April 30, 2003 and 2002 and the results of its operations and its cash flows and the changes in its shareholders’ equity for the years ended April 30, 2003, 2002 and 2001 in accordance with Canadian generally accepted accounting principles. As required by the British Columbia Company Act, we report that, in our opinion, these principles have been applied, after giving effect to the changes in accounting policy described in note 2 to the financial statements, on a consistent basis.
“PricewaterhouseCoopers LLP”
Chartered Accountants
Vancouver, Canada
August 15, 2003
Comments by the Auditors for U.S. Readers on Canada-U.S. Reporting Conflict
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) when the financial statements are affected by conditions and events that cast substantial doubt on the company’s ability to continue as a going concern, such as those described in note 1 to the consolidated financial statements. Our report to the shareholders dated August 15, 2003 is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors’ report when these are adequately disclosed in the financial statements.
“PricewaterhouseCoopers LLP”
Chartered Accountants
Vancouver, Canada
August 15, 2003.
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Consolidated Balance Sheets
As at April 30, 2003 and 2002
(expressed in Canadian dollars)
2003
2002
$
$
Assets
Current assets
Cash and short-term deposits
8,857
14,804
Accounts receivable and prepaid expenses
7,112
3,942
15,969
18,746
Oil and natural gas properties(note 3) 14,217,018 13,910,104
Performance bonds(note 3)
81,710
71,195
Other assets
9,651
12,215
14,324,348
14,012,260
Liabilities
Current liabilities
Accounts payable and accrued liabilities
985,482
1,441,551
Current portion of notes payable (note 4)
609,660
1,066,180
1,595,142
2,507,731
Notes payable(note 4) - 506,000
1,595,142
3,013,731
Shareholders’ Equity
Capital stock(note 5)
24,360,559
22,464,255
Contributed surplus
65,950
-
Equity component of notes payable(note 4)
203,300
132,000
Common shares allotted - not issued
220,000
-
Deficit
(12,120,603)
(11,597,726)
12,729,206
10,998,529
14,324,348 14,012,260
Going concern and nature of operations(note 1).
Approved by the Board of Directors
“Frank R. Hallam” Director “Barry C.J. Ehrl” Director
The accompanying notes are an integral part of the consolidated financial statements.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Consolidated Statements of Shareholders’ Equity
For the years ended April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
Equity
Common shares
component
Total
Number
allotted - Contributed of notes Cumulative shareholders’
of shares Amount not issued surplus payable deficit equity
$ $ $ $ $ ; $
Balance - April 30, 2000
9,958,379 11,575,653
135,000
-
- (9,708,804)
2,001,849
Special warrants issued and
converted to shares
7,500 6,000
-
-
-
-
6,000
Shares recorded as finder’s fee
410,377 172,357
-
-
-
-
172,357
Shares recorded as finder’s fee
- (172,357)
-
-
-
-
(172,357)
Shares issued for cash:
Exercise of warrants
1,811,500 973,470
-
-
-
-
973,470
Exercise of options
72,000 35,380
-
-
-
-
35,380
Private placements
- net of costs
19,137,865 7,729,247
-
-
-
- 7,729,247
Shares issued to acquire
royalty interest
50,000 37,500
(37,500)
-
-
-
-
Loss for the year - -
-
-
- (826,342)
(826,342)
Balance - April 30, 2001
31,447,621 20,357,250
97,500
-
- (10,535,146) 9,919,604
Shares recorded as finder’s fee
183,050 56,665
-
-
-
-
56,665
Shares recorded as finder’s fee
- (56,665)
-
-
-
-
(56,665)
Shares issued to settle
notes payable(note 4)
731,300 219,390
-
-
-
-
219,390
Shares issued for cash:
Private placements
- net of costs
5,653,051 1,790,115
-
-
-
- 1,790,115
Shares issued to acquire
royalty interest
130,000 97,500 (97,500)
-
-
-
-
Notes payable
- -
-
-
132,000
-
132,000
Loss for the year - -
-
-
- (1,062,580) (1,062,580)
Balance - April 30, 2002 38,145,022 22,464,255
-
-
132,000 (11,597,726) 10,998,529
Shares issued for cash:
Private placements
- net of costs
4,217,500 421,750
-
-
-
- 421,750
Shares issued to settle notes
