===============================================================
United States
Securities and Exchange Commission
Washington, DC 20549
Form 20-F
2002 Annual Report
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO
SECTION 12(b) OR (g) of the
Securities Exchange Act of 1934
OR
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED
APRIL 30, 2002
OR
FOR THE TRANSITION PERIOD FROM _______ TO __________
COMMISSION FILE NUMBER: 0-30072
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Derek Resources Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
BRITISH COLUMBIA, CANADA
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
SUITE 1550, 355 BURRARD STREET, VANCOUVER,
BRITISH COLUMBIA, CANADA, V6C 2G8
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED OR TO BE REGISTERED
PURSUANT TO SECTION 12 (b) OF THE ACT.
TITLE OF EACH CLASS
NAME ON EACH EXCHANGE ON WHICH REGISTERED
None
DNA
Securities Registered or to be Registered
Pursuant to Section 12(g) of the Act.
COMMON SHARES WITHOUT PAR VALUE
(TITLE OF CLASS)
Securities For Which There is a Reporting
Obligation Pursuant to Section 15(d) of the Act.
NONE
(TITLE OF CLASS)
INDICATE THE NUMBER OF OUTSTANDING SHARES OF EACH OF THE
ISSUER'S CLASSES OF CAPITAL OR COMMON STOCK AS of the close
of the Period Covered by the Annual Report.
38,145,022 COMMON SHARES
Indicate by Check Mark Whether the Registrant (1) has Filed
All Reports Required To be Filed by Section 12 or 15( d) of
the Securities Exchange Act of 1934 During the Preceding 12
Months (or for such shorter period that the registrant was
required to file such reports), and (2) Has Been Subject to
Such Filing Requirements for the Past 90 Days.
Yes [X] No [ ]
Indicate by Check Mark Which Financial Statement Item the
Registrant Has Elected to Follow.
Item 17 [X] Item 18 [ ]
(Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Past Five Years)
Indicate by Check Mark Whether the Registrant Has Filed All
Documents and Reports Required to be Filed by Sections 12, 13
or 15(d) of the Securities Exchange Act of 1934 Subsequent to
the Distribution of Securities Under a Plan Confirmed by a
Court.
Yes [ ] No [ ] Not Applicable [X]
===============================================================
SECURITIES AND EXCHANGE COMMISSION
FORM 20-F
TABLE OF CONTENTS
Glossary of Terms 7
PART 1 9
Item 1 - Identity of Directors, Senior Management and
Advisers 9
Item 2 - Offer Statistics and Expected Timetable 9
Item 3 - Key Information 9
Selected Financial Data 9
Capitalization and Indebtedness 10
Reasons for the Offer and Use of Proceeds 11
Risk Factors 11
Item 4 - Information on the Company 14
Introduction 14
General Development of the Business of the Registrant 15
Business Overview 18
Organizational Structure 19
Property, Plants and Equipment 19
The LAK Ranch Project, Wyoming, USA 19
Location, Description and Acquisition 19
History of the LAK Ranch Project 23
Geology 23
The Steam Assisted Gravity Drainage Process 25
The Gas Assisted Gravity Drainage Process 26
Operating Agreement 26
Bateman Agreements 27
Development Program 27
Litigation with Asdar Group 29
Item 5 - Operating and Financial Review and Prospects 30
Overview 30
Operating Results 31
Liquidity and Capital Resources 34
Research and Development, Patents and Licences, etc. 35
Trend Information 35
Item 6 - Directors, Senior Management and Employees 35
Directors and Senior Management 35
Compensation 38
Board Practices 40
Employees 40
Share Ownership 40
Item 7 - Major Shareholders and Related Party Transactions 42
Major Shareholders 42
Related Party Transactions 43
Interests of Experts and Counsel 45
Item 8 - Financial Information 45
Consolidated Financial Statements and Other Financial
Information 45
Legal Proceedings 45
Dividend Policy 45
Significant Changes 46
Item 9 - The Offer and Listing 47
Offer and Listings Details 47
Plan of Distribution 48
Markets 48
Selling Shareholders 48
Dilution 48
Expenses of the Issue 48
Item 10 - Additional Information 49
Share Capital 49
Memorandum of Articles of Association 49
Material Contracts 53
Exchange Controls 54
Taxation 55
Canadian Federal Income Tax Consequences 55
Dividends 56
Capital Gains 56
United States Federal Income Tax Consequences 57
U.S. Holders 57
Distributions on Common Shares of the Registrant 57
Foreign Tax Credit 58
Disposition of Common Shares of the Registrant 58
Other Considerations for U.S. Holders 58
Foreign Personal Holding Company 59
Foreign Investment Company 59
Passive Foreign Investment Company 59
Controlled Foreign Corporation Status 61
Elimination of Overlap Between Subpart F Rules and PFIC
Provisions 62
Dividends and Paying Agents 62
Statement by Experts 62
Documents on Display 62
Subsidiary Information 62
Item 11 - Quantitative and Qualitative Disclosures About
Market Risk 62
Item 12 - Description of Securities Other than Equity
Securities 62
Part II 63
Item 13 - Defaults, Dividend Arrearages and Delinquencies 63
Item 14 - Material Modifications to the Rights of Security
Holders and Use of Proceeds 63
Part III 63
Item 15 - Controls and Procedures 63
Item 16 - Reserved 63
Part IV 63
Item 17 - Financial Statements 63
Item 18 - Financial Statements 63
Item 19 - Exhibits 63
Signature Page 67
The information contained in this Annual Report is current
at November 1, 2002 except where a different date is
specified.
Unless otherwise specified, all monetary amounts are
expressed in Canadian dollars.
Financial information is presented in accordance with
accounting principles generally accepted in Canada.
Differences between accounting principles generally accepted
in Canada and in the United States, as applicable to the
Company are set forth in Note 11 to the accompanying
Consolidated Financial Statements of Derek Resources
Corporation.
The following table sets forth certain standard conversions
from the International System of Units (metric units) to the
Standard Imperial Units:
Conversion Table
To Convert From:
To:
Multiply By:
McF
Cubic metres
28.174
Cubic metres
Cubic feet
35.494
Bbls
Cubic metres
0.159
Cubic metres
Bbls oil
6.290
Feet
Metres
0.305
Metres
Feet
3.281
Miles
Kilometres
1.609
Kilometres
Miles
0.621
Acres
Hectares
0.405
Hectares
Acres
2.471
Forward-Looking Statements
Certain of the information contained in this Form 20-F
Annual Report constitutes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. All statements other than
statements of historical facts included or incorporated by
reference in this report, including, without limitation,
statements regarding the company's future financial
position, business strategy, budgets, projected costs and
plans and objectives of management for future operations,
are forward-looking statements. In addition, forward-
looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect,"
"intend," "project," "estimate," "anticipate," "believe," or
" continue" or the negative thereof or variations thereon or
similar terminology. Although the Company believes that the
expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important
factors that could cause actual results to differ materially
from the company's expectations ("Cautionary Statements")
are disclosed under "Item 3 - Key Information, Risk Factors"
and elsewhere in this Annual Report as well as those factors
disclosed in the Company's documents filed from time to time
with the British Columbia Securities Commission, the Alberta
Securities Commission and the United States Securities and
Exchange Commission. All subsequent written and oral
forward-looking statements attributable to the Company, or
persons acting on its behalf, are expressly qualified in
their entirety by the cautionary statements. The Company
assumes no duty to update or revise its forward-looking
statements based on changes in internal estimates or
expectations or otherwise.
GLOSSARY OF TERMS
Except as otherwise identified, the following terms, when
used herein, shall have the following meanings:
"API" refers to the American Petroleum Institute measure of
the specific gravity of oil; the higher the number, the
lighter the oil.
"bbls" refers to barrels of oil.
"bitumen" or "heavy oil" refers to the tar-like form of oil
that cannot be produced by conventional means. When
extracted from oil sands, it can be upgraded into light
sweet crude and other oil products.
"centipoise" is a unit of measure of viscosity, which is the
resistance of a substance to flow under stress; 1 centipoise
= 0.01 poise.
"Common Shares" means common shares in the capital of the
Company.
"Company" refers to Derek Resources Corporation.
"Derek USA" refers to the Company's wholly owned subsidiary,
Derek Resources (U.S.A.) Inc., a Delaware corporation.
"Exchange" refers to the TSX Venture Exchange.
"GAGD" refers to the Gas Assisted Gravity Drainage process
of recovering oil. The GAGD process uses a lower level
horizontal production well and an upper level horizontal gas
injection well and recovers oil by gravity drainage. See
"Item 4 - Information on the Company, The LAK Ranch Project,
Wyoming, USA".
"gravity" refers the specific weight of oil measured on a
scale based on the weight of water.
"kPa" refers to kilopascal, a unit of measurement of
pressure.
"McF" refers to thousand cubic feet.
"md" refers to millidarcy, which is a unit of measure of
permeability.
"MMBTU" refers to million British Thermal Units.
"MMCF" refers to million cubic feet.
"permeability" is a measure of the ease with which a fluid
such as water or oil moves through a rock when the pores are
connected.
"porosity" is the percentage of the bulk volume of a rock or
soil that is occupied by interstices, or pores, whether
isolated or connected.
"psi" means pounds per square inch, which is a unit of
measure of pressure.
"Registrant" refers to Derek Resources Corporation.
"SAGD" refers to the Steam Assisted Gravity Drainage
approach to the thermal recovery of heavy oil. The SAGD
process uses a lower level horizontal production well and an
upper level horizontal steam injection well and recovers oil
by gravity drainage. See "Item 4 - Information on the
Company, The LAK Ranch Project, Wyoming, USA".
"shale out" refers to the change in a porous sandstone or
limestone when the clay content increases until porosity and
permeability disappear and the rock grades into claystone or
shale; also known as "pinch out".
"synclinal fold" is a fold of which the core contains the
stratigraphically younger rocks; it is generally concave
upward.
"WTI" refers to West Texas Intermediate, a reference point
for U.S. oil pricing.
PART 1
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
See "Item 6 - Directors, Senior Management and Employees".
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 - KEY INFORMATION
Selected Financial Data
Selected financial data of the Company for the five fiscal
years ending April 30, 2002 are derived from the financial
statements of the Company which have been audited by
PricewaterhouseCoopers LLP as indicated in their auditor's
reports which are included elsewhere in this Annual Report.
The selected financial data set forth for Fiscal 1998 and
1999 are derived from the Company's audited financial
statements, not included herein.
The selected financial data should be read in conjunction
with the financial statements and other financial
information included elsewhere in the Annual Report.
The Company has not declared any dividends since
incorporation in 1981 and does not anticipate that it will
do so in the foreseeable future. The present policy of the
Company is to retain future earnings for use in its
operations and the expansion of its business.
Summary of Financial Data
The following tables set forth selected financial data with
respect to the Company on a consolidated basis for the
periods indicated. The information appearing below has been
derived from and should be read in conjunction with the
consolidated financial statements of the Company and notes
thereto as well as the information appearing under the
heading "Item 5 - Operating and Financial Review and
Prospects".
The financial statements of the Company and the table set
forth below have been prepared 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 major differences between
Canadian GAAP and U.S. GAAP that would affect the
measurement of the Company's financial position, loss or
cash flows are set forth in Note 11 to the accompanying
Consolidated Financial Statements of the Company.
SELECTED FINANCIAL DATA
(CDN$ except Per Share Data)
Years Ended April 30
2002
2001
2000
1999
1998
Revenues
1,024
131,435
19,824
39,583
12,083
Net Loss
1,062,580
826,342
675,731
528,589
352,490
Loss Per Share
0.03
0.04
0.09
0.14
0.13
Dividends per Share
0.00
0.00
0.00
0.00
0.00
Total Assets
14,012,260
12,503,031
2,071,694
1,159,765
766,487
Long Term Liabilities
506,000
0.00
0.00
0.00
0.00
Oil and Natural Gas Properties (included in Total Assets)
13,910,104
12,249,321
1,523,623
1,099,401
682,206
Deficit at End of Period
11,597,726
10,535,146
9,708,804
9,033,073
8,504,484
Share Capital
($)
22,464,255
20,357,250
11,575,653
10,053,113
8,484,253
Number of Securities (1)
38,145,022
31,447,621
9,958,379
6,805,129
3,356,122
US GAAP Shareholders' Equity (2)
10,998,529
9,919,604
2,001,849
1,094,040
624,769
US GAAP Net Loss (Earnings) (2)
1,062,580
859,859
675,731
560,279
352,490
US GAAP Loss (Earnings) Per Share (2)
0.03
0.04
0.09
0.15
0.13
NOTES:
1. There are 42,076,522 Common Shares issued and
outstanding as of the date of this Form 20-F Annual Report
2. Refer to discussion in "Item 5 - Operating and
Financial Review and Prospects".
In this Annual Report, unless otherwise specified, all
monetary amounts are expressed in Canadian dollars. The
noon buying rates in New York City for cable transfers in
foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York for the conversion of
Canadian dollars into United States dollars on November 1,
2002 was $0.6418.
The following table sets out the average exchange rates for
the five most recent financial years, calculated using the
average of the exchange rates on the last day of each month
in such periods:
Years Ended April 30
2002
2001
2000
1999
1998
Average for Period
0.6379
0.6616
0.6804
0.6624
0.7115
The following table sets out the high and low exchange rates
for each month during the previous six months:
Oct-02
Sep-02
Aug-02
Jul-02
Jun-02
May-02
High for Period
0.6407
0.6433
0.6442
0.6603
0.6619
0.6547
Low For Period
0.6272
0.6304
0.6264
0.6297
0.6452
0.6366
Capitalization and Indebtedness
Not applicable.
Reasons for the Offer and Use of Proceeds
Not applicable.
Risk Factors
The following is a brief discussion of those distinctive or
special characteristics of the Company's operations and
industry which may have a material impact on, or constitute
risk factors in respect of, the Company's future financial
performance. Due to the nature of the Company's business
and the present stage of development on the LAK Ranch
Project, the following risk factors apply:
Exploration and Development Risks
The pilot plant at the LAK Ranch Project utilizes the SAGD
recovery process which falls under the category of improved
recovery pursuant to the definition found in Rule 4-10(a)(4)
of Regulation S-X. As a result, the Company has not
attributed any proved reserves to the LAK Ranch Project.
Technical and economic information derived from the pilot
study will be used to estimate the amount of recoverable oil
for the development of a commercial scale operation. There
is a risk that the Company may not be able to economically
recover the oil in place.
The Company has never brought any property in which it had
an interest into commercial production. As such, the
Company's ability to meet production, timing and cost
estimates for properties cannot be assured. Technical
considerations, delays in obtaining government approvals,
the inability to obtain financing or other factors could
cause delays in developing properties. Such delays could
materially adversely affect the financial performance of the
Company.
Oil and Gas Prices
The Company's principal business risks arise from the nature
of crude oil and natural gas markets, uncertain results of
capital expenditure programs and volatility of interest and
exchange rate.
Factors beyond the control of the Company may affect the
marketability of any oil and gas discovered. The prices of
crude oil and natural gas have experienced volatile and
significant price movements over short periods of time, and
are affected by numerous factors beyond the control of the
Company, including international economic and political
trends, expectations of inflation, currency exchange
fluctuations (specifically, the U.S. dollar relative to
other currencies), interest rates and global or regional
consumption patterns, speculative activities and increased
production due to improved production methods. The prices
which will be available to the Company for sales of its
production will be established by market forces which can be
affected by various factors, including political events,
economic conditions and production costs in major producing
regions and governmental policies with respect to holdings
by a nation or its citizens. The market for crude oil is
influenced by global supply and demand considerations and by
the supply management practices of the world's dominant
producers concentrated in the Organization of Petroleum
Exporting Countries (OPEC). The natural gas market is
primarily influenced by North American supply and demand
profile and by competing fuels. There can be no assurance
that the price of oil or gas will be such that the Company's
leases can be produced at a profit.
Title Matters
While the Company has diligently investigated title to all
its property interests, this should not be construed as a
guarantee of title. The properties may be subject to prior
unregistered agreements or transfers or native land claims
and title may be affected by undetected defects.
Enforcement of Judgments
The ability of investors to enforce judgments of United
States courts based upon the civil liability provisions of
the United States federal securities laws against the
Company and the directors and officers of the Company may be
limited due to the fact that the Company and these persons
reside outside of the United States and, in respect of the
directors and officers, their assets are located outside the
United States. There is uncertainty as to whether Canadian
courts would: (i) enforce judgments of United States courts
obtained against the Company or its directors and officers
predicated upon the civil liability provisions of the United
States federal securities laws, or (ii) entertain original
actions brought in Canadian courts against the Company or
such persons predicated upon the federal securities laws of
the United States, as such laws may conflict with Canadian
laws. In Canada, civil rights are within the legislative
jurisdiction of the Provinces, and in the Province of
British Columbia, in which the Company and the majority of
its directors and officers are resident, does not have laws
for the reciprocal enforcement of judgments of United States
courts.
"Penny Stock" Rules
The Common Shares are "penny stock" as defined by the
Securities and Exchange Commission. Penny stocks are
generally equity securities with a price of less than US
$5.00 (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ National
Market, provided that current price and volume information
with respect to transactions in such securities is provided
by the exchange or system). The Securities and Exchange
Commission has adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks.
The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the
rules, to deliver a standardized risk disclosure document
prepared by the Securities and Exchange Commission that
provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer
also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each
penny stock held in the customer's account. The bid and
compensation information must be given to the customer
orally or in writing before or with the customer's
confirmation. In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise
exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a
suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These
disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for a
stock that is subject to the penny stock rules and therefore
make it more difficult to sell those shares.
Additional Funding Requirements.
The Company has limited financial resources, and there is no
assurance that additional funding will be available to it
for further development of its properties or to fulfill its
obligations under any applicable agreements. The Company
has relied on external financing, including the issuance of
equity securities, to fund its activities to date and will
continue to require external financing for the foreseeable
future. The exploration and development of the Company's
properties depends upon the Company's ability to obtain
financing through any or all of the joint venturing of
projects, debt financing, equity financing or other means.
At April 30, 2002, the Company had a working capital deficit
of $2,488,985. Revenue from oil and gas sales from the LAK
Ranch Project is not sufficient to fully meet its cash
requirements and ongoing commitments 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 Project. At the present
time, the LAK Ranch oil production plant is idle until a
partner or substantial financing can be found. Subsequent
to April 30, 2002, the Company exchanged common shares for a
portion of the notes payable outstanding at April 30, 2002,
extended repayment terms on notes payable not exchanged and
completed a private placement of 3,917,500 units at $0.10
per unit for proceeds of $391,750. See "Item 8 - Financial
Information, Significant Changes".
Environmental and Other Regulatory Requirements
The current or future operations of the Company, including
development activities and commencement of commercial
production on its properties, requires permits from various
governmental authorities and such operations are and will be
subject to laws and regulations governing prospecting,
development, production, exports, taxes, labour standards,
occupational health, waste disposal, toxic substances, land
use, environmental protection, restrictions and prohibitions
on releases or emissions of various substances produced in
association with certain oil and gas operations, safety and
other matters. Companies engaged in the development and
operation of oil and gas properties and related facilities
generally experience increased costs and delays in
production and other schedules as a result of the need to
comply with applicable laws, regulations and permits, the
extent of which cannot be predicted. There can be no
assurance that approvals and permits required to commence
commercial production on its properties will be obtained.
Additional permits and studies, which may include the
environmental impact studies conducted before permits can be
obtained, may be necessary prior to operation of the
properties in which the Company has interests and there can
be no assurance that the Company will be able to obtain or
maintain all necessary permits that may be required to
commence construction, development or operation or
production facilities at these properties on terms which
enable operations to be conducted at economically
justifiable costs.
Failure to comply with applicable laws, regulations and
permitting requirements may result in enforcement actions
thereunder, including orders issued by regulatory or
judicial authorities causing operations to cease or be
curtailed, and may include corrective measures requiring
capital expenditures, installation of additional equipment
or remedial actions. Parties engaged in oil and gas
operations may be required to compensate those suffering
loss or damage by reason of the production activities and
may have civil or criminal fines or penalties imposed for
violations of applicable laws or regulations.
Amendments to current laws, regulations and permits
governing operations and activities of petroleum companies,
or more stringent implementation thereof, could have a
material adverse impact on the Company and cause increases
in capital expenditures or production costs or reduction in
levels of production at producing properties or abandonment
or delays in development of new oil and gas properties.
The Company and its consultants maintain a corporate
insurance program consistent with industry practice to
protect against losses due to accidental destruction of
assets, well blowouts, pollution and other operating
accidents or disruptions. The Company also has operational
and emergency response procedure and safety and
environmental programs in place to reduce potential loss
exposure. To the best of the Company's knowledge, the
Company is currently operating in compliance with all
applicable environmental regulations.
The Company has insurance in amounts that it considers to be
adequate to protect itself against certain risks of mining
and processing. However, the Company may become subject to
liability for hazards against which it cannot insure itself
or which it may elect not to insure against because of
premium costs or other reasons. In particular, the Company
is not insured for environmental liability or earthquake
damage.
Limited Operating History: Losses
The Company has experienced, on a consolidated basis, losses
in all years of its operations. There can be no assurance
that the Company will operate profitably in the future, if
at all. At April 30, 2002, the Company's deficit was
$11,597,726.
Limited History as Operator
Historically, the Company has participated as an interest
holder in oil and gas wells which were successfully brought
into production by others. Prior to the LAK Ranch Project,
it has never acted as operator.
Key Employees.
The Company depends on a number of key employees: Barry
C.J. Ehrl, President & Chief Executive Officer of the
Company; Frank R. Hallam, Chief Financial Officer and
Director of the Company; Paul B. Trost, Vice-President,
Operations of the Company's U.S. subsidiary, Derek USA and
George Pouska, Field Manager of the Company's U.S.
subsidiary, Derek USA. The loss of any one of the named
employees could have an adverse effect on the Company. With
the exceptions of Barry C.J. Ehrl and Frank R. Hallam (see
"Item 6 - Directors, Senior Management and Employees" and
"Item 7 - Major Shareholders and Related Party
Transactions"), the Company has not entered into management
contracts with the named employees. The Company does not
maintain key man insurance on any of its management.
Conflicts of Interest
Certain of the Company's directors and officers serve as
directors or officers of other reporting companies or have
significant shareholdings in other reporting companies and,
to the extent that such other companies may participate in
ventures in which the Company may participate, the directors
of the Company may have a conflict of interest in
negotiating and concluding terms respecting the extent of
such participation. See "Item 6 - Directors, Senior
Management and Employees" and "Item 7 - Major Shareholders
and Related Party Transactions".
Currency Fluctuations
The Company's operations at the LAK Ranch Project are in the
United States and the expenses of such operations are
payable in U.S. dollars while the Company's functional
currency is the Canadian dollar. The majority of the
Company's financings to date have been in Canadian dollars
and will continue to be in Canadian dollars for the
foreseeable future. Accordingly, the Company is subject to
the risk of fluctuations in the relative values of the
Canadian and U.S. dollars. Although this has not had a
materially adverse affect on the Company's results of
operations to date, this may have a materially adverse
affect on the Company's results of operations in the future.
The Company is required to recognize foreign currency
translation gains or losses in the determination of net
earnings and losses, except for exchange gains or losses
relating to non-current monetary assets or liability, which
are deferred and amortized over the remaining life of the
asset or liability.
Price Fluctuations: Share Price Volatility
In recent years, the securities markets in the United States
and Canada have experienced a high level of price and volume
volatility, and the market price of securities of many
petroleum companies have experienced wide fluctuations in
price which have not necessarily been related to the
operating performance, underlying asset values or prospects
of such companies. In particular, the per share price of
the Company's Common Shares fluctuated from a high of $0.49
to a low of $0.06 within the twelve month period preceding
the date of this Form 20-F Annual Report. There can be no
assurance that continual fluctuations in price will not
occur.
Shares Reserved for Future Issuance: Dilution
As at November 1, 2002, there were 2,568,000 stock options
and 12,010,234 share purchase warrants outstanding pursuant
to which Common Shares may be issued in the future, which
will result in further dilution to the Company's
shareholders.
Dividend Record and Policy
The Company has not paid any dividends since incorporation
and it has no plans to pay dividends for some time. The
directors of the Company will determine if and when
dividends should be declared and paid in the future based on
the Company's financial position at the relevant time. All
of the Common Shares are entitled to an equal share of any
dividends declared and paid.
ITEM 4 - INFORMATION ON THE COMPANY
Introduction
The Company was incorporated under the Company Act (British
Columbia) on April 6, 1981 under the name Cove Energy
Corporation. The Company changed its name to Cove Resources
Corporation on May 13, 1988 and to Consolidated Cove
Resources Corporation ("Consolidated Cove") on August 11,
1992. The Company is a reporting issuer in British Columbia
and Alberta. The Common Shares trade on the Exchange under
the symbol "DRS". On January 4, 2001, the Common Shares
commenced trading on the NASD OTC Bulletin Board Service
under the symbol "DRKRF".
The address of the head office of the Company is Suite 1550,
355 Burrard Street, Vancouver, British Columbia, Canada, V6C
2G8. The telephone number of the head office of the Company
is (604) 331-1757 or toll free (888) 756-0066. The address
for service and the registered and records office of the
Company is Tupper Jonsson & Yeadon, Suite 1710 - 1177 West
Hastings Street, Vancouver, British Columbia, Canada. The
Company's website is www.derekresources.com.
The Company is a natural resource company engaged in the
acquisition, exploration and development of oil and gas
properties. It has an interest in one principal property,
the LAK Ranch Project in Wyoming, USA. The pilot plant at
the LAK Ranch Project utilizes the SAGD recovery process
which falls under the category of improved recovery and
pursuant to the definition found in Rule 4-10(a)(4) of
Regulation S-X. As a result, the Company has not attributed
any proved reserves to the LAK Ranch Project. Technical and
economic information derived from the pilot study will be
used to estimate the amount of recoverable oil for the
development of a commercial scale operation. There can be
no assurance that the identified oil deposit at the LAK
Ranch Project will ever qualify as a commercially viable
operation.
General Development of the Business of the Registrant
The four fiscal years ending April 30, 1997 were a period of
re-organization and the Company, although not technically
inactive, did not acquire any new properties or carry on any
active business. During the year ended April 30, 1994,
Consolidated Cove suspended exploration activities on its
existing properties and wrote off all mineral property
interests totalling $2,255,264. During the years ended
April 30, 1994, 1995, 1996, and 1997, Consolidated Cove or
the Company raised $125,000, $104,000, $250,000 and
$645,000, respectively, by way of private placements, and
used these funds to meet its ongoing expenses. Creditors
and shareholder lenders were issued shares to settle debt
totalling $337,657, $52,672, $174,500 and nil during the
years ended April 30, 1994, 1995, 1996 and 1997,
respectively.
