DAUGHERTY RESOURCES INC, DEF 14A, 1999-05-25

DAUGHERTY RESOURCES INC
DEF 14A, 1999-05-25
CRUDE PETROLEUM & NATURAL GAS

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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12.
</TABLE>

DAUGHERTY RESOURCES
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies: .......

(2) Aggregate number of securities to which transaction applies: ..........

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............

(4) Proposed maximum aggregate value of transaction: ......................

(5) Total fee paid: .......................................................

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: ...............................................

(2) Form, Schedule or Registration Statement No.: .........................

(3) Filing Party: .........................................................

(4) Date Filed: ...........................................................

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DAUGHERTY RESOURCES, INC.
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509

To Our Shareholders:

You are cordially invited to attend the 1999 Annual General Meeting of
the Shareholders of Daugherty Resources, Inc. (the "Meeting") to be held at 625
Howe Street, Suite 700, Vancouver, British Columbia, Canada, on June 30,1999 at
10:00 a.m., Vancouver, British Columbia time.

In addition to fixing the number of directors of the Company for the
coming year, electing directors to serve for the coming year and ratifying the
appointment of independent public accountants for the Company for the fiscal
year ending December 31, 1999, your approval is requested for the matters
described below which the Board of Directors of the Company is proposing to the
shareholders at the Meeting. These transactions will mark significant events in
the Company's plans for continued growth and diversification.

Asset Acquisition. On January 26, 1999, the Company and Daugherty
Petroleum, Inc., the Company's wholly-owned subsidiary, entered into an
Agreement for Purchase and Sale with a group of partnerships led by
Environmental Energy, Inc. Under the terms of the agreement, Daugherty
Petroleum, Inc. will purchase a significant number of producing and
non-producing oil and gas leaseholds, including related pipelines, equipment and
other interests, located in Kentucky, Tennessee, and Louisiana. As consideration
for the assets, the Company will issue to the sellers an equity package
consisting of the Company's Limited Series Non-Cumulative, Non-Voting Preferred
Stock and warrants to purchase the Company's Common Stock at various exercise
prices.

The assets to be acquired by Daugherty Petroleum, Inc. pursuant to the
Agreement for Purchase and Sale are expected to enhance the Company's current
portfolio of proved oil and gas producing wells and serve to bolster its
inventory of properties held for future development. Management believes that
the decision to enter into the Agreement for Purchase and Sale is consistent
with the Company's strategy of balancing developmental drilling efforts with
strategic acquisitions of proved properties.

In connection with the approval of the Agreement for Purchase and Sale,
the shareholders will be asked to approve an amendment to the Memorandum and
Articles of the Company that modifies the designation of the rights and
characteristics of the existing Preferred Stock to be consistent with the
description of the Limited Series NonCumulative, Non-Voting Preferred Stock to
be issued pursuant to the Agreement for Purchase and Sale.

Convertible Note Financing. Management is also seeking shareholder
approval for a proposed issuance of the Company's 10% Convertible Secured Notes
("Convertible Notes"). The Convertible Notes will be offered to a limited number
of investors in a private offering to be conducted in reliance on Regulation D
of the Securities Act of 1933, as amended. The Company plans to raise a maximum
of $3,500,000 to fund present and future drilling, recovery and acquisition
activities. In particular, the Company is seeking to use a majority of the
proceeds generated to finance its ongoing natural gas drilling operations in the
Appalachian Basin.

Increasing the Authorized Capital Stock. Finally, management is
proposing an amendment to the Memorandum and Articles of the Company to effect
an increase of the Company's authorized capital stock (the "Capital Stock
Amendment"). The increase would result in an authorized capital stock of
105,000,000 shares, comprised of 100,000,000 shares of the Common Stock and
5,000,000 shares of the Preferred Stock. While authorization of the additional
shares is not required for the Company to engage in either the Agreement for
Purchase and Sale or the Convertible Note financing, and management is not
presently negotiating any transactions that would involve the issuance of the
additional shares to be authorized, management believes that increasing the
capital stock of the Company would offer the Company the opportunity to act in
the event future equity financings or other transactional opportunities are
presented to the Company.

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For the reasons set forth in the enclosed Proxy Statement, your Board
of Directors unanimously believes that the transactions involving the Agreement
for Purchase and Sale, the Convertible Note Financing and the Capital Stock
Amendment are in the best interests of the Company and all of its shareholders.
Therefore, we strongly urge you to vote FOR approval of the Agreement for
Purchase and Sale, the Convertible Note Financing and the Capital Stock
Amendment.

The Proxy Statement provides a detailed description of the Agreement
for Purchase and Sale, the Convertible Note financing, the Capital Stock
Amendment and other information to assist you in considering the matters to be
voted on at the Meeting. We encourage you to review this information carefully
and, if you require assistance, to consult with your financial, tax or other
professional advisers.

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

Lexington, Kentucky
May 25, 1999

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DAUGHERTY RESOURCES, INC.

NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 30, 1999

The 1999 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
June 30, 1999, at the hour of 10:00 a.m. (local time), for the following
purposes:

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 and consider the report of the directors of the Company.

3. To fix the number of directors for the ensuing year.

4. To elect directors for the ensuing year.

5. To consider the ratification of the appointment of Kraft, Rothman,
Berger, Grill, Schwartz & Cohen as independent public accountants of the Company
for the fiscal year ending December 31, 1999.

6. To consider the approval of the Agreement for Purchase and Sale by
and between the Company and Daugherty Petroleum, Inc. and several parties
relating to the acquisition of certain oil and gas leaseholds and related
property.

7. To consider the approval of a special resolution authorizing and
approving an amendment to the Memorandum and Articles of the Company that will
modify the existing designation of the Preferred Stock to be consistent with the
rights, powers, preferences and other characteristics of the Preferred Stock
described in the Agreement of Purchase and Sale and to be issued in connection
with that transaction (the "Designation Amend ment"). A copy of the Designation
Amendment is attached to the Proxy Statement accompanying this Notice.

8. To consider the approval of the issuance of the Company's 10%
Convertible Secured Notes.

9. To consider the approval of a special resolution authorizing and
approving an amendment to the Memorandum and Articles of the Company that will
effect an increase in the number of authorized shares of the Common Stock of the
Company to 100,000,000, without par value, and an increase in the number of
authorized shares of the Preferred Stock to 5,000,000, without par value (the
"Capital Stock Amendment"). A copy of the Capital Stock Amendment is attached to
the Proxy Statement accompanying this Notice.

10. To consider amendments to or variations of any matter identified in
this Notice.

11. To transact such other business as may properly come before the
Meeting or any adjournments thereof.

Shareholders registered as holders of the Company's common shares (the
"Common Stock") who are deemed to hold such shares as of the close of business
on May 21, 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.

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Shareholders are cordially invited to attend the Meeting in person.
Those who do not plan to attend and who wish their shares to be voted are
requested to sign, date, and mail promptly the enclosed proxy, for which a
return envelope is provided.

Only holders of the Common Stock are entitled to vote on all matters to
be considered 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.

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 June 30, 1999.

FOR FULL INFORMATION, THIS NOTICE MUST BE READ IN CONJUNCTION WITH THE PROXY
STATEMENT 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
May 25, 1999

TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE SIGN, DATE AND RETURN
YOUR PROXY AS PROMPTLY AS POSSIBLE. AN ENVELOPE IS ENCLOSED FOR THIS PURPOSE.