payable (note 4)
10,375,200 1,037,520
-
-
-
- 1,037,520
Share issued to settle interest
on notes payable (note 4)
928,830 92,883
-
-
-
-
92,883
Shares issued to settle
accounts payable
3,441,506 344,151
-
-
-
- 344,151
Share consolidation (note 5) (38,072,039) - -
-
-
-
-
Shares allotted - not issued
- - 220,000
-
-
- 220,000
Contributed surplus (note 4)
- -
-
65,950
-
-
65,950
Equity component of
notes payable
- -
-
-
71,300
-
71,300
Loss for the year - -
-
-
- (522,877) (522,877)
Balance - April 30, 2003 19,036,019 24,360,559 220,000
65,950
203,300 (12,120,603) 12,729,206
The accompanying notes are an integral part of the consolidated financial statements.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Consolidated Statements of Loss
For the years ended April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
2003
2002
2001
$
$
$
Revenues
Oil and gas sales - net of royalties
21,702
1,024
10,221
Gain on sale of oil and gas leases
-
-
11,729
Interest - net of bank charges
1,597
-
109,485
Gain on settlement of notes payable (note 4)
37,750
-
-
61,049
1,024
131,435
Expenses
Accounting, legal and audit
64,553
167,557
62,801
Interest expense (note 4)
106,277
141,151
-
Accretion on notes payable (note 4)
250,000
-
-
Consulting and management fees
116,752
370,114
385,333
Office administration and other
131,762
166,434
165,871
Shareholders’ information and travel
40,310
159,721
310,647
Stock exchange and filing fees
22,660
15,740
11,493
Transfer fees
10,010
7,864
9,816
Foreign exchange (gain) loss
(74,293)
35,023
11,816
Cost recoveries
(84,105)
-
-
583,926
1,063,604
957,777
Loss for the year
(522,877)
(1,062,580)
(826,342)
Basic and diluted loss per share(note 2)
(0.04)
(0.09)
(0.11)
Weighted average number of shares
outstanding(note 2)
14,753,342
11,417,283
7,837,082
The accompanying notes are an integral part of the consolidated financial statements.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Consolidated Statements of Cash Flows
For the years ended April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
2003
2002
2001
$
$
$
Cash flows from operating activities
Loss for the year
(522,877)
(1,062,580)
(826,342)
Items not affecting cash
Gain on sale of oil and gas leases
-
-
(11,729)
Amortization of other assets
2,564
6,127
4,376
Interest on notes payable paid in shares
92,883
-
-
Gain on settlement of notes payable
(37,750)
-
-
Accretion on notes payable
250,000
-
-
(215,180)
(1,056,453)
(833,695)
Net change in non-cash working capital items
Accounts receivable and prepaid expenses
(3,170)
143,596
(81,487)
Accounts payable and accrued liabilities
62,903
302,826
45,873
(155,447)
(610,031)
(869,309)
Cash flows from investing activities
Expenditures on oil and natural gas properties (306,914)
(1,660,783)
(10,719,698)
Accounts payable on oil and natural gas
property expenditures
(174,821)
(1,444,702)
2,467,709
Proceeds from sale of oil and gas leases
-
-
11,729
Performance bonds
(10,515)
(3,222)
(31,200)
Other assets
-
-
(14,617)
(492,250)
(3,108,707)
(8,286,077)
Cash flows from financing activities
Notes payable
-
1,923,570
-
Shares allotted - not issued
220,000
-
-
Shares issued for cash
421,750
1,790,115
8,738,097
641,750
3,713,685
8,738,097
Decrease in cash and short-term deposits (5,947)
(5,053)
(417,289)
Cash and short-term deposits
- Beginning of year
14,804
19,857
437,146
Cash and short-term deposits
- End of year
8,857
14,804
19,857
Cash and short-term deposits consist of
Cash
8,857
14,804
19,857
Short-term deposits
-
-
-
8,857
14,804
19,857
Supplemental cash flow information(note 12)
The accompanying notes are an integral part of the consolidated financial statements.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
1
Going concern and nature of operations
The company was incorporated under the British Columbia Company Act on April 6, 1981 under the name Cove Energy Corporation. The company changed its name to Derek Resources Corporation effective May 5, 1995 and to Derek Oil and Gas Corporation (Derek or the company) effective March 3, 2003.