May 11, 1995, the Company consolidated its issued and
outstanding share capital on a 1 for 4.6 basis and changed
its name from Consolidated Cove to its current name, Derek
Resources Corporation.
In its fiscal year ended April 30, 1998, the Company began
and continues to actively pursue a program of acquisition,
exploration and development of oil and gas properties.
Pursuant to an option agreement dated September 24, 1997, as
amended April 21, 1998 and December 11, 1998 (the "LAK
Agreement") between the Company and Rising Phoenix
Development Group Ltd. ("Rising Phoenix"), the Company was
granted an option to purchase from Rising Phoenix up to a
75% working interest in two tracts of land (the "Original
LAK Property") and up to a 37.5% interest in two other
tracts of land (the "Adjoining Property") in Weston County,
Wyoming. See "Item 4 - Information on the Company, The LAK
Ranch Project, Wyoming, USA".
During the year ended April 30, 1998 ("Fiscal 1998"), the
Company issued an aggregate of 1,290,000 special warrants at
a price of $0.50 per special warrant for gross proceeds of
$645,000. The proceeds of the private placement were used
for acquisition and exploration costs at the LAK Ranch
Project and for general working capital. During Fiscal
1999, all 1,290,000 special warrants were converted into
1,290,000 units, each unit comprising of one Common Share
and one share purchase warrant. During Fiscal 1998, the
Company also issued 607,499 Common Shares on the exercise of
607,499 previously issued warrants resulting in net proceeds
to the Company of $179,450. During the same period, the
issuance of 375,000 performance escrow shares at $0.01 per
share to Barry Ehrl, President, C.E.O. and director of the
Company resulted in gross proceeds to the Company of $3,750.
See "Item 7 - Major Shareholders and Related Party
Transactions".
During the year ended April 30, 1999 ("Fiscal 1999"), the
Company issued an aggregate of 1,940,300 special warrants at
prices ranging from $0.40 to $0.50 per special warrant for
gross proceeds of $817,310. 297,500 of the special warrants
were converted into Common Shares while 1,642,500 special
warrants were converted into 1,642,500 units, each unit
comprising of one Common Share and one share purchase
warrant. Another 142,000 Common Shares were issued by
private placements at $0.50 per share for gross proceeds of
$71,000. The proceeds of the private placements were used
for acquisition and exploration costs at the LAK Ranch
Project and for general working capital. Debt in the amount
of $6,300 was settled by the issuance of 15,000 Common
Shares at a deemed price of $0.42 per share. Revenues from
oil and gas royalties totalled $3,471 and the Company sold
certain of its oil and gas leases in Canada, realizing a
gain on sale of $36,609.
In December 1999, the Company acquired federal oil leases
totalling 1,028 acres adjacent to the LAK Ranch Project.
The new ground, which increased the acreage at the LAK Ranch
Project to 7,388 acres, is west and south of the existing
property. The new ground was acquired by application for an
annual rental payment of $1,543.50 and is subject to a
Federal Overriding Royalty of 12.5%. During the same month,
the Company obtained a source water permit for the LAK Ranch
Project, became licensed with the Wyoming State Gas
Commission as an operator and posted a US $25,000 bond with
the State.
During the year ended April 30, 2000 ("Fiscal 2000"), the
Company issued 2,300,000 special warrants at a price of
$0.50 per special warrant for gross proceeds of $1,150,000.
In connection thereof, an aggregate of 74,250 special
warrants were issued by the Company in payment of finder's
fees. The Company also completed another private placement
of 64,000 special warrants at a price of $0.75 per special
warrant for gross proceeds of $48,000. Also during the same
period, the Company issued 267,500 Common Shares on the
exercise of 267,500 previously issued warrants resulting in
gross proceeds to the Company $145,040. Another 30,000
Common Shares were issued on the exercise of 30,000 stock
options for gross proceeds to the Company of $14,900.
The Company entered into an agreement dated June 9, 2000
(the "Agency Agreement") with Yorkton Securities Inc.
("Yorkton") pursuant to which Yorkton was appointed to act
as Agent for a best efforts brokered private placement of
7,050,000 units at a price of $0.42 per unit for gross
proceeds of $2,961,000. Each unit shall comprise of one
Common Share and one share purchase warrant entitling the
holder thereof to purchase one additional Common Share at an
exercise price of $0.53 per share for two years. The
Company agreed to pay the Agent a commission of 7.5% of the
gross proceeds of the offering and to issue Agent's warrants
equal to 10% of the total offering exercisable for two years
at $0.53 per share. The proceeds from this private
placement were used for working capital purposes and for the
development of the LAK Ranch Project.
On June 14, 2000, Company officials appeared before the
Wyoming Oil and Gas Commission and approval to commence
drilling on the LAK Ranch Project was granted. Effective
June 13, 2000, the Company, through its U.S. subsidiary,
Derek USA, entered into a drilling contract with CAZA
Drilling Inc. of Denver, CO ("CAZA") for the first
injector/producer well pair on the LAK Ranch Project. An
escrowed deposit of US $315,000 was established by the
Company on CAZA's behalf. A rig was mobilized on the LAK
Ranch Project on June 19, 2000 and drilling of Well Derek #1
commenced.
By July 10, 2000, Well Derek #1 was completed at a total
measured length of 3,213 feet. The horizontal section of
the well extended a total of 1,810 feet and encountered
1,639 gross feet of Newcastle sandstone reservoir rock. The
Company estimated that 1,200 net feet of this gross footage
was of good to excellent quality reservoir sand and that 400
net feet was of fair quality reservoir sand. A slotted
liner was successfully installed in the horizontal section
of Well Derek #1. On July 15, 2000, the second (injector)
well of the horizontal well pair, Well Derek 2-I, was
spudded. Well Derek 2-I was completed on July 29, 2000 at a
total measured length of 3,210 feet. The horizontal section
of the well was emplaced an average of 24 feet vertically
above Well Derek #1.
By October 17, 2000 all major pieces of equipment for the
surface facility were sourced, minor site preparation was
underway and the route for the natural gas pipeline was
being laid out. By November 14, 2000, grading and survey
work at the LAK Ranch Project site was nearly complete.
Construction and installation of concrete footings was being
carried out. Installation of a 4-inch natural gas pipeline,
which will be about 30,000 feet in length had commenced.
This pipeline is capable of supplying up to 1.5 MMCF of
natural gas to the project on a daily basis. The Company
estimated that this pipeline would provide sufficient fuel
to operate steam generation equipment able to supply steam
to approximately 4 to 6 well pairs. By the end of November
2000, an oil treatment plant, or "heater-treater" and a 22
million BTU leased steam generator, complete with water
treatment plant, pre-fabricated steel building and ancillary
equipment, arrived at the LAK Ranch site.
By December 19, 2000, the Company had spent US $3,868,144 on
construction of the pilot plant facility to meet the earn-in
requirements of the LAK Agreement.
As of January 9, 2001, a 33,000-foot long 4-inch natural gas
pipeline had been installed to the site and completed
sections of the pipeline had been pressure tested. By
February 12, 2001, the LAK Ranch plant was essentially
complete and acid treatment had been initiated on the steam
blow-down wells. Steam generation and injection to the SAGD
well pair had commenced at the beginning of March 2001 and
breakthrough communication between the two wells was
achieved on March 18, 2001. SAGD operations began on March
19, 2001, permitting steam to be injected through the upper
well and condensed steam and oil to be collected through the
lower, producing well.
During Fiscal 2001, the Company's interest in the LAK Ranch
Project was challenged by the optionor, Asdar Group. Asdar
Group filed a lawsuit against the Company claiming that the
Company has not earned its interest in the LAK Ranch Project
and must therefore relinquish its ownership to Asdar Group.
See "Litigation with Asdar Group" on page 29.
During Fiscal 2001, the Company issued 19,137,865 units at
$0.42 per unit for gross proceeds of $8,037,903, which
included the Yorkton brokered placement. In connection
thereof, an additional aggregate of 410,377 units, 705,000
share purchase warrants and $308,656 was paid by the Company
as finder's fees and other costs. The proceeds of the
private placements in Fiscal 2001 were used for the
construction of the pilot plant facility at the LAK Ranch
Project and for general working capital. The Company also
issued 1,811,500 Common Shares on the exercise of 1,811,500
previously issued share purchase warrants resulting in gross
proceeds to the Company of $973,470. Another 72,000 Common
Shares were issued on the exercise of stock options for
gross proceeds to the Company of $35,380.
On September 18, 2000, the Company entered into a Letter of
Intent ("LOI") with MTARRI, Inc. ("MTARRI") to purchase a
51% working interest in the Morton Project. The Morton
Project is located approximately six miles south of Douglas,
Wyoming, in Converse County and covers approximately 1,880
acres. Dr. Paul Trost, Vice-President, Operations of Derek
USA, is also President of MTARRI. Pursuant to the terms of
the LOI, the Company agreed to make a cash payment of US
$19,890 to MTARRI upon the execution of the LOI (paid) and
assume 51% or US $306,000 of the estimated US $600,000 cost
to construct a pilot project to be completed before April
2001. Upon the successful completion of the pilot project,
the Company would then have the option to vest its interest
in the Morton Project by assuming 51% or US $198,900 of the
total US $390,000 acquisition cost due to the underlying
vendor over the next four years. The Company would then be
required to cover 51% of all project costs on an ongoing
basis. MTARRI would be the operator.
The Morton Project lies within the Powder River Basin. Over
the last 15 years, a total of 25 wells have been drilled by
other companies into the Sussex Sand reservoir within the
Morton field. A total of 17 of these wells are still
producing at rates of 1 - 3 barrels of oil per day. The low
production rate is due to the lack of any water drive
mechanism and too low reservoir pressure. In January 2001,
the Company commenced drilling with the spudding of the
first well on the Morton Project and by February 21, 2001,
the first well was complete (1,650 feet) and the second well
was at a depth of 830 feet. The planned total depth of the
second well was 1,750 feet. The first well was planned to be
part of a low temperature oxidation improved oil recovery
pilot test facility to be conducted within a 40 acre parcel
located in the existing 2000 foot deep Morton oilfield.
Due to the commencement of litigation against Asdar and
ongoing costs at the LAK Ranch Project, management felt it
was necessary to sell its interest in the Morton Project in
order to focus its financial resources at LAK Ranch.
Pursuant to a letter agreement dated April 30, 2001 between
the Company and First Echelon Ventures Inc. ("First
Echelon"), the Company sold its rights and interests in the
Morton Project to First Echelon for the sum of US $100,000.
This sum represents the Company's project related costs plus
a small profit of $11,729. In addition, First Echelon
agreed to assume all of the Company's responsibilities set
out in the LOI.
Through an Assignment of a Federal Lease dated July 6, 2001
from Edel P. Smith and Accidental Oil Company, the Company
acquired an additional 80 acres for US $7,500 upon execution
of the Assignment and an additional payment of US $7,875 on
January 1, 2002. This new ground is subject to a Federal
Overriding Royalty of 12.5% and a 5% overriding royalty.
The Company produced and sold oil at the LAK Ranch Project
for the months of April, May and June 2001 but suspended
pilot production operations in mid-June 2001 in order to
install additional wastewater disposal system which would
allow the plant to operate at 100% of its steaming capacity.
The Company restarted pilot plant operations in October 2001
and produced and sold oil for the months of October,
November and December 2001 and the first part of January
2002.
The following summarizes all oil production and sales by the
Company:
Month/Year
Oil Sold
(Barrels)
Average
Gravity (API)
Average
Price/Bbl.
(US$)
Gross
Value
(US$)
April 2001
1096.61
21.4
$25.0001
$27,415.32
May 2001
1586.50
20.8
$25.3986
$40,294.80
June 2001
473.04
19.6
$25.2197
$11,929.91
October 2001
484.41
20.4
$18.4675
$8,945.82
November 2001
698.31
20.8
$17.1111
$11,948.85
December 2001
693.23
19.9
$16.5214
$11,453.13
January 2002
331.17
20.1
$15.8500
$5,249.04
Pilot plant operations were suspended in January of 2002
pending the grant of a surface water discharge permit from
the State of Wyoming. This permit was granted on January
31, 2002. Pilot plant operations were not restarted
subsequent to January, 2002 as the Company decided to seek
further funding for the project before recommencing pilot
plant operations.
All of the oil produced on the LAK Ranch Project to date has
been sold to one customer, Equiva Trading Company ("Equiva")
of Denver, CO pursuant to a Lease Purchase Agreement
executed between the parties on May 17, 2001. Effective
September 1, 2002, Equiva assigned this agreement to Shell
Trading (US) Company.
During Fiscal 2002, the Company issued 5,653,051 units at an
average price of $0.316 per unit for net proceeds of
$1,790,115. In connection thereof, 183,050 units were
issued as finder's fees. The proceeds of the private
placements in Fiscal 2002 were used to settle short-terms
notes and accounts payable and for general working capital.
Notes payable issued during Fiscal 2002 totalled US
$1,217,521 (Cdn $1,923,570). Proceeds from these issuances
were used primarily to cover outstanding construction and
operating expenses at the Company's LAK Ranch Project. See
Note 4 to the financial statements. During the year, the
Company repaid some of the principal and accrued interest on
these notes payable; US $138,000 in exchange for 731,300
common shares and US $78,600 for cash. At April 30, 2002,
the principal outstanding on notes payable totalled US $
1,009,605 (Cdn $1,585,080) and interest accrued on notes
payable totalled US $75,860 (Cdn $119,100).
At October 21, 2002, the outstanding warrants and options
represented a total of 19,554,162 shares issuable for a
maximum of $9,297,474 if these warrants and options are
ultimately exercised in full. The exercise of these warrants
and options is completely at the discretion of the
respective holders and the Company has had no indication
that any of these warrants or options may be exercised.
Business Overview
The Company is a natural resource company engaged in the
acquisition, exploration and development of oil and gas
properties. It has an interest, indirectly, in one
principal property: the LAK Ranch Project. The pilot plant
at the LAK Ranch Project utilizes the SAGD recovery process
which falls under the category of improved recovery and
pursuant to the definition found in Rule 4-10(a)(4) of
Regulation S-X. As a result, the Company has not attributed
any proved reserves to the LAK Ranch Project. Technical and
economic information derived from the pilot study will be
used to estimate the amount of recoverable oil for the
development of a commercial scale operation. There is a
risk that the Company may not be able to economically
recover the oil in place.
Exploration on the Company's LAK Ranch Project is not
affected by seasonal changes. To conduct its exploration,
the Company is dependent on sub-contractors for equipment
and supplies. These are generally available but vary in
price and immediacy of availability subject to demand.
Revenue from the LAK Ranch Project is not sufficient to meet
its cash requirements and the Company is dependent on
external financing to support it as a going concern. Its
ability to continue operations is dependent on the ability
of the Company to obtain additional financing. See "Item 3
- - Key Information - Risk Factors".
For the three years ended April 30, 2002, the Company's
revenues from oil and gas sales, the sale of oil and gas
leases and interest paid on deposits were as follows:
Year Ended
April 30, 2002
Year Ended
April 30, 2001
Year Ended
April 30, 2000
Oil and Gas Sales - Net of Royalties
$1,024
$10,221
$4,546
Gain on Sale of Oil and Gas Leases
-
$11,729
-
Interest (net of bank charges)
-
$109,485
$15,278
Totals
$1,024
$131,435
$19,824
Organizational Structure
The Company has a wholly owned subsidiary, Derek Resources
(U.S.A.) Inc. incorporated by the Company under the laws of
the State of Delaware on August 18, 1981 under the name Cove
Energy Inc. On December 18, 2000, Cove Energy Inc. changed
its name to Derek Resources (U.S.A.) Inc. The registered and
records offices of Derek USA are located at No. 100 West
Tenth Street, Wilmington, Delaware. The principal business
address of Derek USA is Suite 1550 - 355 Burrard Street,
Vancouver, British Columbia, Canada, V6C 2G8. The
authorized share capital of Derek USA consists of 2,000
common shares without par value of which one common share
issued and outstanding is registered in the name of the
Company.
Property, Plants and Equipment
The Company's executive offices are located in rented
premises of approximately 1,000 square feet at Suite 1550,
355 Burrard Street, Vancouver, British Columbia V6C 2G8,
telephone (604) 331-1757. The Company began occupying this
facility in October 2002 on a two-year lease at an
approximate cost of $31,000 per year. It is considered
adequate for current needs. The Company shares this space
with Sydney Resource Corporation, a company in which Barry
C.J. Ehrl,, President, CEO and Director of the Company, is a
director and officer. See "Item 6 - Directors, Senior
Management and Employees" and "Item 7 - Major Shareholders
and Related Party Transactions".
The LAK Ranch Project, Wyoming, USA
Location, Description and Acquisition
The LAK Ranch Project is comprised of the Original LAK
Property and the Adjoining Property, both of which were
acquired from Rising Phoenix Development Group Ltd. ("Rising
Phoenix") pursuant to an option agreement, as well as
property leased directly from the federal government and
property leased directly from Edel P. Smith and Accidental
Oil Company. Pursuant to the terms of the LAK Agreement
described below, Rising Phoenix exercised its option to
acquire a 25% interest in the additional leases.
The LAK Ranch Project is located in the northeast corner of
the Powder River Basin, Weston County, Wyoming in a
relatively flat terrain at an elevation of 4,400 feet.
Geographically, the LAK Ranch Project is located four miles
east of Newcastle, Wyoming adjacent to a paved road (Route
16). See Figure 1 which is attached hereto as Exhibit 10.3.
Supplies and oilfield services are readily available from
Newcastle.
The LAK Ranch Project area is on a cattle ranch. Terrain is
flat and consists of grasses and shrubs. Water can be
easily accessed through either a purchase option or by the
development of the existing groundwater sources (the Madison
Formation). The area is not within 50 miles of any national
parks, wilderness areas or national monuments.
Exhibit 10.3 - Figure 1 - LAK Ranch Project
Original LAK Property and Adjoining Property
Pursuant to an option agreement dated September 24, 1997, as
amended April 21, 1998 and December 11, 1998 (the "LAK
Agreement") between Rising Phoenix and the Company, the
Company was granted an option to purchase from Rising
Phoenix up to a 75 % working interest in two tracts of land
(the "Original LAK Property") and up to a 37.5% working
interest in two other tracts of land (the "Adjoining
Property"). A working interest is a right which requires
proportional participation in both the costs and profits
related to a project like the LAK Ranch Project. The
following table sets forth details of the leases for the
Original LAK Property and the Adjoining Property:
Description of Property Working Interest
Tract A
Township 44 North 75%
Range 60 West, 6th P.M.
Weston County, Wyoming
Section 6:
SW1/4, NE1/4,
E1/2NW1/4,
W1/2SE1/4
Section 7:
W1/2, W1/2E1/2
Section 18:
S1/2SW1/4, NW1/4
Section 19:
W1/2W1/2, NE1/4NW1/4
Township 44 North
Range 61 West, 6th P.M.
Weston County, Wyoming
Section 1:
SE1/4
Section 11:
SE1/4, E1/2NE1/4, S1/2SW1/4
Section 12:
All
Section 13:
W1/2, S1/2SE1/4
Section 14:
All
Section 22
NE1/4
Section 23
N1/2, SE, E1/2SW1/4
Section 24
N1/2, SE1/4, E1/2SW1/4
Section 25
NW1/4NE1/4, N1/2NW1/4,
SW1/4NW1/4, NW1/4SW1/4
Section 26
E1/2NE1/4, NE1/4SE1/4
Section 30
W1/2NW1/4
Tract B
Township 44 North
Range 61 West, 6th P.M.
Weston County, Wyoming
75%
Section 24:
SE1/4SE1/4
Section 24:
NE1/4SE1/4
Section 25:
S1/2SW1/4, NE1/4SW1/4,
NW1/4SE1/4, E1/2NE1/4,
SW1/4NE1/4, SE1/4NW1/4
Tract C
37.5%
Township 44 North
Range 60 West, 6th P.M.
Weston County,
Wyoming
Section 18:
N1/2SW1/4
Township 44 North
Range 61 West, 6th P.M.
Weston County, Wyoming
Section 13:
NE1/4, N1/2SE1/4
Tract D
Township 44 North 37.5%
Range 61 West, 6th P.M.
Weston County, Wyoming
Section 22:
SE1/4
Section 27:
W1/2E1/2
Pursuant to the terms of the LAK Agreement, the Company
acquired its interest in the Original LAK Property and the
Adjoining Property by making payments totalling US $500,000
by December 15, 1998 (US $150,000 to Rising Phoenix and US
$350,000 to Petrospec), incurring expenditures of US
$100,000 by December 15, 1997 and incurring not less than US
$3.5 million (CDN $5.25 million) in expenditures by December
31, 2000 to install a pilot plant facility. After such
time, Rising Phoenix and the Company would share any
additional expenditure in proportion to their ownership of
the LAK Ranch Project. If the Company failed to fulfill the
terms of the LAK Agreement by December 31, 2000, it would
lose any and all rights to the LAK Ranch Project. By
December 19, 2000, the Company had spent US $3,868,144 on
the LAK Ranch Project to meet the earn-in requirements of
the LAK Agreement.
Additional Property Leased from the Federal Government
In December 1999, the Company acquired federal oil leases
totalling 1,028 acres adjacent to the Original LAK Property
and the Adjoining Property. The new ground, which increased
the acreage at the LAK Ranch Project to 7,388 acres, is west
and south of the existing property. The new ground was
acquired by application for an annual rental payment of US
$1,543.50 and is subject to a Federal Overriding Royalty of
12.5%. The following table sets forth details of the
federal oil leases:
Description of Property Working Interest
Township 44 North
Range 61 West, 6th P.M.
Weston County, Wyoming
Section 10:
SW1/4NE1/4
Section 10:
W1/2SE1/4, SE1/4SE1/4,
(Excluding 13.77 acres
in railroad right-of-way
WyW0119068)
Section 15:
W1/2E1/2, E1/2 W1/2, 100%
NW1/4NW1/4, SW1/4SW1/4
Section 15:
E1/2E1/2 (Excluding
23.87 acres in railroad
right-of-way WyW0119068)
Section 25
NE1/4SE1/4, S1/2S1/4
Section 26:
NW1/4NE1/4, E1/2SW1/4
Section 26:
E1/2NW1/4, SE1/4SE1/4
(Excluding 14.23 acres
in railroad right-of-way
WyW0119068)
Additional Property Leased from Edel P. Smith and Accidental
Oil Company
Through an Assignment of a Federal Lease dated July 6, 2001,
as amended July 10, 2001, (the "Assignment") from Edel P.
Smith and Accidental Oil Company, the Company acquired an
additional 80 acres for US $7,500 upon execution of the
Assignment and an additional payment of US $7,875 on January
1, 2002. This new ground is subject to a Federal Overriding
Royalty of 12.5% and a 5% overriding royalty. The following
table sets forth the details of the additional lease:
Description of Property Working Interest
Township 44 North
Range 61 West, 6th P.M.
Weston County, Wyoming
Section 1:
SW1/2SW1/4 100%
Royalties and Lease Payments
Prior to entering into the LAK Agreement with the Company,
Rising Phoenix had entered into an option agreement dated
November 12, 1996 (the "Petrospec Agreement") with Petrospec
to acquire a 100% interest in the Original LAK Property and
the Adjoining Property in consideration for the payment of
US $370,000, the payment of gross over-riding royalty
interests of 1.625% to Paul B. Trost and 2% to Petrospec,
respectively, as well as the completion of a pilot project
estimated to cost US $80,000. Rising Phoenix made payments
totalling US $20,000 and the balance of the payments
totalling US $350,000 were made by the Company to Petrospec
pursuant to the terms of the LAK Agreement.
Pursuant to an agreement dated May 3, 1999 (the "First
Royalties Agreement") among the Company, Petrospec, Paul
Trost and Rising Phoenix, the Company has agreed to issue
100,000 Common Shares to each of Petrospec and Paul Trost in
ten annual tranches of 10,000 Common Shares each to acquire
varying portions of the overriding royalty interests held by
Petrospec and Paul Trost totalling 1.05% pursuant to the
terms of the Petrospec Agreement. As at the date of this
Form 20-F Annual Report, 200,000 Common Shares had been
issued to each of Paul Trost and Petrospec pursuant to the
First Royalties Agreement.
Pursuant to an agreement dated November 9, 1999 (the "Second
Royalties Agreement") among the Company, Sheri Tietjen and
Donald B. Roberts, the Company has agreed to acquire (a)
1.6875% of the overriding royal interests from Sheri Tietjen
by paying US $25,000 and issuing 50,000 Common Shares; and
(b) 1.6875% of the overriding royalty interests from Donald
B. Roberts by paying US $25,000 and issuing 50,000 Common
Shares. In order to vest its acquisitions pursuant to the
Second Royalty Agreement, the Company will be required to
produce a minimum of 600 barrels per day for at least six
continuous months before the seventh anniversary of the
closing of this purchase. The Company has also agreed to
return the 1.6875% royalty to Sheri Tietjen and the 1.6875%
royalty Donald B. Roberts upon the earlier of completion of
the LAK Ranch Project or the twentieth anniversary of the
closing of the Second Royalties Agreement.
The Company's interests in the Original LAK Property and the
Adjoining Property were recorded in the Weston County,
Wyoming records on December 21, 1998. Pursuant to the terms
of the LAK Agreement, the Original LAK Property and the
Adjoining Property is subject to gross overriding royalty
interests as follows:
As to the Original LAK Property: As to the Adjoining Property:
Name of Owner Royalty Interest Name of Owner Royalty Interest
- ------------- ---------------- ------------- ----------------
Lisa Stewart 6.2500% Lisa Stewart 3.1250%
Sheri Tietjen 3.0000% Sheri Tietjen 1.7500%
Donald B. Roberts 3.0000% Donald B. Roberts 1.7500%
Paul B. Trost (1) 1.1538% Paul B. Trost (1) 0.4073%
Petrospec 1.4200% Petrospec 0.5012%
Rick Jeffs 1.0000% Rick Jeffs 1.0000%
The Company 4.4262% The Company 2.7165%
Asdar Group (2) 0.7000% Asdar Group (2) 0.7000%
- ------------- ---------------- ------------- ----------------
Total 20.9500% Total 11.9500%
NOTES:
(1) Paul B. Trost is currently Vice-President, Operations
of the Company's U.S. subsidiary, Derek USA
(2) See Litigation with Asdar Group on page 29.
Between May 3 and October 30, 2001, the Company granted
additional royalties of US $0.1360838 per barrel of oil
produced to certain lenders and debt holders:
1. On May 3, 2001, the Company entered
into a loan agreement with Westerton Management Corp. for US
$56,500. This loan bears interest at a rate of 10% per
annum and was repayable in full on January 31, 2002.
Westerton Management Corp. was granted an overriding royalty
of US $0.02 per barrel of oil produced at the LAK Ranch
Project.