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PROXY STATEMENT

SOLICITATION OF PROXIES

This Proxy Statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Daugherty Resources, Inc.,
a British Columbia corporation (the "Company"), for the 1999 Annual General
Meeting of Shareholders (the "Meeting") in order to:

- Fix the number of directors to serve for the coming year at
three,

- Elect the candidates nominated by the Board of Directors to
serve as directors for the coming year,

- Ratify the appointment of Kraft, Rothman, Berger, Grill,
Schwartz & Cohen as independent public accountants of the
Company for the fiscal year ending December 31, 1999,

- Approve the Agreement for Purchase and Sale,

- Approve an amendment to the Memorandum and Articles of the
Company that will modify the existing designation of the
Preferred Stock to be consistent with the rights, powers,
preferences and other characteristics of the Preferred Stock
described in the Agreement of Purchase and Sale (the
"Designation Amend ment"),

- Approve the issuance of the Company's 10% Convertible Secured
Notes,

- Approve an amendment to the Memorandum and Articles of the
Company that will effect an increase in the number of
authorized shares of the Common Stock of the Company to
100,000,000 and an increase in the number of authorized shares
of the Preferred Stock to 5,000,000 (the "Capital Stock
Amendment"), and

- Transact such other business as may properly come before the
Meeting.

The Annual Report of the Company on Form 10-KSB, including financial
statements for the year ended December 31, 1998, and the Quarterly Report of the
Company on Form 10-QSB for the period ended March 31, 1999 are enclosed with
this Proxy Statement.

This Proxy Statement and the enclosed proxy card were first sent or
given to shareholders on or about May 31, 1999. All associated costs relating to
this proxy solicitation will be borne by the Company. Advance notice of the
Meeting was published in the Vancouver Province in Vancouver, British Columbia
on May 14, 1999. In addition to solicitation by mail, certain of the directors,
officers and 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.

Shares represented by properly executed proxies will be voted as
specified. IF NO SPECIFICATIONS HAVE BEEN GIVEN IN PROXIES WHICH ARE RETURNED,
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 ENSUING YEAR, FOR THE RATIFICATION OF KRAFT,
ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN AS INDEPEND ENT PUBLIC ACCOUNTANTS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1999, FOR THE APPROVAL OF THE AGREEMENT FOR
PURCHASE AND SALE, FOR THE APPROVAL OF THE DESIGNATION AMENDMENT, FOR THE
APPROVAL OF THE ISSUANCE OF THE COMPANY'S 10% CONVERTIBLE SECURED NOTES, FOR THE
APPROVAL OF THE CAPITAL STOCK AMENDMENT AND IN

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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 Proxy
Statement, management 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 adjournments 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.

APPOINTMENT AND REVOCATION OF PROXIES

This solicitation of proxies is being made on behalf of the Board of
Directors 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 needs 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 OF SECURITIES

Shareholders of record at the close of business on May 21, 1999 (the
"Record Date") are entitled to notice of the Meeting. As of the Record Date,
2,183,783 shares of the Common Stock were issued and outstanding, fully paid and
non-assessable. Each share of the Common Stock is entitled to one vote. No other
voting stock of the Company is issued and outstanding. 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 Corporation Act of British Columbia (the "BCCA"),

- The three nominees receiving the greatest number of votes cast
by the holders of the Common Stock will be elected as
directors (Item 2). 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 (Item 1), the ratification of Kraft,
Rothman, Berger, Grill, Schwartz & Cohen as independent public
accountants for the fiscal year ending December 31,1999 (Item
3), the approval of the Agreement for Purchase and Sale (Item
4), and the approval of the issuance of the Company's 10%
Convertible Secured Notes (Item 6).

- Approval of the amendments to the Memorandum and Articles of
the Company effecting (1) a modification to the designation of
the rights and characteristics of the Preferred Stock (Item 5)
and (2) an increase in the number of authorized shares of the
capital stock (Item 7) require an affirmative vote of
two-thirds of the votes cast at the Meeting.

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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.

ITEM 1: 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.

ITEM 2: ELECTION OF DIRECTORS

The Board of Directors is currently composed of three members. 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
by the Board of Directors. 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 persons will be nominated at the Meeting for the
available positions on the Board of Directors of the Company:

- 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 44, has been a director since May 1992.
For the past seven years, Mr. Klyman has been a computer
software designer and programmer specializing in applied
information technology.

- Charles L. Cotterell, age 74, 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 is the past President of Smith
Press Automation Co., Ltd.

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BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

During fiscal year 1998, the Board of Directors held three meetings and
approved actions on three 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 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 2, 2000.

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 compensa tion 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.

Unless otherwise indicated, all references to dollars throughout this
Proxy Statement shall mean United States dollars.

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
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The members of
the Committee are James K. Klyman and Charles L. Cotterell. The Stock Option
Plan provides that 600,000 shares of the Common Stock are to be the subject of
stock options, 400,000 of which are reserved for Mr. Daugherty, and the
remaining 200,000 reserved for other employees of the Company as may be
determined by the Committee.

<PAGE> 10

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 WILLIAM S.
DAUGHERTY, JAMES K. KLYMAN AND CHARLES L. COTTERELL AS DIRECTORS OF THE COMPANY.

ITEM 3: RATIFICATION OF THE APPOINTMENT OF INDEPENDENT ACCOUNTANTS

Subject to shareholder ratification, the Board of Directors has
appointed Kraft, Rothman, Berger, Grill, Schwartz & Cohen, a Toronto, Ontario
based accounting firm, 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 accountant since 1992.
Representatives of Kraft, Rothman, Berger, Grill, Schwartz & Cohen are not
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 Kraft, Rothman, Berger, Grill, Schwartz
& Cohen as the Company's independent public accountants.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE
SELECTION OF KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS FOR THE FISCAL YEAR ENDING DECEMBER 31, 1999.

ITEM 4: RATIFICATION OF AGREEMENT FOR PURCHASE AND SALE

PRELIMINARY AGREEMENT

On November 3, 1997, management of the Company and Environmental
Energy, Inc. ("EEI") executed an Agreement for the Acquisition of Certain Oil
and Gas Interests (the "Preliminary Agreement") by which the Company manifested
its intent to purchase certain oil and gas interests and related assets owned by
EEI and its affiliates. At the time the Preliminary Agreement was executed, the
final terms of the proposed asset transaction, including the identification of
specific oil and gas interests, the valuation of such interests, and the terms
of purchase, had yet to be negotiated by the parties.

As consideration for the transfer of the assets to the Company pursuant
to the Preliminary Agreement, management proposed to issue a combination of
warrants for the purchase of shares of the Common Stock and shares of the
Company's Preferred Stock to EEI.

In anticipation of consummating the transaction contemplated under the
Preliminary Agreement, management proposed, and the shareholders approved, an
amendment to the Company's Memorandum and Articles to expand the Company's
equity structure. The amendment was formally approved at the 1998 Annual General
Meeting of Shareholders and created a class of 6,000,000 shares of Preferred
Stock (subsequently reduced to 1,200,000 shares pursuant to a one share for five
share capital consolidation).

AGREEMENT FOR PURCHASE AND SALE

On January 26, 1999, Daugherty Petroleum, Inc., as purchaser, and the
Company, as accommodation party, entered into that certain Agreement for
Purchase and Sale with EEI, Environmental Energy Partners I, Ltd., Environmental
Energy Partners II, Ltd., Environmental Operating Partners, Ltd., Environmental
Processing Partners, Ltd., Environmental Holding Company, LLC, and Environmental
Operating, Inc. (collectively, the "Sellers") to effect the transaction
originally contemplated by the Preliminary Agreement. A copy of the Agreement

<PAGE> 11

for Purchase and Sale has been filed as an exhibit to a Form 8-K filed by the
Company on May 25, 1999 with respect to the transaction.

Under the terms and conditions of the Agreement for Purchase and Sale,
Daugherty Petroleum, Inc. will acquire a significant number of producing and
non-producing oil and gas leaseholds, including related equipment and other
interests, located in Kentucky, Tennessee and Louisiana. The transaction will be
accounted for as a purchase transaction.

