<PAGE> 1
As Filed with the Securities and Exchange Commission on December 29, 1998.
Registration No. 333-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DAUGHERTY RESOURCES, INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
PROVINCE OF BRITISH COLUMBIA 1311,5172 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
DAUGHERTY RESOURCES, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 1311,5172 TO BE OBTAINED
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
120 PROSPEROUS PLACE
SUITE 201
LEXINGTON, KENTUCKY 40509
(606) 263-3948
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF EACH REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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<S> <C>
WILLIAM S. DAUGHERTY WITH A COPY TO:
PRESIDENT NORMAN T. REYNOLDS, ESQ.
120 PROSPEROUS PLACE LOOPER, REED, MARK & MCGRAW
SUITE 201 1300 POST OAK BOULEVARD, SUITE 2000
LEXINGTON, KENTUCKY 40509 HOUSTON, TEXAS 77056
(606) 263-3948 (713) 986-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE FOR EACH REGISTRANT)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement has been declared
effective.
If any of the securities being registered on this form are to be
offered in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Title of each class of Amount to Proposed maximum Proposed maximum Amount of
securities to be registered be registered offering price per share(1) aggregate offering price(1) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock to be Resold (2):
Shares Outstanding................ 2,183,783 $0.56 $1,222,918 $339.97
Shares Underlying Warrants........ 629,133 $1.14 (4) $717,212 $199.38
Shares Underlying Options......... 865,222 $4.57 (5) $3,954,064 $1099.23
Common Stock to be Resold (3):
Shares Outstanding................ 2,183,783 $0.56 $1,222,918 $339.97
Shares Underlying Warrants........ 629,133 $1.14 (4) $717,212 $199.38
Shares Underlying Options......... 865,222 $4.57 (5) $3,954,064 $1099.23
- ------------------------------------------------------------------------------------------------------------------------------------
Total 7,356,276 $11,788,388 $3,277.17
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee based upon the average of the high and low prices of the
Common Stock reported on The Nasdaq SmallCap Market on December 29, 1998.
(2) Common Stock of Daugherty Resources, Inc., a British Columbia corporation
(formerly Alaska Apollo Resources Inc.).
(3) Common Stock of Daugherty Resources, Inc., a Delaware corporation.
(4) Reflects weighted average exercise price under outstanding Warrants.
(5) Reflects weighted average exercise price under outstanding Options.
The Registrants hereby amend this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE> 2
DAUGHERTY RESOURCES, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM OF FORM S-4 LOCATION OR CAPTION
---------------- -------------------
<S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.................................. Cover Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus................................................ Table of Contents
3. Risk Factors, Ratios of Earnings to Fixed Charges and
Other Information......................................... Summary; Risk Factors
4. Terms of the Transaction.................................. Domestication; Effect of the
Domestication on Shareholder Rights;
Description of Securities; Canadian and
United States Income Tax
Considerations
5. Financial Information..................................... Not Applicable
6. Material Contracts With the Company Being Acquired........ Not Applicable
7. Additional Information Required For Reoffering by
Persons and Parties Deemed to be Underwriters............. Not Applicable
8. Interests of Named Experts and Counsel.................... Not Applicable
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................ Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants............... Not Applicable
11. Incorporation of Certain Information by Reference......... Not Applicable
12. Information With Respect to S-2 or S-3 Registrants........ Not Applicable
13. Incorporation of Certain Information by Reference......... Not Applicable
14. Information With Respect to Registrants Other Than S-2
or S-3 Registrants........................................ Business; Price Range of Common
Shares; Selected Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Index to Financial
Statements
C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information With Respect to S-3 Companies................. Not Applicable
16. In formation With Respect to S-2 or S-3 Companies......... Not Applicable
17. Information With Respect to Companies Other Than S-2
or S-3 Companies.......................................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations Are to
be Solicited.............................................. Outside Cover Page of Prospectus;
Proxy Information; Dissent Rights of the
Company Shareholders; Principal
Shareholders; Domestication;
Management; Certain Transactions
19. Information if Proxies, Consents or Authorizations Are
Not to be Solicited in an Exchange Offer.................. Not Applicable
</TABLE>
<PAGE> 3
DAUGHERTY RESOURCES, INC.
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509
Dear Shareholders:
In addition to the fixing of the number of directors of the Company,
the election of directors for the ensuing year, and the ratification of the
appointment of independent public accountants for the Company for 1999, your
approval is requested for the transaction described below which Daugherty
Resources, Inc. (the "Company") is proposing to its shareholders at the Annual
General Meeting of the Shareholders (the "Meeting") to be held at 625 Howe
Street, Suite 700, Vancouver, British Columbia, Canada, on May 10, 1999, at the
hour of 10:00 a.m. (Vancouver, British Columbia time).
Domestication. The Board of Directors will submit a proposal to
domesticate the Company from a corporation existing under the laws of the
Province of British Columbia, Canada to a corporation existing under the laws of
the State of Delaware, United States of America (the "Domestication"). If
approved by at least three-fourths of the votes cast by holders of the Common
Stock represented in person or by proxy at the Meeting, the Domestication will
result in a change in the Company's jurisdiction of incorporation from the
Province of British Columbia to the State of Delaware and will also result in
the adoption of a new certificate of incorporation and bylaws for the Company,
which will govern the Company under Delaware law. If approved by the
shareholders and subject to requisite regulatory approval, it is anticipated
that the Domestication will become effective on or about May 10, 1999, or as
soon as practicable after the Meeting.
The Domestication is intended to enhance shareholder value over the
long-term by, among other things, improving the Company's ability and
flexibility to meet its future equity and debt financing needs, enhancing the
marketability of the Company's capital stock by raising the Company's profile in
the United States and international capital markets, and providing greater ease
in dealing with income tax and accounting complexities associated with
multi-jurisdictional operations. The Company chose the State of Delaware to be
its domicile because Delaware, like British Columbia, has a modern and flexible
corporate code.
The Board of Directors has reserved the right to terminate or abandon
the Domestication at any time prior to its effectiveness, notwithstanding
shareholder approval, if the Board of Directors determines for any reason that
the consummation of the Domestication would be inadvisable or not in the best
interests of the Company or its shareholders.
For a summary of the principal income tax consequences of the
Domestication to United States shareholders, warrant and option holders,
Canadian shareholders, warrant and option holders, and the Company, see
"Canadian and United States Income Tax Considerations" contained in the
accompanying Information Circular and Joint Proxy Statement/Prospectus (the
"Joint Proxy Statement/Prospectus").
If the Domestication is completed, the shareholders will be required to
surrender their current certificates representing Common and Preferred Stock in
exchange for certificates representing the appropriate number of shares of the
Company as a Delaware corporation. Appropriate transmittal forms will be sent to
the shareholders for these purposes.
The Joint Proxy Statement/Prospectus provides a detailed description of
the Domestication and other information to assist you in considering the matters
on which to be voted. We urge you to review this information carefully and, if
you require assistance, to consult with your financial, tax or other
professional advisers.
1
<PAGE> 4
For the reasons set forth in the Joint Proxy Statement/Prospectus, your
Board of Directors unanimously believes that the proposed Domestication is in
the best interests of the Company and all of its shareholders. We, therefore,
strongly urge you to vote FOR the Domestication.
Whether or not you plan to attend the Meeting, we ask that you indicate
the manner in which you wish your shares to be voted and sign and return your
proxy as promptly as possible in the enclosed envelope so that your vote may be
recorded. You may vote your shares in person if you attend the Meeting, even if
you send in your proxy.
We appreciate your continued interest in Daugherty Resources, Inc.
Very truly yours,
/s/ William S. Daugherty
William S. Daugherty,
Chairman of the Board and President,
On Behalf of the Board of Directors
2
Lexington, Kentucky
April __, 1999
<PAGE> 5
DAUGHERTY RESOURCES, INC.
NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 10, 1999
The Annual General Meeting of Shareholders (the "Meeting") of Daugherty
Resources, Inc., a British Columbia corporation (the "Company") will be held at
625 Howe Street, Suite 700, Vancouver, British Columbia, Canada, on May 10,
1999, at the hour of 10:00 a.m. (Vancouver, British Columbia time), for the
purpose of considering and voting upon the following:
1. To receive and consider the audited financial statements of the
Company for the fiscal year ended December 31, 1998, together with the auditors'
report thereon.
2. To receive the report of the directors of the Company.
3. To fix the number of directors for the ensuing year at three.
4. To elect three directors for the ensuing year.
5. Ratification of the appointment of Hall, Kistler & Co., L.L.P., as
independent public accountants of the Company for 1999.
6. To consider and pass, with or without variation, a special
resolution, subject to requisite regulatory approval, (a) authorizing the
Company to become domesticated as a corporation existing under the laws of the
State of Delaware in accordance with the Delaware General Corporation Law (the
"Domestication"), and (b) approving the adoption of a new Certificate of
Incorporation and Bylaws to govern the Company once it is domesticated and
existing under the laws of the State of Delaware. Copies of the Certificate of
Incorporation and the Bylaws, which are attached to the Information Circular and
Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus")
accompanying this Notice, will be effective upon the filing of the Certificate
of Domestication with the Secretary of State of Delaware and will replace the
Memorandum and Articles of the Company at such time.
7. To consider amendments to or variations of any matter identified in
this Notice.
8. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
FOR FULL INFORMATION, THIS NOTICE MUST BE READ IN CONJUNCTION WITH THE JOINT
PROXY STATEMENT/PROSPECTUS ACCOMPANYING THIS NOTICE.
Shareholders registered as holders of the Company's common shares,
without par value per share (the "Common Stock") and the Company's preferred
shares, without par value per share (the "Preferred Stock"), who are deemed to
hold such shares as of the close of business on April ___, 1999 (the "Record
Date"), are entitled to Notice of the Meeting. A list of the shareholders will
be available for inspection for at least 10 days prior to the Meeting during
normal business hours at the offices of the Company.
Shareholders are cordially invited to attend the Meeting in person.
Those who do not plan to attend and who wish their shares voted are requested to
sign, date, and mail promptly the enclosed proxy, for which a return envelope is
provided.
1
<PAGE> 6
Only holders of the Common Stock are entitled to vote on all matters to
be considered at the Meeting. The holders of the Preferred Stock shall have no
right to vote at the Meeting. If any shareholder transfers his shares after the
Record Date and the transferee, at least 48 hours prior to the Meeting, produces
properly endorsed share certificates to the Secretary or transfer agent of the
Company, or otherwise establishes ownership of the shares, the transferee may
vote those shares. The transfer register will not be closed at any time prior to
the Meeting.
The Board of Directors has by resolution fixed the close of business on
the second business day preceding the day of the Meeting (excluding Saturdays,
Sundays and holidays) and any adjournments thereof as the time before which
proxies to be used or acted upon at the Meeting or any adjournments thereof
shall be deposited with the Company or its transfer agent.
A shareholder who dissents in respect of Item 6 above (the
Domestication) is entitled to be paid the fair value of his Common Stock and
Preferred Stock as set forth in the Joint Proxy Statement/Prospectus.
A description of the procedure to be followed by shareholders
dissenting from the Domestication is set out in the Joint Proxy
Statement/Prospectus under the heading "Domestication - Dissent Rights of
Company Shareholders" and the text of the special resolution with respect to the
Domestication to be submitted to the Meeting is set out in EXHIBIT A to the
Joint Proxy Statement/Prospectus.
Shareholders, whether or not able to attend the Meeting in person, are
requested to date and sign the enclosed form of proxy and to return it to the
Company's Transfer Agent, Pacific Corporate Trust Company, 625 Howe Street,
Suite 830, Vancouver, British Columbia V6C 3B8, by not later than 10:00 a.m.
(Vancouver, British Columbia time) on May 6, 1999.
FOR FULL INFORMATION, THIS NOTICE MUST BE READ IN CONJUNCTION WITH THE JOINT
PROXY STATEMENT/PROSPECTUS ACCOMPANYING THIS NOTICE.
By Order of the Board of Directors,
/s/ William S. Daugherty
William S. Daugherty,
Chairman of the Board and President
Lexington, Kentucky
April ___, 1999
TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND RETURN YOUR
PROXY AS PROMPTLY AS POSSIBLE. AN ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED
IN THE UNITED STATES, IS ENCLOSED FOR THIS PURPOSE.
2
<PAGE> 7
DAUGHERTY RESOURCES, INC.
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509
PROXY
THIS PROXY IS SOLICITED BY THE MANAGEMENT OF DAUGHERTY RESOURCES, INC.
(THE "COMPANY") FOR THE ANNUAL GENERAL MEETING OF ITS SHAREHOLDERS (THE
"MEETING") TO BE HELD ON MAY 10, 1999.
The undersigned hereby appoints William S. Daugherty, the Chairman of
the Board and President of the Company, or failing him, James K. Klyman, a
director of the Company, or instead of either of the foregoing, (insert name)
_______________________________, as nominee of the undersigned, with full power
of substitution, to attend and vote on behalf of the undersigned at the Meeting
to be held at 625 Howe Street, Suite 700, Vancouver, British Columbia, Canada,
on May 10, 1999 at 10:00 a.m., Vancouver, British Columbia time, and at any
adjournments thereof, and directs the nominee to vote or abstain from voting the
shares of the undersigned in the manner indicated below:
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<S> <C>
1. Fixing the Number of Directors. THE UNDERSIGNED HEREBY REVOKES ANY PRIOR
PROXY OR PROXIES.
Vote FOR [_] AGAINST [_] the resolution
fixing the size of the Board of Directors at three. Dated ______________________________, 1999.
2. Election of Directors.
The nominees proposed by management are: ----------------------------------------------------------
Signature of Shareholder
William S. Daugherty
James K. Klyman ----------------------------------------------------------
Charles E. Cotterell Printed Name of Shareholder
Vote FOR [_] the election of all nominees A PROXY WILL NOT BE VALID UNLESS THE FORM
listed above (EXCEPT THOSE WHOSE NAMES THE OF PROXY IS DATED, DULY EXECUTED AND
UNDERSIGNED HAS DELETED). DELIVERED TO THE OFFICE OF PACIFIC
CORPORATE TRUST COMPANY, 625 HOWE
WITHHOLD [_] vote. STREET, SUITE 830, VANCOUVER, BRITISH
COLUMBIA V6C 3B8, NOT LESS THAN 48 HOURS
3. Approval of the continuance of the existence of (EXCLUDING SATURDAYS AND HOLIDAYS)
the Company into the State of Delaware. BEFORE THE MEETING AT WHICH THE PERSON
NAMED THEREIN PURPORTS TO VOTE IN RESPECT
Vote FOR [_] AGAINST [_] the resolution THEREOF.
approving the Domestication of the Company to
the State of Delaware. Joint owners should each sign the proxy and where the
proxy is signed by a corporation either its common seal
4. Auditors. must be affixed to the proxy or it should be signed by the
corporation under the hand of an officer or attorney duly
Vote FOR [_] WITHHOLD [_] vote on the authorized in writing, which authorization must accompany
resolution to appoint Hall, Kistler & Co., L.L.P., the proxy.
Independent Public Accountants, as auditors of
the Company at the remuneration to be fixed by THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED OR
the Board of Directors. WITHHELD FROM VOTING IN ACCORDANCE WITH THE INSTRUCTIONS
OF THE SHAREHOLDER ON ANY BALLOT AND WHERE A CHOICE WITH
6. Upon any other matter that properly comes RESPECT TO ANY MATTER TO BE ACTED UPON IS SPECIFIED, THE
before the Meeting. SHARES WILL BE VOTED ON ANY BALLOT IN ACCORDANCE WITH
SUCH SPECIFICATION.
[ ]
[ ]
(Please advise the Company of any change of address)
</TABLE>
RETURN THIS PROXY IMMEDIATELY.
<PAGE> 8
SUBJECT TO COMPLETION, DATED DECEMBER 29, 1998
JOINT PROXY STATEMENT/PROSPECTUS
DAUGHERTY RESOURCES, INC.,
A BRITISH COLUMBIA CORPORATION
3,678,138 SHARES COMMON STOCK
(WITHOUT PAR VALUE PER SHARE)
---------------
DAUGHERTY RESOURCES, INC.,
A DELAWARE CORPORATION
3,678,138 SHARES COMMON STOCK
(PAR VALUE $0.001 PER SHARE)
---------------
This Joint Proxy Statement/Prospectus (sometimes the "Prospectus") is
furnished to the shareholders of Daugherty Resources, Inc., a British Columbia
corporation (the "Company"), in connection with the solicitation of proxies for
use at the 1999 Annual General Meeting of Shareholders of the Company (the
"Meeting") to be held on May 10, 1999, and at any and all adjournments thereof.
The information given in this Joint Proxy Statement/Prospectus is given as of
April ___, 1999, except as otherwise noted.
At the Meeting, the holders of the Common Stock will be asked to fix
the number of directors for the ensuing year at three, to elect three directors
for the ensuing year, and to ratify the appointment of independent public
accountants for the Company for 1999. Additionally the holders of the Common
Stock will be asked to vote FOR a proposal to domesticate the Company as a
corporation existing under the laws of the Province of British Columbia, Canada
to a corporation existing under the laws of the State of Delaware, United States
of America (the "Domestication").
See "Risk Factors" beginning on page 6 for a discussion of certain
factors related to the Domestication.
The proposed trading symbol on The Nasdaq SmallCap Market is "NGAS."
This document further constitutes the Prospectus of the Company under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
(i) 2,183,783 shares of the common stock of the Company as a Delaware
corporation, par value $0.001 per share (herein referred to as the "Common
Stock"), (ii) the resale of 629,133 shares of the Common Stock to be issued upon
the exercise of warrants of the Company (the "Warrants"), and (iii) the resale
of 865,222 shares of the Common Stock to be issued upon the exercise of options
of the Company (the "Options") to be issued to or held by holders of shares in
the capital of the Company as a result of its Domestication from the Province of
British Columbia to the State of Delaware.
Subject to certain conditions and applicable law, holders of at least
three-quarters of the Common Stock voting in person or by proxy at the Meeting
must approve the Domestication. Holders of the preferred stock of the Company,
without par value per share (the "Preferred Stock"), have no voting rights, but
they do have dissenter's rights. If the Domestication is approved and becomes
effective, all holders of the Common Stock and the Preferred Stock, except those
who have properly exercised their dissenter's rights under applicable law, will
be deemed to be shareholders of the Company as a Delaware corporation as of the
date when the certificate with respect to the Domestication has been properly
executed and duly filed with the Secretary of State of Delaware (the "Effective
Date"). See "Domestication Dissent Rights of Company Shareholders."
Neither the Securities and Exchange Commission (the "Commission") nor
any state securities commission has approved or disapproved these securities, or
determined if this Joint Proxy Statement/Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS APRIL ___, 1999
<PAGE> 9
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS JOINT
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS
FURNISHED.
The date on which this Joint Proxy Statement/Prospectus was first
mailed to shareholders was April ___, 1999.
SHAREHOLDERS, WHETHER OR NOT ABLE TO ATTEND THE MEETING IN PERSON ARE
REQUESTED TO DATE AND SIGN THE ENCLOSED FORM OF PROXY AND TO RETURN IT TO THE
COMPANY'S TRANSFER AGENT, PACIFIC CORPORATE TRUST COMPANY, 625 HOWE STREET,
SUITE 825, VANCOUVER, BRITISH COLUMBIA V6C 3B8, CANADA, BY NOT LATER THAN 10:00
A.M. (VANCOUVER, BRITISH COLUMBIA TIME) ON MAY 6, 1999.
Information contained herein is subject to completion or amendment. A
registration statement on Form S-4 (the "Registration Statement") relating to
the securities to be issued by the Company in the event the Domestication is
approved and to be issued by the Company as a Delaware corporation has been
filed with the Commission. These securities may not be sold nor may offers to
buy be accepted prior to the time the Registration Statement becomes effective.
This Joint Proxy Statement/Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such state.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS
AND FINANCIAL INFORMATION ABOUT THE COMPANY THAT IS NOT INCLUDED IN OR DELIVERED
HEREWITH. ALL SUCH INFORMATION IS AVAILABLE WITHOUT CHARGE TO SECURITY HOLDERS
UPON WRITTEN OR ORAL REQUEST, DIRECTED TO THE COMPANY AT 120 PROSPEROUS PLACE,
SUITE 201, LEXINGTON, KENTUCKY 40509, TELEPHONE (606) 263-3948. IN ORDER TO
OBTAIN TIMELY DELIVERY OF ANY REQUESTED INFORMATION, SECURITY HOLDERS MUST
REQUEST THE INFORMATION NO LATER THAN MAY 3, 1999.
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS CONTAINS
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVES THEREOF OR OTHER
VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE CAUTIONARY STATEMENTS SET
FORTH UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH
FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN SUCH
FORWARD-LOOKING STATEMENTS.
-ii-
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY ......................................................... 1
General ........................................................... 1
The Domestication ................................................. 2
Tax Consequences of the Domestication ............................. 4
RISK FACTORS ............................................................... 6
Risks Relating to the Company ..................................... 6
Risks Relating to Ownership of Company Securities and this Offering 7
GENERAL PROXY INFORMATION .................................................. 9
Solicitation of Proxies ........................................... 9
Appointment and Revocation of Proxies ............................. 10
Voting Securities ................................................. 10
DOMESTICATION .............................................................. 13
The Domestication ................................................. 13
Conditions to the Domestication; Shareholder Approvals ............ 14
Proceedings Before Governmental Authorities ....................... 14
Principal reasons for the Domestication ........................... 15
Effect of the Domestication on Shareholder Rights .......................... 16
Dissent Rights of Company Shareholders ............................ 22
Vote Required ..................................................... 23
PRICE RANGE OF THE COMMON STOCK ............................................ 23
Foreign Laws Affecting the Common and Preferred Stock.............. 24
CAPITALIZATION ............................................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................................ 25
Results of Operations ............................................. 25
Liquidity and Capital Resources ................................... 28
BUSINESS ................................................................... 30
General ........................................................... 30
Available Information ............................................. 30
Oil and Gas Exploration and Production ............................ 31
Gold and Silver Properties ........................................ 34
The Mining Claims ................................................. 36
Red River Hardwoods, Inc. ......................................... 38
Employees ......................................................... 38
Properties ........................................................ 38
Legal Proceedings ................................................. 38
MANAGEMENT ................................................................. 39
Directors and Executive Officers .................................. 39
Section 16(a) Beneficial Ownership Reporting Compliance ........... 39
Executive Compensation ............................................ 40
Option Grants in 1998 ............................................. 40
Compensation of Directors ......................................... 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................. 42
Indebtedness of Directors, Officers and Employees ................. 42
Indebtedness of the Company to a Shareholder ...................... 42
Financing Commitments ............................................. 43
PRINCIPAL SHAREHOLDERS ..................................................... 43
DESCRIPTION OF SECURITIES .................................................. 44
General ........................................................... 44
Common Stock ...................................................... 44
Preferred Stock ................................................... 44
Warrants .......................................................... 45
</TABLE>
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<PAGE> 11
<TABLE>
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Options .................................................................... 45
Provisions Having Possible Anti-Takeover Effects ........................... 45
Exchange Agent, Transfer Agent and Registrars .............................. 46
Dividend Policy ............................................................ 46
CANADIAN AND UNITED STATES INCOME TAX CONSIDERATIONS ................................ 46
United States Tax Consequences ............................................. 46
Consequences to Non-U.S. Holders of Owning and Disposing of the Common Stock
and the Preferred Stock of the Company as a Delaware Corporation ......... 51
Information Reporting and Backup Withholding ............................... 52
Canadian Federal Income Tax Consequences ................................... 52
Eligibility for Investment under the Canadian Act .......................... 54
Summary .................................................................... 54
LEGAL OPINIONS ...................................................................... 55
OTHER MATTERS ....................................................................... 55
OTHER INFORMATION ................................................................... 55
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL GENERAL MEETING OF SHAREHOLDERS55
APPROVAL OF JOINT PROXY STATEMENT/PROSPECTUS ........................................ 55
EXHIBITS ............................................................................ 56
INDEX TO FINANCIAL STATEMENTS ....................................................... FS-1
</TABLE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
provided with this Joint Proxy Statement/Prospectus. Unless otherwise indicated
herein, the financial, business activities, management and other pertinent
information herein relate on a consolidated basis to the Company and its
subsidiaries, Daugherty Petroleum, Inc. and Red River Hardwoods, Inc. Investors
are urged to read this Joint Proxy Statement/Prospectus in its entirety and
carefully consider the information set forth under the heading "Risk Factors."
Additionally, unless otherwise indicated, all Common Stock and per share data
and information in this Joint Proxy Statement/Prospectus assume no conversion of
Preferred Stock or the exercise of outstanding Warrants or Options into shares
of the Common Stock of the Company. Moreover, unless otherwise indicated, all
monetary amounts have been expressed in United States dollars.
GENERAL
The Company. Daugherty Resources, Inc. (the "Company") was incorporated
on February 9, 1979, under the laws of British Columbia, Canada, as Catalina
Energy & Resources Ltd. On November 27, 1981, the Company's name was changed to
Alaska Apollo Gold Mines Ltd., and the authorized capital stock of the Company
was changed from 5,000,000 shares of the Common Stock to 20,000,000 shares of
the Common Stock. On October 14, 1992, the Company's name was changed to Alaska
Apollo Resources Inc., and the Company completed a share recapitalization
pursuant to which the Company's authorized capital was consolidated from
20,000,000 shares of the Common Stock to 6,000,000 shares of the Common Stock.
On September 9, 1993, the Company's authorized capital stock was changed from
6,000,000 shares of the Common Stock to 20,000,000 shares of the Common Stock.
On June 22, 1998, the Company changed its name from Alaska Apollo Resources Inc.
to Daugherty Resources, Inc. At the same time, the Company increased its
authorized Common Stock to 50,000,000 and further provided for 6,000,000 shares
of the Preferred Stock. The shareholders of the Company then voted to
consolidate the authorized capital stock of the Company on a one share for five
shares basis. Consequently on the date of this Prospectus, the Company has
10,000,000 shares of the Common Stock authorized and 1,200,000 shares of the
Preferred Stock authorized. The Company is a diversified natural resources
company that is engaged, through certain subsidiaries, in the exploration and
production of oil and gas in Kentucky, and in the prospecting, acquiring, and,
if warranted, developing gold mining properties in Alaska. The Company commenced
oil and gas operations in 1993, as a result of its acquisition of Daugherty
Petroleum, Inc., a Kentucky corporation. In 1996, the Company concluded the
acquisition of an 80 percent interest in Red River Hardwoods, Inc., a Kentucky
corporation, which is engaged in lumber drying and dimensional hardwood
manufacturing. Upon successful completion of the Domestication, the Company will
be domesticated in Delaware under the name of Daugherty Resources, Inc. The
principal executive offices of the Company are located at 120 Prosperous Place,
Suite 201, Lexington, Kentucky 40509, and its telephone number is (606)
263-3948.
The Meeting. The Meeting is scheduled to be held on May 10, 1999 at
10:00 a.m. Vancouver, British Columbia time at 625 Howe Street, Suite 700,
Vancouver, British Columbia, Canada. The Meeting will be called pursuant to and
governed by the requirements of the Company Act (British Columbia) (the "BCCA").
Purpose. At the Meeting, the holders of the Common Stock will be asked
to vote (i) for a resolution fixing the number of directors at three; (ii) for
the election of three directors to the Company's Board of Directors; (iii) for
the ratification of the appointment of independent auditors for the fiscal year
ending December 31, 1999; and (iv) for the resolution relating to the
Domestication.
Who May Vote. Holders of the Common Stock and the Preferred Stock as of
the close of business on April ___, 1999 will be entitled to Notice of the
Meeting. However, only the holders of the Common Stock have the right to vote in
person or by proxy. The holders of the Preferred Stock have no right to vote;
they have only dissenter's rights.
Recent Market Prices for the Company. There is no established market in
Canada for the Common Stock. However, the shares of the Common Stock are listed
and traded under the symbol "NGASF" on The Nasdaq SmallCap Market operated by
The Nasdaq Stock Market in the United States. As of April ___, 1999, the high
and low bids with respect to the price per share of the Common Stock were $___
and $___, respectively. The Nasdaq SmallCap Market
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quotations represent interdealer prices, without mark-ups, commissions, etc.,
and they may not necessarily be indicative of actual sales prices. For
additional information, see "Price Range of Common Stock." As of the date of
this Joint Proxy Statement/Prospects there were ___ shares of the Common Stock
and 1,200,000 shares of the Preferred Stock issued and outstanding. However,
there is no public market for any shares of the Preferred Stock.
THE DOMESTICATION
Domestication. The Company proposes to change its jurisdiction of
incorporation from British Columbia to Delaware by means of a Domestication
under the General Corporation Law of the State of Delaware (the "DGCL"). Upon
the effectiveness of the Domestication, the Company will become a Delaware
corporation as if it had originally been incorporated in that jurisdiction and
the Company will be discontinued in British Columbia.
Treatment of the Common Stock, Preferred Stock, Warrants and Options.
Immediately following the completion of the Domestication, each share of the
Common Stock and the Preferred Stock, and each Warrant and Option will remain
issued and outstanding as an equivalent security of the Company, as a Delaware
corporation. Once the Domestication has been effected, each holder of
certificates formerly representing Common Stock and Preferred Stock will be
required to surrender such certificates for a certificate representing the
appropriate number of shares of the Company as a Delaware corporation. Holders
of Warrants and Options will continue to hold such securities which will be
exercisable for Common Stock of the Company as a Delaware corporation.
Directors and Officers. The Company's Board of Directors currently
consists of three members, William S. Daugherty, James K. Klyman and Charles L.
Cotterell. Upon Domestication, the Company's Board of Directors will consist of
the same members as set forth in the Certificate of Incorporation to be filed
pursuant to the Company's Domestication into Delaware. Additionally, immediately
following the Domestication, the officers of the Company will be William S.
Daugherty, Chairman of the Board, President and Chief Executive Officer, D.
Michael Wallen, Vice President and Secretary, and Daryl J. Greattinger, Chief
Financial Officer, all of whom are currently officers of the Company. See
"Management - Executive Officers and Directors" for more information concerning
such individuals.
Principal Reasons for the Domestication. The Domestication is intended
to enhance shareholder value over the long-term by, among other things,
improving the Company's ability and flexibility to meet its future equity and
debt financing needs, enhancing the marketability of the Company's capital stock
by raising the Company's profile in the United States and international capital
markets, and providing greater ease in dealing with income tax and accounting
complexities associated with multi-jurisdictional operations. The Company chose
the State of Delaware to be its domicile because Delaware, like British
Columbia, has a modern and flexible corporate code. In particular, the Company
believes that the various indemnity and exculpation provisions of the DGCL will
help it to attract and retain competent directors at a time when the escalating
risks and resultant costs of director liability have made it increasingly
difficult for corporations to find and retain competent directors. In addition,
the State of Delaware has an active bar which is continually assessing and
recommending improvements to the DGCL, and the substantial body of settled case
law under the DGCL adds greater certainty in assessing risks associated with
conducting business.
Conditions to Domestication. The Domestication must receive the
favorable vote, in person or by proxy, of the holders of at least three-fourths
of the Common Stock voting on the special resolution at the Meeting. The
Domestication is also conditioned upon the receipt of the requisite
authorization of the British Columbia Registrar of Companies (the "BCCA
Director") and applicable regulatory authorities. The Domestication is also
subject to abandonment or termination by the Board of Directors under certain
circumstances. See "Domestication - Conditions to Domestication; Shareholder
Approvals."
Effect of Transactions on Consolidated Financial Statements. Because
the Company currently prepares its consolidated financial statements in United
States dollars using United States generally accepted accounting principles
("U.S. GAAP") and, after the Domestication, the consolidated financial
statements of the Company will continue to be presented in United States dollars
and prepared in accordance with U.S. GAAP, the Domestication will have no
accounting implications with respect to the consolidated financial statements of
the Company.
Certain Differences Between Securities of the Company in British
Columbia and Delaware. The Company's authorized capital stock in Delaware will
consist of 100 million shares of common stock, par value $0.001 per share,
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<PAGE> 14
and 5,000,000 shares of preferred stock, par value $0.001 per share, as compared
to 10 million authorized common shares, no par value per share, and 1,200,000
authorized preferred shares, no par value per share, of the Company in British
Columbia. The Domestication will not affect the Common Stock or the Preferred
Stock outstanding, except to the extent of differences in governing law and
changes to the Company's charter and bylaws being effected in the Domestication.
Certain Differences Between Rights of Shareholders. After the
Domestication, the Company will be subject to the provisions of the DGCL. The
DGCL and BCCA are similar in many respects, but do differ from each other in
certain areas. These differences include, among other things, the percentage of
shares needed to approve matters submitted to a shareholder vote, the ability to
require supermajority voting, the ability to provide for cumulative voting,
restrictions on business combinations with related parties, the percentage of
shareholders needed to act by written consent without a meeting, the right to
appoint more than one class of directors, the types of transactions for which
statutory appraisal rights are available, the liability and qualification of
corporate directors and the remedies for oppression with respect to corporate
security holders. See "Domestication - Effect of Domestication on Shareholder
Rights." In addition to the differences embodied in the applicable governing
statutes, there are also differences between the Company's Memorandum and
Articles and the Certificate of Incorporation and Bylaws of the Company as a
Delaware corporation. These include the capitalization of the two corporations,
the directors' power to adopt bylaws without shareholder approval, the expanded
limitations on director liability and the ability of the shareholders to take
action without a meeting. See "Domestication - Effect of Domestication on
Shareholder Rights" and "Description of Securities."
Right to Dissent. Any shareholder of the Company, pursuant to the BCCA,
will have until two days before the Meeting at which the special resolution for
the Domestication the Company from the Province of British Columbia to the State
of Delaware pursuant to Section 37 of the BCCA are to be passed, to give a
notice of dissent concerning his shares of the Common Stock and the Preferred
Stock to the Company with respect to said special resolution. As a result of
giving a notice of dissent the shareholder may, on receiving from the Company a
notice of intention to act under Section 207 of the BCCA, require the Company to
purchase all of his shares in respect of which the notice of dissent was given.
The price to be paid for his shares is their fair value as of the day before the
date on which the resolution for the Domestication is passed, that is, the day
before the Meeting which is scheduled to be held on May 10, 1999. A
shareholder's right to give a notice of dissent with respect to the
Domestication will lapse if not exercised two days before the Meeting at which
the special resolution for the Domestication is to be passed. Further, a notice
of dissent ceases to be effective if the shareholder votes in favor of the
resolution for the Domestication. See "Domestication - Dissent Rights of Company
Shareholders."
