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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
FOR THE FINANCIAL YEAR ENDED DECEMBER 31, 1999
OR
[_] TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE
REQUIRED)
FOR THE TRANSITION PERIOD FROM ________ TO_______
COMMISSION FILE NUMBER: 0-12185
DAUGHERTY RESOURCES, INC.
(Name of Small Business Issuer in its charter)
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<S> <C>
BRITISH COLUMBIA NOT APPLICABLE
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
</TABLE>
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509-1844
(Address of principal executive office)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (606) 263-3948.
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
no par value per share.
Check whether the Issuer (1) filed all reports to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports, and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ].
The issuer revenues for the year ended December 31,1999 were $1,416,725.
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which stock was sold, or the average bid
and asked prices of such stock, as of March 31, 2000, was $3,470,916
The number of shares outstanding of the Issuer's classes of common
equity, as of March 31, 2000 was 2,520,628.
Documents incorporated by reference: None.
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TABLE OF CONTENTS
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PART I Page #
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Item 1. Business 3
Item 2. Description of Properties 12
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
25
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations 26
Item 7. Financial Statements and Supplementary Data 31
Item 8. Changes in and Disagreements with Accounts on Accounting and Financial Disclosure
31
PART III
Item 9. Directors and Executive Officers of the Registrant 31
Item 10. Executive Compensation 32
Item 11. Security Ownership of Certain Beneficial Owners and Management 35
Item 12. Certain Relationships and Related Transactions 37
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Daugherty Resources, Inc. (the "Company" or the "Registrant") is a
natural resources company with assets in oil and gas, and gold and silver
properties. The Company officially changed its name in 1998 from Alaska Apollo
Resources, Inc. to Daugherty Resources, Inc. Originally formed in 1979 to
develop gold properties in Alaska, the Company, through its 1993 acquisition of
Daugherty Petroleum, Inc., has acquired substantial oil and gas interests in the
Appalachian and Illinois Basins.
The Company's strategy is to continue to expand its base in oil and gas
resources in the eastern part of the United States. To implement this strategy,
the Company emphasizes the following elements:
- Reserve growth through high potential developmental drilling;
- Balance between development drilling and acquisitions of proved
oil and gas properties; and
- Equity ownership and incentives to attract and retain employees.
The Company has focused on its oil and gas drilling efforts through its
subsidiary, Daugherty Petroleum, Inc., in the Appalachian and Illinois Basins.
Management has extensive experience in both basins, and the Company believes
that there are significant undiscovered reserve potential and opportunities in
the basins. The Company's concentration on these two basins helps keep
operational expenses to a minimum.
The Company is engaged through Daugherty Petroleum, Inc., which was
incorporated in 1984, in the business of acquiring properties for the
exploration and development of oil and gas, including lease acquisitions,
participation in ventures involving other oil and gas companies and investors,
and in farm-ins from other producers. Daugherty Petroleum performs these
services on behalf of the Company, investors in specific programs, and on a
turnkey basis for other oil and gas companies.
The majority of the wells operated by the Company are located in the
Kentucky and Tennessee portions of the Appalachian Basin. The Appalachian Basin
is characterized by shallow developmental wells, which generally have provided
highly predictable drilling success rates. In addition, because wells drilled in
the Appalachian Basin are closer to the northeast gas market, the natural gas
from this area typically has commanded a price premium relative to natural gas
produced in areas such as the Gulf Coast and Mid-Continent regions of the United
States. Furthermore, the Company's natural gas has a heating value that results
in it receiving a 20% premium for its gas. In addition to its drilling
activities, the Company purchases natural gas producing properties. During 1999,
the Company purchased 20.30675 net wells.
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BUSINESS STRATEGY
The Company's objective is to expand its oil and natural gas reserves,
production and revenues through a strategy that includes the following key
elements:
Expand drilling operations. The Company has primarily concentrated its
drilling operations in the southern portion of the Appalachian Basin. Since 1995
the Company has drilled 52 gas wells. The Company believes that it will be able
to drill a substantial number of new wells on its current undeveloped leased
properties. As of December 31, 1999 the Company had 18,859 net undeveloped
acres. During the first quarter of 2000, the Company drilled 14 productive
wells.
Acquire producing properties. The Company's acquisition efforts are
focused on properties that help build critical mass in areas where the Company
has established operations or is establishing new operations. Acquisitions are
sought that with offer economies in management and administration, and,
therefore, enable the Company to acquire more producing wells without incurring
substantial increases in its costs of operations.
Pursue geographic expansion. The Company has a proven ability to drill
and operate natural gas wells successfully. There are a number of areas outside
the Appalachian Basin where drilling and operating characteristics are similar
to those in Appalachia. The Company will continue to evaluate opportunities to
expand geographically on an ongoing basis.
Reduce risks inherent in natural gas development and marketing. An
integral part of the Company's strategy has been and will continue to be to
concentrate on development, (rather than exploratory) drilling to reduce risk
levels associated with natural gas and oil production. Development drilling is
less risky than exploratory drilling. The Company's focus on shallow wells
allows it to drill more wells the result of which also provides greater
investment diversification than an equal investment in a smaller number of
deeper more expensive wells. Geographical diversification can help to offset
possible weakness in the natural gas market or disappointing drilling results in
one area. The Company intends to continue to expand its marketing capacity to
keep pace with the changing natural gas industry.
Expand strategic relationships. By managing drilling programs for itself
and other investors, the Company is able to share administrative, overhead and
other costs with its partners, reducing costs for both. The Company also is able
to maintain a larger and more capable staff than would be possible without
partners. Other benefits from these associations include greater buying power
for drilling services and materials, larger amounts of natural gas available to
market, increased profits from drilling and operating wells for partners, and
greater awareness of the Company in the investment community.
Gold and silver properties. It is the Company's objective to develop a
strategy to monetize its Alaskan gold and silver properties by 1) seeking a
joint venture partner to provide funds for additional exploration of its
prospects, and 2) considering a divestiture of its gold and silver properties.
To help achieve its goals of monetization of the properties, in March 2000, the
Company commissioned a review of its gold and silver properties by Steffen
Robertson Kirsten (U.S.), Inc., an engineering firm specializing in mineral
properties. In addition, the Company retained Balfour Holding, Inc. an
independent consulting firm to perform an appraisal of the properties.
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EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company's exploration and development activities focus on the
identification and drilling of new productive wells and the acquisition of
existing producing wells from other producers.
DRILLING ACTIVITIES
When prospects have been developed by the Company's staff and
consultants, the Company develops these properties by drilling wells. Typically,
the Company will act as driller for these prospects, entering into contracts
with partnerships, including Company-sponsored partnerships, and other entities
that are interested in exploration or development of the prospects. The Company
generally retains an interest in each well it drills. See "Financing of Drilling
Activities".
Much of the work associated with drilling, completing and connecting
wells, including drilling, fracturing, logging and pipeline construction, is
performed by subcontractors specializing in those operations, as is common in
the industry. A large part of the material and services used by the Company in
the development process is acquired from industry vendors by virtue of direct
negotiation of rates and costs for services and supplies. As the prices paid to
the Company by its investor partners for the Company's services are frequently
fixed before the wells are drilled or are determined solely on the well depth,
the Company is subject to the risk that prices of goods or services used in the
development process could increase, rendering its contracts with its investor
partners less profitable or unprofitable. In addition, problems encountered in
the process can substantially increase development costs, sometimes without
recourse for the Company to recover its costs from its partners.
During 1999, the Company participated in the drilling of 5 gross wells
(1.95 net wells). All of these wells were completed as wells capable of
producing gas in commercial quantities. Drilling was primarily concentrated on
two farmouts from Equitable Production Company in Knox and Bell Counties,
Kentucky.
ACQUISITIONS OF PRODUCING PROPERTIES
In addition to drilling new wells, the Company continues to pursue
opportunities to purchase existing producing wells from other producers and
greater ownership interests in the wells it operates. Generally, outside
interests purchased include a majority in the wells and include the right to
operate the wells.
WELL OPERATIONS
The Company currently operates approximately 136 natural gas wells in the
Appalachian Basin and 45 oil wells in the Illinois Basin. The Company also
operates 5 oil wells in the Appalachian Basin. The Company's ownership interest
in these wells range from 10% to 100%, and, on average, the Company has an
approximate 39% ownership interest in the wells it operates. As of December 31,
1999 these wells produce an aggregate of about 1709 Mcf of natural gas per day,
including the Company's share of 667 Mcf per day.
The Company is paid a monthly operating charge for each well it operates.
The rate is competitive with rates charged by other operators in the area. The
charge covers monthly operating
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and accounting costs, and insurance. Other costs for special non-recurring
activities, such as reworks and recompletions are billed to the working interest
owners on as those expenses arise.
TRANSPORTATION
Natural gas wells are connected by underground pipelines to natural gas
markets. Over the years, the Company has developed extensive gathering systems
in its areas of operations. The Company also continues to construct new
gathering lines as necessary to provide for the marketing of natural gas being
developed from new areas and to enhance or maintain its existing systems.
DRILLING ACTIVITIES
The following table summarizes the Company's development drilling
activity for the years ended December 31, 1997, 1998 and 1999. There is no
correlation between the number of productive wells completed during any period
and the aggregate reserves attributable to those wells.
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<CAPTION>
Total Productive Dry
----- ---------- ---
Drilled Net Drilled Net Drilled Net
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
1997 12 3.2400 12 3.2400 0 0
1998 14 3.5125 14 3.5125 0 0
1999 5 1.9500 5 1.9500 0 0
Total 31 8.7025 31 8.7025 0 0
</TABLE>
MARKETING
The Company markets substantially all of the oil and gas production from
Company operated properties for both the account of the Company and the other
working interest owners in these properties. As of March 31, 2000, substantially
all of the Company's natural gas production is sold to Nami Resources, LLC under
a short-term (less than 12 months) contract. During 1999, Southern Gas Company
and Nami Resources each purchased in excess of 10% of the gas sold by the
Company for its own account. Oil sales contracts are short-term and are based
upon field posted prices plus negotiated bonuses. During 1999, Indiana Farm
Bureau Mark Oil Company, and B. P. Bear Creek Oil, LLC each purchased in excess
of 10% of the oil sold by the Company for its own account. Because alterative
purchasers of oil and gas are readily available, the Company believes that the
loss of any of these purchasers would not have a material adverse effect on the
Company.
VOLATILITY OF OIL AND GAS PRICES AND HEDGING
As an independent oil and gas producer, the Company's revenue,
profitability and future rate of growth are substantially dependent upon the
prevailing prices of, and demand for, natural gas, oil and condensate. The
Company's ability to maintain or increase its borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent upon oil
and gas prices. Prices for oil and natural gas are subject to wide fluctuation
in response to relatively minor changes in the supply of, and demand for, oil
and gas, market uncertainty and a variety of additional factors that are beyond
the control of the Company. These factors include the level of consumer product
demand, weather conditions, domestic and foreign governmental regulations, the
price and availability of alternative fuels, political conditions in oil and gas
producing regions worldwide, the foreign supply of oil and natural gas, the
price of oil and gas imports and overall economic factors. From time to time,
oil and gas prices have been depressed by excess domestic and imported supplies;
however,
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prices for oil and gas have recently increased materially. It is impossible to
predict future oil and natural gas price movements with any certainty. Any
continued and extended decline in the price of oil or gas could have a material
adverse effect on the Company's financial position, cash flows and results of
operations and may reduce the amount of the Company's oil and natural gas that
can be produced economically. Additionally, substantially all of the Company's
sales of oil and natural gas are made in the spot market or pursuant to
contracts based on spot market prices and not pursuant to long term fixed price
contracts.
FINANCING OF DRILLING ACTIVITIES
The Company conducts development-drilling activities for its own account
and for other investors. Since 1984, the Company has sponsored private drilling
limited partnerships. The Company generally invests, as its equity contribution
to each drilling partnership, a sum approximating 20% of the aggregate
subscriptions received for that particular drilling partnership. As a result,
the Company is subject to substantial cash commitments at the closing of each
drilling partnership. The funds received from these programs are restricted to
use in future drilling operations. While funds are received by the Company
pursuant to drilling contracts in the year of the contract, the Company
recognizes revenues from drilling operations on the percentage of completion
method as the wells are drilled, rather than when funds are received. Most of
the Company's drilling and development funds are received from partnerships in
which the Company serves as managing general partner. However, because wells
produce for a number of years, the Company continues to serve as operator for a
number of unaffiliated parties. In addition to the partnership structure, the
Company also utilizes joint venture arrangements for financing drilling
activities.
In 1999, the Company contributed $215,292 in drilling funds to
partnerships that it served as managing general partner. The financing process
begins when the Company enters into a development agreement with an investor
partner, pursuant to which the Company agrees to assign its rights in the
property to be drilled to the partnership or other entity. The partnership or
other entity thereby becomes owner of a working interest in the property.
GOVERNMENTAL REGULATION
The Company's business and the natural gas industry in general are
heavily regulated. The availability of a ready market for natural gas production
depends on several factors beyond the Company's control. These factors include
regulation of natural gas production, federal and state regulations governing
environmental quality and pollution control, the amount of natural gas available
for sale, the availability of adequate pipeline and other transportation and
processing facilities and the marketing of competitive fuels. State and federal
regulations generally are intended to prevent waste of natural gas, protect
rights to produce natural gas between owners in a common reservoir and control
contamination of the environment. Pipelines are subject to the jurisdiction of
various federal, state and local agencies. The Company takes the steps necessary
to comply with applicable regulations both on its own behalf and as part of the
services it provides to its investor partnerships. The Company believes that it
is in substantial compliance with such statutes, rules, regulations and
governmental orders although there can be no assurance that this is or will
remain the case. The following discussion of the regulation of the United States
natural gas industry is not intended to constitute a complete discussion of the
various statutes, rules, regulations and environmental orders to which the
Company's operations may be subject.
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REGULATION OF NATURAL GAS EXPLORATION AND PRODUCTION
The Company's natural gas operations are subject to various types of
regulation at the federal, state and local levels. Prior to commencing drilling
activities for a well, the Company must procure permits and/or approvals for the
various stages of the drilling process from the applicable state and local
agencies in the state in which the area to be drilled is located. Such permits
and approvals include those for the drilling of wells, and such regulation
includes maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties on which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. The Company's operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or portion units and the density of wells, which may
be drilled and the unitization or pooling of natural gas properties. In this
regard, some states allow the forced pooling or integration of tracts to
facilitate exploration while other states rely primarily or exclusively on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units, and therefore, more difficult to develop a
project if the operator owns less than 100% of the leasehold. In addition, some
states have conservation laws that establish maximum rates of production from
natural gas reservoirs and impose certain requirements regarding the ratability
of production. The effect of these regulations may limit the amount of natural
gas the Company can produce from its wells and may limit the number of wells or
the locations at which the Company can drill. The regulatory burden on the
natural gas industry increases the Company's cost of doing business and,
consequently, affects its profitability. In as much as such laws and regulations
are frequently expanded, amended and reinterpreted, the Company is unable to
predict the future cost or impact of complying with such regulations.
REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS
Historically, the transportation and sale for resale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas Act of 1938,
the Natural Gas Policy Act of 1978 (the "NGPA") and the regulations promulgated
thereunder by FERC. Maximum selling prices of certain categories of natural gas
sold in "first sales," whether sold in interstate or intrastate commerce, were
regulated pursuant to the NGPA. The Natural Gas Well Head Decontrol Act (the
"Decontrol Act") removed, as of January 1, 1993, all remaining federal price
controls from natural gas sold in "first sales" on or after that date. FERC's
jurisdiction over natural gas transportation was unaffected by the Decontrol
Act. While sales by producers of natural gas and all sales of crude oil,
condensate and natural gas liquids can currently be made at market prices,
Congress could reenact price controls in the future.
The Company's sales of natural gas are affected by the availability,
terms and cost of transportation. The price and terms for access to pipeline
transportation are subject to extensive regulation. In recent years, FERC has
undertaken various initiatives to increase competition within the natural gas
industry. As a result to initiatives like FERC Order No. 636, issued in April
1992, the interstate natural gas transportation and marketing system has been
substantially restructured to remove various barriers and practices that
historically limited non-pipeline natural gas sellers, including producers, from
effectively competing with interstate pipelines for sales to local distribution
companies and large industrial and commercial customers. The most significant
provisions of Order No. 636 require that interstate pipelines provide
transportation separate or "unbundled" from their sales service, and require
that pipelines provide firm and interruptible transportation service on an open
access basis that is equal for all natural gas suppliers. In many
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instances, the result of Order No. 636 and related initiatives have been to
substantially reduce or eliminate the interstate pipelines' traditional role as
wholesalers of natural gas in favor of providing only storage and transportation
services. Another effect of regulatory restructuring is the greater
transportation access available on interstate pipelines. In some cases,
producers and marketers have benefited from this availability. However,
competition among suppliers has greatly increased and traditional long-term
producer-pipeline contracts are rare. Furthermore, gathering facilities of
interstate pipelines are no longer regulated by FERC, thus allowing gatherers to
change higher gathering rates.