As consideration for the sale of the assets pursuant to the Agreement
for Purchase and Sale, the Company will issue to the Sellers the following
securities:

1,024,924 SHARES OF LIMITED SERIES NON-CUMULATIVE, NON-VOTING PREFERRED
STOCK. In addition to being non-voting and having other general characteristics
to be established by the Board of Directors, the Preferred Stock will be:

- Convertible by the Sellers into shares of the Common Stock, on
a share for share basis, at any time within a period of two
years from the date of issuance. Upon the expiration of the
two year period, all unconverted shares of the Preferred Stock
will automatically convert into shares of the Common Stock. In
addition, the Sellers will receive a conversion bonus of
shares of the Common Stock equal to 12 percent of the number
of shares of the Preferred Stock unconverted on the second
anniversary date; or

- Convertible by the Company if the last sales price of the
Common Stock equals or exceeds $10.00 for at least 20 trading
days and proper notice of conversion is provided to the
holder. In the event the Company elects to convert, the
Sellers will receive a conversion bonus of shares of the
Common Stock equal to one half of one percent per month of the
number of shares of the Preferred Stock which were converted,
times the number of months from issuance of the Preferred
Stock to the date of conversion.

The Sellers will not have any preemptive rights to acquire additional
shares of the Preferred Stock or the Common Stock upon conversion.

170,821 UNITS OF ACQUISITION WARRANTS. Each single Unit of Acquisition
Warrants consists of the following number and types of warrants to acquire
shares of the Common Stock within a period of five years from the date of
issuance of the warrant:

- Two Series A Acquisition Warrants entitling the holder to
purchase one share of the Common Stock at a price of $1.75 per
share;

- One Series B Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $2.00 per
share;

- One Series C Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $2.50 per
share;

- One Series D Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $3.00 per
share;

- One Series E Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $3.50 per
share;

<PAGE> 12

- One Series F Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $4.00 per
share; and

- One Series G Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $4.50 per
share.

The exercise price of each of the Acquisition Warrants will
automatically be reduced to $1.00 per share during any period the Company's
Common Stock becomes and remains delisted from the Nasdaq SmallCap Market.

The Company can redeem each series of Acquisition Warrants, as an
entire series, at a price of $0.05 per Acquisition Warrant if the last sales
price of the Common Stock equals or exceeds 200 percent of the exercise price of
the series of Acquisition Warrants being redeemed for 20 consecutive trading
days and proper notice of redemption is provided to the holder. The Company is
not required to establish a sinking fund for the redemption of the shares.

All shares of the Common Stock acquired by the Sellers pursuant to the
conversion of the Preferred Stock or the Acquisition Warrants will be subject to
the terms of a voting trust until such time as the shares are distributed to the
various interest holders of the Sellers. A panel of trustees will be appointed
by the Sellers to hold title to the shares of the Common Stock and shall have
discretionary authority to vote the same as a majority of the trustees shall
determine. The voting trust shall terminate upon the earlier of distribution or
ten years from the date of its creation.

While the Company is under no obligation to register the Preferred
Stock or any shares of the Common Stock which may be issued upon the conversion
of the Preferred Stock or the exercise of an Acquisition Warrant, in the event
the Company files a registration statement during the period when the securities
are restricted, the securities will have certain "piggyback" rights to
participate in the registration.

DILUTIVE EFFECT. The issuance of the Preferred Stock and the
Acquisition Warrants will have a dilutive effect on the present owners of the
Common Stock. Upon full conversion of the Preferred Stock, the Sellers will own
at least 1,024,924 shares of the Common Stock. The holders of the Preferred
Stock will also receive an additional number of shares at the time of conversion
as a bonus depending on the timing and manner of conversion. Excluding the
conversion bonus shares of the Common Stock, but including the shares underlying
the Acquisition Warrants, the Sellers will own approximately 16.8 percent of the
voting stock of the Company, calculated on a current fully diluted basis,
immediately following conversion of the Preferred Stock. Assuming that the
Sellers also fully exercise their rights to purchase shares of the Common Stock
under the Acquisition Warrants, the Sellers' ownership percentage of the Common
Stock could rise to approximately 39.4 percent based on a current fully diluted
calculation.

FINANCIAL INFORMATION. The Company employed the independent public
accounting firm of Hall, Kistler & Company, LLP to prepare an audited report
regarding the combined statement of revenues and direct operating expenses for
the oil and gas interests to be acquired by the Company pursuant to the
Agreement for Purchase and Sale. The report covers the fiscal period ended
December 31, 1998 and is attached hereto as Exhibit A. In addition, the Company
has prepared pro forma financial information, consisting of a pro forma
consolidated balance sheet and consolidated statements of operation, taking into
account the effects of the Agreement for Purchase and Sale on the financial
condition of the Company. A copy of the Pro Forma Consolidated Financial
Statements (Unaudited) are attached hereto as Exhibit B.

FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION; ACCOUNTING
TREATMENT. For U.S. federal income tax purposes, the transaction will be treated
as a taxable asset acquisition by Daugherty Petroleum, Inc., the Company's
wholly-owned U.S. subsidiary, using the stock of its parent as consideration for
the assets to be acquired. Daugherty Petroleum, Inc. will be treated as
acquiring the stock of the Company immediately before the purchase either as a
contribution to capital or in a IRC sec.351 exchange. Therefore, Daugherty
Petroleum, Inc. will take a carryover basis in the Company's stock, which is
deemed to be zero. When Daugherty Petroleum, Inc. transfers (or is treated as
transferring) the parent stock in exchange for the assets, there is some risk
that Daugherty Petroleum will recognize gain on the transfer in an amount equal
to the value of the assets to be acquired. This is

<PAGE> 13

due to the fact that the provisions of IRC sec.1032, which extend
non-recognition treatment to corporations on the sale of their own stock, will
not specifically apply to subsidiaries in the transfer of the stock of a parent
until the finalization of Proposed Treasury Regulation secs .1.1032-3.
Nevertheless, any gain attributable to the Company as a result of the
acquisition will likely be offset by operating loss carryforwards and, as such,
will have no economic impact on the Company or Daugherty Petroleum, Inc.

The Company is not aware of any additional federal or state regulatory
requirements that must be complied with or any approvals that must be obtained
from any governmental agencies as a condition precedent to the transaction.

PURPOSE FOR TRANSACTION. The assets to be acquired by Daugherty
Petroleum, Inc. pursuant to the Agreement for Purchase and Sale will enhance the
Company's current portfolio of proved oil and gas producing wells and serve to
bolster its inventory of properties held for future development. Management
believes that the decision to enter into the Agreement for Purchase and Sale is
consistent with the Company's strategy of balancing developmental drilling
efforts with strategic acquisitions of proved properties. In addition,
management believes that the amount of consideration to be provided to the
Sellers in connection with the acquisition is reasonable and represents a fair
value for such interests.

The acquisition also allows the Company to expand its production base
to other oil and gas basins. The Louisiana properties allow the Company to
establish a production base while learning the intricacies of producing in other
areas. This new knowledge will better equip management in evaluating other
opportunities in this areas.

VOTE REQUIRED

Rule 4310 of the Marketplace Rules of The Nasdaq Stock Market requires
the Company to obtain shareholder approval of a transaction involving the
issuance of securities in connection with the acquisition of assets of another
company when, as in this case, where, due to the present or potential issuance
of common stock, or securities convertible into or exercisable for common stock,
the common stock has or will have upon issuance voting power equal to or in
excess of 20 percent of the voting power outstanding before the issuance of
stock or securities convertible into or exercisable for common stock. Based on
the requirements of Rule 4310, an 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 Agreement for Purchase and Sale.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
AGREEMENT FOR PURCHASE AND SALE.

ITEM 5: DESIGNATION OF CERTAIN CHARACTERISTICS OF THE PREFERRED STOCK

Upon shareholder approval of the Agreement for Purchase and Sale, the
shareholders will be asked to approve resolutions authorizing an amendment to
the Memorandum and Articles of the Company (the "Designation Amendment") that
will modify the existing designation of the Preferred Stock to be consistent
with the rights, powers, preferences and other characteristics of the Preferred
Stock described in the Agreement of Purchase and Sale and to be issued in
connection with that transaction. A copy of the resolutions authorizing the
Designation Amendment is attached hereto as Exhibit C. The following description
of the Designation Amendment is qualified by reference to the full text of the
resolutions authorizing the Designation Amendment.