Section 200 of the BCCA sets out the rights of a shareholder to apply
to a court for relief in certain circumstances. By way of example, a shareholder
may apply to a court for relief if he believes the proposed Domestication is
unfairly prejudicial to him.
Timing of the Effective Date. Assuming that the Domestication is
approved by requisite shareholder action and all other conditions thereto are
satisfied, it is currently expected that the Domestication will all be completed
on or about May 10, 1999, subject to receipt of requisite regulatory approval or
as soon thereafter as practicable.
Stock Exchange Listings. The Common Stock currently trades on The
Nasdaq SmallCap Market in the United States under the symbol "NGASF." There is
no trading on an exchange or other quotation system in Canada. Upon the
consummation of the Domestication, the Company's Common Stock will be listed on
The Nasdaq SmallCap Market under the symbol "NGAS," assuming all listing
requirements are met. As of the date of this Joint Proxy Statement/Prospectus
there are ___ shares of the Common Stock and 1,200,000 shares of the Preferred
Stock issued and outstanding, but there is no public market for the Preferred
Stock in any jurisdiction. Further, the Preferred Stock shall not be registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") for
trading.
Future Dividend Policy. The Company does not expect to pay dividends on
its capital stock in the foreseeable future. See "Description of Securities -
Dividend Policy." The Preferred Stock is eligible for non-cumulative ordinary
dividends prior and in preference to shares of the Common Stock, when and if
declared by the Board of Directors of the Company.
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<PAGE> 15
Common Stock Held by Directors, Executive Officers and Their
Affiliates. At April ___, 1999, the directors, and executive officers of the
Company and their affiliates held ___ shares of the Common Stock which
constituted ___ percent of the outstanding shares of the Common Stock entitled
to vote at the Meeting. The Domestication must receive the favorable vote, in
person or by proxy, of the holders of at least three-fourths (75 percent) of the
Common Stock voting on the special resolution at the Meeting.
Preferred Stock Held by Directors, Executive Officers and Their
Affiliates. At April ___, 1999, the directors, and executive officers of the
Company and their affiliates held no shares of the Preferred Stock. As of the
date of this Prospectus, 1,200,000 shares of the Preferred Stock were issued and
outstanding. The shares of the Preferred Stock have no voting rights; however,
they do have dissenter's rights under the BCCA.
TAX CONSEQUENCES OF THE DOMESTICATION
Canadian Income Tax Consequences. The Domestication will not constitute
a taxable event for the Company's shareholders. Shareholders of the Company will
continue to hold their shares at the same aggregate adjusted cost base as before
the Domestication. Any dividends paid by the Company after the Domestication
must be included by shareholders in computing their income and will not be
eligible for the gross up and dividend tax credit or other rules applicable to
dividends from Canadian corporations. Shareholders who exercise dissenter's
rights in respect of the Domestication may be deemed to have received a dividend
and may realize a capital gain or loss on receipt of payment for their shares.
See "Canadian and United States Income Tax Considerations."
The Company will be deemed to have completed a tax year for Canadian
tax purposes immediately prior to the Domestication. Any assets owned by the
Company immediately prior to the Domestication will be deemed to have been
disposed of by the Company at their fair market value, and any gains or losses
recognized by the Company on the deemed disposition of those assets will be
included in the Company's Canadian taxable income for that year. However, the
Company will not recognize any gain as a result of the Domestication, and
consequently, the Company will have no tax liability with respect to the
Domestication.
United States Federal Income Tax Consequences. The Company believes
that the Domestication will constitute a tax-free reorganization for United
States federal income tax purposes and that no gain or loss will be recognized
by United States shareholders of the Company as a result of the exchange of
Common Stock and Preferred Stock for shares of the Common Stock and Preferred
Stock of the Company as a Delaware corporation in connection with the
Domestication. Thus, provided they satisfy the necessary filing requirements,
the shareholders will not be subject to United States income tax as a result of
the Domestication except to the extent that (i) they receive cash as a result of
dissenting, and (ii) either such shareholders are United States persons or such
gain is effectively connected to a United States trade or business of such
shareholder. See "Canadian and United States Income Tax Considerations." After
the Effective Date, dividends received by corporate shareholders will, subject
to applicable exceptions and restrictions, be eligible for the 70 percent
dividends received deduction. Moreover, dividends paid to United States
shareholders after the Domestication will no longer be subject to Canadian
withholding tax. The Company has never paid cash dividends on its Common Stock
or Preferred Stock. There is no current expectation that dividends will be paid
on the Common Stock or on the Common Stock of the Company as a Delaware
corporation for the foreseeable future. The Preferred Stock is eligible for
non-cumulative ordinary dividends prior and in preference to shares of the
Common Stock, when and if declared by the Board of Directors of the Company. See
"Description of Securities - Dividend Policy."
Holders of Warrants and Options should not recognize gain or loss.
However, the Internal Revenue Service (the "Service") or courts could disagree
with this characterization of the results to Warrant and Option holders and
instead treat the transaction in connection with the Warrants and Options as a
taxable exchange of the Warrants and Options.
All shareholders should read carefully the more detailed discussions
under "Canadian and United States Income Tax Considerations" and are urged to
consult their own tax advisers.
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<PAGE> 16
RECOMMENDATION OF THE BOARD
The Board of Directors recommends that the holders of the Company's
Common Stock vote (i) FOR a resolution fixing the number of directors at three;
(ii) FOR the election of three directors to the Company's Board of Directors;
(iii) FOR the ratification of the appointment of independent auditors for the
fiscal year ending December 31, 1999; and (iv) FOR the Domestication.
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<PAGE> 17
RISK FACTORS
The Company's operations and the transactions described herein are
subject to certain significant risks, including the following:
RISKS RELATING TO THE COMPANY
Operating Results (Year ending December 31, 1998). For the year ending
December 31,1998, the Company's gross revenues increased ___ percent to $___
from $___ for the same period in 1997. The Company experienced a net loss of
$___ in 1998 compared to a net loss of $___ in 1997. The increase in gross
revenues was attributable primarily to an increase in lumber sales related to
the Company's 80 percent owned subsidiary, Red River Hardwoods, Inc., which
increased by $___ from $___ in 1997 to $___ in 1998. During 1998, total
operating expenses were $___ compared to $___ in 1997, for an increase of $___.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." There can be no assurance that the Company will not experience
future losses and that, if such losses are prolonged, the financial condition of
the Company would not be materially impaired.
Operating Results (Three months ending March 31, 1999). For the three
month period ending March 31, 1999, the Company's gross revenues increased $___
to $___ from $___ for the same period in 1998. The Company experienced a net
loss of $___ in this period compared to a net loss of $___ in the same period of
1998.
The Company's gross revenues were derived from drilling contract
revenues of $___ (___ percent) from natural gas and oil operations and
production revenues of $___ (___ percent) and lumber sales and product
manufacturing revenues of $___ (___ percent).
The increase in gross revenues of $___ was attributable to the
increased drilling activities and lumber sales during the period. Contract
revenues from drilling activities increased by $___ from $___ in the first three
months of 1998 to $___ in the first three months of 1999. Manufacturing revenues
related to Red River Hardwoods, Inc. increased by $___ from $___ in the first
three months of 1998 to $___ in the first three months of 1999.
During the first three months of 1999, total direct costs increased by
$___ to $___ compared to $___ in the first quarter of 1998. These direct costs
included Red River Hardwoods, Inc.'s expenses and drilling costs for ___ natural
gas wells.
Oil and Gas Operations. The profitability of the Company's oil and gas
operations depends upon certain factors which are beyond the Company's control,
such as natural gas and crude oil prices that are subject to substantial
fluctuations as a result of variations in supply and demand, seasonality and
other factors. The Company's principal oil and gas operation is the production
of natural gas. Market, economic and regulatory factors may in the future
materially affect the Company's sales of its gas production. The Company faces
significant competition in its oil and gas operations.
Reserves. Unless the Company acquires additional properties containing
proved reserves or conducts successful exploration and development activities,
or both, the proved reserves of the Company will decline as reserves are
produced.
See generally "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Mining Operations. The Company has had no revenues from its mining
properties. Further, during each year the Company must expend certain funds to
maintain the validity of the title to its mining properties. There can be no
assurance that the Company will ever be able to put its mining properties into
production, or that it will ever be able to generate a profit from their
operations. See generally "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Reliance on Key Personnel. The Company's success depends to a
significant extent on a small number of key technical and managerial personnel,
the loss of any one of which could have a material adverse effect on the
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<PAGE> 18
Company's operations. The Company believes that its future success will also
depend in part upon its ability to attract and retain highly skilled technical
and managerial personnel. Competition for such personnel is intense. There can
be no assurance that the Company will be successful in attracting and retaining
the personnel it requires to grow and operate profitably. See "Management."
RISKS RELATING TO OWNERSHIP OF COMPANY SECURITIES AND THIS OFFERING
Issuance of Additional Shares. The Company currently has outstanding
Warrants to purchase approximately ___ shares of the Common Stock at an
approximate weighted average purchase price of $___ per share, and outstanding
exercisable Options to purchase approximately ___ shares of the Common Stock at
prices from $___ to $___ per share. Of the outstanding exercisable Options to
purchase ___ shares, Options to purchase ___ shares will expire on ___. See
"Description of Securities." Issuance of the Common Stock upon the conversion or
exercise of the Preferred Stock, Warrants or Options may adversely affect the
prevailing market price of the Common Stock, as well as cause a dilution of the
ownership interests of shareholders generally.
Tax Consequences of the Domestication on Holders of Warrants and
Options. Although the matter is not free from doubt, for United States federal
income tax purposes, the Domestication should not result in the recognition of
gain or loss under IRC ss.1001 to the holders of Warrants and Options in the
Company. The Service or the courts could disagree with this characterization of
the results to holders of Warrants and Options, and instead treat the
transaction in connection with the Warrants and the Options as a taxable
exchange. In such event, each U.S. Holder (as defined under "Canadian and United
States Income Tax Considerations - United States Tax Consequences") of Warrants
or Options will recognize gain or loss on the exchange equal to the difference
between the fair market value of its Warrants or Options after the Domestication
and the adjusted tax basis of its Warrants or Options (which such gain or loss
will be capital gain or loss if the Warrants or the Options are capital assets
that have been held for more than one year). Each holder of Warrants or Options
is urged to consult its own tax adviser regarding the tax consequences of the
Domestication on its particular circumstances. See "Canadian and United States
Income Tax Considerations" for a further description of the tax consequences of
the Domestication.
Certain Differences in Shareholders' Rights. There are a substantial
number of differences between the BCCA and the DGCL and between the Company's
Memorandum and Articles and the Certificate of Incorporation and Bylaws. These
differences may materially affect the rights of shareholders. Included elsewhere
in this Joint Proxy Statement/Prospectus is a summary of some of the changes
that will occur as a result of the Domestication of the Company from the
Province of British Columbia to the State of Delaware. Although this summary
describes the material consequences to shareholders as a result of the
Domestication, it is not intended to be exhaustive and the shareholders should
consult with their legal advisers regarding all of the implications of the
Domestication. See "Domestication - Effect of the Domestication on Shareholder
Rights" and "Description of Securities."
Anti-takeover Protections. Certain provisions of the DGCL and of the
Company's Certificate of Incorporation and Bylaws may be deemed to provide
anti-takeover protections. These provisions include provisions for the issuance
of "blank check" preferred stock, advance notice requirements for director
nominations and actions to be taken at annual meetings, and the protections
afforded by Section 203 of the DGCL. Such provisions could impede any merger,
consolidation, takeover or other business combination involving the Company or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. See "Domestication - Effect of the
Domestication on Shareholder Rights - Anti-Takeover Effects" and "Description of
Securities - Provisions Having Possible Anti-Takeover Effects."
Absence of Dividends. The Company has never paid cash dividends on its
common equity securities. The Company's current policy is to retain earnings, if
any, to finance the anticipated growth of its business. Any further
determination as to the payment of dividends will be made at the discretion of
the Board of Directors and will depend upon the Company's operating results,
financial condition, capital requirements, general business conditions and such
other factors as the Board of Directors deems relevant. The Company may procure
credit from third parties for additional capital for expansion and business
development activities. It is likely that any credit facility procured by the
Company may limit or restrict the Company's ability to pay cash dividends on the
Common Stock under certain circumstances. In the event that the Domestication is
effected, it is anticipated that the dividend policy of the Company as a
Delaware corporation will be the same as the Company's current policy. The
Preferred Stock is eligible for non-
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<PAGE> 19
cumulative ordinary dividends prior and in preference to shares of the Common
Stock, when and if declared by the Board of Directors of the Company.
Absence of Efficient Public Market; Possible Volatility of Stock Price.
The shares of the Common Stock are currently traded on The Nasdaq SmallCap
Market and it is anticipated that if the Domestication occurs, the shares of the
Company as a Delaware corporation will likewise be listed on The Nasdaq SmallCap
Market. Such listing may not provide for an active public market for the Common
Stock and there can be no assurance that an active trading market for the Common
Stock of the Company as a Delaware corporation will develop or, if developed,
that it will be sustained. The market price of the Common Stock of the Company
as a Delaware corporation could be subject to significant fluctuations in
response to variations in results of operations and other factors. In addition,
the equity markets in recent years have experienced price and volume
fluctuations that often have been unrelated or disproportionate to the operating
performance of companies; the price of the Common Stock of the Company as a
Delaware corporation could be affected by such fluctuations. There is no trading
on an exchange or other quotation system in Canada. As of the date of this Joint
Proxy Statement/Prospectus, there were ___ shares of the Common Stock and
1,200,000 shares of the Preferred Stock issued and outstanding. It is not
anticipated that any shares of the Preferred Stock will be publically traded on
any exchange.
"Penny Stock" Issues. The shares of the Common Stock, which are traded
on The Nasdaq SmallCap Market, are "penny stocks" as defined in the Exchange
Act. As a result, an investor may find it more difficult to dispose of or obtain
accurate quotations as to the price of the shares of the Common Stock being
registered hereby. In addition, the "penny stock" rules adopted by the
Commission under the Exchange Act subject the sale of the shares of the Common
Stock to certain regulations which impose sales practice requirements on
broker-dealers. For example, broker-dealers selling such securities must, prior
to effecting the transaction, provide their customers with a document which
discloses the risks of investing in such securities. Furthermore, if the person
purchasing the securities is someone other than an accredited investor or an
established customer of the broker-dealer, the broker-dealer must also approve
the potential customer's account by obtaining information concerning the
customer's financial situation, investment experience and investment objectives.
The broker-dealer must also make a determination whether the transaction is
suitable for the customer and whether the customer has sufficient knowledge and
experience in financial matters to be reasonably expected to be capable of
evaluating the risk of transactions in such securities. Accordingly, the
Commission's rules may limit the number of potential purchasers of the shares of
the Common Stock.
Although the shares of the Common Stock are currently traded on The
Nasdaq SmallCap Market, there can be no assurance that an active trading market
will be sustained. The Nasdaq Stock Market recently approved changes to the
standards for companies to become listed on The Nasdaq SmallCap Market
including, without limitation, new corporate governance standards, a new
requirement that the market price of the shares must remain above $1.00 per
share or else such shares will be delisted from The Nasdaq Stock Market. If the
shares of the Common Stock are delisted, then such shares would be quoted on the
OTC Bulletin Board. The Company plans on having the shares of the Common Stock
quoted for sale on The Nasdaq SmallCap Market following the Domestication.
Consequently, all of the requirements with respect to continued listing on The
Nasdaq SmallCap Market which existed prior to the Domestication will apply after
the Domestication. In an effort to comply with the market price requirement for
the shares of the Common Stock, the Company on June 22, 1998 consolidated its
capital stock on a one share for five shares basis. The immediate effect of the
consolidation was to place the market price for the shares of the Common Stock
above $1.00 for a period of time. However, recently, the market value of the
shares of the Common Stock has been below $1.00, and if it remains that way, The
Nasdaq Stock Market could seek to delist such shares from The Nasdaq SmallCap
Market.
Moreover, various state securities laws impose restrictions on
transferring "penny stocks," and as a result, investors in the Common Stock may
have their ability to sell their shares of the Common Stock impaired.
Need to Maintain a Current Prospectus. The Company must maintain a
current prospectus in order for the shareholders to sell the shares of the
Common Stock to which this Joint Proxy Statement/Prospectus relates. In the
event that the Company is unable to maintain a current prospectus due to lack of
sufficient financial resources or for other reasons, the shareholders may be
unable to resell their shares of the Common Stock in any public market.
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<PAGE> 20
Shares Reserved for Issuance. The Company has ___ shares of the Common
Stock reserved for issuance upon the conversion of the Preferred Stock and the
exercise of the Warrants and the Options. These convertible securities are
convertible or exercisable at prices that range from fixed prices of $___ to
$___ per share and variable prices depending on the market price of the Common
Stock and expire on various dates extending to___, 200__. There can be no
assurance that any of these securities will be sold or converted or exercised,
or that the Company will receive any proceeds from the conversion or the
exercise thereof. The exercise or conversion of these securities, and the resale
of the underlying shares of the Common Stock could have a dilutive effect on the
prevailing market price of the Common Stock. See "Management - Stock Options"
and "Description of Securities."
Year 2000 Compliance. The Company's field and administrative operations
have been reviewed for Year 2000 Compliance. Normal upgrades will result in
essential operations being Year 2000 compliant. Some remaining operations, such
as non-essential personal computers and non-financial software products, can be
easily upgraded at nominal cost and inconvenience. The Company has contacted its
gas purchasers and third party software and service vendors concerning Year 2000
compliance. Those third parties not already compliant have indicated that they
are working to be compliant. The Company will be preparing contingency plans
regarding those third parties that do not currently meet Year 2000 compliance
standards. Costs incurred to date, future costs, implementation of contingency
plans and completion of modifications or replacements have not been and are not
expected to be material or pose a material risk.
Forward-Looking Statements and Associated Risk. Management believes
that this Joint Proxy Statement/Prospectus contains forward-looking statements,
including statements regarding, among other items, the Company's future plans
and growth strategies and anticipated trends in the industry in which the
Company operates. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
many of which are beyond the Company's control. Actual results could differ
materially from these forward-looking statements as a result of the factors
described herein, including, among others, regulatory or economic influences. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this Joint Proxy Statement/Prospectus
will in fact transpire or prove to be accurate. The inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
GENERAL PROXY INFORMATION
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the management of the
Company through this Joint Proxy Statement/Prospectus, which seek to appoint the
persons named therein to represent the holders at the Meeting to fix the number
of directors for the ensuing year, to elect directors for the ensuing year, to
ratify the appointment of independent public accountants, and to vote on a
special resolution to authorize the Domestication and certain related matters,
and to transact such other business as may properly come before the Meeting or
any adjournment(s) thereof.
Solicitation of proxies by mail is expected to commence on April ___,
1999, and the cost thereof will be borne by the Company. Advance notice of the
Meeting was published in the Vancouver Province in Vancouver, British Columbia
on _____, 1999. In addition to solicitation by mail, certain of the directors,
officers and regular employees of the Company may, without extra compensation,
solicit proxies by telephone, telegraph and personal interview. Arrangements
will be made with brokerage houses, custodians, nominees and other fiduciaries
to send proxy materials to their principals, and they will be reimbursed by the
Company for postage and clerical expenses. Unless otherwise specified herein,
all references to dollars shall mean United States dollars.
Shares represented by properly executed proxies will be voted as
specified. IF NO SPECIFICATIONS HAVE BEEN GIVEN IN THE PROXIES, THE SHARES
REPRESENTED THEREBY WILL BE VOTED FOR THE FIXING OF THE NUMBER OF DIRECTORS FOR
THE ENSUING YEAR AT THREE, FOR THE ELECTION OF THE NOMINEES LISTED HEREIN AS
DIRECTORS, FOR THE RATIFICATION OF HALL, KISTLER & CO., L.L.P. AS INDEPENDENT
PUBLIC ACCOUNTANTS FOR 1999, FOR THE SPECIAL RESOLUTION AUTHORIZING THE
DOMESTICATION AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON ANY
OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING. At the time of the
printing of this Joint Proxy Statement/Prospectus, management
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knows of no such other matters to come before the Meeting other than the matters
referred to in the Notice of Meeting. However, if any other matters which are
not now known to management should properly come before the Meeting or any
adjournment(s) thereof, the proxies will be voted on such matters in accordance
with the best judgment of the proxies named therein.
A form of proxy will not be valid unless it is completed and delivered
to Pacific Corporate Trust Company, 625 Howe Street, Suite 830, Vancouver,
British Columbia V6C 3B8, Canada, not less than 48 hours (excluding Saturdays
and holidays) before the Meeting at which the person named therein purports to
vote in respect thereof.
APPOINTMENT AND REVOCATION OF PROXIES
This solicitation of proxies is being made on behalf of the management
of the Company. The individuals named in the accompanying form of proxy are the
President and a director of the Company. A shareholder wishing to appoint some
other person (who need not be a shareholder of the Company) to represent him at
the Meeting has the right to do so, either by inserting such person's name in
the blank space provided in the form of proxy or by completing another form of
proxy.
Proxies may be revoked at any time before the commencement of the
Meeting by delivering to the Chairman of the Meeting a written revocation or a
duly executed proxy bearing a later date. The principal executive office and
mailing address of the Company is 120 Prosperous Place, Suite 201, Lexington,
Kentucky 40509. For a period of at least 10 days prior to the Meeting, a
complete list of shareholders entitled to vote at the Meeting will be available
for inspection by shareholders of record during ordinary business hours for
proper purposes at the Company's principal executive office.
VOTING SECURITIES
Shareholders of record at the close of business on April ___, 1999 (the
"Record Date"), are entitled to notice of the Meeting. On the Record Date the
authorized capital stock of the Company consisted of 10,000,000 shares of common
stock, without par value per share (the "Common Stock"), each of which shares is
entitled to one vote, of which there were ___ shares issued and outstanding,
fully paid and non-assessable. The Company's authorized capital also provides
for 1,200,000 shares of preferred stock, without par value per share (the
"Preferred Stock"), of which there were 1,200,000 shares issued and outstanding,
fully paid and non-assessable on the Record Date. The shares of the Preferred
Stock are not entitled to vote; however such shares are entitled to dissenter's
rights under the BCCA. The quorum for the transaction of business at the Meeting
consists of two persons present and being, or representing by proxy,
shareholders holding not less than one-tenth of the outstanding shares of the
Common Stock. If sufficient shares are not represented in person or by proxy at
the Meeting to constitute a quorum, the Meeting may be postponed or adjourned in
order to permit further solicitations of proxies by the Company. Proxies given
pursuant to this solicitation and not revoked will be voted at any postponement
or adjournment of the Meeting in the manner set forth above.
Under the BCCA, the three nominees receiving the greatest number of
votes cast by the holders of the Common Stock will be elected directors. There
will be no cumulative voting in the election of directors. A simple majority of
the votes cast at the Meeting is required to approve the fixing of the number of
directors for the ensuing year at three, and for the ratification of Hall,
Kistler & Co., L.L.P. as independent public accountants for 1999. Under the BCCA
a majority of at least three-fourths of the votes cast at the Meeting (in person
or by proxy) is required to approve the Domestication. Only holders of the
shares of the Common Stock have a right to vote at the Meeting.
Under British Columbia law, abstentions are treated as present and
entitled to vote and thus will be counted in determining whether a quorum is
present and will have the effect of a vote against a matter, except the election
of directors as to which they will have no effect.
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DETERMINATION OF THE NUMBER OF DIRECTORS
Management proposes to fix the number of directors of the Company at
three for the ensuing year.
VOTE REQUIRED
The affirmative vote of a majority of the total number of shares of the
Common Stock present in person or represented by proxy at the Meeting is
required to fix the number of directors of the Company at three for the ensuing
year.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FIXING OF THE NUMBER
OF DIRECTORS FOR THE ENSUING YEAR AT THREE.
ELECTION OF DIRECTORS
The size of the Board of Directors is currently determined at three. It
is intended that the number of directors will be three for the ensuing year.
TERM OF OFFICE
The term of office of each of the current directors expires at the
Meeting. The persons named below will be nominated for election at the Meeting
as management's nominees. Each director elected will hold office until the next
annual general meeting of the shareholders of the Company or until his successor
is elected or appointed, unless his office is earlier vacated in accordance with
the Memorandum and Articles of the Company or the provisions of the BCCA.
NOMINEES
The following sets forth certain information with respect to the
business experience of each nominee during the past five years and certain other
directorships held by each nominee.
William S. Daugherty, age 44, has been a director since September 1993.
Mr. Daugherty has served as President and Chief Operating Officer of the Company
since September 1993 when he acquired 1,250,000 shares of the Common Shares in
exchange for all of his common stock in Daugherty Petroleum, Inc. Mr. Daugherty
has served as President of Daugherty Petroleum, Inc. since 1984. In 1995, Mr.
Daugherty was elected as Chairman of the Board of the Company.
James K. Klyman, age 43, has been a director since May 1992. For the
past five years Mr. Klyman has been a computer software designer and programmer
specializing in applied information technology.
Charles L. Cotterell, age 73, has been a director since June 1994. Mr.
Cotterell has been involved in the resources industry and has participated in
the natural gas and oil industries in Western Canada and the United States,
particularly in Kentucky. He is a Vice President of Konal Engineering Co. Ltd.,
is a past director of Mariner Mines, Ltd., Nordustrial, Ltd., Goliath Boat Co.,
and Dominion Power Press Equipment Co., Ltd., and the past President of Smith
Press Automation Co., Ltd.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
During fiscal 1998, the Board of Directors held ___ meetings and
approved actions on ___ separate occasions by unanimous consent without formal
meetings. The Board of Directors has established an Audit Committee and
Nominating Committee to oversee specific matters affecting the Company.
Committees. The Company does not have an Executive Committee. The
Company is required to have an Audit Committee of which the current members are
William S. Daugherty, James K. Klyman and Charles L. Cotterell. The Audit
Committee held one meeting during fiscal 1998. The Audit Committee meets with
the Company's
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independent accountants to review the Company's accounting policies, internal
controls and other accounting and auditing matters; makes recommendations to the
Board as to the engagement of independent accountants; and reviews the letter of
engagement and statement of fees relating to the scope of the annual audit and
special audit work which may be recommended or required by the independent
accountants.
The Nominating Committee, currently composed of William S. Daugherty
and Charles L. Cotterell, held one meeting during fiscal 1998. The functions
performed by the Nominating Committee include selecting candidates to fill
vacancies on the Board of Directors, reviewing the structure and composition of
the Board, and considering qualifications requisite for continuing Board
service. The Nominating Committee will consider candidates recommended by a
shareholder of the Company. Any such recommendation for the 2000 Annual General
Meeting of Shareholders should be provided to the Corporate Secretary of the
Company by March ___, 1999.
During the fiscal year ended December 31, 1998, each director attended
all meetings of the Company's Board of Directors and the respective Committees
on which he served.
Compensation Committee Interlocks and Insider Participation. The
Company does not have a Compensation Committee or other Board committee
performing an equivalent function. In establishing compensation levels, the
Board of Directors has endeavored to ensure the compensation programs for the
Company's executive officers were effective in attracting and retaining key
executives responsible for the success of the Company and were administered in
an appropriate fashion in the long-term best interests of the Company and its
shareholders. In that regard, the Board of Directors sought to align total
compensation for the Company's executive officers with the performance of the
Company and the individual performance of each executive officer in assisting
the Company in accomplishing its goals.
All actions of the Board with respect to Mr. Daugherty's compensation
are taken without his involvement. Mr. Daugherty and Charles L. Cotterell, one
of the directors of the Company, participated in deliberations concerning other
officer and key employee base compensation, while bonuses and incentive stock
options are authorized by the action of the entire Board of Directors.
Base Salary. The Board's policy with respect to 1998 base salaries for
executive officers was generally to keep them at appropriate levels in light of
what was customary in the industry. Mr. Daugherty's base compensation has not
been increased since September 1993. In 1996, Mr. Daugherty's annual salary was
reduced to $75,000.
Stock Options. The Board of Directors believes that to achieve the
Company's long-term growth objectives and to align management and its
shareholders' interests, it is in the best interest of the Company from time to
time to grant stock options to key members of its management and staff.
Consequently, on March 7, 1997, the Board of Directors adopted, subject to the
approval of the shareholders of the Company, a Stock Option Plan under Section
422 of the Internal Revenue Code of 1986, as amended. The Stock Option Plan is
administered by a Committee appointed by the Board of Directors, the members of
which are to be "Non-Employee Directors" as defined in Rule 16b-3 of the
Exchange Act. The members of the Committee are James K. Klyman and Charles L.
Cotterell. The Stock Option Plan provides that 3,000,000 shares of the Common
Stock are to be the subject of stock options, 2,000,000 of which are reserved
for Mr. Daugherty, and the remaining 1,000,000 reserved for other employees of
the Company as may be determined by the Committee.
VOTE REQUIRED
The three nominees receiving the greatest number of votes cast by the
holders of the Common Stock will be elected as directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE
NOMINEES FOR DIRECTORS OF THE COMPANY AS DESCRIBED HEREIN.
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Subject to shareholder ratification, the Board of Directors has
appointed Hill, Kistler & Co., L.L.P., a Cincinnati, Ohio based accounting firm
to replace Kraft, Rothman, Berger, Grill, Schwartz & Cohen, a Toronto,
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Ontario based accounting firm, to serve as the Company's independent public
accountants for the fiscal year ending December 31, 1999. Kraft, Rothman,
Berger, Grill, Schwartz & Cohen has served as the Company's independent public
accountants since 1992, but since the Company is moving its place of domicile
from British Columbia to Delaware, management has decided to appoint United
States based accountants. No disagreement over accounting practices of the
Company exists. Neither representatives of Hill, Kistler & Co., L.L.P. nor
Kraft, Rothman, Berger, Grill, Schwartz & Cohen are expected to be present at
the Meeting.
VOTE REQUIRED
The affirmative vote of a majority of the total number of shares of the
Common Stock present in person or represented by proxy at the Meeting is
required to approve the ratification of Hill, Kistler & Co., L.L.P. as the
Company's independent public accountants.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
SELECTION OF HILL, KISTLER & CO., L.L.P. AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.
DOMESTICATION
THE DOMESTICATION
The Company is proposing to continue its existence through a
"domestication" under Section 388 of the DGCL (the "Domestication") (also
referred to as a "continuation" under Section 37 of the BCCA). A copy of the
special resolution authorizing the Domestication to be voted on by the
shareholders is attached as EXHIBIT A. The continued, or domesticated,
corporation will become subject to the DGCL on the date of its domestication,
but will be deemed to have commenced its existence in Delaware on the date it
originally commenced existence in British Columbia. Under the DGCL, a
corporation becomes domesticated in Delaware by filing a Certificate of
Domestication and a Certificate of Incorporation for the corporation being
domesticated. A copy of the proposed form of the Certificate of Domestication of
the Company that will be filed in Delaware is attached as Exhibit B. A copy of
the Certificate of Incorporation of the Company that will be filed in Delaware
is attached as EXHIBIT C. The Domestication will be effective upon the filing of
such certificates and thereafter the Company will be subject to such Certificate
of Incorporation. The Company will be discontinued in British Columbia as of the
date a Certificate of Discontinuance is issued by the BCCA Director. Upon the
Domestication, the Board of Directors of the Company will adopt Bylaws, a copy
of which is attached as EXHIBIT D. Attached as EXHIBIT E and EXHIBIT F are
copies of Section 37 and Section 207, respectively, of the BCCA dealing with
dissenter's rights.
The Domestication will not interrupt the existence of the Company. Each
share of the Common Stock and the Preferred Stock will remain issued and
outstanding as a share of the Common Stock and the Preferred Stock of the
Company after its corporate existence is continued from British Columbia under
the BCCA and domesticated in Delaware pursuant to the DGCL. For a summary of
certain of the rights of shareholders of the Company before and after the
Domestication, see "Domestication - Effect of the Domestication on Shareholder
Rights."
Officers and Directors. The Company's Board of Directors currently
consists of three members, William S. Daugherty, James K. Klyman and Charles L.
Cotterell. Upon the Domestication, the Company's Board of Directors will consist
of the same three individuals who are currently directors of the Company and who
are named as the directors in the Certificate of Incorporation to be filed
pursuant to the Company's Domestication into Delaware. Additionally, immediately
following the Domestication, the officers of the Company will be William S.
Daugherty, Chairman of the Board, President and Chief Executive Officer, D.
Michael Wallen, Vice President and Secretary, and Daryl J. Greattinger, Chief
Financial Officer, all of whom are the current officers of the Company. See
"Management - Directors and Executive Officers" for more information concerning
such individuals.
Exchange of Share Certificates. As soon as practicable on or after the
Domestication, the Company's shareholders of record immediately prior to the
Domestication will be sent detailed instructions concerning the procedures to be
followed for submission of certificates representing the Common Stock and the
Preferred Stock to an exchange agent appointed by the Company (the "Exchange
Agent"), together with a form of transmittal letter to be sent to the Exchange
Agent at the time such certificates are submitted.
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After the Domestication, the Exchange Agent will deliver to any holder
who has previously submitted a duly completed and executed transmittal letter
and a certificate representing the Common Stock and the Preferred Stock, a
certificate issued by the Company representing an equal number of shares of the
Common Stock and the Preferred Stock, as the case may be, of the Company as a
Delaware corporation into which such shares of the Common Stock and the
Preferred Stock were converted.
After the Domestication but before a certificate representing Common
Stock or Preferred Stock is surrendered, certificates representing Common Stock
and Preferred Stock will represent the number of shares of the Common Stock and
the Preferred Stock of the Company as a Delaware corporation into which such
Common Stock and Preferred Stock were converted pursuant to the terms of the
Domestication. The transfer agent for the Company will be instructed to forward
to the Exchange Agent any certificates for shares of capital stock of the
Company otherwise delivered by the shareholder. The Exchange Agent will deliver
certificates representing the appropriate amount and type of the Company's
capital stock in accordance with the shareholder's instructions for transfer or
exchange.