Additional proposals and proceedings that might affect the natural gas
industry are nearly always pending before Congress, FERC, state commissions and
the courts. The natural gas industry historically has been very heavily
regulated; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by FERC and Congress will continue. The Company cannot
determine to what extent future operations and earnings of the Company will be
affected by new legislation, new regulations, or changes in existing
regulations, at federal, state or local levels.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Public interest in the protection of the
environment has increased dramatically in recent years. The trend of more
expansive and stricter environmental legislation and regulations could continue.
To the extent laws are enacted or other governmental action is taken that
restricts drilling or imposes environmental protection requirements that result
in increased costs to the natural gas industry in general, the business and
prospects of the Company could be adversely affected.
The Company generates wastes that may be subject to the Federal Resource
Conservation and Recovery Act ("RCRA") and comparable state statutes. The U.S.
Environmental Protection Agency ("EPA") and various state agencies have limited
the approved methods of disposal for certain hazardous wastes. Furthermore,
certain wastes generated by the Company's operations that are currently exempt
from treatment as "hazardous wastes" may in the future be designated as
"hazardous wastes," and therefore be subject to more rigorous and costly
operating and disposal requirements.
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and natural gas.
Although the Company believes that it has utilized good operating and waste
disposal practices, prior owners and operators of these properties may not have
utilized similar practices, and hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by the
Company or on or under locations where such wastes have been taken for disposal.
These properties and the wastes disposed thereon may be subject to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
RCRA and analogous state laws as well as state laws governing the management of
oil and natural gas wastes. Under such laws, the Company could be required to
remove or remediate previously disposed waste (including waste disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to prevent
future contamination.
CERCLA and similar state laws impose liability, without regard to fault
or the legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release
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of a "hazardous substance" into the environment. These persons include the owner
or operator of the disposal site or sites where the release occurred and
companies that disposed of or arranged for the disposal of the hazardous
substances found at the site. Persons who are or were responsible for release of
hazardous substances under CERCLA may be subject to joint and several liability
for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the hazardous substances
released into the environment.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of certain
pollution control requirements with respect to air emissions from the operations
of the Company. The EPA and states have been developing regulations to implement
these requirements. The Company may be required to incur certain capital
expenditures in the next several years for air pollution control equipment in
connection with maintaining or obtaining operating permits and approvals
addressing other air emission-related issues.
The Company's expenses relating to preserving the environment during 1999
were not significant in relation to operating costs and the Company expects no
material change in 2000. Environmental regulations have had no materially
adverse effect on the Company's operations to date, but no assurance can be
given that environmental regulations will not, in the future, result in a
curtailment of production or otherwise have a materially adverse effect on the
Company's business, financial condition or results of operations.
OPERATING HAZARDS AND INSURANCE
The Company's exploration and production operations include a variety of
operating risks, including the risk of fire, explosions, blowouts, craterings,
pipe failure, casing collapse, abnormally pressured formations, and
environmental hazards such as gas leaks, ruptures and discharges of toxic gas,
the occurrence of any which could result in substantial losses to the Company
due to injury and loss of life, severe damage to and destruction of property,
natural resources and equipment, pollution and other environmental damage,
clean-up responsibilities, regulatory investigation and penalties and suspension
of operations. The Company's pipeline, gathering and distribution operations are
subject to the many hazards inherent in the natural gas industry. These hazards
include damage to wells, pipelines and other related equipment, and surrounding
properties caused by hurricanes, floods, fires and other acts of God,
inadvertent damage from construction equipment, leakage of natural gas and other
hydrocarbons, fires and explosions and other hazards that could also result in
personal injury and loss of life, pollution and suspension of operations.
Any significant problems related to its facilities could adversely affect
the Company's ability to conduct its operations. In accordance with customary
industry practice, the Company maintains insurance against some, but not all,
potential risks; however, there can be no assurance that such insurance will be
adequate to cover any losses or exposure for liability. The occurrence of a
significant event not fully insured against could materially adversely affect
the Company's operations and financial condition. The Company cannot predict
whether insurance will continue to be available at premium levels that justify
its purchase or whether insurance will be available at all.
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COMPETITION
Competition in the oil and gas industry is intense, particularly with
respect to the acquisition of producing properties and proved undeveloped
acreage. Major and independent oil and gas companies actively bid for desirable
oil and gas properties, as well as for the equipment and labor required to
operate and develop such properties. The Company believes that its geographic
focus, its exploration, drilling and production capabilities, and the experience
of its management generally enable it to compete effectively. Many of the
Company's competitors, however, have financial resources and exploration and
development budgets that are substantially greater than those of the Company,
which may adversely affect the Company's ability to compete with these
companies.
SENTRA CORPORATION
Sentra Corporation, a Kentucky Corporation, is a 100% owned subsidiary of
Daugherty Petroleum. Effective April 2, 1999 Daugherty Petroleum, Inc. acquired
all outstanding shares of Sentra for its book value of $44,417 from an
individual serving as Director and President of the Company. Sentra owns and
operates two natural gas distribution systems in south central Kentucky. The two
systems are located in the cities of Fountain Run and Gamaliel pursuant to
natural gas franchises granted by those cities and certificates of convenience
and necessity issued by the Kentucky Public Service Commission. Sales of gas at
retail rates commenced in November 1999 to a limited number of customers.
Completion of the construction of both distribution systems is expected by the
Fall of 2000.
UTILITY REGULATION
Sentra Corporation, a 100% owned subsidiary that is a Kentucky public
utility, is subject to regulation by the Kentucky Public Service Commission in
virtually all of its activities, including pricing and supply of services,
addition of and abandonment of service to customers, design and construction of
facilities, and safety issues.
GALAX ENERGY CONCEPTS, LLC
Galax Energy is a North Carolina limited liability corporation owned 50%
by Daugherty Petroleum, Inc. Galax Energy generates steam at its Galax, Virginia
plant by burning wood waste as fuel and sells the steam to National Textiles on
a long-term contract. The plant is financed with industrial revenue bonds issued
through the Industrial Development Authority of the City of Galax, Virginia.
EMPLOYEES
As of December 31, 1999, the Company had 12 employees, including one in
finance, four in administration, two in exploration and development, and five in
production. The Company's engineers and well tenders are generally responsible
for the day-to-day operation of wells and pipeline systems. In addition, the
Company retains subcontractors to perform geological duties, drilling,
fracturing, logging, and pipeline construction functions at drilling sites. The
Company's employees act as supervisors of the subcontractors.
The Company's employees are not covered by a collective bargaining
agreement. The Company considers relations with its employees to be excellent.
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ITEM 2. DESCRIPTION OF PROPERTIES
EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company's exploration and development activities focus on the
identification and drilling of new productive wells and the acquisition of
existing producing wells from other producers.
DRILLING ACTIVITIES
When prospects have been developed by the Company's staff and
consultants, the Company develops these properties by drilling wells. Typically,
the Company will act as driller for these prospects, entering into contracts
with partnerships, including Company-sponsored partnerships, and other entities
that are interested in exploration or development of the prospects. The Company
generally retains an interest in each well it drills. See "Financing of Drilling
Activities".
Much of the work associated with drilling, completing and connecting
wells, including drilling, fracturing, logging and pipeline construction, is
performed by subcontractors specializing in those operations, as is common in
the industry. A large part of the material and services used by the Company in
the development process is acquired from industry vendors by virtue of direct
negotiation of rates and costs for services and supplies. As the prices paid to
the Company by its investor partners for the Company's services are frequently
fixed before the wells are drilled or are determined solely on the well depth,
the Company is subject to the risk that prices of goods or services used in the
development process could increase, rendering its contracts with its investor
partners less profitable or unprofitable. In addition, problems encountered in
the process can substantially increase development costs, sometimes without
recourse for the Company to recover its costs from its partners.
During 1999, the Company participated in the drilling of 5 gross wells
(1.95 net wells). All of these wells were completed as wells capable of
producing gas in commercial quantities. Drilling was primarily concentrated on
two farmouts described below from Equitable Production Company in Knox and Bell
Counties, Kentucky.
Kay Jay Gas Farmout, Knox & Bell Counties, Kentucky. The Kay Jay Farmout
consists of approximately 14,000 acres. Several wells surround the acreage. The
Kay Jay Field is on the southern boundary of the acreage where over 30 wells
have been drilled since 1979 with over 20 of those productive. The Field
produces natural gas from the Maxon Sand, Big Lime, Borden, Devonian Shale and
Clinton Formations. Oil is produced from the Maxon Sand and Big Lime Formations.
In late 1996, the Company successfully extended the Field onto its acreage. As
of the date of this report the Company has drilled 31 wells on this acreage, 19
of which are currently producing. The remaining 12 are scheduled for completion
in the near future or have been completed and are waiting on a gathering line.
All wells drilled on the acreage have encountered natural gas. The Company has
extended its gathering system on to the acreage by installing 9,500 feet of
pipeline in 1999. The Company's gathering system is connected to the Columbia
Natural Resources (CNR) pipeline system.
Hatfield Gap Farmout, Bell County, Kentucky. The Hatfield Gap Farmout consists
of approximately 4,000 acres. The acreage joins the 13 well Hatfield Gap Field
that produces from the Big Lime, Borden and Devonian Shale Formations operated
by CNR. Just southwest of the Hatfield Gap Field
12
<PAGE> 13
is the Days Chapel Field, which was for a number of years the most prolific oil
field in the State of Tennessee. As of the end of 1999 the Company had drilled
two successful gas wells as of the end of 1999 on this acreage and as of the
date of this report, had drilled an additional six productive wells on the
acreage.
ACQUISITIONS OF PRODUCING PROPERTIES
In addition to drilling new wells, the Company continues to pursue
opportunities to purchase existing producing wells from other producers and
greater ownership interests in the wells it operates. Generally, outside
interests purchased include a majority in the wells and include the right to
operate the wells.
Ken-Tex Oil & Gas, Inc. On October 13, 1999 Daugherty Petroleum, Inc. agreed to
purchase 50% interest in 24 natural gas wells located in Knox County, Kentucky
together with related gathering systems, easements, and operating rights for
$425,000 payable in restricted shares of the Company's common stock, valued at
$2.2191 per share. In order to facilitate the acquisition, Daugherty Petroleum,
Inc. arranged the purchase of the remaining 50% interest by an unrelated party
for $425,000 cash plus acquisition and rework costs. The wells have 1.2 BCF of
natural gas reserves of which 0.7 BCF is in the proved developed category. As of
December 31, 1999 131,051 shares of stock had been released on the acquisition
and 330.7 MMCF of the reserves were acquired and booked on the Company's
reserves at December 31, 1999 independent reserve study. Additional interests in
the wells and reserves associated therewith were acquired on February 24, 2000
and in consideration for the interests 27,348 shares were transferred to
Ken-Tex.
Environmental Energy. On November 4, 1999 Daugherty Petroleum, Inc. completed an
oil and gas acquisition with Environmental Energy and affiliated limited
partnerships of interests in 37 Appalachian Basin oil and gas wells in Kentucky
and Tennessee, and four wells in Louisiana. Also included were gathering lines
and related facilities located in Scott and Morgan Counties, Tennessee.
Daugherty Resources, Inc. issued 1,024,923 shares of preferred stock that is
convertible to common stock on a share for share basis within two years plus
warrants exercisable at a rate of $1.75 to $4.50 per share. Shareholders
approved the acquisition at the June 30, 1999 annual meeting. This acquisition
added 256.9 MMCFE to the Company's reserves at December 31, 1999.
PRODUCTION
The following table shows the Company's net production in Bbls of crude
oil and in Mcf of natural gas and the costs and weighted average selling prices
thereof, for the last three years.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Production (1):
Oil (MBbls) 7.458 7.553 7.286
Natural Gas (MMcf) 135.890 124.680 137.200
Equivalent MMcfs (2) 180.640 169.990 180.920
Average sales Price:
Oil (per Bbl) $ 16.100 $ 11.720 $ 17.980
Average Natural Gas Price (per Mcf) $ 2.610 $ 2.530 $ 2.530
Average production cost (lifting cost) per $ 0.670 $ 0.650 $ 0.650
equivalent Mcf (3)
</TABLE>
13
<PAGE> 14
(1) Production as shown in the table is net to the Company and is determined
by multiplying the gross production volume of properties in which the
Company has an interest by the percentage of the leasehold or other
property interest owned by the Company.
(2) A ratio of energy content of natural gas and oil (six Mcf of natural gas
equals one barrel of oil) was used to obtain a conversion of the
leasehold or other property interest owned by the Company.
(3) Production costs represent oil and gas operating expenses as reflected in
the financial statements of the Company.
WELL OPERATIONS
The Company currently operates approximately 136 natural gas wells in the
Appalachian Basin and 45 oil wells in the Illinois Basin. The Company also
operates 5 oil wells in the Appalachian Basin. The Company's ownership interest
in these wells range from 10% to 100%, and, on average, the Company has an
approximate 39% ownership interest in the wells it operates. As of December 31,
1999 these wells produce an aggregate of 2008 Mcfe of natural gas per day,
including the Company's share of 790 Mcfe per day.
The Company is paid a monthly operating charge for each well it operates.
The rate is competitive with rates charged by other operators in the area. The
charge covers monthly operating and accounting costs, and insurance. Other costs
for special non-recurring activities, such as reworks and recompletions are
billed to the working interest owners on as those expenses arise.
TRANSPORTATION
Natural gas wells are connected by underground pipelines to natural gas
markets. Over the years, the Company has developed extensive gathering systems
in its areas of operations. The Company also continues to construct new
gathering lines as necessary to provide for the marketing of natural gas being
developed from new areas and to enhance or maintain its existing systems.
DRILLING ACTIVITIES
The following table summarizes the Company's development drilling
activity for the years ended December 31, 1997, 1998 and 1999. There is no
correlation between the number of productive wells completed during any period
and the aggregate reserves attributable to those wells.
<TABLE>
<CAPTION>
Total Productive Dry
----- ---------- ---
Drilled Net Drilled Net Drilled Net
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
1997 12 3.2400 12 3.2400 0 0
1998 14 3.5125 14 3.5125 0 0
1999 5 1.9500 5 1.9500 0 0
- ------ - ------ - -
Total 31 8.7025 31 8.7025 0 0
</TABLE>
14
<PAGE> 15
SUMMARY OF PRODUCTIVE WELLS
The table below shows the number of the Company's productive gross and
net wells at December 31, 1999.
<TABLE>
<CAPTION>
WELLS
-----
GAS OIL
--- ---
Location Gross Net Gross Net
-------- ----- --- ----- ---
<S> <C> <C> <C> <C>
Kentucky 122 49.4650 41 32.0461
Tennessee 14 7.0000 10 5.0000
Louisiana 2 .3185 2 .1870
--- ------- --- -------
Total 138 56.7835 53 37.2331
</TABLE>
RESERVES
Net Proved Natural Gas and Oil Reserves. All of the Company's oil and
natural gas reserves are located in the United States. The Company's approximate
net proved reserves were estimated by Wright & Company, Inc., independent
petroleum engineers, ("Wright & Company"), to be 11,606,757 Mcf of natural gas
and 66,722 Bbls of oil at December 31, 1999; 10,958,990 Mcf of natural gas and
86,038 Bbls of oil at December 31, 1998; and 9,379,587 Mcf of natural gas and
68,744 Bbls of oil at December 31, 1997. These reserves were prepared in
compliance with the rules of the Securities and Exchange Commission (the "SEC")
based on year-end prices. An analysis of the change in estimated quantities of
natural gas and oil reserves from January 1, 1999 to December 31, 1999, is
contained within Note 23 of the Notes to the Consolidated Financial Statement.
Net Developed Natural Gas and Oil Reserves. The Company's approximate net
developed reserves were estimated, by Wright & Company to be 3,242,748 Mcf of
natural gas and 66,722 Bbls of oil at December 31, 1999; 2,573,031 Mcf of
natural gas and 86,038 Bbls of oil at December 31, 1998; and 2,493,809 Mcf of
natural gas and 68,744 bbls of oil at December 31, 1997.
Additional Reserves. Between December 31, 1999 and March 31, 2000 the
Company drilled fourteen wells, which will result in an increase in estimated
reserves as reported for the period ending December 31, 1999.
Standardized Measure Of Discounted Future Net Cash Flows And Changes
Therein Relating To Proved Natural Gas And Oil Reserves. The standardized
measure of discounted future net cash flows attributable to the Company's proved
oil and gas reserves, giving effect to future estimated income tax expenses, was
estimated by Wright & Company in 1999, 1998 and 1997 to be $5,517,481 million as
of December 31, 1999, $5,007,298 million as of December 31, 1998, and $4,847,567
million as of December 31, 1997. These amounts are based on year-end prices at
the respective dates. The values expressed are estimates only, and may not
reflect realizable values or fair market values of the natural gas and oil
ultimately extracted and recovered. The standardized measure of discounted
future net cash flows may not accurately reflect proceeds of production to be
received in the future from the sale of natural gas and oil currently owned and
does not necessarily reflect the actual costs that would be incurred to acquire
equivalent natural gas and oil reserves.