2. On May 9, 2001, the Company entered
into a loan agreement with Marble Hall Investments Ltd. for
US $75,000. This loan bears interest at a rate of 10% per
annum and was repayable in full on January 31, 2002.
3. On May 9, 2001, the Company entered
into a loan agreement with Wet Coast Management Corp. for US
$75,000. This loan bears interest at a rate of 10% per
annum and is repayable in full on January 31, 2002. Wet
Coast Management Corp. was granted an overriding royalty of
US $0.03 per barrel of oil produced at the LAK Ranch
Project.
4. On June 6, 2001, the Company entered
into a loan agreement with Spartan Establishment for US
$100,000. This loan bears interest at 10% per annum,
payable monthly, plus an overriding royalty of US $0.01 per
barrel of oil produced at the LAK Ranch Project and matures
on May 31, 2003 but does not bear a conversion right.
5. On June 21, 2001, the Company entered
into an agreement with Bateman Project Holdings Limited of
Johannesburg, South Africa pursuant to which Bateman agreed
to defer US $471,183 of debt payable by the Company until
May 31, 2002. The Company granted a permanent gross over-
riding royalty in the amount of US $0.0471 per barrel of oil
produced net to the Company's interest. See "Bateman
Agreements" on page 27.
6. On June 27, 2001, the Company entered
into a loan agreement in the amount of US $100,000 with
Cristina Casati. The loan bears interest at a rate of 10%
per annum, plus an additional overriding royalty of US $0.01
per barrel of oil produced at the LAK Ranch Project. The
loan may be converted in whole or in part into Common Shares
for $0.75 per share at any time until May 31, 2003 at which
time it is repayable in full.
7. On June 28, 2001, the Company entered
into a loan agreement in the amount of US $50,000 with
Savannah Consulting Ltd. The loan bears interest at a rate
of 10% per annum, plus an additional overriding royalty of
US $0.005 per barrel of oil produced at the LAK Ranch
Project. The loan may be converted in whole or in part into
Common Shares for $0.75 per share at any time until May 31,
2002 at which time it was repayable in full.
8. On June 28, 2001, the Company entered
into a loan agreement in the amount of US $50,000 with John
F.P. Lush. The loan bears interest at a rate of 10% per
annum, plus an additional overriding royalty of US $0.005
per barrel of oil produced at the LAK Ranch Project. The
loan may be converted in whole or in part into Common Shares
for $0.75 per share at any time until May 31, 2002 at which
time it was repayable in full.
9. On October 30, 2001, the Company
entered into a letter agreement with Western Industrial,
Inc., an unrelated party, pursuant to which Western
Industrial agreed to defer payment of US $89,838.35 of debt
payable by the Company until August 31, 2002. The loan
bears interest at a rate of 10% per annum, plus an
additional overriding royalty of US $0.0089838 per barrel of
oil produced at the LAK Ranch Project. The loan may be
converted in whole or in part into Common Shares for $0.75
per share at any time until August 31, 2002 at which time it
was repayable in full.
In order to maintain the Original LAK Property and the
Adjoining Property leases in an active state, minimum shut-
in royalties for the 2000 calendar year totalling US$11,368
were paid to Sheri Tietjen (as to US$2,784), Donald B.
Roberts (as to US$2,784) and Lisa Stewart (as to US$5,800).
Shut-in royalties are monies paid to mineral interest owners
(lessors) by the mineral interest lessee(s) during those
time periods when no production of oil is occurring.
Alternatively, when production of oil is minimum and the
income to the lessors falls below a predetermined base
level, shut-in royalties of a certain minimal dollar mount
must be paid annually to the mineral interest owners in
order to maintain the lease in good standing. A surface
lease fee of US $600 per year is payable to True Ranches, a
cattle ranch which operates on the property covering the LAK
Ranch Project. The Company is required to post a US $25,000
operator bond with the State of Wyoming for liability or
damage to the leases. An annual rental payment of $1.50 per
acre is payable for the first five years of the federal oil
leases. Thereafter, the annual rental payment is $2.00 per
acre.
History of the LAK Ranch Project
Approximately 26 holes were drilled by other companies on
the LAK Ranch Project to define the location of the oil and
in previous attempts to produce it. Companies such as Texaco
and Conoco have previously explored the LAK Ranch Project.
Conoco conducted a steam pilot flood and found the oil
responded favorably to steam recovery. Parrent Engineering
conducted a four-well solvent flood and was also successful
in mobilizing the oil, however solvent costs rendered this
approach marginally economic. In the 1980's, Surtek, an
enhanced oil recovery specialist firm, conducted extensive
laboratory core floods and installed a five-well pilot test
for its alkaline polymer-surfactant chemical flood. Again
the initial results were favourable but a drop in the oil
price precluded continued operation.
Geology
Oil has been produced from at least four geological
formations in the Powder River Basin. On the LAK Ranch
Project, the Newcastle sandstone formation hosts the oil
reservoir of interest. Oil is already being produced from
the Newcastle sandstone formation at a location 10 miles
southwest of the LAK Ranch Project.
On the northern and eastern margins of the LAK Ranch
Project, the Newcastle sandstone formation outcrops on
surface and forms almost a right angle bend near the LAK
Ranch Project headquarters. On the east flank of the LAK
Ranch Project, the Newcastle sandstone formation dips (forms
an angle with the horizontal) 25 to 45 degrees to the west.
On the northern edge of the LAK Ranch Project, the Newcastle
sandstone formation dips to the south at 20 to 45 degrees.
The change in dip of the Newcastle sandstone formation at
various locations on the LAK Ranch Project indicates that
the Newcastle sandstone formation forms a geological
structure known as a syncline or synclinal fold. This
synclinal fold structure and related dipping (not
horizontal) oil reservoir would aid oil recovery on the LAK
Ranch Property in that heated oil will flow more readily
under the force of gravity down into the collection well if
the reservoir is dipping rather than horizontal.
Oil has migrated upward from the center of the Powder River
Basin and can be observed as oil staining in Newcastle
sandstone outcrops on surface.
At the LAK Ranch Project area, the Newcastle sandstone
formation averages 45 feet in thickness and consists of a 12
to 16 foot thick upper layer and a 20 to 50+ foot thick
lower layer. These two sandstone layers are separated by a 6
to 20 foot thick shale layer. Based on Surtek's previous
drilling and coring operations, both the upper and lower
sandstone layers average 22% porosity, have an average
permeability of 780 md and average oil saturations of 65%.
In December 1997, the Company drilled four wells along the
projected horizontal well path to verify the presence of the
sands, their thickness, porosities and permeabilities as
well as the presence of oil in the sands at the LAK Ranch
Project. During the drilling of these four wells, the sand
intervals were core drilled and a solid piece of sandstone
three inches in diameter was extracted from the sand
intervals. This core sample was then utilized to determine
the reservoir characteristics. The log data on the four
wells is summarized below:
<table>
<caption>
<s> <c> <c> <c> <c> <c>
Upper Marine Sand Lower Alluvial Sand
Well Location Average Average
Net Pay Porosity Net Pay Porosity
(Ft) (%) (Ft) (%)
- ---------- ------------- --------------- -------- --------- -------
LAK 1-1 1-1-44N-61W 14 17 29 15
LAK 12-9 9-12-44N-61W 13 14 46 17
LAK 12-10 10-12-44N-61W 15 14 22 16.5
LAK 12-11 11-12-44N-61W 0 Shale Out 26 14.8
</table>
The core analysis on the four wells is summarized below:
Well Permeability Porosity Oil Saturation
Range Range Range
(md) (%) (%)
- ---------- ------------- --------------- --------
LAK 1-1 2 to 350 8.2 to 29.6 40 to 58
LAK 12-9 148 to 1,122 24.6 to 29.0 35 to 53
LAK 12-10 945 to 2,196 18.0 to 22.9 31 to 68
LAK 12-11 -1 -1 -1
NOTES:
(1) Core not yet analyzed.
Core porosities as measured by an independent third party
laboratory consistently showed higher porosities than did
the density gamma logs as measured downhole. The core
porosities typically exceeded downhole porosities by 4 - 7
porosity units. No explanation was given by the laboratory,
however the Company recognizes that if the downhole log
porosities are correct, less oil may be available for
recovery. One of the purposes of the pilot project is to
conduct a volumetric balance and further define this
problem.
Reservoir permeabilities of 10 to 100 millidarcies are
considered good and reservoir permeabilities of 100 to 1,000
millidarcies are considered very good. The four wells were
drilled with fresh water which flushed oil from the core
samples. Therefore an oil saturation of 72% was used for an
original saturation figure.
Dr. John Donnelly conducted investigations designed to
examine the viability of utilizing thermal recovery methods
to exploit the Newcastle Formation on the LAK Ranch
Property. Data from drilling carried out by the Company on
the LAK Ranch Property, combined with information gathered
from numerous other wells in the area of the LAK Ranch
Property, led Dr. Donnelly to the conclusion that the
potential oil reservoir underlying the LAK Property was
dipping (not horizontal). A dipping (not horizontal)
reservoir would allow heated oil to flow under the force of
gravity down into the collection well, where the oil would
be pumped to the surface.
Dr. Donnelly's computer simulation assumed a horizontal well
approximately 500 metres long and located in the sand and
used to inject steam. A second horizontal well, also 500
metres long and located in the same sand but below the first
well by approximately 20 feet was also simulated and used as
the oil producer. Results of the simulation model showed
the LAK Ranch oil could be economically recovered by these
horizontal wells and with the injection of steam. Based on
the computer model and Dr. Donnelly's professional
experience with this type of oil recovery employing
horizontal wells and steam injection, his computer
simulation showed each well pair would theoretically recover
potentially economic quantities of oil over an 11-year
operating period. Since each well pair would produce the
oil from a 20-acre area, numerous well pairs would be
required to produce the oil from the entire field. The
accepted industry terminology for this type of
steam/horizontal well recovery method is Steam Assisted
Gravity Drainage or SAGD.
Crude at the LAK Ranch Project is a napthenic-based crude
oil, contains no sulfur and flows readily when heated to 70
o F and above. On May 17, 2001 the Company entered into a
Lease Purchase Agreement with Equiva Trading Company
("Equiva"), the trading arm of Texaco, to sell the Company's
crude oil production to Equiva. This Agreement may be
cancelled by either party following thirty days advance
written notice. Equiva agreed to purchase all of the
Company's crude oil production at the Equiva posted price
for Wyoming Sweet (other) in effect on the date of delivery,
adjusted for gravity delivered, plus an additional US $1.00
per barrel. This price is the equivalent of West Texas
Intermediate (WTI) plus US $0.50.
The Steam Assisted Gravity Drainage Process
Due to the gravity of the oil at the LAK Ranch Project and
its relatively high in-place viscosity (at the reservoir
temperature of 48o F), production of oil by conventional
means has historically been uneconomic due to the adverse
mobility ratio between the viscous oil and water. Recent
Canadian development of the SAGD process for recovery of
heavy oils appears to be suited for economic recovery of oil
at the LAK Ranch Project.
SAGD is a technique developed by the Alberta Department of
Energy, formerly AOSTRA, in connection with nine industry
partners: Amoco Canada, Chevron Canada, Chinese National
Petroleum Corporation (CNPC Canada), Gibson Petroleum
Company Limited, Imperial Oil, Japex Oil Sands Ltd., Petro
Canada, Shell Canada and Suncor Inc. SAGD was developed in
the Underground Test Facility (the "UTF") near Fort
McMurray, Alberta. The UTF was an experimental bitumen
production facility initiated by the Alberta Department of
Energy more than a decade ago to pioneer a unique oil sands
recovery technology to unlock a large portion of Alberta's
oil sands buried too deep for surface mining. Sperry-Sun
pioneered the development of technologies for drilling SAGD
wells to improve recovery and reduce field development costs
for heavy oil projects. SAGD is not a patented process and
no licensing fees are applicable.
The SAGD approach to the thermal recovery of heavy oil
depends on long horizontal wells placed at the base of the
reservoir. Steam is introduced into the base of the
reservoir. Because of the low density of gaseous steam, it
rises in the reservoir and heats the formation. The heated
oil and water (both condensed steam and heated formation
water) in the formation drain down to the horizontal well
from which they are produced to surface. The mechanism by
which the process proceeds within the reservoir is
illustrated in Figure 2 which is attached hereto as Exhibit
10.4.
See Exhibit 10.3 - Figure 2 - SAGD Process
The steam is injected into the reservoir from either another
horizontal well or alternatively a series of vertical wells.
As the oil and water is withdrawn from the reservoir, the
steam chamber expands both upwards and sideways. The upward
growth proceeds in a random but rapid manner until it is
limited by the top of the reservoir. In contrast, the steam
chamber expands sideways and downwards in a very stable
manner.
At a later stage in the process, when the chamber has
reached the top of the reservoir, the rate of oil production
is controlled by the lateral expansion of the steam chamber.
This is illustrated in Figure 2. The similarity between the
situation shown in the lower diagram in Figure 2 and the
coning of gas in conventional operations is apparent. If
the oil and water are removed too quickly from the
horizontal production well, then the steam chamber will be
drawn down into the well and bypassing will occur.
Essentially the only drive mechanism to move the oil to the
well is gravity. The process is ineffective with vertical
producing well because of the relatively low flows that can
be achieved under these conditions. However, with long
horizontal wells, economic production rates can be achieved.
The SAGD process has not been used in a commercial operation
to date. The success of the process has been demonstrated
at a pre-commercial pilot plant in the Athabasca oil sands
near the large mining projects operated by Syncrude and
Suncor. Variations of the process have also been tested by
Esso at Cold Lake, Amoco at Wolf Lake and Primrose, Shell at
Peace River and Sceptre at Tangleflags. A modified SAGD
process consisting of a horizontal producer with several
vertical injectors is being successfully operated by Chevron
in California to produce heavy oil from thin-bedded steeply
dipping sand at a cost of US $6 per barrel.
The Gas Assisted Gravity Drainage Process
The Upper Marine Sand is separated from the Lower Alluvial
Sand by a shale/siltstone barrier. This upper sand will be
heated during SAGD oil recovery from the main (lower) sand.
This pre-heating of the upper sand will supplement the
performance of a GAGD oil recovery system which will be used
to recover oil from the upper sand.
The GAGD process involves using a lower horizontal
production well and an upper horizontal injection well, with
a gravity drainage recovery system. The GAGD process is
similar to the SAGD process except for the following:
1. A non-condensable gas such as natural gas, flue gas or
carbon dioxide is injected instead of steam;
2. The injection well will be placed up-structure, as far
as the region heated by the underlying SAGD injection
extends at the time recovery operations will commence in
the upper sand;
3. GAGD recovery operations will commence after thermal
recovery of the lower sand has heated a sufficient
volume of the upper sand; for the LAK Ranch Project this
is expected to take approximately three years;
4. Instead of using steam trap control to control the
production rate from the production well (as in the case
of the SAGD process), the production rate will be
controlled as follows:
1. The fluid production rate is fixed initially at a
level which is expected to result in sufficiently
delayed gas coming down to the production well; the
optimum delay is determined by site-specific
economic sensitivity tests;
(b) Once gas coning results in gas production rates
reaching a predetermined value, the withdrawal
rate is controlled based on maintaining this
predetermined gas production rate approximately
constant; the predetermined value should be a low
rate, less than the rate required to replace the
voidage as oil is produced; and
(c) The fluids produced using the GAGD process will
contain very little water (unless the reservoir
has a mobile water saturation), and the gas
production rate will be low; hence processing
costs for the produced fluids are expected to be
comparable to primary production costs.
Operating Agreement
Derek and Rising Phoenix entered into a Model Form of
Operating Agreement (the "Operating Agreement") dated for
reference April 21, 1998 setting out the terms of the joint
venture between the parties and appointing the Company as
operator of the LAK Ranch Project. Pursuant to the terms of
the Operating Agreement, the Company is entitled to charge a
drilling well rate of US $5,000 per well which can be
prorated for less than a full month, or a producing well
rate of US $1,000 per month to compensate for overhead
costs. The Company is also entitled to charge a fee for
construction, installation or expansion of fixed assets
required for the development and operation of the LAK Ranch
Project. This fee is either be negotiated between the
parties prior to the commencement of construction or shall
be based on the following rates for any major construction
project:
1. 5% of the first US $100,000;
2. 4% of costs in excess of US $100,000 but less than US
$1,000,000; and
3. 3% of costs in excess of US $1,000,000.
Should the Company fail to contribute in whole or in part,
its proportion of future exploration and development costs,
the Company's interest in the LAK Ranch Project would be
diluted out on a well by well basis. Conversely, the
Company's interest in the LAK Ranch Project would increase
on a well by well basis in the event that Rising Phoenix
failed to contribute, in whole or in part, their proportion
of future exploration or development costs.
During Fiscal 2001, Rising Phoenix's interest in the LAK
Ranch Project was ultimately assigned to Asdar Group who
became the Company's joint venture partner in the LAK Ranch
Project. Pursuant to the terms of a Settlement Agreement
dated November 21, 2001, Asdar Group relinquished its
interest in the LAK Ranch Project to the Company. See
"Litigation with Asdar Group" on page 29.
Bateman Agreements
On March 20, 2000, a Memorandum of Understanding dated March
20, 2000 (the "MOU") was executed between the Company and
Bateman International BV of the Netherlands ("BIBV").
Pursuant to the terms of the MOU, BIBV agreed to provide
professional project management, engineering, design,
procurement and construction management services to the
Company for a fee of 5% of the total cost of the pilot plant
as it relates to the surface facility, subject to a minimum
of US $150,000 and reimbursement of costs. BIBV also agreed
to purchase 892,857 special warrants at $0.42 per special
warrant for US $250,000, the proceeds of which the Company
advanced to BIBV as prepayment for its services pursuant to
the MOU. The MOU was formalized by an Engineering,
Procurement and Construction Management Agreement dated
August 21, 2000 between the Company and Bateman Engineering
Inc. ("Bateman") of Denver, CO.
On June 21, 2001, a letter agreement was executed between
the Company and Bateman Project Holdings Limited ("BPHL") of
Johannesburg, South Africa pursuant to which Bateman agreed
to defer US $471,183 of debt payable by the Company until
May 31, 2002. Any amounts incurred in excess of US $471,183
would be due and payable in the normal course of business.
In consideration, Bateman would receive interest of 10% per
annum commencing June 15, 2001 with both principal and
interest due on May 31, 2002. In addition, the Company
granted a permanent gross over-riding royalty in the amount
of US $0.0471 per barrel of oil produced net to the
Company's interest. As security for the amount deferred, the
Company granted a lien in favour of Bateman, first on the
surface equipment owned by the Company and located on the
LAK Ranch Project and secondly, if required to satisfy
amounts outstanding on the repayment date, on the LAK Ranch
Project itself. The Company was not able to repay the
principal and interest on May 31, 2002. On August 21, 2002,
BPHL agreed to settle one half of the total debt outstanding
in exchange for common shares of the Company at a price of
$0.10 per share with the remaining amount payable to be
secured by way of a new note issued by the Company bearing
interest at 10% per annum and maturing on September 30,
2003. BPHL will have the right, after August 21, 2003, to
convert any unpaid principal and interest into Common Shares
at an exercise price of $0.10 per share.
Development Program
Management of the Company reviewed engineering reports
prepared by other companies who have previously attempted to
put the LAK Ranch Project into production. A known
reservoir of oil exists in the Newcastle sand under the LAK
Ranch Project, however a pilot test was necessary to
determine the economic viability of using SAGD technology on
this reservoir.
During the year ended April 30, 2001, the Company completed
the construction of a pilot plant to test the production
potential on the LAK Ranch Project using SAGD technology.
Dr. John Donnelly designed the pilot plant described below
and ran computer simulation models on the reservoir. Dr.
Donnelly has field demonstrated his ability to successfully
design and engineer an SAGD recovery process as evidenced by
the on going Black Rock heavy oil recovery project operating
near Cold Lake, Alberta.
The total cost of constructing and starting up the SAGD
pilot plant was budgeted at approximately $6.0 million (US
$4.0 million). The pilot project required the drilling of
two horizontal wells in the sand and injecting steam in the
upper well and collecting and producing the oil from the
lower well from the lower sand. Surface facilities will be
required to produce the steam and separate the produced oil,
steam and water, together with water supply wells and water
disposal wells. Two additional horizontal wells will also be
drilled in an overlying sand, located approximately 14 feet
above the lower sand. Oil from this sand will experience a
decrease in its viscosity due to the fugitive heat loss from
the steamflooding of the underlying sand located
approximately 14 feet lower. Oil recovery from the upper or
overlying sand will be augmented by the injection of exhaust
gases from the steam boiler to provide an energy source and
push the oil to the lower horizontal recovery well. This
recovery method for the upper sand is called the Gas
Assisted Gravity Drainage process, or GAGD. Under full
field development, each 20-acre area would contain four
horizontal wells, two in the lower sand where steam is
injected and two in the upper sand where the fugitive heat
loss from the lower sand will decrease the viscosity of the
oil sufficiently to allow recovery. Both of these recovery
methods are highly dependent on the influence of the gravity
drainage of the oil due to the tilted nature of the
reservoirs.
On June 14, 2000, Company officials appeared before the
Wyoming Oil and Gas Commission and approval to commence
drilling on the LAK Ranch Project was granted. Effective
June 13, 2000, the Company, through its U.S. subsidiary,
Derek USA, entered into a drilling contract with CAZA
Drilling Inc. of Denver, CO ("CAZA") for the first
injector/producer well pair on the LAK Ranch Project. An
escrowed deposit of US $315,000 was established by the
Company on CAZA's behalf. A rig was mobilized on the LAK
Ranch Project on June 19, 2000 and drilling of Well Derek #1
commenced.
By July 10, 2000, Well Derek #1 was completed at a total
measured length of 3,213 feet. The horizontal section of
the well extended a total of 1,810 feet and encountered
1,639 gross feet of Newcastle sandstone reservoir rock. The
Company estimated that 1,200 net feet of this gross footage
was of good to excellent quality reservoir sand and that 400
net feet was of fair quality reservoir sand. A slotted
liner was successfully installed in the horizontal section
of Well Derek #1. On July 15, 2000, the second (injector)
well of the horizontal well pair, Well Derek 2-I, was
spudded. Well Derek 2-I was completed on July 29, 2000 at a
total measured length of 3,210 feet. The horizontal section
of the well was emplaced an average of 24 feet vertically
above Well Derek #1.
By October 17, 2000 all major pieces of equipment for the
surface facility were sourced, minor site preparation was
underway and the route for the natural gas pipeline was
being laid out. By November 14, 2000, grading and survey
work at the LAK Ranch Project site was nearly complete.
Construction and installation of concrete footings was being
carried out. Installation of a 4-inch natural gas pipeline,
which will be about 30,000 feet in length had commenced.
This pipeline is capable of supplying up to 1.5 MMCF of
natural gas to the project on a daily basis. The Company
estimated that this pipeline would provide sufficient fuel
to operate steam generation equipment able to supply steam
to approximately 4 to 6 well pairs. By the end of November
2000, an oil treatment plant, or "heater-treater" and a 22
MMBTU leased steam generator, complete with water treatment
plant, pre-fabricated steel building and ancillary
equipment, arrived at the LAK Ranch site.
On December 15, 2000, the Company executed a Gas Sales
Agreement with Western Gas Resources, Inc. of Denver, CO to
supply 100% of the first 1,500 MMBtu per day of the
Company's natural gas requirements at the LAK Ranch Project
for a period of five years from the first delivery.
On January 9, 2001, 33,000-foot long 4-inch natural gas
pipeline had been installed to the site and completed
sections of the pipeline had been pressure tested. By
February 12, 2001, the LAK Ranch plant was essentially
complete and acid treatment had been initiated on the steam
blow-down wells. Steam generation and injection to the SAGD
well pair had commenced at the beginning of March 2001 and
breakthrough communication between the two wells was
achieved on March 18, 2001. SAGD operations began on March
19, 2001, permitting steam to be injected through the upper
well and condensed steam and oil to be collected through the
lower, producing well.
The Company produced and sold oil at the LAK Ranch Project
for the months of April, May and June 2001 but suspended
pilot production operations in mid-June 2001 in order to
install additional wastewater disposal system which would
allow the plant to operate at 100% of its steaming capacity.
The Company restarted pilot plant operations in October 2001
and produced and soil oil for the months of October,
November and December 2001 and the first part of January
2002.
The following summarizes all oil production and sales by the
Company:
Month/Year Oil Sold Average Average Gross
(Barrels) Gravity (API) Price/Bbl. Value
(US$) (US$)
- ---------- -------- ------------ --------- ----------
Apr-01 1096.61 21.4 $25.00 $27,415.32
May-01 1586.5 20.8 $25.40 $40,294.80
Jun-01 473.04 19.6 $25.22 $11,929.91
Oct-01 484.41 20.4 $18.47 $ 8,945.82
Nov-01 698.31 20.8 $17.11 $11,948.85
Dec-01 693.23 19.9 $16.52 $11,453.13
Jan-02 331.17 20.1 $15.85 $ 5,249.04
Pilot plant operations were suspended in January of 2002
pending the grant of a surface water discharge permit from
the State of Wyoming. This permit was granted on January
31, 2002. Pilot plant operations were not restarted
subsequent to January, 2002 as the Company decided to seek
further funding for the project before recommencing pilot
plant operations.
All of the oil produced on the LAK Ranch Project to date has
been sold to one customer, Equiva Trading Company of Denver,
CO pursuant to a Lease Purchase Agreement executed between
the parties on May 17, 2001. Effective September 1, 2002,
Equiva assigned this agreement to Shell Trading (US)
Company.
Litigation with Asdar Group
On October 3, 2000, Rising Phoenix's remaining interest in
the LAK Ranch Project was assigned to 2U Online.com, Inc., a
Delaware public corporation. On October 13, 2000, this
interest was subsequently assigned to Asdar Group ("Asdar"),
a Nevada public corporation whose shares are quoted on the
NASD OTC Bulletin Board Service. As a result, Asdar became
the Company's joint venture partner in the LAK Ranch
Project.
Pursuant to the terms of the LAK Agreement, the Company is
required to incur not less than US $3.5 million in
expenditures by December 31, 2000 to install a pilot plant
facility. On December 19, 2000, the Company delivered
formal notice to Asdar that it had spent US $3,868,144 on
the LAK Ranch Project, met the earn-in requirements of the
LAK Agreement and vested its 75% working interest in the LAK
Ranch Project. Between October 2000 and February 2001, the
Company sent Asdar detailed project accounting statements
and general ledgers with requests that Asdar pay for their
25% share of ongoing project costs in excess of US
$3,500,000. Asdar was also invited to inspect the site well
before year-end, but declined the invitation.
Asdar made no payments to the Company with respect to their
share of operating costs for the LAK Ranch Project. On
January 30, 2001, the Company delivered formal notice of
default to Asdar for their failure to pay amounts then due.