TERMS OF THE DESIGNATION AMENDMENT. The Designation Amendment will
serve to modify Part 23.1(b) of the Memorandum and Articles of the Company by
changing the triggering event that will permit the Company to initiate a
conversion of shares of the Preferred Stock into shares of the Common Stock. The
existing Memorandum and Articles permits the Company to effect a conversion of
the Preferred Stock, within two years of the date of issue, "if the last sales
price per share of common shares, as noted on the Company's principal trading
exchange, equals or exceeds US$2.00 per share for at least 20 consecutive days"
and "proper notice of conversion is given to the Company [sic] by the holder
[sic] no sooner than one day after, and no later than ten days after the
expiration of the referenced 20 consecutive trading day period." The Designation
Amendment will:

<PAGE> 14

- Increase the last sales price per share of the Common Stock
required to initiate conversion from $2.00 to $10.00; and

- Correct the references to the party delivering and accepting
notice of such conversion by the Company (i.e. change
"Company" to "holder" and "holder" to "Company.")

REASONS FOR AND EFFECT OF THE DESIGNATION AMENDMENT. The changes
contained in the Designation Amendment will be made in order to establish the
rights and characteristics of the Preferred Stock as set forth in the Agreement
for Purchase and Sale. The principal effect of the Designation Amendment will be
to set a higher trading price for the Common Stock and, thus, a higher threshold
to be met in order to trigger the Company's right to effect a conversion of the
shares of Preferred Stock into shares of the Common Stock.

VOTE REQUIRED

The affirmative vote of three-quarters 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 resolutions authorizing the Designation Amendment.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
RESOLUTIONS AUTHORIZING THE DESIGNATION AMENDMENT.

ITEM 6: APPROVAL OF 10% CONVERTIBLE SECURED NOTES

THE OFFERING

Management is also seeking shareholder approval for the proposed
issuance of the Company's 10% Convertible Secured Notes ("Convertible Notes").
The Convertible Notes will be offered to a limited number of investors in a
private placement conducted in reliance on Regulation D of the Securities Act of
1933, as amended.

The proceeds from the offering of the Convertible Notes will allow the
Company to increase natural gas reserves and revenues by providing capital to be
used for the explicit purpose of drilling proven locations and acquiring proved
producing properties. The maximum aggregate principal amount of the Convertible
Notes that the Company proposes to issue is limited to $3,500,000. The first
$1,000,000 of the net proceeds from the offering of the Convertible Notes will
be used to finance the Company's share of drilling and completion costs for
natural gas drilling operations in the Appalachian Basin. Net proceeds in excess
of the first $1,000,000 may be applied to finance all or part of the proposed
acquisition of a percentage working interest in producing oil and gas properties
located in Knott County, Kentucky. Any additional net proceeds will be added to
working capital for future drilling, recovery or acquisition programs.

The Convertible Notes will have the following characteristics:

- The Convertible Notes will be issued at 100 percent of their
respective principal amounts;

- Interest on the Convertible Notes will accrue at a rate of 10
percent per annum from the date of issuance until maturity;

- Interest payments will be due and payable semi-annually until
maturity;

- The Convertible Notes will be convertible at the option of the
holder at any time, unless previously redeemed, into the
Common Stock at a conversion rate to be established at 125
percent of the average between the high and low bid prices of
the Common Stock on the Nasdaq Small Cap Market for the each
of

<PAGE> 15

the 10 trading days immediately preceding the closing, subject
to adjustment in certain events;

- Each holder of a Convertible Note will have a right to require
the Company to redeem the security 18 months after the closing
at a price equal to 100 percent of the principal amount of the
Convertible Note, plus accrued interest, each payable in cash,
plus a premium equal to 25 percent of the principal amount of
the Convertible Note, payable in shares of the Common Stock,
determined by dividing that amount by the prevailing market
price of the Common Stock;

- The Company may redeem the Convertible Notes at any time
following 18 months after the closing at a price equal to 100
percent of their principal amount, plus accrued interest,
payable in cash;

- The Convertible Notes will be guaranteed by Daugherty
Petroleum, Inc., the Company's wholly-owned U.S. subsidiary
("DPI"), which will collateralize the guarantee by granting a
security interest in DPI's mining interests, however, DPI may
provide substitute collateral in the form of specified oil and
gas interests upon the occurrence of certain events; and

- Within 120 days after the closing, the Company will file a
registration statement with the Securities and Exchange
Commission (the "Commission") to register the resale of the
shares of the Common Stock underlying the Convertible Notes.

No sinking fund is required to be established by the Company for the
redemption of the Convertible Notes.

The closing of the offering will be conditioned upon the receipt and
acceptance of subscriptions for a minimum principal amount of $750,000 in
Convertible Notes on or before the termination date, as defined in the offering
materials, or such extension date. All subscription funds received prior to the
closing will be deposited in escrow and will only be released to the Company
upon the receipt of subscriptions aggregating at least $750,000.

POTENTIAL DILUTION. The issuance of the Convertible Notes may have a
dilutive effect on the present owners of the Common Stock. If the holders of the
Convertible Notes elect to convert or require redemption of the Convertible
Notes into shares of the Common Stock, or the Company elects to redeem the
Convertible Notes on its own account, the number of shares of the Common Stock
issued will cause a dilution of interest of the present shareholders of the
Company. The extent of such potential dilution cannot be reasonably calculated
at this time and will depend on several factors, including, but not limited to,
the total principal amount of Convertible Notes issued by the Company, interest
accrual and market prices for the Common Stock at the time of conversion or
redemption.

VOTE REQUIRED

Rule 4310 of the Marketplace Rules of The Nasdaq Stock Market requires
the Company to obtain shareholder approval prior to the issuance of securities
in connection with a transaction, other than a public offering, involving the
sale or issuance by the Company of the Common Stock (or securities convertible
into or exercisable into the Common Stock) equal to 20 percent or more of the
Common Stock or 20 percent or more of the voting power outstanding before
issuance for less than the greater of book or market value of the stock. Based
on the requirements of Rule 4310, an 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 transaction involving the issuance of
the Convertible Notes.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE
OF THE CONVERTIBLE NOTES.

<PAGE> 16

ITEM 7: AUTHORIZATION OF ADDITIONAL SHARES OF THE CAPITAL STOCK

The shareholders will be asked to approve resolutions authorizing an
amendment to the Memorandum and Articles of the Company (the "Capital Stock
Amendment") that will increase the authorized capital stock of the Company. A
copy of the resolutions authorizing the Capital Stock Amendment is attached
hereto as Exhibit D. The following description of the Capital Stock Amendment is
qualified by reference to the full text of the resolutions authorizing the
Capital Stock Amendment.

EFFECT OF THE CAPITAL STOCK AMENDMENT. The primary effect of the
Capital Stock Amendment would be to expand the Company's present equity
structure. The Capital Stock Amendment would increase the number of authorized
shares of the Common Stock from 10,000,000 to 100,000,000 shares and increase
the number of authorized shares of the Preferred Stock from 1,200,000 to
5,000,000. The additional authorized shares of the Common Stock and the
Preferred Stock would be of the same respective classes and possess the same
respective rights as those shares presently authorized. The Capital Stock
Amendment would not alter or modify any preemptive right of holders of the
Common Stock or the Preferred Stock to acquire additional shares of the Company,
which is denied.