Failure by a shareholder to return appropriate transmittal letters or
to surrender certificates representing Common Stock and Preferred Stock will not
affect such person's rights as a shareholder, as such shareholder's certificates
representing Common Stock and Preferred Stock following the Domestication will
represent the number of shares of the Common Stock and the Preferred Stock of
the Company as a British Columbia corporation into which such Common Stock and
Preferred Stock were converted pursuant to the terms of the Domestication, and
will present no material consequences to the Company.
CONDITIONS TO THE DOMESTICATION; SHAREHOLDER APPROVALS
Domestication. The Domestication is subject to, among other things, (i)
approval by the Company's shareholders of the special resolution authorizing the
Domestication (a copy of which is attached as EXHIBIT A) by the affirmative vote
of at least three-fourths of the Common Stock voting in person or by proxy at
the Meeting or any adjournments thereof (the holders of the Preferred Stock will
have no right to vote; however they will have dissenter's rights), and (ii) the
authorization of the BCCA Director (the Company intends to apply to the BCCA
Director to authorize the Domestication sufficiently in advance of the
Domestication in order to obtain such authorization as soon as possible
following approval of the Domestication by the Company's shareholders).
Notwithstanding the requisite shareholder approvals of the
Domestication, the Board of Directors of the Company has reserved the right to
terminate or abandon the Domestication without further shareholder approval if
the Board of Directors determines that the consummation of the Domestication
would be inadvisable or not in the best interests of the Company or its
shareholders, or if all of the respective conditions to consummation of the
Domestication have not occurred within a reasonable period of time.
PROCEEDINGS BEFORE GOVERNMENTAL AUTHORITIES
British Columbia Registrar. The Domestication is subject to the
authorization of the BCCA Director pursuant to Section 37 of the BCCA. If the
special resolution is passed by the requisite number of holders of the shares of
the Common Stock, the Company intends to apply to the BCCA Director for
authorization of the Domestication. The BCCA Director is empowered to authorize
the Domestication if, among other things, the BCCA Director is satisfied that
the Domestication will not adversely affect creditors or shareholders of the
Company and has set out five conditions in this regard.
Under the DGCL, the following will apply:
1. The property of the Company continues to be the property of the
Company, once domiciled in Delaware;
2. The Company, once domiciled in Delaware, continues to be liable for
the obligations of the Company prior to the Domestication;
3. An existing cause of action, claim or liability to prosecution is
unaffected;
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4. A civil, criminal or administrative action or proceeding pending by
or against the Company may be continued to be prosecuted by or against the
Company after the Domestication; and
5. A conviction against, or ruling, order or judgment in favor of or
against the Company prior to the Domestication may be enforced by or against the
Company after the Domestication.
Furthermore, the BCCA Director requires that an application for
authorization of a British Columbia corporation to continue in another
jurisdiction must be accompanied by:
1. A consent from the Corporations Tax Branch of the Ministry of
Revenue;
2. A consent from the British Columbia Securities Commission;
3. A legal opinion to the effect that the laws of the other
jurisdiction meet the requirements of Section 37 of the BCCA.
Delaware. Subject to receipt of the authorization of the BCCA Director
to the Domestication, the Company anticipates that it will file with the
Secretary of State of Delaware a Certificate of Domestication and a Certificate
of Incorporation under Section 388 of the DGCL, and that the Company will be
domesticated in Delaware on the date that all of the conditions to the
Domestication have been satisfied. Promptly thereafter, the Company intends to
give notice to the BCCA Director that the Company has been continued under the
laws of Delaware and, pursuant to Section 37 of the BCCA, request that the BCCA
Director issue a Certificate of Discontinuance bearing the same date as the date
shown in the Certificate of Incorporation issued under the DGCL.
Resales of the Common Stock. The Company will be relying on exemptions
contained in the applicable legislation of the relevant provinces of Canada for
the issuance of its shares of the Common Stock and the Preferred Stock pursuant
to the terms of the Domestication. The Company may but is not obligated to apply
for orders and rulings from various securities commissions and regulatory
authorities in the relevant provinces of Canada where required to the effect
that the shares of the Common Stock issuable in the Domestication may be resold
by former holders of the shares of the Common Stock of the Company without
restriction provided that the seller complies with certain formalities of
applicable legislation which presently include:
1. If the Company's shares which were exchanged for shares of the
Company as a Delaware corporation were subject to a hold period, that hold
period must have elapsed;
2. If the seller is an insider of the Company, there is no default by
the Company of any requirements of the applicable legislation;
3. The trade is not a distribution from the holdings of a control
person;
4. No unusual effort is made to prepare the market or create a demand
for the securities; and
5. No extraordinary commission or consideration is paid in respect of
the trade.
No assurances can be made that any such orders, rulings and approvals
will be applied for or obtained.
Resales of the Preferred Stock. Following the Domestication, the shares
of the Preferred Stock will continued to be subject to the same restrictions on
their resale as existed prior to the Domestication. On the date of this Joint
Proxy Statement/Prospectus there were 1,200,000 shares of the Preferred Stock
issued and outstanding.
PRINCIPAL REASONS FOR THE DOMESTICATION
The Domestication will result in the Company as a Delaware corporation
succeeding to all of the operations, assets and liabilities of Daugherty
Resources, Inc., a British Columbia, Canada corporation. The Board of Directors
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believes that, by domiciling in the United States, the Company will be able to
enhance shareholder value over the long term. The Board's belief is based, in
part, on the following factors:
1. By domiciling in the U.S., the marketability of the Common Stock
will be enhanced by raising the Company's profile in various capital markets;
and
2. By becoming subject to U.S. tax laws, the Company will be provided
with greater ease in dealing with income tax complexities associated with
multijurisdictional operations.
Furthermore, in the experience of management, potential debt and equity
capital sources and strategic partners in the U.S. are more comfortable dealing
with a U.S. corporation than a foreign corporation. Management believes this may
be because U.S. entities are likely to be more familiar with U.S. standards of
accounting, securities law disclosure requirements and legal principles.
The Company chose the State of Delaware to be its domicile because
Delaware, like British Columbia, has a modern and flexible corporate code. The
escalating risks and resultant costs of director liability have made it
increasingly difficult for corporations to find and retain competent directors,
and the Company believes the various indemnity and exculpation provisions of the
DGCL will help it to attract and retain competent directors. Delaware has an
active bar which is continually assessing and recommending improvements to the
DGCL, and the substantial body of settled case law under the DGCL adds greater
certainty in assessing risks associated with conducting business.
EFFECT OF THE DOMESTICATION ON SHAREHOLDER RIGHTS
On the Effective Date of the Domestication, the Company will be deemed
incorporated under the laws of the State of Delaware and will be governed by the
Certificate of Incorporation filed with the Certificate of Domestication and the
new Delaware Bylaws adopted in connection therewith. The discussion below sets
forth the rights of the shareholders of the Company following the Domestication.
Differences between the BCCA and the DGCL and between the Company's
Memorandum and Articles and the proposed Company Certificate of Incorporation
and Bylaws will result in various changes in the rights of shareholders of the
Company. The following summary of such differences describes the material
consequences of the Domestication to the Company's shareholders. This summary
does not purport to be exhaustive and is qualified in its entirety by reference
to the Company's Certificate of Incorporation, Bylaws, and Memorandum and
Articles. The text of the proposed Certificate of Incorporation and Bylaws are
included in this Joint Proxy Statement/Prospectus as EXHIBIT C and EXHIBIT D,
respectively, and the BCCA and the DGCL. A copy of the Company's Memorandum and
Articles, and the BCCA and the DGCL will be available for reference by the
shareholders of the Company or their legal advisers at the registered office of
the Company. For further discussion of certain provisions of the Company's
Certificate of Incorporation, see "Description of Securities."
Capital Structure. Under the Company's Certificate of Incorporation,
the total number of shares of capital stock that the Company will have the
authority to issue is 105 million, consisting of 100 million shares of the
Common Stock, par value $0.001 per share, and 5,000,000 shares of Preferred
Stock, par value $0.001 per share. In accordance with the DGCL, the Company's
Certificate of Incorporation grants the Board of Directors broad powers to fix
by resolution the powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock. Under the Company's
Memorandum, the Company presently has the authority to issue only 10 million
shares of the Common Stock and 1,200,000 shares of the Preferred Stock, each
class without par value per share.
No Bylaws under the BCCA. A number of corporate governance matters that
may be addressed in the bylaws of a Delaware corporation must be addressed in
the articles of a British Columbia company. The articles of a British Columbia
corporation can only be amended upon the approval by a three-fourths majority of
the votes cast, whereas the DGCL and the Company's Certificate of Incorporation
confer upon the Board of Directors the power to adopt, amend or repeal its
bylaws (which may also be adopted, amended or repealed by simple majority vote
of the shareholders). Thus, the Board of Directors of a Delaware corporation has
the power to make decisions on a number of matters with respect to which
shareholder approval would be required if amendments were to be made to the
articles of a British Columbia corporation, such as matters related to
shareholder meetings and voting; powers, number of
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members, committees, compensation and removal of members of the Board of
Directors; requisite notices to directors or shareholders; titles, elections,
salaries and terms of office of officers; certificates, transfers, record dates
and registered ownership of stock; and indemnification of officers, directors,
employees and agents.
Shareholder Approval; Vote on Extraordinary Corporate Transactions. The
BCCA generally requires that a greater number and diversity of corporate matters
be approved by a vote of shareholders than is required by the DGCL. Furthermore,
most of the matters for which the BCCA requires shareholder approval must be
approved by a three-fourths majority of the votes cast. The only material
matters with respect to which a simple majority is required are the election of
directors and the appointment and removal of auditors. Under the DGCL, mergers
or consolidations require the approval of the holders of a majority of the
outstanding stock of the corporation entitled to vote thereon except: (i) for a
corporation that survives the merger where the merger requires the issuance of
common stock not exceeding 20 percent of such corporation's shares outstanding
immediately prior to the merger, the merger agreement does not amend in any
respect the survivor's certificate of incorporation and shareholder approval is
not specifically mandated in the survivor's certificate of incorporation; and
(ii) for both corporations where the corporation surviving the merger was a 90
percent or greater parent of the other corporation. Unless a greater percentage
is required by the certificate of incorporation, a sale, lease or exchange of
all or substantially all the property or assets of a corporation or an amendment
to the certificate of incorporation also require the approval of the holders of
a majority of the outstanding stock entitled to vote thereon. In other
circumstances, unless the certificate of incorporation provides otherwise, a
matter may be approved under the DGCL by a simple majority of the votes cast
(assuming a quorum is present).
Supermajority Voting Provisions. A Delaware corporation may set forth
in its certificate of incorporation any greater majority ("supermajority") vote
requirements than required by law, thereby helping to assure that the status quo
of the matter voted upon is maintained. The Company's Certificate of
Incorporation under the DGCL does not contain supermajority vote requirements.
While the BCCA does not specifically allow for supermajority voting, the BCCA
allows the articles to add to the statutory list of matters that require a
three-fourths majority vote of shareholders. The Company's Articles do not
supplement such statutory list.
Amendments to the Charter. Under the BCCA, an amendment to a
corporation's memorandum requires the approval of a three-fourths majority of
the votes cast. Under the DGCL, an amendment to a corporation's certificate of
incorporation requires the approval of a majority of the outstanding stock
entitled to vote, unless such level of approval is increased by the certificate
of incorporation. In addition, under the DGCL, if the amendment to the
certificate of incorporation adversely affects the rights of a particular class
of stock, that class is entitled to vote separately on the amendment whether or
not it is designated as voting stock.
Place of Meetings. The BCCA requires all meetings of shareholders to be
held in British Columbia unless consent of the British Columbia Registrar of
Companies is otherwise obtained. The DGCL provides that meetings of the
shareholders shall be held at any place in or out of Delaware as may be
designated by or in the manner provided in a corporation's bylaws. The Bylaws of
the Company as a Delaware corporation provide that meetings of the shareholders
shall be held at any place designated by the Board of Directors, and if a
meeting place is not designated by the Board of Directors, then the meeting
shall be held at the Company's principal place of business.
Quorum of Shareholders. The Company Articles presently provide that a
quorum for shareholders' meetings consists of at least two shareholders, present
in person or represented by proxy, holding at least 10 percent of the shares
entitled to vote. In accordance with the DGCL, the Bylaws of the Company as a
Delaware corporation provide that a quorum consists of a majority of shares
entitled to vote, present in person or represented by proxy. Under the DGCL the
certificate of incorporation or bylaws may provide otherwise for a quorum, but
in no event may a quorum consist of less than one-third of the shares entitled
to vote at the meeting. The Bylaws of the Company as a Delaware corporation
provide that the holders of a majority of the voting power of the outstanding
shares of the Company entitled to vote generally in the election of directors,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders, except that when specified business is to be voted on by a class
or series voting as a class, the holders of a majority of the voting power of
the shares of such class or series shall constitute a quorum for the transaction
of such business.
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<PAGE> 29
Cumulative Voting. Cumulative voting permits each share of stock
entitled to vote in the election of directors to have such number of votes as is
equal to the number of directors to be elected. A shareholder may then cast all
of his votes for a single candidate or may allocate them among as many
candidates as he may choose. As a result, shareholders holding a significant
minority percentage of the outstanding shares entitled to vote in the election
of directors may be able to assure the election of one or more directors. The
BCCA does not provide for cumulative voting. While the DGCL provides for
cumulative voting, it does not require that cumulative voting be made available
to shareholders. The Company's Certificate of Incorporation under the DGCL does
not provide for cumulative voting.
Call of Meetings. In accordance with the BCCA, the Company's Articles
provide that one or more shareholders of the Company holding not less than five
percent of the issued voting shares of the Company may give notice to the
directors requiring them to call and hold a general meeting. The BCCA requires
that such meeting be held within four months of such notice. The DGCL provides
that a special meeting of the shareholders, for any purpose, may be called by
the Board of Directors or by such person or persons as may be authorized by the
certificate of incorporation or bylaws. The Bylaws of the Company as a Delaware
corporation provide that a special meeting of shareholders may be called by the
Board of Directors or by the holders of at least one-tenth of the shares
entitled to vote at such a meeting.
Form of Proxy and Information Circular. The BCCA and the Securities Act
(British Columbia) S.B.C. 1997, c. 418, require a reporting company, such as the
Company, to provide with notice of a general meeting a form of proxy for use by
every shareholder entitled to vote at such meeting, as well as an information
circular containing prescribed information regarding the matter to be dealt with
at and conduct of the general meeting. The DGCL does not require a corporation,
such as the Company, to solicit proxies or provide information regarding matters
to be dealt with at meetings other than a special meeting in which case notice
of the special meeting must state the purpose(s) for which the meeting was
called. Matters concerning disclosure are generally governed by the federal and
state securities legislation in the United States. Because the Company is
presently a "reporting issuer" under the Securities Act (British Columbia), and
will continue to be a reporting issuer thereunder notwithstanding the
Domestication, it is bound by the equivalent (or more stringent) provisions
described above that are contained in the Securities Act (British Columbia).
Shareholder Consent in Lieu of Meeting. Under the BCCA, shareholder
action on matters ordinarily requiring a simple majority vote may be taken
without a meeting if shareholders holding at least three-fourths of the
outstanding shares consent thereto in writing. For actions ordinarily requiring
a three-fourths majority vote, the written consent of all shareholders is
required. Under the DGCL, unless otherwise provided in the certificate of
incorporation, shareholders may act by written consent without a meeting if
holders of outstanding stock representing not less than the minimum number of
votes that would be necessary to take such action at an annual or special
meeting execute a written consent providing for such action. The Bylaws of the
Company as a Delaware corporation provide for action by less than unanimous
written consent of shareholders as allowed by the DGCL.
Director Qualification and Number. The BCCA prohibits certain persons
from serving as a director. Such prohibitions generally apply to persons under
age 18, undischarged bankrupts, persons found to be mentally infirm, companies
and persons convicted of certain offenses relating to corporate activities or
fraud or who have had certain registrations with the British Columbia Securities
Commission canceled. Additionally, a majority of the directors of an British
Columbia corporation must be Canadian residents and at least one director must
be a resident of the Province of British Columbia. The DGCL has no similar
direct prohibitions or requirements.
The number of directors of a Delaware corporation may be changed by
resolution of the directors if the certificate of incorporation or bylaws so
provide (as is the case with the Company's Bylaws). Under the BCCA, a reporting
company must have at least three directors. Additionally, the Board of Directors
may, between annual general meetings, increase the number of directors by up to
one-third of the current members and fill the resulting vacancies.
Classified Board. The DGCL permits, but does not require, the adoption
of a classified Board of Directors with staggered terms, with each class serving
staggered two or three year terms after the initial term. The BCCA does not
specifically provide for the adoption of a classified Board of Directors,
although, presumably, the Articles of a
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<PAGE> 30
British Columbia corporation could include such provisions. Neither the
Company's Certificate of Incorporation under the DGCL nor the Company Articles
provide for a classified Board of Directors.
Removal of Directors. Under the DGCL, directors may generally be
removed, with or without cause, by a vote of the holders of a majority of the
shares being voted. Under the BCCA, directors may be removed, with or without
cause, upon a three-fourths majority vote of shareholders. However, under the
DGCL, if the board is classified, directors may be removed only for cause,
unless the certificate of incorporation provides otherwise. Further, if a
director is elected by holders of a class or series of shares, the BCCA provides
that only the shareholders of that class or series can vote to remove that
director, with or without cause, whereas the DGCL provides that only the
shareholders of that class or series can vote to remove that director without
cause. Finally, in the case of a corporation having cumulative voting, under the
DGCL, a director may not be removed from office if the votes cast against the
director's removal would be sufficient to elect such director and such votes
could be voted cumulatively at an election at which the same total number of
votes were cast and the entire board is being elected or, if there are classes
of directors, the class of directors of which such director is a part is being
elected. The Company's Certificate of Incorporation does not provide for a
classified board or cumulative voting.
Personal Liability of Directors. The BCCA provides that every director
of a corporation, in exercising his powers and performing his functions, shall
act honestly and in good faith and in the best interests of the corporation and
shall exercise the care, diligence and skill of a reasonably prudent person.
Delaware case law has developed a similar duty of loyalty and duty of care,
which applies to actions by directors. The BCCA also specifically imposes
personal liability to a corporation upon its directors who vote for, or consent
to, a resolution that is in violation of applicable provisions of the BCCA
relating to the acquisition of a corporation's own shares, the payment of a
commission or the allowance of a discount in connection with subscriptions for
the corporation's shares, the giving of certain loans, guarantees of financial
assistance, authorizing a dividend payment if the corporation is insolvent or
thereby rendered insolvent or the carrying on or business or the exercise of a
power that a corporation is restricted from carrying on or exercising. In
contrast, the DGCL only specifically provides for director liability in the case
of the authorization of an unlawful dividend payment or unlawful stock purchase
or redemption. Additionally, the BCCA subjects a director to liability for
wrongful profits for failure to disclose an interest in a proposed transaction
and to abstain from voting on such transaction. The DGCL recognizes that an
"interested director" transaction may be voidable but only if it was not
approved by disinterested directors or by the shareholders or if it was not fair
to the corporation.
Enforcement of Director Liability. The BCCA provides that any
shareholder or director may, with the permission of an appropriate court, bring
an action in the corporation's name to enforce an obligation owed to the
corporation, including enforcement of a director's obligation to the corporation
or the seeking of damages for breach of a director's duties to the company.
Under the BCCA, the person proposing to bring suit must show that he has made
reasonable efforts to cause directors of the corporation to prosecute the
action, he is acting in good faith, it is prima facie in the interest of the
Company that the action be brought and in the case of an application by a
shareholder, that he is a shareholder at the time of the event giving rise to
the action. Similarly, in Delaware, a shareholder may bring a derivative action
on behalf of the corporation to enforce a corporate right, including to allege a
breach of a director's duty to the corporation. Delaware law requires that the
plaintiff in a derivative suit be a shareholder of the corporation at the time
of the wrong complained of and remain so through the duration of the suit, that
such plaintiff make a demand on the directors of the corporation to assert the
corporate claim unless such demand would be futile, and that such plaintiff be
an adequate representative of the other shareholders. Additionally, derivative
actions in Delaware are subject to a motion to dismiss by either the corporation
or a special litigation committee on the ground that prosecution of the suit is
not in the corporation's best interest.
Limitations on Director Liability. Under the DGCL, the certificate of
incorporation of a Delaware corporation may limit the personal liability of a
director to the shareholders of the corporation for monetary damages for breach
of fiduciary duty, except for: (i) any breach of a director's duty of loyalty to
the corporation or its shareholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) paying
a dividend or approving a stock repurchase in violation of statutory
limitations; or (iv) any transaction from which a director derived an improper
personal benefit. In the event that such a provision is included in a
corporation's certificate of incorporation, directors of such corporation are
protected against personal liability for monetary damages for breaches of their
duty of care. Under the DGCL, absent adoption of such a provision, directors can
be held
19
<PAGE> 31
monetarily liable in connection with decisions made on behalf of a corporation
if such decisions are not made with such care, including reasonable inquiry, as
an ordinarily prudent person in a like position would use. The Company's
Certificate of Incorporation includes a provision limiting the liability of its
directors in accordance with the provisions of the DGCL.
While the provision limiting the liability of directors under the DGCL
provides directors with protection from awards of monetary damages for breaches
of the duty of care, it does not eliminate the director's duty of care.
Accordingly, it would have no effect on the availability of equitable remedies,
such as an injunction or rescission, based upon a director's breach of the duty
of care and in no way would affect a director's liability under U.S. federal
securities laws. Furthermore, liabilities that may arise out of acts or
omissions occurring prior to the consummation of the Domestication would not be
covered, so that directors of the Company would remain potentially liable for
monetary damages in connection with such acts or omissions. The BCCA has no
comparable provision limiting the liability of directors of British Columbia
companies although it provides that a court may relieve a director from
liability if such director demonstrates that he acted honestly and reasonably
and that the circumstances warrant relief.
Indemnification of Directors, Officers and Employees. In accordance
with the provisions of the BCCA, the Company's Articles generally provide for
the mandatory indemnification of any director, officer, employee or agent of the
Company against all costs, charges and expenses, including attorney's fees,
settlement amounts and amounts paid to satisfy a judgment, incurred by reason of
his position with the Company if he acted honestly and in good faith with a view
to the best interests of the Company and exercised the care, diligence and skill
of a reasonably prudent person and with respect to any criminal action, he had
reasonable grounds for believing that his conduct was lawful. However, in the
case of directors of the Company, any proposed indemnification must be approved
by the appropriate court. In Delaware, a corporation may indemnify any of its
directors, officers, employees or agents against expenses (including attorney's
fees), judgments, fines and settlement amounts incurred by reason of his
position with the corporation if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to a criminal proceeding had no reasonable cause
to believe his conduct was unlawful. However, in the context of a derivative
suit, the indemnification may only be for expenses and may generally not be
provided if the party requesting indemnification has been found liable to the
corporation. The Bylaws of the Company as a Delaware corporation provide that
the Company will indemnify each director, officer and employee to the fullest
extent permitted by the DGCL.
Financial Assistance to Purchase Shares. The BCCA limits the
circumstances under and the extent to which a corporation may give financial
assistance to any person. Financial assistance cannot be given at a time when
the corporation is, or as a result of the assistance would be, insolvent and is
otherwise restricted to affiliated companies, employees in some circumstances,
owners of more than 90 percent of the issued shares and situations where there
are reasonable grounds for believing that, or the directors are of the opinion
that, to render such assistance is in the best interests of the company. The
DGCL requires only that the giving of financial assistance to a director,
officer or employee may be, in the judgment of the directors, reasonably
expected to benefit the corporation.
Oppression Remedies. Under the BCCA, a shareholder of a corporation has
the right to apply to a court on the grounds that the corporation is acting or
proposes to act in a way that is prejudicial to the shareholder. On such an
application, the court may make such order as it sees fit, including an order to
prohibit any act proposed by the corporation. The DGCL does not contain a
similar statutory provision although shareholders have similar rights under the
Delaware common law.
Rights of Dissent and Appraisal. The BCCA provides that shareholders
who dissent to certain actions being taken by a corporation may exercise their
right of dissent and require the corporation to purchase the shares held by such
shareholders at the fair value of such shares. The dissent right is applicable
when a corporation proposes to (i) continue out of the jurisdiction; (ii)
provide financial assistance to a person for the purchase of the corporation's
shares; (iii) sell the whole, or substantially the whole, of the corporation's
undertaking; (iv) enter into a statutory amalgamation; or (v) sell the whole or
part of its business or property upon liquidation. See EXHIBIT E (Section 37 of
the BCCA) and EXHIBIT F (Section 207 of the BCCA) attached hereto.
The DGCL is more restrictive and only grants appraisal rights to
dissenting shareholders of constituent corporations in mergers and
consolidations. Even in the merger/consolidation context, however, the DGCL does
not
20
<PAGE> 32
grant appraisal rights to the shareholders of a parent corporation in the event
of a "short-form" merger with its subsidiary. Furthermore, the DGCL does not
give appraisal rights in a merger or consolidation to holders of stock listed on
a national securities exchange or designated as a "national market system
security" or held of record by more than 2,000 shareholders, provided that such
holders receive shares of stock of the corporation surviving the merger or
consolidation or shares of stock of any other corporation which is either listed
on a national securities exchange or held of record by more than 2,000
shareholders. The BCCA does not contain a similar exemption from its provisions
relating to dissenter's rights of appraisal for amalgamations. In addition,
appraisal rights are available under the DGCL for sales of all or substantially
all of the corporation's assets, for mergers or consolidations for which
appraisal rights would not otherwise be available, and for certificate of
incorporation amendments if the certificate of incorporation so provides. The
Company's Certificate of Incorporation does not provide for these permissive
appraisal rights.
Investigations. The BCCA provides that on application of shareholders
holding not less than 20 percent of the issued shares of any class of a
corporation, or an application of a corporation, a court may appoint an
inspector to investigate the affairs and management of the corporation or its
affiliates. The DGCL does not contain a comparable provision.
Shareholder Register; Corporate Records. A Delaware corporation's stock
ledger, a list of its shareholders and other books and records may be inspected,
upon written demand, by shareholders of record for a purpose reasonably related
to their interests as shareholders. The BCCA includes similar provisions for
inspection of records.
Dividends and Distributions. The DGCL permits a corporation, unless
otherwise restricted by the certificate of incorporation, to pay dividends out
of surplus or, if there is no surplus, out of net profits for the current and
preceding fiscal year (provided that the amount of capital of the corporation is
not less than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets). In addition, the DGCL generally provides that a corporation may redeem
or repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation. The ability of a Delaware corporation to pay
dividends on, or to make repurchases or redemptions of, its shares is dependent
on the financial status of the corporation standing alone and not on a
consolidated basis. In determining the amount of surplus of a Delaware
corporation, the assets of the corporation, including stock of subsidiaries
owned by the corporation, must be valued at their fair market value as
determined by the Board of Directors if fair market value is less than
historical book value and may be valued at their fair market value if fair
market value is greater than historical book value.
Section 73 of the BCCA provides that directors of a corporation may set
in advance a date as the record date to determine the shareholders of the
corporation entitled to receive payment of a dividend. If a record date is set,
it must be not more than 49 days before the date on which the dividend is to be
paid. If no record date is set, the date of the resolution of the directors
declaring the dividend is deemed to be the record date. The BCCA does not
require the payment of dividends. However, Section 127(1)(c) of the BCCA
provides that directors of a corporation who vote for, or consent to, a
resolution authorizing the payment of a dividend if the corporation is insolvent
or the payment renders the corporation insolvent are jointly and severally
liable to the corporation to make good any loss or damage suffered by the
corporation as a result of such payment.
Pro Rata Redemption of Shares. The BCCA requires a corporation which
proposes to purchase its own shares other than through a stock exchange or from
an employee or former employee to make its offer to purchase pro rata to every
shareholder who holds shares of the class or series to be purchased. The DGCL
contains no similar provisions.
Business Combinations. After the Domestication, the Company will be
subject to the provisions of Section 203 of the DGCL ("Section 203"). Section
203 provides, with certain exceptions, that a Delaware corporation may not
engage in any of a broad range of business combinations with a person, or an
affiliate or associate of such person, who is an "interested shareholder" for
three years from the date that such person became an interested shareholder
unless: (i) the transaction resulting in a person becoming an interested
shareholder, or the business combination, is approved by the Board of Directors
of the corporation before the person becomes an interested shareholder, (ii) the
interested shareholder acquired 85 percent or more of the outstanding voting
stock of the corporation in the same transaction that makes such person an
interested shareholder (excluding shares owned by persons who are both officers
and directors of the corporation, and shares held by certain employee stock
ownership plans), or (iii) on or after the
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<PAGE> 33
date the person becomes an interested shareholder, the business combination is
approved by the corporation's Board of Directors and by the holders of at least
two-thirds of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested shareholder. Under Section
203, an "interested shareholder" is defined as any person who is (a) the owner
of 15 percent or more of the outstanding voting stock of the corporation, or (b)
an affiliate or associate of the corporation and who was the owner of 15 percent
or more of the outstanding voting stock of the corporation at any time within
the three years immediately prior to the date on which it is sought to be
determined whether such person is an interested shareholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by an appropriate provision in its certificate of incorporation. The
Company's Certificate of Incorporation contains such an exclusion in favor of
William S. Daugherty, the Chairman and Chief Executive Officer of the Company.
There is no comparable provision relating to business combinations under the
BCCA.
Anti-Takeover Effects. Certain powers granted to companies under the
DGCL may allow a Delaware corporation to make itself potentially less vulnerable
to hostile takeover attempts. These powers include the ability to (i) implement
a staggered Board of Directors (which prevents an immediate change in control of
the board), (ii) require that notice of nominations for directors be given to
the corporation prior to a meeting where directors will be elected (which may
give management an opportunity to make a greater effort to solicit its own
proxies), (iii) only allow the Board of Directors to call a special meeting
(which may thwart a raider's ability to call a meeting to make disruptive
changes), (iv) eliminate shareholder's action by written consent (which would
restrict a raider's actions to a meeting scenario), (v) remove a director from a
staggered board only "for cause" (which gives some protection to directors on a
staggered board from arbitrary removal), (vi) provide that the power to
determine the number of directors and to fill vacancies be vested solely in the
board (so that the incumbent board, not a raider would control vacant board
positions), (vii) provide for supermajority voting in certain circumstances such
as mergers and certificate of incorporation amendments, and (viii) issue "blank
check" preferred stock (which may be used to make a corporation less attractive
to a raider). Additionally, as discussed above, Section 203 of the DGCL may in
certain circumstances have an anti-takeover effect. The Company's Certificate of
Incorporation includes provisions for the issuance of "blank check" preferred
stock, the filling of vacancies on the Board of Directors by the remaining
directors, and advance notice requirements for director nominations and actions
to be taken at annual meetings.
The BCCA similarly has provisions that may have the effect of
discouraging hostile takeovers, including the ability to authorize a classified
Board of Directors, advance notice for meetings of shareholders, a requirement
that a director may be removed before the end of his term only by a
three-fourths majority vote, a provision allowing the Board of Directors to
increase the number of directors by up to one-third of the current members and
fill the resulting vacancies, and a requirement for a three-fourths majority
vote on most matters submitted to shareholders, including amendments to the
Company Articles.
DISSENT RIGHTS OF COMPANY SHAREHOLDERS
A shareholder who complies with the dissent procedure of Section 207 of
the BCCA is entitled to be paid by the Company the fair value of the shares held
by him in respect of which he dissents determined as of the close of business on
the day before the resolution relating to the Domestication is passed. The
dissent procedure of Section 207 of the BCCA is summarized below and
shareholders who may wish to dissent are specifically referred to the disclosure
set forth below, as failure by such shareholder to adhere strictly to the
requirements of such section may result in the loss of such shareholder's rights
under that section. Each shareholder who might desire to exercise these rights
of dissent should carefully consider and comply with the provisions of such
section and consult with his legal adviser.
The following summary is qualified in its entirety by reference to
Section 207 of the BCCA, a copy of which is attached as EXHIBIT F.
Company Act (British Columbia). Pursuant to the BCCA, a shareholder has
until two days before the Meeting at which the special resolution for the
Domestication of the Company from the Province of British Columbia to the State
of Delaware pursuant to Section 37 of the BCCA is to be considered, a copy of
which is attached as EXHIBIT E, to give a notice of dissent concerning his
shares of the Common Stock to the Company by registered mail to the registered
office of the Company at 625 Howe Street, Suite 600, Vancouver, British
Columbia, Canada V6C 2T6, with
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<PAGE> 34
respect to the special resolution. As a result of giving a notice of dissent the
shareholder may, on receiving from the Company a notice of intention to act
under Section 207 of the BCCA, require the Company to purchase all of his shares
in respect of which the notice of dissent was given.
A shareholder of the Company has the right to give a notice of dissent
with respect to the Domestication pursuant to Section 37(4) of the BCCA. If a
shareholder gives such notice of dissent, then Section 207 of the BCCA applies.
The essence of these provisions is that a dissenting shareholder can require the
Company to purchase all of his shares in respect of which he gives notice of
dissent. The price to be paid for his shares is their "fair value" as of the day
before the date on which the resolution for Domestication is passed, that is,
the day before the Meeting which is scheduled to be held on May 10, 1999. "Fair
value" is typically the last quoted price on the day prior to the date the
resolution is considered; however, "fair value" may also be set by agreement of
the Company and the dissenting shareholders or application may be made to an
appropriate court to determine "fair value." In the event that a court
application is made, each party typically bears its own costs although the court
has the power to award costs against a party depending on the circumstances.
A shareholder's right to give a notice of dissent with respect to the
Domestication will lapse if not exercised two days before the Meeting at which
the special resolution for the Domestication is to be passed. Further, a notice
of dissent ceases to be effective and constitutes a waiver of the right to
dissent if the shareholder fails to vote against the resolution for the
Domestication. Thus, a notice of dissent will cease to be effective if the
shareholder votes in favor of the resolution for the Domestication or returns an
unmarked proxy which is not revoked prior to the Meeting.
Section 200 of the BCCA sets out the rights of a shareholder to apply
to a court for relief in certain circumstances. By way of example, a shareholder
may apply to a court for relief if he believes the proposed Domestication is
unfairly prejudicial to him.
Any shareholder who is uncertain of his rights under Sections 37(4),
200 and 207 of the BCCA and who wishes to exercise any of those rights should
consult legal counsel in British Columbia.