On March 1, 2001 the Company initiated formal foreclosure
proceedings in Wyoming against Asdar for their failure to
pay for their share of the ongoing project costs. In the
March 1, 2001 foreclosure action, the Company claimed
amounts then due or that would become due by March 15, 2001
totalling US $777,190 plus accrued interest, attorney's fees
and costs.
On March 20, 2001, Asdar filed a complaint against the
Company in Wyoming District Court, alleging that the Company
could not legally foreclose on the Asdar interest since it
had not yet been determined that the Company's interest in
the LAK Ranch Project had vested. Asdar filed a Wyoming
application for entry of Temporary Restraining Order and
Preliminary Injunction against the Company on March 20,
2001. The purpose of this application was to stop the
Company's foreclosure on Asdar's interest in the LAK Ranch
Project. A hearing was held on April 6, 2001 and the
District Judge denied this application on April 17, 2001.
On April 13, 2001 the Company foreclosed on all of Asdar's
rights and interests in the LAK Ranch Project. To effect
foreclosure, the Company bid an amount of US $852,571.11 to
purchase all of Asdar's rights, giving the Company a 100%
interest in the LAK Ranch Project. The Weston County Sheriff
completed a Certificate of Sale recording the Company's
purchase and this document was recorded with the County
Clerk. Under Wyoming law, Asdar had 90 days from April 13,
2001 to remedy their situation by repayment of the
foreclosure amount plus costs and interest. Asdar responded
by filing a lis pendens notice of claim, thereby providing
public notice that a lawsuit involving title was being
brought against the LAK Ranch Project. On May 4, 2001,
Derek filed a motion in the District Court of the Sixth
Judicial District for Wyoming requesting a partial summary
judgment in its favour against Asdar seeking court approval
that it has acquired a 75% interest in the LAK Ranch
Project. This motion was scheduled to be heard on October
31, 2001.
Prior to the court hearing, Asdar agreed to a settlement.
Pursuant to the terms of the Settlement Agreement dated
November 21, 2001, Asdar released the lis pendens filed
against the property and relinquished any claim to any right
or interest in the LAK Ranch Project. In return it received
a proportionate reducible gross overriding royalty on the
property of 0.7%. Payment of the royalty is retroactive to
the commencement of production. Asdar 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, Asdar 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.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of the financial condition, changes
in financial conditions and results of operations of the
Company for the years ended April 30, 2002, 2001 and 2000
should be read in conjunction with the consolidated
financial statements of the Company and related notes
included therein. The Company's financial statements are
presented in Canadian dollars have been prepared in
accordance with Canadian GAAP. Differences between
accounting principles generally accepted in Canadian GAAP
and U.S. GAAP, as applicable to the Company, are set forth
in Note 11 to the accompanying Consolidated Financial
Statements of the Company.
Overview
The Company is a natural resource company engaged in the
acquisition, exploration and development of oil and gas
properties. Since Fiscal 1998, the Company has primarily
been focused on financing the acquisition of the LAK Ranch
Project and the construction of the pilot plant facility.
The pilot plant utilizes the SAGD recovery process which
falls under the category of improved recovery pursuant to
the definition found in Rule 4-10(a)(4) of Regulation S-X.
As a result, the Company has not attributed any proved
reserves to the LAK Ranch Project. Technical and economic
information derived from the pilot study will be used to
estimate the amount of recoverable oil for the development
of a commercial scale operation. There is a risk that the
Company may not be able to economically recover the oil in
place.
The Company has total and deferred exploration expenditures
of $13,910,104 at April 30, 2002, $12,249,321 at April 30,
2001 and $1,523,623 at April 30, 2000, all of which was
spent on the LAK Ranch Project. The recoverability of these
amounts is dependent upon the existence of economically
recoverable reserves, securing and maintaining title and
beneficial interest in the LAK Ranch Project, the ability of
the Company to obtain the necessary financing to complete of
the development of its property, any future profitable
production, or alternatively, upon the Company's ability to
dispose of its interests on an advantageous basis.
Accordingly, there is substantial doubt about the ability of
the Company to continue as a going concern.
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 expense, 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
realizable values are written down to that net realizable
value in the period in which such determinations are made.
For cost centres that do not yet have proven reserves, the
amounts shown for oil and natural gas interests represent
costs to date, and the underlying value is entirely
dependent on the existence and future economic recovery of
reserves.
Estimated future site restoration costs are provided on a
unit-of-production basis. Actual costs are charged against
the accumulated provision as incurred.
Future write-downs of properties are dependent on many
factors, including general and specific assessments of oil
and gas resources, the likelihood of increasing or
decreasing resources, land costs, estimates of future oil
and gas prices, potential extraction methods and costs, the
likelihood of positive of negative changes to the
environment, taxation, labor and capital costs. The Company
cannot assess the monetary impact of these factors at the
current stage of its properties.
Revenue from oil and gas sales from the LAK Ranch Project 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.
The Company has not been required to make any material
expenditure for environmental compliance to date. The
operations of the Company may in the future be affected from
time to time in varying degrees by changes in the
environmental regulations. Both the likelihood of new
regulations and their overall affect upon the Company vary
greatly from state to state and are not predictable. See
"Item 3 - Key Information, Risk Factors".
Operating Results
Year Ended April 30, 2002 Compared to the Year Ended April
30, 2001
The Company incurred a net loss of $1,062,580 or $0.03 per
share for Fiscal 2002 compared to a net loss of $826,342 or
$0.04 per share for Fiscal 2001. Revenues from oil and gas
sales (net of royalties) totaled $1,024 for Fiscal 2002. In
comparison, revenues from oil and gas sales (net of
royalties) ($10,221), a gain on the sale of the Morton
Project ($11,729) and interest earned on cash balances
($109,485) totaled $131,435 in Fiscal 2001. Interest earned
on cash balances decreased in Fiscal 2002 due to lower cash
balances while in Fiscal 2001, the Company had higher cash
balances from the proceeds of private placements completed
during the year.
General and administrative expenses were $1,063,604 for
Fiscal 2002 compared to $957,777 for Fiscal 2001. Costs
generally increased during Fiscal 2002, most notably in the
categories of accounting, legal and audit fees at $167,557
in Fiscal 2002 (Fiscal 2001 - $62,801), interest expense of
$141,151 in Fiscal 2002 (Fiscal 2001 - $nil) and foreign
exchange loss of $35,023 in Fiscal 2002 (Fiscal 2001 -
$11,816). The increase in accounting, legal and audit in
Fiscal 2002 is primarily attributable to the litigation with
Asdar. The increase in interest expense in Fiscal 2002 is
primarily attributable to the notes payable issued during
Fiscal 2002 totalling US $1,217,521. The foreign exchange
loss in Fiscal 2002 is primarily attributable to a weaker
Canadian dollar, resulting in foreign exchange losses being
recognized on US dollar denominated notes payable.
Oil and natural gas property costs deferred during Fiscal
2002 totalled $1,660,783 compared to $10,725,698 during
Fiscal 2001, all of which was spent on the LAK Ranch
Project. The amount deferred for Fiscal 2002 can be
attributable to the capitalization of some final plant
construction and adjustment costs and the capitalization of
pilot test operating costs. The amount deferred for Fiscal
2001 can be attributable to the capitalization of
construction costs of the well pair and pilot plant
facility.
The Company's operations at the LAK Ranch Project are in the
United States and the expenses of such operations are
payable in U.S. dollars while the Company's functional
currency is the Canadian dollar. Most of the Company's
financings to April 30, 2002 were in Canadian dollars and
the majority will continue to be in Canadian dollars for the
foreseeable future. Accordingly, the Company is subject to
the risk of fluctuations in the relative values of the
Canadian and U.S. dollars. Although this has not had a
materially adverse affect on the Company's results of
operations to date, this may have a materially adverse
affect on the Company's results of operations in the future.
The Company is required to recognize foreign currency
translation gains or losses in the determination of net
earnings and losses, except for exchange gains or losses.
For the year ended April 30, 2002, net loss from foreign
exchange was $35,023 compared to $11,816 for the year ended
April 30, 2001. The Company is not aware of any government
currency policies or regulations which may affect the
Company's operations.
The Company's operations are not adversely affected by
inflation.
Year Ended April 30, 2001 Compared to the Year Ended April
30, 2000
The Company incurred a net loss of $826,342 or $0.04 per
share for Fiscal 2001 compared to a net loss of $675,731 or
$0.09 per share for Fiscal 2000. Revenues from interest
earned on cash balances ($109,485), oil and gas sales
($10,221) and a gain on the sale of the Morton Project
($11,729) totaled $131,435 in Fiscal 2001. In comparison,
interest earned on cash balances ($15,278) and revenues from
oil and gas sales ($4,546) totalled $19,824 in Fiscal 2000.
The increase in interest earned on cash balances in Fiscal
2001 is due to higher cash balances from the proceeds of
private placements completed during the year.
General and administrative expenses were $957,777 for Fiscal
2001 compared to $695,555 for Fiscal 2000. Costs generally
increased during Fiscal 2001, most notably in the categories
of consulting and management fees at $385,333 in Fiscal 2001
(Fiscal 2000 - $273,938), office administration and other at
$177,687 in Fiscal 2001 (Fiscal 2000 - $123,116) and
shareholders' information and travel at $310,647 in Fiscal
2001 (Fiscal 2000 - $225,244). The increase in consulting
and management fees and office administration and other
expenses is primarily attributable to the increase in the
Company's development activities at the LAK Ranch Project.
The increase in shareholders' information and travel
expenses in Fiscal 2001 primarily attributable to the
Company's increased efforts in Fiscal 2001 to raise
financing for the development of the LAK Ranch Project.
Oil and natural gas property costs deferred during Fiscal
2001 totalled $10,725,698 compared to $424,222 during Fiscal
2000, all of which was spent on the LAK Ranch Project. The
increase in Fiscal 2001 is attributable to the
capitalization of construction costs of the well pair and
pilot plant facility.
Year Ended April 30, 2000 Compared to the Year Ended April
30, 1999
The Company incurred a net loss of $675,731 or $0.09 per
share for Fiscal 2000 compared to a net loss of $528,589 or
$0.14 per share for Fiscal 1999. Revenues from interest
earned on cash balances ($15,278) and oil and gas sales
($4,546) totaled $19,824 for Fiscal 2000 compared to $39,583
in Fiscal 1999. In Fiscal 1999, the Company sold certain of
its oil and gas leases in Canada, realizing a gain on sale
of $36,609 and revenues from oil and gas sales totalled
$3,471. This was offset by bank charges of $497.
General and administrative expenses were $695,555 for Fiscal
2000 compared to $568,172 for Fiscal 1999. The increases
were experienced in the categories of office administration
and other at $123,116 for Fiscal 2000 (Fiscal 1999 -
$75,356) and shareholders' information and travel at
$225,244 for Fiscal 2000 (Fiscal 1999 - $73,975). The
increase in office administration and other is attributable
to increased business activity as the Company moved towards
production on its LAK Ranch Property and carried out
financings. The increase in shareholders' information and
travel is primarily attributable to the Company's increased
efforts in Fiscal 2000 to raise financing for the
development of the LAK Ranch Project.
Acquisition, exploration and development costs deferred
against the LAK Ranch Project totaled $424,222 during Fiscal
2000 compared with $417,195 during Fiscal 1999.
US vs. Canadian GAAP
The Company prepares its consolidated financial statements
in accordance with Canadian GAAP which differs in certain
respects from those principles the Company would have
followed had its consolidated financial statements been
prepared in accordance with U.S. GAAP. The major
differences between Canadian GAAP and U.S. GAAP that would
affect the measurement of the Company's financial position,
loss or cash flows are set forth below.
<table>
<caption>
<s> <c> <c> <c>
30-Apr
2002 2001 2000
$ $ $
Adjustment to earnings: ---------- --------- ---------
Loss for the period under Canadian GAAP 1,062,580 826,342 675,731
Consulting and management fees (a) - 33,517 -
Loss for the period under U.S. GAAP 1,062,580 859,859 675,731
Loss per share under U.S. GAAP 0.03 0.04 0.09
Adjustments to shareholders' equity
Total shareholders' equity under Canadian GAAP 10,998,529 9,919,604 2,001,849
Consulting and management fees (a) - (33,517) -
Escrow shares released (a) - 33,517 -
Total shareholders' equity under U.S. GAAP 10,998,529 2,011,849 9,919,604
</table>
(a) On November 17, 1997, the Company issued 375,000
performance escrow shares to a director at $0.01 per share.
See "Item 7 - Major Shareholders and Related Party
Transactions". These shares are released from escrow
subject to the terms of release as required by the
Exchange. Under US 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 ending April 30, 2002, nil (2001 - 55,862;
2000 - nil) Common Shares were released from escrow.
Accounting for stock-based compensation
For financial statement purposes, the Company has elected to
follow the Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," in accounting
for its stock options. Under APB No. 25, as the exercise
price of the company's stock options and warrants equals the
market price of the underlying stock at the date of grant,
no compensation expense is recognized.
Recent accounting pronouncements
In August 2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 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.
In October 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 requires that long-lived assets be classified as
assets either to be held and used, to be disposed of other
than by sale, or to be disposed of by sale. It also
prescribes various approaches to valuing these types of long-
lived assets. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company does not
expect that the implementation of these guidelines will have
a material impact on its consolidated financial position or
results of operations.
On May 7, 2002, the FASB issued SFAS No. 145, which
rescinded SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt", SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers", and SFAS No. 64,
"Extinguishment of Debt Made to Satisfying Sinking-Fund
Requirements", and amended SFAS No. 13, "Accounting for
Leases". The provisions are effective for fiscal years
beginning after May 15, 2002. The Company does not expect
that the implementation of these standards will have a
material impact on its consolidated financial position or
results of operations.
On July 30, 2002, the FASB issued SFAS No.146, "Accounting
for Costs Associated with Exit or Disposal Activities". SFAS
No. 146 requires companies to recognize costs associated
with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or
disposal plan. The provisions are effective for exit or
disposal activities that are initiated after December 31,
2002.
In November 2001, the Accounting Standards Board of the
Canadian Institute of Chartered Accountants issued new
Handbook Section 3870, "Stock-based Compensation and Other
Stock-based Payments". This Section establishes standards
for the recognition, measurement and disclosure of stock-
based compensation and other stock-based payments made in
exchange for goods and services. It applies to transactions
in which an enterprise grants shares of common stock, stock
options, or other equity instruments, or incurs liabilities
based on the price of common stock or other equity
instruments, and sets out a fair value based method of
accounting which is required for certain, but not all, stock-
based transactions. The Company is analyzing the impact of
Section 3870 and will adopt the standard on May 1, 2002.
Liquidity and Capital Resources
The working capital of the Company is a direct result of
funds raised from the sale of equity shares over the outflow
into acquisition, exploration and development costs as well
as administrative expenses. The working capital balance
(deficit) at the end of the following periods were: April
30, 2002 - $(2,488,985); April 30, 2001 - $(2,416,032); and
April 30, 2000 - $433,352. The fluctuations stem from timing
differences between when money is raised from equity issues
and when expenditures are committed on exploration and
development.
The Company's cash and short-term deposits at April 30, 2002
totalled $14,804 compared to $19,857 at April 30, 2001 and
$437,146 at April 30, 2000. Aside from cash and short-term
deposits, the Company had no material unused sources of
liquid assets. The cash and term deposits are attributable
primarily to the issue of share capital.
During Fiscal 2002, the Company issued 5,653,051 units at an
average price of $0.316 per unit for net proceeds of
$1,790,115. In connection thereof, 183,050 units were
issued as finder's fees. The proceeds of these private
placements in Fiscal 2002 were used to settle short-terms
notes and accounts payable and for general working capital
resulting from construction and operations at the LAK Ranch
Project. Notes payable issued during Fiscal 2002 totalled
US $1,217,521 (Cdn $1,923,570). Proceeds from these
issuances were used primarily to cover outstanding
construction and operating expenses at the Company's LAK
Ranch Project. See Note 4 to the financial statements.
During the year, the Company repaid some of the principal
and accrued interest on these notes payable; US $138,000 in
exchange for 731,300 common shares and US $78,600 for cash.
At April 30, 2002, the principal outstanding on notes
payable totalled US $ 1,009,605 (Cdn $1,585,080) and
interest accrued on notes payable totalled US $75,860 (Cdn
$119,100).
During Fiscal 2001, the Company issued 19,137,865 units at
$0.42 per unit for net proceeds of $7,729,247. In
connection thereof, an aggregate of 410,377 units, 705,000
share purchase warrants and $222,075 was paid by the Company
as finder's fees. The proceeds of the private placements in
Fiscal 2001 were used for the construction of the pilot
plant facility at the LAK Ranch Project and for general
working capital. The Company also issued 1,811,500 Common
Shares on the exercise of 1,811,500 previously issued share
purchase warrants resulting in gross proceeds to the Company
of $973,470. Another 72,000 Common Shares were issued on
the exercise of stock options for gross proceeds to the
Company of $35,380.
During Fiscal 2000, the Company issued 2,300,000 special
warrants at a price of $0.50 per special warrant for gross
proceeds of $1,150,000. In connection thereof, an aggregate
of 74,250 special warrants were issued by the Company in
payment of finder's fees. The Company also completed
another private placement of 64,000 special warrants at a
price of $0.75 per special warrant for gross proceeds of
$48,000. Also during the same period, the Company issued
267,500 Common Shares on the exercise of 267,500 previously
issued warrants resulting in gross proceeds to the Company
$145,040. Another 30,000 Common Shares were issued on the
exercise of 30,000 stock options for gross proceeds to the
Company of $14,900.
From the beginning of Fiscal 2001 (May 1, 2000) to September
13, 2001 a total of two U.S. residents purchased an
aggregate of 739,000 units at a price of $0.42 for aggregate
gross proceeds of $310,380. All the financings were
principally conducted outside the United States, however two
U.S. residents purchased an aggregate of 300,000 special
warrants at prices of $0.40 and $0.50 per special warrant
for aggregate gross proceeds of $145,000. Another U.S.
resident received a commission of 112,500 special warrants
at a deemed value of $0.40 per special warrant for arranging
a financing. None of the debt settlements were conducted in
the United States or with U.S. residents.
At April 30, 2002, the Company had a working capital deficit
of $2,488,985. Revenue from oil and gas sales from the LAK
Ranch Project is not sufficient to fully meet its cash
requirements and ongoing commitments 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 Project. At the present
time, the LAK Ranch oil production plant is idle until a
partner or substantial financing can be found. Subsequent
to April 30, 2002, the Company exchanged common shares for a
portion of the notes payable outstanding at April 30, 2002,
extended repayment terms on notes payable not exchanged and
completed a private placement of 3,917,500 units at $0.10
per unit for proceeds of $391,750. See "Item 8 - Financial
Information, Significant Changes".
Research and Development, Patents and Licences, etc.
The Company does not engage in research and development
activities.
Trend Information
Factors which may have a material effect on the Company's
future financial condition are set forth in "Item 3 - Key
Information, Risk Factors".
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
Directors and Senior Management
The following table sets out certain information concerning
the directors and executive officers of the Company. Each
director holds office until the next annual general meeting
of the Company or until his successor is elected or
appointed, unless his office is earlier vacated in
accordance with the Articles of the Company, or with the
provisions of the Company Act. The officers are appointed
at the pleasure of the board of directors.
<table>
<caption>
<s> <c> <c>
Name, Position, Age and
Country of Residence Principal Occupation or Employment Date Appointed
- --------------------------- ----------------------------------------- --------------
BARRY C.J. EHRL (1) President of the Company April, 1981
President, CEO and Director President of Sydney Resource Corporation,
Age: 63 a public company involved in mineral
Resident of Canada exploration in British Columbia
(non-competitive).
FRANK R. HALLAM (1) Chartered Accountant November, 1997
CFO and Director Director of Platinum Group Metals Ltd.,
Age: 42 a public company with platinum group metal
Resident of Canada properties in Canada and South Africa
(non-competitive).
EDWARD G. BYRD (1) Director of Century Pacific Greenhouses, a October, 1994
Director private agricultural business
Age: 65 (non-competitive).
Resident of Canada
BRENT C. EHRL President of Pacific Supply Company, a September, 1997
Corporate Secretary private wholesale dried-goods business
Age: 43 (non-competitive).
Resident of Canada
ROBERT E. SWENARCHUK President of Rescom Consultants Ltd., a October, 1986
Vice-President, Communications private company which provides a range
Age: 67 of financial and investor services to
Resident of Canada public companies (non-competitive);
Director of Quaterra Resources Inc. and
Eaglecrest Explorations Ltd. (non-competitive).
PAUL TROST President of MTARRI, Inc., a private profess October, 1997
Vice-President, Operations of professional services business involved in oil
Derek Resources (U.S.A.) Inc. consulting and acquisition of oil interests
Age: 58 (possible competitor).
Resident of United States
GEORGE POUSKA President of Petrospec Corporation, a private October, 1997
Field Manager of Derek holding company involved in the acquisition of
Resources (U.S.A.) Inc. oil field rights and interests (possible
Age: 60 competitor).
Resident of United States
</table>
NOTES:
(1) Member of the Audit Committee
No Director and/or Executive Officer has been the subject of
any order, judgment, or decree of any governmental agency or
administrator or of any court or competent jurisdiction,
revoking or suspending for cause any license, permit or
other authority of such person or of any corporation of
which he is a Director and/or Executive Officer, to engage
in the securities business or in the sale of a particular
security or temporarily or permanently restraining or
enjoining any such person or any corporation of which he is
an officer or director from engaging in or continuing any
conduct, practice, or employment in connection with the
purchase or sale of securities, or convicting such person of
any felony or misdemeanor involving a security or any aspect
of the securities business or of theft or of any felony.
Certain of the Company's directors and officers serve as
directors or officers of other reporting companies or have
significant shareholdings in other reporting companies and,
to the extent that such other companies may participate in
ventures in which the Company may participate, the directors
of the Company may have a conflict of interest in
negotiating and concluding terms respecting the extent of
such participation. In the event that such a conflict of
interest arises at a meeting of the Company's directors, a
director who has such a conflict will abstain from voting
for or against the approval of such participation or such
terms. From time to time several companies may participate
in the acquisition, exploration and development of natural
resource properties thereby allowing for their participation
in larger programs, permitting involvement in a greater
number of programs and reducing financial exposure in
respect of any one program. It may also occur that a
particular company will assign all or a portion of its
interest in a particular program to another of these
companies due to the financial position of the company
making the assignment. Under the laws of British Columbia,
the directors of the Company are required to act honestly,
in good faith and in the best interests of the Company. In
determining whether or not the Company will participate in a
particular program and the interest therein to be acquired
by it, the directors will primarily consider the degree of
risk to which the Company may be exposed and its financial
position at the time.
The Company's plan currently in place to resolve actual and
potential conflicts of interest requires (1) full disclosure
from directors, officers and key employees with respect to
any potentially competitive interests; and (2) the Board of
Directors to assess each actual or potential conflict of
interest on a case-by-case basis. If the Board of Directors
determines that an actual or potential conflict of interest
exists, it will act to mitigate or remove the conflict.
There have been no actual conflicts of interest issues to
date.
While the Directors of the Company are involved in other
business ventures and with the exception of Barry C.J. Ehrl,
do not spend full time on the affairs of the Company, the
Company believes that each devotes as much time to the
affairs of the Company as are required to satisfactorily
carry out their duty.
Brent C. Ehrl, Corporate Secretary, is the son of Barry C.J.
Ehrl, President, Chief Executive Officer and Director.
Other than discussed above, there are no family
relationships between any two or more Directors or Executive
Officers. There are no arrangements or understandings
between any two or more Directors or Executive Officers
pursuant to which he was selected as a Director or Officer.
Barry C.J. Ehrl, President, Chief Executive Officer and
Director
Mr. Ehrl has served as President, Chief Executive Officer
and Director of the Company since 1981, raising several
million dollars for the acquisition of the LAK Ranch Project
and the development of the pilot plant facility. Between
1990 and 1994, he was President and Chief Financial Officer
of Star Valley Resources, Inc., which at that time was
involved in oil recovery projects with Gulf Canada and
British Gas. Between 1986 and 1991, Mr. Ehrl was President
and C.E.O. of Sun Mask Petroleum in which he raised $17
million for proposed takeovers of Inland Natural Gas and
Trans-Mountain Pipeline. Between 1986 and 1990, Mr. Ehrl
was Vice-President, Finance and Director of Dawn Development
Canada Corporation, a private catering firm where he was
directly responsible for raising over $10 million for
restaurant acquisitions in London and Vancouver. Between
1983 and 1995, Mr. Ehrl was Chief Financial Officer of Anvil
Resources Ltd. where he was directly responsible for raising
in excess of $5 million for exploration and development of
mineral properties in British Columbia and the Maritime
provinces. Mr. Ehrl also serves as President, C.E.O. and
Director of Sydney Resource Corporation, a public company
involved in mineral exploration in British Columbia. Mr.
Ehrl currently devotes 80% of his time on the affairs of the
Company.
Frank R. Hallam, B.Ba, CA, Chief Financial Officer and
Director
Frank Hallam was an auditor with Coopers and Lybrand (now
PricewaterhouseCoopers) prior to joining the Tan Range Group
of Companies in 1994. He has extensive experience at the
senior management level with several publicly-listed
resource companies. In addition to serving as Chief
Financial Officer and Director of the Company, Mr. Hallam
also serves as a Director of Platinum Group Metals Ltd., a
public company with platinum group metal properties in
Canada and South Africa. Mr. Hallam currently devotes 50%
of his time on the affairs of the Company.
Edward G. Byrd, CA, Director
Edward Byrd, Chartered Accountant, is currently a Director
of Century Pacific Greenhouses, a private agricultural
business. Mr. Byrd was formerly a Senior Partner with
Coopers & Lybrand (now PricewaterhouseCoopers) as well as a
director of Atomic Energy Canada Limited. He has several
years of experience dealing with public and private sector
companies and has served on the boards of several public
resource companies. Currently, Mr. Byrd is a director of
Star Valley Resources, Inc., a public company involved in
gold and oil properties in the former U.S.S.R. Mr. Byrd
currently devotes 15% of his time on the affairs of the
Company.
Brent C. Ehrl, Corporate Secretary
Brent Ehrl is currently President of Pacific Supply Company,
a private wholesale dry goods business. He also serves as
Director of Sydney Resource Corporation, a public company
involved in mineral exploration in British Columbia. Brent
Ehrl currently devotes 75% of his time on the affairs of the
Company.
Robert E. Swenarchuk, Vice-President, Communications.
Robert Swenarchuk has more than 25 years of successful
practice in the corporate and investor relations sectors of
the natural resources industry. Currently, he is President
of Rescom Consultants Ltd., which he founded in 1980.