The data contained in Note 23 of the Notes to the Company's Consolidated
Financial Statement should not be viewed as representing the expected cash flow
from, or current value of, existing
15
<PAGE> 16
proved reserves, as the computations are based on a large number of estimates
and arbitrary assumptions. Reserve quantities cannot be measured with precision,
and their estimation requires many judgmental determinations and frequent
revisions. The required projection of production and related expenditures over
time requires further estimates with respect to pipeline availability, rates of
demand and governmental control. Actual future prices and costs utilized in the
computation of reported amounts. Any analysis or evaluation of the reported
amounts should give specific recognition to the computational methods and the
limitations inherent therein.
Reserves pledged. Substantially all of the Company's natural gas and oil
reserves have been mortgaged or pledged as security for the Company's credit
agreements. See Note 9 of Notes to Consolidated Financial Statements.
NATURAL GAS LEASES
The following table sets forth, as of December 31, 1999, the acres of
developed and undeveloped natural gas and oil properties in which the Company
had an interest, listed alphabetically by state.
<TABLE>
<CAPTION>
Developed Acreage Undeveloped Acreage
----------------- -------------------
Gross Net Gross Net
----- --- ----- ---
<S> <C> <C> <C> <C>
Kentucky 16,565 13,004 22,187 18,859
Louisiana 120 80 0 0
Tennessee 2,056 1,614 500 393
-------------- ------------- -------------- --------------
Total 18,741 14,698 22,687 19,252
</TABLE>
TITLE TO NATURAL GAS AND OIL PROPERTIES
The Company believes that it holds good and indefeasible title to its
properties, in accordance with standards generally accepted in the natural gas
and oil industry, subject to such exceptions stated in the opinion of counsel
employed in the various areas in which the Company conducts its exploration
activities, which exceptions, in the Company's judgment, do not detract
substantially from the use of such property. As is customary in the natural gas
and oil industry, only a perfunctory title examination is conducted at the time
the properties believed to be suitable for drilling operations are acquired by
the Company. Prior to the commencement of drilling operations, an extensive
title examination is conducted and curative work is performed with respect to
defects, which the Company deems to be significant. A title examination had been
performed with respect to substantially all of the Company's producing
properties. No single property owned by the Company represents a material
portion of the Company's holdings.
The properties owned by the Company are subject to royalty, overriding
royalty and other outstanding interests customary in the industry. The
properties are also subject to burdens such as liens incident to operating
agreements, current taxes, development obligations under natural gas and oil
leases, farmout arrangements and other encumbrances, easements and restrictions.
The Company does not believe that any of these burdens will materially interfere
with the use of or affect the value of such properties.
16
<PAGE> 17
GOLD AND SILVER PROPERTIES
The Unga Island Project is located 579 miles southwest of Anchorage,
Alaska, on Unga Island, one of the Shumagin Islands on the easterly island group
in the Aleutian Chain. The head of Baralof Bay, the present landing point for
the Project, is approximately 10.5 miles by boat from the City of Sand Point
harbor and 6 miles by air from the Sand Point airport. Sand Point, located on
Popof Island, has a permanent population of about 1,000. Facilities at Sand
Point include repair shops, a large grocery-hardware-dry goods store, schools
through the 12th grade, and a modern harbor/dock.
The climate relating to the mining properties is relatively mild due to
the proximity of the Japanese Current. The temperature rarely falls below zero
degrees Fahrenheit and the ocean has a mean temperature of 53 degrees
Fahrenheit. The annual average rainfall on Unga Island is between 45 and 50
inches, one-third of this falling as snow. Unga Island is on the same latitude
as Ireland and Denmark.
The mining properties cover over 381 acres, and are situated on 15
federal patented lode claims and one federal patented mill site claim (the
"Apollo-Sitka Claims," which consist of approximately 280 acres) and six State
of Alaska mining claims (the "Shumagin Claims," which consist of approximately
101 acres). A three-mile road connects the two claim groups.
Daugherty Resources, Inc., through its predecessor companies and
subsidiaries acquired its interest in the two mining properties pursuant to a
Lease/purchase Option Agreement with Azel L. Crandall in 1979. This Agreement
was converted to a Sales Contract in 1986, whereby the Company agreed to
purchase the mining properties from Mr. Crandall for $854,818, with $50,000 to
be paid in 1987, and $24,000 to be paid in years 1988, 1989, and 1990. On May 1,
1990, Alaska Apollo further agreed to pay Mr. Crandall $2,000 per month until
the aggregate amounts received by Mr. Crandall, including any royalty payments,
equal the amount of the purchase price. No interest is due under the Agreement.
The amount owed Mr. Crandall under this Agreement on December 31, 1999, was
$510,818. Alaska Apollo also agreed to pay Mr. Crandall a four percent net
smelter revenue royalty, which would be credited against any balance remaining
under the Purchase Contract.
The six State of Alaska mining claims begin at the west end of Baralof
Bay. The State owns the five patented Federal Claims that underlay these State
mining claims.
The State Claims were subject to annual rental payments of $40 per
claim through 1998. This amount increased to $130 per claim in 1999. In addition
to the annual rental payments, annual assessment work of $100 per claim for the
Shumagin Claims must be performed and recorded annually. If more than the
required $100 worth of work for each location is performed in any one year, the
excess value may be carried forward and applied against labor requirements for
up to four years. A $100 per claim cash payment may be made in lieu of annual
assessment work. The Shumagin Claims are subject to a royalty payable to the
State of Alaska of three percent of net income realized by the Company. The
annual claim rental payment for a given year is credited against the production
royalty due in that year.
The Aleutians East Borough (the "AEB") made application to the State of
Alaska for surface rights on the Company's Shumagin Claims under the State
Municipal Entitlements Act of 1989. The stated purpose of the AEB's selection
was to obtain a land base that could support economic
17
<PAGE> 18
development. The Company was notified of this selection and the state's proposed
conveyance of the surface land on December 1, 1994. The Company filed comments
with the State of Alaska. The Company simultaneously notified the Alaska
Department of Natural Resources, Division of Mining, of its intention to file an
application to convert the Shumagin Claims to a State Upland Mining Lease. The
latter application was subsequently submitted.
A Final Finding and Decision on the AEB's application, issued January
18, 1996, contained a provision making the application subject to valid existing
rights, easements, and reservations, including the Shumagin Claims. The grant
Decision became final after expiration of an appeal period February 7, 1996. The
Company retains the right to enter the land for drilling, developing, and
otherwise operating its mineral holding. No adverse impact on the Company's
Shumagin Claims or other exploration, development and mining activities on Unga
Island is anticipated as a result of the Shumagin Claims' surface rights being
transferred to the AEB. The Company's application for conversion of its Shumagin
Claims to a State Upland Mining Lease is pending.
Beginning in 1994, and continuing through 1996, the Company expanded
its activities relating to the gold and silver properties from those of simple
maintenance of the physical property to preparing for its future development. In
1996, an update of the engineering data was completed by Edward O. Strandberg,
Jr., P.E., Mining Engineer, to address reserve estimates as well as to review
operational considerations and issues.
During the past several years, the U.S. Securities and Exchange
Commission, along with other regulators and professional mining organizations,
developed more stringent guidelines for disclosing Reserves to investors.
Additionally, a review of past calculations was warranted in light of lower gold
prices. Consequently, the Company retained Steffen Robertson and Kirsten (U.S.)
Inc. ("SRK Consulting") an independent engineering firm, to review past reserve
calculations and bring these calculations into compliance with currently
approved practices. In addition, the Company retained Balfour Holdings, Inc., an
independent financial advisor, to assist it in determining the value of the
property.
In conjunction with the efforts of SRK Consulting and Balfour Holdings,
Inc., the Company has concluded that the global amounts of gold and silver
disclosed previously for the Company's Alaskan properties were correct, but has
reclassified them as Mineral Inventories rather than Reserves. As a result of
the reclassification of the gold and silver properties being reclassified as
Mineral Inventories, the project has been reclassified as being in the
Exploration Stage.
THE MINING CLAIMS
The Apollo-Sitka and Shumagin structures are epithermal gold-silver
veins hosted within a major fault and breccia structure within propyllitic to
argillic-altered Tertiary-age andesites and basalt crystal-lithic tuffs and
flows with local areas of dacite and latite tuffs, flows and breccias. The veins
range from three to sixty feet wide. Localized areas carry disseminated pyrite,
fine-grained galena, honey sphalerite and minor chalcopyrite.
The Apollo-Sitka Claims and Mill site. Development of the Apollo-Sitka
Claims started in 1887 with the discovery of gold by G.C. King. The Claims were
in production from 1891 through 1904, principally by Apollo Consolidated Mining
Company. During this period, 500,000 tons of ore were extracted with a recovery
of approximately 145,138 equivalent ounces of gold (0.29 ounces of equivalent
gold per ton). Approximately 17,000 feet of underground working were driven
during the
18
<PAGE> 19
mining of and search for oxide gold ore. A 60 stamp mill, located on the
property, recovered approximately 75 to 80 percent of the gold contained in the
oxide ore. Low recoveries of the lead, zinc, and copper sulfides contained in
the ore were made. Mining operations were shut down in 1904 after the
free-milling oxide reserve was depleted and exploratory work discovered only
precious metal-bearing copper-lead-zinc sulfide ores, which were uneconomical to
process with mill technology available at the time. The development of the
flotation mineral recovery process and improvements in that process over the
years may possibly have rendered the current Apollo-Sitka reserves and indicated
resources economical at current metal prices, although the Company has made no
efforts to determine the viability of the Apollo-Sitka Claims.
Daugherty Resources, Inc, through its predecessor companies and
subsidiaries, obtained a lease on the project in October 1979 and has conducted
multiple exploration programs on the property, both individually and with joint
venture partners. The program in 1983 led to the discovery of the Shumagin
deposit. These programs have cumulatively drilled in excess of 100 holes,
dewatered and explored parts of the historic workings as well as completed
geologic, geophysical and geochemical surveys. A camp and access roads were also
constructed during this period.
The Apollo-Sitka Claims continue to offer attractive precious/base
metal exploration targets. Future exploration would be conducted with a phased
program involving surface and underground diamond drilling, further
rehabilitation and equipping of the existing shafts, and level rehabilitation
and geologic sampling and mapping. The existing mine workings, including those
rehabilitated by the Company over 1980-1982, will be valuable during future
underground exploration and development work on the Apollo-Sitka Claims. The
property is currently on standby pending increases in gold prices.
Apollo-Sitka Property. There are no defined reserves at the
Apollo-Sitka property and no assurance that a commercially viable ore deposit
exists until further drilling or other underground testing is done and a
comprehensive feasibility study based upon such work is concluded.
SRK Consulting commented that the prior estimate for the Apollo-Sitka
deposit was based solely on a report written by Frank Brown in 1935. "In the
opinion of SRK there is no reliance in this report upon data which could be
deemed sufficient or acceptable for modern Reserves, nor for reporting to the
SEC." They also concluded, "that the Apollo-Sitka mineralization represents a
high-quality target for modern exploration. Should the Shumagin project progress
to development, the economics of locating additional mill-feed from a deposit
close by, such as this, would be highly attractive."
The Shumagin Claims. The Shumagin Claims are located approximately 2.5
miles north of the Apollo-Sitka Claims and consist of six State of Alaska mining
claims. They are connected to the Apollo-Sitka Claims by a three-mile road. Gold
and silver mineralization was encountered on the Shumagin Claims in 1983, when
the Company diamond drilled 3,190 feet. From its discovery in 1983 to December
31, 1995, management estimates that the Company has spent $5.5 million on
exploration of the Shumagin Claims. Funds for this exploration were provided by
a party interested in the exploration of the claims (approximately $350,000 in
1989) and the balance through the sale of the Company's Common Stock in 1983
($3,002,272), 1985 ($416,305) and 1987 ($1,613,382).
There are no defined reserves at the Shumagin and no assurance that a
commercially viable ore deposit exists until further drilling or other
underground testing is done and a comprehensive feasibility study based upon
such work is concluded.
19
<PAGE> 20
SRK Consulting prepared a Mineral Inventory estimate, based on 17,963
feet of diamond drilling, 1,017 feet of percussion drilling, 1,827 feet of
trenching, 286 feet of crosscuts, and 641 feet of drift sampling. Surface
mapping and geological logs were reviewed and interpreted. The Mineral Inventory
appears to be contained in six ore shoots ranging over 1,334 feet vertically and
1,782 feet horizontally. Strong structural control of the ore deposit is
evident. The deposit is open in all quadrants and at depth.
SRK Consulting concluded that the prior estimate by Strandberg (1995)
is "globally reasonable, and may be conservative in tonnage." They continued "By
definitions outlined in SEC Guideline 7, the estimate of Strandberg (1995)
cannot be classified in any part, nor in its entirety, as a Reserve, either
Proven or Probable." SRK Consulting recategorized Strandberg's Reserves as a
Mineral Inventory of 280,000 tons grading 0.80 ounces gold per ton and 3.7
ounces of silver per ton. They also noted, "that the mineralization is open
along strike and at depth. In 1990, Battle Mountain Gold Company drilled a deep
diamond hole and intersected, at 711 feet below sea level, 18 feet (down hole)
of mineralized vein with an assayed grade of 0.47 ounces per ton gold. Based on
this reported intersection and other available data, SRK Consulting concluded
that the exploration potential of the Shumagin structure is very good."
Additional exploration work is necessary in order to convert the
Mineral Inventory into mineable reserves in the Proven and Probable categories.
It is anticipated that this work will include surface exploration, diamond
drilling, shaft sinking and exploration drifting, crosscutting, raising, and
diamond drilling from underground drill stations. A decision to place the ore
deposit in production is contingent upon favorable completion of further
exploration and preliminary and final feasibility studies.
The Aleut Corporation controls approximately 10 percent of the Company's
drill/trench-inferred gold reserves and approximately 31 percent of the
Company's inferred gold reserves. This distribution is based on vertical claim
line boundaries on the Shumagin patented claim pattern. The Aleut Corporation's
share in current gold reserves is assumed to be in ore outside the vertical
downward projection of the patented claim pattern. The ore reserve division
assumes no assertion of extralateral rights by either the Company or the State
of Alaska.
Certain Factors Affecting Mineral Inventory. The Company's Unga Island
activities on the Apollo-Sitka and Shumagin Claims are at the exploration stage.
The Mineral Inventories are estimates based on surface and underground sampling,
drilling, and geologic inference. Complete assurance cannot be given that all of
the reserves and indicated resources are recoverable. Metal price fluctuations,
variations in production costs and mine/mill recoveries, environmental
considerations, the results of exploration work and geologic interpretation, and
other factors may require restatement of the reserves and indicated resources.
Neither the Mineral Inventories nor projections of future operations should be
interpreted as assurances of the economic life or profitability of future
operations. The Company has conducted no additional exploration work on the
properties since 1996 because of the low price of gold. Since 1979, the Company
has spent in excess of $11,200,000 on land acquisition, exploration, engineering
and conceptual studies, and buildings, equipment and machinery. In March 2000,
the Company retained SRK Consulting an independent engineering firm, to review
past reserve calculations and bring these calculations into compliance with
currently approved practices and Balfour Holdings, Inc. to conduct an appraisal
of the gold and silver properties. SRK Consulting in its April 4, 2000 report
entitled "Unga Island Project Resource and Reserve Review" concluded that the
Company's gold and silver properties cannot be classified
20
<PAGE> 21
as a Reserve, either Proven or Probable and should be reclassified as Mineral
Inventory. In its April 2, 2000 report "Valuation of the Unga Island Gold-Silver
Project, Alaska", Balfour Holdings determined that the gold and silver
properties have a Fair Market Value of $4,450,000 using the Market and Cost
appraisal approaches. The difference in total past expenditures and current Fair
Market Value is attributed to the Company's reclassification of the gold and
silver properties to a Mineral Inventory, the continued low price of gold and
the resulting changing market conditions. As a result of the work of SRK
Consulting, Inc. and Balfour Holdings, Inc., the Company has recorded impairment
to the value of the gold and silver properties reducing its value to appraised
value of $4,450,000.
Gold Price Volatility. The Company's anticipated profitability with
respect to potential production mining activities, which could be initiated
after completion of further exploration work, would be significantly affected by
variations in the market price of gold. Gold prices can fluctuate widely and are
affected by factors such as inflation, interest rates, currency exchange rates,
central bank sales, forward selling by producers, supply and demand, global or
regional political and economic crises and production costs in major gold
producing regions such as South Africa and the republics of the former Soviet
Union. The aggregate effect of these factors, all of which are beyond the
Company's control, is impossible for management to predict.