General Corporation Law of the State of Delaware. Shareholders of the
Company will not be entitled to dissenter's or appraisal rights under the DGCL
in connection with the Domestication.
VOTE REQUIRED
The special resolution relating to the Domestication will not be
effective unless passed at the Meeting by at least three-fourths of the votes
cast by the holders of the Common Stock as a group. The holders of the Preferred
Stock do not have any right to vote with respect to the Domestication. However,
under the BCCA, the holders of the Preferred Stock will have dissenter's rights.
EXHIBIT A to this Joint Proxy Statement/Prospectus contains the text of
the special resolution with respect to the Domestication to be submitted to the
shareholders at the Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE DOMESTICATION.
PRICE RANGE OF THE COMMON STOCK
The Company's Common Stock trades on The Nasdaq SmallCap Market in the
United States. There is no trading of the Common Stock in Canada. The range of
the high and low bid information for the Common Stock for each full quarterly
period within the two most recent fiscal years is shown on the following table.
As of April ___,1999, the Company was authorized to issue 10,000,000 shares of
the Common Stock and 1,200,000 shares of the Preferred Stock, of which there
were issued and outstanding ___ shares of the Common Stock and 1,200,000 shares
of the Preferred Stock. No dividends have been declared or paid with respect to
the Common Stock or the Preferred Stock during any period. The prices of the
shares of the Common Stock listed below have been adjusted to take into account
the consolidation of the capital stock of the Company on a one share for five
shares basis which occurred on June 22, 1998.
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<TABLE>
<CAPTION>
MAR. 31, DEC. 31, SEPT. 30, JUN. 30, MAR. 31, DEC. 31, Sept. 30, Jun. 30,
QUARTER ENDED 1999 1998 1998 1998 1998 1997 1997 1997
------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Bid Price $ $ $ $1.375 $1.405 $1.875 $1.875 $2.50
Low Bid Price $ $ $ $1.0938 $1.25 $1.095 $1.405 $2.03
</TABLE>
The Nasdaq SmallCap Market quotations represent interdealer prices,
without mark-ups, commissions, etc. They may not necessarily be indicative of
actual sales prices.
As of April ___, 1999, there were ___ holders of record of the Common
Stock, of whom ___ were United States shareholders holding a total of ___ shares
or approximately ___ percent of the issued and outstanding shares of the Common
Stock.
FOREIGN LAWS AFFECTING THE COMMON AND PREFERRED STOCK
Exchange Controls and Other Limitations. There are no governmental
laws, decrees or regulations in Canada relating to restrictions on the
import/export of capital or affecting the remittance of interest, dividends or
other payments to non-resident holders of the shares of the Common or the
Preferred Stock. Any such remittances to United States residents, however, are
subject to a 15 percent withholding tax pursuant to Article X of the reciprocal
tax treaty between Canada and the United States. (See below).
Except as provided in the Investment Canada Act, there are no
limitations under the laws of Canada, the Province of British Columbia or in the
charter or any of the constituent documents of the Company on the right of
foreigners to hold and/or vote shares of the Common Stock or to hold shares of
the Preferred Stock.
The Investment Canada Act essentially requires a non-Canadian making an
investment to acquire control of a Canadian business, the investment in which
exceeds $150,000,000, to file an application for review with Investment Canada,
the Canadian federal agency created by the Investment Canada Act. Where the
acquisition of control is indirect and made by a non-Canadian (other than an
American, as defined) (for example by the purchase of shares in a controlling
parent corporation which has a Canadian business subsidiary) the threshold is
$500 million. For Americans, there is no review of such indirect acquisitions.
The proposed investment, if above the threshold, may not proceed unless the
Investment Canada agency and its responsible minister are satisfied that the
investment will be of benefit to Canada.
A Canadian business is defined in the Investment Canada Act as a
business carried on in Canada that has a place of business in Canada, an
individual or individuals in Canada who are employed or self-employed in
connection with the business, and assets in Canada used in carrying on the
business. An American, as defined in the Investment Canada Act, includes an
individual who is a United States citizen or a lawful permanent resident of the
United States, a government or governmental agency of the United States, an
American-controlled entity, corporation or limited partnership, and a
corporation, limited partnership or trust of which two-thirds of its directors,
general partners or trustees, as the case may be, are Americans.
The acquisitions of certain Canadian businesses are excluded from the
$150,000,000 threshold and remain subject to review in any event. These excluded
businesses are oil, gas, uranium, financial services (except insurance),
transportation services and cultural and broadcast media services (i.e., the
publication, distribution or sale of books, magazines, periodicals, other than
printing or typesetting businesses, television and radio services).
Taxation. Generally, dividends paid by Canadian corporations to
non-resident shareholders are subject to a withholding tax of 25 percent of the
gross amount of such dividends. However, Article X of the reciprocal tax treaty
between Canada and the United States reduces to 15 percent the withholding tax
on the gross amount of dividends paid to residents of the United States. A
further five percent reduction in the withholding rate on the gross amount of
dividends is applicable when a United States corporation owns at least 10
percent of the voting stock of the Canadian corporation paying the dividends.
A non-resident of Canada who holds shares of the Common or the
Preferred Stock of the Company as capital property will not be subject to tax on
capital gains realized on the disposition of such shares unless such shares are
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<PAGE> 36
"taxable Canadian property" within the meaning of the Canadian Income Tax Act
and no relief is afforded under any applicable tax treaty. The shares of the
Common and the Preferred Stock would be "taxable Canadian property" of a
non-resident if at any time during the five year period immediately preceding a
disposition by the non-resident of such shares not less than 25 percent of the
issued shares of any class of the Company belonged to the non-resident, the
person with whom the non-resident did not deal at arm's length, or to the
non-resident and any person with whom the non-resident did not deal at arm's
length.
CAPITALIZATION
After taking into account the consolidation of the capital stock of the
Company on a one share for five shares basis which occurred on June 22, 1998,
the following table sets forth the capitalization of the Company at December 31,
1998, and March 31, 1999. This table should be read in conjunction with the
Company's Financial Statements and Notes thereto that are provided with this
Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999 (1)
----------------- ------------------
<S> <C> <C>
Stockholders' deficit:
Preferred Stock, no par value, 1,200,000 shares
authorized; 1,200,000 shares issued and outstanding on
December 31, 1998, and March 31, 1999, respectively ............ $X $X
Common Stock, no par value, 10,000,000 shares
authorized; ___ and ___ shares issued and
outstanding on December 31, 1998, and March 31, 1999,
respectively ................................................... X X
Accumulated deficit............................................... (X) (X)
--- ---
Total stockholders' equity........................................ $XXX $X
=== =
- ------------------
</TABLE>
(1) Does not give effect to the issuance of (i) ___ shares of the Common Stock
upon exercise of the Warrants; and (ii) ___ shares of the Common Stock upon
exercise of the Options.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the combined financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto provided with
this Joint Proxy Statement/Prospectus. Statements contained in this
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations," which are not historical facts may be forward-looking statements.
Such information involves risks and uncertainties, including those created by
general market conditions, competition and the possibility that events may occur
which could limit the ability of the Company to maintain or improve its
operating results or execute its primary growth strategy. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could be inaccurate, and there can therefore
be no assurance that the forward-looking statements included herein will prove
to be accurate. The inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Moreover, such forward-looking statements are
subject to certain risks and uncertainties which could cause actual results to
differ materially from those projected. Readers are cautioned not to place undue
reliance on these forward-looking statements that speak only as of the date
hereof.
RESULTS OF OPERATIONS
Three Months Ending March 31, 1999. For the three month period ending
March 31, 1999, the Company's gross revenues increased $___ to $___ from $___
for the same period in 1998. The Company experienced a net loss of $___ in this
period compared to a net loss of $___ in the same period of 1998.
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<PAGE> 37
The Company's gross revenues were derived from drilling contract
revenues of $___ (___ percent) from natural gas and oil operations and
production revenues of $___ (___ percent) and lumber sales and product
manufacturing revenues of $___ (___ percent).
The increase in gross revenues of $___ was attributable to the
increased drilling activities and lumber sales during the period. Contract
revenues from drilling activities increased by $___ from $___ in the first three
months of 1998 to $___ in the first three months of 1999. Manufacturing revenues
related to Red River Hardwoods, Inc. increased by $___ from $___ in the first
three months of 1998 to $___ in the first three months of 1999.
During the first three months of 1999, total direct costs increased by
$___ to $___ compared to $___ in the first quarter of 1998. These direct costs
included Red River Hardwoods, Inc.'s expenses and drilling costs for ___ natural
gas wells.
Fiscal 1998 - 1997. With the acquisition of Daugherty Petroleum, Inc.
in the fourth quarter of 1993, the Company began a strategy of aggressively
acquiring natural gas and oil properties in southeastern and western Kentucky.
Daugherty Petroleum, Inc. has provided the Company with a diversified asset base
which includes natural resources other than its prospective gold and silver
mining properties and has also increased the Company's asset base. During 1998,
management continued to invest in areas it deemed critical in developing an
infrastructure suitable to support its future growth. These areas included
ongoing expenses in management, professional and operational personnel and other
expenses deemed necessary to position the Company for future acquisitions and
financing. Also, on November 17, 1996, Daugherty Petroleum, Inc. acquired an 80
percent interest in Red River Hardwoods, Inc., a dimensional hardwood
manufacturing company.
Historically, the Company's revenues have been realized from two
primary sources. The first is from its interests in the producing natural gas
and oil wells it operates and in which it owns interests. The second source of
revenue for the Company has been derived from its activities as "turnkey
driller" and operator for various drilling programs in its geographic area.
During 1996 and 1997, Daugherty Petroleum, Inc. reduced its dependence on
activities as "turnkey driller" for private investors and instead concentrated
on joint ventures with industry partners. In 1998, approximately ___ percent of
the Company's revenues were derived from joint venture and partnership drilling.
Natural gas and oil operations and revenues accounted for ___ percent of the
revenues. Lumber sales and manufacturing sales related to Red River Hardwoods,
Inc. accounted for ___ percent.
For the year ending December 31, 1998, the Company's gross revenues
increased ___ percent to $___ from $___ for the same period in 1997. The
Company's gross revenues were derived from turnkey contract revenues of $___
(___ percent); natural gas and oil production revenues of $___ (___ percent);
operating revenues of $___ (___ percent); and lumber sales of $___ (___
percent). The increase in gross revenues was attributable primarily to an
increase in lumber sales related to Red River Hardwoods, Inc. Lumber sales
increased by $___ from $___ in 1997 to $___ in 1998. Contract revenues from
turnkey drilling activities increased by $___ from $___ in 1997 to $___ in 1998.
The Company concentrated on developing drilling prospects for its own drilling
efforts during 1998.
During 1998, total operating expenses were $___ compared to $___, for
an increase of $___. Consulting and management fees increased by $___ due to
additional out-sourcing and management bonuses. Goodwill increased by $___ to
$___ due to Red River Hardwoods, Inc. Legal fees increased due to the Company's
decision to proceed with moving the Company's domicile from British Columbia to
Delaware.
The Company experienced a net loss of $___ in 1998 compared to a net
loss of $___ in 1997. The increase in net loss was primarily a result of
increased interest, consulting, promotional expenses, and losses on disposition
of assets.
The Company believes there are four factors that will increase its
revenues and reduce losses. First, the natural gas gathering systems completed
in 1997 and currently under construction will allow the Company to increase its
natural gas flow. Second, the drilling contracts signed in late 1997 and 1998,
and Letters of Intent to drill up to 120 wells will allow the Company to
increase both its turnkey contract revenues and its natural gas production
revenues. Third, natural gas prices in Appalachia have remained strong for 1998,
and Daugherty Petroleum, Inc.
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<PAGE> 38
signed a one year gas sales contract for 1998 production for $2.47 per MCF.
Fourth, Red River Hardwoods, Inc., an 80 percent owned subsidiary, has
experienced increased sales in the first quarter of 1998.
Fiscal 1997 - 1996. With the acquisition of Daugherty Petroleum, Inc.
in the fourth quarter of 1993, the Company began a strategy of aggressively
acquiring natural gas and oil properties in southeastern and western Kentucky.
Daugherty Petroleum, Inc. has provided the Company with a diversified asset base
which includes natural resources other than its prospective gold and silver
mining properties and has also increased the Company's asset base. During 1997,
management continued to invest in areas it deemed critical in developing an
infrastructure suitable to support its future growth. These areas included
ongoing expenses in management, professional and operational personnel and other
expenses deemed necessary to position the Company for future acquisitions and
financing. Also, on November 17, 1996, Daugherty Petroleum, Inc. acquired an 80
percent interest in Red River Hardwoods, Inc., a dimensional hardwood
manufacturing company.
Historically, the Company's revenues have been realized from two
primary sources. The first is from its interests in the producing natural gas
and oil wells it operates and in which it owns interests. The second source of
revenue for the Company has been derived from its activities as "turnkey
driller" and operator for various drilling programs in its geographic area.
During 1996 and 1997, Daugherty Petroleum, Inc. reduced its dependence on
activities as "turnkey driller" for private investors and instead concentrated
on joint ventures with industry partners. In 1997, approximately 23.05 percent
of the Company's revenues were derived from joint venture and partnership
drilling. Natural gas and oil operations and revenues accounted for 8.22 percent
of the revenues. Lumber sales and manufacturing sales related to Red River
Hardwoods, Inc. accounted for 68.73 percent.
For the year ending December 31, 1997, the Company's gross revenues
increased 125.65 percent to $4,846,157 from $2,147,606 for the same period in
1996. The Company's gross revenues were derived from turnkey contract revenues
of $1,116,890 ( 23.05 percent); natural gas and oil production revenues of
$304,775 (6.29 percent); operating revenues of $93,543 (1.93 percent); and
lumber sales of $3,330,949 (68.73 percent). The increase in gross revenues was
attributable primarily to an increase in lumber sales related to Red River
Hardwoods, Inc. Lumber sales increased by $2,626,175 from $704,774 in 1996 to
$3,330,949 in 1997. Contract revenues from turnkey drilling activities increased
by $89,239 from $1,027,651 in 1996 to $1,116,890 in 1997. The Company
concentrated on developing drilling prospects for its own drilling efforts
during 1997.
During 1997, total operating expenses were $2,397,780 compared to
$1,451,755, for an increase of $946,025. Consulting and management fees
increased by $94,513 due to additional out-sourcing and management bonuses.
Goodwill increased by $28,359 to $210,467 due to Red River Hardwoods, Inc. Legal
fees increased due to the Company's decision to proceed with moving the
Company's domicile from British Columbia to Delaware.
The Company experienced a net loss of $1,708,418 in 1997 compared to a
net loss of $733,973 in 1996. The increase in net loss was primarily a result of
increased interest, consulting, promotional expenses, and losses on disposition
of assets.
The Company believes there are four factors that will increase its
revenues and reduce losses. First, the natural gas gathering systems completed
in 1997 and currently under construction will allow the Company to increase its
natural gas flow. Second, the drilling contracts signed in late 1997 and 1998,
and Letters of Intent to drill up to 120 wells will allow the Company to
increase both its turnkey contract revenues and its natural gas production
revenues. Third, natural gas prices in Appalachia have remained strong for 1998,
and Daugherty Petroleum, Inc. signed a one year gas sales contract for 1998
production for $2.47 per MCF. Fourth, Red River Hardwoods, Inc., an 80 percent
owned subsidiary, has experienced increased sales in the first quarter of 1998.
Fiscal 1996 - 1995. For the year ending December 31, 1996, the
Company's gross revenues increased 4.65 percent to $2,147,606 from $2,052,222
for the same period in 1995. The Company's gross revenues were derived from
turnkey contract revenues of $902,140 (42.01 percent); natural gas and oil
production revenues of $458,618 (21.35 percent); operating revenues of $82,074
(3.8 percent); and lumber sales of $704,774 (32.82 percent). The increase in
gross revenues was attributable primarily to an increase in lumber sales related
to Red River Hardwoods, Inc.. Lumber sales increased by $476,581 from $228,303
in 1995 to $704,774 in 1996. Contract revenues from turnkey drilling activities
declined by $377,975 from $1,280,115 in 1995 to $902,140 in 1996. The Company
concentrated on
27
<PAGE> 39
developing drilling prospects for its own drilling efforts in the last half of
1996, therefore, reducing prospects available for drilling partnerships.
During 1996, total operating expenses were $1,451,755 compared to
$1,829,616, in 1995 for a decrease of $377,861. Total operating expenses
included Red River Hardwoods, Inc.'s expenses from November 18, 1996, the date
of the acquisition, to year end 1996. Consulting and management fees decreased
by $114,872. Goodwill amortization increased marginally by $3,152 to $182,108
due to the acquisition of Red River Hardwoods, Inc. Legal fees and advertising
and promotion expenses decreased due to the Company's decision not to sponsor a
year end drilling program.
The Company experienced a net loss of $733,973 in 1996 compared to a
net loss of $1,440,003 in 1995. The decrease in net loss was primarily a result
of increased revenues as a result of lumber sales related to Red River
Hardwoods, Inc. and decreased expenses.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ending March 31, 1999. The Company continues to acquire
natural gas and oil properties. Daugherty Petroleum, Inc. has provided the
Company with a diversified asset base which includes natural resources other
than its original gold and silver mining properties. During the first three
months of 1999, management continued to invest in areas it deemed crucial in
developing an infrastructure suitable to support future growth. These areas
included ongoing expenses in management, professional and operational personnel,
and other expenses deemed necessary to position the Company for future
acquisitions and financing.
Historically, the Company's revenues have been from its interests in
the producing natural gas and oil wells it operates and in which it owns
interest, from its activities as "turnkey driller" and operator for various
drilling programs in its geographic area, and sales of wood products. Daugherty
Petroleum, Inc. has reduced its dependence on activities as "turnkey driller"
for private investors and instead concentrated on joint venture with industry
partners. During the first three months of 1999, approximately ___ percent of
the Company's revenues were derived from joint venture drilling. Natural gas and
oil operations and revenues accounted for ___ percent of the revenues.
Manufacturing sales related to Red River accounted for ___ percent of the
revenues.
Working capital for the period ending March 31, 1999, was a negative
$___, compared to the same period in 1998, when working capital was a negative
$___.
During the first three months of 1999, and compared to the same period
in 1998, the changes in the composition of the Company's current assets were:
cash balances decreased $___ from $___ to $___; accounts receivable balances
decreased $___ from $___ to $___; and inventories increased $___ from $___ to
$___. Other current assets such as prepaids and notes receivable decreased $___
from $___ to $___. Overall, current assets decreased by $___ to $___.
Current liabilities for the period ended March 31, 1999 were $___
compared to $___ for the period ended March 31, 1998. Drilling pre-payments
expected to be used during 1999 accounted for $___ of the increase.
While management believes that its cash flow resulting in operating
revenues will contribute significantly to its short-term financial commitments
and operating costs, it has continued to refine its long range strategy in 1999
to meet the Company's financial obligations. This strategy involves:
- ACQUISITION OF REVENUE-PRODUCING PROPERTIES: In November 1997,
Daugherty Petroleum, Inc. signed a Letter of Intent to acquire
producing oil and gas properties in Kentucky, Louisiana and
Tennessee. Management believes that the addition of these
properties will favorably impact the Company's cash flow.
Daugherty Petroleum, Inc. is continually reviewing existing
properties in its area of interest that are for sale. See
"Business - Oil and Gas Exploration and Production -
Environmental Energy, Inc. Oil and Gas Assets Acquisition."
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<PAGE> 40
- ACQUIRING A LINE OF CREDIT: The Company has received a
preliminary term sheet for a $1,000,000 line of credit from
Compass Bank of Houston, Texas. This credit facility was
secured in August of 1998. See "Business - Oil and Gas
Exploration and Production - Compass Bank Credit Facility."
- INSTALLATION OF ADDITIONAL NATURAL GAS GATHERING SYSTEM: The
Company plans to expand its natural gas pipeline by 45,000
feet in 1998. The extension will allow for substantially more
natural gas to be transported to market from wells drilled in
1997 and 1998.
- ADDITIONAL FUNDING FOR RED RIVER HARDWOODS, INC.: The Company
is seeking additional capital for Red River Hardwoods, Inc.
that will allow it to increase its inventory, which would
permit Red River Hardwoods, Inc. to operate at a more
efficient capacity, and thereby increase its revenues.
The Company plans to drill ___ wells during 1999 and will attempt to
earn interests ranging from 12.5 percent to 50 percent interest in each well it
drills. The Company's interest in these wells is expected to be financed by an
energy lender.
Year Ending December 31, 1998. Working capital for the period ending
December 31, 1998, was a negative $___, compared to the same period in 1997,
when working capital was a negative $___.
During 1998, the major changes in the composition of the Company's
current assets were: cash balances increased $___ from $___ to $___; accounts
receivable balances decreased $___ from $___ to $___; inventories increased $___
from $___ to $___; and other current assets such as prepaids and notes
receivable increased $___ from $___ to $___. The increase in cash balances was a
result of prepaid drilling money received late in 1998.
Current liabilities increased $___ from $___ to $___. The major
components of this growth were from the Company's increase in the current
portion of long term debt by $___ from $___ to $___, an increase in accounts
payable, prepaid drilling monies and accrued liabilities of $___ from $___ to
$___. Prepaid drilling monies accounted for $___ of this increase. Short term
bank loans decreased $___ from $___ to $___.
During 1997, the Company held negotiations with several financial
institutions and potential investors with the intent of securing financing
necessary to provide credit facilities for the Company to support existing and
future capital requirements. In December, 1996, Daugherty Petroleum, Inc. signed
a loan agreement with a subsidiary of Enron Capital and Trade Resources, Inc.,
in the amount of $340,000 providing financing for one well to be acquired and 50
percent of the drilling and completion costs of four natural gas wells. As of
December 31, 1998, Daugherty Petroleum, Inc. owed $___ on this credit line. It
is expected that, in addition to this credit facility, Daugherty Petroleum, Inc.
will secure additional loans to develop its existing natural gas leasehold
interests. The Company will see increased natural gas revenue when pipeline
facilities are installed to allow gas flow from wells drilled in 1997 that have
not been connected to the gas gathering system.
In 1997, operating capital was improved by the issuance of 1,086,467
shares of Common Stock valued at $457,974 in lieu of cash payments to various
consultants for services rendered. These shares reflected a total value of
$457,974 and were issued, without discount, at market bid prices ranging from $
0.38 to $0.50 per share under Form S-8 registration statements filed by the
Company.
Due to losses experienced by the Company in 1998, it did not utilize
any of the net operating loss carryforwards available to it for U.S. and
Canadian tax purposes. As of December 31, 1998, the Company has $___ in net loss
carry-forwards in the U.S. that will expire from 1999 through 2012. In addition,
for Canadian federal tax purposes, these carry-forwards are Canadian $___ and
expire at periods through 2004.
YEAR 2000 COMPLIANCE
The Company's field and administrative operations have been reviewed
for Year 2000 Compliance. Normal upgrades will result in essential operations
being Year 2000 compliant. Some remaining operations, such as non-essential
personal computers and non-financial software products, can be easily upgraded
at nominal cost and inconvenience. The Company has contacted its gas purchasers
and third party software and service vendors concerning
29
<PAGE> 41
Year 2000 compliance. Those third parties not already compliant have indicated
that they are working to be compliant. The Company will be preparing contingency
plans regarding those third parties that do not currently meet Year 2000
compliance standards. Costs incurred to date, future costs, implementation of
contingency plans and completion of modifications or replacements have not been
and are not expected to be material or pose a material risk.
BUSINESS
GENERAL
Daugherty Resources, Inc. (the "Company") is a diversified natural
resources company with assets in oil and gas, gold prospects, and a hardwood
manufacturing facility. Originally formed in 1979 to develop gold properties in
Alaska, the Company, through its 1993 acquisition of Daugherty Petroleum, Inc.,
has acquired substantial oil and gas interests in the Appalachian and Illinois
Basins. In 1996, Daugherty Petroleum, Inc. concluded its acquisition of an 80
percent interest in Red River Hardwoods, Inc., a lumber drying and dimensional
hardwood manufacturing facility based in Kentucky.
The Company's strategy is to continue to expand its base in natural
resources in the eastern part of the United States. To implement this strategy,
the Company emphasizes the following elements:
- Diversification of the Company's assets to take advantage of
natural resources located in the vicinity of its operations.
- Reserve growth through high potential developmental drilling.
- Balance between development drilling and acquisitions of
proved oil and gas properties.
- A dedication to research and development in the energy field.
- Conversion of the non-income producing gold assets to income
producing assets.
- Equity ownership and incentives to attract and retain
employees.
The Company has focused on its oil and gas drilling efforts through its
subsidiary Daugherty Petroleum, Inc. in the Appalachian and Illinois Basins.
Management has extensive experience in both basins, and the Company believes
that there are significant undiscovered reserve potential and opportunities in
the basins. The Company's concentration on these two basins helps keep
operational expenses to a minimum.
AVAILABLE INFORMATION
Pursuant to the Securities Act, the Company has filed a Registration
Statement with the Commission of which this Joint Proxy Statement/Prospectus
forms a part. This Joint Proxy Statement/Prospectus does not contain all of the
information contained in the Registration Statement and the exhibits thereto,
certain parts of which have been omitted in accordance with rules of the
Commission. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and, in each instance,
reference is made to the copy of the document so filed for a more complete
description of the matter involved, and each such statement is qualified in its
entirety by such reference.
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Commission.
The Registration Statement and the exhibits thereto, along with the
reports, proxy statements and other information filed by the Company pursuant to
the Exchange Act, are on file with, and may be examined without charge, at the
following public reference facilities of the Commission: 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York,
New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material may be obtained, at
prescribed rates, from
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<PAGE> 42
the Public Reference Room of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549. Any interested person may obtain information on
the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet web site that contains
reports, proxy and information statements, and other information, including
registration statements, annual reports, quarterly reports, and periodic
reports, of issuers who file electronically with the Commission. The address of
that web site is http://www.sec.gov.
OIL AND GAS EXPLORATION AND PRODUCTION
The Company is engaged through Daugherty Petroleum, Inc., which was
incorporated in 1984, in the business of acquiring properties for the
exploration and development of oil and gas, including lease acquisitions,
participation in ventures involving other oil and gas companies and investors,
and in farmins from other producers. Daugherty Petroleum, Inc. performs these
services on behalf of the Company, investors in specific programs, and on a
turnkey basis for other oil and gas companies. Daugherty Petroleum, Inc. has
also acquired producing properties, both to operate and to resell. These
acquisitions often require workover attempts and the purchase of these
properties is usually based upon an assumed return on investment to the Company
of four years or less. During 1998, the Company acquired mineral leases in its
area of operations and expanded its reserve base through the drilling of ___
natural gas wells. For the three months ended March 31, 1999, the Company
drilled ___ natural gas wells and completed ___ natural gas wells. Drilling
operations for the first three months of 1999 were primarily related to a joint
venture on the Company's farmout acreage acquired from Equitable Resources
Energy Corporation.
Daugherty Petroleum, Inc. continues to construct a natural gas pipeline
gathering system and in 1998 completed ___ feet in the Appalachian Basin. For
the three months ended March 31, 1999, the Company extended its gas gathering
system by ___ feet. This system has allowed Daugherty Petroleum, Inc. to extend
its operations and will allow further exploration into areas previously
inaccessible to pipeline gathering systems.
Daugherty Petroleum, Inc. is active in gas exploration, development and
production in the western edge of the Appalachian Basin in eastern and
southeastern Kentucky. The Appalachian Basin, which has relatively shallow
production, is the oldest and, geographically, one of the largest producing
regions in the United States. In the Appalachian Basin, Daugherty Petroleum,
Inc. operates gas wells in Whitley, Knox, and Bell Counties, Kentucky. The wells
range between 1,500 and 4,000 feet in depth with daily production ranging
between 20 and 200 Mcf per day. The gas produced in the fields is of a good
quality and dry. The proximity of the gas fields to the northeastern United
States market has generally resulted in higher than average natural gas prices.
The majority of Daugherty Petroleum, Inc.'s oil is produced from leases
located in the western Kentucky portion of the Illinois Basin. The wells in
which Daugherty Petroleum, Inc. owns interests are less than 2,500 feet deep,
and each well typically produces one to five barrels daily. Daugherty Petroleum,
Inc. acquired most of its oil production through acquisitions. Most fields in
the Illinois Basin are eventually produced by waterflooding (secondary recovery
methods), and it is the intention of the Company to waterflood some of its
properties that have the characteristics to flood well. In addition to
waterflooding to enhance production, the Company intends to drill on proven
undeveloped leases that it owns.
Daugherty Petroleum, Inc. owns a net ___ Bcf or its equivalent of
proven natural gas reserves. The Company purchased .449 Bcf gas reserves in 1997
from Equitable Resources Energy Company. The Company sold its interests in 28
gas wells that contained 0.597 Bcf. For information relating to Daugherty
Petroleum, Inc.'s proven reserves and proven undeveloped reserves, see the
Consolidated Financial Statements provided with this Joint Proxy
Statement/Prospectus.
Dominion Reserves, Inc. On June 16, 1995, Daugherty Petroleum, Inc.
signed a joint venture agreement with Dominion Reserves, Inc. to drill 15 wells
in Knox County, Kentucky. The agreement also gave Dominion Reserves, Inc. a
first option to drill additional wells in an area of mutual interest with the
Company. These 15 wells have successfully been drilled.
Los Alamos National Laboratory and University of Houston's Oil Recovery
Center Research Project. On September 5, 1995, the Company signed a Cooperative
Research and Development Contract with Los Alamos National Laboratory and the
Regents of the University of California. The scope of the new contract is to
"investigate the design
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<PAGE> 43
of a development drilling program for gas fields." The Company continues to
transmit data on field geology and well production to the Los Alamos Laboratory
for digitization. After all the information is obtained and digitized, analysis
will be performed to study areas for potential development and assist the
Company in selecting drilling locations for greater enhancement of natural gas
reserves.
Equitable Resources Energy Company Farmout Agreement. On April 12,
1996, Daugherty Petroleum, Inc. entered into a Farmout Agreement with Equitable
Resources Energy Company to develop 5,400 acres in Knox and Bell Counties,
Kentucky. On October 3, 1997, Daugherty Petroleum, Inc. exercised its right
pursuant to the terms of the farmout, to acquire an additional block of 8,500
acres contiguous to the original farmout acreage. Daugherty Petroleum, Inc. has
negotiated drilling programs totaling 120 wells, some of which will be drilled
on the farmout acreage. To date, ___ wells have been successfully drilled on the
farmout acreage.
Enron Capital & Trade Reserves, Inc. On December 11, 1996, Daugherty
Petroleum, Inc. entered into a loan agreement with Joint Energy Development
Investments Limited Partnership, a Delaware limited partnership managed by Enron
Capital & Trade Resources, Inc., to fund four wells to be drilled on the EREC
farmout acreage during the first quarter of 1997. On March 21, 1997, Daugherty
Petroleum, Inc. drew the initial funds on the line of credit, and repaid the
loan in its entirety in September 1998.
Compass Bank Credit Facility. On August 26, 1998, Daugherty Petroleum,
Inc. received a $1,000,000 revolving credit facility from Compass Bank, Houston,
Texas. The facility is earmarked for funding the Company's portion of the first
wells in the 100-well commitment signed in November, 1997. The wells will be
drilled on three farmouts covering 18,000 acres in the Appalachian Basin.
Environmental Energy, Inc. Oil and Gas Assets Acquisition. On November
3, 1997, Daugherty Petroleum, Inc. signed a Letter of Intent to acquire oil and
gas producing properties and to enter into an extensive oil and gas exploration
and financing program with Environmental Energy, Inc. The Agreement provides on
closing that the Company will issue 1,200,000 shares of the Preferred Stock for
oil and gas assets located in Kentucky, Louisiana and Tennessee. The Preferred
Stock is to be convertible to shares of the Common Stock on a share-for-share
basis within two years. Also, the Company will issue Warrants for 1,600,000
shares of the Common Stock. The Warrants will be exercisable as follows: 400,000
Series A Warrants exercisable at $1.75 per share, 200,000 Series B Warrants
exercisable at $2.00 per share, 200,000 Series C Warrants exercisable at $2.50
per share, 200,000 Series D Warrants exercisable at $3.00 per share, 200,000
Series E Warrants exercisable at $3.50 per share, 200,000 Series F Warrants
exercisable at $4.00 per share, and 200,000 Series G Warrants exercisable at
$4.50 per share. The Series A-G Warrants may be exercisable for $1.00 while and
only while the Company's Common Stock becomes and remains de- listed from The
Nasdaq SmallCap Market.
Environmental Energy, Inc. Agreement to Build Utility Franchise. On
November 3, 1997, Daugherty Petroleum, Inc. signed an agreement to build and
operate a natural gas utility in Southern Kentucky that is owned by
Environmental Energy, Inc. and its affiliates. Under the Agreement, Daugherty
Petroleum, Inc. will be responsible for the design installation, construction
and subsequent operation of the utility. The Company is contractually obligated
to issue Options covering 400,000 shares of the Common Stock to Environmental
Energy. The Options are exercisable at $5.00 per share and will expire in 2002.
Niagara Oil, Inc. During 1996, Daugherty Petroleum, Inc. entered into
an agreement to sell its subsidiary, Niagara Oil, Inc. and to perform certain
rework services on the wells and waterflood equipment. The agreement requires
Daugherty Petroleum, Inc. to conclude negotiations with the United States
Environmental Protection Agency relating to the terms of an Administrative
Order, necessitated by violations of the prior operator, while detailing future
operations of the wells. The EPA has tendered a draft Administrative Order and
Daugherty Petroleum, Inc. has delivered its response. It is anticipated that,
following public hearing, the Administrative Order will be issued and Daugherty
Petroleum, Inc.'s sale of Niagara Oil, Inc. will be consummated during 1998.
Production and Sales. For the three month period ending March 31, 1999,
the Company's gross revenues increased $___ to $___ from $___ for the same
period in 1998. The Company experienced a net loss of $___ in this period
compared to a net loss of $___ in the same period of 1998.
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<PAGE> 44
The Company's gross revenues were derived from drilling contract
revenues of $___ (___ percent) from natural gas and oil operations and
production revenues of $___ (___ percent) and lumber sales and produce
manufacturing revenues of $___ (___ percent).