REASONS FOR THE CAPITAL STOCK AMENDMENT. Management believes that the
authorization of additional shares of the Common Stock and the Preferred Stock
will serve the best interests of the Company. First, by increasing the number of
securities available for issuance, the Company has the opportunity to raise
additional capital through selected equity financings. Second, the Company can
explore more flexible approaches to equity financing by packaging shares of the
Common Stock and the Preferred Stock in offerings for investors. Third, the
authorization of additional equity securities provides the Company greater
latitude when engaging in commercial transactions by offering alternatives
method of payment. For example, while there are already a sufficient number of
authorized shares of the Common Stock and Preferred Stock to engage in the
Agreement for Purchase and Sale, the Capital Stock Amendment will enable the
Company to engage in future acquisitions by issuing securities, as opposed to
making monetary payment, in consideration for the assets or stock of the
targets. This approach would permit the Company to conserve working capital for
use in developing the acquired properties or in the general operations of the
Company.

POTENTIAL DILUTION. Existing shareholders of the Company may not be
eligible to participate in any potential future offering of shares of the Common
Stock or the Preferred Stock authorized by the Capital Stock Amendment. In the
event shares of the Common Stock are issued, and existing shareholders are not
able or eligible to purchase a sufficient number of shares to maintain their
ownership percentage of the Company, such sharehold ers will be diluted.
Similarly, in the event authorized shares of the Preferred Stock with rights of
conversion into shares of the Common Stock are issued, the equity ownership of
existing shareholders of the Common Stock will be diluted upon conversion of the
Preferred Stock into the Common Stock. The extent of such potential dilution
cannot be reasonably anticipated at this time.

VOTE REQUIRED

The affirmative vote of at least two-thirds 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 Capital Stock Amendment.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
RESOLUTIONS AUTHORIZING THE CAPITAL STOCK AMENDMENT.

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 Proxy Statement. Each
director is elected for a one year term and serves until his successor is
elected and qualified.

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 44 Director May 1992
Charles L. Cotterell 74 Director June 1994
D. Michael Wallen 44 Vice President and Secretary January 1997
</TABLE>

A description of the business experience during the past several years
for each of the directors and executive officers of the Company.

William S. Daugherty, age 44, has served as a 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, and also serves as the Governor's
Official Representative to the Interstate Oil and Gas Compact Commission. Mr.
Daugherty holds a B.S. Degree from Berea College, Berea, Kentucky.

James K. Klyman, age 44, has been a director since May 1992. For the
past seven years, Mr. Klyman has been a computer software designer and
programmer specializing in applied information technology.

Charles L. Cotterell, age 74, 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. Before 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. Mr. Wallen holds a B.S. Degree from
Morehead State University, Morehead, Kentucky.

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.

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 effective June 29, 1998.

<PAGE> 18

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION
--------------------- LONG-TERM COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS #
- --------------------------- ---- ------ --------- ---------

<S> <C> <C> <C> <C>
William S. Daugherty 1998 $75,000 $12,500 (1) -0-
Chairman and President 1997 75,000 12,500 (2) 400,000 (3)
1996 86,538 -0- 40,000 (4)
<FN>
- ---------------
(1) The bonus was in the form of 12,500 shares of the Common Stock valued at $1.00 per share.
(2) The bonus was in the form of 25,000 shares of the Common Stock valued at $0.50 per share.
The shares represent bonuses approved by the Board of Directors on June 25, 1997. The shares
were issued June 27, 1997.
(3) These options were approved on March 7, 1997 by the Board of Directors
pursuant to the Alaska Apollo Resources Inc. 1997 Stock Option Plan, and
are exercisable at $1.546875 per share after giving effect to the one for
five consolidation of Common Shares that was effective June 29, 1998. The
options vest over a five year period with 71,111 vesting during 1997
through 2001 and 44,445 vesting in 2002. The options expire on March 6,
2002. Vesting is subject to Mr. Daugherty's continued employment.
(4) These options were approved on June 28, 1996 by the Board of Directors and
are exercisable at $5.00 per share after giving effect to the one for five
consolidation of Common Shares that was effective June 29, 1998. 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.
</TABLE>

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.

STOCK OPTIONS

No stock options were granted by the Company during 1998. The following
table shows the number of shares of the Common Stock underlying all exercisable
and non-exercisable stock options held by William S.
Daugherty as of December 31, 1998.
<TABLE>
<CAPTION>

AGGREGATED FISCAL YEAR-END OPTION VALUES
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 252,222/267,778 -0-
<FN>
- -------------------
(1) The closing market price for the shares of Common Stock at December 31, 1998 was $0.50. None of the options
granted to Mr. Daugherty were in-the-money as of the end of the fiscal year 1998.
</TABLE>

The following is a summary of options which have been granted by the
Company to William S. Daugherty during the course of his employment. In all
instances the number of shares have been reduced and the exercise price
increased to reflect the effect of the one for five consolidation of the Common
Stock which was effective June 29, 1998.

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 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 Alaska Apollo

<PAGE> 19

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.

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 pursuant to
Form S-8 promulgated by the Commission. 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 2,000 shares of the
Common Stock valued at $1.00 per share.
<TABLE>
<CAPTION>

AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------- -----------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
----------- ------------------------------- -----------------------------------
<S> <C> <C>
James K. Klyman 6,000/0 -0-
Charles L. Cotterell 6,000/0 -0-
<FN>
- ------------------
(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.
</TABLE>

The following is a summary of options which have been granted by the
Company to the non-employee directors during the course of their respective
tenures. In all instances the number of shares have been reduced and the
exercise price increased to reflect the effect of the one for five consolidation
of the Common Stock which was effective June 29, 1998.

In 1993, Mr. Klyman was granted options to purchase 2,000 shares of the
Common Stock exercisable at $9.50 per share that expired 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 that expired 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.

<PAGE> 20

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
$158,603.
<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 $33,500 $59,750
President and Chief
Executive Officer
<FN>

- ---------------------

(1) The indebtedness of Mr. Daugherty consists primarily of two promissory
notes in the principal amount of $26,250 and $21, 600 date January 1, 1999
and January 1, 1998 bearing interest at the rate of six percent per annum.
The notes are secured by Mr. Daugherty's interest in oil and gas
partnerships sponsored by the Company's subsidiary, Daugherty Petroleum.
Inc.
</TABLE>

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 $64,779.00 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.

On October 30, 1995, Trio Growth Trust, an Ontario trust, loaned the
Company's subsidiary, Daugherty Petroleum, Inc., the sum of $130,000. The
indebtedness bears interest at the rate of 10 percent per annum and is due and
payable in full on June 30, 2001. On February 6, 1996, Trio Growth Trust loaned
Daugherty Petroleum, Inc. an additional $320,000 bearing interest at the rate of
10 percent per annum and is due and payable in full on June 30, 2001. The loans
were in conjunction with the acquisition by Daugherty Petroleum, Inc. of Red
River Hardwoods, Inc. and are secured by certain inventory and accounts
receivable of Red River Hardwoods, Inc.

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 wholly-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 (after adjustment for the one for
five consolidation effective June 29, 1998) pursuant to a Warrant Agreement
dated March 7, 1997 between the Company and Trio Growth Trust. As a result of
the underwriting agreement, and its ownership of other warrants for the purchase
of 100,000 shares of the Common Stock, Trio Growth Trust is the beneficial owner
of 15.5 percent of the Common Stock of the Company. In addition to the
underwriting commit ment of Trio Growth Trust, Exergon Capital S.A. agreed to
participate in the underwriting of Red River Hard woods, 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 (after adjustment for the one for five consolidation effective
June 29, 1998), pursuant to a Warrant Agreement dated March 7, 1997 between the
Company and Exergon Capital S.A. Due to the Warrant Agreement and its ownership
of 100,000 shares of the Common Stock, Exergon Capital S.A. is the beneficial
owner of 8.8 percent of the Common Stock of the Company.