The company is engaged in the acquisition, exploration and development of oil and gas properties. The company’s current oil and gas activities are in the pre-production stage and, accordingly, Derek considers itself to be an exploration stage company.
For the years ended April 30, 2003, 2002 and 2001, the company has incurred losses of $522,877, $1,062,580 and $826,342 respectively, and as at April 30, 2003, the company has insufficient working capital to meet its ongoing operating commitments. Revenue from its oil and gas properties is not sufficient to fully meet its cash requirements and the company is dependent on its shareholders and creditors to support it as a going concern. While the company has been successful in obtaining financing from shareholders and directors in the past, there is no assurance the company will continue to be successful in raising necessary financing. Accordingly, there is substantial doubt about the ability of the company to continue as a going concern.
Management is actively pursuing additional sources of financing and is pursuing a partnership with an outside source to develop the LAK Ranch property. The LAK Ranch oil production plant is idle until a partner or substantial financing can be found. On April 15, 2003, the company entered into an agreement with an investor whereby the investor will provide US$700,000 to fund operating and development expenditures on the existing well pair constructed on the LAK Ranch project. In exchange for the funding, the investor will earn a direct, fully participating 49% interest in the existing well pair and will receive 49% of net revenues from the well pair until such time as it has received 1.2 times its original investment (US$840,000). Subsequent to achieving the payback, the investor’s working interest will be reduced to 33%. Under the terms of the farm-in agreement, the funding may only be spent on qualifying operating an d development expenses on the existing well pair. In addition, the investor will have the right to participate for a 33% working interest in up to one new well pair per year for each of the calendar years 2004 through 2007.
The terms of the financing agreement required the company to raise an additional US$300,000 by November 1, 2003, to provide total financing for the existing well pair of US$1,000,000. On August 13, 2003, the company closed a private placement of 4,000,000 common units at $0.15 per unit for net proceeds of US$435,000, consisting of one common share and one-half common share purchase warrant. One full warrant will be convertible into common shares of the company at $0.20 per share for one year.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
The continued operations of the company and the recoverability of the amounts shown for oil and natural gas properties are dependent upon the existence of economically recoverable oil reserves, maintaining title and beneficial interest in the property, the ability of the company to obtain necessary financing to bring the reserves into production, and upon future profitable production or proceeds from the disposition of properties. The amounts shown as oil and natural gas properties represent net costs to date, less amounts depleted or written off, and do not necessarily represent present or future values.
These consolidated financial statements have been prepared on a going concern basis and, accordingly, do not include any adjustments that might be necessary should the company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities other than in the normal course of business.
2
Significant accounting policies
Generally accepted accounting principles
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which, as they apply to these financial statements, differ in certain respects from those in the United States, as explained in note 11.
Principles of consolidation
These consolidated financial statements include the accounts of the company and its wholly owned U.S. subsidiary, Derek U.S.A.
Use of estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could materially differ from those reported.
Cash and short-term deposits
Cash and short-term deposits consist of cash on deposit with banks and highly liquid short-term interest-bearing securities with maturities at purchase dates of three months or less.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
Oil and natural gas properties
The company follows the full-cost method of accounting for oil and natural gas properties, whereby all costs relating to exploration and development of oil and natural gas reserves are capitalized. Such costs include land acquisition costs, geological and geophysical expenses, engineering fees, related direct administrative expenses, and costs of drilling both productive and non-productive wells, including the cost of production equipment.