During 1998, ___ percent of the Company's operating revenues were
derived from its oil and gas related activities. The Company's oil and gas gross
revenues totaled $___ and were comprised of turnkey contract revenues of $___
(___ percent); oil and gas production revenues of $___ (___ percent); and
operating revenues of $___ (___ percent). Gas sales are dependent on a variety
of factors beyond the control of the Company, including competition with other
gas suppliers, seasonal demand for gas and access to gas markets through
transportation systems owned by third parties. The Company sells its natural gas
production on one and two year sales contracts. During the past several years
there had been a worldwide surplus of oil that placed downward pressure on oil
prices.
Productive Wells and Acreage. Daugherty Petroleum, Inc. owns fractional
working interests (cost bearing interests) in ___ gross (___ net) producing gas
wells and in___ gross (___ net) producing oil wells. The majority of Daugherty
Petroleum, Inc.'s gas production is located in southeastern Kentucky, in Whitley
and Knox Counties. Oil production is located primarily in Henderson and Hopkins
Counties in the western Kentucky portion of the Illinois Basin.
A "gross well" is a well in which the Company owns a working interest.
A "net well" is deemed to exist when the sum of the fractional working interests
owned by the Company in gross wells equals one.
As of December 31, 1998, Daugherty Petroleum, Inc., owned natural gas
and oil mineral leases covering ___ gross (___ net) acres of land. In 1998,
Daugherty Petroleum, Inc. had a budget of $___ for drilling exploratory wells,
and $___ for drilling developmental wells.
A "gross acre" is an acre in which a working interest is owned. The
number of gross acres represents the sum of acres in which a working interest is
owned. A "net acre" is deemed to exist when the sum of the fractional working
interests in gross acres equals one. The number of net acres is the sum of the
fractional working interests in gross acres expressed in whole numbers or
fractions thereof.
Drilling Activity. During 1998, Daugherty Petroleum, Inc., participated
in the drilling of ___ gross (___ net) wells and the deepening of ___ existing
wells. All of these wells were completed as wells capable of producing gas or
oil in commercial quantities. For the three months ended March 31, 1999, the
Company drilled ___ natural gas wells and completed ___ natural gas wells.
Natural Gas and Oil Reserves. The following table sets forth
information as to the Company's proved and proved developed reserves of natural
gas and oil as of December 31, 1998, 1997, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
GAS LIQUIDS
TOTAL PROVED RESERVES AS OF: (MCF) (BBL)
---------------------------- ----- --------
<S> <C> <C>
December 31, 1998
December 31, 1997 9,379,587 68,744
December 31, 1996 14,509,433 285,252
December 31, 1995 10,353,988 201,491
December 31, 1994 7,844,657 130,912
</TABLE>
As used herein, the term "Mcf" means thousand cubic feet, the term
"MMcf" means million cubic feet, the term "Bcf" means billion cubic feet, and
the term "Bbl" means barrel. Liquids include crude oil, condensate and natural
gas liquids.
The 1997 and 1998 oil and gas reserves were prepared by Wright and
Company, Inc., Nashville, Tennessee. The 1994, 1995 and 1996 oil and gas
reserves were prepared by the Company. No estimates of the Company's proved net
oil and gas reserves have been filed with or included in reports to any federal
authority or agency.
33
<PAGE> 45
Certain Factors Affecting Reserves. There are numerous uncertainties
inherent in estimating quantities of proved reserves, including many factors
beyond the control of the producer. The reserve data set forth herein represents
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of crude oil and natural gas that cannot be measured
in an exact manner, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. As a result, estimates of different engineers often vary. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimate. Accordingly, reserve
estimates are often different from the quantities of crude oil and natural gas
that are ultimately recovered. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they were based.
Marketing. The revenues generated by the Company's exploration and
production operations are highly dependent upon the prices of, and demand for,
natural gas, and to a lesser extent, crude oil. For the last several years,
prices of natural gas and crude oil have reflected a worldwide surplus of supply
over demand. The Company saw higher prices for its natural gas beginning in 1996
and in December 1997, signed a one year contract for up to 1.5 MMcf per day at
$2.47 per Mcf. The Company's efforts to expand its gathering system has improved
its access to new markets where prices more closely reflect the Appalachian hub
prices received by other operators in the Appalachian Basin.
Market conditions for oil and gas are the result of a number of factors
outside the control of the Company, including changing economic conditions,
seasonal weather conditions, loss of markets to alternative fuels, increased
foreign production, and governmental regulation. Historically, demand for, and
prices of, natural gas are seasonal, generally peaking in the winter when
heating requirements are highest.
Most of the Company's natural gas production is sold to Southern Gas
Company. A gas market is available through other potential customers, including
The Wiser Oil Company and Delta Natural Gas Company. The Company sells
approximately 60 percent of its crude oil production to Indiana Farm Bureau,
Inc., with the balance being sold to refineries such as South Kentucky
Purchasing and Bear Creek Oil. The Company believes that the loss of any
purchaser of the Company's oil and gas production would not have a materially
adverse affect on the Company.
Competition. The oil and gas industry is highly competitive. The
Company encounters competition from other oil and gas companies in all areas of
its operations, including the acquisition of producing properties. The Company's
competitors include major integrated oil and gas companies, numerous independent
oil and gas companies, individuals, and drilling and income programs. Many of
the Company's competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company. Such companies may be able to pay more for productive oil and gas
properties and exploratory prospects and to define, evaluate, bid for, and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and discover reserves in the future will depend upon its ability to
evaluate and select suitable properties and to consummate transactions in a
highly competitive environment.
Government Regulation. The Company's oil and gas operations are subject
to extensive state and federal regulations which have increased the cost of
doing business by requiring additional equipment or methods to eliminate or
reduce pollution and have increased financial exposure as in the case of federal
laws and regulations which may result in absolute liability for cleanup or
removal of contamination. Consequently, governmental agencies may from time to
time suspend or curtail operations considered to be detrimental to the ecology
or which may jeopardize public safety. The Company does not anticipate any
material adverse effect on its financial or competitive position as a result of
compliance with such laws and regulations.
GOLD AND SILVER PROPERTIES
The Company's mining properties are located on the southeastern end of
Unga Island in the Shumagin Islands group of the Aleutian Islands, approximately
579 miles southwest of Anchorage, Alaska. The mining properties cover over 381
acres, and are situated on 15 federal patented lode claims and one federal
patented millsite claim (the "Apollo- Sitka Claims," which consist of
approximately 280 acres) and six State of Alaska mining claims (the "Shumagin
Claims," which consist of approximately 101 acres). A three mile road connects
the two claim groups.
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<PAGE> 46
The Aleutians East Borough (the "AEB") made application to the State of
Alaska for surface rights on the Company's Shumagin Claims under the State
Municipal Entitlements Act of 1989. The stated purpose of the AEB's selection
was to obtain a land base which could support economic development. The Company
was notified of this selection and the state's proposed conveyance of the
surface land on December 1, 1994. The Company filed comments with the State of
Alaska. The Company simultaneously notified the Alaska Department of Natural
Resources, Division of Mining, of its intention to file an application to
convert the Shumagin Claims to a State Upland Mining Lease. The latter
application was subsequently submitted.
A Final Finding and Decision on the AEB's application, issued January
18, 1996, contained a provision making the application subject to valid existing
rights, easements, and reservations, including the Shumagin Claims. The grant
Decision became final after expiration of an appeal period February 7, 1996. The
Company retains the right to enter the land for drilling, developing, and
otherwise operating its mineral holding. No adverse impact on the Company's
Shumagin Claims or other exploration, development and mining activities on Unga
Island is anticipated as a result of the Shumagin Claims' surface rights being
transferred to the AEB. The Company's application for conversion of its Shumagin
Claims to a State Upland Mining Lease is pending.
Beginning in 1994, and continuing through 1996, the Company
aggressively pursued the development of its mining properties and expanded its
activities from those of simple maintenance of the physical property to
preparing for its future development. In 1996, an update of the engineering data
was completed to address reserve estimates as well as to review operational
considerations and issues which were addressed in a number of meetings held in
Anchorage, Alaska.
Certain Factors Affecting Reserves and the Indicated Resources. The
Company's Unga Island activities on the Apollo-Sitka and Shumagin Claims have
brought the project to the mid-exploration stage. The reserves and indicated
resources are estimates based on surface and underground sampling, drilling, and
geologic inference. Complete assurance cannot be given that all of the reserves
and indicated resources are recoverable. Metal price fluctuations, variations in
production costs and mine/mill recoveries, environmental considerations, the
results of exploration work and geologic interpretation, and other factors may
require restatement of the reserves and indicated resources. Neither the
reserves, indicated resources, nor projections of future operations should be
interpreted as assurances of the economic life or profitability of future
operations.
Gold Price Volatility. The Company's anticipated profitability with
respect to potential production mining activities, which could be initiated
after completion of further exploration work, would be significantly affected by
variations in the market price of gold. Gold prices can fluctuate widely and are
affected by factors such as inflation, interest rates, currency exchange rates,
central bank sales, forward selling by producers, supply and demand, global or
regional political and economic crises and production costs in major gold
producing regions such as South Africa and the republics of the former Soviet
Union. The aggregate effect of these factors, all of which are beyond the
Company's control, is impossible for management to predict.
The volatility of gold prices is illustrated by the following table of
the high, low and average afternoon fixing prices of gold per ounce in United
States dollars on the London Bullion Market:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High $ $361 $415 $396 $396
Low $ $283 $368 $372 $371
Average $ $322 $391 $384 $384
</TABLE>
Factors in Bringing a Mineral Project into Production. The Company's
decisions as to whether the mining properties contain mineable ore deposits and
whether any property should be placed in production will depend on the results
of phased exploration programs and feasibility studies, the recommendations of
management and technical support, and the willingness and capability of the
Company's co-venturers or other participants to proceed. This decision will
involve consideration and evaluation of several significant factors, including,
but not limited to (i) costs of bringing a property into production, including
exploration, preparation of feasibility studies, development work, and the
construction of exploration, development, and production mine/mill facilities;
(ii) availability and costs of
35
<PAGE> 47
financing; (iii) production costs; (iv) metal market prices; (v) compliance
requirements for environmental and mine safety and health regulations; and (vi)
political climate and governmental regulations. Exploration and development of
the properties may be expensive and take a number of years. There is no
assurance that the Company, its co-venturers, or other participants will have
the necessary funds for any of these activities.
THE MINING CLAIMS
The Apollo-Sitka Claims and Millsite. Development of the Apollo-Sitka
Claims started in 1887. The Claims were in production from 1891 through 1904.
During this period, 500,000 tons of ore were extracted with a recovery of
approximately 145,138 equivalent ounces of gold (0.29 ounces of equivalent gold
per ton). Approximately 17,000 feet of underground working were driven during
the mining of and search for oxide gold ore. A 60 stamp mill, located on the
property, recovered approximately 75 to 80 percent of the gold contained in the
oxide ore. Low recoveries of the lead, zinc, and copper sulfides contained in
the ore were made. Mining operations were shut down in 1904 after the
free-milling oxide reserve was depleted and exploratory work discovered only
precious metal-bearing copper-lead- zinc sulfide ores, which were uneconomical
to process with mill technology available at the time. The development of the
flotation mineral recovery process and improvements in that process over the
years may possibly have rendered the current Apollo-Sitka reserves and indicated
resources economical at current metal prices, although the Company has made no
efforts to determine the viability of the Apollo-Sitka Claims.
The Apollo-Sitka Claims contain attractive precious/base metal
exploration targets. Exploration would be conducted with a phased program
involving surface and underground diamond drilling, further rehabilitation and
equipping of the existing shafts, and level rehabilitation and geologic sampling
and mapping. The existing mine workings, including those rehabilitated by the
Company over 1980-1982, will be valuable during future underground exploration
and development work on the Apollo-Sitka Claims.
Apollo-Sitka Reserves. The following table sets forth information as to
the Company's probable reserves of gold and silver as of December 31, 1996, with
respect to the Apollo-Sitka Claims:
APOLLO-SITKA INDICATED RESOURCES AND RESERVES
<TABLE>
<CAPTION>
BLOCK OUNCES PER TON GOLD SILVER CLASSIFICATION
----- -------------- ---- ------ --------------
<S> <C> <C> <C> <C>
Apollo (1) 2,250,000 0.145(2) 8.0 Indicated Resource
Sitka (3)
A 7,000 0.203 2.67 Proven
B 1,650 0.188 2.42 Proven
C 8,150 0.131 1.73 Proven
----- ----- ----
Total/Average 16,800 0.167 2.19
======
D 1,560 0.212 2.85 Probable
E 2,390 0.096 1.45 Probable
F 3,680 0.002 0.22 Probable
G 14,670 0.001 1.02 Probable
------ ----- ----
Total/Average 22,300 0.026 1.06
======
- ---------------
</TABLE>
(1) Based solely on Frank R. Brown's report, APOLLO CONSOLIDATED GOLD MINING
COMPANY, 1935. Mr. Brown classified the reserve as "Probable." The reserve
is re-classified as an INDICATED RESOURCE, which conforms to current
guidelines for reporting resources and reserves.
(2) Based on the assumption that Mr. Brown used a $20.67 per ounce gold price
in his 1935 report.
(3) Alaska Apollo Gold Mines, Ltd., internal report, December 1983.
The Shumagin Claims. The Shumagin Claims are located approximately 2.5
miles north of the Apollo-Sitka Claims and consist of six State of Alaska mining
claims. They are connected to the Apollo-Sitka Claims by a three-mile road.
Gold and silver mineralization was encountered on the Shumagin Claims in 1983,
when the Company diamond drilled 3,190 feet. From its discovery in 1983 to
December 31, 1995, management estimates that the Company has spent $5.5 million
on exploration of the Shumagin Claims. Funds for this exploration were provided
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<PAGE> 48
by a party interested in the exploration of the claims (approximately $350,000
in 1989) and the balance through the sale of the Company's Common Stock in 1983
($3,002,272), 1985 ($416,305) and 1987 ($1,613,382).
An independently prepared reserve estimate, incorporating the ore
intercept in a deep 1990 diamond drill hole as well as the previous Company's
raw drill hole and trench data, was completed by Edward O. Strandberg, Jr.,
P.E., Mining Engineer, on March 30, 1995. The ore reserves are defined by 17,963
feet of diamond drilling, 1,827 feet of percussion drilling, 1,017 feet of
trenching, 286 feet of crosscuts, and 641 feet of drift. The reserves appear to
be contained in six ore shoots ranging over 1,334 feet vertically and 1,782 feet
horizontally. Strong structural control of the ore deposit is evident. The
deposit is open in all quadrants and at depth.
Ore continuity determined by the exploration work allows classification
of a reserve as drill/trench-inferred and inferred ore. Drill/trench-inferred
reserves are determined based upon geologic inference and drilling and/or
trenching. The inferred reserve is estimated by projection from or between
drill/trench-inferred ore blocks. Reserves in both classifications are mineable
reserves, based on a current site specific operating cost estimate for
underground cut and fill mining of the ore with shaft access.
A break-even cutoff grade of 0.27 ounces of gold per ton was determined
at a 200 ton per day cut and fill ore production rate and a $375 gold price. The
break-even grade is sensitive to mining and milling costs, the gold price, and
mill recovery. Fixed costs, such as royalties and gold refining charges further
impact the break-even cutoff grade. A minimum mining width of four feet and a
tonnage factor of 12 cubic feet per ton were employed.
Additional exploration work is necessary in order to verify the
reserves as demonstrated mineable reserves in the proven and probable measured
reserve categories, and to expand reserves. It is anticipated that this work
will include surface exploration, diamond drilling, shaft sinking and
exploration drifting, crosscutting, raising, and diamond drilling from
underground drill stations. A decision to place the ore deposit in production is
contingent upon favorable completion of further exploration and preliminary and
final feasibility studies.
The Aleut Corporation controls approximately 10 percent of the
Company's drill/trench-inferred gold reserves and approximately 31 percent of
the Company's inferred gold reserves. This distribution is based on vertical
claim line boundaries on the Shumagin patented claim pattern. The Aleut
Corporation's share in current gold reserves is assumed to be in ore outside the
vertical downward projection of the patented claim pattern. The ore reserve
division assumes no assertion of extralateral rights by either the Company or
the State of Alaska.
The increase in reserves over 1993-1994 levels reflected in the March
30, 1995, estimate is the result of the incorporation of a deep 1990 diamond
drill hold drill log and assay data and additional geologic interpretation in
the reserve analysis. Classification of the reserve as drill/trench-inferred and
inferred ore in the 1995 reserve estimate is consistent with current industry
practice.
The Shumagin Gold and Silver Reserves. The following table sets forth
information as to the Company's reserves of gold and silver as of December 30,
1995, with respect to the Shumagin Claims.
SHUMAGIN RESERVES (UNCUT AND UNDILUTED)
<TABLE>
<CAPTION>
OUNCES PER TON OUNCES
-------------- ------
TONS GOLD SILVER GOLD SILVER
---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Drill/Trench Inferred 149,283 0.891 4.24 133,005 633,081
Inferred 131,052 0.700 3.00 91,755 392,794
------- ----- ---- -------- -------
Total/Average 280,335 0.802 3.66 224,760 1,025,875
======= ======= =========
</TABLE>
The Shumagin reserve estimate was prepared by Edward O. Strandberg,
Jr., P.e., independent consulting mining engineer and documented in a report
dated March 30, 1995. Since March 30, 1995, no major favorable or adverse event
has occurred which the Company believes significantly affects or changes
estimated reserve quantities as of that date except for the lower market price
of gold.
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<PAGE> 49
Climate. The climate relating to the mining properties is relatively mild
due to the proximity of the Japanese Current. The temperature rarely falls below
zero degrees Fahrenheit and the ocean has a mean temperature of 53 degrees
Fahrenheit. The annual average rainfall on Unga Island is between 45 and 50
inches, one-third of this falling as snow. Unga Island is on the same latitude
as Ireland and Denmark.
Competition. The mining industry is intensely competitive. The Company
competes with numerous individuals and companies, including major mining
companies which have greater technical and financial resources than the Company.
The level of competition for desirable mining leases, suitable prospects for
drilling operations, and for project funds is high.
Permitting. Various permits are required from governmental bodies for
exploration, development, and mining operations to be conducted. No assurance
can be given that such permits will be received, or that environmental standards
imposed by federal, state, or local authorities will not be changed with
material adverse effects on the Company=s activities. Compliance with such laws
may cause delays and require additional capital. The Company may be subject to
environmental damage liability which it may elect not to insure against due to
prohibitive premium costs and other reasons. The Company continues to respect
and make every effort to preserve the environment and terrain of Unga Island.
The Company is in material compliance with all federal, state and local laws
relating to current activities.
RED RIVER HARDWOODS, INC.
On November 18, 1996, pursuant to a plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code, Daugherty Petroleum, Inc. acquired an 80
percent interest in Red River Hardwoods, Inc., a lumber dimension production
facility located in Clay City, Kentucky. Red River Hardwoods, Inc. produces
rough semi-machined and fully-machined wood component products for the
construction and furniture industries. These components include interior trim
and mouldings, hardwood flooring, and furniture parts. The Company purchases
green lumber from local saw mills and kiln dries the lumber used in its
operations.
Subsequent to the bankruptcy, Daugherty Petroleum, Inc., assigned 20
percent of the outstanding common stock in Red River Hardwoods, Inc., or 4,000
shares, to one of its shareholders, Trio Growth Trust. Additionally, Trio Growth
Trust was granted an option to acquire 2,660 additional shares of the common
stock of Red River Hardwoods, Inc., to bring its percentage ownership to 33.3
percent.
EMPLOYEES
At March 31, 1999, the Company employed ___ persons.
PROPERTIES
In addition to the properties discussed above with respect to each
business segment, the Company leases office space in Lexington, Kentucky, for
its executive offices pursuant to a lease which will expire May 31, 2003. The
Company maintains customary compensation, liability, and property insurance for
all of its operations, which also includes well coverage for oil and gas
exploration and production activities.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of its business. The
Company maintains insurance coverage against potential claims in an amount which
it believes to be adequate. The Company believes that it is not presently a
party to any litigation the outcome of which would have a material adverse
effect on its results of operations or financial condition.
38
<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the directors and executive officers of the
Company, together with their ages as of the date of this Joint Proxy
Statement/Prospectus. Each director is elected for a one year term and serves
until his successor is elected and qualified.
<TABLE>
<CAPTION>
NAME Age Position Director/Officer Since
---- --- -------- ----------------------
<S> <C> <C> <C>
William S. Daugherty 44 Chairman of the Board, President
and Chief Executive Officer September 1993
James K. Klyman 43 Director May 1992
Charles L. Cotterell 73 Director June 1994
D. Michael Wallen 44 Vice President and Secretary January 1997
Daryl J. Greattinger 43 Chief Financial Officer June 1997
</TABLE>
A description of the business experience during the past several years
for each of the directors and executive officers of the Company and certain
significant employees of the Company is set forth below.
William S. Daugherty, age 44, has served as Director, President and
Chief Operating Officer of the Company since September 1993. Mr. Daugherty has
served as President of Daugherty Petroleum, Inc. since 1984. In 1995, Mr.
Daugherty was elected as Chairman of the Board of the Company. Mr. Daugherty is
past president of the Kentucky Oil and Gas Association and the Kentucky
Independent Petroleum Producers Association. Mr. Daugherty also serves as the
Governor's Official Representative to the Interstate Oil and Gas Compact
Commission.
James K. Klyman, age 43, has been a director since May 1992. For the
past six years Mr. Klyman has been a computer software designer and programmer
specializing in applied information technology.
Charles L. Cotterell, age 73, has been a director since June 1994. Mr.
Cotterell has been involved in the resources industry and has participated in
the natural gas and oil industries in Western Canada and the United States,
particularly in Kentucky. He is a Vice President of Konal Engineering Co., Ltd.,
is a past director of Mariner Mines, Ltd., Nordustrial, Ltd., Goliath Boat Co.,
and Dominion Power Press Equipment Co., Ltd., and the past President of Smith
Press Automation Co., Ltd.
D. Michael Wallen, age 44, joined Daugherty Petroleum, Inc. in March
1995 as Vice President of Engineering and was elected a Vice President of the
Company in March 1997. Prior to joining the Company, Mr. Wallen served as the
Director of the Kentucky Division of Oil and Gas for six years. Prior to serving
as Director of the Kentucky Division of Oil and Gas, he worked as well drilling
and completion specialist and as a gas production engineer in the Appalachian
Basin for various operating companies.
Daryl Greattinger, CPA, age 43, joined the Company and has served as
Chief Financial Officer since June 1997. For the past sixteen years, Mr.
Greattinger has been the owner and a practicing accountant of Greattinger and
Crowley, a CPA practice located in Monticello, Kentucky. Previously, Mr.
Greattinger held accounting positions at Petro 7, Inc., an independent oil and
gas company, and International Harvester.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10 percent of a registered
class of the Company's equity securities, to file with the Commission and The
Nasdaq Stock Market initial reports of ownership and reports of changes in
ownership of the Common Stock and other equity securities of the Company.
Directors, officers and greater than 10 percent shareholders are required by the
Commission's regulations to furnish the Company with copies of all Section 16(a)
forms they file. All such persons have filed all required reports for the fiscal
year ended December 31, 1998.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table sets forth information regarding annual and
long-term compensation with respect to the fiscal years ended December 31, 1998,
1997 and 1996 for services in all capacities rendered to the Company by William
S. Daugherty, the Chief Executive Officer of the Company. There was no other
person serving as an executive officer of the Company at December 31, 1998,
whose total annual salary and bonus exceeded $100,000. All of the unissued
shares of the Common Stock described below and their per share values reflect
the consolidation of the capital stock of the Company on a one share for five
shares basis which occurred on June 22, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS #
- --------------------------- ---- ------ ----------- ---------
<S> <C> <C> <C> <C>
William S. Daugherty 1998
Chairman and President 1997 $75,000 12,500 (1) 400,000 (2)
1996 $86,538 -0- 40,000 (3)
- -----------
</TABLE>
(1) The bonus was in the form of 5,000 shares of the Common Stock valued at
$2.50 per share. The shares represent bonuses approved by the Board of
Directors on June 25, 1997. The shares were issued June 27, 1997.
(2) These options were approved on March 7, 1997 by the Board of Directors
pursuant to the Daugherty Resources, Inc. 1997 Stock Option Plan, are
exercisable at $1.546875 per share and vest over a five year period with
71,111 shares vesting during 1997. The options expire on March 6, 2002.
Vesting is subject to Mr. Daugherty's continued employment.
(3) These options were approved on June 28, 1996 by the Board of Directors and
are exercisable at $5.00 per share. The options vest over a four year
period and expire five years from the date of vesting. Vesting is subject
to Mr. Daugherty's continued employment.
While the officers of the Company receive benefits in the form of
certain perquisites, the individual identified in the foregoing table has not
received perquisites which exceed in value the lesser of $50,000 or 10 percent
of such officer's salary and bonus.
OPTION GRANTS IN 1998
The following table provides details regarding the stock options
indicated in the Summary Compensation Table as having been granted to the named
executive officer in 1998. In addition, in accordance with the rules of the
Commission, there are shown hypothetical gains or "option spreads" that could be
realized for the respective options, based on arbitrarily assumed rates of
annual compound stock price appreciation of five percent and 10 percent from the
date the options were granted over the full five-year term of the options. No
gain to the optionees is possible without an increase in the stock price which
will benefit all shareholders proportionately. All of the unissued shares of the
Common Stock described below and their per share values reflect the
consolidation of the capital stock of the Company on a one share for five shares
basis which occurred on June 22, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUALS GRANTS APPRECIATION FOR OPTION TERMS (1)
- ----------------------------------------------------------------- ---------------------------------------------------------
Percent of
Total Options
Number of Shares Granted to Exercise or
Underlying Employees Base Price Expiration 5% 10%
Name Options Granted in 1998 ($ per share) Date ($) ($)
---- --------------- ------- ------------ -------------- ----- ----
<S> <C> <C> <C> <C> <C> <C>
W.S. Daugherty (2) 400,000 93.02% $1.546875 12-31-2007 $180,202 $389,429
- ------------
</TABLE>
(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises or stock holdings are dependent on
the future performance of the shares of the Common Stock and overall stock
market conditions. There can be no assurance that the amounts reflected in
this table will be achieved.
(2) On June 25, 1997, the Board of Directors of the Company authorized the
granting of incentive stock options covering 400,000 shares of the Common
Stock for Mr. Daugherty vesting and exercisable in increments of 71,111
shares on March 7, 1997 and January 1, 1998, 1999, 2000, and 2001, with a
final increment of 44,445 shares on January 1, 2002. All options authorized
in favor of Mr. Daugherty in 1997 are exercisable at $1.546875 per share,
expire five years from the date of vesting and are contingent upon Mr.
Daugherty's employment at the time of vesting. As of March 31, 1999, these
options have not been issued; however, the Company is obligated to issue
them to Mr. Daugherty.
40
<PAGE> 52
THE FOLLOWING TABLE SHOWS THE NUMBER OF SHARES OF THE COMMON STOCK
UNDERLYING ALL EXERCISABLE AND NON-EXERCISABLE STOCK OPTIONS HELD BY THE NAMED
EXECUTIVE OFFICER AS OF DECEMBER 31, 1998. ALL OF THE UNISSUED SHARES OF THE
COMMON STOCK DESCRIBED BELOW AND THEIR PER SHARE VALUES REFLECT THE
CONSOLIDATION OF THE CAPITAL STOCK OF THE COMPANY ON A ONE SHARE FOR FIVE SHARES
BASIS WHICH OCCURRED ON JUNE 22, 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------- -----------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
<S> <C> <C>
WILLIAM S. DAUGHERTY 161,111/398,889 $1,289/$5,961(1)
</TABLE>
(1) The closing market price for the shares of Common Stock at December 31,
1998 was $___. Only the options granted in 1998 to Mr. Daugherty were
in-the-money as of the end of the fiscal year.
Mr. Daugherty received options to purchase 40,000 shares of the Common
Stock in 1994 exercisable at $9.50 per share in increments of 10,000 shares each
on December 10, 1994, 1995, 1996, and 1997. These options expired on December
10, 1998. In February 1995, the Board of Directors of the Company authorized the
granting of incentive stock options covering 40,000 shares of the Common Stock
for Mr. Daugherty vesting and exercisable in 10,000 share increments on February
27, 1995, 1996, 1997 and 1998. Additionally, on December 27, 1995, the Board of
Directors of the Company authorized the granting of incentive stock options
covering 40,000 shares of the Common Stock for Mr. Daugherty vesting and
exercisable in 10,000 share increments on December 27, 1995, 1996, 1997 and
1998. All options authorized in favor of Mr. Daugherty in 1995 are exercisable
at $5.00 per share, expire five years from the date of vesting and are
contingent upon Mr. Daugherty's employment at the time of vesting. As detailed
above, on June 28, 1996, the Board of Directors authorized the granting of
incentive stock options to Mr. Daugherty covering 40,000 shares of the Common
Stock. On March 7, 1997, pursuant to an Incentive Stock Option Agreement between
the Company and Mr. Daugherty, the Administrative Committee of the Daugherty
Resources, Inc. 1997 Stock Option Plan granted Mr. Daugherty options to purchase
400,000 shares of the Common Stock exercisable at $1.546875 per share. Options
for 71,111 shares vested on March 7, 1997, with 71,111 shares vesting on January
1, 1998, 1999, 2000, and 2001, and the remaining 44,445 shares vesting on
January 1, 2002. These options are contingent upon Mr. Daugherty's employment
with the Company on the vesting dates. They expire on March 7, 2002. All of the
unissued shares of the Common Stock described above and their per share values
reflect the consolidation of the capital stock of the Company on a one share for
five shares basis which occurred on June 22, 1998.
COMPENSATION OF DIRECTORS
The Company compensates its non-employee directors for their services
to the Company in the form of shares of the Common Stock registered on a Form
S-8 Registration Statement. The Company also reimburses its directors for
expenses incurred in attending board meetings. The Company paid the non-employee
directors the following amounts during fiscal year 1998: Charles L. Cotterell
and James K. Klyman each received ___ shares of common stock valued at $___ per
share. Further, the Company has granted Options to acquire shares of the Common
Stock to the following current directors of the Company, other than Mr.
Daugherty: Charles L. Cotterell and James K. Klyman each received Options for
2,000 shares of the Common Stock exercisable at $3.25 per share which vested on
June 25, 1997 and expire on June 24, 2002. All of the unissued shares of the
Common Stock described in this paragraph and in the below described table and
their per share values reflect the consolidation of the capital stock of the
Company on a one share for five shares basis which occurred on June 22, 1998.
41
<PAGE> 53
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------- -----------------------------------
<S> <C> <C>
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- -----------------------------
James K. Klyman 8,000/0 -0-
Charles L. Cotterell 8,000/0 -0-
- --------------
</TABLE>
(1) The market price for the shares of the Common Stock at December 31, 1998
was below the option price for each share of the Common Stock.
In 1993, Mr. Klyman was granted options to purchase 2,000 shares of the
Common Stock exercisable at $9.50 per share and expiring December 10, 1998. On
June 15, 1994, the Board of Directors approved the reduction of the exercise
price of these options to $5.00. On June 15, 1994, Mr. Cotterell was granted an
option to purchase 2,000 shares of the Common Stock in 1994 exercisable at $5.00
per share expiring December 10, 1998. On February 27, 1995, the Board of
Directors approved the grant of options to Messrs. Klyman and Cotterell to
purchase 2,000 shares of the Common Stock each exercisable at $5.00 per share
and expiring February 27, 2000. On June 28, 1996, the Board of Directors
approved the grant of options to Messrs. Klyman and Cotterell to purchase 2,000
shares of the Common Stock each exercisable at $5.00 per share and expiring June
28, 2001. On June 25, 1997, the Board of Directors approved the grant of options
to Messrs. Klyman and Cotterell to purchase 2,000 shares of the Common Stock
each exercisable at $3.25 per share and expiring June 24, 2002. All of the
unissued shares of the Common Stock described above and their per share values
reflect the consolidation of the capital stock of the Company on a one share for
five shares basis which occurred on June 22, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF DIRECTORS, OFFICERS AND EMPLOYEES
As of March 31, 1999, the aggregate indebtedness to the Company and to
any other person which is the subject of a guarantee, support agreement, letter
of credit or other similar arrangement or understanding provided by the Company
of all present and former directors, officers and employees of the Company was
$___.
<TABLE>
<CAPTION>
LARGEST AMOUNT
NAME AND INVOLVEMENT OF OUTSTANDING DURING AMOUNT OUTSTANDING
PRINCIPAL POSITION ISSUER OR SUBSIDIARY LAST COMPLETED FISCAL YEAR AS OF MARCH 31, 1999
------------------ -------------------- -------------------------- --------------------
<S> <C> <C> <C>
William S. Daugherty (1) Lender $ $
President and Chief
Executive Officer
- ------------
</TABLE>
(1) Part of the indebtedness of Mr. Daugherty to the Company is evidenced by a
promissory note dated September 23, 1993 in the principal amount of
$50,000. The debt was incurred to assist Mr. Daugherty in the payment of
his legal expenses resulting from the acquisition by the Company of
Daugherty Petroleum, Inc. By the terms of the note, the unpaid principal
bears interest at the rate of six percent per annum and is repayable in
monthly instalments of not less than $1,000 per month. Repayment commenced
in November 1993. The note was originally due on December 31, 1997, has
been extended until December 31, 1998. The note is unsecured. As of March
31, 1999, the unpaid principal balance of the note was $___. As of
December 31, 1998, and March 31, 1999, Renfro Valley Broadcasting, Inc., a
company wholly-owned by Mr. Daugherty was indebted to Daugherty Petroleum,
Inc. in the amount of $___.
INDEBTEDNESS OF THE COMPANY TO A SHAREHOLDER
Niagara Oil, Inc., a subsidiary of Daugherty Petroleum, Inc., is
indebted to Jayhead Investments Limited., an affiliate of Alaska Investments
Limited. The remaining balance of the indebtedness is $___ and bears interest at
a rate of 10 percent beginning April 1, 1995. Payment terms are based on
quarterly payments of interest only with the total principal and interest, if
any, due in full June 1, 1999. This indebtedness is secured by the assets of
Niagara Oil, Inc., as well as the corporate guarantee of Daugherty Petroleum,
Inc.