Rescom provides a range of financial and investor services
to public companies. Over the past 15 years he has been
involved in arranging financing for mining exploration and
development projects in Canada, the United States, Mexico,
Russia, Kazakhstan and China. He has extensive financial
community contacts throughout North America, Europe and
Asia. Currently, Mr. Swenarchuk is Senior Vice-President,
Corporate Development for Eaglecrest Explorations Ltd., Rio
Fortuna Exploration Corp., Quaterra Resources Inc. and
International Bravo Resource Corp., all of which are
involved in mineral exploration. Mr. Swenarchuk currently
devotes 10% of his time on the affairs of the Company.
Paul Trost, PhD, B.Sc.,Vice-President, Operations of Derek
USA
Dr. Trost obtained his PhD in geochemistry at the Colorado
School of Mines. With over 20 years of oil exploration,
production and operating experience, Dr. Trost is an
established expert in the field of hazardous waste
remediation and waste treatment. Dr. Trost also holds
several oil recovery and waste treatment process patents.
He was previously a co-founder of an enhanced oil recovery
company which specialized in tertiary oil recovery
operations using chemical approaches and is currently
actively involved in using geochemical techniques to
evaluate oil projects. Presently, he is President of
MTARRI, Inc., a private professional services business
involved in oil consulting and the acquisition of oil
interests. Dr. Trost currently devotes 10% of his time on
the affairs of the Company.
George Pouska, MBA, B.Sc., Field Manager of Derek USA
Mr. Pouska has 28 years experience in the fields of
remediation and enhanced oil recovery applications and
chemical engineering. Mr. Pouska, a Registered Professional
Engineer and the holder of several oil industry patents, has
been involved in the design and construction of several
commercial enhanced oil recovery systems. Presently, he is
President of Petrospec Corporation, a private holding
company involved in the acquisition of oil field rights and
interests. Mr. Pouska currently devotes 5% of his time on
the affairs of the Company.
Compensation
The following table sets forth all compensation paid or
accrued by the Company to its directors and members of its
administrative, supervisory or management bodies for the
financial year ended April 30, 2002.
The Company has no pension plan and no other arrangement for
non-cash compensation to the directors of the Company except
stock options.
<table>
<caption>
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Long Term Compensation
---------------------------------------------------------------------------------------------------
Name and Principal Position Annual Compensation Awards Payouts
Other --------------------------------------------------------------
-------------------------- Annual Securities Restricted
Year Salary Bonus Compen- Under Options/ Shares / Units LTIP All Other
sation SARs Granted Awarded Payouts Compensation
($) ($) (#) ($) ($) ($) ($)
---------------------------------------------------------------------------------------------------
Barry C.J. Ehrl 2002 $120,000 $Nil $Nil 602,500 (1) $Nil $Nil $Nil
President, CEO and Director
Frank R. Hallam 2001 $ 96,000 $Nil $Nil 499,500 (1) $Nil $Nil $Nil
CFO and Director
Edward G. Byrd 2001 $ Nil $Nil $Nil 160,000 (1) $Nil Nil $Nil
Director
Brent C. Ehrl 2001 $ 7,231 $Nil $Nil 95,000 (1) $Nil $Nil $Nil
Corporate Secretary
Robert Swenarchuk 2001 $ 6,000 $Nil $Nil 55,000 (1) $Nil $Nil $Nil
VP,Communications
Paul Trost 2001 $10,500 $Nil $Nil 65,000 (1) $Nil $Nil $Nil
VP, Operations of Derek USA
George Pouska 2001 $18,328 $Nil $Nil Nil $Nil $Nil $Nil
Field Manager of Derek USA
</table>
NOTES:
1. Options granted on November 5, 2001 are exercisable at a
price of $0.35 per share and expire on November 4, 2005.
With the exceptions of Barry Ehrl and Frank Hallam, the
Company does not have any written consulting agreements with
any of its directors or officers.
Pursuant to a management agreement dated September 30, 2000
between the Company and Barry Ehrl, Mr. Ehrl was engaged as
President and Chief Executive Officer of the Company for an
unspecified term. Pursuant to the management agreement, Mr.
Ehrl received compensation in the amount of $8,500 per month
for the period October 1, 2000 through January 1, 2001 and
$10,000 per month for the period subsequent to February 1,
2001 as well as the reimbursement of out-of-pocket expenses.
The management agreement may be terminated by Mr. Ehrl at
any time by providing 90 days' notice to the Company. The
management agreement with Mr. Ehrl may be terminated by the
Company at any time with cause or, without cause, by
providing 36 months' notice or payment in lieu of notice of
not less than $360,000.
Pursuant to a management agreement dated September 30, 2000
between the Company and Frank Hallam, Mr. Hallam was engaged
as Chief Financial Officer of the Company for an unspecified
term. Pursuant to the management agreement, Mr. Hallam
received compensation in the amount of $6,500 per month for
the period October 1, 2000 through January 1, 2001 and
$8,000 per month for the period subsequent to February 1,
2001 as well as the reimbursement of out-of-pocket expenses.
The management agreement may be terminated by Mr. Hallam at
any time by providing 90 days' notice to the Company. The
management agreement with Mr. Hallam may be terminated by
the Company at any time with cause or, without cause, by
providing 36 months' notice or payment in lieu of notice of
not less than $288,000.
Board Practices
The Board of Directors presently consists of three
Directors. Each Director was elected at the annual general
meeting of the shareholders of the Company, held on October
31, 2001. Each Director holds office until the next annual
general meeting of the Company or until his successor is
elected or appointed, unless his office is earlier vacated
in accordance with the Articles of the Company, or with the
provisions of the Company Act (British Columbia). See page
36 for the dates on which the current Directors of the
Company were first elected or appointed.
With the exceptions of Barry Ehrl and Frank Hallam, the
Company has not entered into contracts providing for
benefits to the directors upon termination of employment.
Mssrs. Ehrl and Hallam are entitled to receive amounts not
less than $360,000 and $288,000, respectively, upon
termination of employment pursuant to their respective
management agreements with the Company. See "Compensation"
above.
Board Committees
Audit Committee Pursuant to Section 187 of the Company Act
(British Columbia), the Company is required to have an Audit
Committee. As at the date hereof, the members of the Audit
Committee are Barry Ehrl, Frank Hallam and Edward Byrd.
Section 187(1) of the Company Act requires the directors of
a reporting company to elect from among their number a
committee composed of not fewer than three directors, of
whom a majority must not be officers or employees of the
company or an affiliate of the company. The election must
occur at the first meeting of the directors following each
annual general meeting, and those elected will hold office
until the next annual general meeting. Section 187(4)
provides that before a financial statement that is to be
submitted to an annual general meeting is considered by the
directors, it must be submitted to the audit committee for
review with the auditor, and, after that, the report of the
audit committee on the financial statement must be submitted
to the directors. Section 187(5) provides that the auditor
must be given notice of, and has the right to appear before
and to be heard at, every meeting of the audit committee,
and must appear before the audit committee when requested to
do so by the committee. Finally, section 187(6) provides
that on the request of the auditor, the chair of the audit
committee must convene a meeting of the audit committee to
consider any matters the auditor believes should be brought
to the attention of the directors or members.
Currently, the Company has three directors, two of whom are
officers of the Company: Barry C.J. Ehrl, President & CEO,
and Frank R. Hallam, CFO. The Company does not have a
sufficient number of outside directors but intends to
address this in 2003.
Employees
At April 30, 2002, the Company had two full time employees
and one part-time employee. In comparison, the Company had
two full time employees and no part-time employees at April
30, 2001 and 2000.
The Company engages directors, officers and independent
contractors from time to time to supply work on specific
corporate business and project exploration programs.
Share Ownership
With respect to the persons listed in "Compensation," above,
the following table discloses the number of Common Shares
and percent of the Common Shares outstanding held by those
persons, as of November 1, 2002. The Common Shares possess
identical voting rights.
No. of Percent of
Name and Title Shares (1)(2) Shares Outstanding
- ----------------------------- -------------- ------------------
Barry C.J. Ehrl 1,143,471 2.70%
President, CEO and Director
Frank R. Hallam 273,900 Less than 1%
CFO and Director
Edward G. Byrd 136,362 Less than 1%
Director
Brent C. Ehrl 55,409 Less than 1%
Corporate Secretary
Robert E. Swenarchuk 323,706 Less than 1%
Vice-President, Communications
Paul Trost 153,000 Less than 1%
Vice-President, Operations of Derek USA
George Pouska 130,000 Less than 1%
NOTES:
1. Includes beneficial, direct and indirect shareholdings.
2. Does not include stock options and other rights to
purchase or acquire shares.
3. There are 42,076,522 Common Shares issued and
outstanding as of the date of this Form 20-F Annual Report
The following table discloses the incentive stock options
outstanding to the aforementioned persons as of November 1,
2002:
<table>
<caption>
<s> <c> <c> <c> <c>
Name of Person(s) Date of Grant # Common Shares Exercise Price Expiry Date
or Issuance Subject to Issuance (Per Share)
Barry C.J. Ehrl Dec. 1, 1997 90,000 $0.51 Dec. 1, 2002
President, CEO and Director 5-May-99 90,000 $0.48 5-May-04
Nov. 5, 2001 602,500 $0.35 Nov. 4, 2005
Frank R. Hallam Dec. 1, 1997 42,000 $0.51 Dec. 1, 2002
CFO and Director 5-May-99 30,000 $0.48 5-May-04
Nov. 5, 2001 499,500 $0.35 Nov. 4, 2005
Edward G. Byrd 5-May-99 20,000 $0.48 5-May-04
Director Oct. 15, 1999 11,000 $0.75 Oct. 15, 2004
Nov. 5, 2001 160,000 $0.35 Nov. 4, 2005
Brent C. Ehrl Dec. 1, 1997 20,000 $0.51 Dec. 1, 2002
Corporate Secretary 5-May-99 25,000 $0.48 5-May-04
Nov. 5, 2001 95,000 $0.35 Nov. 4, 2005
Robert E. Swenarchuk Dec. 1, 1997 50,000 $0.51 Dec. 1, 2002
Vice-President, Communications 5-May-99 40,000 $0.48 5-May-04
Nov. 5, 2001 55,000 $0.35 Nov. 4, 2005
Paul Trost Dec. 1, 1997 20,000 $0.51 Dec. 1, 2002
Vice-President, Operations of Derek 5-May-99 20,000 $0.48 5-May-04
Dec. 16, 1999 50,000 $0.70 Dec. 16, 2004
Nov. 5, 2001 65,000 $0.35 Nov. 4, 2005
George Pouska Nil
</table>
GEORGE POUSKA
Field Manager of Derek USA
Nil
The Company has no arrangements for involving the employees
in the capital of the Company. The Company does not have a
share purchase plan, dividend reinvestment plan or a share
option plan for its directors, officers and employees.
However, the Company will, from time to time, grant
individual stock options to its directors, officers or
employees as an incentive.
The following table discloses the share purchase warrants
outstanding to the aforementioned persons as of November 1,
2002:
<table>
<caption>
<s> <c> <c> <c> <c>
Name of Person(s) Date of Grant # Common Shares Exercise Price Expiry Date
or Issuance Subject to Issuance (Per Share)
Barry C.J. Ehrl Aug. 20, 2001 60,000 $0.75 Aug. 20, 2003
President, CEO and Directo Oct. 19, 2001 100,000 $0.40 Oct. 19, 2003
Dec. 20, 2001 135,000 $0.40 Dec. 20, 2003
Frank R. Hallam Aug. 20, 2001 91,000 $0.75 Aug. 20, 2003
CFO and Director
Oct. 19, 2001 75,000 $0.40 Oct. 19, 2003
Edward G. Byrd Nil
Director
Brent C. Ehrl Dec. 20, 2001 10,000 $0.40 Dec. 20, 2003
Corporate Secretary
Robert E. Swenarchuk Sept. 11, 2000 239,000 $0.53 Sept. 11, 2002
Vice-President, Communications
Paul Trost Oct. 19, 2001 73,500 $0.40 Oct. 19, 2003
Vice-President, Operations of Derek USA
George Pouska Dec. 20, 2001 50,000 $0.40 Dec. 20, 2003
Field Manager of Derek USA
</table>
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major Shareholders
To the best of the Company's knowledge, it is not directly
or indirectly owned or controlled by another corporation(s)
or by any foreign government.
There are presently no arrangements known to the Company,
the operation of which may at a subsequent date result in a
change in control of the Company.
There have been no significant changes in the percentage
ownership held by any major shareholders during the past
three years except for the acquisition of 3,829,000 Common
Shares by Curb Inc. whose shares were acquired primarily
through private placements.
As at October 15, 2002, the persons or groups known to the
Company to own more than 5% of the Company's issued and
outstanding Common Shares are:
Identity of Person Amount Percent
or Group Owned of Class (1)
Curb Inc. (2) 3,829,000 9.1%
6301 Indian School NE
Suite 1208
Albuquerque, NM
USA 87110
Notes:
1. There are 42,076,522 Common Shares issued and
outstanding as of the date of this Form 20-F Annual
Report
2. Curb Inc. is controlled by Mr. Charles Haegelin
Holders of Record in the United States
Based on the Company's knowledge, after reasonable inquiry
as of October 15, 2002, the most recent practicable date for
conducting such search in the light of the time required for
responses, the total number of Common Shares held of record
by 225 residents in the United States is 13,320,265 Common
Shares representing approximately 31.7% of the 42,076,522
Common Shares issued and outstanding. The foregoing is
comprised of the following:
1. According to the records of the Company's registrar and
transfer agent, Computershare Trust Company of Canada,
there are 4,991,245 Common Shares held of record by 173
residents of the United States, one of which is Cede &
Co. with a total of 277,538 Common Shares.
2. Through a search conducted by the Company, the Company
has ascertained that there are no Common Shares held by
residents of the United States through CDS & Co. in
Canada.
3. A search conducted through Cede & Co. in the United
States by the Company revealed there are 53 holders of
record resident in the United States owning 8,606,558
Common Shares of record (CDS held a deficit of 8,609,029
Common Shares).
The Common Shares commenced trading on the NASD OTC Bulletin
Board Service on January 4, 2001, making the Company's
shares available to U.S. residents on the open market.
Related Party Transactions
Certain of the Company's directors and officers serve as
directors or officers of other reporting companies or have
significant shareholdings in other reporting companies and,
to the extent that such other companies may participate in
ventures in which the Company may participate, the directors
of the Company may have a conflict of interest in
negotiating and concluding terms respecting the extent of
such participation. In the event that such a conflict of
interest arises at a meeting of the Company's directors, a
director who has such a conflict will abstain from voting
for or against the approval of such participation or such
terms. From time to time several companies may participate
in the acquisition, exploration and development of natural
resource properties thereby allowing for their participation
in larger programs, permitting involvement in a greater
number of programs and reducing financial exposure in
respect of any one program. It may also occur that a
particular company will assign all or a portion of its
interest in a particular program to another of these
companies due to the financial position of the company
making the assignment. Under the laws of British Columbia,
the directors of the Company are required to act honestly,
in good faith and in the best interests of the Company. In
determining whether or not the Company will participate in a
particular program and the interest therein to be acquired
by it, the directors will primarily consider the degree of
risk to which the Company may be exposed and its financial
position at the time.
Management believes that the transactions referenced below
were on terms at least as favorable to the Company as it
could have obtained from unaffiliated parties.
Other than disclosed elsewhere in this Annual Report, none
of the Company's directors, senior officers, principal
shareholders named in "Item 7 - Major Shareholders and
Related Party Transactions", or any relative or spouse of
the foregoing, have had an interest, direct or indirect, in
any transaction, during the current financial year ending
April 30, 2002, or in any proposed transaction which has
materially affected or will materially affect the Company or
any of its subsidiaries except for the following:
1. Barry C.J. Ehrl, President, C.E.O. and Director of the
Company provided management services to the Company as
President and C.E.O. During Fiscal 2002, Mr. Ehrl was paid or
accrued $120,000 pursuant to a management agreement with the
Company. See "Item 6 - Directors, Senior Management and
Employees".
1. Frank R. Hallam, C.F.O. and Director of the Company
provided management services to the Company as C.F.O.
During Fiscal 2002, Mr. Hallam was paid or accrued
$96,000 pursuant to a management agreement with the
Company. See "Item 6 - Directors, Senior Management and
Employees".
2. Brent C. Ehrl, Corporate Secretary of the Company,
provided administrative services to the Company. During
Fiscal 2002, Brent Ehrl was paid or accrued $37,231 for
administrative services rendered. Brent Ehrl does not
have an agreement with the Company but is paid by the
Company upon the rendering of services and receipt of
expense reports and/or invoices. See "Item 6 -
Directors, Senior Management and Employees".
4. Robert E. Swenarchuk, Vice-President, Communications
of the Company, provided corporate communication
services to the Company. During Fiscal 2002, Mr.
Swenarchuk was paid or accrued $6,000 for corporate
communication services rendered. Mr. Swenarchuk does
not have an agreement with the Company but is paid by
the Company upon the rendering of services and receipt
of expense reports and/or invoices. See "Item 6 -
Directors, Senior Management and Employees".
5. Paul B. Trost, Vice-President, Operations and Director
of the Company's wholly owned U.S. subsidiary, Derek
USA, provided consulting services to the Company.
During Fiscal 2002, MTARRI, Inc., a private company
beneficially owned by Mr. Trost, was paid or accrued
$10,500 for consulting services rendered.
6. George Pouska, Field Manager of the Company's wholly
owned U.S. subsidiary, Derek USA, provided consulting
services to the Company. During Fiscal 2002, Petrospec
Corporation, a private company beneficially owned by Mr.
Pouska was paid or accrued $18,328 for consulting
services rendered.
7. Pursuant to an escrow agreement dated November 7, 1997
(the "Escrow Agreement") among Montreal Trust Company,
the Company, Barry Ehrl, President C.E.O. and director
of the Company, the Company issued 375,000 performance
escrow shares to Mr. Ehrl at an ascribed value of $0.01
per share. The performance shares are subject to the
terms of release as required by the Executive Director
of the Commission or the Exchange which provide that
holders of performance shares in a natural resource
company will be entitled to a pro-rata release of those
shares on the basis of 15% of the original number of
performance shares for every $100,000 expended on
exploration and development of a resource property
calculated proportionately after the first $100,000
expenditure. No more than 50% of the original number of
performance shares may be released in any twelve-month
period and no expenditure on exploration and development
made prior to the date of a company's initial public
offering may be included. Where administrative expenses
exceed 33% of total expenditures during the period on
which the calculation is based, the pro-rata release
factor of 15% will be reduced to 7.5% and the percentage
of the original number of performance shares available
for release in any twelve-month period will be reduced
to 25%. Resource property option payments cannot be
included as expenditures on exploration and development
of a resource property for the purpose of calculating
the allowable escrow release.
The restrictions contained in the Escrow Agreement
provide that the performance shares may not be traded
in, dealt with in any manner whatsoever, or released,
nor may the Company, its transfer agent or escrow
holder, make any transfer or record any trading of the
performance shares without the consent of the Executive
Director of the Commission, or while the Common Shares
are listed on the Exchange without the consent of the
Exchange. A holder of the performance shares who ceases
to be a principal of the Company, or who dies or becomes
bankrupt is not thereby subject to forfeiture of the
performance shares under the terms of the Escrow
Agreement.
Any performance shares not released from escrow by
November 7, 2002 shall be cancelled. During Fiscal 1999,
the Exchange consented to the release from escrow of
70,422 shares to Mr. Ehrl. During Fiscal 2001, the
Exchange consented to the release from escrow of an
additional 55,862 shares to Mr. Ehrl. During Fiscal
2000 and Fiscal 2002, no shares were released from
escrow.
There were 248,716 performance escrow shares remaining
at April 30, 2002.
8. The Company's executive offices are located in rented
premises which it shares with Sydney Resource
Corporation, a company which Barry C.J. Ehrl, President,
CEO and Director of the Company, is a director and
officer.
No director, senior officer, relative or associate of such
persons was indebted to the Company during the current
financial year ending April 30, 2002.
Interests of Experts and Counsel
Not applicable.
ITEM 8 - FINANCIAL INFORMATION
Consolidated Financial Statements and Other Financial
Information
See the audited consolidated financial statements listed in
Item 17 hereof and filed as part of this Form 20-F Annual
Report. These financial statements include the consolidated
balance sheets as at April 30, 2002 and 2001 and statements
of loss and cash flows for each of the three years ended
April 30, 2002.
These financial statements were prepared in accordance with
accounting principles generally accepted in Canada.
Differences between accounting principles generally accepted
in Canada and in the United States, as applicable to the
Company, are set forth in Note 11 to the accompanying
consolidated financial statements of the Company.
Legal Proceedings
There are no other actual or pending material legal
proceedings to which the Company is or is likely to be a
party or of which any of its properties is or is likely to
be the subject except for the following:
Two creditors filed claims against the Company for
settlement of amounts due to them in 2002. One creditor was
paid in full subsequent to year-end and their action is
being terminated. The other creditor, Venture 101 of
Douglas, Wyoming, was liquidated during the year and the
Company is awaiting further advice from their trustees as to
how a settlement arrangement may be reached. Venture 101
had claimed unpaid amounts due from the Company. The
Company records an amount due to Venture 101 of US
$45,568.15.
Dividend Policy
The Company has not declared any dividends since
incorporation in 1981 and does not anticipate that it will
do so in the foreseeable future. The present policy of the
Company is to retain future earnings for use in its
operations and the expansion of its business.
Significant Changes
Since April 30, 2002, the date of the most recent audited
financial statements, the following significant changes have
occurred:
1. Pursuant to a letter agreement dated June 21, 2001
between the Company and Bateman Project Holdings Limited
("BPHL") of Johannesburg, South Africa pursuant to which
Bateman agreed to defer US $471,183 of debt payable by
the Company until May 31, 2002. Any amounts incurred in
excess of US $471,183 would be due and payable in the
normal course of business. In consideration, Bateman
would receive interest of 10% per annum commencing June
15, 2001 with both principal and interest due on May 31,
2002. The debt may be converted in whole or in part
into Common Shares for $0.75 per share at any time until
May 31, 2002. In addition, the Company granted a
permanent gross over-riding royalty in the amount of US
$0.0471 per barrel of oil produced net to the Company's
interest. As security for the amount deferred, the
Company granted a lien in favour of Bateman, first on
the surface equipment owned by the Company and located
on the LAK Ranch Project and secondly, if required to
satisfy amounts outstanding on the repayment date, on
the LAK Ranch Project itself. See "Item 4 - Information
on the Company, The LAK Ranch Project, Wyoming, USA".
The Company was not able to repay the principal and
interest on May 31, 2002. On August 21, 2002, Bateman
Project Holdings Limited agreed to settle one half of
the total debt outstanding in exchange for common shares
of the Company at a price of $0.10 per share with the
remaining amount payable to be secured by way of a new
note issued by the Company bearing interest at 10% per
annum and maturing on September 30, 2003. BPHL will
have the right, after August 21, 2003, to convert any
unpaid principal and interest into Common Shares at an
exercise price of $0.10 per share.
2. On June 6, 2001, the Company entered into a loan
agreement with Sparten Establishment for US $100,000.
This loan bears interest at 10% per annum, payable
monthly, plus an overriding royalty of US $0.01 per
barrel of oil produced at the LAK Ranch Project and
matures on May 31, 2003 but does not bear a conversion
right. The proceeds were used to settle outstanding
accounts payable for construction and operating costs at
the LAK Ranch Project. On August 21, 2002, the lender
agreed to settle US $50,000 from the principal amount
in exchange for Common Shares at a price of $0.10 per
share and to exchange 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.
3. On June 27, 2001, the Company entered into a loan
agreement in the amount of US $100,000 with Cristina
Casati. The loan bears interest at a rate of 10% per
annum, plus an additional overriding royalty of US $0.01
per barrel of oil produced at the LAK Ranch Project.
The loan may be converted in whole or in part into
Common Shares for $0.75 per share at any time until May
31, 2003 at which time it is repayable in full. The
proceeds were used to settle outstanding accounts
payable for construction and operating costs at the LAK
Ranch Project. On August 21, 2002, the lender agreed to
settle the accrued interest on this note in the amount
of US $12,114 in exchange for Common Shares at a price
of $0.10 per share.
4. On June 28, 2001, the Company entered into a loan
agreement in the amount of US $50,000 with Savannah
Consulting Ltd. The loan bears interest at a rate of 10%
per annum, plus an additional overriding royalty of US
$0.005 per barrel of oil produced at the LAK Ranch
Project. The loan may be converted in whole or in part
into Common Shares for $0.75 per share at any time until
May 31, 2002 at which time it was repayable in full.
The proceeds were used to settle outstanding accounts
payable for construction and operating costs at the LAK
Ranch Project. The Company was not able to repay the
principal and interest on May 31, 2002. On August 21,
2002, the lender agreed to settle the principal and
interest outstanding in the amount of US $56,041 in
exchange for Common Shares at a price of $0.10 per
share.
5. On June 28, 2001, the Company entered into a loan
agreement in the amount of US $50,000 with John F.P.
Lush. The loan bears interest at a rate of 10% per
annum, plus an additional overriding royalty of US
$0.005 per barrel of oil produced at the LAK Ranch
Project. The loan may be converted in whole or in
part into Common Shares for $0.75 per share at any time
until May 31, 2002 at which time it was repayable in
full. The proceeds were used to settle outstanding
accounts payable for construction and operating costs at
the LAK Ranch Project. The Company was not able to
repay the principal and interest on May 31, 2002. On
August 21, 2002, the lender agreed to settle the
principal and interest outstanding in the amount of US
$56,041 in exchange for Common Shares at a price of
$0.10 per share.
6. On October 30, 2001, the Company entered into a loan
agreement with Western Industrial, Inc. for US
$89,838.35. The loan bears interest at a rate of 10% per
annum, plus an additional overriding royalty of US
$0.0089838 per barrel of oil produced at the LAK Ranch
Project. The loan may be converted in whole or in part
into Common Shares for $0.75 per share at any time until
August 31, 2002 at which time it was repayable in full.
The proceeds were used to settle outstanding accounts
payable for construction and operating costs at the LAK
Ranch Project. On August 21, 2002, the lender agreed
to settle the principal and interest outstanding in
the amount of US $99,806 in exchange for Common Shares
at a price of $0.10 per share.
7. During the period 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 August 21, 2002, the
lender agreed to settle the principal and interest
outstanding in the amount of US $160,193 in exchange for
Common Shares at a price of $0.10 per share.
8. On August 29, 2002, the Company entered into an
Assignment Agreement dated August 9, 2002 with Equiva
Trading Company with respect the assignment of the May
17, 2001 agreement (to purchase crude oil produced from
the LAK Ranch Project) to Shell Trading (US) Company.
9. On August 19, 2002, as amended September 3, 2002, the
Company entered into a leasing proposal with Oxford
Properties Group with respect to the head office space.