Costs are allocated to a separate cost centre for each program in which the company has an interest and are depleted by cost centre using the unit-of-production method based upon estimated proven developed reserves. Cost centres whose carrying values exceed their estimated net recoverable amount are written down to that net realizable value in the period in which such determinations are made up. For cost centres that do not yet have proven reserves, the amounts shown for oil and natural gas properties represent costs to date, net of any revenues, and the underlying value is entirely dependent on the existence and future economic recovery of reserves. These cost centres are not depleted until quantities of proven reserves can be determined.
Estimated future site restoration costs are provided on a unit-of-production basis. Actual costs are charged against the accumulated provision as incurred.
Translation of foreign currencies
The integrated foreign subsidiary is translated using the temporal method. Under this method of translation, monetary assets and liabilities denominated in foreign currencies are translated at the exchange rate in effect at the balance sheet date, and non-monetary assets and liabilities are translated at the exchange rate in effect at the date of the transaction. Revenues and expenses are translated at the average exchange rate for the period with the exception of depletion of oil and gas properties, which is translated at historical exchange rates. Resulting exchange gains or losses are included in the determination of loss for the period.
Stock options
The company grants stock options under a stock option plan as described in note 7. Effective May 1, 2003, the company adopted the new recommendations of the Canadian Institute of Chartered Accountants for stock-based compensation. The company has elected not to recognize compensation expense when stock options are issued. No stock options were issued during the year ended April 30, 2003.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
Loss per share
Loss per share has been calculated using the weighted average number of shares issued and outstanding during the reporting period, including shares issuable under special warrants but excluding escrow shares of the company, using the treasury stock method to compute the dilutive effect of stock options, warrants and similar instruments. The resulting dilutive effect of stock options and warrants has not been included in the calculation of loss per share because to do so would be anti-dilutive.
Loss per share has been presented to give retroactive effect to the share capital consolidation (note 5), as follows:
2002
2001
Weighted average number of shares outstanding
Restated
11,417,283
7,837,082
As previously reported
34,251,850
23,511,247
Loss per share
Restated
0.09
0.11
As previously reported
0.03
0.04
Income taxes
Future income taxes are recorded using the liability method. Under this method, future tax assets and liabilities are based upon differences between the financial reporting and tax basis of assets and liabilities measured using substantially enacted tax rates. The effect on future tax assets and liabilities of a change in the rates is recognized in income in the period that substantive enactment occurs. The company records future tax assets only when it is more likely than not that the asset will be realized.
Financial instruments
Financial instruments are classified in accordance with the substance of the contractual arrangement. The fair values of financial instruments are reported separately where fair values are determinable and where they are materially different from their carrying values.
3
Oil and natural gas properties
2003
2002
$
$
United States - LAK Ranch oil project (unproven)
14,217,018 13,910,104
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
The company has working interests in certain wells located in Oklahoma and Kansas, U.S.A. These interests are carried at a nominal value.
By way of an option agreement dated September 24, 1997, the company has a working interest in the unproven LAK Ranch oil leasehold interest located near Newcastle, Wyoming, U.S.A. Under the terms of the option agreement, the company acquired an initial 75% interest in the LAK property and up to a 37.5% interest in two adjoining tracts of land by making payments of US$600,000 and funding of US$3,500,000 in exploration expenditures by December 31, 2000. The agreement required that all property expenditures made in excess of US$3,500,000 were to be on a pro rata basis by the company and the optionor. On December 19, 2000, the company delivered formal notice to the optionor that the company had spent US$3,868,144 on the LAK project and had met the earn-in requirements of the option agreement and that the company had vested its 75% working interest in the LAK property.
By January 30, 2001, the optionor had made no payment to the company with respect to its 25% share of ongoing exploration costs for the LAK property. The company delivered a formal notice of default to the optionor for its failure to pay amounts then due. On March 1, 2001, the company initiated formal foreclosure proceedings in Wyoming. The optionor contested the company’s foreclosure proceedings to the Wyoming District Court. The court upheld the company’s right to foreclose. On April 13, 2001, the company foreclosed on all of the optionor’s rights and interests in the LAK property for a bid amount of US$852,571, representing the optionor’s share of LAK property costs incurred to date, giving the company a 100% interest in the property.