The volatility of gold prices is illustrated by the following table of
the high, low and average afternoon fixing prices of gold per ounce in United
States dollars on the London Bullion Market as of December 31 in each of the
years indicated below:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
High $312 $311 $361 $415 $396 $396
Low $256 $273 $283 $368 $372 $371
Average: $279 $294 $322 $391 $384 $384
</TABLE>
Factors in Bringing a Mineral Project into Production. The Company's
decisions as to whether the mining properties contain mineable ore deposits and
whether any property should be placed in production will depend on the results
of phased exploration programs and feasibility studies, the recommendations of
management and technical support, and the willingness and capability of the
Company's co-venturers or other participants to proceed. This decision will
involve consideration and evaluation of several significant factors, including,
but not limited to:
- Costs of bringing a property into production, including
exploration, preparation of feasibility studies, development
work, and the construction of exploration, development, and
production mine/mill facilities;
- Availability and costs of financing;
- Production costs;
- Metal market prices;
- Compliance requirements for environmental and mine safety and
health regulations; and
- Political climate and governmental regulations.
Exploration and development of the properties may be expensive and take
a number of years. There is no assurance that the Company, its co-venturers, or
other participants will have the necessary funds for any of these activities.
21
<PAGE> 22
Competition. The mining industry is intensely competitive. The Company
competes with numerous individuals and companies, including major mining
companies that have greater technical and financial resources than the Company.
The level of competition for desirable mining leases, suitable prospects for
drilling operations, and for project funds is high.
Permitting. Various permits are required from governmental bodies for
exploration, development, and mining operations to be conducted. No assurance
can be given that such permits will be received, or that environmental standards
imposed by federal, state, or local authorities will not be changed with
material adverse effects on the Company's activities. Compliance with such laws
may cause delays and require additional capital. The Company may be subject to
environmental damage liability that it may elect not to insure against due to
prohibitive premium costs and other reasons. The Company continues to respect
and make every effort to preserve the environment and terrain of Unga Island.
The Company is in material compliance with all federal, state and local laws
relating to current activities.
Glossary of Technical Terms Relating to Geology, Mining and Related
Matters. The following terms used in the preceding discussion mean:
ANDESITE Light-colored volcanic rock
CHALCOPYRITE A sulphide mineral of copper and iron, a
common ore of copper.
DEVELOPMENT STAGE Properties where the operators are engaged
in the preparation of an established
commercially mineable deposit (reserves) for
its extraction which are not in the
Production Stage.
DRIFT A horizontal underground tunnel driven
alongside or through an ore deposit, from
either an adit or shaft, to gain access to
the deposit.
EPITHERMAL A shallow-forming process that forms mineral
deposits by depositing minerals from hot
solutions.
EXPLORATION STATE Properties, which are neither at the
Development or Production stage.
FAULT OR FAULT ZONE A fracture in a rock where there has been
displacement of the two sides.
FEASIBILITY STUDY A study to determine the viability of
placing a mining property into commercial
production at an acceptable rate of return.
This study shall normally include, inter
alia, a review of geology, ore reserves,
metallurgy, environmental considerations,
mining methods, mine capital and operating
cost estimates, process flow sheets, process
plant capital and specifications and
requirements, surface utility requirements,
transportation requirements, rate-of-return
calculations, general personnel requirements
and appropriate sensitivity analysis
incorporating price and costs sensitivities.
FLOTATION A milling process by which some mineral
particles are induced to become attached to
bubbles of froth and float, and others to
sink so
22
<PAGE> 23
that the valuable minerals are concentrated
and separated from the worthless material.
GALENA A sulphide mineral of lead and iron, a
common ore of lead.
GRADE The percentage of ore content in rock.
MILL A plant where ore is ground fine and
undergoes physical or chemical treatment to
extract or upgrade the valuable metals.
MINERAL INVENTORY OR MINERAL DEPOSIT
Gold-bearing material that has been
physically delineated by one or more of a
number of methods including drilling,
underground work, surface trenching and
other types of sampling. This material has
been found to contain a sufficient amount of
mineralization of an average grade of metal
or metals to have economic potential that
warrants further exploration evaluation.
While this material is not currently or may
never be classified as reserves, it is
reported as mineralized material only if the
potential exists for reclassification into
the reserves category. This material has
established geologic continuity, but cannot
be classified in the reserves category until
final technical, economic and legal factors
have been determined and the project
containing the material has been approved
for development.
Under United States Securities and Exchange
Commission standards, a mineral deposit does
not qualify as a reserve unless the
recoveries from the deposit are expected to
be sufficient to recover total cash and
nonce costs for the mine and related
facilities.
ORE A natural aggregate of one or more minerals
which, at a specified time and place, may be
mined and sold at a profit, or from which
some parts may be profitably separated.
OXIDE ORE Ore subjected to weathering and oxidation of
primary minerals.
PRE-FEASIBILITY STUDY A preliminary evaluation of the feasibility
of placing a prospective ore body or deposit
of minerals into production, including, but
not limited to, preliminary assessments of
tonnages, grades and amenability to
processing of identifies mineral materials
herein and including a preliminary estimate
of capital and operating costs.
PROBABLE (INDICATED RESERVES)
Reserves for which quantity and grade and/or
quality are computed from information
similar to that used for Proven (Measured)
Reserves, but the sites for inspection,
sampling, and measurement are farther apart
or are otherwise less adequately spaced. The
degree of assurance, although lower than
that for Proven Reserves, is high enough to
assume continuity between points of
observation.
23
<PAGE> 24
PRODUCTION STAGE Mining properties that have advanced to the
point where the operators are actively
exploiting the mineral deposits (Reserves).
PROVEN (MEASURED) RESERVES
Proven (Measured) Reserves are reserves for
which (a) quantity is computed from
dimensions revealed in outcrops, trenches,
workings or drill holes; grade and/or
quality are computed from the results of
detailed sampling and (b) the sites for
inspection, sampling and measurement are
spaced so closely and the geologic character
is so well defined that size, shape, depth
and mineral content of reserves are
well-established.
RECOVERY RATE The percentage of metal recovered from ore.
RESERVES That part of a mineral deposit that could be
economically and legally extracted or
produced at the time of the reserve
determination.
SHAFT A vertical or steeply inclined opening
providing access to a mine for equipment,
personnel and supplies and to hoist out ore
and waste. It can also be used for
ventilation and as an auxiliary exit from
the mine.
SPHALERITE A sulphide mineral of zinc and iron, a
common ore of zinc.
STOPE An underground opening in a mine from which
ore has been or is being extracted.
SULFIDES Compounds of sulphur with other metallic
elements.
TUFFS Volcanic rock formed by consolidation of
volcanic ash.
VEINS A mineralized zone having a more or less
regular development in length, width and
depth, which clearly separates it from
neighboring rock.
OFFICE FACILITIES
The Company leases an office in Lexington, Kentucky, which serves as
the Company's leading headquarters. The Company also maintains a field operating
office in Madisonville, Kentucky. The Company believes its facilities are
sufficient for its current and anticipated operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various legal proceedings in
the ordinary course of business. The Company is not currently a party to any
litigation that it believes would materially affect the Company's business,
financial condition or results of operations.
24
<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock trades on the Nasdaq Small Cap Market in the
United States under the symbol NGAS. There is no trading of the Common Stock in
Canada. The range of the high and low bid information for the Common Stock for
each full quarterly period within the two most recent fiscal years is shown on
the following table. As of March 31, 2000, the Company was authorized to issue
100,000,000 shares of the Common Stock, of which there were issued and
outstanding 2,520,628 shares. No dividends were declared or paid during 1999.
<TABLE>
<CAPTION>
QUARTER ENDED 12/31/99 09/30/99 06/30/99 03/31/99 12/31/98 09/30/98 06/30/98 03/31/98 (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Bid Price $1.250 2.313 2.563 1.109 .3133 .625 1.375 1.250
High Bid Price $1.375 2.563 3.188 1.313 .5000 .750 1.625 1.565
</TABLE>
(1) The Low and High Bid Prices for the quarter ending March 31, 1998,
have been adjusted to reflect the impact of the one for five
consolidation of the Common Stock, which was effective June 29, 1998.
As of March 31, 2000, the high and low bids with respect to the price of
the Common Stock were $1.656 and $1.594, respectively. The Nasdaq Small Cap
Market quotations represent interdealer prices, without mark-ups, commissions,
etc., and they may not necessarily be indicative of actual sales prices.
As of December 31, 1999, there were 2,711 holders of record of the Common
Stock, of whom 2,632 were United States shareholders holding a total of
2,202,392 shares representing approximately 97 percent of the issued and
outstanding shares of the Common Stock.
FOREIGN LAWS AFFECTING THE COMMON STOCK
Exchange Controls and Other Limitations. There are no governmental laws,
decrees or regulations in Canada relating to restrictions on the import/export
of capital or affecting the remittance of interest, dividends or other payments
to non-resident holders of the shares of Common Stock. Any such remittances to
United States residents, however, are subject to a 15 percent withholding tax
pursuant to Article X of the reciprocal tax treaty between Canada and the United
States. (See below).
Except as provided in the Investment Canada Act, there are no limitations
under the laws of Canada, the Province of British Columbia or in the charter or
any of the constituent documents of the Company on the right of foreigners to
hold and/or vote shares of the Common Stock.
The Investment Canada Act essentially requires a non-Canadian making an
investment to acquire control of a Canadian business, the investment in which
exceeds $150,000,000 to file an
25
<PAGE> 26
application for review with Investment Canada, the Canadian federal agency
created by the Investment Canada Act. Where the acquisition of control is
indirect and made by a non-Canadian (other than an American, as defined) (for
example by the purchase of shares in a controlling parent corporation which has
a Canadian business subsidiary) the threshold is $500 million. For Americans,
there is no review of such indirect acquisitions. The proposed investment, if
above the threshold, may not proceed unless the Investment Canada agency and its
responsible minister are satisfied that the investment will be of benefit to
Canada.
A Canadian business is defined in the Investment Canada Act as a business
carried on in Canada that has a place of business in Canada, and individual or
individuals in Canada who are employed or self-employed in connection with the
business, and assets in Canada used in carrying on the business. An American, as
defined in the Investment Canada Act, includes an individual who is a United
States citizen or a lawful permanent resident of the United States, a
governmental agency of the United States, and American-controlled entity,
corporation or limited partnership, and a corporation, limited partnership or
trust of which two-thirds of its directors, general partners or trustees, as the
case may be, are Americans.
The acquisitions of certain Canadian businesses are excluded from the
$150,000,000 threshold and remain subject to review in any event. These excluded
businesses are oil, gas, uranium, financial services (except insurance),
transportation services and cultural and broadcast media services (i.e., the
publication, distribution or sale of books, magazines, periodicals, other than
printing or typesetting businesses, television and radio services).
Taxation. Generally, dividends paid by Canadian corporations to
non-resident shareholders are subject to a withholding tax of 25 percent of the
gross amount of such dividends. However, Article X of the reciprocal tax treaty
between Canada and the United States reduces to 15 percent the withholding tax
on the gross amount of dividends paid to residents of the United States. A
further 5 percent reduction in the withholding rate on the gross amount of
dividends is applicable when a United States corporation owns at least 10
percent of the voting stock of the Canadian corporation paying the dividends.
A non-resident of Canada who holds shares of the Common Stock of the
Company as capital property will not be subject to tax on capital gains realized
on the disposition of such shares unless such shares are "taxable Canadian
property" within the meaning of the Canadian Income Tax Act and no relief is
afforded under any applicable tax treaty. The shares of the Common Stock would
be "taxable Canadian property" of a non-resident if at any time during the five
year period immediately preceding a disposition by the non-resident of such
shares not less than 25 percent of the issued shares of any class of the Company
belonged to the non-resident, the person with whom the non-resident did not deal
at arms length, or to the non-resident and any person with whom the non-resident
did not deal at arm's length.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following is a discussion of the Company's financial condition and
results of operations. Statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are not
historical facts, may be forward-looking statements. Reliance upon such
information involves risks and uncertainties, including those created by general
market conditions, competition and the possibility that events may occur which
could limit the ability of the
26
<PAGE> 27
Company to maintain or improve its operating results or execute its primary
growth strategy. Although management believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and there can be no assurances that the forward-looking statements
included herein will prove to be accurate. The inclusion of such information
should not be regarded as a representation by management or any other person
that the objectives and plans of the Company will be achieved. Moreover, such
forward-looking statements are subject to certain risks and uncertainties, which
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements.
Daugherty Resources, Inc., formerly Alaska Apollo Resources Inc., (the
"Company" or the "Registrant") is a diversified natural resources company with
assets in oil and gas, and gold and silver properties prospects. Originally
formed in 1979 to develop gold properties, the Company in the fourth quarter of
1993, acquired its wholly-owned subsidiary, Daugherty Petroleum, Inc. The
purchase of Daugherty Petroleum, Inc. has given the Company a diversified
revenue and asset base that is primarily located in Appalachia.
Fiscal 1999 - 1998
For the year ending December 31, 1999, the Company's gross revenues
decreased $4,527,196 to $1,416,725 from $5,943,921 for the same period in 1998.
The majority of the decrease was attributable to the Company's divestiture of
Red River Hardwoods, Inc. The Company experienced a net loss from continuous
operations of $7,892,135 for 1999 compared to net loss of $1,568,348 for 1998.
During 1999, the Company recognized impairment to its gold mining properties,
which accounted for $6,782,229 of the $7,892,135 loss from continuous
operations. The Company experienced a net gain from discounted operations at Red
River of $671,215 for the year ending December 31, 1999.
The Company's gross revenues were derived from drilling contract
revenues of $878,714 (62%) and from natural gas and oil operations and
production revenues of $538,011 (38%).
The decrease in gross revenues of $4,527,196 was primarily attributable
to the divestiture of Red River during the period. Contract revenues from
drilling activities decreased by $1,001,266 from $1,879,980 for the year ending
December 31, 1998 to $878,714 for the year ending December 31, 1999.
During 1999, total direct costs decreased by $4,421,760 to $779,580
compared to $5,201,340 in 1998. These direct costs included drilling and related
costs for five natural gas wells.
For year ending December 31, 1999, the Company drilled five natural gas
wells, completed eight natural gas wells and extended its gathering system by
9,500 feet. In the first quarter of 2000, the Company drilled fourteen wells,
completed seven wells and added an additional 5,000 feet of gathering system.
On June 30 1999, the following were approved:
- A Special Resolution that changed the Company's authorization
capital from 10,000,000 shares of common stock, without par
value per share, to 100,000,000 shares of common
27
<PAGE> 28
stock, without par value per share, and from 1,200,000 shares
of preferred stock, without par value per share, to 5,000,000
shares of preferred stock, without par value per share.
- An Altered Memorandum changed the authorized capital of the
Company to 105,000,000 shares divided into 5,000,000 shares of
preferred stock, without par value and 100,000,000 common
shares without par value.
- A Special Resolution that altered Article 23.1(b) of the
Company Articles by substituting a new Article 23.1(b) that
sets forth the conditions and terms upon which the preferred
shares can be converted to common stock.
Copies of these documents were filed as an exhibit to Form 8-K, for the
Company for reporting an event on October 25, 1999 (File No. 0-12185).
The authorization for the issuance of preferred stock by the Company
allowed the acquisition in October 1999 of 41 wells in Kentucky, Louisiana and
Tennessee. Also, in October 1999, the Company acquired 24 natural gas wells in
Knox County, Kentucky. The Company now operates a total of 186 wells located in
Kentucky. (See "Liquidity" and "About the Company")
The Company believes there are several factors that will increase
revenues in the year 2000. First, the divestiture of Red River Hardwoods, Inc.
should eliminate substantial debt thereby significantly increasing cash flow.
Second, the Company will receive additional revenues from the oil and gas
properties it acquired during the last quarter of 1999. Third, the expansion of
its natural gas gathering system completed in 1999 and additional expansion
planned in 2000 will dramatically increase Daugherty Petroleum's ability to
transport natural gas.
Fiscal 1998 - 1997
Since acquiring Daugherty Petroleum, Inc., the Company has increased
its reserves through the acquisition of oil and gas properties in the
Appalachian and Illinois Basins, and the drilling of wells through joint venture
and turnkey drilling programs, where Daugherty Petroleum, Inc. is the primary
decision maker. The Company continued to aggressively seek acquisitions and
drilling programs.