10. On August 27, 2002, the Company completed a private
placement for 3,917,500 units at a price of $0.10 per
unit for gross proceeds of $391,750. Each unit
consisted of one common share and one share purchase
warrant exercisable at a price of $0.15 per share for
a period of two years. Proceeds of $391,750 were used
for general administrative expenses and working capital
related to the LAK Ranch Project.
ITEM 9 - THE OFFER AND LISTING
Offer and Listings Details
There is no offer associated with this Annual Report.
Trading History
The following table sets forth the high and low market
prices for the Common Shares on the Exchange for each full
quarterly period within the within the two most recent
fiscal years:
CDNX HIGH CDNX LOW OTC-BB HIGH OTC-BB LOW
PERIOD CDN $ CDN $ USD $ USD $
- ----------------- --------- -------- ----------- ----------
2002
Fourth Quarter $0.31 $0.15 $0.21 $0.12
Third Quarter $0.42 $0.23 $0.27 $0.13
Second Quarter $0.49 $0.22 $0.32 $0.16
First Quarter $0.60 $0.41 $0.40 $0.28
2001
Fourth Quarter $0.80 $0.41 $0.51 $0.28
Third Quarter $0.80 $0.44 $0.43 $0.31
Second Quarter $1.18 $0.65 n/a (1) n/a (1)
First Quarter $0.85 $0.45 n/a (1) n/a (1)
NOTES:
(1) The Common Shares commenced trading on the NASD OTC
Bulletin Board Service on January 4, 2001.
The following table sets forth the annual high and low
market prices for the five fiscal years ending April 30,
2002:
CDNX HIGH CDNX LOW OTC-BB HIGH OTC-BB LOW
YEARS ENDING APRIL 30 CDN $ CDN $ USD $ USD $
- --------------------- --------- -------- ----------- ----------
2002 $0.60 $0.15 $0.40 $0.12
2001 $1.18 $0.41 $0.51 $0.28
2000 $1.25 $0.31 n/a (1) n/a (1)
1999 $0.75 $0.34 n/a (1) n/a (1)
1998 $0.79 $0.21 n/a (1) n/a (1)
NOTES:
(1) The Common Shares commenced trading on the NASD OTC
Bulletin Board Service on January 4, 2001.
The following table sets forth the high and low market prices
for the most recent six months:
CDNX HIGH CDNX LOW OTC-BB HIGH OTC-BB LOW
MONTH CDN $ CDN $ USD $ USD $
- ------- --------- --------- ----------- ----------
Oct-02 $0.10 $0.05 $0.07 $0.05
Sep-02 $0.10 $0.06 $0.07 $0.04
Aug-02 $0.15 $0.09 $0.09 $0.05
Jul-02 $0.17 $0.07 $0.15 $0.06
Jun-02 $0.22 $0.15 $0.16 $0.10
The closing price of the Company's shares on November 1,
2002 was $0.09 on the Exchange and US $0.065 on the NASD OTC
Bulletin Board Service.
There have been no trading suspensions in the prior three
years.
Plan of Distribution
Not applicable.
Markets
The Common Shares trade on the Exchange under the symbol
"DRS" on the Exchange. On January 4, 2001, the Common
Shares commenced trading on the NASD OTC Bulletin Board
Service under the symbol "DRKRF".
Selling Shareholders
Not applicable.
Dilution
Not applicable.
Expenses of the Issue
Not applicable.
ITEM 10 - ADDITIONAL INFORMATION
Share Capital
Not applicable.
Memorandum of Articles of Association
Objects and Purposes of the Company
The Memorandum of the Company places no restrictions upon
the Company's objects and purposes.
Directors' Powers
Section 12.6 of the Articles of the Company (the "Articles")
provides that a director who is in any way directly or
indirectly interested in a contract or proposed contract or
transaction with the Company shall declare the nature and
extent of his interest at a meeting of the directors in
accordance with the provisions of the Company Act of the
Province of British Columbia (the "Company Act"). Subject to
the Company Act, a director shall not vote in respect of any
such contract or transaction with the Company in which he is
interested and if he shall do so, his vote shall not be
counted, but he may be counted in the quorum present at the
meeting at which such vote is taken. Subject to the Company
Act, the foregoing shall not apply to:
1. any contract or transaction relating to a loan to the
Company, which a director of a specified corporation or
a specified firm in which he has an interest has
guaranteed or joined in guaranteeing the repayment of
the loan or any part of the loan; or
2. any contract or transaction made or to be made with, or
for the benefit of an affiliated corporation or a
subsidiary corporation of which a director is a
director; or
3. any contract by a director to subscribe for shares,
debentures or debt obligations to be issued by the
Company or a subsidiary of the Company, or any contract,
arrangement or transaction in which a director is,
directly or indirectly, interested if all the other
directors are also, director or indirectly interested in
the contract, arrangement or transaction; or
4. if authorized by ordinary resolution pursuant to Article
12.4, the remuneration of the directors.
Subject to the Company Act the foregoing prohibitions and
exceptions thereto may from time to time be suspended or
amended to any extent by ordinary resolution, either
generally or in respect of any particular contract,
arrangement or transaction or for any particular period.
Section 15.1 of the Articles provides that the quorum
necessary for the transaction of the business of the
Directors may be fixed by the Directors and unless so fixed
such quorum shall be a majority of the Board. The Chairman
of the Board, if any, or in his absence the President of the
Company, shall be the chairman of all meetings of the Board
but if at any meeting neither the Chairman of the Board, if
any, nor the President shall be present within 30 minutes
after the time appointed for holding the same or if both the
Chairman of the Board and the President, being present
decline to act, the directors present may choose someone of
their number to be chairman at such meeting. A director
interested in a contract or a proposed contract or
transaction with the Company pursuant to Section 12.6 is to
be counted in a quorum notwithstanding his interest.
Section 12.4 of the Articles provides that the remuneration
of the Directors as such may from time to time be determined
by the Directors, unless by ordinary resolution the members
determine that such remuneration shall be determined by the
members, such remuneration to be in addition to any salary
or other remuneration paid to any officer or employee of the
Company as such, who is also a director. The Directors
shall be repaid such reasonable expenses as they may incur
in and about the business of the Company and if any Director
shall perform any professional or other services for the
Company that, in the opinion of the Directors, are outside
the ordinary duties of a Director or shall otherwise be
specially occupied in or about the Company's business, he
may be paid a remuneration to be fixed by the Board, or, at
the option of such Director, by the Company in general
meeting, and such remuneration may be either in addition to,
or in substitution for, any other remuneration that he may
be entitled to receive, and the same shall be charged as
part of the ordinary expenses of the Company. Unless
otherwise determined by ordinary resolution, the Directors
on behalf of the Company, may pay a gratuity or pension or
allowance on retirement to any Director who has held any
salaried office or place of profit with the Company or to
his spouse or dependents and may make contributions to any
fund and pay premiums for the purchase or provision of any
gratuity, pension or allowance. There are no restrictions
in the Articles upon the directors' power, in the absence of
an independent quorum, to vote compensation to themselves or
any members of their body.
Section 8.1 of the Articles provides that the directors may
from time to time at their discretion authorize the Company:
1. to guarantee the indebtedness of an affiliate of the
Company or of any other person;
2. to borrow money for the purposes of the Company or an
affiliate of the Company in such manner and amount, on
such security, from such sources and upon such terms
and conditions as they think fit;
3. to issue bonds, debentures and other debt obligations
either as principal debtor or as surety or guarantor for
any liability or obligation, contingent or otherwise, of
an affiliate of the Company or of any other person;
4. to mortgage or charge, whether by way of either
specific or floating charge, or give other security on
the undertaking, or on whole or any part of the property
and assets of the Company, both present and future.
The borrowing powers of the directors set forth in the
Articles can be varied by amending the Articles. Section
219 of the Company Act provides that a Company may alter its
Articles by filing with the registrar of companies a
certified copy of a special resolution altering the
Articles. A special resolution is a resolution passed by a
majority of not less than three quarters of the votes cast
by those members of a company who, being entitled to do so,
vote in person or by proxy at a general meeting of the
company, or consented to in writing by every member of a
company who would have been entitled to vote in person or by
proxy at a general meeting of the company. Under the
Company Act, an ordinary resolution of shareholders requires
approval by a majority of the votes cast at a meeting of
shareholders, present in person or represented by proxy.
Qualifications of Directors
There is no provision in the Articles imposing a requirement
for retirement or non-retirement of directors under an age
limit requirement.
Section 12.3 of the Articles provides that a director shall
not be required have any share qualification (to hold a
share in the capital of the Company) but any person not
being a member of the Company who becomes a director shall
be deemed to have agreed to be bound by the provisions of
the Articles to the extent as if he were a member of the
Company.
Section 114 of the Company Act provides that no person is
qualified to act as a director if that person is:
(a) under the age of 18 years;
(b) found to be incapable of managing the person's own
affairs by reason of mental infirmity;
(c) a corporation;
(d) an undischarged bankrupt;
(e) unless the court orders otherwise, convicted of an
offence in connection with the promotion, formation or
management of a corporation, or involving fraud, unless
5 years have elapsed since the expiration of the period
fixed for suspension of the passing of sentence without
sentencing or since a fine was imposed, or the term of
imprisonment and probation imposed, if any, was
concluded, whichever is the latest, but the disability
imposed by this paragraph ceases on a pardon being
granted under the Criminal Records Act (Canada); or
(f) in the case of a reporting company, a person whose
registration in any capacity has been cancelled under
(i) the Securities Act by either the British Columbia
Securities Commission or the executive director, or
(ii) the Mortgage Brokers Act by either the Commercial
Appeals Commission or the registrar, unless the
commission, the executive director or the
registrar, whichever is applicable, otherwise
orders, or unless 5 years have elapsed since the
cancellation of the registration.
Pursuant to Section 114(3) of the Company Act, every person
who acts as a director of a company and who is not qualified
to act as a director of the company because of section 114
(1) commits an offence.
Section 108 of the Company Act provides that every company
must have at least one director, and a reporting company
must have at least three directors. Section 109(1) states
that the majority of the directors of every company must be
persons ordinarily resident in Canada, while section 109(2)
specifies that one director of every company must be
ordinarily resident in British Columbia.
Section 13.1 of the Articles provides for the removal of a
Director, which states that the directorship of a Director
shall be immediately terminated:
1. if he is found to be incapable of managing the person's
own affairs by reason of mental infirmity;
2. if he becomes bankrupt;
3. if by notice in writing to the Company at its
registered office he resigns;
4. if he is removed pursuant to Article 14.2;
5. if he is convicted within or without the Province of an
offence;
1. in connection with the promotion, formation or
management of a corporation; or
2. involving fraud;
unless 5 years have elapsed since the expiration of the
period fixed for suspension of the passing of sentence
without sentencing or since a fine was imposed, or the
term of imprisonment and probation imposed, if any, was
concluded, whichever is the latest, but the disability
imposed by this paragraph ceases on a pardon being
granted under the Criminal Records Act (Canada); or
6. if the Company is a reporting company, if his
registration in any capacity under the Securities Act or
the Mortgage Brokers Act or the Commodity Brokers Act
is cancelled, unless the Securities Commission,
the Superintendent of Brokers or the Registrar of
Companies, whichever is applicable, otherwise orders, or
unless five years have elapsed since the
cancellation of the registration; or
7. if he ceases to be qualified to act as a Director
pursuant to the Company Act.
8. if he is convicted after the date of his election or
appointment as a director of any criminal or quasi-
criminal offence other than an offence described in
subparagraph (e) and the Directors determine that it is
in the best interests of the Company that his
directorship be terminated.
Section 14.2 of the Articles provides that the Company may,
by special resolution remove any Director, and by ordinary
resolution, appoint another person in his stead. Any
director so appointed shall hold office only until the
conclusion of the next annual general meeting of the
Company, but shall be eligible for re-election at such
meeting.
Rights, Preference and Restrictions
All of the authorized shares of common stock of the Company
are of the same class and, once issued, rank equally as to
dividends, voting powers, and participation in assets and in
all other respects, on liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary, or any
other distribution of the assets of the Company among its
shareholders for the purpose of winding up its affairs after
the Company has paid out its liabilities. The issued common
shares are not subject to call or assessment rights or any
pre-emptive or conversion rights. The holders of Shares are
entitled to one vote for each Share on all matters to be
voted on by the shareholders. There are no provisions for
redemption, purchase for cancellation, surrender or purchase
funds.
To change the rights of holders of stock, where such rights
are attached to an issued class or series of shares, section
226 of the Company Act requires the consent by a separate
resolution of the holders of the class or series of shares,
as the case may be, requiring a majority of 75% of the votes
cast.
Annual General Meetings and Extraordinary General Meetings
The Company Act provides that the Company must hold an
annual general meeting at least once in every calendar year
and not more than 13 months after the date that the last
annual general meeting was held. If the Company fails to
hold an annual general meeting, the Supreme Court of British
Columbia may, on the application of a shareholder of the
Company, call or direct an annual general meeting. The
Company must give to its members entitled to receive notice
of a general meeting not less than 21 days' notice of any
general meeting of the Company, but those members may waive
or reduce the period of notice for a particular meeting by
unanimous consent in writing. The Company Act requires the
directors of a reporting company to provide with notice of a
general meeting a form of proxy for use by every member
entitled to vote at such meeting as well as an information
circular containing prescribed information regarding the
matter to be dealt with and conduct of the general meeting.
Prior to each annual general meeting of its members the
directors of the Company must place comparative financial
statements, made up to a date not more than 6 months before
the annual general meeting, the report of the auditor, and
the report of the directors to the members.
The directors of the Company may, whenever they see fit,
convene an extraordinary general meeting. One or more
shareholders of the Company may also requisition an
extraordinary general meeting so long as such shareholders
own not less than 5% of the issued and outstanding shares at
the date such shareholders requisition an extraordinary
general meeting. After receiving such requisition, the
Company's directors must immediately give notice of the
extraordinary general meeting which must be held within four
months after the date of delivery of the requisition to the
Company.
Limitations on Ownership of Securities
There are no limitations on the right to own securities,
imposed by foreign law or by the charter or other
constituent document of the Company.
Change in Control of Company
No provision of the Company's Articles, charter or bylaws
would have the effect of delaying, deferring, or preventing
a change in control of the Company, and operate only with
respect to a merger, acquisition or corporate restructuring
of the Company or any of its subsidiaries.
Ownership Threshold
There are no bylaw provisions governing the ownership
threshold above which shareholder ownership must be
disclosed.
Changes to Capital
There are no conditions imposed by the Company's memorandum
and articles governing changes in the capital where such
conditions are more stringent than is required by the law of
British Columbia.
Material Contracts
The following material contracts have been entered into by
the Company within the past two years, copies of which may
be inspected between the hours of 10:00 am and 5:00 p.m. at
the head office of the Company located at Suite 1550, 355
Burrard Street, Vancouver, British Columbia, V6C 2G8.
1. Recorded Certificate of Purchase dated April 13, 2001
executed by the Weston County Sheriff confirming the
sale of Asdar Group's 25% interest in the LAK Ranch
Project to Derek Resources Corporation by way of a
mortgage foreclosure. See "Item 4 - Information on the
Company, The LAK Ranch Project, Wyoming, USA".
2. Letter agreement dated April 30, 2001 between the
Company and First Echelon Ventures Inc. pursuant to
which the Company sold its rights and interests in the
Morton Project to First Echelon for the sum of US
$100,000. See "Item 4 - Information on the Company,
General Development of the Business of the Registrant".
3. Lease Purchase Agreement dated May 17, 2001 between the
Company and Equiva Trading Corporation pursuant to which
Equiva purchased crude oil produced from the LAK Ranch
Project. See "Item 4 - Information on the Company, The
LAK Ranch Project, Wyoming, USA".
4. Finder's Fee Agreement dated May 30, 2001 between the
Company and Tecucomp Geological Inc. pursuant to which
Tecucomp was engaged by the Company to assist in finding
a joint venture partner or financier for the development
of the LAK Ranch Project.
5. Letter agreement dated June 21, 2001 between the
Company and Bateman Project Holdings Limited of
Johannesburg, South Africa pursuant to which Bateman
agreed to defer US $471,183 of debt payable by the
Company until May 31, 2002. See "Item 4 - Information on
the Company, The LAK Ranch Project, Wyoming, USA" and
"See Item 8 - Financial Information, Significant
Changes".
6. Assignment of a Federal Lease dated July 6, 2001, as
amended July 10, 2001, from Edel P. Smith and Accidental
Oil Company pursuant to which the Company acquired an
additional 80 acres in the LAK Ranch Project. See
"Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
7. Loan agreement dated May 3, 2001 between the Company
and Westerton Management Corp. for US $56,500. See
"Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
8. Loan agreement dated May 9, 2001 between the Company
and Marble Hall Investments Ltd. for US $75,000. See
"Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
9. Loan agreement dated May 9, 2001 between the Company
and Wet Coast Management Corp. for US $75,000. See
"Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
10. Loan agreement dated June 6, 2001 between the Company
and Sparten Establishment for US $100,000. See "Item 4
- Information on the Company, The LAK Ranch Project,
Wyoming, USA".
11. Loan agreement dated June 27, 2001 in the amount of US
$100,000 between the Company and Cristina Casati. See
"Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
12. Loan agreement dated June 28, 2001 in the amount of US
$50,000 between the Company and Savannah Consulting Ltd.
See "Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
13. Loan agreement dated June 28, 2001 in the amount of US
$50,000 between the Company and John F.P. Lush. See
"Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
14. Loan agreement dated October 30, 2001 between the
Company and Western Industrial, Inc. for US $89,838.35.
See "Item 4 - Information on the Company, The LAK Ranch
Project, Wyoming, USA".
15. Settlement agreement dated November 21, 2001 with Asdar
Group whereby Asdar released the lis pendens filed
against the property and relinquished any claim to any
right or interest in the LAK Ranch Project. See
"Litigation with Asdar Group" on page 29.
16. Assignment Agreement dated August 9, 2002 between the
Company and Equiva Trading Company with respect the
assignment of the May 17, 2001 agreement (to purchase
crude oil produced from the LAK Ranch Project) to Shell
Trading (US) Company.
17. Leasing proposal dated August 19, 2002, as amended
September 3, 2002, between the Company and Oxford
Properties Group with respect to the head office space.
Exchange Controls
There are no governmental laws, decrees or regulations in
Canada relating to restrictions on the export or import of
capital, or affecting the remittance of interest, dividends
or other payments to non-resident holders of Common Shares.
Any remittances of dividends to United States residents are,
however, subject to a 15% withholding tax (5% if the
shareholder is a corporation owning at least 10% of the
outstanding Common Shares) pursuant to Article X of the
reciprocal tax treaty between Canada and the United States.
See "Taxation" on page 55.
Except as provided in the Investment Canada Act (the "Act"),
which has provisions which govern the acquisition of a
control block of voting shares by non-Canadians of a
corporation carrying on a Canadian business, there are no
limitations specific to the rights of non-Canadians to hold
or vote the Common Shares under the laws of Canada or the
Province of British Columbia or in the charter documents of
the Company.
The following describes those provisions of the Act
pertinent to an investment in the Company by a person who is
not a Canadian resident (a "non-Canadian").
The Act requires a non-Canadian making an investment which
would result in the acquisition of control of the Canadian
business to notify the Investment Review Division of
Industry Canada, the federal agency created by the Act; or
in the case of an acquisition of a Canadian business, the
gross value of the assets of which exceeds certain threshold
levels of the business activity of which is related to
Canada's cultural heritage or national identity, to file an
application for review with the Investment Review Division.
The notification procedure involves a brief statement of
information about the investment on a prescribed form, which
is required to be filed with Investment Canada by the
investor at any time up to 30 days following implementation
of the investment. It is intended that investments requiring
only notification will proceed without government
intervention unless the investment is in a specific type of
business activity related to Canada's cultural heritage and
national identity.
If an investment is reviewable under the Act, an application
for review in the form prescribed is required to be filed
with Investment Canada prior to the investment taking place
and the investment may not be implemented until the review
has been completed and the Minister responsible for the
Investment Canada Act is satisfied that the investment is
likely to be of net benefit to Canada. If the Minister is
not satisfied that the investment is likely to be of net
benefit to Canada, the non-Canadian must not implement the
investment or, if the investment has been implemented, may
be required to divest himself of control of the business
that is the subject of the investment.
The following investments by non-Canadians are subject to
notification under the Act:
1. an investment to establish a new Canadian business; and
2. an investment to acquire control of a Canadian business
that is not reviewable pursuant to the Act.
The following investments by a non-Canadian are subject to
review under the Act:
1. direct acquisitions of control of Canadian businesses
with assets of $5 million or more, unless the
acquisition is being made by a World Trade Organization
("WTO") member country investor (the United States being
a member of the WTO);
2. direct acquisitions of control of Canadian businesses
with assets of $172,000,000 or more by a WTO investor;
3. indirect acquisitions of control of Canadian businesses
with assets of $5 million or more is such assets
represent more than 50% of the total value of the
assets of the entities, the control of which is being
acquired, unless the acquisition is being made by a WTO
investor, in which case there is no review;
4. indirect acquisitions of control of Canadian businesses
with assets of $50 million or more even if such assets
represent less than 50% or the total value of the assets
of the entities, the control of which being acquired,
unless the acquisition is being made by a WTO investor,
in which case there is no review; and
5. an investment subject to notification that would not
otherwise be reviewable if the Canadian business engages
in the activity of publication, distribution or sale for
books, magazines, periodicals, newspapers, film or
video recordings, audio or video music recordings, or
music in print or machine-readable form.
An acquisition is direct if it involves the acquisition of
control of the Canadian business or of its Canadian parent
or grandparent and an acquisition is indirect if it involves
the acquisition of control of a non-Canadian parent or
grandparent of an entity carrying on the Canadian business.
Control may be acquired through the acquisition of actual
voting control by the acquisition of voting shares of a
Canadian corporation or through the acquisition of
substantially all of the assets of the Canadian business.
No change of voting control will be deemed to have occurred
if less than one-third of the voting control of a Canadian
corporation is acquired by an investor.
A WTO investor, as defined in the Act, includes an
individual who is a national of a member country of the
World Trade Organization or who has the right of permanent
residence in relation to that WTO member, a government or
government agency of a WTO investor-controlled corporation,
limited partnership, trust or joint venture and a
corporation, limited partnership, trust or joint venture
that is neither WTO-investor controlled or Canadian
controlled of which two-thirds of its board of directors,
general partners or trustees, as the case may be, are any
combination of Canadians and WTO investors.
The higher thresholds for WTO investors do not apply if the
Canadian business engages in activities in certain sectors
such as uranium, financial services, transportation services
or communications.
The Act specifically exempts certain transactions from
either notification or review. Included among this category
of transactions is the acquisition of voting shares or other
voting interests by any person in the ordinary course of
that person's business as a trader or dealer in securities.
The Regulations under the Act specifies the remedies,
offences and punishment applicable. Section 39 states that
"When the Minister believes that a non-Canadian, contrary to
this act (a) has failed to give notice; or (b) has
implemented an investment which is prohibited", then the
Minister may send a demand requiring the default to be
remedied and if this demand is not complied with, the
Minister may apply for a Court Order require divestiture or
other remedies, as the circumstances require. Civil
penalties apply for non-compliance with any provision, and
criminal penalties may also apply.
Taxation
Canadian Federal Income Tax Consequences
The following is a discussion of the material Canadian
federal income tax consequences applicable to a holder of
Common Shares who is a resident of the United States and who
is not a resident of Canada and who does not use or hold,
and is not deemed to use or hold, his Common Shares in
connection with carrying on a business in Canada (a "non-
resident holder"). Accordingly, shareholders and
prospective investors should consult their own tax advisors
for advice regarding their individual tax consequences.
This summary is based upon the current provisions of the
Income Tax Act (Canada) (the "ITA"), the regulations
thereunder (the "Regulations"), the current publicly
announced administrative and assessing policies of Revenue
Canada, Taxation, and all specific proposals (the "Tax
Proposals") to amend the ITA and Regulations announced by
the Minister of Finance (Canada) prior to the date hereof.
This summary assumes that the Tax Proposals will be enacted
in their form as of the date of this Annual Report.
Dividends
Dividends paid on the Common Shares to a non-resident holder
will be subject to withholding tax. The Canada-U.S. Income
Tax Convention (1980) (the "Treaty") provides that the
normal 25% withholding tax rate under the ITA is reduced to
15% on dividends paid on shares of a corporation resident in
Canada (such as the Company) to beneficial owners of the
dividends who are residents of the United States, and also
provides for a further reduction of this rate to 5% where
the beneficial owner of the dividends is a corporation that
is a resident of the United States which owns at least 10%
of the voting shares of the corporation paying the dividend.
Capital Gains
Under the ITA, a taxpayer's capital gain or capital loss
from a disposition of a Common Share is the amount, if any,
by which his proceeds of disposition exceed (or are exceeded
by) the aggregate of his adjusted cost base of the share and
reasonable expenses of disposition. Three-quarters of a
capital gain (the "taxable capital gain") is included in
income, and three-quarters of a capital loss in a year (the
"allowable capital loss") is deductible from taxable capital
gains realized in the same year. The amount by which a
shareholder's allowable capital loss exceeds his taxable
capital gains in a year may be deducted from a taxable
capital gain realized by the shareholder in the three
previous or any subsequent year, subject to certain
restrictions in the case of a corporate shareholder and
subject to adjustment when the capital gains inclusion rate
in the year of disposition differs from the inclusion rate
in the year the deduction is claimed.
A non-resident of Canada is not subject to tax under the ITA
in respect of a capital gain realized upon the disposition
of a share of a public corporation unless the share
represents "taxable Canadian property" to the holder
thereof. The Company is a public corporation for purposes
of the ITA and a Common Share will be taxable Canadian
property to a non-resident holder if, at any time during the
period of five years immediately preceding the disposition,
the non-resident holder, persons with whom the non-resident
holder did not deal at arm's length, or the non-resident
holder and persons with whom he did not deal at arm's length
together owned not less than 25% of the issued shares of any
class of shares of the Company.
Where a non-resident holder who is an individual ceased to
be resident in Canada, and at the time he ceased to be a
Canadian resident elected to have his Common Shares treated
as taxable Canadian property, he will be subject to Canadian
tax on any capital gain realized on disposition of the
Common Shares, subject to the relieving provisions of the
Treaty described below. The Common Shares may also be
taxable Canadian property to a holder if the holder acquired
them pursuant to certain "rollover" transactions. This
would include transactions under Sections 85 and 87 of the
ITA which apply to share for share and amalgamation
transactions.