Under the terms of a subsequent settlement agreement with the optionor, the optionor relinquished any claim to any right or interest in the LAK Ranch property. In return, it received a proportionate, reducible gross overriding royalty on the property of 0.7%. It was also granted certain participation rights in the event that the company should sell some or all of its rights and interests in the property. From any net sales proceeds, the optionor will receive a 7.5% interest in the first US$7.5 million of net proceeds and 1% of any proceeds thereafter, subject to certain adjustments.
The main productive portion of the LAK property is subject to a 16.09% overriding royalty. The adjoining property is subject to a 9.23% overriding royalty. During the year ended April 30, 2002, as part of certain financings (note 4), the company granted additional royalties of US$0.136 per barrel of oil produced on the LAK property. During the year ended April 30, 2003, the company granted a lien on the LAK property as security against certain borrowings (note 4).
The company has posted performance bonds of US$55,000 in relation to the LAK property.
During the year ended April 30, 2003, the company capitalized $10,400 (2002 - $72,000) in general and administrative costs in the LAK property.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
4
Notes payable
2003 2002
Debt
Equity
Total
Total
$
$
$
$
Notes payable
565,460
203,300
768,760
1,585,080
Accrued interest
44,200
-
44,200
119,100
609,660
203,300
812,960
1,704,180
2003
2002
$
$
Interest expense on notes payable
106,277
138,000
The fair value of the notes payable is estimated to equal the total carrying value of the debt and equity components amounting to $812,960.
Certain of the notes payable, with options to convert principal and interest to common shares of the company, have been split between debt and equity. The equity component has been calculated using an option pricing model, based on the price of the company’s common shares on the date the notes were issued, the option price, the price volatility of the company’s shares and a risk free discount rate based on Government of Canada Treasury Bill rates. The debt component of convertible notes payable is accreted over the term to maturity of the notes payable, to equal the face amount of the note, through a change to earnings.
Details of the notes payable are as follows:
In May 2001, the company issued promissory notes, with no fixed repayment terms, in the principal amount of US$206,500, bearing interest at an effective rate of 10.5% per annum. In addition to the interest payable on the notes, the lenders received a gross overriding royalty on the LAK Ranch property of US$0.05 per barrel of oil produced. During the year ended April 30, 2002, the company repaid promissory notes and accrued interest of US$138,000 by issuing common shares, and US$78,600 in cash.
On June 6, 2001, the company issued a promissory note in the principal amount of US$100,000, bearing interest at an effective rate of 10% per annum. All principal and any outstanding interest were due and payable on June 6, 2002. In addition to the interest payable on the note, the lender received a gross overriding royalty on the LAK Ranch property of US$0.01 per barrel of oil produced. On February 5, 2003, the company settled US$50,000 of the note in exchange for 786,850 common shares of the company and exchanged the remaining principal amount of US$50,000 by way of a new promissory note bearing interest at an effective rate of 10% per annum, repayable on September 30, 2003.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
On June 15, 2001, the company issued a promissory note in the principal amount of US$471,183, bearing interest at an effective rate of 10% per annum, in settlement of accounts payable. All principal and interest were due and payable on May 31, 2002. In addition to the interest payable on the note, the lender received a gross overriding royalty on the LAK Ranch property of US$0.0471 per barrel of oil produced. The lender also received a right to convert some or all of the principal and interest outstanding into shares of the company at an exercise price of $0.75 per share at any time during the life of the note. Effective August 21, 2002, the lender agreed to settle one-half of the total principal and interest outstanding in exchange for 4,471,090 common shares of the company. The excess of the carrying amount of the notes payable over the fair value of common shares issued of $37,750, has been included in contributed surpl us. The lender also agreed that the remaining amount payable by the company would be secured by way of a new note issued by the company bearing interest at 10% per annum and maturing on September 30, 2003. In addition, the company granted the lender a lien on the LAK Ranch property. The lender will have the right, after August 21, 2003 but before September 30, 2003, to convert any unpaid principal and interest into common shares of the company at an exercise price of $0.10 per share (repriced to $0.30 per share on March 3, 2003 - note 5). The company realized a gain of $37,750 on the settlement of this note payable.