<PAGE> 21

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.
<TABLE>
<CAPTION>

SHARES OWNED PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OF CLASS
-------------- ---------------- ------------ --------

<S> <C> <C> <C>
Common Stock William S. Daugherty 624,633 (1) 24.7
121 Prosperous Place, Suite 201
Lexington, Kentucky 40509

Trio Growth Trust 400,000 (2) 15.5
18 York Valley Crescent
Willowdale, Ontario M2P 1A7

GraceChurch Securities Ltd. 160,600 7.4
21 Abbotsbury House, Abbotsbury Road
London W14 8EN, England

Alaska Investments Limited 202,669 9.3
Ospery House, 5 Old Street
St. Helier, Jersey, Channel Islands, U.K.

Exergon Capital S.A. 200,000 (3) 8.8
Dufourstrasse 101
Zurich 8008, Switzerland

Charles L. Cotterell 19,540 (4) *
121 Prosperous Place, Suite 201
Lexington, Kentucky 40509

James K. Klyman 6,000 (5) *
121 Prosperous Place, Suite 201
Lexington, Kentucky 40509
440,000 (6) 17.0
Environmental Energy, Inc.
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
650,173 (7) 27.8
Directors and executive officers as a group
(3 persons)
<FN>
- ---------------------
* Represents ownership of less than one percent.
(1) Includes 277,500 shares of the Common Stock, warrants to purchase 23,800 shares of the Common Stock and options
to acquire 323,333 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) Includes 13,540 shares of the Common stock and options to purchase 6,000 shares of the Common Stock which are
currently exercisable.
(5) Consists of options to purchase 6,000 shares of the Common Stock which are currently
exercisable.
(6) Includes 40,000 shares of the Common Stock and options to purchase 400,000 shares of the Common Stock which are
currently exercisable.
(7) Includes 291,040 shares of the Common Stock, options to purchase 335,333 shares of the Common Stock which are
currently exercisable, and warrants to purchase 23,800 shares of the Common Stock which are currently exercisable.

</TABLE>

<PAGE> 22

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

A copy of the exhibits to this Proxy Statement 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 May 21, 1999, such person was a beneficial owner of
shares of the Common Stock.

All information contained in this Proxy Statement 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 March 2, 2000
to be considered for inclusion in the proxy statement and form of proxy relating
to the 2000 meeting.

APPROVAL OF PROXY STATEMENT

This Proxy Statement 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

May 25, 1999

<PAGE> 23
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 JUNE 30, 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 June 30, 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:

1. Fixing the Number of Directors.

Vote FOR [ ] AGAINST [ ] the resolution fixing the size of the Board of
Directors at three.

2. Election of Directors.

The nominees proposed by management are:

William S. Daugherty
James K. Klyman
Charles E. Cotterell

Vote FOR [ ] the election of all nominees listed above
(EXCEPT THOSE WHOSE NAMES THE UNDERSIGNED HAS DELETED).

WITHHOLD [ ] vote.

3. Approval of the Agreement for Purchase and Sale.

Vote FOR [ ] AGAINST [ ] the resolution approving the Agreement for
Purchase and Sale by and between the Company and several parties
relating to the acquisition of certain oil and gas leaseholds and
related property.

4. Approval of the Amendment to the Articles with respect to the Preferred
Stock.

Vote FOR [ ] AGAINST [ ] the resolution approving a special resolution
authorizing and approving an amendment to the Memorandum and Articles
of the Company that will modify the existing designation of the
Preferred Stock.

5. Approval of the issuance of the Company's 10% Convertible Secured
Notes.

Vote FOR [ ] AGAINST [ ] the resolution approving the issuance of the
Company's 10% Convertible Secured Notes.

6. Approval of a special resolution authorizing the Capital Stock
Amendment.

Vote FOR [ ] AGAINST [ ] the resolution approving the a special
resolution authorizing the Capital Stock Amendment.

7. Auditors.

Vote FOR [ ] WITHHOLD [ ] vote on the resolution to appoint Kraft,
Rothman, Berger, Grill, Schwartz & Cohen, Chartered Accountants, as
auditors of the Company at the remuneration to be fixed by the Board of
Directors.

8. Upon any other matter that properly comes before the Meeting.

[ ]
[ ]
(Please advise the Company of any change of address)

THE UNDERSIGNED HEREBY REVOKES ANY PRIOR PROXY OR PROXIES.

Dated ______________________________, 1999.

_______________________________________________________________________________
Signature of Shareholder

_______________________________________________________________________________
Printed Name of Shareholder

A PROXY WILL NOT BE VALID UNLESS THE FORM OF PROXY IS DATED, DULY EXECUTED AND
DELIVERED TO THE OFFICE OF PACIFIC CORPORATE TRUST COMPANY, 625 HOWE STREET,
SUITE 830, VANCOUVER, BRITISH COLUMBIA V6C 3B8, NOT LESS THAN 48 HOURS
(EXCLUDING SATURDAYS AND HOLIDAYS) BEFORE THE MEETING AT WHICH THE PERSON NAMED
THEREIN PURPORTS TO VOTE IN RESPECT THEREOF.

Joint owners should each sign the proxy and where the proxy is signed by a
corporation either its common seal must be affixed to the proxy or it should be
signed by the corporation under the hand of an officer or attorney duly
authorized in writing, which authorization must accompany the proxy.

THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED OR WITHHELD FROM VOTING IN
ACCORDANCE WITH THE INSTRUCTIONS OF THE SHAREHOLDER ON ANY BALLOT AND WHERE A
CHOICE WITH RESPECT TO ANY MATTER TO BE ACTED UPON IS SPECIFIED, THE SHARES WILL
BE VOTED ON ANY BALLOT IN ACCORDANCE WITH SUCH SPECIFICATION.

RETURN THIS PROXY IMMEDIATELY.

<PAGE> 1
Exhibit A

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Daugherty Resources, Inc.:

We have audited the accompanying combined statement of revenues and
direct operating expenses for certain oil and gas interests of Environmental
Energy, Inc. and its affiliates, Environmental Operating, Inc. and affiliated
limited partnerships ("Environmental Interest") to be acquired from the
Environmental Interest Owners for the year ended December 31, 1998. This
statement is the responsibility of Environmental Energy, Inc.'s management. Our
responsibility is to express an opinion on this financial statement based on our
audit.

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

The statement of revenues and direct operating expenses for the
Environmental Interests acquired from the Environmental Interest Owners was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission as described in Note A and are not intended
to be a complete presentation of revenues and expenses.

In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and direct operating expenses of the
Environmental Interests acquired from the Environmental Interest Owners for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.

Hall, Kistler & Company, LLP

Certified Public Accountants

Canton, Ohio
April 19, 1999

FS-1
<PAGE> 2

COMBINED STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES
ENVIRONMENTAL INTERESTS
YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S> <C>
Revenues ........................................ $ 281,217
Direct operating expenses ....................... (59,688)
---------
Excess of revenues over direct operating expenses $ 221,529
=========
</TABLE>

The accompanying notes are an integral part of this statement.