At the Annual General Meeting held on June 22, 1998, shareholders
approved special resolutions, effective June 29, 1998, including one that
changed the Company's name from Alaska Apollo Resources Inc. to Daugherty
Resources, Inc., a name that management believes more closely represents the
Company's current revenue generating activities. Further, special resolutions
were approved that increased the Company's capital structure as follows:
- The Company's authorized common shares were increased from
20,000,000 common shares without par value, of which
10,141,331 are issued, to 50,000,000 common shares without par
value, of which 10,141,331 will be issued;
- The Memorandum of the Company was altered so that the
authorized capital was increased by creating 6,000,000
preferred shares without par value;
- Special rights and restrictions were attached to the common
shares and preferred shares; and
- The 50,000,000 common shares and 6,000,000 preferred shares
were consolidated by a one for five reverse stock split,
resulting in the authorized capital of the Company being
11,200,000 shares, divided into 10,000,000 common shares
without par value, with
28
<PAGE> 29
2,028,266 common shares issued and outstanding and 1,200,000
preferred shares without par value.
For the year ending December 31, 1998, the Company's gross revenues
increased $1,097,764 to $5,943,921 from $4,846,157 for the same period in 1998.
The Company experienced a net loss of $1,568,348 in 1998 compared to a net loss
of $1,708,418 in 1997.
The Company's gross revenues were derived from drilling contract
revenues of $1,879,980 (30 percent) from natural gas and oil operations and
production revenues of $483,728 (eight percent) and lumber sales and product
manufacturing revenues of $3,580,240 (60 percent).
The increase in gross revenues of $1,097,764 was primarily attributable
to the increased drilling activities during the year. Contract revenues from
drilling activities increased by $763,090 from $1,116,890 in 1997 to $1,879,980
in 1998. Manufacturing revenues related to Red River Hardwoods increased by
$249,291 from $3,330,949 in 1997 to $3,580,240 in 1998.
During 1998, total direct costs increased by $1,044,545 to $5,201,340
compared to $4,156,795 in 1997. These direct costs included Red River Hardwoods'
expenses and drilling costs for 14 natural gas wells.
LIQUIDITY
The Company continues to acquire natural gas and oil properties.
Daugherty Petroleum, Inc. has provided the Company with a diversified asset base
that includes natural resources other than its original gold and silver mining
properties. During 1999, management continued to invest in areas it deemed
crucial in developing an infrastructure suitable to support future growth. These
areas included ongoing expenses in management, professional and operational
personnel, and other expenses deemed necessary to position the Company for
future acquisitions and financing.
Working capital as of December 31, 1999, was a negative $2,816,687
compared to December 31, 1998, when working capital was negative $3,605,450.
During 1999, and compared to the same period in 1998, the changes in
the composition of the Company's current assets were: cash balances increased
$1,721,338 from $528,666 to $2,250,004; accounts receivable balances decreased
$193,628 from $411,496 to $217,868. Other current assets such as prepaids,
inventory, and notes receivable decreased $463,826 from $490,929 to $27,103,
primarily due to the sale of Red River. Overall, current assets increased by
$1,063,884 to $2,494,975.
Current liabilities as of December 31, 1999 were $5,311,662 compared to
$5,036,541 as of December 31, 1998. During 1999, and compared to the same period
in 1998, the changes in the composition of current liabilities were: short-term
loans and current portion of long-term debt decreased $667,593 from $2,101,479
to $1,433,886, customer drilling deposits increased $1,613,954 from $922,510 to
$2,536,464, accounts payable and accrued liabilities decreased $671,240 from
$2,012,552 to $1,341,312.
While management believes that its cash flow resulting in operating
revenues will contribute significantly to its short-term financial commitments
and operating costs, it has continued to refine its long-range strategy in 2000
to meet the Company's financial obligations. This strategy involves:
29
<PAGE> 30
- ACQUISITION OF REVENUE-PRODUCING PROPERTIES: In 1999 Daugherty
Petroleum, Inc. acquired interests in a total of 65 wells in
its area of interest, along with pipeline facilities and
equipment. Management believes that the addition of these
properties will favorably impact the Company's cash flow. The
Company is also continually reviewing existing properties in
its area of interest that are for sale.
- DRILLING ACTIVITY: For 1999 the Company drilled five natural
gas wells. In the first quarter of 2000, the Company drilled
14 wells. Factors for the increase included higher oil and gas
prices, and partnership activity that was delayed until late
in the fourth quarter of 1999 as discussed below.
- INCREASE IN PARTNERSHIP ACTIVITY: Because of lower energy
prices the Company's partnership efforts were hampered in the
three quarters of 1999. However, higher oil and gas prices
have sparked interest in natural gas drilling. During the
fourth quarter Daugherty Petroleum, Inc. finalized three
partnership agreements covering 13 wells to be drilled by the
end of the first quarter of 2000. An subsequent agreement to
drill one additional well was reached in March 2000.
Management believes that the successful completion of these
wells will spur additional activity.
- INSTALLATION OF ADDITIONAL NATURAL GAS GATHERING SYSTEM: In
1998 the Company expanded its natural gas pipeline by 27,500
feet. In 1999 the Company expanded its natural gas pipeline by
9,500 feet. As of March 31, 2000 the Company had expanded its
gathering system by 5,000 feet and intends to expand an
additional 20,000 feet in the second quarter of 2000. These
extensions will allow for substantially more natural gas to be
transported to market from the wells the Company has drilled.
- SALE OF RED RIVER HARDWOODS, INC.: On December 1, 1999,
Daugherty Petroleum, Inc. closed the sale of Red River
Hardwoods, Inc., thereby divesting all of its interest in Red
River. The divestiture of Red River dramatically affects the
Company's financial statement by reducing outstanding debt by
approximately $3.7 million and eliminating the operating
losses generated by Red River.
- MONETIZE ALASKAN GOLD ASSETS: The Company retained Steffen
Robertson Kirsten (U. S.) Inc., an independent engineering
firm specializing in mineral properties, to review its gold
and silver properties and issue a report. In addition, the
Company retained Balfour Holding, Inc., an independent
consulting firm, to appraise the properties. With this new
information in hand, the Company is prepared to seek a joint
venture partner to provide funds for additional exploration on
the prospects or to sell them.
Over the years, the Company has held negotiations with several
financial institutions and potential investors with the intent of securing
financing necessary to provide credit facilities for the Company to support
existing and future capital requirements. In December 1996, Daugherty Petroleum,
Inc. signed a loan agreement with a subsidiary of Enron Capital and Trade
Resources, Inc., in the amount of $340,000 providing financing for one well to
be acquired and 50 percent of the drilling and completion costs of four natural
gas wells. The balance of this loan was paid off on September 1, 1998, when
Daugherty Petroleum, Inc. secured a line of credit from Compass Bank, Houston,
which as of December 31, 1999, had a balance due of $972,177. It is expected
that, in
30
<PAGE> 31
addition to this credit facility, Daugherty Petroleum, Inc. will secure
additional loans to develop its existing natural gas leasehold interests. The
company will realize increased natural gas revenue as gathering facilities are
expanded to allow sales from recently drilled wells that have not been connected
to the gas gathering system.
YEAR 2000 ISSUE
The Company experienced no known disruptions as a result of the year
date change and intends to continue monitoring its critical systems at various
other date changes during the Year 2000. The Company expenditures for addressing
Year 2000 issues were not material, nor does the Company expect to incur any
significant costs addressing Year 2000 issues in the future.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 7 appears on pages I through
XXVIII of this Report, and is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the directors and executive officers of the
Company, together with their ages as of the date of this Report. Each director
is elected for a one-year term and serves until his successor is elected and
qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
William S. Daugherty 45 Chairman of the Board, September 1993
President and Chief Executive
Officer
James K. Klyman 45 Director May 1992
Charles L. Cotterell 75 Director June 1994
D. Michael Wallen 45 Vice President and Secretary N/A
</TABLE>
A description of the business experience during the past several years
for each of the directors and executive officers of the Company and certain
significant employees of the Company is set forth below.
William S. Daugherty, age 45, has served as Director, President and
Chief Operating Officer of the Company since September 1993. Mr. Daugherty has
served as President of Daugherty Petroleum, Inc. since 1984. In 1995, Mr.
Daugherty was elected as Chairman of the Board of the Company. Mr. Daugherty is
past president of the Kentucky Oil and Gas Association, the Kentucky Independent
Petroleum Producers Association, and also serves as the Governor's Official
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<PAGE> 32
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 45, 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 75, 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 45, joined Daugherty Petroleum, Inc. in March
1995, as Vice President of Engineering and was elected a Vice President of the
Company in March 1997. Prior to joining the Company, Mr. Wallen served as the
Director of the Kentucky Division of Oil and Gas for six years. Prior to serving
as Director of the Kentucky Division of Oil and Gas, he worked as well drilling
and completion specialist and as a gas production engineer in the Appalachian
Basin for various operating companies. 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 Securities Exchange of 1934 (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 Securities and Exchange Commission (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. The Company has not received any forms required by 16(a) from
Environmental Energy, Inc., Environmental Energy Partners I, Ltd., Environmental
Energy Partners II, Ltd., Environmental Holding Company, LLC and Environmental
Operating Partners, Ltd. which previously became beneficial owners.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding annual and
long-term compensation with respect to the fiscal years ended December 31, 1999,
1998 and 1997 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, 1999,
whose total annual salary and bonus exceeded $100,000.
32
<PAGE> 33
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Name and Principal Position Year Salary Bonus ($) Options #
- --------------------------- ---- ------ --------- ---------
<S> <C> <C> <C> <C>
William S. Daugherty 1999 $ 75,000 $ 12,500 (1) 0
Chairman and President 1998 $ 75,000 $ 12,500 (2) 0
1997 $ 75,000 $ 12,500 (3) 400,000 (4)
</TABLE>
- -----------------
(1) The bonus was in the form of 12,500 shares of the Common Stock valued at
$1.00(U.S.) per share.
(2) The bonus was in the form of 12,500 shares of the Common Stock valued at
$1.00(U.S.) per share.
(3) The bonus was in the form of 25,000 shares of the Common Stock valued at
$0.50(U.S.) per share. The shares represent bonuses approved by the Board
of Directors on June 25, 1997. The shares were issued June 27, 1997.
(4) These options were approved on March 7, 1997, by the Board of Directors
pursuant to the Alaska Apollo Resources Inc. 1997 Stock Option Plan, are
exercisable at $1.546875 (U.S.) 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.
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 $50,000 or 10 percent
of such officer's salary and bonus.
STOCK OPTIONS
No stock options were granted to officers by the Company during 1999.
The following table shows the number of shares of the Common Stock underlying
all exercisable and non-exercisable stock options held by William S. Daugherty
as of December 31, 1999.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NAME NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
---- OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------ ------------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
William S. Daugherty 404,444/115,556 0
</TABLE>
- ---------------------
(1) The closing market price for the shares of Common Stock at December 31,
1999, was $1.375. None of the options granted to Mr. Daugherty were in the
money as of the end of the fiscal year 1999.
The following is a summary of options that 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
33
<PAGE> 34
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
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 1999:
Charles L. Cotterell and James Klyman (formerly Klyman-Mowczan) each received
2,000 shares of the Common Stock valued at $1.00 (U.S.) per share.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NAME NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
---- OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------ ------------------------------
EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------- -------------------------
<S> <C> <C>
James K. Klyman 6,000/0 0
Charles L. Cotterell 6,000/0 0
</TABLE>
(1) The market price for the shares of the Common Stock at December 31, 1999,
was below the option price for each share of the Common Stock.
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 (U.S.) per share and expiring June 24, 2002.
34
<PAGE> 35
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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>
TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED PERCENT OF
-------------- ---------------- ------------ ----------
BENEFICIALLY CLASS
------------ -----
<S> <C>
Common Stock William S. Daugherty 718,244(1) 24.4
121 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Trio Growth Trust 400,000(2) 13.7
18 York Valley Crescent
Willowdale, Ontario M2P 1A7
Grace Church Securities Ltd. 160,600 6.4
21 Abbotsbury House, Abbotsbury Road
London W14 8EN, England
Alaska Investments Limited 202,669 8.0
5 Old Street
Ospery House
St. Helier, Jersey, Channel Islands,
U.K.
Exergon Capital S.A. 200,000(3) 7.6
Dufourstrasse 101
Zurich 8008, Switzerland
Jayhead Investments 218,880(4) 8.4
18 York Valley Crescent
Willowdale, Ontario H2P 1A7
Canada
D. Michael Wallen 85,600(5) 3.3
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Charles L. Cotterell 21,540(6) .9
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
James K. Klyman 6,000(7) .23
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Environmental Energy, Inc. 1,560,000(8) 38.6
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
TITLE OF CLASS BENEFICIAL OWNER SHARES OWNED PERCENT OF
-------------- ---------------- ------------ ----------
BENEFICIALLY CLASS
------------ -----
<S> <C> <C> <C>
Environmental Energy Partners I, Ltd. 407,487 (9) 13.9
c/o Environmental Energy, Inc.
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
Environmental Energy Partners II, Ltd. 588,793 (10) 18.9
c/o Environmental Energy, Inc.
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
Environmental Holding Company, LLC 434,381 (11) 14.7
c/o Environmental Energy, Inc.
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
Environmental Processing Partners Ltd. 190,638 (12) 7.0
c/o Environmental Energy, Inc.
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
Environmental Operating Partners, Ltd. 770,725 (13) 23.4
c/o Environmental Energy, Inc.
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
Directors and executive officers as a 833,384 (14) 27.7
group (4 persons)
</TABLE>
- -------------
* REPRESENTS OWNERSHIP OF LESS THAN ONE PERCENT.
(1) INCLUDES 290,000 SHARES OF THE COMMON STOCK, WARRANTS TO PURCHASE 23,800
SHARES OF THE COMMON STOCK AND OPTIONS TO ACQUIRE 404,444 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 50,000 SHARES OF COMMON STOCK AND 68,880 SHARES OF COMMON STOCK
OWNED THROUGH JAYHEAD'S INTEREST IN ALASKA INVESTMENTS LIMITED AND WARRANTS
TO 100,000 SHARES OF COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(5) INCLUDES 35,600 SHARES OF COMMON STOCK AND OPTIONS TO PURCHASE 50,000
SHARES OF COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(6) INCLUDES 15,540 SHARES OF THE COMMON STOCK AND OPTIONS TO PURCHASE 6,000
SHARES OF THE COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(7) CONSISTS OF OPTIONS TO PURCHASE 6,000 SHARES OF THE COMMON STOCK WHICH ARE
CURRENTLY EXERCISABLE.
(8) INCLUDES 40,000 SHARES OF THE COMMON STOCK AND OPTIONS TO PURCHASE
1,520,000 SHARES OF THE COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(9) CONSISTS OF 174,638 SHARES OF PREFERRED STOCK WHICH MAY BE CONVERTED TO
COMMON SHARES ON A ONE FOR ONE BASIS AND WARRANTS TO PURCHASE 232,849
SHARES OF COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(10) CONSISTS OF 252,109 SHARES OF PREFERRED STOCK WHICH MAY BE CONVERTED TO
COMMON SHARES ON A ONE FOR ONE BASIS AND WARRANTS TO PURCHASE 336,684
SHARES OF COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(11) CONSISTS OF 186,164 SHARES OF PREFERRED STOCK WHICH MAY BE CONVERTED TO
COMMON SHARES ON A ONE FOR ONE BASIS AND WARRANTS TO PURCHASE 248,217
SHARES OF COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(12) CONSISTS OF 81,702 SHARES OF PREFERRED STOCK WHICH MAY BE CONVERTED TO
COMMON SHARES ON A ONE FOR ONE BASIS AND WARRANTS TO PURCHASE 108,936
SHARES OF COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
(13) CONSISTS OF 330,310 SHARES OF PREFERRED STOCK THAT MAY BE CONVERTED TO
COMMON SHARES ON A ONE FOR ONE BASIS AND WARRANTS TO PURCHASE 440,415
SHARES OF COMMON STOCK THAT ARE CURRENTLY EXERCISABLE.
(14) INCLUDES 343,140 SHARES OF THE COMMON STOCK, OPTIONS TO PURCHASE 466,444
SHARES OF THE COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE, AND WARRANTS TO
PURCHASE 23,800 SHARES OF THE COMMON STOCK WHICH ARE CURRENTLY EXERCISABLE.
36
<PAGE> 37
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF DIRECTORS, OFFICERS AND EMPLOYEES
As of March 31, 2000, 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
$299,616.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION INVOLVEMENT OF ISSUER OR LARGEST AMOUNT OUTSTANDING DURING AMOUNT OUTSTANDING AS OF
-------- ----------
SUBSIDIARY LAST COMPLETED FISCAL YEAR MARCH 31, 1999
---------- --------------------- --------------
<S> <C> <C> <C>
William S. Daugherty (1) Lender $81,933 $80,970
President and Chief Executive
Officer
</TABLE>
- ------------------
(1) The indebtedness of Mr. Daugherty consists primarily of three promissory
notes in the principal amount of $33,333, $27,000 and $21,600, dated
January 1, 2000, 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.
INDEBTEDNESS OF THE COMPANY TO A SHAREHOLDER
Daugherty Petroleum, Inc., is indebted to Jayhead Investments Limited,
an affiliate of Alaska Investments Limited. The 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, 2001.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Documents Filed with this Report.