On June 27, 2001, the company issued a promissory note for a principal amount of US$100,000, bearing interest at a rate of 10% per annum. All interest and principal are due and payable by the company on May 31, 2003. In addition to the interest payable on the note, the lender received a gross overriding royalty on the LAK Ranch property of US$0.01 per barrel of oil produced. The lender also received a right to convert some or all of the principal and interest outstanding into shares of the company at a price of $0.75 per share (repriced to $2.25 per share on March 3, 2003 - note 5) at any time during the life of the note. On February 5, 2003, the company settled the accrued interest on this note in the amount of US$12,114 in exchange for 190,640 common shares of the company.
On June 28, 2001, the company issued promissory notes for a total principal amount of US$100,000, bearing interest at a rate of 10% per annum. All interest and principal were due and payable by the company on May 31, 2002. In addition to the interest payable on the note, the lenders received a gross overriding royalty on the LAK Ranch property of US$0.01 per barrel of oil produced. The lenders also received a right to convert some or all of the principal and interest outstanding into shares of the company at a price of $0.75 per share at any time during the life of their notes. On February 5, 2003, the company settled the principal and interest outstanding on these notes in the amount of US$112,082 in exchange for 1,763,840 common shares of the company. The excess of the carrying amount of the notes payable over the fair value of common shares issued of $15,300, has been included in contributed surplus.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
On August 31, 2001, the company issued a promissory note in the principal amount of US$89,838 in settlement of accounts payable, bearing interest at a rate of 10% per annum. All interest and principal were due and payable by the company on August 31, 2002. In addition to the interest payable on the note, the lender received a gross overriding royalty on the LAK Ranch property of US$0.0089 per barrel of oil produced. The lender also received a right to convert some or all of the principal and interest outstanding into shares of the company at a price of $0.75 per share at any time during the life of the note. On February 5, 2003, the company settled the principal and interest outstanding on this note in the amount of US$99,806 in exchange for 1,570,640 common shares. The excess of the carrying amount of the notes payable over the fair value of common shares issued of $12,900, has been included in contributed surplus.
During the period from February 2002 to April 2002, the company borrowed US$150,000 in four separate tranches from a single lender, bearing interest at a rate of 15% per annum, payable on demand. On February 5, 2003, the company settled the principal and interest outstanding in the amount of US$160,193 in exchange for 2,520,970 common shares of the company.
5
Capital stock
Authorized
100,000,000 common shares without par value
Issued
19,036,019 common shares
Effective March 3, 2003, the company consolidated its common shares by issuing one new share for every three previous common shares outstanding, resulting in a reduction of issued shares from 57,108,058 to 19,036,019.
On November 17, 1997, the company issued 375,000 escrow shares to a director at $0.01 per escrow share. These escrow shares are subject to the terms of release as required by the TSX Venture Exchange. The company previously released 126,284 shares from escrow, leaving 82,905 shares remaining in escrow, subsequent to the foregoing share consolidation.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
6
Warrants
Each of the company’s common share purchase warrants are convertible into one common share, upon payment of the exercise price.
Share purchase warrant activity for the years ended April 30, 2003 and 2002 was as follows:
Number of
Weighted
Shares
average price
$
Outstanding - April 30, 2001
7,469,830
1.74
Granted
2,189,134
1.26
Expired
(734,417)
3.00
Outstanding - April 30, 2002
8,924,547
1.50
Granted
1,405,833
0.45
Expired
(6,735,413)
1.59
Outstanding - April 30, 2003
3,594,967
1.21
As at April 30, 2003, outstanding share purchase warrants were as follows:
Number of
Price per
Shares
share
Expiry date
$
97,000
2.25
August 20, 2003
178,333
1.20
September 14, 2003
529,828
1.20
October 19, 2003
1,383,973
1.20
December 21, 2003
1,305,833
0.45
August 30, 2004
100,000
0.45
December 13, 2004
3,594,967
The figures in the tables above reflect the retroactive effect of the common share consolidation (note 5).