Where a U.S. resident holder realizes a capital gain on a
disposition of Common Shares that constitute taxable
Canadian property, the Treaty relieves the non-resident
shareholder from liability for Canadian tax on such capital
gains unless:
1. the value of the shares is derived principally from
"real property" in Canada, including the right to
explore for or exploit natural resources and rights to
amounts computed by reference to production from natural
resources. It is a question of fact as to whether the
value of the Company's common shares results
principally from real property in Canada. Although a
tax opinion on this matter has not been obtained, given
the nature of the Company's business and its stage of
development, we have concluded that the value of our
shares would likely fall into this category;
2. the non-resident holder is an individual who was
resident in Canada for not less than 120 months during
any period of 20 consecutive years preceding, and at any
time during the 10 years immediately preceding, the
disposition and the shares were owned by him when he
ceased to be resident in Canada or are property
substituted for property that was owned at that time; or
3. the shares formed part of the business property of a
"permanent establishment" or pertained to a fixed base
used for the purpose of performing independent personal
services that the shareholder has or had in Canada
within the 12 months preceding the disposition.
Notwithstanding the potential exemption from Canadian tax
provided under the Treaty, where a non-resident of Canada
disposes of Common Share that are taxable Canadian property,
the non-resident is required to file a Canadian income tax
return in respect of such dispositions.
United States Federal Income Tax Consequences
The following is a discussion of all material United States
Federal income tax consequences, under current law, that may
be applicable to a U.S. Holder (as defined below) of Common
Shares of the Registrant. This discussion does not address
all potentially relevant Federal income tax matters and it
does not address consequences peculiar to persons subject to
special provisions of Federal income tax law, such as those
described below as excluded from the definition of a U.S.
Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences. (See "Canadian
Federal Income Tax Consequences" above.)
The following discussion is based upon the sections of the
Internal Revenue Code of 1986, as amended to the date hereof
(the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative
positions of the IRS and court decisions that are currently
applicable, any or all of which could be materially and
adversely changed, possibly on a retroactive basis, at any
time. In addition, this discussion does not consider the
potential effects, both adverse and beneficial, of any
future legislation which, if enacted, could be applied,
possibly on a retroactive basis, at any time. Shareholders
and prospective investors should consult their own tax
advisors for advice regarding their individual tax
consequences.
U.S. information reporting requirements may apply with
respect to the payment of dividends to U.S. Holders of the
Company's shares. Under Treasury regulations currently in
effect, non-corporate holders may be subject to backup
withholding at a 31% rate with respect to dividends when
such holder (1) fails to furnish or certify a correct
taxpayer identification number to the payor in the required
manner; and (2) is notified by the IRS that it has failed to
report payments of interest or dividends properly; or (3)
fails, under certain circumstances, to certify that it has
been notified by the IRS that it is subject to backup
withholding for failure to report interest and dividend
payments.
U.S. Holders
As used herein, a "U.S. Holder" is a holder of Common Shares
of the Registrant who or which is a citizen or individual
resident (or is treated as a citizen or individual resident)
of the United States for federal income tax purposes, a
corporation or partnership created or organized (or treated
as created or organized for federal income tax purposes) in
or under the laws of the United States or any political
subdivision thereof, or a trust or estate the income of
which is includable in its gross income for federal income
tax purposes without regard to its source, if, (i) a court
within the United States is able to exercise primary
supervision over the administration of the trust and
(ii) one or more United States trustees have the authority
to control all substantial decisions of the trust. For
purposes of this discussion, a U.S. Holder does not include
persons subject to special provisions of Federal income tax
law, such as tax-exempt organizations, qualified retirement
plans, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies,
broker-dealers and Holders who acquired their stock through
the exercise of employee stock options or otherwise as
compensation.
Distributions on Common Shares of the Registrant
U.S. Holders receiving dividend distributions (including
constructive dividends) with respect to Common Shares of the
Registrant are required to include in gross income for
United States Federal income tax purposes the gross amount
of such distributions to the extent that the Registrant has
current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited,
subject to certain limitations, against the U.S. Holder's
United States Federal income tax liability or,
alternatively, may be deducted in computing the U.S.
Holder's United States Federal taxable income by those who
itemize deductions. (See more detailed discussion at
"Foreign Tax Credit" below). To the extent that
distributions exceed current or accumulated earnings and
profits of the Registrant, they will be treated first as a
return of capital up to the U.S. Holder's adjusted basis in
the Common Shares and thereafter as gain from the sale or
exchange of the Common Shares. Preferential tax rates for
long-term capital gains are applicable to a U.S. Holder
which is an individual, estate or trust. There are
currently no preferential tax rates for long-term capital
gains for a U.S. Holder which is a corporation.
Dividends paid on the Common Shares of the Registrant will
not be eligible for the dividends received deduction
provided to corporations receiving dividends from certain
United States corporations. A U.S. Holder which is a
corporation may, under certain circumstances, be entitled to
a 70% deduction of the United States source portion of
dividends received from the Registrant (unless the
Registrant qualifies as a "foreign personal holding company"
or a "passive foreign investment company", as defined below)
if such U.S. Holder owns shares representing at least 10% of
the voting power and value of the Registrant. The
availability of this deduction is subject to several complex
limitations which are beyond the scope of this discussion.
Foreign Tax Credit
A U.S. Holder who pays (or has withheld from distributions)
Canadian income tax with respect to the ownership of Common
Shares of the Registrant may be entitled, at the option of
the U.S. Holder, to either a deduction or a tax credit for
such foreign tax paid or withheld. It will be more
advantageous to claim a credit because a credit reduces
United States Federal income taxes on a dollar-for-dollar
basis, while a deduction merely reduces the taxpayer's
income subject to tax. This election is made on a year-by-
year basis and applies to all foreign taxes paid by (or
withheld from) the U.S. Holder during that year. There are
significant and complex limitations which apply to the
credit, among which is the general limitation that the
credit cannot exceed the proportionate shares of the U.S.
Holder's United States income tax liability that the U.S.
Holder's foreign source income bears to his or its worldwide
taxable income. In the determination of the application of
this limitation, the various items of income and deduction
must be classified into foreign and domestic sources.
Complex rules govern this classification process. There are
further limitations on the foreign tax credit for certain
types of income such as "passive income", "high withholding
tax interest", "financial services income", "shipping
income", and certain other classifications of income. The
availability of the foreign tax credit and the application
of the limitations on the credit are fact specific and
holders and prospective holders of Common Shares of the
Registrant should consult their own tax advisors regarding
their individual circumstances.
Disposition of Common Shares of the Registrant
A U.S. Holder will recognize gain or loss upon the sale of
Common Shares of the Registrant equal to the difference, if
any, between the amount of cash plus the fair market value
of any property received, and the Holder's tax basis in the
Common Shares of the Registrant. This gain or loss will be
capital gain or loss if the Common Shares are a capital
asset in the hands of the U.S. Holder unless the Registrant
were to become a controlled foreign corporation. For the
effect on the Registrant of becoming a controlled
corporation, see "Controlled Foreign Corporation Status"
below. Any capital gain will be a short-term or long-term
capital gain or loss depending upon the holding period of
the U.S. Holder. Gains and losses are netted and combined
according to special rules in arriving at the overall
capital gain or loss for a particular tax year. Deductions
for net capital losses are subject to significant
limitations. For U.S. Holders which are individuals, any
unused portion of such net capital loss may be carried over
to be used in later tax years until such net capital loss is
thereby exhausted. For U.S. Holders which are corporations
(other than corporations subject to Subchapter S of the
Code), an unused net capital loss may be carried back three
years from the loss year and carried forward five years from
the loss year to be offset against capital gains until such
net capital loss is thereby exhausted.
Other Considerations for U.S. Holders
In the following circumstances, the above sections of this
discussion may not describe the United States Federal income
tax consequences resulting from the holding and disposition
of Common Shares of the Registrant:
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the
total combined voting power or the total value of the
Registrant's outstanding shares is owned, actually or
constructively, by five or fewer individuals who are
citizens or residents of the United States and 60% or more
of the Registrant's gross income for such year was derived
from certain passive sources (e.g., from dividends received
from its subsidiaries), the Registrant would be treated as a
"foreign personal holding company." In that event, U.S.
Holders that hold Common Shares of the Registrant would be
required to include in income for such year their allocable
portion of the Registrant's passive income which would have
been treated as a dividend had that passive income actually
been distributed. To the best knowledge of the Registrant,
it is not and has never been a Foreign Personal Holding
Company.
Foreign Investment Company
If 50% or more of the combined voting power or total value
of the Registrant's outstanding shares are held, actually or
constructively, by citizens or residents of the United
States, United States domestic partnerships or corporations,
or estates or trusts other than foreign estates or trusts
(as defined by the Code Section 7701(a)(31)), and the
Registrant is found to be engaged primarily in the business
of investing, reinvesting, or trading in securities,
commodities, or any interest therein, it is possible that
the Registrant might be treated as a "foreign investment
company" as defined in Section 1246 of the Code, causing all
or part of any gain realized by a U.S. Holder selling or
exchanging Common Shares of the Registrant to be treated as
ordinary income rather than capital gains. To the best
knowledge of the Registrant, it is not and has never been a
Foreign Investment Company.
Passive Foreign Investment Company
A U.S. Holder who holds stock in a foreign corporation
during any year in which such corporation qualifies as a
passive foreign investment company ("PFIC") is subject to
U.S. federal income taxation of that foreign corporation
under one of two alternative tax methods at the election of
each such U.S. Holder. The directors of the Registrant
believe that the Company has and does qualify as a Passive
Foreign Investment Company for U.S. shareholders.
Section 1296 of the Code defines a PFIC as a corporation
that is not formed in the United States and, for any taxable
year, either (i) 75% or more of its gross income is "passive
income," which includes interest, dividends and certain
rents and royalties or (ii) the average percentage, by value
(or, if the company is a controlled foreign corporation or
makes an election, adjusted tax basis), of its assets that
produce or are held for the production of "passive income"
is 50% or more. For taxable years of U.S. persons beginning
after December 31, 1997, and for tax years of foreign
corporations ending with or within such tax years, the
Taxpayer Relief Act of 1997 provides that publicly traded
corporations must apply this test on a fair market value
basis only. The Registrant believes that it is a PFIC.
As a PFIC, each U. S. Holder must determine under which of
the alternative tax methods it wishes to be taxed. Under
one method, a U.S. Holder who elects in a timely manner to
treat the Registrant as a Qualified Electing Fund ("QEF"),
as defined in the Code, (an "Electing U.S. Holder") will be
subject, under Section 1293 of the Code, to current federal
income tax for any taxable year in which the Registrant's
qualifies as a PFIC on his pro-rata share of the
Registrant's (i) "net capital gain" (the excess of net long-
term capital gain over net short-term capital loss), which
will be taxed as long-term capital gain to the Electing U.S.
Holder and (ii) "ordinary earnings" (the excess of earnings
and profits over net capital gain), which will be taxed as
ordinary income to the Electing U.S. Holder, in each case,
for the U.S. Holder's taxable year in which (or with which)
the Registrant taxable year ends, regardless of whether such
amounts are actually distributed.
A QEF election also allows the Electing U.S. Holder to (i)
treat any gain realized on the disposition of his Common
Shares (or deemed to be realized on the pledge of his Common
Shares) as capital gain; (ii) treat his share of the
Registrant's net capital gain, if any, as long-term capital
gain instead of ordinary income, and (iii) either avoid
interest charges resulting from PFIC status altogether (see
discussion of interest charge below), or make an annual
election, subject to certain limitations, to defer payment
of current taxes on his share of the Registrant's annual
realized net capital gain and ordinary earnings subject,
however, to an interest charge. If the Electing U.S. Holder
is not a corporation, such an interest charge would be
treated as "personal interest" that is not deductible at all
in taxable years beginning after 1990.
The procedure a U.S. Holder must comply with in making a
timely QEF election will depend on whether the year of the
election is the first year in the U.S. Holder's holding
period in which the Registrant is a PFIC. If the U.S.
Holder makes a QEF election in such first year, (sometimes
referred to as a "Pedigreed QEF Election"), then the U.S.
Holder may make the QEF election by simply filing the
appropriate documents at the time the U.S. Holder files its
tax return for such first year. If, however, the Registrant
qualified as a PFIC in a prior year, then in addition to
filing documents, the U.S. Holder must also elect to
recognize as an "excess distribution" (i) under the rules of
Section 1291 (discussed below), any gain that he would
otherwise recognize if the U.S. Holder sold his stock on the
application date or (ii) if the Registrant is a controlled
foreign corporation ("CFC"), the Holder's pro rata share of
the corporation's earnings and profits. (But see
"Elimination of Overlap Between Subpart F Rules and PFIC
Provisions"). Either the deemed sale election or the deemed
dividend election will result in the U.S. Holder being
deemed to have made a timely QEF election.
With respect to a situation in which a Pedigreed QEF
election is made, if the Registrant no longer qualifies as a
PFIC in a subsequent year, normal Code rules and not the
PFIC rules will apply.
If a U.S. Holder has not made a QEF Election at any time (a
"Non-electing U.S. Holder"), then special taxation rules
under Section 1291 of the Code will apply to (i) gains
realized on the disposition (or deemed to be realized by
reason of a pledge) of his Common Shares and (ii) certain
"excess distributions", as specially defined, by the
Registrant.
A Non-electing U.S. Holder would be required to pro-rate all
gains realized on the disposition of his Common Shares and
all excess distributions over the entire holding period for
the Common Shares. All gains or excess distributions
allocated to prior years of the U.S. Holder (other than
years prior to the first taxable year of the Registrant
during such U.S. Holder's holding period and beginning after
January 1, 1987 for which it was a PFIC) would be taxed at
the highest tax rate for each such prior year applicable to
ordinary income. The Non-electing U.S. Holder also would be
liable for interest on the foregoing tax liability for each
such prior year calculated as if such liability had been due
with respect to each such prior year. A Non-electing U.S.
Holder that is not a corporation must treat this interest
charge as "personal interest" which, as discussed above, is
wholly non-deductible. The balance of the gain or the
excess distribution will be treated as ordinary income in
the year of the disposition or distribution, and no interest
charge will be incurred with respect to such balance.
If the Registrant is a PFIC for any taxable year during
which a Non-electing U.S. Holder holds Common Shares, then
the Registrant will continue to be treated as a PFIC with
respect to such Common Shares, even if it is no longer by
definition a PFIC. A Non-electing U.S. Holder may terminate
this deemed PFIC status by electing to recognize gain (which
will be taxed under the rules discussed above for Non-
Electing U.S. Holders) as if such Common Shares had been
sold on the last day of the last taxable year for which it
was a PFIC.
Under Section 1291(f) of the Code, the Department of the
Treasury has issued proposed regulations that would treat as
taxable certain transfers of PFIC stock by Non-electing U.S.
Holders that are not otherwise taxed, such as gifts,
exchanges pursuant to corporate reorganizations, and
transfers at death.
If a U.S. Holder makes a QEF Election that is not a
Pedigreed Election (i.e., it is made after the first year
during which the Registrant is a PFIC and the U.S. Holder
holds shares of the Registrant) (a "Non-Pedigreed
Election"), the QEF rules apply prospectively but do not
apply to years prior to the year in which the QEF first
becomes effective. U.S. Holders should consult their tax
advisors regarding the specific consequences of making a Non-
Pedigreed QEF Election.
Certain special adverse rules will apply with respect to the
Common Shares while the Registrant is a PFIC whether or not
it is treated as a QEF. For example under Section 1297(b)(6)
of the Code (as in effect prior to the Taxpayer Relief Act
of 1997), a U.S. Holder who uses PFIC stock as security for
a loan (including a margin loan) will, except as may be
provided in regulations, be treated as having made a taxable
disposition of such stock.
The foregoing discussion is based on currently effective
provisions of the Code, existing and proposed regulations
thereunder, and current administrative rulings and court
decisions, all of which are subject to change. Any such
change could affect the validity of this discussion. In
addition, the implementation of certain aspects of the PFIC
rules requires the issuance of regulations which in many
instances have not been promulgated and which may have
retroactive effect. There can be no assurance that any of
these proposals will be enacted or promulgated, and if so,
the form they will take or the effect that they may have on
this discussion. Accordingly, and due to the complexity of
the PFIC rules, U.S. Holders of the Registrant are strongly
urged to consult their own tax advisors concerning the
impact of these rules on their investment in the Registrant.
For a discussion of the impact of the Taxpayer Relief Act of
1997 on a U.S. Holder of a PFIC, see "Mark-to-Market
Election For PFIC Stock Under the Taxpayer Relief Act of
1997" and "Elimination of Overlap Between Subpart F Rules
and PFIC Provisions" below.
Mark-to-Market Election for PFIC Stock Under the Taxpayer
Relief Act of 1997
The Taxpayer Relief Act of 1997 provides that a U.S. Holder
of a PFIC may make a mark-to-market election with respect to
the stock of the PFIC if such stock is marketable as defined
below. This provision is designed to provide a current
inclusion provision for persons that are Non-Electing
Holders. Under the election, any excess of the fair market
value of the PFIC stock at the close of the tax year over
the Holder's adjusted basis in the stock is included in the
Holder's income. The Holder may deduct any excess of the
adjusted basis of the PFIC stock over its fair market value
at the close of the tax year. However, deductions are
limited to the net mark-to-market gains on the stock that
the Holder included in income in prior tax years, or so
called "unreversed inclusions."
For purposes of the election, PFIC stock is marketable if it
is regularly traded on (1) a national securities exchange
that is registered with the SEC, (2) the national market
system established under Section 11A of the Securities
Exchange Act of 1934, or (3) an exchange or market that the
IRS determines has rules sufficient to ensure that the
market price represents legitimate and sound fair market
value.
A Holder's adjusted basis of PFIC stock is increased by the
income recognized under the mark-to-market election and
decreased by the deductions allowed under the election. If
a U.S. Holder owns PFIC stock indirectly through a foreign
entity, the basis adjustments apply to the basis of the PFIC
stock in the hands of the foreign entity for the purpose of
applying the PFIC rules to the tax treatment of the U.S.
owner. Similar basis adjustments are made to the basis of
the property through which the U.S. persons hold the PFIC
stock.
Income recognized under the mark-to-market election and gain
on the sale of PFIC stock with respect to which an election
is made is treated as ordinary income. Deductions allowed
under the election and loss on the sale of PFIC with respect
to which an election is made, to the extent that the amount
of loss does not exceed the net mark-to-market gains
previously included, are treated as ordinary losses. The
U.S. or foreign source of any income or losses is determined
as if the amount were a gain or loss from the sale of stock
in the PFIC.
If PFIC stock is owned by a CFC (discussed below), the CFC
is treated as a U.S. person that may make the mark-to-market
election. Amounts includable in the CFC's income under the
election are treated as foreign personal holding company
income, and deductions are allocable to foreign personal
holding company income.
The above provisions apply to tax years of U.S. persons
beginning after December 31, 1997, and to tax years of
foreign corporations ending with or within such tax years of
U.S. persons.
The rules of Code Section 1291 applicable to nonqualified
funds do not apply to a U.S. Holder for tax years for which
a mark-to-market election is in effect. If Code Section
1291 is applied and a mark-to-market election was in effect
for any prior tax year, the U.S. Holder's holding period for
the PFIC stock is treated as beginning immediately after the
last tax year of the election. However, if a taxpayer makes
a mark-to-market election for PFIC stock that is a
nonqualified fund after the beginning of a taxpayer's
holding period for such stock, a coordination rule applies
to ensure that the taxpayer does not avoid the interest
charge with respect to amounts attributable to periods
before the election.
Controlled Foreign Corporation Status
If more than 50% of the voting power of all classes of stock
or the total value of the stock of the Registrant is owned,
directly or indirectly, by U.S. Holders, each of whom own
10% or more of the total combined voting power of all
classes of stock of the Registrant, the Registrant would be
treated as a "controlled foreign corporation" or "CFC" under
Subpart F of the Code. This classification would bring into
effect many complex results including the required inclusion
by such 10% U.S. Holders in income of their pro rata shares
of "Subpart F income" (as defined by the Code) of the
Registrant and the Registrant's earnings invested in "U.S.
property" (as defined by the Code). In addition, under
Section 1248 of the Code, gain from the sale or exchange of
Common Shares of the Registrant by such a 10% U.S. Holder of
Registrant at any time during the five year period ending
with the sale or exchange is treated as ordinary dividend
income to the extent of earnings and profits of the
Registrant attributable to the stock sold or exchanged.
Because of the complexity of Subpart F, and because the
Registrant may never be a CFC, a more detailed review of
these rules is beyond of the scope of this discussion.
Elimination of Overlap Between Subpart F Rules and PFIC
Provisions
Under the Taxpayer Relief Act of 1997, a PFIC that is also a
CFC will not be treated as a PFIC with respect to certain
10% U.S. Holders. For the exception to apply, (i) the
corporation must be a CFC within the meaning of section
957(a) of the Code and (ii) the U.S. Holder must be subject
to the current inclusion rules of Subpart F with respect to
such corporation (i.e., the U.S. Holder is a "United States
Shareholder," see "Controlled Foreign Corporation," above).
The exception only applies to that portion of a U.S.
Holder's holding period beginning after December 31, 1997.
For that portion of a United States Holder before January 1,
1998, the ordinary PFIC and QEF rules continue to apply.
As a result of this new provision, if the Registrant were
ever to become a CFC, U.S. Holders who are currently taxed
on their pro rata shares of Subpart F income of a PFIC which
is also a CFC will not be subject to the PFIC provisions
with respect to the same stock if they have previously made
a Pedigreed QEF Election. The PFIC provisions will however
continue to apply to PFIC/CFC U.S. Holders for any periods
in which they are not subject to Subpart F and to U.S.
Holders that did not make a Pedigreed QEF Election unless
the U.S. Holder elects to recognize gain on the PFIC shares
held in the Registrant as if those shares had been sold.
Dividends and Paying Agents
Not applicable.
Statement by Experts
Not applicable.
Documents on Display
The material contracts listed herein may be inspected
between the hours of 10:00 a.m. and 5:00 p.m. at the head
office of the Company located at Suite 1550, 355 Burrard
Street, Vancouver, British Columbia.
Subsidiary Information
The Company has a wholly owned subsidiary, Derek Resources
(U.S.A.) Inc. incorporated by the Company under the laws of
the State of Delaware on August 18, 1981 under the name Cove
Energy Inc. On December 18, 2000, Cove Energy Inc. changed
its name to Derek Resources (U.S.A.) Inc. The registered and
records offices of Derek USA are located at No. 100 West
Tenth Street, Wilmington, Delaware. The principal business
address of Derek USA is Suite 1550 - 355 Burrard Street,
Vancouver, British Columbia. The authorized capital of Derek
USA consists of 2,000 common shares without par value of
which one common share issued and outstanding is registered
in the name of the Company.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
Not applicable.
PART II
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
Not applicable.
PART III
ITEM 15 - CONTROLS AND PROCEDURES
The directors of the Company are elected annually and hold
office until the next annual general meeting of the members
of the Company or until their successors in office are duly
elected or appointed. The Company does not have an
executive committee. All directors are elected for a one-
year term. All officers serve at the pleasure of the
Board. The next annual general meeting of the shareholders
of the Company has been set for November 28, 2002.
The Company's Board of Directors has one committee, the
Audit Committee. The members of the Audit Committee do not
have any fixed terms for holding their positions, are
appointed and replaced from time to time by resolution of
the Board of Directors and do not receive any separate
remuneration for acting as members of the committee.
The Audit Committee, comprised of Barry C.J. Ehrl, Ed Byrd
and Frank R. Hallam has the responsibility of reviewing with
the Company's Auditor all financial statements to be
submitted to an annual general meeting of the shareholders
of the Company, prior to their consideration by the Board of
Directors. Due to the small size of the Company's Board of
Directors, the present audit committee has only one outside,
non-executive member, Ed Byrd. The Company expects to expand
the Company's Board and establish a majority of outside
members on the Audit Committee during 2003.
On November 1, 2002, management concluded its evaluation of
the effectiveness of our disclosure controls and procedures.
As of that date, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company maintains
effective disclosure controls and procedures relating to
transactions, assets, liabilities, accounting and other
records and public reporting and disclosure that ensure
information required to be disclosed in the Company's
reports under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
Specifically, the disclosure controls and procedures assure
that information is accumulated and communicated to the
Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. There have been no
significant changes in the Company's internal controls or in
other factors that could significantly affect these controls
subsequent to the date of management's evaluation.
ITEM 16 - RESERVED
PART IV
ITEM 17 - FINANCIAL STATEMENTS
See the Consolidated Financial Statements and Exhibits
listed in Item 19 hereof and filed as part of this Annual
Report.
These financial statements were prepared in accordance with
accounting principles generally accepted in Canada.
Differences between accounting principles generally accepted
in Canada and in the United States, as applicable to the
Company, are set forth in Note 11 to the accompanying
Consolidated Financial Statements of the Company.
ITEM 18 - FINANCIAL STATEMENTS
Not applicable.
ITEM 19 - EXHIBITS
1. Financial Statements
1. The audited consolidated financial statements which
include the consolidated balance sheets as at April 30,
2002 and 2001 and statements of operations, cash flows,
shareholders' equity and development expenditures for
each of the years in the three years ended April 30,
2002 together with the notes thereto.