----------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) Financial statements, Daugherty Resources, Inc. and subsidiary companies
Cover Page
Table of Contents
Report of Kraft, Berger, Grill, Schwartz, Cohen & March LLP I
Independent chartered accounts, dated January 28, 2000
Balance Sheet - December 31, 1999 II-III
Statement of Deficit for the year ended December 31, 1999 IV
Statement of Loss for the year ended December 31, 1999 V
Statement of Cash Flow for the year ended December 31, 1999 VI
Notes to the Financial Statement VII-XXVIII
</TABLE>
All schedules have been omitted since the information required to be
submitted has been included in the financial statements or notes or has been
omitted as not applicable or not required.
37
<PAGE> 38
(2) Exhibits--
The exhibits indicated by an asterisk (*) are incorporated by
reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3(a)* Memorandum and Articles for Catalina Energy & Resources Ltd.,
a British Columbia corporation, dated January 31, 1979, filed
as an exhibit to Form 10 Registration Statement filed May 25,
1984. File No. 0-12185.
3(b)* Certificate for Catalina Energy & Resources Ltd., a British
Columbia corporation, dated November 27, 1981, changing the
name of Catalina Energy & Resources Ltd. to Alaska Apollo Gold
Mines Ltd., and further changing the authorized capital of the
Company from 5,000,000 shares of common stock, without par
value per share, to 20,000,000 shares of common stock, without
par value per share, filed as an exhibit to Form 10
Registration Statement filed May 25, 1984. File No. 0-12185.
3(c)* Certificate of Change of Name for Alaska Apollo Gold Mines
Ltd., a British Columbia corporation, dated October 14, 1992,
changing the name of Alaska Apollo Gold Mines Ltd. to Alaska
Apollo Resources Inc., and further changing the authorized
capital of the Company from 20,000,000 shares of common stock,
without par value per share, to 6,000,000 shares of common
stock, without par value per share, filed as Exhibit 3(c) to
Form 10-K/A, amendment No. 1, for the Company for the fiscal
year ended December 31, 1993. (File No. 0-12185).
3(d)* Altered Memorandum of Alaska Apollo Resources Inc., a British
Columbia corporation, dated September 9, 1994, changing the
authorized capital of the Company from 6,000,000 shares of
common stock, without par value per share, to 20,000,000
shares of common stock, without par value per share, filed as
Exhibit 3(d) to Form 10-K/A, Amendment No. 1, for the Company
for the fiscal year ended December 31, 1993. (File No.
0-12185).
3(e)* Certificate of Change of Name for Alaska Apollo Resources
Inc., a British Columbia corporation, dated June 24, 1998,
changing the name of Alaska Apollo Resources Inc. to Daugherty
Resources, Inc. and further changing the authorized capital of
the Registrant from 20,000,000 shares of common stock, without
par value per share, to 50,000,000 shares of common stock,
without par value, and authorizing the creation of 6,000,000
shares of preferred stock, without par value per share. (File
No.0-12185).
3(f)* Altered Memorandum of Daugherty Resources, Inc., a British
Columbia corporation, dated June 24, 1998, changing the
authorized common stock of the Registrant from 50,000,000
shares of common stock, without par value per share, to
10,000,000 shares of common stock, without par value. (File
No.0-12185).
3(g)* Altered Memorandum of Daugherty Resources, Inc., a British
Columbia corporation, dated June 25, 1998, changing the
authorized preferred stock of the Registrant from 6,000,000
shares of preferred stock, without par value per share, to
1,200,000 shares
38
<PAGE> 39
of preferred stock, without par value. Filed as an exhibit to
Form 8-K, by the Company for reporting an event on June 29,
1998. (File No.0-12185).
3(h)* Special Resolution of Daugherty Resources, Inc., a British
Columbia corporation, dated June 30, 1999, changing the
authorized capital of the Registration from 10,000,000 shares
of common stock, without par value per share, to 100,000,000
shares of common stock, without par value per share, and from
1,200,000 shares of preferred stock, without par value per
share, to 5,000,000 shares of preferred stock, without par
value per share. Altered Memorandum of Daugherty Resources,
Inc., dated June 30, 1999, changing the authorized capital of
the Company to 105,000,000 shares divided into 5,000,000
shares of preferred stock, without par value and 100,000,000
common shares without par value. Special Resolution of
Daugherty Resources, Inc., a British Columbia corporation,
dated June 30, 1999, altering Article 23.1(b) of the Company
Articles by substituting a new Article 23.1(b) that sets forth
the conditions and terms upon which the preferred shares can
be converted to common stock. Filed as an exhibit to Form 8-K,
for the Company for reporting an event on October 25, 1999.
(File No.0-12185)
4* See Exhibit No. 3(a), (b). (c), (d), (e), (f), and (g).
10(a)* Alaska Apollo Resources Inc. 1997 Stock Option Plan, filed as
Exhibit 10(a) to Form 10-K for the Company for the fiscal year
ended December 31, 1996. (File No. 0-12185).
10(b)* Incentive Stock Option Agreement by and between Alaska Apollo
Resources Inc. and William S. Daugherty dated March 7, 1997,
filed as Exhibit 10(b) to Form 10-K for the Company for the
fiscal year ended December 31, 1996. (File No. 0-12185).
10(c)* Agreement of Purchase and Sale by and between Environmental
Energy Partners I, Ltd., Environmental Energy Partners II,
Ltd, Environmental Operating Partners, Ltd., Environmental
Holding, LLC, Environmental Processing Partners, Ltd.,
Environmental Energy, Inc., and Environmental Operating, Inc.,
as Sellers and Daugherty Petroleum, Inc., as Buyer, and
Daugherty Resources, Inc. as Accommodating Party, dated as of
January 26, 1999, filed as an Exhibit to Form 8-K by the
Company for reporting an event on May 25, 1999 (File No.
0-12185).
10(d)* Agreement for the Purchase and Sale by and between H&S Lumber,
Inc., Buyer, and Daugherty Petroleum, Inc., Seller, for the
sale of Red River Hardwoods, Inc., an 80% subsidiary of
Daugherty Petroleum, Inc., which was effective June 30, 1999,
and closed December 1, 1999, filed as Exhibit 10.1 to Form 8-K
by the Company for reporting an event on December 9, 1999
(File No. 0-12185).
21 Subsidiaries of the Company:
- Daugherty Petroleum, Inc., a Kentucky corporation.
- Red River Hardwoods, Inc., a Kentucky corporation.
See Item 10(d) above.
- Sentra Corporation
39
<PAGE> 40
23(a)* Consent of Richard M. Russell & Associates, Inc. described in
Exhibit 23(a) to Form 10-K for the Company for the fiscal year
ended December 31, 1993. (File No. 0-12185).
23(b) Consent of Kraft, Rothman, Berger, Grill, Schwartz & Cohen.
23(c)* Consent of Edward O. Strandberg, Jr., P.E. described in
Exhibit 23(c) to Form 10-K for the Company for the fiscal year
ended December 31, 1993. (File No. 0-12185).
23(d) Consent of Wright and Company, Inc.
23(e) Consent of Steffen Robertson and Kristen (U. S.), Inc. ("SRK"
described in Exhibit 23(e) to Form 10-KSB for the Company for
the fiscal year ended December 31, 1999.
23(f) Consent of Balfour Holdings, Inc. described in Exhibit 23(f)
to Form 10-KSB for the Company for the fiscal year ended
December 31, 1999. (File No. 0-12185).
24 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
-------------------
None
(c) Financial Statement Schedules.
-----------------------------
No schedules are required, as all information required has
been presented in the audited financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Daugherty Resources, Inc.
By /s/ William S. Daugherty
---------------------------
William S. Daugherty
Chairman of the Board
April 14, 2000
40
<PAGE> 41
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
William S. Daugherty Chairman of the Board, President, Director April 14, 2000
-------------------- of the Registrant
WILLIAM S. DAUGHERTY
James K. Klyman * Director of the Registrant April 14, 2000
-----------------
JAMES K. KLYMAN
Charles L. Cotterell * Director of the Registrant April 14, 2000
----------------------
CHARLES L. COTTERELL
*By /s/ William S. Daugherty April 14, 2000
------------------------
William S. Daugherty
Attorney-in-Fact
</TABLE>
41
<PAGE> 42
DAUGHERTY RESOURCES INC.
CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
<PAGE> 43
DAUGHERTY RESOURCES INC.
DECEMBER 31, 1999
CONTENTS
PAGE
AUDITORS' REPORT I
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet II-III
Statement of Deficit IV
Statement of Loss V
Statement of Cash Flow VI
Notes to Financial Statements VII-XXVII
SUPPLEMENTARY INFORMATION
Schedule of General and Administrative Costs XXVIII
<PAGE> 44
PAGE I
AUDITORS' REPORT
To The Shareholders Of
DAUGHERTY RESOURCES INC.
We have audited the consolidated balance sheets of DAUGHERTY RESOURCES INC. as
at December 31, 1999 and 1998 and the consolidated statements of deficit, loss
and cash flows for each of the three years ended December 31, 1999, 1998 and
1997. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1999
and 1998 and the results of its operations and its cash flows for each of the
three years ended December 31, 1999, 1998 and 1997 in accordance with generally
accepted accounting principles in Canada.
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
April 10, 2000
<PAGE> 45
PAGE II
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
ASSETS
1999 1998
---- ----
<S> <C> <C>
CURRENT
Cash $ 2,250,004 $ 528,666
Accounts receivable 217,868 411,496
Inventories -- 432,468
Prepaid expense and other asset 27,103 51,277
Loans to related parties -- 7,184
---------- ----------
2,494,975 1,431,091
BONDS AND DEPOSITS 41,000 54,224
MINING PROPERTY AND RELATED EXPENDITURES (Note 4) 4,450,000 11,232,229
OIL AND GAS PROPERTIES - net (Note 5) 5,885,825 4,651,103
CAPITAL (Note 6) 110,061 1,807,221
LOANS TO RELATED PARTIES (Note 7) 225,963 105,031
INVESTMENT (Note 8) 17,842 127,260
OTHER ASSET 126,107 --
GOODWILL (net of accumulated amortization $1,118,476; 1998 - $1,005,693) 671,089 1,079,973
---------- ----------
$14,022,862 $20,488,132
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
APPROVED ON BEHALF OF THE BOARD:
- ---------------------------------- -----------------------------------
Director Director
<PAGE> 46
PAGE III
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
LIABILITIES
1999 1998
------------ ------------
<S> <C> <C>
CURRENT
Bank loans (Note 9) $ 1,156,437 $ 914,007
Accounts payable 690,157 1,161,422
Accrued liabilities 651,155 851,130
Customers' drilling deposits 2,536,464 922,510
Long-term debt (Note 10) 277,449 1,167,962
Loan payable -- 19,510
------------ ------------
5,311,662 5,036,541
LOAN PAYABLE (Note 11) 43,745 10,708
LONG-TERM DEBT (Note 10) 1,662,636 2,736,051
------------ ------------
7,018,043 7,783,300
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 12)
AUTHORIZED
5,000,000 Preferred shares
100,000,000 Common shares
ISSUED
1,152,363 Preferred shares 650,000 --
2,493,280 Common shares (1998 - 2,183,783) 21,685,043 21,209,821
Capital stock to be issued 395,685 --
------------ ------------
22,730,728 21,209,821
DEFICIT (15,725,909) (8,504,989)
------------ ------------
7,004,819 12,704,832
------------ ------------
$ 14,022,862 $ 20,488,132
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 47
PAGE IV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED STATEMENT OF DEFICIT
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
DEFICIT, beginning of year, as previously reported $ (8,504,989) $ (6,936,641) $ (5,050,087)
Prior period adjustment -- -- (178,136)
------------ ------------ ------------
DEFICIT, beginning of year, as restated (8,504,989) (6,936,641) (5,228,223)
Net loss for the year (7,220,920) (1,568,348) (1,708,418)
------------ ------------ ------------
DEFICIT, end of year $(15,725,909) $ (8,504,989) $ (6,936,641)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 48
PAGE V
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED STATEMENT OF LOSS
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
GROSS REVENUE $ 1,416,725 $ 5,943,921 $ 4,846,157
DIRECT EXPENSES 779,580 5,201,340 4,156,795
----------- ----------- -----------
637,145 742,581 689,362
GENERAL AND ADMINISTRATIVE COSTS (Page XXVIII) 1,747,051 2,292,683 2,397,780
----------- ----------- -----------
LOSS BEFORE THE FOLLOWING (1,109,906) (1,550,102) (1,708,418)
Impairment loss on mining properties (Note 4) (6,782,229) -- --
Non-controlling interest -- (18,246) --
----------- ----------- -----------
LOSS FROM CONTINUING OPERATIONS (7,892,135) (1,568,348) (1,708,418)
Net gain from discontinued operations (Note 16) 671,215 -- --
----------- ----------- -----------
NET LOSS FOR THE YEAR (7,220,920) (1,568,348) (1,708,418)
=========== =========== ===========
NET LOSS PER SHARE (Note 14)
Continuing operations $ (3.49) $ (0.77) $ (0.93)
=========== =========== ===========
For the year $ (3.19) $ (0.77) $ (0.93)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 49
PAGE VI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations $(7,892,135) $(1,568,348) $(1,708,418)
Impairment loss on mining properties 6,782,229 -- --
Equity loss from investment 108,658 -- --
Amortization and depletion 487,070 599,006 575,535
(Gain) loss on sale of assets (29,626) 3,034 210,685
Non-controlling interest -- 18,246 --
(Increase) decrease in prepaid expenses and other asset 15,102 175,005 (181,883)
(Increase) decrease in accounts receivable (78,381) 82,226 198,606
(Increase) decrease in inventories -- 245,676 (97,829)
Increase (decrease) in accounts payable (338,938) 7,952 269,432
Increase (decrease) in accrued liabilities (116,062) 490,734 (221,242)
Increase (decrease) in customers' drilling deposits 1,613,954 (480,797) 1,403,307
Prior period adjustment -- -- (178,136)
Decrease in bonds and deposits -- -- 3,419
----------- ----------- -----------
551,871 (427,266) 273,476
----------- ----------- -----------
FINANCING ACTIVITIES
Financing costs (137,607) -- --
Increase (decrease) in bank loans 1,204,278 869,507 (12,500)
Issue of capital stock 310,906 255,385 433,966
Decrease in loan payable (13,473) (17,705) (5,348)
Increase (decrease) of long-term debt (59,902) (330,509) 273,379
Decease in notes receivable -- -- 11,238
----------- ----------- -----------
1,304,202 776,678 700,735
----------- ----------- -----------
INVESTING ACTIVITIES
Discontinued operations 485,926 -- --
Proceeds from sale of assets 67,430 12,404 593,717
Purchase of capital assets (26,703) (87,865) (55,900)
(Increase) decrease in loans to related parties (113,748) (85,583) 13,880
Investment ( (126,500) (35,014) (92,246)
Additions to oil and gas properties, net (380,077) (702,628) (626,812)
Investment in Sentra Corporation (41,063) -- --
----------- ----------- -----------
(134,735) (898,686) (167,361)
----------- ----------- -----------
CHANGE IN CASH 1,721,338 (549,274) 806,850
CASH, beginning of year 528,666 1,077,940 271,090
----------- ----------- -----------
CASH, end of year $ 2,250,004 $ 528,666 $ 1,077,940
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE
Interest paid during the year $ 252,331 $ 301,163 $ 275,241
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 50
PAGE VII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
I. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, which, except as
described in Note 20 conform in all material respects with accounting
principles generally accepted in the United States.
1. BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
company and its wholly-owned subsidiary, Daugherty Petroleum Inc.
("DPI") and its 100% owned subsidiary. All material inter- company
accounts and transactions have been eliminated on consolidation.
(b) ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Material estimates that are particularly susceptible to significant
change related to the determination of inventory carrying value. In
connection with the determination of inventory carrying values,
management must make estimates relating to yield factors and amounts
of overhead to be applied. Other material estimates are described in
oil and gas properties.
(c) INVENTORIES
Inventories were carried at the lower of cost and net realizable
value. Cost had been determined by the first-in, first-out method.
(d) MINING PROPERTY AND RELATED EXPENDITURES
The company's mining properties are in the exploration stage and all
costs relating to mining properties by project area are deferred until
such time as the properties are put into commercial production, sold
or abandoned. Costs deferred include acquisition costs, exploration
and development expenditures and cost of assets permanently dedicated
to exploration and development. Buildings, equipment and machinery
will not be amortized until the mine achieves commercial production.
The ultimate realization of the deferred costs and expenditures is
dependent upon the discovery of commercially exploitable ore bodies,
at which time such costs and expenditures will be charged against
income using an appropriate method and rate to be determined.
<PAGE> 51
PAGE VIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) MINING PROPERTY AND RELATED EXPENDITURES (Continued)
When evaluation of a project area discloses possible impairment, the
deferred costs and expenditures thereon are written down to the
recoverable amount. Unsuccessful projects are written off when
abandoned (Note 4).