42
<PAGE> 54
FINANCING COMMITMENTS
On January 6, 1997, Trio Growth Trust agreed to act as the underwriter
in a private placement of up to $1,000,000 for the Company's 80 percent owned
subsidiary, Red River Hardwoods, Inc. In consideration for such underwriting,
the Company agreed to issue to Trio Growth Trust immediately exercisable
warrants for the purchase of 300,000 shares of the Common Stock, such warrants
having an exercise price of $0.625 per share pursuant to a Warrant Agreement
dated March 7, 1997 between the Company and Trio Growth Trust. As a result of
the underwriting agreement, Trio Growth Trust acquired a beneficial ownership of
11.93 percent of the Common Stock of the Company. In addition to the
underwriting commitment of Trio Growth Trust, Exergon Capital S.A. agreed to
participate in the underwriting of Red River Hardwoods, Inc., and in
consideration thereof received immediately exercisable warrants for the purchase
of 100,000 shares of the Common Stock, such warrants having an exercise price of
$0.625 per share, pursuant to a Warrant Agreement dated March 7, 1997 between
the Company and Exergon Capital S.A. As a result of said Warrant Agreement,
Exergon Capital S.A. is the beneficial owner of 5.97 percent of the Common Stock
of the Company.
PRINCIPAL SHAREHOLDERS
The following table indicates the number of shares of the Common Stock
owned beneficially as of March 31, 1999 by (i) each person known to the Company
to beneficially own more than five percent of the outstanding shares of the
Common Stock, (ii) each director, (iii) the officers of the Company, and (iv)
all directors and executive officers as a group. Except to the extent indicated
in the footnotes to the following table, each of the persons or entities listed
therein has sole voting and sole investment power with respect to the shares of
the Common Stock which are deemed beneficially owned by such person or entity.
All of the unissued shares of the Common Stock described below and their per
share values reflect the consolidation of the capital stock of the Company on a
one share for five shares basis which occurred on June 22, 1998.
<TABLE>
<CAPTION>
SHARES OWNED PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OF CLASS
-------------- ---------------- ------------ --------
<S> <C> <C> <C>
Common Stock................................ William S. Daugherty 479,911 (1) 14.02
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Trio Growth Trust 400,000 (2) 11.93
18 York Valley Crescent
Willowdale, Ontario M2P 1A7
GraceChurch Securities Ltd. 160,600 4.79
21 Abbotsbury House, Abbotsbury Road
London W14 8EN, England
Alaska Investments Limited 202,667 6.04
Ospery House, 5 Old Street
St. Helier, Jersey, Channel Islands, U.K.
Exergon Capital S.A. 200,000 (3) 5.97
Dufourstrasse 101
Zurich 8008, Switzerland
Jayhead Investments Limited 100,000 (4) 2.98
18 York Valley Crescent
Willowdale, Ontario M2P 1A7
Charles L. Cotterell 16,840 (5) *
James K. Klyman 8,000 (6) *
Environmental Energy, Inc. 400,000 (7) 11.93
Directors and executive officers as a group
(5 persons) 560,651 (8) 16.42
- ----------------
</TABLE>
Represents ownership of less than one percent.
(1) Includes 265,000 shares of the Common Stock, Warrants to purchase 23,800
shares of the Common Stock and Options to acquire 191,111 shares of the
Common Stock which are currently exercisable.
(2) Consists of Warrants to purchase 400,000 shares of the Common Stock which
are currently exercisable.
(3) Includes 100,000 shares of the Common Stock and Warrants to purchase
100,000 shares of the Common Stock which are currently exercisable.
(4) Consists of Warrants to purchase 100,000 shares of the Common Stock which
are currently exercisable.
(5) Includes 8,840 shares of the Common stock and Options to purchase 8,000
shares of the Common Stock which are currently exercisable.
(6) Consists of Options to purchase 8,000 shares of the Common Stock which are
currently exercisable.
(7) Consists of Options to purchase 400,000 shares of the Common Stock which
are current exercisable.
43
<PAGE> 55
(8) Includes 284,740 shares of the Common Stock, Options to purchase 252,111
shares of the Common Stock which are currently exercisable, and Warrants to
purchase 23,800 shares of the Common Stock which are currently exercisable.
DESCRIPTION OF SECURITIES
The following summary description of the capital stock of the Company,
after the Domestication, does not purport to be complete and is qualified in its
entirety by reference to the Daugherty Resources, Inc. Certificate of
Incorporation and Bylaws, copies of which are attached as EXHIBIT C and EXHIBIT
D, respectively. Furthermore, except as noted, the following discussion
describes the capital stock of the Company assuming that the Domestication has
already been effected. Currently, the authorized capital stock of the Company
consists of 10,000,000 shares of the Common Stock, without par value per share,
and 1,200,000 shares of the Preferred Stock, without par value per share. As of
the date of this Joint Proxy Statement/Prospectus there are ___ shares of the
Common Stock issued and outstanding, and 1,200,000 shares of the Preferred Stock
issued and outstanding.
GENERAL
The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock, par value $0.001 per share, ___ shares of which will be
issued and outstanding immediately following the Domestication, and 5,000,000
shares of Preferred Stock, par value $0.001 per share, 1,200,000 shares of which
will be issued and outstanding immediately following the Domestication. Pursuant
to an agreement with Environmental Energy, Inc., the issued and outstanding
shares of the Preferred Stock may be convertible into shares of the Common Stock
on a share-for-share basis within two years. Upon the expiration of the two year
period, all of the shares of the Preferred Stock which have not been so
converted will automatically convert into shares of the Common Stock. See
"Business Oil and Gas Exploration and Production - Environmental Energy, Inc.
Oil and Gas Assets Acquisition."
COMMON STOCK
Subject to the rights of holders of the Preferred Stock then
outstanding, holders of the Common Stock are entitled to receive such dividends
as may from time to time be declared by the Board of Directors of the Company.
Holders of the Common Stock are entitled to one vote per share on all matters on
which the holders of the Common Stock are entitled to vote. Because holders of
the Common Stock do not have cumulative voting rights, the holders of a majority
of the shares of Common Stock represented at a meeting can select all of the
directors.
Holders of the Common Stock have no preemptive rights to subscribe for
any additional securities that the Company may issue and there are no redemption
provisions or sinking fund provisions applicable to the Common Stock, nor is the
Common Stock subject to calls or assessments by the Company. All shares of the
Common Stock to be outstanding upon completion of the Domestication will be
legally issued, fully paid and nonassessable. Upon the liquidation, dissolution
or winding up of the Company, holders of the shares of the Common Stock are
entitled to share equally, share-for-share, in the assets available for
distribution after payment to all creditors of the Company, subject to the
rights, if any, of the holders of any outstanding shares of the Preferred Stock.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors of the Company is authorized, subject to any limitations prescribed by
law, to provide for the issuance of shares of Preferred Stock from time to time
in one or more series and to establish the number of shares to be included in
each such series and to fix the designation, powers, preferences and relative,
participating, optional and other special rights of the shares of each such
series and any qualifications, limitations or restrictions thereof. Because the
Board of Directors has such power to establish the powers, preferences and
rights of each series, it may afford the holders of Preferred Stock preferences,
powers and rights (including voting rights) senior to the rights of the holders
of Common Stock. The issuance of rights to purchase shares of the Preferred
Stock could be used to discourage an unsolicited acquisition proposal. Pursuant
to an agreement with Environmental Energy, Inc. the 1,200,000 shares of the
Preferred Stock held by Environmental Energy, Inc. will be convertible into
shares of the Common Stock on a share-for-share basis within two years. Upon the
expiration of the two year period, all of the shares of the Preferred Stock
which remain outstanding will automatically convert into
44
<PAGE> 56
shares of the Common Stock. See "Business - Oil and Gas Exploration and
Production - Environmental Energy, Inc. Oil and Gas Assets Acquisition."
WARRANTS
The following table describes the Warrants that the Company has
outstanding or are contractually bound to issue and that will continue to be
obligations of the Company following the Domestication.
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING SHARES EXERCISE PRICE EXPIRATION DATE
----------------- -------------- ---------------
<S> <C> <C>
2,667 18.00 Not Available
1,333 18.00 Not Available
1,333 18.00 Not Available
100,000 2.50 10/30/2000
300,000 0.625 3/6/2002
23,800 2.50 6/27/2001
100,000 0.625 3/6/2002
100,000 0.625 3/6/2002
</TABLE>
OPTIONS
The following table describes the Options that the Company has outstanding and
that will continue to be obligations of the Company following the Domestication
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING SHARES EXERCISE PRICE EXPIRATION DATE
----------------- -------------- ---------------
<S> <C> <C>
26,000 $5.00 12/10/98
40,000 9.50 12/10/98
70,000 5.00 2/27/2000-2003
69,000 5.00 12/27/2000-2002
84,000 5.00 6/28/2001-2003
142,222 1.546875 3/6/2002
30,000 3.25 6/25/2002
4,000 3.25 6/25/2002
400,000 5.00 11/2/2002
</TABLE>
The Warrants granted to Trio Growth Trust, Exergon Capital S.A., and
Jayhead Investments, Ltd. provide for "piggyback" and demand registration rights
with respect to the Common Stock to be issued upon the exercise of any such
Warrants. Moreover, the Options granted to Mr. Daugherty and others pursuant to
the Company's Stock Option Plan provide that Option holders shall have demand
registration rights with respect to any Common Stock issued upon the exercise of
any such Options.
PROVISIONS HAVING POSSIBLE ANTI-TAKEOVER EFFECTS
The Certificate of Incorporation and the Bylaws of the Company contain
provisions that could have an anti-takeover effect. These provisions may
discourage certain types of transactions which may involve an actual or
threatened change of control of the Company although the Company did not adopt
these provisions with the intent to discourage these types of transactions. Set
forth below is a description of such provisions in the Certificate of
Incorporation and the Bylaws. The Board of Directors has no current plans to
formulate or effect additional measures that could have an anti-takeover effect.
The Certificate of Incorporation of the Company grants the Board of
Directors broad powers to fix by resolution the powers, preferences and rights,
and the qualifications, limitations and restrictions on the Preferred Stock.
This power could be used to create a class of Preferred Stock that, because of
its rights, could discourage a potential takeover. Additionally, the Bylaws give
the Board of Directors power to fill vacancies on the Board without
45
<PAGE> 57
shareholder approval. As a result, an incumbent Board, not a potential raider,
would have control over board positions in the period between annual
shareholders' meetings. Finally, the Bylaws provide for an advance notice
procedure with regard to business to be brought before an annual meeting of
shareholders, which could discourage a potential raider from taking action at
such a meeting.
Additionally, the Company is subject to the provisions of Section 203
of the DGCL. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business transaction" with an "interested
shareholder" for a period of three years after the date that the person became
an interested shareholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
shareholder is approved in a prescribed manner. A "business combination"
generally includes, without limitation, a merger, assets or stock sale, or a
transaction resulting in a financial benefit to the interested shareholder. An
"interested shareholder" generally is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15 percent or more of a
corporation's outstanding voting stock.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by an appropriate provision in its certificate of incorporation. The
Company's Certificate of Incorporation contains such an exclusion in favor of
William S. Daugherty, the Chairman and Chief Executive Officer of the Company.
There is no comparable provision relating to business combinations under the
BCCA.
EXCHANGE AGENT, TRANSFER AGENT AND REGISTRARS
The Exchange Agent, Transfer Agent and Registrar for exchange of stock
certificates following the Domestication will be Pacific Corporate Trust
Company.
DIVIDEND POLICY
The Company has never paid cash dividends on its common equity
securities. The Company's current policy is to retain earnings, if any, to
finance the anticipated growth of its business. Any further determination as to
the payment of dividends will be made at the discretion of the Board of
Directors and will depend upon the Company's operating results, financial
condition, capital requirements, general business conditions and such other
factors as the Board of Directors deems relevant. The Company may procure credit
from third parties for additional capital for expansion and business development
activities. It is likely that any credit facility procured by the Company may
limit or restrict the Company's ability to pay cash dividends on the Common
Stock of the Company as a Delaware corporation under certain circumstances. In
the event that the Domestication is effected, it is anticipated that the
dividend policy of the Company will be the same as the Company's current policy.
CANADIAN AND UNITED STATES INCOME TAX CONSIDERATIONS
The Domestication will result in certain income tax consequences in
both the United States and Canada, which management believes will have a
positive effect on the Company by reducing, over the long term, income taxes
paid by the Company and giving the Company the flexibility to enter into certain
types of mergers, acquisitions and combination transactions with U.S.
corporations which could result in adverse tax consequences absent the
Domestication. Certain tax consequences of the Domestication are summarized
below.
The following summary is of a general nature only and it is not
intended to be, nor should it be construed to be, legal or tax advice to any
shareholder of the Company. Accordingly, shareholders of the Company should
consult their own tax advisers for advice with respect to the federal income tax
consequences to them of the proposed Domestication and the exercise of
dissenter's rights.
UNITED STATES TAX CONSEQUENCES
General. The following is a summary of the material United States
federal income tax consequences of the Domestication and the material United
States federal income and estate tax consequences to Non-U.S. Holders (as
defined below) of holding and disposing of the Common Stock (as defined below)
of the Company.
46
<PAGE> 58
The summary is based on current law, which is subject to change
(possibly retroactively). The summary does not discuss all aspects of U.S.
taxation that may be relevant to security holders in light of their personal
investment circumstances or to certain security holders subject to special
treatment under U.S. tax laws (such as securities dealers, tax-exempt entities
(including qualified retirement plans) and insurance companies) and does not
discuss the tax consequences under state, local, or foreign laws. Security
holders are urged to consult their own tax advisers regarding the federal,
state, local, and other tax considerations of participating in the Domestication
and of holding and disposing of shares of the Common Stock.
The term "U.S. Holder" means a beneficial owner of the stock of the
Company that is for U.S. federal income tax purposes (i) a citizen or resident
of the United States, (ii) a corporation or partnership created or organized in
the United States or under the laws of the United States or of any state
thereof, or (iii) an estate or trust whose income is includible in gross income
for United States federal income tax purposes regardless of its source. The term
"Non-U.S. Holder" means a beneficial owner of the stock of the Company that is
not a U.S. Holder.
Foreign Investment in Real Property Tax Act ("FIRPTA") Implications.
The Company is a publicly traded Canadian corporation. All of its shares are
owned by various U.S. and foreign shareholders. The Company owns 100 percent of
Daugherty Petroleum, a U.S. corporation. Daugherty Petroleum's assets consist
mainly of oil and gas properties and gold mining claims, which assets are deemed
to be United States real property interests ("USRPI") as defined under IRC
Section 897(c)(1) such that Daugherty Petroleum qualifies as a United States
real property holding company ("USRPHC") as a result of IRC Section 897(c)(2).
The Company plans to change its place of incorporation to the United States via
a reorganization under IRC Section 368(a)(1)(F) (the Domestication). Based on
the above fact pattern and the following discussion, the Company would not be
subject to FIRPTA income recharacterization under IRC Section 897 or withholding
under IRC Section 1445; however, certain related reporting requirements are
applicable.
Prior to the enactment of FIRPTA, real property, although located in
the United States, could be sold by foreign persons at a gain tax-free if the
sellers were not engaged in a U.S. trade or businesection Congress enacted
FIRPTA to establish equality of tax treatment between foreign and domestic
investors. The general rule of FIRPTA is that gain or loss of a foreign person
from the disposition of USRPI must be taken into account "as if" the foreign
person were engaged in a U.S. trade or business, and "as if" the gain were
effectively connected income. See IRC Section 897(a)(1). Inbound reorganizations
that involve a transfer of U.S. real estate from a foreign corporation to a U.S.
corporation in a reorganization are subject to special FIRPTA reorganization
rules under IRC Sections 897(d) and (e). In general, those rules are
intended to ensure that the gain on a U.S. real estate asset that is held by a
foreign corporation will either be taxed at the time of the reorganization or be
retained as future taxable gain in the form of carryover tax basis in the stock
of the acquiring corporation.
Regardless of whether the conversion of the Company into a United
States Person ("the Company") occurs by corporate continuance or actual
transfer, the following exchanges are deemed to occur in the Domestication:
1. The Company transfers its assets (Daugherty Petroleum stock) to the
Company in exchange for the Common Stock of the Company as a Delaware
corporation in an exchange normally protected from gain recognition by IRC
Section 361(a), and the Company assumes the Company's liabilities (if any);
2. The Company distributes the Common Stock of the Company as a
Delaware corporation received in exchange for its assets to its shareholders in
a distribution normally protected from gain recognition by IRC Section 361(c);
and
3. The shareholders of the Company exchange their shares of the Company
for like shares of the Company as a Delaware corporation in an exchange normally
protected from gain recognition by IRC Section 354.
The IRC Section 361(a) Exchange. Any nonrecognition provision shall
apply to a transfer by a foreign person of USRPI on which gain is realized only
to the extent that the transferred USRPI is exchanged for USRPI which,
immediately following the exchange, would be subject to U.S. taxation upon its
disposition, and the transferor complies with the filing requirements of
paragraph (d)(1)(iii) of Treasury Regulation Section 1.897-5T. See Treasury
Regulation Section 1.897-6T(a)(l)-(3). However, Notice 89-57 has temporarily
suspended the filing requirements of Treasury Regulation Section
1.897-5T(d)(1)(iii) if the following conditions are satisfied:
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1. The transfer or distribution otherwise qualifies in its entirety for
nonrecognition under the temporary regulations under IRC Sections 897(d) and
(e);
2. The Company does not have any other income that is effectively
connected with a U.S. trade or business during the taxable year that includes
the transfer or distribution under IRC Sections 897(d) and (e); and
3. One of the following conditions is satisfied (a) a withholding
certificate is obtained pursuant to Treasury Regulation Section 1.1445-3(a), or
(b) a notice of nonrecognition is submitted to the IRS pursuant to the
provisions of Treasury Regulation Section 1.1445-2(d)(2).
In the instant case, the Company would constitute a USRPHC, and the
Company would be receiving USRPI in exchange for USRPI, Daugherty Petroleum
stock. Also, a subsequent disposition of the Common Stock of the Company as a
Delaware corporation by the Company would be subject to taxation. Therefore, the
transfer by the Company of its Daugherty Petroleum stock to the Company in the
IRC Section 361(a) exchange will not result in recognition of gain under FIRPTA.
In addition, assuming the Company does not have any income that is
effectively connected with a U.S. trade or business and the Company files a
notice of nonrecognition with the Service, the Company will not have to comply
with the reporting requirements of the FIRPTA regulations.
The IRC Section 361(c) Distribution. IRC Section 897(d)(1) and Treasury
Regulation Section 1.897-5T(c)(1) of the temporary regulations generally require
that, if a foreign corporation makes a distribution of USRPI to a shareholder,
then the foreign corporation must recognize any gain (but not loss) on the
distribution. The gain recognized is the excess of the fair market value of
USRPI at the time of the distribution over its adjusted basis. The amount which
would be subject to taxation is equal to the difference between the fair market
value of the Common Stock of the Company as a Delaware corporation and the
Company's adjusted basis in that stock. Via the Domestication, the Company will
receive a substituted basis in the Company equal to the Company's adjusted basis
in Daugherty Petroleum. See IRC Section 358(a)(1). Moreover, as the Company's
only asset is Daugherty Petroleum stock, the fair market value of the Company
should be equal to the fair market value of the Company (which is readily
determinable as it is publicly traded). Therefore, the amount which would be
subject to tax under IRC Section 897 is effectively equal to the difference
between the fair market value of the Company's Common Stock and the Company's
adjusted tax basis in Daugherty Petroleum. The Company's basis in Daugherty
Petroleum is greater than Daugherty Petroleum's fair market value. Since a loss
would result in this transaction, IRC Section 897 would not apply to the IRC
Section 361(c) distribution.
The IRC Section 354 Exchange. Although a foreign corporation may be a
USRPHC, stock in a foreign corporation is not USRPI for purposes of determining
gain or loss on the disposition of such stock. (IRC Section 897(c) generally
defines USRPI as an interest in U.S. real property or any interest in a domestic
corporation.) Therefore, the IRC Section 354 exchange is not taxable under
FIRPTA as a transfer by the Company's shareholders is not a disposition of a
USRPI subject to FIRPTA.
Withholding Implications. Any person acquiring USRPI from a foreign
person is required to withhold a tax of 10 percent of the amount realized by the
foreign person. See Treasury Regulation Section 1.1445-1(b). The "amount
realized" includes the gross amount of remuneration received or to be received
by the seller including cash, notes, the fair market value of other property,
and the assumption of liabilities. As a result, withholding will be required
regardless of the amount of cash received. See Treasury Regulation Section
1.1445-1(g)(5). Special withholding rules apply to foreign corporations
distributing USRPI to their shareholders under IRC Section 1445(e) and Treasury
Regulation Section 1.1445-5. IRC Section 1445(e) and Treasury Regulation Section
1.1445-5 require foreign corporations which distribute USRPI to interest-holders
to withhold 35 percent of the gain recognized on the distribution pursuant to
IRC Section 897(d). See Treasury Regulation Section 1.1445-5(d).
The IRC Section 361(a) Exchange. The IRC Section 361(a) exchange will
not attract withholding if the Company gives notice to the Company that it is
not required to recognize any gain or loss on the transaction due to the
operation of a nonrecognition provision of the IRC, and the Company sends a copy
of the Company's notice to the Assistant Commissioner (International) within 20
days of the date of transfer. See Treasury Regulation Section 1.1445-
2(d)(2)(i).
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The IRC Section 361(c) Distribution. As no gain would be recognized on
the IRC Section 361(c) distribution, the distribution should not attract
withholding. See Treasury Regulation Section 1.1445-5(d). As a practical matter,
a withholding certificate should be submitted to the Service on the date of or
prior to the disposition. See Treasury Regulation Section 1.1445-5(d)(2)(ii).
There are no withholding requirements in connection with IRC Section
354.
Reporting Requirements. The following outlines the applicable reporting
requirements pertaining to the above-described transaction.
The IRC Section 361(a) Exchange. FIRPTA Reporting Requirements Notice
89-57 has temporarily suspended the filing requirements of Treasury Regulation
Section 1.897-5T(d)(1)(iii) if the following conditions are satisfied:
1. The transfer or distribution otherwise qualifies in its entirety for
nonrecognition under the temporary regulations under IRC Sections 897(d) and
(e);
2. The Company does not have any other income that is effectively
connected with a U.S. trade or business during the taxable year that includes
the transfer or distribution under IRC Sections 897(d) and (e); and one of the
following conditions is satisfied: (a) a withholding certificate is obtained
pursuant to Treasury Regulation Section 1.1445-3(a), or (b) a notice of
nonrecognition is submitted to the Service pursuant to the provisions of
Treasury Regulation Section 1.1445-2(d)(2).
As the Domestication qualifies in its entirety for nonrecognition, and
the Company does not have any income that is effectively connected with a U.S.
trade or business, the IRC Section 361(a) exchange satisfies the conditions set
forth in Notice 89-57. Therefore, the Company does not have to fulfill the
filing requirements of Treasury Regulation Section 1.897-5T(d)(1)(iii) (note, it
is assumed that the Company will file a notice of nonrecognition. See IRC
Section 1445 reporting requirements, below).
IRC Section 1445 Withholding Reporting Requirements. No particular form
is required for the Company's notice to the Company that the Company is not
required to recognize gain or loss with respect to the transfer. However, the
notice must be verified as true and signed under penalties of perjury by a
responsible officer of the Company. The following information must be set forth
in paragraphs labeled to correspond with the designation set forth below.
Treasury Regulation Section 1.1445-9T(b).
1. A statement that the document submitted constitutes a notice of a
nonrecognition transfer pursuant to the requirements of Treasury Regulation
Section 1.1445-2(d)(2);
2. The name, identifying number (if any), and address of the Company;
3. A statement that the Company is not required to recognize any gain
or loss with respect to the transfer;
4. A brief description of the transfer; and
5. A brief summary of the law and facts supporting the claim that
recognition of gain or loss is not required with respect to the transfer.
the Company should submit this notice to the Assistant Commissioner
(International) within 20 days of the transfer.
The IRC Section 361(c) Distribution. Under Notice 89-57 (see The IRC
ss.361(a) Exchange, above), no additional statements are required.
As no gain would be recognized on the IRC Section 361(c) distribution,
the distribution should not attract withholding. Treasury Regulation Section
1.1445-5(d). As a practical matter, a withholding certificate should be
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submitted to the Service on the date of or prior to the disposition. See
Treasury Regulation Section 1.1445-5(d)(2)(ii). An application for a withholding
certificate must be submitted to the Assistant Commissioner (International).
The application must set forth information concerning the USRPI
interest with respect to which the withholding certificate is sought, including
the type of interest, and the contract price. The application must include a
calculation of the maximum tax that may be imposed on the Company. The
application must also include all evidence necessary to substantiate the claimed
calculation, such as records of adjustments to basis or appraisal of fair market
value.
There are no reporting requirements in connection with IRC Section 354.
Basis and Holding Period Considerations. The total basis of the Common
Stock or the Preferred Stock received by a shareholder will equal his total
basis in stock surrendered in the exchange. The holding period for shares will
be the same as such shareholder's holding period for the shares surrendered,
provided that the shares were held as a capital asset.
Generally, a shareholder's basis in each share received would equal
such shareholder's total basis in the shares surrendered divided by the total
number of shares of received. However, the basis and holding period of specific
shares (including shares of different classes) may be determined solely by
reference to the basis and holding period of specific shares surrendered if the
shareholder can specifically identify such shares.
Pursuant to Temporary Treasury Regulation Section 7.367(b)-7(c),
exchanging U.S. Holders who have held 10 percent or more of the total voting
power of all classes of stock of the Company entitled to vote at any time during
the five year period ending on the Effective Date of the Domestication would
include in income (as dividend income) their pro rata portion of the Company's
earnings and profits attributable to the stock exchanged to the extent that the
fair market value of the stock exchanged exceeds its basis. The basis of the
Common Stock received by certain foreign corporations treated as U.S. Holders
pursuant to Temporary Treasury Regulation Section 7.367(b)-2(b) would then be
increased by such amount. However, management has determined that the Company
has no earnings and profits for this purpose.
Each exchanging U.S. Holder must file with his District Director of the
Service on or before the last day for filing his federal income tax return
(determined by taking into account any extensions of time therefor) for the year
in which the Domestication is consummated, the notice required by Temporary
Treasury Regulation Section 7.367(b)-1(c). Any such U.S. Holder who fails to
file the necessary notice and who fails to establish reasonable cause for such
failure may be denied the benefit of the federal income tax consequences
specified above.
Consequences of the Domestication to Non-U.S. Holders. A Non-U.S.
Holder who dissents and receives cash in exchange of his Common Stock or
Preferred Stock will recognize gain or loss in the manner described above for
U.S. Holders. A Non-U.S. Holder will not be subject to U.S. federal income tax
with respect to capital gains unless (i) such gain is effectively connected with
the conduct of a trade or business within the U.S. by such holder, (ii) such
holder is an individual who has been present in the U.S. for at least 183 days
during the taxable year of the disposition, the Common Stock or the Preferred
Stock is a capital asset and either (a) such individual's "tax home" for federal
income tax purposes is in the U.S., or (b) the gain is attributable to an office
or other fixed place of business maintained in the U.S. by such individual, or
(c) the Company is or has been a USRPHC and the Non-U.S. Holder owned directly
or pursuant to certain attribution rules at any time during the five-year period
ending on the date of disposition more than five percent of the Company's Common
Stock (assuming that Common Stock is regularly traded on an established
securities market). As discussed above, the Company's wholly-owned subsidiary,
Daugherty Petroleum, is a USRPHC.
Consequences of the Domestication on Holders of Warrants and Options.
Although the matter is not free from doubt, for United States federal income tax
purposes, the Domestication should not result in the recognition of gain or loss
under IRC Section 1001 to the holders of Warrants and Options in the Company.
The Service or the courts could disagree with this characterization of the
results to Warrant and Option holders and instead treat the transaction in
connection with the Warrants and Options as a taxable exchange. In such event,
each U.S. Holder of Warrants and Options will recognize gain or loss on the
exchange equal to the difference between the fair market value of its Warrants
and Options prior to the Domestication and the adjusted tax basis of its
Warrants and Options of the
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Company (which such gain or loss will be capital gain or loss if the Warrants
and Options are capital assets that have been held for more than one year).
Non-U.S. Holders of Warrants and Options will not be subject to United States
federal income tax with respect to capital gains (resulting from the
Domestication) unless (i) such gain is effectively connected with the conduct of
a trade or business within the United States by such holder, (ii) such holder is
an individual who has been present in the United States for at least 183 days
during the taxable year of the disposition, the Warrants and Options are capital
assets and either (a) such individual's "tax home" for federal income tax
purposes is in the United States, or (b) the gain is attributable to an office
or other fixed place of business maintained in the United States by such
individual, or (c) the Company is or has been a USRPHC for federal income tax
purposes and the Non-U.S. Holder of Warrants or Options is treated as owning
directly or indirectly or pursuant to certain attribution rules at any time
during the five-year period ending on the date of disposition more than five
percent of the Company's Common Stock (assuming that the Common Stock is
regularly traded on an established securities market). Each holder of Warrants
and Options is urged to consult its own tax adviser regarding the tax
consequences of the Domestication on its particular circumstances. See "Risk
Factors - Risks Relating to Ownership of Company Securities and this Offering -
Tax Consequences of the Domestication on Holders of Warrants and Options."
CONSEQUENCES TO NON-U.S. HOLDERS OF OWNING AND DISPOSING OF THE COMMON STOCK AND
THE PREFERRED STOCK OF THE COMPANY AS A DELAWARE CORPORATION
Dividends. Generally, dividends paid to a Non-U.S. Holder of Common
Stock will be subject to U.S. withholding tax at the rate of 30 percent of the
amount of the dividend, or at a lower applicable treaty rate. Under the income
tax treaty between the United States and Canada, the withholding tax rate on
dividends paid to most shareholders who are resident in Canada will be 15
percent. In the case of Canadian corporations that beneficially own 10 percent
or more of the voting stock of the Company, such withholding rate will be five
percent (six percent if paid in 1996). Under current Treasury regulations,
dividends paid to an address outside the U.S. are presumed to be paid to a
resident of such country for purposes of determining the applicability of a
treaty rate. Under proposed Treasury regulations not currently in effect,
however, a holder of Common Stock who wished to claim the benefit of an
applicable treaty rate would be required to file certain forms with the Company
or its agent. Such forms would contain the holder's name and address and other
pertinent information certified by such holder under penalties of perjury.
If, however, the dividend is effectively connected with the conduct of
a trade or business within the U.S. by a Non-U.S. Holder, the dividend will be
subject to regular U.S. federal income tax, which is not collected by
withholding, provided the Non-U.S. Holder files an Internal Revenue Service Form
4224 with the Company or its agent in accordance with current Treasury
regulations. Moreover, in the case of a Non-U.S. Holder that is a corporation, a
branch profits tax at the rate of 30 percent (or a lower applicable treaty rate)
may be imposed on such corporation on its earnings (including dividends)
effectively connected with a U.S. trade or business to the extent that such
earnings are considered to be repatriated away from the U.S. trade or business.
Sale of Common Stock. A Non-U.S. Holder will not be subject to U.S.
federal income tax on any gain recognized upon the sale (or other disposition)
of Common Stock unless (i) such gain is effectively connected with the conduct
of a trade or business within the U.S. by such holder, (ii) such holder is an
individual who has been present in the U.S. for at least 183 days during the
taxable year of the disposition, the Common Stock is a capital asset and either
(a) such individual's "tax home" for federal income tax purposes is in the U.S.,
or (b) the gain is attributable to an office or other fixed place of business
maintained in the U.S. by such individual, or (c) the Company is or has been a
USRPHC and the Non-U.S. Holder owned directly or pursuant to certain attribution
rules at any time during the five-year period ending on the date of disposition
more than five percent of the Company's Common Stock (assuming that Common Stock
is regularly traded on an established securities market). As discussed above,
the Company's wholly-owned subsidiary, Daugherty Petroleum, is a USRPHC.
Estate Tax. Common Stock owned (or treated as owned) by an individual
who, at the time of death, is neither a citizen or a domiciliary of the U.S.
will be includible in his gross estate for U.S. federal estate tax purposes and
thus may be subject to U.S. estate tax, unless an applicable estate tax treaty
provides otherwise.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each shareholder
the amount of cash proceeds paid as a result of the Domestication and dividends
paid to, and the tax withheld with respect to, each shareholder. These reporting
requirements apply regardless of whether withholding was reduced by an
applicable tax treaty or not required. Copies of these information returns may
also be made available under the provisions of a specific treaty or agreement
with the tax authorities in the country in which a Non-U.S. Holder resides.
Shareholders may be subject to backup withholding at the rate of 31
percent with respect to cash proceeds from the Domestication, gross proceeds
from the sale of the Common Stock, or dividends paid on the Common Stock, unless
such holder (i) is a corporation or comes within certain other exempt
categories, or (ii) provides a correct taxpayer identification number, certifies
as to no loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A shareholder who does
not provide the Company with his correct taxpayer identification number may be
subject to penalties imposed by the Service. U.S. backup withholding tax will
generally not apply to payments to a payee at an address outside the U.S. unless
the payor has knowledge that the payee is a U.S. person.
Payment to a Non-U.S. Holder of the proceeds of a sale of Common Stock
to or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the holder certifies as to its status as a
Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption. Payment of the proceeds of a sale of Common Stock to or through a
non-U.S. office of a broker generally will not be subject to backup withholding
or information reporting; however, if such holder is (i) a U.S. person, (ii) a
"controlled foreign corporation," or (iii) a foreign person that derives 50
percent or more of its gross income from the conduct of a trade or business in
the U.S., such payment will be subject to information reporting (but currently
not backup withholding) unless such broker has documentary evidence in its
records that the holder is a Non-U.S. Holder and certain other conditions are
met or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be
credited against the shareholder's federal income tax liability, if any, or
refunded, provided the required information is furnished to the Service.
CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the principal Canadian federal
income tax consequences under the Income Tax Act (Canada) (the "Canadian Act")
and the Canada-U.S. Tax Convention (1980) (the "U.S. Treaty") of the
Domestication (also referred to as a "Continuance" under Section 37 of the BCCA)
and the exercise of dissent rights as described herein to shareholders and
holders of Warrants and Options of the Company.