FS-2
<PAGE> 3

NOTES TO COMBINED STATEMENT
OF REVENUE AND DIRECT OPERATING EXPENSES
ENVIRONMENTAL INTERESTS

DECEMBER 31, 1998

NOTE A Summary of Significant Accounting Policies.
------------------------------------------

Basis of Presentation.
----------------------

The accompanying statements present the revenues and direct operating
expenses of certain oil and gas interests ("Environmental Interests") of
Environmental Energy, Inc. and its affiliates, Environmental Operating, Inc.,
and Environmental Holding Company, LLC, and affiliated limited partnerships:
Environmental Energy Partners I, LTD., Environmental Energy Partners II, LTD.,
Environmental Operating Partners, LTD., Environmental Processing Partners, LTD.,
(collectively referred to as "Sellers") , which are to be acquired by Daugherty
Resources, Inc. ("DRI") pursuant to an Agreement for Purchase and Sale dated
January 26, 1999 ("Agreement"). Under the terms of the Agreement, DRI is to
acquire working interests in various wells in exchange for 1,024,924 shares of
Limited Series Non-Cumulative, Non-Voting Preferred Stock (DRI Preferred") and
170,821 Units of Acquisitions Warrants ("DRI Warrants"). The DRI Preferred are
convertible on a share for share basis into Common Stock of DRI ("DRI Common").
The DRI Preferred may be converted (1) by the Sellers at any time within two
years of issuance, and (2) by DRI at any time within two years of issuance if
last sales price of DRI Common equals or exceeds Ten Dollars ($10.00) for at
least 20 consecutive trading days and notice of conversion is given to Sellers
no sooner than ten days after the 20th consecutive trading day equaling or
exceeding Ten Dollars ($10.00). Any DRI Preferred so converted will receive a
Conversion Bonus of DRI Common of one half of one percent of the number of DRI
Preferred converted times the number of months from issuance to the date of
conversion. Any DRI Preferred that has not been converted before the second
anniversary date of its issue shall be converted on a share for share basis by
DRI into DRI Common and the Holders will receive a Conversion Bonus of DRI
Common equal to 12% of the number of DRI Preferred so converted. The DRI
Preferred and DRI Common shall bear Rule 144 restrictive legends and shall be
subject to the requirements of Rule 144. The Units of Acquisition Warrants shall
consist of two (2) Series A Acquisition Warrants, one (1) Series B Acquisition
Warrant, one (1) Series C Acquisition Warrant, one (1) Series D Acquisition
Warrant, one (1) Series E Acquisition Warrant, one (1) Series F Acquisition
Warrant, and one (1) Series G Acquisition Warrant with the following features:

FS-3
<PAGE> 4

<TABLE>
<CAPTION>
WARRANTS HOLDER MAY PURCHASE PRICE EXPIRY
-------- ------------------- ----- ------
<S> <C> <C> <C>
Series A One Share of DRI Common $1.75 5 years from issuance
Series B One Share of DRI Common $2.00 5 years from issuance
Series C One Share of DRI Common $2.50 5 years from issuance
Series D One Share of DRI Common $3.00 5 years from issuance
Series E One Share of DRI Common $3.50 5 years from issuance
Series F One Share of DRI Common $4.00 5 years from issuance
Series G One Share of DRI Common $4.50 5 years from issuance
</TABLE>

Each Series of Acquisition Warrants is redeemable by DRI as an entire
series, at a price of $.05 per Acquisition Warrant, at the option of DRI if (1)
the last sales price of DRI Common equals or exceeds 200% of the exercise price
of the Series of Acquisition Warrants being redeemed for 20 consecutive trading
days and (2) notice of redemption is given to the Warrantholder no sooner than
one day after and no later than ten days after the 20th consecutive trading day.
The notice of redemption must give a minimum of 90 days notice to the
Warrantholder and the Warrantholder shall have the right to exercise the Warrant
until the close of business of the date fixed for redemption in the notice.

Omitted Historical Financial Information
----------------------------------------

Full historical financial statements, including general and
administrative expenses and interest expense, have not been presented due to the
fact that (a) the sellers of the Environmental Interests cannot make a
practicable determination of the portion of their general and administrative
expenses, interest expense or other indirect expenses which is attributable to
the properties subject to the above transactions, and (b) the property interests
acquired pursuant to the above transactions are primarily fully developed
producing properties in which DRI has had no management involvement. Total
incurred exploration and development costs associated with the Environmental
Energy, Inc. Interests through December 31, 1998 were approximately $12,500,000.

Accrual Basis Statements
------------------------

Memorandum adjustments have been made to the financial information
derived from the Sellers in order to present the accompanying statements in
accordance with generally accepted accounting principles.

NOTE B Unaudited Supplemental Oil and Gas Information.
----------------------------------------------

The determination of oil and gas reserves is complex and highly
interpretive. Assumptions used to estimate reserve information may significantly
increase or decrease such reserves in future periods. The estimates of reserves
are subject to continuing changes and therefore, an accurate determination of
reserves may not be possible for many years because of the time needed for
development, drilling, testing and studies of the reservoirs. Net proved oil and
gas reserves and the discounted future net cash flows related to the acquired
properties were estimated by the Company's petroleum engineers as of December
31, 1998 in accordance with

FS-4
<PAGE> 5

Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities." Since reserve evaluations for earlier dates had not
been prepared, it is not practical to include any information as to changes in
reserve quantities, nor any change in present value disclosures. At December 31,
1998, net proved reserves for the acquired properties were estimated as 4.9
MBbls of oil and 334 MMcf of natural gas. Net production for the year ended
December 31, 1998, was 2.7 MBbls of oil and 114.2 MMcf of natural gas.

The standardized measure of discounted future net cash flows at
December 31, 1998, related to the estimated proved oil and gas reserves is as
follows:

<TABLE>
<S> <C>
Future net revenue $ 814,316
Future production costs (168,424)
Future development costs (8,039)
Future income taxes -0-
---------
Future net cash flows $ 637,853
Discount (209,017)
---------
Standardize measure of discounted future net cash flows $ 428,836
=========
</TABLE>

The calculated weighted average sales prices utilized for the purposes
of estimating the acquired properties' proved reserves and future net revenue
were $11.98 per barrel of oil and between $2.17 and $2.25, per Mcf of natural
gas. Total estimated future net cash flows before income taxes, discounted at
10% per annum, was $428,836 as of December 31, 1998.

During 1998, $42,000 was expended for capital improvements to the
properties, none of which related to exploration.

FS-5

<PAGE> 1
Exhibit B

PRO FORMA FINANCIAL INFORMATION
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The accompanying pro forma consolidated balance sheet and pro forma
consolidated statements of operations give effect to Daugherty Resources, Inc.'s
("Company") acquisition of the oil and gas Interests of Environmental Energy,
Inc. and its affiliates Environmental Operating, Inc. and affiliated limited
partnerships ("Environmental Interests"), and are based upon assumptions set
forth in the notes to such statements.

The pro forma consolidated financial statements comprise historical
data which have been retroactively adjusted or combined to reflect the effects
of the above mentioned transaction on the historical consolidated financial
statements. The historical information assumes that the transaction for which
pro forma effects are shown was consummated on March 31, 1999 for the pro forma
consolidated balance sheet and January 1 of each period presented for the pro
forma consolidated statements of operations. Such pro forma information should
be read in conjunction with the related historical financial information and is
not necessarily indicative of the results which would actually have occurred had
the transaction been in effect on the date or the beginning of the periods
indicated or which may occur in the future due to several factors, including,
but not limited to, commencement of production from new wells that has occurred
subsequent to the dates of the periods presented.

PF-1
<PAGE> 2

PRO FORMA CONSOLIDATED BALANCE SHEET
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
MARCH 31, 1999
(UNAUDITED, IN THOUSANDS)

<TABLE>
<CAPTION>
ENVIRONMENTAL
HISTORICAL INTERESTS PRO
COMPANY ACQUISITION FORMA

(a)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 298 $ -0- $ 298
Accounts receivable 336 -0- 336
Inventory 397 -0- 397
Other current assets 20 -0- 20
-------- ------ --------
TOTAL CURRENT ASSETS 1,051 -0- 1,051

OIL AND GAS PROPERTIES (NET) 4,637 650 5,287
- ---------------------------

MINING PROPERTY (NET) 11,232 -0- 11,232
- ---------------------

PROPERTY AND EQUIPMENT (NET) 1,738 -0- 1,738
- ---------------------------

OTHER ASSETS
- ------------
Related party loans 96 -0- 96
Bonds and deposits 54 -0- 54
Other assets 266 -0- 266
Goodwill, net of amortization of $848 1,028 -0- 1,028
-------- ------ --------
1,444 -0- 1,444
-------- ------ --------
TOTAL ASSETS $ 20,102 $ 650 $ 20,752
======== ====== ========