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
7
Stock options
Stock options are granted at the discretion of the board of directors, pursuant to an incentive stock option plan, within regulatory requirements, to directors, consultants and employees. Stock options are priced at the higher of the previous day’s closing price and the 15-day average price prior to the granting of the option as quoted on the TSX Venture Exchange and expire after five years. Stock options vest immediately, once granted and approved, except stock options issued to investor relations consultants, which vest over a one-year period. The total number of outstanding stock options cannot exceed 10% of issued and outstanding capital stock.
Stock option activity for the years ended April 30, 2003 and 2002 was as follows:
Number of
Weighted
Shares
average price
$
Outstanding - April 30, 2001
935,000
2.37
Granted
640,000
1.05
Cancelled
(719,000)
2.49
Outstanding - April 30, 2002
856,000
1.20
Cancelled
(175,667)
1.53
Outstanding - April 30, 2003
680,333
1.13
As at April 30, 2003, outstanding stock options were as follows:
Number of
Price per
shares share
$
Expiry date
75,000
1.44
May 5, 2004
3,667
2.25
October 15, 2004
16,667
2.10
December 16, 2004
584,999
1.05
November 4, 2005
680,333
The figures in the tables above reflect the retroactive effect of the common share consolidation (note 5).
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
8
Related party transactions
a)
The company has a management contract that provides the president with a fee for services rendered of $10,000 per month plus out-of-pocket expenses. Charges under this agreement of $80,000 for the year ended April 30, 2003 (2002 - $120,000; 2001 - $120,910) have been included in consulting and management fee expenses.
b)
b) A director of the company provided professional services. For the year ended April 30, 2003, consulting and management fee expenses include $nil (2002 - $84,000; 2001 - $84,910) paid to the director and accounting expenses include $nil (2002 - $12,000; 2001 - $12,000) paid to this same director.
c)
During the year ended April 30, 2003, consulting fees of $36,000 (2002 - $96,981; 2001 - $139,875) were paid or payable to officers and a director, and included in consulting and management fee expenses.
d)
At April 30, 2002, accounts payable included $115,457 payable to officers and directors for services provided under the foregoing arrangements and $14,742 to companies with common officers and directors for certain costs incurred on behalf of the company in the normal course of business.
Other related party transactions are noted elsewhere in these consolidated financial statements.
9
Income taxes
The company has Canadian net operating losses available for carry-forward of approximately $3,750,000 expiring over the next seven years. No future tax benefit has been recognized in these accounts related to these losses.
10
Segmented information
The company currently operates in one reportable segment. Segmented information has been shown in note 3 for oil and natural gas properties. Substantially all the company’s remaining assets and liabilities are in Canada. Revenues are sourced primarily in the U.S.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
11
Material differences between Canadian and United States generally accepted accounting principles (GAAP)
The company prepares its consolidated financial statements in accordance with accounting principles generally accepted in Canada (Canadian GAAP), which differ in certain respects from those principles that the company would have followed had its consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The significant measurement differences between Canadian and U.S. GAAP and their effect on the consolidated financial statements are described below:
2003
2002
2001
$
$
$
Consolidated statements of loss
Loss for the year under Canadian GAAP
(522,877)
(1,062,580)
(826,342)
Consulting and management fees (a)
-
-
(33,517)
Accretion on notes payable (b)
250,000
-
-
Gain on settlement of notes payable (b)
(37,750)
-
-
Loss for the year under U.S. GAAP
(310,627)
(1,062,580)
(859,859)
Loss per share under U.S. GAAP
(0.02)
(0.09)
(0.11)
Consolidated balance sheets
Liabilities
Liabilities under Canadian GAAP
1,595,142
3,013,731
2,583,427
Equity component of notes payable (b)
57,000
132,000
-
1,652,142
3,145,731
2,583,427
Shareholders’ equity
Shareholders’ equity under Canadian GAAP 12,729,206
10,998,529
9,919,604
Consulting and management fees (a)
-
-
(33,517)
Escrow shares released (a)
-
-
33,517
Accretion on notes payable (b)
250,000
-
-
Gain on settlement of notes payable (b)
(37,750)
-
-
Equity component of notes payable (b)
(203,300)
(132,000)
-
Contributed surplus (b)
(65,950)
-
-
12,672,206
10,866,529
9,919,604
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
a)
On November 17, 1997, the company issued 375,000 performance escrow shares to a director at $0.01 per share. These shares are released from escrow subject to the terms of release as required by the regulators. Under U.S. GAAP (APB No. 25), these escrow shares result in compensation expense on the date of release from escrow measured as the excess of the fair value of the shares at that time over the price paid for the shares. During the year ended April 30, 2001, 55,862 shares were released from escrow.