This summary is based upon and takes into account the current
provisions of the Canadian Act and the current regulations thereunder (the
"Regulations"), all specific proposals to amend the Canadian Act and the
Regulations publicly announced by the Minister of Finance prior to the date
hereof (the "Amendments"), and the Company's understanding of the current
administrative practices published by Revenue Canada ("RCT"). This summary does
not otherwise take into account or anticipate any changes in law, whether by
judicial, governmental or legislative decision or action, nor, except as
specifically noted herein, does it take into account tax laws or considerations
of any province or territory of Canada or any jurisdiction outside Canada.
Moreover, there can be no assurance that the Amendments will be enacted as
proposed or that the Canadian Act, the Regulations thereunder or the
administrative practices of RCT, respectively, will not change, in a manner
which will affect the tax consequences of the transactions to the Company, the
shareholders or the holders of Warrants and Options.
This summary is based on the facts and agreements described herein and
is also based on the assurances of management of the Company that no other
transactions have been undertaken or are contemplated that would affect the
matters dealt with herein.
This summary is restricted to those shareholders and holders of
Warrants and Options of the Company who, for purposes of the Canadian Act, are
resident in Canada, deal at arm's length with the Company and hold their shares
or Warrants and Options as capital property. A share, Warrant, or Option will
generally be capital property to holders
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unless it is held in the course of carrying on a business of trading or dealing
in securities, has been acquired in a transaction or transactions considered to
be an adventure in the nature of trade, or is a mark-to-market property of
certain financial institutions.
This summary is of a general nature only, is not exhaustive of all
potentially relevant Canadian federal income tax considerations and is not
intended to be, nor should it be construed to be, legal or tax advice to any
particular shareholder or holder of Warrants and Options. Therefore,
shareholders and holders of Warrants and Options should consult their own tax
advisers with respect to their particular circumstances.
Domestication; Shareholders Consequences. The Domestication will not
constitute a taxable event for the Company's shareholders or holders of Warrants
and Options. Shareholders or holders of Warrants and Options of the Company will
continue to hold their shares or Warrants and Options at the same adjusted cost
base as before the Domestication.
Any dividends paid by the Company to its shareholders on the Common
Stock after the Domestication must be included in computing their income.
After the Domestication, in the case of shareholders who are
individuals, dividends received on Common Stock, as dividends on shares of a
foreign corporation, will not be entitled to the benefit of the gross up and
dividend tax credit rules in the Canadian Act. After the Domestication, in the
case of corporate shareholders of which the Company is not a foreign affiliate
for purposes of the Canadian Act, dividends received on Common Stock are not
deductible in computing taxable income.
Under the U.S. Treaty, the U.S. withholding tax on dividends paid by
the Company after the Domestication will be 15 percent in most cases, and six
percent for dividends paid in 1997 in the case of a Canadian corporation that
owns at least 10 percent of the voting stock of the Company at the time the
dividend is paid.
U.S. withholding taxes imposed on such dividends may either be credited
against Canadian taxes payable by the investor, or deducted by such investor in
computing income for Canadian tax purposes, at the investor's option, subject to
the detailed rules in the Canadian Act in that regard.
Special rules apply to corporate shareholders that receive dividends
from a foreign affiliate and such shareholders are advised to consult their own
tax advisers with respect thereto.
Domestication; Dissenting Shareholders. The consequences under the
Canadian Act to a shareholder who dissents from the Domestication described
herein and who receives a payment for his shares are discussed below.
The receipt by a dissenting shareholder of a cash payment from the
Company equal to the fair value of his Common Stock prior to the completion of
the Domestication will generally be treated as a dividend to the holder of such
shares to the extent that such payment exceeds the paid-up capital for purposes
of the Canadian Act of the subject shares. The balance of the fair value paid
(i.e. the amount equal to the paid-up capital of the shares) will generally be
treated as proceeds of disposition of the subject shares for capital gains
purposes. Consequently, such dissenting shareholders would realize a capital
gain (capital loss) to the extent that the proceeds of disposition he receives
for the share exceed (are exceeded by) the shareholder's adjusted cost base
thereof. Notwithstanding the foregoing, if the dissenting recipient shareholder
is a corporation resident in Canada, the full amount of the redemption proceeds
received may be treated under the Canadian Act as proceeds of disposition, with
the result that no dividend will be deemed to have been paid to the shareholder
and any gain or loss realized by it upon disposition of the shares will be
determined by reference to the full amount of the redemption proceeds. Corporate
shareholders should consult their own adviser with respect to the applicability
of these provisions.
If the dissenting shareholder receives such cash payment after the
Domestication, the payment will be treated as proceeds of disposition of the
subject shares for capital gains purposes. Accordingly, the dissenting
shareholder will realize a capital gain or loss as described above.
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Any capital loss arising on the exercise of dissent rights by a
corporate shareholder of the Company will be reduced by dividends received or
deemed to be received, including any deemed dividend arising from the exercise
of dissent rights, on the subject shares to the extent and under the
circumstances prescribed in the Canadian Act. Similar rules apply where a
corporation is a member of a partnership or a beneficiary of a trust that owns
shares of the Company. Under the Amendments, these rules will be extended to
apply where a trust or partnership is a member of a partnership or a beneficiary
of a trust that owns shares of the Company.
Domestication; Company Consequences. The "corporate emigration" rules
under the Canadian Act will apply upon Domestication. Accordingly, the Company
will be deemed to have completed a taxation year immediately prior to it being
granted articles of continuance in Delaware. In addition, each property owned by
the Company immediately before the deemed year-end will be deemed to have been
disposed by it for proceeds of disposition equal to that property's fair market
value and immediately reacquired at a cost equal to such proceeds of
disposition. Any gains or losses derived by the Company from such deemed
disposition of property will be taken into account in determining the amount of
the Company's taxable income for the taxation year which ends immediately before
the Domestication. The amount of any taxable income so determined will be
subject to tax in accordance with the provisions of the Canadian Act, and
payable within 60 days after the Domestication. However, since the Company will
realize no gain on such deemed disposition, the Company will incur no tax as a
result of the Domestication.
The Company will also be required to pay a special branch tax
applicable to the amount by which the fair market value of the Company's
property exceeds the aggregate of its liabilities, including any liabilities
under the Canadian Act (other than the special branch tax itself), and the
paid-up capital of its issued and outstanding shares at the time of the
Domestication. The rate of tax under the U.S. Treaty is six percent, on the
assumption that the Domestication occurs in 1998.
Following completion of the Domestication, the Company will be
considered to be a resident of the United States for Canadian tax purposes.
Accordingly, it would only be required to pay Canadian tax on Canadian-source
income rather than on its worldwide income.
ELIGIBILITY FOR INVESTMENT UNDER THE CANADIAN ACT
Following the Domestication, the Common Stock or the Common Stock of
the Company as a Delaware corporation, as the case may be, will not be qualified
investments under the Canadian Act for trusts governed by registered retirement
savings plans, registered retirement income funds and deferred profit sharing
plans until the Common Stock or the Common Stock of the Company as a Delaware
corporation, as the case may be, are listed on a prescribed stock exchange.
Following the Domestication, the Common Stock or the Common Stock of the Company
as a Delaware corporation, as the case may be, will be considered foreign
property for the purposes of the foreign property limitations under the Canadian
Act subject, however, to a 24 month grace period that generally applies to
shares that had been held, or were exchanged for shares that had been held,
prior to the Domestication. Pursuant to the Amendments, however, if an entity
subject to the foreign property limitations acquired all of its Common Stock
after 1995, otherwise than as a consequence of the exercise of rights acquired
before 1996, its Common Stock will be classified as foreign property from the
time of acquisition and it will not be eligible for such 24 month grace period.
SUMMARY
The foregoing discussion of the tax aspects of the Domestication is a
summary of the most significant of such aspects, based on the law as presently
interpreted. There is no assurance that the present law or interpretations
thereof will not be changed, with or without retroactive effect, or that the
Service will agree with the conclusions of counsel as to the tax matters
discussed above.
THE FOREGOING SUMMARY IS OF A GENERAL NATURE ONLY AND IT IS NOT INTENDED TO BE,
NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY SHAREHOLDER OF THE
COMPANY. ACCORDINGLY, SHAREHOLDERS OF THE COMPANY SHOULD CONSULT THEIR OWN TAX
ADVISERS FOR ADVICE WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES TO THEM
OF THE PROPOSED DOMESTICATION AND THE EXERCISE OF DISSENT RIGHTS.
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LEGAL OPINIONS
Certain legal matters relating to the Domestication have been passed
upon for the Company by Looper, Reed, Mark & McGraw, Incorporated, Houston,
Texas.
OTHER MATTERS
The Board of Directors knows of no other matter to be presented at the
Meeting. If any additional matter should be presented properly, it is intended
that the enclosed proxy will be voted in accordance with the discretion of the
persons named in the proxy.
OTHER INFORMATION
The Consolidated Financial Statements included herein were audited by
Kraft, Rothman, Berger, Grill, Schwartz & Cohen, auditors of the Company. No
disagreement over accounting practices of the Company exists.
The estimates of proved reserves of oil and gas and related estimates
of future net revenues and present value thereof as of _________ included in
this Joint Proxy Statement/Prospectus have been derived from the reports of ___,
and all such information has been so included in reliance on the authority of
such firm as experts regarding the matters contained in their report.
The estimates of ore as of _________ included in this Joint Proxy
Statement/Prospectus have been derived from the reports of Edward O. Strandberg,
Jr., P.E., and all such information has been so included in reliance on the
authority of such firm as experts regarding the matters contained in their
report.
A copy of the exhibits to this Joint Proxy Statement/Prospectus
submitted to the Commission is available to each shareholder of record, at the
cost of duplication, upon receipt of a written request addressed to the Company
at 120 Prosperous Place, Suite 201, Lexington, Kentucky 40509. The Company will
also make these materials available at the same cost to "beneficial owners" of
such securities upon receipt of a similar written request, containing a
representation that, as of April ___, 1999, such person was a beneficial owner
of shares of the Common Stock.
All information contained in this Joint Proxy Statement/Prospectus
relating to the occupations and security holdings of directors and officers of
the Company is based upon information received by the Company from such
directors and officers.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL GENERAL MEETING OF SHAREHOLDERS
Proposals of shareholders intended to be presented at the 2000 Annual
General Meeting of Shareholders must be received by the Company by ___, 1999 to
be considered for inclusion in the proxy statement and form of proxy relating to
the 2000 meeting.
APPROVAL OF JOINT PROXY STATEMENT/PROSPECTUS
This Joint Proxy Statement/Prospectus and the enclosed form of proxy,
and the sending thereof to the shareholders of the Company, have been approved
by the Board of Directors of the Company.
By Order of the Board of Directors,
/s/ William S. Daugherty
William S. Daugherty,
Chairman of the Board and President
December 29, 1998
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EXHIBITS
Exhibit A Special Resolution with respect to the Domestication
Exhibit B Form of Certificate of Domestication of Daugherty Resources,
Inc.
Exhibit C Certificate of Incorporation of Daugherty Resources, Inc.
Exhibit D Bylaws of Daugherty Resources, Inc.
Exhibit E Section 37 of the BCCA relating to Dissenter's Rights in
connection with the Domestication
Exhibit F Section 207 of the BCCA relating to Dissent Procedure
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EXHIBIT A
SPECIAL RESOLUTION
THE DOMESTICATION
Set forth below is the text of the resolution to be submitted with
respect to the Domestication to the Shareholders at the Meeting.
NOW THEREFORE BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:
1. The Company be and it is hereby authorized and directed to become
domesticated as a corporation incorporated under the laws of the State of
Delaware pursuant to the Delaware General Corporation Law (the "DGCL").
2. The Company be and it is hereby authorized and directed to adopt a
new Certificate of Incorporation and Bylaws, copies of which are attached to the
Joint Proxy Statement/Prospectus furnished to the shareholders, to be effective
upon the domestication of the Company as a Delaware corporation.
3. Any director or officer of the Company be and he is hereby
authorized and directed, for and in the name of and on behalf of the Company, to
execute all such documents under the corporate seal or otherwise and to do all
such other acts and things including without limitation, the execution of a
Certificate of Domestication in the prescribed form and the delivery thereof to
the Secretary of State of Delaware under the DGCL and the execution as an
incorporator of the Certificate of Incorporation attached hereto and the
delivery of the Certificate of Incorporation to the Secretary of State of
Delaware, as he may determine in his sole and absolute discretion to be
necessary or advisable to give effect to the foregoing provisions of this
resolution, the execution of any such document or the doing of any such act or
thing being conclusive evidence of such determination, provided that the
directors of the Company may, in their sole discretion revoke this special
resolution without further approval of the shareholders at any time prior to the
filing of the Certificate of Domestication with the Secretary of State of
Delaware.
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EXHIBIT B
CERTIFICATE OF DOMESTICATION OF
DAUGHERTY RESOURCES, INC.
UNDER SECTION 388 OF THE DELAWARE GENERAL CORPORATION LAW
1. The name of the corporation immediately prior to the filing of this
Certificate of Domestication is Daugherty Resources, Inc. (the "Company").
2. The Company was incorporated in the Province of British Columbia,
Canada, on February 5, 1979.
3. The name of the Company as set forth in its Certificate of
Incorporation filed in accordance with Section 103 of the General Corporation
Law of the State of Delaware is Daugherty Resources, Inc.
4. Immediately prior to the filing of this Certificate of
Domestication, the principal place of business of the Company was located in the
State of Kentucky.
IN WITNESS WHEREOF, this Certificate of Domestication has been executed
on this the ___ day of May, 1999.
DAUGHERTY RESOURCES, INC.
By__________________________________
William S. Daugherty, President
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EXHIBIT C
CERTIFICATE OF INCORPORATION
OF
DAUGHERTY RESOURCES, INC.
ARTICLE I
The name of the Company is DAUGHERTY RESOURCES, INC.
ARTICLE II
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Company shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
1. AUTHORIZED STOCK. The total number of shares of stock which the
Company shall have authority to issue is 105,000,000, consisting of 100,000,000
shares of common stock, par value $0.001 per share (the "Common Stock"), and
5,000,000 shares of preferred stock, par value $0.001 per share (the "Preferred
Stock").
2. PREFERRED STOCK. The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized to create and
provide for the issuance of shares of Preferred Stock in series and, by filing a
certificate pursuant to the applicable law of the State of Delaware (the
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designations, powers,
preferences and rights of the shares of each such series and the qualifications,
limitations or restrictions thereof. The authority of the Board of Directors
with respect to each series shall include, but not be limited to, determination
of the following:
(a) The designation of the series, which may be by
distinguishing number, letter or title.
(b) The number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the Preferred
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
(c) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series.
(d) The dates at which dividends, if any, shall be payable.
(e) The redemption rights and price or prices, if any, for
shares of the series.
(f) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
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(g) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company.
(h) Whether the shares of the series shall be convertible into
shares of any other class or series, or any other security, of the Company or
any other corporation, and, if so, the specification of such other class or
series of such other security, the conversion price or prices or rate or rates,
any adjustments thereof, the date or dates at which such shares shall be
convertible and all other terms and conditions upon which such conversion may be
made.
(i) Restrictions on the issuance of shares of the same series
or of any other class or series.
(j) The voting rights, if any, of the holders of shares of the
series.
(k) Such other powers, preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof as the Board of Directors shall determine.
3. COMMON STOCK. The Common Stock shall be subject to the express terms
of the Preferred Stock and any series thereof. Each share of Common Stock shall
be equal to each other share of Common Stock. The holders of shares of Common
Stock shall be entitled to one vote for each such share upon all questions
presented to the stockholders.
4. VOTING RIGHTS. Except as may be provided in this Certificate of
Incorporation or in a Preferred Stock Designation, or as may be required by
applicable law, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, and holders of shares of
Preferred Stock shall not be entitled to receive notice of any meeting of
stockholders at which they are not entitled to vote. At each election for
directors every stockholder entitled to vote at such election shall have the
right to vote, in person or by proxy, the number of shares owned by him for as
many persons as there are directors to be elected and for whose election he has
a right to vote. It is expressly prohibited for any stockholder to cumulate his
votes in any election of directors.
5. DENIAL OF PREEMPTIVE RIGHTS. No stockholder of the Company shall by
reason of his holding shares of any class have any preemptive or preferential
right to purchase or subscribe to any shares of any class of the Company now or
hereafter to be authorized or any notes, debentures, bonds, or other securities
convertible into or carrying options or warrants to purchase shares of any
class, now or hereafter to be authorized, whether or not the issuance of any
such shares, or such notes, debentures, bonds or other securities would
adversely affect dividend or voting rights of such stockholder, other than such
rights, if any, as the Board of Directors in its discretion may fix; and the
Board of Directors may issue shares of any class of the Company, or any notes,
debentures, bonds, or other securities convertible into or carrying options or
warrants to purchase shares of any class, without offering any such shares of
any class, either in whole or in part, to the existing stockholders of any
class.
ARTICLE V
The name and mailing address of the incorporator is as follows:
Name Address
---- -------
Norman T. Reynolds 1300 Post Oak Boulevard, Suite 2000
Houston, Texas 77056
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ARTICLE VI
The number of directors constituting the initial Board of Directors of
the Company is three. The names and addresses of the persons who are to serve as
directors until the first annual meeting of the stockholders, or until their
successors have been elected and qualified are:
Name Address
---- -------
William S. Daugherty 120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
James K. Klyman 120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Charles L. Cotterell 120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
ARTICLE VII
All of the corporate powers of the Company shall be vested in and
exercised by a Board of Directors consisting of the number of directors
specified in the Bylaws of the Company. In furtherance and not in limitation of
the powers conferred by statute, the Board of Directors is expressly authorized:
(a) To authorize and cause to be executed mortgages and liens
upon the real and personal property of the Company.
(b) To set apart out of any of the funds of the Company
available for dividends a reserve or reserves for any proper purpose and to
abolish any such reserve in the manner in which it was created.
(c) The Board of Directors may, by resolution adopted by a
majority of the whole Board, designate an Executive Committee, and one or more
additional committees, to exercise, subject to applicable provisions of law,
such powers of the Board in the management of the business and affairs of the
Company as set forth in said resolution, but no such committee shall have the
power or authority in reference to the following matters: (i) approving or
adopting, or recommending to the stockholders, any action or matter expressly
required to be submitted to the stockholders for approval or, (ii) adopting,
amending or repealing any Bylaw of the Company. The Executive Committee and each
such other committee shall consist of two or more directors of the Company. The
Board of Directors may designate one or more directors as alternate members of
any committee, who may replace any absent or disqualified member at any meeting
of the committee. Any such committee may to the extent permitted by law exercise
such powers and shall have such responsibilities as shall be specified in the
designating resolution. In the absence or disqualification of any member of such
committee or committees, the member or members thereof present at any meeting
and not disqualified from voting, whether or not constituting a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member.
(d) When and as authorized by the stockholders in accordance
with law, to sell, lease or exchange all or substantially all of the property
and assets of the Company, including its good will and its corporate franchises,
upon such terms and conditions and for such consideration, which may consist in
whole or in part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as its board of directors
shall deem expedient and for the best interests of the Company.
ARTICLE VIII
Whenever a compromise or arrangement is proposed between the Company
and its creditors or any class of them and/or between the Company and its
stockholders or any class of them, any court of equitable jurisdiction within
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the State of Delaware may, on the application in a summary way of the Company or
of any creditor or stockholder thereof or on the application of any receiver or
receivers appointed for the Company under the provisions of Section 291 of Title
8 of the Delaware Code or on the application of trustees in dissolution or of
any receiver or receivers appointed for the Company under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Company, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Company, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Company as a consequence of such
compromise or arrangement, the said compromise or arrangement and said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Company, as the case may
be, and also on the Company.
ARTICLE IX
Bylaws of the Company may be adopted, amended or repealed by the Board
of Directors or by the affirmative vote of the holders of a majority of the
Company's stock, outstanding and entitled to vote at the meeting at which any
Bylaw is adopted, amended or repealed. Such Bylaws may contain any provision for
the regulation and management of the affairs of the Company and the rights or
powers of its stockholders, directors, officers or employees not inconsistent
with statute or this Certificate of Incorporation.
ARTICLE X
The Company reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE XI
The Company is to have perpetual existence.
ARTICLE XII
A director of the Company shall not be personally liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director; provided, however, that this Article shall not eliminate or limit the
liability of a director: (a) for any breach of the director's duty of loyalty to
the Company or stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (d) for any transaction
from which the director derived an improper personal benefit.
If the Delaware General Corporation Law is amended after the date of
filing of this Certificate to authorize corporate action further limiting or
eliminating the personal liability of a director, then the liability of the
directors of the Company shall be limited or eliminated to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. Any repeal or
modification of this Article by the stockholders of the Company or otherwise
shall not adversely affect any right or protection of a director of the Company
existing at the time of such repeal or modification.
ARTICLE XIII
The Company shall be governed by Section 203 of the Delaware General
Corporation Law. Provided, however, notwithstanding anything herein contained to
the contrary, the provisions of Section 203 of the Delaware General Corporation
Law shall not be applicable to William S. Daugherty.
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ARTICLE XIV
The Company shall indemnify each director and officer of the Company
who may be indemnified, to the fullest extent permitted by Section 145 of the
Delaware General Corporation Law ("Section 145"), as it may be amended from time
to time, in each and every situation where the Company is obligated to make such
indemnification pursuant to Section 145. In addition, the Company shall
indemnify each of the Company's directors and officers in each and every
situation where, under Section 145, the Company is not obligated, but is
permitted or empowered, to make such indemnification. The Company may, in the
sole discretion of the Board, indemnify any other person who may be indemnified
pursuant to Section 145 to the extent the Board deems advisable, as permitted by
such section. The Company shall promptly make or cause to be made any
determination which Section 145 requires.
ARTICLE XV
1. No contract or transaction between the Company and one or more of
its directors or officers, or between the Company and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers, are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board or
committee which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose, if: (a) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board or the committee, and the Board or committee in good
faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (b) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by a vote of the stockholders; or (c) the
contract or transaction is fair as to the Company as of the time it is
authorized, approved or ratified, by the Board, a committee or the stockholders.
2. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board or of a committee which
authorizes the contract or transaction.
I, the undersigned, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, do make this Certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this ___ day of May, 1999.
------------------------------
NORMAN T. REYNOLDS
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EXHIBIT D
BYLAWS OF DAUGHERTY RESOURCES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
ARTICLE I
OFFICES AND RECORDS
1.1 DELAWARE OFFICE. The principal office of DAUGHERTY RESOURCES, INC.
(the "Company") in the State of Delaware shall be located in the City of
Wilmington, County of New Castle, and the name and address of its registered
agent is The Corporation Trust Company, 1209 Orange Street, Wilmington,
Delaware.
1.2 OTHER OFFICES. The Company may have such other offices, either
within or without the State of Delaware, as the Board of Directors may from time
to time designate or as the business of the Company may from time to time
require.
1.3 BOOKS AND RECORDS. The books and records of the Company may be kept
outside the State of Delaware at such place or places as may from time to time
be designated by the Board of Directors.
ARTICLE II
STOCKHOLDERS
2.1 ANNUAL MEETING. The annual meeting of stockholders of the Company
shall be held at such place, either within or without the State of Delaware, and
at such time and date as the Board of Directors, by resolution, shall determine
for the purpose of electing directors and for the transaction of such other
business as may be properly brought before the meeting.
2.2 SPECIAL MEETING. Subject to the rights of the holders of any series
of stock having a preference over the Common Stock of the Company as to
dividends or upon liquidation (the "Preferred Stock") to elect additional
directors under specific circumstances, special meetings of the stockholders may
be called by the Board of Directors or by one or more stockholders holding at
least one-tenth of the shares entitled to vote at any such meeting.
2.3 PLACE OF MEETING. The Board of Directors may designate the place of
meeting for any meeting of the stockholders. If no designation is made by the
Board of Directors, the place of meeting shall be the principal place of
business of the Company in Lexington, Kentucky.
2.4 NOTICE OF MEETING. Written or printed notice, stating the place,
day and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be prepared and delivered by the Company not less than 10 days nor
more than 60 days before the date of the meeting, either personally or by mail,
to each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States mail
with postage thereon prepaid, addressed to the stockholder at such stockholder's
address as it appears on the stock transfer books of the Company. Such further
notice shall be given as may be required by law. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Company's notice of meeting. Meetings may be held
without notice if all stockholders entitled to vote are present, or if notice is
waived by those not present in accordance with Section 7.4 of these Bylaws. Any
previously scheduled meeting of the stockholders may be postponed by resolution
of the Board of Directors upon public notice given prior to the time previously
scheduled for such meeting of stockholders.
2.5 QUORUM AND ADJOURNMENT. Except as otherwise provided by law or by
the Certificate of Incorporation, the holders of a majority of the voting power
of the outstanding shares of the Company entitled to vote generally in the
election of directors (the "Voting Stock"), represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders, except that when
specified business is to be voted on by a class or series voting as a class, the
holders of a majority of the voting power of the shares of such class or series
shall constitute a quorum for the transaction of such business. The chairman of
the meeting or a majority of the shares of Voting Stock so represented may
adjourn the meeting from time to time, whether or not there is such a quorum
(or, in the case of specified business
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to be voted on by a class or series, the chairman or a majority of the shares of
such class or series so represented may adjourn the meeting with respect to such
specified business). No notice of the time and place of adjourned meetings need
be given except as required by law. The stockholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
2.6 PROXIES. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or as may be permitted by law, or
by such stockholder's duly authorized attorney-in-fact. Such proxy must be filed
with the Secretary of the Company or such stockholder's representative at or
before the time of the meeting.
2.7 NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETINGS OF STOCKHOLDERS.
(1) Nominations of persons for election to the
Board of Directors of the Company and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (a)
pursuant to the Company's notice of meeting delivered pursuant to Section 2.4 of
these Bylaws, (b) by or at the direction of the Board of Directors, or (c) by
any stockholder of the Company who is entitled to vote at the meeting, who
complied with the notice procedures set forth in clauses (2) and (3) of this
paragraph (A) and this Bylaw and who was a stockholder of record at the time
such notice is delivered to the Secretary of the Company.
(2) For nominations or other business to be properly
brought before an annual meeting by a stockholder pursuant to clause (c) of
paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice
thereof in writing to the Secretary of the Company and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal office
of the Company not less than 70 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of an annual meeting is advanced by more than 30 days,
or delayed by more than 70 days, from the first anniversary date of the previous
year's annual meeting, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 70th day prior to such
annual meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the Company. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the regulations promulgated thereunder, including such person's written consent
to being named in the proxy statement as a nominee and to serving as a director
if elected; (b) as to any other business that the stockholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (c) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such stockholder,
as they appear on the Company's books, and of such beneficial owner, and (ii)
the class and number of shares of the Company which are owned beneficially and
of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence
of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number
of directors to be elected to the Board of Directors of the Company is increased
and there is no public announcement by the Company naming all of the nominees
for director or specifying the size of the increased Board of Directors made by
the Company at least 80 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this Bylaw shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal office of the Company not later than the close of business on the 10th
day following the day on which such public announcement is first made by the
Company.
(B) SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Company's notice of meeting
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pursuant to Section 2.4 of these Bylaws. Nominations of persons for election to
the Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Company's notice of meeting (a) by
or at the direction of the Board of Directors, or (b) by any stockholder of the
Company who is entitled to vote at the meeting, who complies with the notice
procedures set forth in this Bylaw and who is a stockholder of record at the
time such notice is delivered to the Secretary of the Company. Nominations by
stockholders of persons for election to the Board of Directors may be made at
such a special meeting of stockholders if the stockholder's notice as required
by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the
principal executive offices of the Company not earlier than the 90th day prior
to such special meeting and not later than the close of business on the later of
the 70th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Board of Directors to be elected at such
meeting.
(C) GENERAL.
(1) Only persons who are nominated in accordance
with the procedures set forth in this Bylaw shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Bylaw. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed in accordance with the
procedures set forth in this Bylaw and, if any proposed nomination or business
is not in compliance with this Bylaw, to declare that such defective proposal or
nomination shall be disregarded.
(2) For purposes of this Bylaw, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Company with the Securities and Exchange Commission pursuant to
Sections 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this
Bylaw, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect
any rights of stockholders to request inclusion of proposals in the Company's
proxy statement pursuant to Rule 14a-8 under the Exchange Act.
2.8 PROCEDURE FOR ELECTION OF DIRECTORS. Election of directors at all
meetings of the stockholders at which directors are to be elected may be by
written ballot, and, subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specific circumstances, a
plurality of the votes cast thereat shall elect. Except as otherwise provided by
law, the Certificate of Incorporation or these Bylaws, all matters other than
the election of directors submitted to the stockholders at any meeting shall be
decided by a majority of the votes cast with respect thereto.
2.9 INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS.
(A) The Board of Directors by resolution shall appoint one or
more inspectors, which inspector or inspectors may include individuals who serve
the Company in other capacities, including, without limitation, as officers,
employees, agents or representatives of the Company, to act at a meeting of
stockholders and make a written report thereof. One or more persons may be
designated as alternate inspectors to replace any inspector who fails to act. If
no inspector or alternate has been appointed to act, or if all inspectors or
alternates who have been appointed are unable to act at a meeting of
stockholders, the chairman of the meeting shall appoint one or more inspectors
to act at the meeting. Each inspector, before discharging his duties, shall take
and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability. The inspectors shall have
the duties prescribed by the General Corporation Law of the State of Delaware.
(B) The secretary of the meeting shall fix and announce at the
meeting the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at a meeting.
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2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT. Any action required to be
taken at any annual or special meeting of stockholders, or any action which may
be taken at any such meeting, may be taken without a meeting, without prior
notice and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
ARTICLE III
BOARD OF DIRECTORS
3.1 GENERAL. The business and affairs of the Company shall be managed
by or under the direction of its Board of Directors. In addition to the powers
and authorities by these Bylaws expressly conferred upon them, the Board of
Directors may exercise all such powers of the Company and do all such lawful
acts and things as are not by law or by the Certificate of Incorporation or by
these Bylaws required to be exercised or done by the stockholders.
3.2 NUMBER, TENURE AND QUALIFICATIONS. Subject to the rights of the
holders of any series of Preferred Stock to elect directors under specific
circumstances, the number of directors shall be fixed from time to time pursuant
to a resolution adopted by a majority of the Board of Directors but shall
consist of not less than three directors. Each director shall hold office until
his successor shall have been duly elected and qualified.
3.3 REGULAR MEETINGS. A regular meeting of the Board of Directors may
be held without other notice than this Bylaw immediately after, and at the same
place as, each annual meeting of stockholders. The Board of Directors may, by
resolution, provide the time and place for the holding of additional regular
meetings without other notice than such resolution.
3.4 SPECIAL MEETINGS. Special meetings of the Board of Directors shall
be called at the request of the Chairman of the Board, the Chief Executive
Officer or a majority of the Board of Directors. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
3.5 NOTICE. Notice of any special meeting shall be given to each
director at such director's business or residence in writing or by telegram or
by telephone communication. If mailed, such notice shall be deemed adequately
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid, at least five days before such meeting. If by telegram, such
notice shall be deemed adequately delivered when the telegram is delivered to
the telegraph company at least 24 hours before such meeting. If by facsimile
transmission, such notice shall be transmitted at least 24 hours before such
meeting. If by telephone, the notice shall be given at least 12 hours prior to
the time set for the meeting. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice of such meeting. A meeting may be held at any time
without notice if all the directors are present or if those not present waive
notice of the meeting in writing, either before or after such meeting.
3.6 QUORUM. A majority of the Board of Directors shall constitute a
quorum for the transaction of business, but if at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of the directors
present may adjourn the meeting from time to time without further notice. The
act of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors. The directors present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum.
3.7 VACANCIES. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specific circumstances, and
unless the Board of Directors otherwise determines, vacancies resulting from
death, resignation, retirement, disqualification, removal from office or other
cause, and newly created directorships resulting from any increase in the
authorized number of directors, shall be filled by the affirmative vote of a
majority of the remaining directors, though less than a quorum of the Board of
Directors, and directors so chosen shall hold office for a term expiring at the
next annual meeting of stockholders and until such director's successor shall
have been duly elected and qualified. No decrease in the number of authorized
directors shall shorten the term of any incumbent director.
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3.8 EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may, by
resolution adopted by a majority of the whole Board, designate an Executive
Committee, and one or more additional committees, to exercise, subject to
applicable provisions of law, such powers of the Board in the management of the
business and affairs of the Company as set forth in said resolution, but no such
committee shall have the power or authority in reference to the following
matters: (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required to be submitted to the stockholders for
approval or (ii) adopting, amending or repealing any Bylaw of the Company. The
Executive Committee and each such other committee shall consist of two or more
directors of the Company. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee may to
the extent permitted by law exercise such powers and shall have such
responsibilities as shall be specified in the designating resolution. In the
absence or disqualification of any member of such committee or committees, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not constituting a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member. Each committee shall keep written minutes of its
proceedings and shall report such proceedings to the Board of Directors when
required.
A majority of any committee may determine its action and fix the time
and place of its meetings, unless the Board of Directors shall otherwise
provide. Notice of such meetings shall be given to each member of the committee
in the manner provided for in Section 3.5 of these Bylaws. The Board of
Directors shall have power at any time to fill vacancies in, to change the
membership of, or to dissolve any such committee. Nothing herein shall be deemed
to prevent the Board of Directors from appointing one or more committees
consisting in whole or in part of persons who are not directors of the Company;
provided, however, that no such committee shall have or may exercise any
authority of the Board of Directors.
3.9 REMOVAL. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specific circumstances, any
director, or the entire Board of Directors, may be removed from office at any
time, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
ARTICLE IV
OFFICERS
4.1 ELECTED OFFICERS. The elected officers of the Company shall be a
Chairman of the Board, a Chief Executive Officer, one or more Vice Presidents, a
Secretary, and such other officers (including, without limitation, a President)
as the Board of Directors from time to time may deem proper. The Chairman of the
Board may also serve as the Chief Executive Officer. The Chairman of the Board
shall be chosen from the directors. All officers chosen by the Board of
Directors shall each have such powers and duties as generally pertain to their
respective stockholders and of the Board of Directors. The Chairman shall make
reports to the Board of Directors and the stockholders, and shall perform all
such other duties as are properly required of him by the Board of Directors.