(e) OIL AND GAS PROPERTIES
(i) ACCOUNTING TREATMENT FOR COSTS INCURRED
The company follows the successful effort method of accounting.
Accordingly, property acquisition costs, costs of successful
exploration wells and development costs and the cost of support
equipment and facilities are capitalized. Costs of unsuccessful
exploratory wells are expensed when determined to be
non-productive. The costs associated with drilling and
equipping wells not yet completed are capitalized as
uncompleted wells, equipment and facilities. Production costs,
overhead and all exploration costs, other than costs of
exploratory drilling, are charged to expense as incurred.
Depletion on developed properties is computed using the
units-of-production method, using the reserves underlying the
proved developed oil and gas properties.
The company assesses impairment of oil and gas properties to
the extent that the aggregate net value of oil and gas
properties exceeds the future net revenues relating to oil and
gas reserves.
Significant estimates by the company's management are involved
in determining oil and gas reserve volumes and values. Such
estimates are primary factors in determining the amount of
depletion expense and whether or not oil and gas properties are
impaired.
(ii) REVENUE AND EXPENSE RECOGNITION
Revenue on turnkey drilling contracts is recognized upon
substantial completion of the well. Oil and gas revenue is
recognized when sold. All income and expense items are
recognized pursuant to the accrual method of accounting.
(iii) WELLS AND RELATED EQUIPMENT
Wells and related equipment are recorded at cost and are
amortized using the units-of- production method, using the
reserves underlying the proved developed oil and gas
properties.
<PAGE> 52
PAGE IX
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) GOODWILL
Goodwill is recorded at cost and is being amortized over 10 years on a
straight-line basis. The goodwill arose on the acquisition of DPI and
Red River Hardwoods Inc. ("RRH"). The goodwill applicable to RRH was
written-off when RRH was disposed in 1999. The management determines
the potential permanent impairment in value of goodwill and its
estimated useful life, annually, based on estimation of fair value.
(g) CAPITAL ASSETS
Capital assets are stated at cost. Amortization is being provided for
on a straight-line basis over the useful life of the asset ranging
from five to thirty-one years.
(h) INVESTMENT
Investment in a 50% owned limited liability company is accounted for
on the equity method of accounting.
(i) CAPITALIZED FINANCING COSTS
Financing costs totalling $137,607 incurred in connection with the
issuance of 10% convertible secured notes payable are being
capitalized and amortized over the life of the indebtedness.
(j) FUTURE INCOME TAXES
The company provides for income taxes using the asset and liability
method, required by the Canadian Institute of Chartered Accountants
(CICA) Handbook section 3465. The asset and liability method requires
that income taxes reflect the expected future tax consequences of
temporary differences between the carrying amounts of assets or
liabilities and their tax bases. Future income tax assets and
liabilities are determined for each temporary difference based on the
tax rates which are expected to be in effect when the underlying items
of income and expense are expected to be realized.
<PAGE> 53
PAGE X
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Concentrations of Credit Risks
The company grants credit to its customers, primarily located in the
northeastern and central United States, during the normal course of
business. The company performs ongoing credit evaluations of its
customers' financial conditional and generally requires no collateral
from its customers. At times throughout the year, the company may
maintain certain bank accounts in excess of FDIC insured limits.
2. ACQUISITIONS
SENTRA CORPORATION ("SENTRA")
Effective April 2, 1999, DPI acquired all outstanding shares of Sentra for
its book value of $44,417 from a director and president of the company.
Sentra is a Kentucky corporation that owns and operates two natural gas
distribution systems in south central Kentucky. The two systems were built
in the cities of Fountain Run and Gamaliel pursuant to franchises granted
by those cities and certificates of convenience and necessity issued by the
Kentucky Public Service Commission.
KEN-TEX OIL AND GAS, INC. ("KEN-TEX")
Effective October 13, 1999, DPI purchased from Ken-tex 24 natural gas wells
in Knox County, Kentucky for $850,000, payable in cash of $425,000 and
shares of the company with a total value of $425,000 ($2.22 per share).
However, DPI sold 50% of its interest in the 24 natural gas wells together
with related gathering system, easement and operating rights for cash of
$425,000 plus acquisition and rework costs to unrelated party. DPI will
operate the wells which have 1.2 billion cubic feet (BCF) of natural gas
reserves, of which 0.7 BCF is in the proved developed producing category.
3. INVENTORIES
1999 1998
-------- --------
Raw materials - Green Lumber $ -- $ 51,843
- Kiln Dried Lumber -- 56,391
Supplies -- 13,653
Work in process -- 264,064
Finished goods -- 46,517
-------- --------
$ -- $432,468
======== ========
<PAGE> 54
PAGE XI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
4. MINING PROPERTY AND RELATED EXPENDITURES
1999 1998
----------- -----------
Unga Island Alaska mineral properties, at cost 1,010,000 1,010,000
Deferred expenditures 9,445,168 9,445,168
Building, equipment and machinery 777,061 777,061
----------- -----------
11,232,229 11,232,229
Impairment loss 6,782,229 --
----------- -----------
$ 4,450,000 $11,232,229
=========== ===========
Management determined a review of past calculations was warranted in light of
lower gold prices. Additionally, during the past several years, the U.S.
Securities and Exchange Commission ("SEC"), along with other regulators and
professional gold and silver organizations, developed more stringent guidelines
for disclosing reserves to investors. The company retained Steffen Robertson and
Kirsten (U.S.) Inc. ("SRK Consulting"), an independent engineering firm, to
review past reserve calculations and bring these calculations into compliance
with currently approved practices. In addition, the company retained Balfour
Holdings, Inc., as independent financial advisor, to assist it in determining
the value of the property.
SRK Consulting concluded that the company's gold and silver properties cannot be
classified as a reserve, either proven or probable, and should be reclassified
as gold and silver inventory. Under SEC standards, a gold and silver deposit
does not qualify as a reserve unless the recoveries from the deposit are
expected to be sufficient to recover total cash and non-cash costs for the mine
and related facilities.
Balfour Holdings determined that the gold and silver properties have a fair
market value of $4,450,000 using the market and cost appraisal approaches. The
difference in total past expenditures and current fair market value is
attributed to the company's reclassification of the gold and silver properties
to a gold and silver inventory, the continued low price of gold and the
resulting changing market conditions. As a result of the work of SRK Consulting,
Inc. and Balfour Holdings, Inc., the company has recorded an impairment of
$6,782,229 to the gold and silver properties reducing its value to the appraised
value of $4,450,000.
The above mining properties were used as collateral for the 10% convertible
secured notes (Note 10).
<PAGE> 55
PAGE XII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
5. OIL AND GAS PROPERTIES
1999 1998
---------------------------------- ----
Accumulated
Cost Amortization Net Net
---- ------------ --- ---
Proved properties $6,237,025 $ 809,957 $5,427,068 $4,425,773
Wells and related equipment 535,698 76,941 458,757 225,330
---------- ---------- ---------- ----------
$6,772,723 $ 886,898 $5,885,825 $4,651,103
========== ========== ========== ==========
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ----
Accumulated
Cost Amortization Net Net
---- ------------ --- ---
<S> <C> <C> <C> <C>
Land $ 12,908 $ -- $ 12,908 $ 113,801
Buildings 6,239 520 5,719 872,617
Machinery and equipment 45,578 33,247 12,331 612,834
Office furniture, fixtures and equipment 80,844 64,096 16,748 41,372
Vehicles 136,880 74,525 62,355 89,871
Equipment under capital lease -- -- -- 76,726
---------- ---------- ---------- ----------
$ 282,449 $ 172,388 $ 110,061 $1,807,221
========== ========== ========== ==========
</TABLE>
7. LOANS TO RELATED PARTIES
The loans to related parties represent loans receivable from officers of
the company bearing interest at 6% per annum and are payable monthly from
production revenues for a period of five years with a balloon payment at
maturity date. These are collateralized by the officers' ownership interest
in drilling partnerships with DPI.
<PAGE> 56
PAGE XIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
8. INVESTMENT
(a) GALAX ENERGY CONCEPTS, LLC ("GALAX")
In December 1999, DPI made a capital contribution to Galax, a North
Carolina limited liability of $126,500. Galax generates steam at its
Galax, Virginia plant utilizing wood waste as fuel and sells the steam
to National Textiles, LLC, on a long-term sales contract. DPI acquired
its interest in Galax in mid 1997 for a commitment to assist
management in its effort to complete a boiler retrofit and work toward
a profitable operation. Galax was not consolidated with the company at
December 31, 1999 because DPI does not have effective control of
Galax's operating, financing and investing activities. Consequently,
the equity method of accounting for this investment has been used.
During the year, Galax reported a loss of $217,316 of which 50% was
picked up by the company.
(b) DPI's 80% owned subsidiary acquired a 50% interest in a Kentucky
limited liability company. The investment is accounted for on the
equity method. In 1999, this investment was disposed when the
subsidiary was sold.
9. BANK LOANS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revolving loan facility payable interest only at prime plus 1%
per annum (9.25%; 1998 - 8.75%), is secured by a first mortgage
on producing gas interests and is guaranteed by an unrelated
third party. The facility will expire on March 1, 2000 at which
time the oil and gas reserves that are used as collateral will be
evaluated $ 972,165 $ 772,177
Note payable bearing interest at 6.62% per annum, maturing January
13, 2000 and is collateralized by a certificate of deposit 134,830 134,830
Note payable bearing interest at 10.5% per annum, maturing May 18,
2000 and is collateralized by 200,000 shares of stock which were
owned by a director of the company 42,442 --
Note payable bearing interest at 7.85% per annum which is payable
semi-annually, and matures on March 23, 2000 7,000 7,000
---------- ----------
$1,156,437 $ 914,007
========== ==========
</TABLE>
<PAGE> 57
PAGE XIV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
10. LONG-TERM DEBT
On July 8, 1986, the company purchased the mineral property on Unga Island,
Alaska for debt in the amount of $854,818. The debt is non-interest
bearing, payable at $2,000 per month, until fully paid, and is secured by
deeds of trust over the Unga Island mineral claims and certain buildings
and equipment located thereon.
The purchase agreement also provides for the payment of monthly royalties
at 4% of net smelter returns or net revenue, as defined in the agreement.
Any royalties paid reduce the amount of the purchase price payable above.
The obligation is stated at its remaining face value of $510,818 and has
not been discounted.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Note payable as outlined above $ 510,818 $ 534,818
10% convertible notes mature July 31, 2004, collateralized by DPI's
mining properties. Interest is payable semi-annually on February 1
August 1, commencing on February 1, 2000. At the option of the
holder, the note is convertible on or before July 31, 2004 to shares
of common stock at the rate of 368.8132 shares per each $1,000
principal amount of the notes. In addition, the put rights are
exercisable during the 10 day period commencing 14 months after
August 17, 1999 (closing date) requiring the company to redeem the
notes 18 months (put date) after the closing date at a price equal
to 100% of principal amount plus accrued interests and a premium
equal to 25% of principal, payable in put shares. After the put
date, the company may redeem the note in whole or part at 100%
of principal amount plus accrued interest 850,000 --
American Environmental Resources Inc., unsecured and non-interest bearing 150,000 100,000
Interest bearing note, secured by certain gas producing properties,
payable monthly at $3,500 129,324 --
---------- ----------
Carried forward ................ $1,640,142 $ 634,818
========== ==========
</TABLE>
<PAGE> 58
PAGE XV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
10. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Brought forward ......... $1,640,142 $ 634,818
Loan payable to Summit Funding, Inc., collateralized by
production, bearing interest at 9.25% per annum, payable in
monthly instalments of $5,252, maturing March 25, 2001 96,194 142,320
Unsecured loan payable to Ridgecrest Enterprises, Inc.
bearing interest at 6.27% per annum, payable in monthly
instalments of $1,771, maturing August 9, 2000 79,688 79,688
Loans payable to various banks with interest rates ranging from
8.45% to 11% per annum, payable in total monthly instalments
of $3,257 with maturities from September 1, 2000 to June 17, 2003,
collateralized by receivables and various vehicles 59,282 105,593
Unsecured loan payable to Trio Growth, bearing interest at 10%
per annum, principal and interest due June 30, 2001 -- 450,000
Loan payable to non-affiliated company, bearing interest at 10%
per annum, collateralized by the assets and the corporate guarantee
of a wholly-owned subsidiary, payable in quarterly payments of
interest only 64,779 64,779
Various obligations of the former 80% owned subsidiary disposed
in 1999 -- 2,426,815
---------- ----------
1,940,085 3,904,013
Less: Current portion 277,449 1,167,962
---------- ----------
$1,662,636 $2,736,051
========== ==========
Principal repayments for the next five years are as follows:
2000 $ 277,429
2001 307,895
2002 71,645
2003 30,299
2004 874,000
Thereafter 378,817
----------
$1,940,085
==========
</TABLE>
<PAGE> 59
PAGE XVI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
10. LONG-TERM DEBT (continued)
Interest expense for the year ended December 31, 1999 was $219,206 (1998 -
$334,811). There was no interest capitalized during these years.
11. LOAN PAYABLE
This loan payable to a limited liability corporation being controlled by a
director of the company bears interest at 9% per annum. The principal and
the accrued interest are due on July 18, 2001. The 1998 loan payable to a
director of the company was fully paid during the year.
12. CAPITAL STOCK
On June 30, 1999, the company's authorized capital stock was amended as
follows.
The preferred shares were increased from 1,200,000 shares, without par
value, to 5,000,000 shares, without par value, and the common shares were
increased from 10,000,000 shares, without par value, to 100,000,000 shares,
without par value.
On June 22, 1998, the company's authorized capital stock was amended as
follows.
(i) The common shares were increased from 20,000,000 shares, without par
value, to 50,000,000 shares, without par value, which were then
consolidated into 10,000,000 shares, without par value.
(ii) Another class of capital stock was authorized by creating 6,000,000
preferred shares, which were then consolidated into 1,200,000
preferred shares. The preferred shares are non-voting, non- cumulative
and are convertible into common shares, on a share for share basis, at
any time within two years of the date of issue of the preferred shares
if certain conditions are met.
(a) PREFERRED SHARES ISSUED
During the year, the company issued 1,152,363 preferred shares from
the treasury with a total value of $650,000 as consideration for the
oil and gas property acquired by DPI from Environmental Energy Inc.
and its affiliated limited partnerships. The oil and gas property
acquired included interest in 37 Appalachian Basin oil and gas wells
in Kentucky and Tennessee, three gas wells in Louisiana and several
miles of natural gas pipelines and facilities located in Scott and
Morgan Counties, Tennessee. In addition, the company granted 1,536,941
warrants that are exercisable at a range of $1.75 to $4.50 per share
expiring August 20, 2004.
<PAGE> 60
PAGE XVII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
12. CAPITAL STOCK (Continued)
(b) COMMON SHARES ISSUED
<TABLE>
<CAPTION>
Shares Amount
---------- ----------
# $
<S> <C> <C>
Balance, December 31, 1997 1,964,351 20,954,436
Issued to employees as incentive bonuses 65,500 65,500
Issued for settlement of debt 153,932 189,885
---------- ----------
Balance, December 31, 1998 2,183,783 21,209,821
Issued to employees as incentive bonus 83,000 83,000
Issued for exercise of stock option 50,000 19,000
Issued for settlement of debt 45,446 82,407
Issued for acquisition of oil and gas properties 131,051 290,815
---------- ----------
Balance, December 31, 1999 2,493,280 21,685,043
(c) SHARES TO BE ISSUED
Subscribed and paid for in cash 101,200 126,500
Shares to be issued in connection with the sale of Red River
Hardwoods Inc. (Note 16) 70,929 135,000
Shares to be issued in connection with the purchase of Ken-tex
oil and gas property 60,468 134,185
---------- ----------
232,597 395,685
========== ==========
</TABLE>
(d) Stock options and warrants have been granted and approved by the
shareholders to purchase common shares of the company as follows.
<PAGE> 61
PAGE XVIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
12. CAPITAL STOCK (Continued)
A. OPTIONS
<TABLE>
<CAPTION>
ISSUED EXERCISABLE PRICE EXPIRY
------ ----------- ----- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 1,168,000 754,111 1.55-9.50 (i)
==========
1998 - expired (66,000)
----------
Balance, December 31, 1998 1,102,000 819,222
==========
1999 - granted 1,255,000 0.38-1.00 (ii)
- expired (50,000)
----------
Balance, December 31, 1999 2,307,000 2,024,222
========== =========
</TABLE>
(i) 400,000 of these options were granted to Environmental Energy
Inc. exercisable immediately at $5.00 per share and will expire
in November 2002. Another 400,000 options were granted to the
president of the company exercisable over a period of six years
commencing in March 1997 at $1.55 per share and will expire in
March 2002.