b)
Certain of the notes payable, with options to convert principal into common shares of the company, have been split between debt and equity. Under U.S. GAAP, the conversion option would not be attributed any value and, accordingly, the entire carrying amount of the notes payable would be classified as debt.
Recent accounting pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” which requires that asset retirement obligations be recognized when they are incurred, and be capitalized as part of the asset’s carrying value and displayed as liabilities. SFAS No. 143 also requires increased disclosure surrounding asset retirement obligations. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The company is analyzing the impact of SFAS No. 143 and will adopt the standard on May 1, 2003.
The FASB has issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under this standard, exit costs and restructuring liabilities generally will be recognized only when incurred. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The company does not expect that the implementation of this new standard will have a material impact on its consolidated financial position or results of operations.
The FASB has issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which requires that certain financial instruments previously classified as equity now be classified as liabilities. SFAS No. 150 is effective for the beginning of the first interim period commencing after June 15, 2003. The company does not expect that the implementation of this new standard will have a material impact on its consolidated financial position or results of operations.
The Accounting Standards Board of the Canadian Institute of Chartered Accountants (CICA) has approved a new Handbook section, “Asset Retirement Obligations,” to replace the current guidance on future removal and site restoration costs included in the CICA accounting standard 3061, “Property, Plant and Equipment.” The standard, which is similar to SFAS No. 143, is effective for years beginning on or after January 1, 2004. The standard requires recognition of a liability at its fair value for the obligation associated with the retirement of a tangible long-lived asset. A corresponding asset retirement cost would be added to the carrying amount of the related asset and amortized to expense over the useful life of the asset. The company is analyzing the impact of this new standard, which will be adopted on May 1, 2004.
Derek Oil and Gas Corporation
(formerly Derek Resources Corporation)
(an exploration stage company)
Notes to Consolidated Financial Statements
April 30, 2003, 2002 and 2001
(expressed in Canadian dollars)
The CICA has issued CICA 3063, “Impairment of Long-Lived Assets.” This statement establishes standards for the recognition, measurement and disclosure of the impairment of non-monetary long-lived assets, including property, plant and equipment, intangible assets with finite useful lives, deferred pre-operating costs and long-term prepaid assets. The company does not expect that the implementation of this new standard will have a material impact on its consolidated financial position or results of operations.
The CICA has approved Accounting Guideline AcG-16, which amends AcG-5, “Full Cost Accounting in the Oil and Gas Industry.” The changes modify the ceiling test in AcG-5 to be consistent with CICA 3063. AcG-16 is effective for years beginning on or after January 1, 2004. The company is analyzing the impact of this new standard, which will be adopted on May 1, 2004.
12
Supplemental cash flow information
2003
2002
2001
$
$
$
Interest paid
13,394
15,000
-
Non-cash investing and financing activities
Shares issued to settle accounts payable and
accrued liabilities
344,151
-
6,000
Shares issued to settle notes payable
1,130,403
219,390
-