4.2 ELECTION AND TERM OF OFFICE. The elected officers of the Company
shall be elected annually by the Board of Directors at the regular meeting of
the Board of Directors held at the time of each annual meeting of the
stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as convenient. Subject to Section
4.8 of these Bylaws, each officer shall hold office until such officer's
successor shall have been duly elected and shall have qualified or until such
officer's death or until such officer shall resign.
4.3 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at
all meetings of the stockholders and of the Board of Directors. The Chairman
shall make reports to the Board of Directors and the stockholders and shall
perform all such other duties as are properly required of him by the Board of
Directors.
4.4 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be
responsible for the general management of the affairs of the Company and shall
perform all duties incidental to the Chief Executive Officer's office which may
be required by law and all such other duties as are properly required of him by
the Board of Directors. The Chief Executive Officer shall see that all orders
and resolutions of the Board of Directors and of any committee thereof are
carried into effect.
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4.5 PRESIDENT. The President (if one shall have been chosen by the
Board of Directors) shall act in a general executive capacity and shall assist
the Chairman of the Board in the administration and operation of the Company's
business and general supervision of its policies and affairs. The President
shall, in the absence of or because of the inability to act of the Chairman of
the Board, perform all duties of the Chairman of the Board and preside at all
meetings of stockholders and of the Board of Directors. The President may sign,
alone or with the Secretary, or an Assistant Secretary, or any other proper
officer of the Company authorized by the Board of Directors, certificates,
contracts, and other instruments of the Company as authorized by the Board of
Directors.
4.6 VICE PRESIDENTS. Each Vice President shall have such powers and
perform such duties as from time to time may be assigned to him by the Board of
Directors or be delegated to him by the President. The Board of Directors may
assign to any Vice President general supervision and charge over any territorial
or functional division of the business and affairs of the Company.
4.7 SECRETARY. The Secretary shall give, or cause to be given, notice
of all meetings of stockholders and directors and all other notices required by
law or by these Bylaws, and in case of the Secretary's absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the Chairman of the Board, the Chief Executive Officer, or by the Board of
Directors, upon whose request the meeting is called as provided in these Bylaws.
The Secretary shall record all the proceedings of the meetings of the Board of
Directors, any committees thereof and the stockholders of the Company in a book
to be kept for that purpose, and shall perform such other duties as may be
assigned to him by the Board of Directors, the Chairman of the Board or the
Chief Executive Officer. The Secretary shall have the custody of the seal of the
Company and shall affix the same to all instruments requiring it, when
authorized by the Board of Directors, the Chairman of the Board or the Chief
Executive Officer, and attest to the same.
4.8 REMOVAL. Any officer elected by the Board of Directors may be
removed by a majority of the members of the whole Board whenever, in their
judgment, the best interests of the Company would be served thereby. No elected
officer shall have any contractual rights against the Company for compensation
by virtue of such election beyond the date of the election of such officer's
successor or such officer's death, resignation or removal, whichever event shall
first occur, except as otherwise provided in an employment contract or an
employee plan.
4.9 VACANCIES. A newly created office and a vacancy in any office
because of death, resignation, or removal may be filled by the Board of
Directors for the unexpired portion of the term at any meeting of the Board of
Directors.
ARTICLE V
STOCK CERTIFICATES AND TRANSFERS
5.1 STOCK CERTIFICATES AND TRANSFERS.
(A) The interest of each stockholder of the Company shall be
evidenced by certificates for shares of stock in such form as the appropriate
officers of the Company may from time to time prescribe, unless it shall be
determined by, or pursuant to, a resolution adopted by the Board of Directors
that the shares representing such interest be uncertificated. The shares of the
stock of the Company shall be transferred on the books of the Company by the
holder thereof in person or by such person's attorney, upon surrender for
cancellation of certificates for the same number of shares, with an assignment
and power of transfer endorsed thereon or attached thereto, duly executed, with
such proof of the authenticity of the signature as the Company or its agents may
reasonably require.
(B) The certificates of stock shall be signed, countersigned
and registered in such manner as the Board of Directors may by resolution
prescribe, which resolution may permit all or any of the signatures on such
certificates to be in facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Company with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
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ARTICLE VI
INDEMNIFICATION
6.1 MANDATORY INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party, or who was or is a witness without being
named a party, to any threatened, pending or completed action, claim, suit or
proceeding, whether civil, criminal, administrative or investigative, any appeal
in such an action, suit or proceeding, and any inquiry or investigation that
could lead to such an action, suit or proceeding (a "Proceeding"), by reason of
the fact that such individual is or was a Director or officer of the Company, or
while a Director or officer of the Company is or was serving at the request of
the Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another corporation, partnership,
trust, employee benefit plan or other enterprise, shall be indemnified and held
harmless by the Company from and against any judgments, penalties (including
excise taxes), fines, amounts paid in settlement and reasonable expenses
(including court costs and attorneys' fees) actually incurred by such person in
connection with such Proceeding if it is determined that he acted in good faith
and reasonably believed (A) in the case of conduct in his official capacity on
behalf of the Company that his conduct was in the Company's best interests, (B)
in all other cases, that his conduct was not opposed to the best interests of
the Company, and (C) with respect to any Proceeding which is a criminal action,
that he had no reasonable cause to believe his conduct was unlawful; provided,
however, that in the event a determination is made that such person is liable to
the Company or is found liable on the basis that personal benefit was improperly
received by such person, the indemnification is limited to reasonable expenses
actually incurred by such person in connection with the Proceeding and shall not
be made in respect of any Proceeding in which such person shall have been found
liable for willful or intentional misconduct in the performance of his duty to
the Company. The termination of any Proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself be determinative of whether the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any Proceeding which is a
criminal action, had no reasonable cause to believe that his conduct was
unlawful. A person shall be deemed to have been found liable in respect of any
claim, issue or matter only after the person shall have been so adjudged by a
court of competent jurisdiction after exhaustion of all appeals therefrom.
6.2 DETERMINATION OF INDEMNIFICATION. Any indemnification under the
foregoing Section 6.1 (unless ordered by a court of competent jurisdiction)
shall be made by the Company only upon a determination that indemnification of
such person is proper in the circumstances by virtue of the fact that it shall
have been determined that such person has met the applicable standard of
conduct. Such determination shall be made (A) by a majority vote of a quorum
consisting of Directors who at the time of the vote are not named defendants or
respondents in the Proceeding; (B) if such quorum cannot be obtained, by a
majority vote of a committee of the Board of Directors, designated to act in the
matter by a majority of all Directors, consisting solely of two or more
Directors who at the time of the vote are not named defendants or respondents in
the Proceeding; (C) by special legal counsel (in a written opinion) selected by
the Board of Directors or a committee of the Board by a vote as set forth in
clause (A) or (B) of this Section 6.2, or, if such quorum cannot be obtained and
such committee cannot be established, by a majority vote of all Directors (in
which Directors who are named defendants or respondents in the Proceeding may
participate); or (D) by the stockholders of the Company in a vote that excludes
the shares held by Directors who are named defendants or respondents in the
Proceeding.
6.3 ADVANCE OF EXPENSES. Reasonable expenses, including court costs and
attorneys' fees, incurred by a person who was or is a witness or who was or is
named as a defendant or respondent in a Proceeding, by reason of the fact that
such individual is or was a Director or officer of the Company, or while a
Director or officer of the Company is or was serving at the request of the
Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another corporation, partnership,
trust, employee benefit plan or other enterprise, shall be paid by the Company
at reasonable intervals in advance of the final disposition of such Proceeding,
and without the determination specified in the foregoing Section 6.2, upon
receipt by the Company of a written affirmation by such person of his good faith
belief that he has met the standard of conduct necessary for indemnification
under this Article 6, and a written undertaking by or on behalf of such person
to repay the amount paid or reimbursed by the Company if it is ultimately
determined that he is not entitled to be indemnified by the Company as
authorized in this Article 6. Such written undertaking shall be an unlimited
obligation of such person and it may be accepted without reference to financial
ability to make repayment.
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6.4 PERMISSIVE INDEMNIFICATION. The Board of Directors of the Company
may authorize the Company to indemnify employees or agents of the Company, and
to advance the reasonable expenses of such persons, to the same extent,
following the same determinations and upon the same conditions as are required
for the indemnification of and advancement of expenses to Directors and officers
of the Company.
6.5 NATURE OF INDEMNIFICATION. The indemnification and advancement of
expenses provided hereunder shall not be deemed exclusive of any other rights to
which those seeking indemnification may be entitled under the Certificate of
Incorporation, these Bylaws, any agreement, vote of stockholders or
disinterested Directors or otherwise, both as to actions taken in an official
capacity and as to actions taken in any other capacity while holding such
office, shall continue as to a person who has ceased to be a Director, officer,
employee or agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of such person.
6.6 INSURANCE. The Company shall have the power and authority to
purchase and maintain insurance or another arrangement on behalf of any person
who is or was a Director, officer, employee or agent of the Company, or who is
or was serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise against any
liability, claim, damage, loss or risk asserted against such person and incurred
by such person in any such capacity or arising out of the status of such person
as such, irrespective of whether the Company would have the power to indemnify
and hold such person harmless against such liability under the provisions
hereof. If the insurance or other arrangement is with a person or entity that is
not regularly engaged in the business of providing insurance coverage, the
insurance or arrangement may provide for payment of a liability with respect to
which the Company would not have the power to indemnify the person only if
including coverage for the additional liability has been approved by the
stockholders of the Company. Without limiting the power of the Company to
procure or maintain any kind of insurance or other arrangement, the Company may,
for the benefit of persons indemnified by the Company, (A) create a trust fund;
(B) establish any form of self-insurance; (C) secure its indemnity obligation by
grant of a security interest or other lien on the assets of the Company; or (D)
establish a letter of credit, guaranty, or surety arrangement. The insurance or
other arrangement may be procured, maintained, or established within the Company
or with any insurer or other person deemed appropriate by the Board of Directors
regardless of whether all or part of the stock or other securities of the
insurer or other person are owned in whole or part by the Company. In the
absence of fraud, the judgment of the Board of Directors as to the terms and
conditions of the insurance or other arrangement and the identity of the insurer
or other person participating in the arrangement shall be conclusive and the
insurance or arrangement shall not be voidable and shall not subject the
Directors approving the insurance or arrangement to liability, on any ground,
regardless of whether Directors participating in the approval are beneficiaries
of the insurance or arrangement.
6.7 NOTICE. Any indemnification or advance of expenses to a present or
former director of the Company in accordance with this Article 6 shall be
reported in writing to the stockholders of the Company with or before the notice
or waiver of notice of the next stockholders' meeting or with or before the next
submission of a consent to action without a meeting and, in any case, within the
next twelve month period immediately following the indemnification or advance.
6.8 CHANGE OF CONTROL. Following any "change of control" of the Company
of the type required to be reported under Item 1 of Form 8-K promulgated under
the Exchange Act, any determination as to entitlement to indemnification shall
be made by independent legal counsel selected by the claimant which independent
legal counsel shall be retained by the Board of Directors on behalf of the
Company.
6.9 AMENDMENT. Any amendment or repeal of this Article VI shall not
adversely affect any right or protection existing hereunder in respect of any
act or omission occurring prior to such amendment or repeal.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 FISCAL YEAR. The fiscal year of the Company shall be determined by
resolution of the Board of Directors.
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7.2 DIVIDENDS. The Board of Directors may from time to time declare,
and the Company may pay, dividends on its outstanding shares in the manner and
upon the terms and conditions provided by law and its Certificate of
Incorporation.
7.3 SEAL. The corporate seal may bear in the center the emblem of some
object, and shall have inscribed thereunder the words "Corporate Seal" and
around the margin thereof the words "Daugherty Petroleum, Inc. - Delaware."
7.4 WAIVER OF NOTICE. Whenever any notice is required to be given to
any stockholder or director of the Company under the provisions of the General
Corporation Law of the State of Delaware, a waiver thereof in writing, signed by
the person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice. Neither
the business to be transacted at, nor the purpose of, any annual or special
meeting of the stockholders or of the Board of Directors need be specified in
any waiver of notice of such meeting.
7.5 AUDITS. The accounts, books and records of the Company shall be
audited upon the conclusion of each fiscal year by an independent certified
public accountant selected by the Board of Directors, and it shall be the duty
of the Board of Directors to cause such audit to be made annually.
7.6 RESIGNATIONS. Any director or any officer, whether elected or
appointed, may resign at any time by serving written notice of such resignation
on the Chairman of the Board, the Chief Executive Officer, the President, if
any, or the Secretary, and such resignation shall be deemed to be effective as
of the close of business on the date said notice is received by the Chairman of
the Board, the Chief Executive Officer, the President, if any, or the Secretary
or at such later date as is stated therein. No formal action shall be required
of the Board of Directors or the stockholders to make any such resignation
effective.
ARTICLE VIII
AMENDMENTS
8.1 AMENDMENTS. These Bylaws may be amended, added to, rescinded or
repealed by the Board of Directors or by the affirmative vote of the holders of
a majority of the Company's stock, outstanding and entitled to vote at the
meeting at which any Bylaw is adopted, amended or repealed.
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EXHIBIT E
SECTION 37 OF THE COMPANY ACT (BRITISH COLUMBIA)
TRANSFER OF INCORPORATION FROM BRITISH COLUMBIA
AND DISSENTER'S RIGHTS
Section 37 (1) A company may, if authorized by
(a) a special resolution,
(b) the registrar, and
(c) the laws of another jurisdiction,
apply to the proper officer of that other jurisdiction for an
instrument of continuation continuing the company as if it had
been incorporated under the laws of that other jurisdiction.
(2) A company ceases to be a company within the meaning of this
Act on and after the date on which the company is continued
under the laws of the other jurisdiction, and the company must
promptly file with the registrar a copy of the instrument of
continuation certified by the proper officer of the other
jurisdiction.
(3) This section applies only in respect of a jurisdiction that
has laws that permit corporations incorporated under its laws
to apply for an instrument of continuation under the laws of
British Columbia.
(4) A member of the company may, until 2 days before the meeting
at which the special resolution referred to in subsection (1)
is to be passed, give notice of dissent to the company
concerning the member's shares, and in that event section 207
applies.
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EXHIBIT F
SECTION 207
DISSENT PROCEDURE
Section 207 (1) If,
(a) being entitled to give notice of dissent to a
resolution as provided in section 37, 103, 126, 222,
249 or 289, a member of a company (in this Act called
a "dissenting member") gives notice of dissent,
(b) the resolution referred to in paragraph (a) is
passed, and
(c) the company or its liquidator proposes to act on the
authority of the resolution referred to in paragraph
(a),
the company or the liquidator must first give to the
dissenting member notice of the intention to act and advise the dissenting
member of the rights of dissenting members under this section.
(2) On receiving a notice of intention to act in accordance with
subsection (1), a dissenting member is entitled to require the company to
purchase all of the dissenting member's shares in respect of which the notice of
dissent was given.
(3) The dissenting member must exercise the right given by subsection
(2) by delivering to the registered office of the company, within 14 days after
the company, or the liquidator, gives the notice of intention to act,
(a) a notice that the dissenting member requires the company
to purchase all of the dissenting member's shares referred to in subsection (2),
and
(b) the share certificates representing all of those shares,
and, on delivery of that notice and those share certificates,
the dissenting member is bound to sell those shares to the company and the
company is bound to purchase them.
(4) A dissenting member who has complied with subsection (3), the
company, or, if there has been an amalgamation, the amalgamated company, may
apply lo the count and the court may
(a) require the dissenting member to sell, and the company or
the amalgamated company to purchase, the shares in respect of which the notice
of dissent has been given,
(b) set the price and terms of the purchase and sale, or order
that the price and terms be established by arbitration, in either case having
due regard for the rights of creditors,
(c) join in the application any other dissenting member who
has complied with subsection (3), and
(d) make consequential orders end give directions it considers
appropriate.
(5) The price that must be paid to a dissenting member for the shares
referred to in subsection (2) is their fair value as of the day before the date
on which the resolution referred to in subsection (1) was passed, including any
appreciation or depreciation in anticipation of the vote on the resolution, and
every dissenting member who has complied with subsection (3) must be paid the
same price.
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(6) The amalgamation or winding up of the company, or any change in its
capital, assets or liabilities resulting from the company acting on the
authority of the resolution referred to in subsection (1), does not affect the
right of the dissenting member and the company under this section or the price
to on paid for the shares.
(7) Every dissenting member who has complied with subsection (3)
(a) may not vote, or exercise or assert any rights of a
member, in respect of the shares for which notice of dissent has been given,
other than under this section,
(b) may not withdraw the requirement to purchase the shares,
unless the company consents, and
(c) until the dissenting member is paid in full, may exercise
and assert all the rights of a creditor of the company.
(8) If the court determines that a person is not a dissenting member,
or is not otherwise entitled to the right provided by subsection (2), the court,
without prejudice to any acts or proceedings that the company, its members, or
any class of members may have taken during the intervening period, may make the
order it considers appropriate to remove the limitations imposed on the person
by subsection (7).
(9) The relief provided by this section is not available if, subsequent
to giving notice of dissent, the dissenting member acts inconsistently with the
dissent, but a request to withdraw the requirement to purchase the dissenting
member's shares is not an act inconsistent with the dissent.
(10) A notice of dissent ceases to be effective if the dissenting
member consents to or votes in favour of the resolution of the company to which
the dissent relates, unless the consent or vote is given solely as a proxy
holder for a person whose proxy required an affirmative vote.
F-2
<PAGE> 87
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of independent public accountants........................................ FS-2
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998............. FS-3
Consolidated Statements of Operations for the three months ended March 31,
1999, 1998 and 1997, and the years ended December 31, 1998, 1997 and 1996...... FS-4
Consolidated Statements of Stockholders' Equity for the three months ended
March 31, 1999, 1998, and 1997, and the years ended December 31, 1998,
1997 and 1996.................................................................. FS-5
Consolidated Statements of Cash Flows for the three months ended March 31,
1999, 1998 and 1997 and the years ended December 31, 1998, 1997 and 1996....... FS-6
Notes to Consolidated Financial Statements...................................... FS-7
</TABLE>
FS-1
<PAGE> 88
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Company Act (British Columbia) (the "BCCA" herein), the
Articles of the Company permit that the Company shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or proceeding, whether or not brought by the Company or by a
corporation or other legal entity or enterprise as hereinafter mentioned and
whether civil, criminal or administrative, by reason of the fact that he is or
was a director, officer, employee or agent of the Company or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, a partnership, joint venture, trust or other enterprise,
against all costs, charges and expenses, including legal fees and any amount
paid to settle the action or proceeding or satisfy a judgment, if he acted
honestly and in good faith with a view to the best interests of the corporation
or other legal entity or enterprise as aforesaid of which he is or was a
director, officer, employee or agent, as the case may be, and exercised the
care, diligence and skill of a reasonably prudent person, and with respect to
any criminal or administrative, action or proceeding, he had reasonable grounds
for believing that his conduct was lawful; provided that the Company shall not
be bound to indemnify any such person, other than a director, officer or an
employee of the Company (who shall be deemed to have notice of the article of
the Company's Article dealing with indemnification and to have contracted with
the Company in the terms hereof solely by virtue of his acceptance of such
office or employment) if in acting as agent for the Company or as a director,
officer, employee or agent of another corporation or other legal entity or
enterprise as aforesaid, he does so by written request of the Company containing
an express reference to said article; and provided further that no
indemnification of a director or former director of the Company, or director or
former director of a corporation in which the Company is or was a shareholder,
shall be made except to the extent approved by a court pursuant to the BCCA or
any other statute. The determination of any action, suit or proceeding by
judgment, order, settlement, conviction or otherwise shall not, of itself,
create a presumption that the person did not act honestly and in good faith and
in the best interests of the Company and did not exercise the care, diligence
and skill of a reasonably prudent person and, with respect to any criminal
action or proceeding, did not have reasonable grounds to believe that his
conduct was lawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
---------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3(a)* Memorandum and Articles for Catalina Energy &
Resources Ltd., a British Columbia corporation,
dated January 31, 1979, filed as an exhibit to
Form 10 Registration Statement filed May 25,
1984. File No. 0-12185.
3(b)* Certificate for Catalina Energy & Resources
Ltd., a British Columbia corporation, dated
November 27, 1981, changing the name of Catalina
Energy & Resources Ltd. to Alaska Apollo Gold
Mines Ltd., and further changing the authorized
capital of the Company from 5,000,000 shares of
common stock, without par value per share, to
20,000,000 shares of common stock,
II-1
<PAGE> 89
without par value per share, filed as an exhibit
to Form 10 Registration Statement filed May 25,
1984. File No. 0-12185.
3(c)* Certificate of Change of Name for Alaska Apollo
Gold Mines Ltd., a British Columbia corporation,
dated October 14, 1992, changing the name of
Alaska Apollo Gold Mines Ltd. to Daugherty
Resources, Inc., and further changing the
authorized capital of the Company from 20,000,000
shares of common stock, without par value per
share, to 6,000,000 shares of common stock,
without par value per share, filed as Exhibit 3(c)
to Form 10-K/A, amendment No. 1, for the Company
for the fiscal year ended December 31, 1993. (File
No. 0-12185).
3(d)* Altered Memorandum of Daugherty Resources, Inc., a
British Columbia corporation, dated September 9,
1994, changing the authorized capital of the
Company from 6,000,000 shares of common stock,
without par value per share, to 20,000,000 shares
of common stock, without par value per share,
filed as Exhibit 3(d) to Form 10-K/A, Amendment
No. 1, for the Company for the fiscal year ended
December 31, 1993. (File No. 0-12185).
3(e)* Special Resolution of Alaska Apollo Resources
Inc., a British Columbia corporation, dated June
22, 1998, changing the name of Alaska Apollo
Resources Inc. to Daugherty Resources, Inc., and
further changing the authorized capital of the
Company from 20,000,000 shares of common stock,
without par value per share, to 50,000,000 shares
of common stock, without par value per share, and
authorizing the creation of 6,000,000 shares of
preferred stock, without par value per share.
Altered Memorandum of Daugherty Resources, Inc., a
British Columbia corporation, dated June 24, 1998,
changing the authorized common stock of the
Company from 50,000,000 shares of common stock,
without par value per share, to 10,000,000 shares
of common stock, without par value per share.
Special Resolution of Alaska Apollo Resources
Inc., a British Columbia corporation, dated June
22, 1998, consolidating the authorized preferred
shares of 6,000,000 shares to 1,200,000 shares.
Altered Memorandum of Daugherty Resources, Inc., a
British Columbia corporation, dated June 25, 1998,
changing the authorized preferred stock of the
Company from 6,000,000 shares of preferred stock,
without par value per share, to 1,200,000 shares
of preferred stock, without par value per share.
Filed as an exhibit to Form 8-K, for the Company
dated July 10, 1998. (File No. 0-12185).
4* See Exhibit No. 3(a).
5** Opinion of Looper, Reed, Mark & McGraw as to the
legality of the securities to be issued.
8 Opinion of Looper, Reed, Mark & McGraw as to
certain tax matters.
10(a)* Daugherty Resources, Inc. 1997 Stock Option Plan,
filed as Exhibit 10(a) to Form 10-K for the
Company for the fiscal year ended December 3l,
1996. (File No. 0-12185).
10(b)* Incentive Stock Option Agreement by and between
Daugherty Resources, Inc. and William S.
Daugherty dated March 7, 1997, filed as Exhibit
10(b) to Form 10-K for the Company for the
fiscal year ended December 3l, 1996, (File
No. 0-12185).
10(c)* Warrant Agreement by and between Daugherty
Resources, Inc. and Jayhead Investments Limited
dated March 7, 1997, filed as Exhibit 10(c) to
Form 10-K for the Company for the fiscal year
ended December 31, 1996. (File No. 0-12185).
10(d)* Warrant Agreement by and between Daugherty
Resources, Inc. and Trio Growth Trust dated March
7, 1997, filed as Exhibit 10(d) to Form 10-K for
the Company for the fiscal year ended December 31,
1996. (File No. 0-12185).
II-2
<PAGE> 90
10(e)* Warrant Agreement by and between Daugherty
Resources, Inc. and Exergon Capital S.A. dated
March 7, 1997, filed as Exhibit 10(e) to Form 10-K
for the Company for the fiscal year
ended December 3l, 1996. (File No. 0-12185).
11 Computation of Per Share Earnings.
21 Subsidiaries of the Company:
- Niagara Oil, Inc., a Kentucky corporation.
- Daugherty Petroleum, Inc., a Kentucky
corporation.
- Red River Hardwoods, Inc., a Kentucky
corporation.
23(a)* Consent of Richard M. Russell & Associates, Inc.
described in Exhibit 23(a) to Form 10-K for the
Company for the fiscal year ended December 31,
1993. (File No. 0-12185).
23(b)* Consent of Kraft, Rothman, Berger, Grill, Schwartz
& Cohen described in Exhibit 23(b) to Form 10-KSB
for the Company for the fiscal year ended December
31, 1997. (File No. 0-12185).
23(c)* Consent of Edward O. Strandberg, Jr., P.E.
described in Exhibit 23(c) to Form 10-K for the
Company for the fiscal year ended December 31,
1993. (File No. 0-12185).
23(d)* Consent of Wright and Company, Inc. described in
Exhibit 23(d) to Form 10-KSB for the Company for
the fiscal year ended December 31, 1997. (File No.
0-12185).
24 Powers of Attorney.
27 Financial Data Schedule.
- --------------------------
* These exhibits are incorporated by reference.
** These exhibits are to be filed by amendment.
(b) Financial Statement Schedules.
------------------------------
No schedules are required as all information
required has been presented in the audited
financial statements.
ITEM 22. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes to file, during
any period in which offers or sales are being made, a post-effective amendment
to this Registration Statement.
(b) To include any prospectus required by Section 10(a)(3) of
the Securities Act.
(c) To reflect in the Joint Proxy Statement/Prospectus any
facts or events arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the Registration Statement.
(d) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(e) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE> 91
(f) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(g) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who maybe deemed
underwriters, in addition to the information called for by the other Items of
the applicable form. That every prospectus that is filed pursuant to this
paragraph (g) will be filed as a part of an amendment to the Registration
Statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act, each such post-
effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the registration statement relating to
the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(h) The undersigned Company hereby undertakes to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of this form within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration Statement
through the date of responding to the request.
(i) The undersigned Company hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Lexington, Kentucky, on December 29,
1998.
DAUGHERTY RESOURCES, INC.
By /s/ William S. Daugherty
-------------------------------------------
William S. Daugherty, Chairman of the Board
II-4
<PAGE> 92
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William S. Daugherty Chairman of the Board and December 29, 1998
---------------------------------- President
WILLIAM S. DAUGHERTY
/s/ Charles L. Cotterell* Director December 29, 1998
----------------------------------
CHARLES L. COTTERELL
/s/ James K. Klyman* Director December 29, 1998
----------------------------------
JAMES K. KLYMAN
/s/ Daryl J. Greattinger Chief Financial Officer December 29, 1998
----------------------------------
DARYL J. GREATTINGER
*By William S. Daugherty December 29, 1998
-----------------------------
William S. Daugherty,
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5
LOOPER, REED, MARK & McGRAW
Incorporated
Attorneys
1300 Post Oak Boulevard, Suite 2000
Norman T. Reynolds Houston, Texas 77056 Other Offices:
713-986-7180 713-986-7000 Dallas, Texas
[email protected] Fax 713-986-7100 Austin, Texas
April ___, 1999
Mr. William S. Daugherty
Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Re: Form S-4 Registration Statement
Gentlemen:
We have acted as counsel for Daugherty Resources, Inc. (the "Company")
in connection with the registration by the Company of ___ shares of its common
stock, without par value per share (the "Securities"), as contemplated by the
Company's Registration Statement on Form S-4 filed on the date hereof with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended.
In connection therewith, we have examined, among other things, the
Memorandum and Articles of Association, as amended, of the Company, the
corporate proceedings of the Company with respect to the issuance and
registration of the Securities, the Registration Statement, certificates of
public officials, statutes and other instruments and documents, as a basis for
the opinions expressed herein.
Based upon and subject to the foregoing, and upon such other matters as
we have determined to be relevant, we are of the opinion that:
1. The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the Province of British Columbia.
2. All of the Securities, upon issuance and delivery thereof, will be
validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement.
Very truly yours,
LOOPER, REED, MARK & McGRAW
<PAGE> 1
EXHIBIT 8
LOOPER, REED, MARK & McGRAW
Incorporated
Attorneys
1300 Post Oak Boulevard, Suite 2000
Norman T. Reynolds Houston, Texas 77056 Other Offices:
713-986-7180 713-986-7000 Dallas, Texas
[email protected] Fax 713-986-7100 Austin, Texas
April ___, 1999
Mr. William S. Daugherty
Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Re: Domestication of Daugherty Resources, Inc. From British
Columbia to Delaware
Gentlemen:
We have reviewed the legal statements under the caption "United States
Tax Consequences" in the October 1998 Form S-4 Registration Statement (the
"Registration Statement") of Daugherty Resources, Inc., and it is our opinion
that they fairly present and address the material United States federal income
tax consequences of the Domestication to the categories of taxpayers described
therein.
In rendering this opinion, we have reviewed the existing relevant
provisions of the Internal Revenue Code of 1986, Treasury Regulations, rulings
and pronouncements of the Internal Revenue Service ("IRS"), and case law, any of
which could change at any time and which change could have retroactive effect.
In addition, our opinion does not bind a court or the IRS. Further, the summary
of United States federal income tax consequences in the Registration Statement
is general in nature, does not provide specific tax planning for particular
investors, and does not purport to discuss all tax consequences of the
Domestication. We express no opinion as to the Canadian or foreign tax
consequences of the Domestication or as to the state and local tax consequences
of the Domestication. All terms not defined herein shall have the same meaning
as set forth in the Registration Statement.
The opinion set forth herein in no way implies any approval or
recommendation of an investment in Daugherty Resources, Inc. We hereby consent
to your referring to this opinion letter in the Registration Statement. Except
as noted above, no reference may be made to this opinion letter in any financial
statement, registration statement, or other document, nor may this opinion
letter be distributed in any manner without our prior written consent.
Very truly yours,
LOOPER, REED, MARK & McGRAW
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
The table below presents information necessary for the computation of
loss per share of the Common Stock, on both a primary and fully diluted basis,
for the three months ended March 31, 1999 and 1998 and the years ended December
31, 1998, 1997 and 1996. The computations below reflect the consolidation of the
capital stock of the Company on a one share for five shares basis which occurred
on June 22, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------------------- --------------------------------------
1999 1998 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss applicable to shares of
Common Stock and Common
Stock equivalents................... $(538,690) $(1,708,418) $(733,973)
Average number of shares of
Common Stock outstanding............ 1,968,891 1,964,351 1,700,991
Common Stock equivalents............ 1,425,404 1,425,404 283,293
Total shares of Common
Stock and Common Stock
equivalents......................... 3,394,295 3,389,755 1,984,284
Primary loss per share of
Common Stock........................ $(0.27) $(0.87) $(0.43)
Fully diluted loss per share of
Common Stock........................ $(0.16) $(0.50) $(0.37)
</TABLE>
Common Stock equivalents are considered anti-dilutive because of the
net losses incurred by the Company.
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, Daugherty Resources, Inc., a British Columbia corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4, a draft of which has been previously
reviewed by the undersigned (the "Registration Statement"), together with any
and all exhibits and other documents having relation to the Registration
Statement;
NOW, THEREFORE, the undersigned in his capacity as a director or
officer or both, as the case may be, of the Company, does hereby constitute and
appoint William S. Daugherty and D. Michael Wallen, and each of them severally,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to do any and all acts and things in his name
and on his behalf in his capacity as a director or officer or both, as the case
may be, of the Company, as fully and to all intents and purposes as the
undersigned might or could do in person, and to execute any and all instruments
for the undersigned and in his name in any and all capacities which such person
may deem necessary or advisable to enable the Company to comply with the Act and
any rules, regulations and requirements of the Commission, in connection with
the filing of the Registration Statement, including specifically, but not
limited to, power and authority to sign for the undersigned, in his capacity as
a director or officer or both, as the case may be, of the Company, the
Registration Statement and any and all other documents (including, without
limitation, any amendments to the Registration Statement or to such other
documents) which such person may deem necessary or advisable in connection
therewith; and the undersigned does hereby ratify and confirm all that such
person shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 29th day of December, 1998.
/s/ Charles L. Cotterell
--------------------------------
CHARLES L. COTTERELL
<PAGE> 2
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, Daugherty Resources, Inc., a British Columbia corporation (the
"Company"), intends to file with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), a
Registration Statement on Form S-4, a draft of which has been previously
reviewed by the undersigned (the "Registration Statement"), together with any
and all exhibits and other documents having relation to the Registration
Statement;
NOW, THEREFORE, the undersigned in his capacity as a director or
officer or both, as the case may be, of the Company, does hereby constitute and
appoint William S. Daugherty and D. Michael Wallen, and each of them severally,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to do any and all acts and things in his name
and on his behalf in his capacity as a director or officer or both, as the case
may be, of the Company, as fully and to all intents and purposes as the
undersigned might or could do in person, and to execute any and all instruments
for the undersigned and in his name in any and all capacities which such person
may deem necessary or advisable to enable the Company to comply with the Act and
any rules, regulations and requirements of the Commission, in connection with
the filing of the Registration Statement, including specifically, but not
limited to, power and authority to sign for the undersigned, in his capacity as
a director or officer or both, as the case may be, of the Company, the
Registration Statement and any and all other documents (including, without
limitation, any amendments to the Registration Statement or to such other
documents) which such person may deem necessary or advisable in connection
therewith; and the undersigned does hereby ratify and confirm all that such
person shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 29th day of December, 1998.
/s/ James K. Klyman
----------------------------
JAMES K. KLYMAN
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 375,576
<SECURITIES> 0
<RECEIVABLES> 557,853
<ALLOWANCES> 0
<INVENTORY> 363,258
<CURRENT-ASSETS> 1,296,687
<PP&E> 19,029,195
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,325,882
<CURRENT-LIABILITIES> 4,061,297
<BONDS> 3,187,377
21,209,821
0
<COMMON> 0
<OTHER-SE> (8,132,613)
<TOTAL-LIABILITY-AND-EQUITY> 20,325,882
<SALES> 4,408,820
<TOTAL-REVENUES> 4,408,820
<CGS> 4,119,881
<TOTAL-COSTS> 4,119,881
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 283,503
<INCOME-PRETAX> (1,195,972)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,195,972)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.33)
</TABLE>