LIABILITIES AND
---------------
STOCKHOLDER'S EQUITY
--------------------

CURRENT LIABILITIES
- -------------------

Short-term loans and notes $ 879 $ -0- $ 879
Current portion of long-term debt 1,151 -0- 1,151
</TABLE>

PF-2
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Accounts payable 1,465 -0- 1,465
Accrued liabilities 751 -0- 751
Drilling prepayments 824 -0- 824
-------- ------ --------
TOTAL CURRENT LIABILITIES 5,070 -0- 5,070

LONG-TERM LIABILITIES 2,554 -0- 2,554
- ---------------------

PAYABLE TO RELATED PARTIES 25 -0- 25
- --------------------------
7,649 -0- 7,649
MINORITY INTEREST -0- -0- -0-

STOCKHOLDER'S EQUITY
- --------------------
Common stock 21,210 -0- 21,210
Common stock subscribed -0- -0- -0-
Preferred stock -0- 650 650
Additional paid in capital -0- -0- -0-
Retained earnings (deficit) (8,505) -0- (8,505)
Current income (loss) (252) -0- (252)
-------- ------ --------
12,453 650 13,103
-------- ------ --------
TOTAL LIABILITIES AND
- ---------------------
STOCKHOLDER'S EQUITY $ 20,102 $ 650 $ 20,752
======== ====== ========
</TABLE>

The accompanying notes are an integral part of this pro forma financial
statement.

PF-3
<PAGE> 4

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED, IN THOUSANDS)

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ENVIRONMENTAL
HISTORICAL INTERESTS PRO
COMPANY ACQUISITION ADJUSTMENTS FORMA
(c)
<S> <C> <C> <C> <C>
GROSS REVENUE $ 1,360 $ 48 -0- $ 1,408
- -------------

DIRECT EXPENSES 1,207 15 (b) 42 1,264
- --------------- -------

GROSS PROFIT (LOSS) 153 33 (42) 144

GENERAL AND ADMINISTRATIVE
- --------------------------
EXPENSES 340 -0- -0- 340
--------

OTHER INCOME (EXPENSE) (65) -0- -0- (65)
- --------------------- ------- ------- -------

INCOME (LOSS) BEFORE
INCOME TAX AND OTHER $ (252) $ 33 $ (42) $ (261)
- --------------------

Income tax expense (benefit) -0- -0- -0- -0-
------- ------- ------- -------
NET INCOME (LOSS) $ (252) $ 33 $ (42) $ (261)
======= ======= ======= =======

Shares outstanding 2,184 2,184

Earnings per share $ (.12) $ (.12)
</TABLE>
The accompanying notes are an integral part of this pro forma financial
statement.

PF-4
<PAGE> 5

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

ENVIRONMENTAL
HISTORICAL INTERESTS PRO
COMPANY ACQUISITION ADJUSTMENTS FORMA
(c)

<S> <C> <C> <C> <C>
GROSS REVENUE $ 5,944 $281 $ -0- $ 6,225
- -------------

DIRECT EXPENSES 5,201 59 (b) 156 5,416
- ---------------

GROSS PROFIT 743 222 (156) 809

GENERAL AND ADMINISTRATIVE
- --------------------------
EXPENSES 2,436 -0- -0- 2,436
--------

OTHER INCOME (EXPENSE) 143 -0- -0- 143
- ---------------------

INCOME (LOSS) BEFORE
INCOME TAX AND OTHER (1,550) 222 (156) (1,484)
- --------------------

Income tax expense
(benefit) -0- -0- -0- -0-

MINORITY PORTION (18) -0- -0- (18)
- ---------------- ---- ----- -------

NET INCOME (LOSS) $(1,568) $222 $(156) $(1,502)
======= ==== ===== =======

Shares outstanding 2,184 2,184

Average number of shares
outstanding for 1998 2,035 2,035

Earnings per share (.77) (.74)

</TABLE>
The accompanying notes are an integral part of this pro forma financial
statement.

PF-5
<PAGE> 6

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
(UNAUDITED)

(a) To reflect Daugherty Resources acquisition of oil and gas
properties from the Environmental Interest owners and the related issuance of
preferred stock. Due to the restrictions on the preferred stock to be issued,
the marketable value of the preferred stock was undeterminable. The fair market
value of the underlying assets was used to estimate the value of the preferred
stock. The fair market value of oil and gas working interests were based upon
the Company's petroleum engineers reserves analysis and the other non-producing
properties were based on managements estimates of fair market value.

(b) Represents the increase in depreciation, depletion expense
resulting from the inclusion of the Environmental Interests acquisition computed
on the straight line and units of production method.

PF-6

<PAGE> 1
EXHIBIT C

SPECIAL RESOLUTION
AUTHORIZATION OF ADDITIONAL COMMON SHARES AND PREFERRED SHARES

Set forth below is the text of the resolution to be submitted with
respect to an amendment to the Memorandum and Articles of the Company which
shall effect (1) an increase in the number of authorized common shares of the
Company, without par value per share, to 100,000,000, and (2) an increase in the
number of authorized preferred shares of the Company, without par value per
share, to 5,000,000.

NOW THEREFORE BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:

1. The proper officers of the Company be, and they hereby are,
authorized and directed to file an amendment to the Memorandum and Articles of
the Company, other relevant corporate documents, in substantially same form as
follows:

"The authorized capital of the Company consists of 105,000,000
shares, divided into 5,000,000 preferred shares, without par value per
share, and 100,000,000 common shares, without par value per share'

2. The proper officers of the Company be, and they hereby are,
authorized and directed, for and in the name of and on behalf of the Company, to
execute all such documents, instruments, and certificates under the corporate
seal or otherwise, and to do all such other acts and things, as they may
determine in their sole and absolute discretion to be necessary or advisable in
order to carry out the purpose and intent of the foregoing resolution.

<PAGE> 1
EXHIBIT D

SPECIAL RESOLUTION
AMENDMENT TO DESIGNATION OF RIGHTS AND CHARACTERISTICS OF PREFERRED SHARES

Set forth below is the text of the resolution to be submitted with
respect to an amendment to the Memorandum and Articles of the Company which
shall effect an amendment to the designation of the rights and characteristics
of the Preferred Shares.

NOW THEREFORE BE IT RESOLVED AS A SPECIAL RESOLUTION THAT:

1. The proper officers of the Company be, and they hereby are,
authorized and directed to file an amendment to the Memorandum and Articles of
the Company, and other relevant corporate documents, which shall delete the
existing Part 23.1(b) of the Memorandum of the Company and replace it with the
text, in substantially same form, as follows:

"(b) The preferred shares may be issued from time to time in
one or more series. Initially the shares will be authorized as a single
series, but may be expanded to include additional series pursuant to
proper shareholder approval. The preferred shares may be converted into
common shares of the Company at the election of the holder thereof at
any time within two years of the date of issue of the preferred shares,
on a share for share basis. The preferred shares may be converted into
common shares of the Company by the Company at any time within two
years of the date of issue of the preferred shares, on a share for
share basis, if the following conditions are met: (i) the last sales
price per share of the common shares, as noted on the Company's
principal trading exchange, equals or exceeds US$10.00 for at least 20
consecutive days, and (ii) proper notice of conversion is given to by
the Company to the holder no sooner than one day after, and no later
than 10 days after, the expiration of the referenced 20 consecutive
trading day period. Any preferred shares not converted by the Company
or the holder before the second anniversary of its issue shall be
automatically converted by the Company into the common shares on a
share for share basis on the second anniversary of issue. Any preferred
shares converted automatically by the Company on the second anniversary
of issue, shall receive a conversion bonus of the common shares equal
to 12 percent of the number of preferred shares which remain
unconverted on the second anniversary date. Any preferred shares
converted by the Company prior to the second anniversary date shall
receive a conversion bonus of the common shares equal to 0.5 percent
per month of the number of preferred shares which are converted, times
the total number of months elapsed from the date of issuance of the
preferred shares to the date of conversion."