Derek Resources Corporation
(an exploration stage company)
Consolidated Financial Statements
April 30, 2002, 2001 and 2000
(expressed in Canadian dollars)
To the Shareholders of
Derek Resources Corporation
We have audited the consolidated balance sheets of Derek
Resources Corporation (an exploration stage company) as at
April 30, 2002 and 2001 and the consolidated statements of
loss, shareholders' equity and cash flows for the years ended
April 30, 2002, 2001 and 2000. 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, 2002 and 2001 and the results of its
operations and its cash flows and the changes in its
shareholders' equity for the years ended April 30, 2002, 2001
and 2000 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
July 24, 2002
(except note 1, which is as at August 27, 2002 and note 4,
which is at August 21, 2002)
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 July 24, 2002 except
note 1, which is as at August 27, 2002, and note 4, which is at
August 21, 2002 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
<table>
<caption>
<s> <c> <c>
2002 2001
$ $
---------- ----------
Assets
Current assets
Cash and short-term deposits 14,804 19,857
Accounts receivable and prepaid expenses 3,942 147,538
---------- ----------
18,746 167,395
Oil and natural gas properties (note 3) 13,910,104 12,249,321
Performance bonds (note 3) 71,195 67,973
Other assets 12,215 18,342
---------- ----------
14,012,260 12,503,031
---------- ----------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 1,441,551 2,583,427
Current portion of notes payable (note 4) 1,066,180 -
---------- ----------
2,507,731 2,583,427
Notes payable (note 4) 506,000 -
---------- ----------
3,013,731 2,583,427
---------- ----------
Shareholders' Equity
Capital stock (note 5) 22,464,255 20,357,250
Equity component of notes payable (note 4) 132,000 -
Common shares allotted - not issued (note 3) - 97,500
Deficit (11,597,726) (10,535,146)
---------- ----------
10,998,529 9,919,604
---------- ----------
14,012,260 12,503,031
---------- ----------
Going concern and nature of operations (note 1)
</table>
<table>
<caption>
<s> <c> <c> <c> <c> <c> <c>
Special Total
Common shares Shares warrants share-
Number Amount allotted - and notes Cumulative holders'
of shares $ not issued payable deficit equity
$ $ $ $
---------- ---------- -------- ------- ---------- ----------
Balance - April 30, 1999 6,805,129 10,053,113 - 74,000 (9,033,073) 1,094,040
Conversion of special warrants to shares 297,500 74,000 - (74,000) - -
Special warrants issued and converted to shares 2,364,000 1,198,000 - - - 1,198,000
Shares recorded as finder's fee 74,250 37,125 - - - 37,125
Shares recorded as finder's fee - (37,125) - - - (37,125)
Shares issued for cash:
Exercise of warrants 267,500 145,040 - - - 145,040
Exercise of options 30,000 14,900 - - - 14,900
Shares issued to acquire royalty interest 120,000 90,600 - - - 90,600
Shares allotted to acquire royalty interest - - 135,000 - - 135,000
Loss for the year - - - - (675,731) (675,731)
---------- ---------- -------- ------- ---------- ----------
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 repay 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
---------- ---------- -------- ------- ---------- ----------
2002 2001 2000
$ $ $
Revenues
Oil and gas sales - net of royalties 1,024 10,221 4,546
Gain on sale of oil and gas leases - 11,729 -
Interest - net of bank charges - 109,485 15,278
---------- ---------- --------
1,024 131,435 19,824
---------- ---------- --------
Expenses
Accounting, legal and audit 167,557 62,801 50,772
Interest expense 141,151 - -
Consulting and management fees 370,114 385,333 273,938
Office administration and other 166,434 165,871 107,302
Shareholders' information and travel 159,721 310,647 225,244
Stock exchange and filing fees 15,740 11,493 14,520
Transfer fees 7,864 9,816 7,965
Foreign exchange loss 35,023 11,816 15,814
---------- ---------- --------
1,063,604 957,777 695,555
---------- ---------- --------
Loss for the year (1,062,580) (826,342) (675,731)
---------- ---------- --------
Basic and diluted loss per share (0.03) (0.04) (0.09)
---------- ---------- --------
Weighted average number of shares outstanding 34,251,850 23,511,247 7,906,952
---------- ---------- --------
2002 2001 2000
$ $ $
---------- ---------- --------
Cash flows from operating activities
Loss for the year (1,062,580) (826,342) (675,731)
Items not affecting cash
Gain on sale of oil and gas leases - (11,729) -
Amortization of other assets 6,127 4,376 -
---------- ---------- --------
(1,056,453) (833,695) (675,731)
Net change in non-cash working capital items
Accounts receivable and prepaid expenses 143,596 (81,487) (60,142)
Accounts payable and accrued liabilities 302,826 45,873 4,120
---------- ---------- --------
(610,031) (869,309) (731,753)
---------- ---------- --------
Cash flows from investing activities
Expenditures on oil and natural gas properties (1,660,783) (10,719,698) (198,622)
Accounts payable on oil and natural gas property (1,444,702) 2,467,709 -
Proceeds from sale of oil and gas leases - 11,729 -
Performance bonds (3,222) (31,200) (36,773)
Other assets - (14,617) (8,101)
---------- ---------- --------
(3,108,707) (8,286,077) (243,496)
---------- ---------- --------
Cash flows from financing activities
Notes payable 1,923,570 - -
Special warrants issued for cash - - 1,198,000
Shares issued for cash 1,790,115 8,738,097 159,940
---------- ---------- --------
3,713,685 8,738,097 1,357,940
---------- ---------- --------
(Decrease) increase in cash and (5,053) (417,289) 382,691
short-term deposits
Cash and short-term deposits - 19,857 437,146 54,455
Beginning of year
---------- ---------- --------
Cash and short-term deposits - 14,804 19,857 437,146
End of year
Cash and short-term deposits consist of
Cash 14,804 19,857 62,146
Short-term deposits - - 375,000
---------- ---------- --------
14,804 19,857 437,146
---------- ---------- --------
Supplemental cash flow information (note 12)
</table>
1 Going concern and nature of operations
Derek Resources Corporation is an exploration stage oil and gas
company with working interests in oil wells in Canada and oil and
gas properties in the United States.
For the years ended April 30, 2002, 2001 and 2000, the company has
incurred losses of $1,062,580, $826,342 and $675,731 respectively,
and as at April 30, 2002, 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. At the present time, the LAK Ranch oil production
plant is idle until a partner or substantial financing can be found.
Subsequent to year-end (note 4), the company exchanged common shares
for a portion of the notes payable outstanding at April 30, 2002,
and extended repayment terms on notes payable not exchanged. In
addition, on August 27, 2002, the company completed a private
placement of 3,917,500 units at $0.10 per unit. Each unit consists
of one common share and one common share purchase warrant
exercisable at $0.15 for a period of two years.
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 Resources (USA)
Inc.
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 period. 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.
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. 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.
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. Exchange gains or losses are included in
the determination of loss for the period, except for exchange gains
or losses relating to non-current monetary assets or liabilities,
which are deferred and amortized over the remaining life of the
asset or liability.
Stock options
No expense is recognized when stock options are issued. Any
consideration paid by option holders on exercise of stock options is
credited to capital stock.
Loss per share
Effective April 30, 2001, the company changed the method of
calculating loss per share in accordance with recommendations of the
Canadian Institute of Chartered Accountants (CICA). Loss per share
has been calculated using the weighted average number of common
shares issued and outstanding during the period, excluding shares
held in escrow but including shares issuable under special warrants.
Outstanding stock options and warrants that could potentially dilute
basic loss per share have not been included in the computation of
diluted loss per share because to do so would be anti-dilutive. The
loss per share in the prior year's financial statements as a result
of adopting the new recommendations was as follows:
2000
$
----
Basic and diluted loss per share (restated) 0.09
Loss per share prior to change in accounting policy 0.08
Income taxes
Effective May 1, 2000, the company adopted the liability method of
accounting for income taxes, on a retroactive basis, in accordance
with the recommendations of the CICA. Under this method, future tax
assets and liabilities are based upon differences between financial
reporting and tax basis of assets and liabilities measured using
substantially enacted tax rates. The company has adopted the new
recommendations retroactively without restating prior years'
financial statements. There was no effect on the company's financial
position or results of operations as a result of adopting the new
standard.
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 value is
determinable and where they are materially different from their
carrying values.
3 Oil and natural gas properties
2002 2001
$ $
---------- ----------
United States - LAK Ranch oil project 13,910,104 12,249,320
Canada - 1
---------- ----------
13,910,104 12,249,321
United States
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 (LAK) oil leasehold
interest located near Newcastle, Wyoming, U.S.A. Under the terms of
the option agreement, the company acquired a 75% interest in the LAK
property and up to a 37.5% interest in two adjoining tracts of lands
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.
Subsequent to the foreclosure, the optionor filed a lawsuit against
the company claiming that the company had not earned its interest in
the LAK property. The company then filed a motion for partial
summary judgement against the optionor and the court in Wyoming set
a date to hear the motion on October 31, 2001.
Prior to the court hearing, on October 18, 2001, the optionor agreed
to a settlement. Under the terms of the settlement agreement, 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.
During the year ended April 30, 2000, the company acquired 4.43% of
the pre-existing 18.82% overriding royalty interest in the LAK
property as follows:
* 1.05% purchased in return for 200,000 common shares of the
company, of which 20,000 have been issued during the year ended
April 30, 2000, and another 50,000 during the year ended April
30, 2001, with the balance being issued during the year ended
April 30, 2002;
* 3.38% purchased in return for US$50,000 and 100,000 common shares
of the company.
On June 30, 2000, as part of a private placement, the company
granted an additional 1% field royalty on the LAK property. The main
productive portion of the LAK property is now 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.
The company has posted performance bonds of US$45,000 in relation to
the LAK property.
During the year ended April 30, 2002, the company capitalized
$72,000 (2001 - $72,000) in general and administrative costs in the
LAK property.
4 Notes payable
2002 2001
--------- -----
Debt Equity Total Total
$ $ $ $
--------- ------- --------- -----
Notes payable 1,453,080 132,000 1,585,080 -
Accrued interest 119,100 - 119,100 -
1,572,180 132,000 1,704,180 -
--------- ------- --------- -----
2002 2001
$ $
--------- -------
Interest expense on
notes payable 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
$1,585,080.
Repayment of principal and interest on two of the notes payable, in
the amount of $506,000, are due subsequent to April 30, 2003 and,
accordingly, have been classified as non-current.
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.
Details of the notes payable issued during the year ended April 30,
2002 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
August 21, 2002, the lender agreed to settle US$50,000 from the
principal amount in exchange for common shares of the company at a
price of $0.10 per share and to exchange 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.
On June 15, 2001, the company issued a promissory note in the
principal amount of US$471,183 in settlement of accounts payable.
Interest on the note was calculated at a rate of 10% per annum. 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. The company was not able to repay the
principal and interest on May 31, 2002. On August 21, 2002, the
lender agreed to settle one-half of the total debt outstanding in
exchange for common shares of the company at a price of $0.10 per
share. 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. The lender will have the right, after August 21,
2003, to convert any unpaid principal and interest into common
shares of the company at an exercise price of $0.10 per share,
subject to regulatory approval.
On June 27, 2001, the company issued a promissory note for a
principal amount of US$100,000, bearing interest at a rate of 10.0%
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 at any time during the life of the note. On August 21,
2002, the company settled the accrued interest on this note in the
amount of US$12,114 in exchange for common shares of the company at
a price of $0.10 per share.
On June, 28, 2001, the company issued promissory notes for a total
principal amount of US$100,000, bearing interest at a rate of 10.0%
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. The company
did not repay the principal and interest on May 31, 2002. On August
21, 2002, the company settled the principal and interest outstanding
on these notes in the amount of US$112,082 in exchange for common
shares of the company at a price of $0.10 per share.
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 10.0% 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 August 21, 2002, the company settled the
principal and interest outstanding on this note in the amount of
US$99,806 in exchange for common shares of the company at a price of
$0.10 per share.
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
August 21, 2002, the lender agreed to settle all principal and
interest outstanding in the amount of US$160,193 in exchange for
common shares of the company at a price of $0.10 per share.
5 Capital stock
Authorized
100,000,000 common shares without par value
Issued
38,145,022 common shares
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.
During the year ended April 30, 2002, nil (2001 - 55,862; 2000 -
nil; 1999 - 70,422) shares were released from escrow, leaving
248,716 shares remaining in escrow.
6 Warrants
The company's special warrant units convert without additional
consideration into one common share and one common share purchase
warrant.
Share purchase warrants activity for the years ended April 30, 2001
and 2002 was as follows:
Weighted
Number of average price
shares $
Outstanding - April 30, 2000 4,817,750 0.8
Granted 20,253,239 0.53
Exercised (1,811,500) 0.54
Expired (850,000) 0.77
Outstanding - April 30, 2001 22,409,489 0.58
Granted 6,567,401 0.42
Expired (2,203,250) 1
Outstanding - April 30, 2002 26,773,640 0.5
The share purchase warrants are exercisable into 26,773,640
shares of the company.
As at April 30, 2002, outstanding share purchase warrants
were as follows:
Number of Price per Expiry date
shares share
$
9,787,478 0.53 30-Jun-02
1,185,428 0.53 11-Sep-02
7,708,000 0.53 18-Sep-02
1,525,333 0.53 29-Mar-03
291,000 0.75 20-Aug-03
535,000 0.4 14-Sep-03
1,589,484 0.4 19-Oct-03
4,151,917 0.4 21-Dec-03
26,773,640
7 Stock options
Stock options are granted at the discretion of the board of
directors, within regulatory requirements, to directors, officers,
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.
Stock options vest immediately, once granted and approved, and
cannot exceed 10% of issued and outstanding capital stock.
Stock option activity for the years ended April 30, 2001 and 2002
was as follows:
Weighted
Number of average price
shares $
Outstanding - April 3 810,000 0.48
Granted 2,207,000 0.85
Exercised (72,000) 0.49
Cancelled (140,000) 0.59
Outstanding - April 3 2,805,000 0.79
Granted 1,920,000 0.35
Cancelled (2,157,000) 0.83
Outstanding - April 3 2,568,000 0.4
As at April 30, 2002, outstanding stock options were as
follows:
Number of shares Price per Expiry date
share
$
222,000 0.51 1-Dec-02
100,000 0.68 27-Dec-03
225,000 0.48 5-May-04
51,000 0.75 15-Oct-04
50,000 0.7 16-Dec-04
1,920,000 0.35 4-Nov-05
2,568,000
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 $120,000 for the year
ended April 30, 2002 (2001 - $120,910; 2000 - $85,619) have been
included in consulting and management fee expenses.
b) A director of the company provided professional services. For the
year ended April 30, 2002, consulting and management fee expenses
include $84,000 (2001 - $84,910; 2000 - $36,000) paid to the director
and accounting expenses include $12,000 (2001 - $12,000; 2000 -
$12,000) paid to this same director.
c) During the year ended April 30, 2002, consulting fees of $96,981
(2001 - $139,875; 2000 - $18,375) 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 and expenses are sourced
primarily in Canada.
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
major differences between Canadian and U.S. GAAP that would affect
the measurement of the company's financial position, loss or cash
flows are described below.
Consolidated balance sheets and statements of loss and shareholders'
equity
2002 2001 2000
$ $ $
Adjustments to earnings:
Loss for the year under Canadian GAAP 1,062,580 826,342 675,731
Consulting and management fees (a) - 33,517 -
Loss for the year under U.S. GAAP 1,062,580 859,859 675,731
Loss per share under U.S. GAAP 0.03 0.04 0.09
Adjustments to shareholders' equity:
Total shareholders' equity under Canadian 10,998,529 9,919,604 2,001,849
Consulting and management fees (a) - (33,517) -
Escrow shares released (a) - 33,517 -
Total shareholders' equity under U.S. GAA 10,998,529 9,919,604 2,001,849
":" put in per J. Bunting Aug 17/01 rn
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, 2002, nil (2001 -
55,862; 2000 - nil) shares were released from escrow.
Accounting for stock-based compensation
For financial statement purposes, the company has elected to follow
the Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees," in accounting for its stock options.
Under APB No. 25, as the exercise price of the company's stock
options and warrants equals the market price of the underlying stock
at the date of grant, no compensation expense is recognized.
Recent accounting pronouncements
In August 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, "Accounting for Asset Retirement Obligations".
SFAS No. 143 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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires
that long-lived assets be classified as assets either to be held and
used, to be disposed of other than by sale, or to be disposed of by
sale. It also prescribes various approaches to valuing these types
of long-lived assets. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The company does not expect that
the implementation of these guidelines will have a material impact
on its consolidated financial position or results of operations.
On May 7, 2002, the FASB issued SFAS No. 145, which rescinded SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers",
and SFAS No. 64, "Extinguishment of Debt Made to Satisfying Sinking-
Fund Requirements", and amended SFAS No. 13, "Accounting for
Leases". The provisions are effective for fiscal years beginning
after May 15, 2002. The company does not expect that the
implementation of these guidelines will have a material impact on
its consolidated financial position or results of operations.
On July 30, 2002, the FASB issued SFAS No.146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions are effective
for exit or disposal activities that are initiated after December
31, 2002.
In November 2001, the Accounting Standards Board of the Canadian
Institute of Chartered Accountants issued new Handbook Section 3870,
"Stock-based Compensation and Other Stock-based Payments". This
Section establishes standards for the recognition, measurement and
disclosure of stock-based compensation and other stock-based
payments made in exchange for goods and services. It applies to
transactions in which an enterprise grants shares of common stock,
stock options, or other equity instruments, or incurs liabilities
based on the price of common stock or other equity instruments, and
sets out a fair value based method of accounting which is required
for certain, but not all, stock-based transactions. The company is
analyzing the impact of Section 3870 and will adopt the standard on
May 1, 2002.
12 Supplemental cash flow information
2002 2001 2000
$ $ $
------- ----- -------
Interest paid 15,000 - -
Non-cash investing and financing activities
Shares issued or allotted to a - - 225,600
Shares issued to settle accoun - 6,000 -
Shares issued to settle notes 219,390 - -
EXHIBITS
2.1 Certificate of Incorporation, Name Changes and
Articles/By-Laws of the Company.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
2.2 Instruments defining the rights of holders of equity
or debt securities being registered.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
3.0 Voting Trust Agreements: Not Applicable
4.0 Material Contracts:
4.1 Option Agreement dated September 24, 1997, as
amended April 21, 1998 and December 11, 1998,
between Derek Resources Corporation and Rising
Phoenix Development Group Ltd. pursuant to which
Derek Resources Corporation acquired two options to
purchase from Rising Phoenix Development Group Ltd.
up to a 75% working interest in the Original LAK
Property and up to a 37.5% interest in the
Adjoining Property.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.2 Model Form of Operating Agreement dated April 21,
1998 between Derek Resources Corporation and Rising
Phoenix Development Group Ltd. setting out the terms
of the joint venture between the parties and
appointing the Company as operator of the LAK Ranch
Project.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.3 Finder's Fee Agreement dated September 24, 1997
between Derek Resources Corporation and Yorkton
Securities Inc.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.4 Escrow Agreement dated for reference November 7,
1997 among Montreal Trust Company of Canada, Derek
Resources Corporation and Barry C.J. Ehrl.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.5 Letter dated April 10, 1998 from Texaco Trading
and Transportation Inc. to Petrospec Corporation.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.6 Agreement dated May 3, 1999 among Derek
Resources Corporation, Petrospec, Paul Trost and
Rising Phoenix, pursuant to which the Company has
agreed to issue 100,000 Common Shares to each of
Petrospec and Paul Trost in ten annual tranches of
10,000 Common Shares each to acquire varying portions
of the overriding royalty interests held by Petrospec
and Paul Trost pursuant to the terms of the
Petrospec Agreement.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.7 Agreement dated September 30, 1999 between
Derek Resources Corporation and MTARRI pursuant to
which MTARRI was terminated as project manager of the
LAK Ranch Project and the arrangement to pay MTARRI a
percentage of all third party expenses incurred on
the LAK Ranch project was terminated effective
September 30, 1999. MTARRI will continue to be paid
consulting fees based on the hourly and daily fees
for Paul Trost's services.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.8 Agreement dated November 9, 1999 among Derek
Resources Corporation, Sheri Tietjen and Donald B.
Roberts, pursuant to which the Company has agreed to
acquire (a) 1.6875% of the overriding royal interests
from Sheri Tietjen by paying US $25,000 and issuing
50,000 Common Shares; and (b) 1.6875% of the
overriding royalty interests from Donald B. Roberts
by paying US $25,000 and issuing 50,000 Common
Shares.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.9 Memorandum of Understanding dated March 20,
2000 between Derek Resources Corporation and
Bateman International BV of the Netherlands pursuant
to which BIBV agreed to provide professional
project management, engineering, design, procurement
and construction management services to the Company
for a fee of 5% of the total cost of the pilot plan
at the LAK Ranch Project as it relates to the surface
facility, subject to a minimum of US $150,000 and
reimbursement of costs.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.10 Agency Agreement dated June 9, 2000 between
Derek Resources Corporation and Yorkton Securities
Inc. pursuant to which Yorkton was appointed to act
as Agent for a best efforts brokered private
placement of 7,050,000 units at a price of $0.42 per
unit for gross proceeds of $2,961,000.
-- Incorporated by Reference to Form 20-F 2000
Annual Report --
4.11 Engineering, Procurement and Construction
Management Agreement dated August 21, 2000 between
the Company and Bateman Engineering Inc. of Denver,
CO which formalized the Memorandum of Understanding
dated March 20, 2000 between the Company and Bateman
International BV.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.12 Letter of Intent dated September 18, 2000 between
Derek Resources Corporation and MTARRI, Inc. to
purchase a 51% working interest in the Morton Project
located in Converse County, Wyoming. Dr. Paul Trost,
Vice-President, Operations of Derek USA is also
President of MTARRI.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.13 Management agreement dated September 30, 2000
between Derek Resources Corporation and Barry Ehrl,
President, CEO and Director of the Company.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.14 Management agreement dated September 30, 2000
between Derek Resources Corporation and Frank
Hallam, CFO and Director of the Company.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.15 Gas Sales Agreement dated December 15, 2000
between Derek Resources Corporation and Western Gas
Resources, Inc. to supply 100% of the first 1,500
MMBtu per day of the Company's natural gas
requirements at the LAK Ranch Project.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.16 Recorded Certificate of Purchase dated April 13,
2001 executed by the Weston County Sheriff confirming
the sale of Asdar Group's 25% interest in the LAK
Ranch Project to Derek Resources Corporation by way
of a mortgage foreclosure.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.17 Letter agreement dated April 30, 2001 between
Derek Resources Corporation and First Echelon
Ventures Inc. pursuant to which the Company sold its
rights and interests in the Morton Project to First
Echelon for the sum of US $100,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.18 Lease Purchase Agreement dated May 17, 2001
between Derek Resources Corporation and Equiva
Trading Corporation (the trading arm of Texaco),
pursuant to which Equiva purchased crude oil
produced from the LAK Ranch Project.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.19 Finder's Fee Agreement dated May 30, 2001 between
Derek Resources Corporation and Tecucomp Geological
Inc. pursuant to which Tecucomp was engaged by the
Company to assist in finding a joint venture partner
or financier for the development of the LAK Ranch
Project.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.20 Letter agreement dated June 21, 2001 between
Derek Resources Corporation and Bateman Project
Holdings Limited of Johannesburg, South Africa
pursuant to which Bateman agreed to defer US $471,183
of debt payable by the Company until May 31, 2002.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.21 Assignment of a Federal Lease dated July 6, 2001,
as amended July 10, 2001, from Edel P. Smith and
Accidental Oil Company pursuant to which the Company
acquired an additional 80 acres in the LAK Ranch
Project.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.22 Loan agreement dated May 3, 2001 between
Derek Resources Corporation and Westerton Management
Corp. for US $56,500.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.23 Loan agreement dated May 9, 2001 between
Derek Resources Corporation and Marble Hall
Investments Ltd. for US $75,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.24 Loan agreement dated May 9, 2001 between
Derek Resources Corporation and Wet Coast Management
Corp. for US $75,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.25 Loan agreement dated June 6, 2001 between
Derek Resources Corporation and Sparten Establishment
for US $100,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.26 Loan agreement dated June 27, 2001 between
Derek Resources Corporation and Cristina Casati for
US $100,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.27 Loan agreement dated June 28, 2001 between
Derek Resources Corporation and Savannah Consulting
Ltd. for US $50,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.28 Loan agreement dated June 28, 2001 between
Derek Resources Corporation and John F.P. Lush for US
$50,000.
-- Incorporated by Reference to Form 20-F 2001
Annual Report --
4.29 Loan agreement dated October 30, 2001 between
Derek Resources Corporation and Western Industrial,
Inc. for US $89,838.35.
4.30 Assignment Agreement dated August 9, 2002 between
Derek Resources Corporation and Equiva Trading
Company with respect the assignment of the May 17,
2001 agreement (to purchase crude oil produced from
the LAK Ranch Project) to Shell Trading (US) Company.
4.31 Leasing proposal dated August 19, 2002, as
amended September 3, 2002, between Derek Resources
Corporation and Oxford Properties Group with respect
to the head office space.
5.0 Foreign Patents: Not Applicable.
6.0 Statement Explaining Calculation of Earnings Per
Share Information: Not Included
7.0 Statement Explaining Calculation of Ratio of Earning
to Fixed Charges, Ratio of Combined Fixed Charges and
Preferred Stock Dividends or any other Ratios: Not
Included
8.0 Diagram of Parent and Subsidiaries: Not Included.
9.0 Statement Regarding Financial Statements Filed in
Registration Statements for Initial Public Offering
of Securities: Not Applicable
10.3 Figure 1 - LAK Ranch Project
10.4 Figure 2 - SAGD Process
===============================================================
SIGNATURE PAGE
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly
caused and authorized the undersigned to sign this Annual
Report on its behalf.
DEREK RESOURCES CORPORATION
(Registrant)
Date: November 1, 2002 /s/ Barry C.J. Ehrl
----------------
Barry C.J. Ehrl
President, CEO and Director
===============================================================
CERTIFICATION
I, Barry C.J. Ehrl, certify that:
1. I have reviewed this annual report on Form 20-F
of Derek Resources Corporation;
2. Based on my knowledge, this annual
report does not contain any untrue statement of a
material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made,
not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial
statements, and other financial information included in
this annual report, fairly present in all material
respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the
periods presented in this annual report;
4. The registrant's other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and
procedures to ensure that material information
relating to the registrant, including its
consolidated subsidiaries, is made known to us
by others within those entities, particularly
during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and procedures as
of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our
conclusions about the effectiveness of the
disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying
officers and I have disclosed, based on our most
recent evaluation, to the registrant's auditors
and the audit committee of registrant's
board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the
design or operation of internal controls which
could adversely affect the registrant's ability to
record, process, summarize and report financial
data and have identified for the registrant's
auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material,
that involves management or other employees who
have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying
officers and I have indicated in this annual report
whether or not there were significant changes in
internal controls or in other factors that could
significantly affect internal controls subsequent
to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 1, 2002
DEREK RESOURCES CORPORATION
/s/ Barry C.J. Ehrl
_______________________
Barry C.J. Ehrl
President, CEO and Director
===============================================================
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Derek Resources
Corporation (the "Company") on Form 20-F for the fiscal year
ended April 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Barry C.J.
Ehrl, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. The Report fully complies with the
requirements of Section 15(d) of the Securities Exchange
Act of 1934; and
2. The information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: November 1, 2002
DEREK RESOURCES CORPORATION
/s/ Barry C.J. Ehrl
_______________________
Barry C.J. Ehrl
President, CEO and Director
===============================================================
CERTIFICATION
I, Frank R. Hallam, certify that:
1. I have reviewed this annual report on Form 20-F
of Derek Resources Corporation;
2. Based on my knowledge, this annual
report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which
such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying
officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the
design or operation of internal controls which could
adversely affect the registrant's ability to record,
process, summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that
involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I
have indicated in this annual report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 1, 2002
DEREK RESOURCE CORPORATION
/s/ Frank R. Hallam
_______________________
Frank R. Hallam
C.F.O. and Director
===============================================================
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Derek Resources
Corporation (the "Company") on Form 20-F for the fiscal year
ended April 30, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Frank R.
Hallam, C.F.O. and Director of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the
requirements of Section 15(d) of the Securities Exchange
Act of 1934; and
2. The information contained in the Report
fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: November 1, 2002
DEREK RESOURCES CORPORATION
/s/ Frank R. Hallam
_______________________
Frank R. Hallam
C.F.O. and Director
===============================================================