(ii) In 1999, 71,111 options previously issued to the president of the
company became exercisable at a price of $1.55 per share and will
expire in March 2002. 1,120,000 options were granted to
Environmental Energy, Inc. exercisable immediately at $1.00 per
share and will expire in August 2004.
B. WARRANTS
ISSUED PRICE EXPIRY
------ ----- ------
$
Balance, December 31, 1997 629,293 0.625-2.500 (i)
1998 - expired (5,333) 2.500
--------
Balance, December 31, 1998 623,960
1999 - granted 1,536,782 1.75-4.50 (ii)
--------
Balance, December 31, 1999 2,160,742
=========
<PAGE> 62
PAGE XIX
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
12. CAPITAL STOCK (Continued)
B. WARRANTS (Continued)
(i) 100,000 of these warrants will expire on October 30, 2000; 29,293
on June 28, 2001; and 500,000 on March 6, 2002.
(ii) These warrants expire on August 20, 2004.
13. INCOME TAXES
Income tax expense for the year ended December 31, 1999, consist of the
following components.
Current $ --
Deferred --
-----------
Total income tax expense $ --
===========
FUTURE INCOME TAX ASSETS
Net operating loss carry-forward $ 3,274,531
Investment tax credits 3,473
-----------
3,278,004
Less: Valuation allowance 2,387,884
-----------
$ 890,120
===========
Future income tax liabilities $ (890,120)
===========
NET DEFERRED TAX ASSETS $ --
===========
14. LOSS PER SHARE
Loss per share is calculated using the weighted average number of shares
outstanding during the year. The weighted average of common shares was
2,261,754 (1998 - 2,035,188; 1997 - 1,831,926). Outstanding stock options
and warrants have no dilutive effect on the loss per share.
<PAGE> 63
PAGE XX
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, other receivable, accounts
payable and accrued liabilities approximate fair value due to the
short-term maturity of these instruments. Other note receivable, bonds and
deposits, loans receivable and payable, other long-term debt payable
approximate fair value since they bear interest at variable rates. At
December 31, 1999, the long-term debt carrying value of $790,140 is
different from the fair value of $532,628.
The fair value of long-term debt is based upon discounted future cash flows
using discount rates that reflect current market conditions for instruments
having similar terms and conditions.
16. DISCONTINUED OPERATIONS
RED RIVER HARDWOODS INC. ("RRH")
Effective June 30, 1999, DPI sold its 80% interest in RRH to unrelated
party. RRH represented DPI's only entry in the wood products segment. The
sale, which was completed on December 8, 1999, generated a net gain of
$671,215, as follows.
<TABLE>
<S> <C>
Net assets (liabilities) disposed
Total identifiable assets $ 2,292,681
Total identifiable liabilities 3,495,317
-----------
(1,202,636)
Original investment 220,090
Release of DPI's receivable owed by RRH 137,019
Release of DPI's line of credit owed by RRH 319,255
Company's shares to be issued to cover any overstatement in receivables
and inventory and understatement of RRH's payables for complete satisfaction
of any breach in DPI's representation and warranty 135,000
Purchaser's expenses paid for by DPI 18,153
-----------
(373,119)
Proceeds from sale 537,000
-----------
Gain on sale of subsidiary 910,119
Loss from discontinued operations (238,904)
-----------
Net gain from discontinued operations $ 671,215
===========
</TABLE>
<PAGE> 64
PAGE XXI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
17. STATEMENT OF CASH FLOWS
Non-cash transactions in 1999 were as follows:
(a) issue of $425,000 common shares and $650,000 preferred shares in
exchange for acquisition of oil and gas properties;
(b) $135,000 common shares to be issued to the purchaser of RRH.
18. RELATED PARTY TRANSACTIONS
The company is party to certain agreements and transactions in the normal
course of business. Significant related party transactions not disclosed
elsewhere include the following.
(a) Officers' Remuneration
The accounts of the company include consulting and management fees
paid or payable to officers and directors for the three years ended
December 31, 1999.
(b) Shareholder Information
During 1993, a shareholder expended, on behalf of the company,
shareholder information expenses in the amount of $75,000. The company
has recorded a reserve provision against payment of this amount until
the company's mining operations commence production.
(c) Occupancy Costs
Occupancy costs in 1998 include rent of approximately $15,600 (1997 -
$30,000) paid to a company which is 50% owned by a director and an
officer of this company. The lease expired July 1, 1998.
<PAGE> 65
PAGE XXII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
19. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
Mining
Exploration Oil and
and Gas Wood 1999 1998
Development Development Products Corporate Total Total
----------- ----------- -------- --------- ----- -----
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Revenue (net) -- 637,145 -- -- 637,145 742,581
----------- ----------- ----------- ----------- ----------- -----------
General corporate expenses -- -- -- 1,020,795 1,020,795 1,364,674
Interest on long-term debt -- 103,902 -- 146,784 250,686 334,811
Amortization - equipment -- 29,530 -- 9,517 39,047 220,344
- goodwill -- 178,956 -- -- 178,956 210,467
Depletion, impairment 6,782,229 257,567 -- -- 7,039,796 180,633
----------- ----------- ----------- ----------- ----------- -----------
6,782,229 569,955 -- 1,177,096 8,529,280 2,310,929
Discontinued segment -- -- 671,215 -- 671,215 --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (6,782,229) 67,190 671,215 (1,177,096) (7,220,920) (1,568,348)
=========== =========== =========== =========== =========== ===========
Identifiable assets 4,450,000 5,885,825 -- 3,687,037 14,022,862 20,488,132
=========== =========== =========== =========== =========== ===========
Capital expenditures -- 380,077 -- 26,703 406,780 790,492
=========== =========== =========== =========== =========== ===========
</TABLE>
20. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES
(a) FAS 121
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED
The 1997 fiscal year is the initial year of application of FAS 121
"accounting for the impairment of long-lived assets and for long-lived
assets to be disposed". If FAS 121 had been applied as at December 31,
1997 and 1996, there would have been no material effect on the
company's financial position or results of operations.
<PAGE> 66
PAGE XXIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
20. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES (Continued)
(b) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES REQUIRED UNDER
SFAS 123
Issued by the Financial Accounting Standards Board in October, 1995,
SFAS 123 established financial accounting and reporting standards for
stock-based employee compensation plans as well as transactions in
which an entity issues its equity instruments to acquire goods or
services from non-employees. This statement defines a fair value based
method of accounting for employee stock option or similar equity
instruments, and encourages all entities to adopt that method of
accounting for all their employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost of
those plans using the intristic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees.
Entities electing to remain with the accounting in Opinion 25 must
make pro-forma disclosures of net income and, if presented, earnings
per share, as if the fair value based methods of accounting defined by
SFAS 123 had been applied. SFAS 123 is applicable to fiscal years
beginning after December 15, 1995.
The company accounts for its stock options under Canadian GAAP, which,
in the company's circumstances are not materially different from the
amounts that would be determined under the provisions of the
Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25") and related interpretations in
accounting for its stock option plan.
No compensation expense has been charged to the consolidated statement
of loss for the plan for the years ended December 31, 1999, 1998 and
1997. Had compensation expense for the company's stock-based
compensation plan been determined based on the fair value at the grant
dates for awards under the Plan consistent with the method under the
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123 "Accounting for Stock- based Compensation" ("SFAS
123"), the company's net loss and loss per share would have been
reported as the pro-forma amounts indicated in the table below. The
fair value of each option grant was estimated on the date the grants
are exercisable using the fair value recognition method, with the
following assumptions: risk free interest rate of 6% dividend yield of
0%, theoretical volatility assumption of .30, with vesting provisions
and the expected lives of options of five years.
<TABLE>
<CAPTION>
1999 1998 1997
AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA
----------- --------- ----------- --------- ----------- ---------
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)
- U.S. GAAP (7,220,920) (7,446,070) (1,568,348) (1,590,539) (1,708,418) (1,797,064)
Net earnings (loss) per share
Continuing operations (3.49) (3.59) (0.77) (0.78) (0.93) (0.98)
For the year (3.19) (3.29) (0.77) (0.78) (0.93) (0.98)
Weighted average fair value
of options granted during
this period -- .23 0.00 0.17 0.00 0.024
</TABLE>
<PAGE> 67
PAGE XXIV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
20. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES (Continued)
(c) RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
and for hedging activities. In June 1999, SFAS 137 was issued to defer
the effective date of SFAS 133 beginning after June 15, 2000, SFAS 137
is effective for the company's 2001 fiscal year.
21. PRIOR PERIOD ADJUSTMENT
Recognition of income before substantial completion of contracts, as well as the
non-accrual of finder's fees related to the sale of a subsidiary, resulted in
the understatement of the reported net loss in DPI's previously issued 1996
financial statements. These were corrected in 1997.
22. COMMITMENT
OPERATING LEASE
The company is committed to a lease for its office space for an annual rent
of $51,120 under an agreement expiring October 31, 2003.
23. SUPPLEMENTAL OIL AND GAS INFORMATION
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
1999 1998 1997
-------- -------- --------
Revenues $376,343 $312,769 $304,775
Production costs 30,604 21,455 17,604
Exploration expenses -- 2,938 --
Depreciation, depletion and amortization 257,567 190,510 173,077
-------- -------- --------
Results to operations for producing activities $ 88,172 $ 97,866 $114,094
======== ======== ========
<PAGE> 68
PAGE XXV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
23. SUPPLEMENTAL OIL AND GAS INFORMATION (Continued)
CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCTION ACTIVITIES
The components of capitalized costs related to the company's oil and gas
producing activities are as follows.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Proved properties $6,237,025 $4,990,465 $4,196,085
Pipelines, equipment and other interests 535,698 289,968 213,837
---------- ---------- ----------
6,772,723 5,280,433 4,409,922
Accumulated depreciation, depletion and amortization 886,898 629,330 438,821
---------- ---------- ----------
$5,885,825 $4,651,103 $3,971,101
========== ========== ==========
</TABLE>
Costs Incurred in Oil and Gas Producing Activities
The costs incurred by the company in its oil and gas activities during
fiscal years 1999, 1998 and 1997 are as follows.
1999 1998 1997
---------- ---------- ----------
Property acquisition costs:
Unproved properties $ -- $ -- $ --
Proved properties 1,246,560 794,380 525,854
Exploration costs -- -- --
Developments costs 245,730 76,131 101,022
OIL AND GAS RESERVE INFORMATION (Unaudited)
The company's estimates of net proved oil and gas reserves and the present
value thereof have been verified by Wright & Company, Inc., a petroleum
engineering firm.
In addition, the standardized measures of discounted future net cash flows
may not represent the fair market value of the company's oil and gas
reserves or the present value of future cash flows of equivalent reserves,
due to anticipated future changes in oil and gas prices and in production
and development costs and other factors for which effects have not been
provided.
<PAGE> 69
PAGE XXVI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
23. SUPPLEMENTAL OIL AND GAS INFORMATION (Continued)
OIL AND GAS RESERVE INFORMATION (Unaudited)
The standardized measure of discounted future net cash flows is
information provided for the financial statement user as a common base
for comparing oil and gas reserves of enterprises in the industry.
GAS OIL
----------- -----------
(mcf) (bbls)
Balance at December 31, 1996 14,509,433 285,252
Current additions 5,045,929 --
Transfers/sales of reserves in place (2,282,357) --
Revision to previous estimates (7,819,278) (205,627)
Production (74,140) (10,881)
----------- -----------
Balance at December 31, 1997 9,379,587 68,744
Current additions 3,855,113 --
Transfers/sales of reserves in place (1,761,741) --
Revision to previous estimates (394,094) 24,480
Production (119,875) (7,186)
----------- -----------
Balance at December 31, 1998 10,958,990 86,038
Purchase of reserves in place 549,800 6,300
Current additions 1,081,400 --
Transfers/sales of reserves in place (212,231) --
Revision to previous estimates (631,550) (18,341)
Production (139,652) (7,275)
----------- -----------
Balance at December 31, 1999 11,606,757 66,722
=========== ===========
Proved development reserves at:
December 31, 1999 3,242,748 66,722
December 31, 1998 2,573,031 86,038
December 31, 1997 2,493,809 68,744
<PAGE> 70
PAGE XXVII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1999
23. SUPPLEMENTAL OIL AND GAS INFORMATION (Continued)
OIL AND GAS RESERVE INFORMATION (Unaudited) (Continued)
Presented below is the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves.
The estimated future production is priced at year-end prices. The
resulting estimated future cash inflows are reduced by estimated future
costs to develop and produce the proved reserves based on year-end cost
levels. The future net cash flows are reduced to present value amounts
by applying a 10% discount factor.
1999 1998 1997
------- ------- -------
(in thousands)
Future cash inflows $33,507 $28,818 $24,174
Future production and development costs 16,478 12,113 9,281
Future income tax expenses 1,480 1,690 1,389
------- ------- -------
Future net cash flows 15,549 15,015 13,504
Less 10% annual discount for estimated
timing of cash flows 10,511 10,515 8,473
------- ------- -------
Standardized measure of discounted future
net cash flows $ 5,038 $ 4,500 $ 5,031
======= ======= =======
The following table summarizes the changes in the standardized measure of
discounted future net cash flows from estimated production of proved oil
and gas reserves after income taxes.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 4,500 $ 5,031 $ 3,750
Increase (decrease) in discounted future net cash flows:
Sales and transfers of oil and gas net of related costs (345) (292) (286)
Net changes in prices and production costs 359 (263) 12,681
Revisions of previous quantity estimates (780) (556) (10,970)
Extensions, discoveries and improved recovery
less related costs 215 76 101
Purchases of reserves in place 517 -- --
Accretion of discount 450 503 375
Net change in future income taxes 67 (90) (87)
Other 55 91 (533)
-------- -------- --------
Balance, end of year $ 5,038 $ 4,500 $ 5,031
======== ======== ========
</TABLE>
<PAGE> 71
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED SCHEDULE OF GENERAL AND ADMINISTRATIVE COSTS
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Salaries $ 257,974 $ 463,643 $ 358,134
Interest on long-term debt 250,686 334,811 294,836
Office and general 140,856 223,906 111,355
Amortization - goodwill 178,956 210,467 210,467
- capital assets 39,047 198,029 191,991
- oil and gas equipment -- 9,877 26,865
Financing costs 11,500 -- --
Depletion - oil and gas properties 257,567 180,633 146,212
Bad debts 25,742 171,146 25,484
Consulting and management fees 137,825 141,892 276,204
Legal fees 137,965 111,375 165,220
Audit and accounting 65,300 100,289 75,920
Advertising and promotion 84,711 74,476 96,876
Shareholders' information 66,478 58,363 68,314
Rent 56,920 53,600 30,697
Property and payroll taxes 22,477 48,291 33,875
Insurance 36,993 41,396 86,124
Repairs and maintenance 7,627 8,621 8,827
Trust and stock exchange company fees 8,290 4,740 2,867
----------- ----------- -----------
1,786,914 2,435,555 2,210,268
----------- ----------- -----------
Less: Interest and other income 48,670 29,653 11,669
Miscellaneous (38,433) 113,219 11,504
Gain (loss) on sale of capital assets 29,626 -- (210,685)
----------- ----------- -----------
39,863 142,872 (187,512)
----------- ----------- -----------
$ 1,747,051 $ 2,292,683 $ 2,397,780
=========== =========== ===========
</TABLE>
<PAGE> 1
Exhibit 23(b)
CONSENT OF INDEPENDENT CANADIAN AUDITOR
---------------------------------------
We hereby consent to the use in the Form 10-KSB of Daugherty Resources,
Inc. (File No. 0-12185 ) for the fiscal year ended December 31, 1999, of our
independent audited financial reports for the year December 31, 1999. We also
consent to all references to us in such Form 10-KSB, including references to us
as experts.
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH
By: /s/ Bernard Kraft
--------------------
Bernard Kraft
Partner
Markham, Ontario
April 11, 2000
<PAGE> 1
Exhibit 23(d)
CONSENT OF INDEPENDENT PETROLEUM CONSULTANT
-------------------------------------------
We hereby consent to the use in the Form 10-KSB of Daugherty Resources,
Inc. (File No. 0-12185 ) for the fiscal year ended December 31, 1999, of our
independent oil and gas reserve reports dated March 15, 2000, for the year ended
December 31, 1999. We also consent to all references to us in such Form 10-KSB,
including references to us as experts.
WRIGHT & COMPANY, INC.
By: /s/ D. Randall Wright
---------------------
President
Brentwood, Tennessee
April 11, 2000
<PAGE> 1
Exhibit 23(e)
CONSENT OF INDEPENDENT MINERAL GEOLOGIST AND ENGINEER
-----------------------------------------------------
We hereby consent to the use in the Form 10-KSB of Daugherty Resources,
Inc. (File No. 0-12185 ) for the fiscal year ended December 31, 2000, of our
Unga Island Project Resource and Reserve Review dated April 5, 2000, relating to
gold and silver projects of Daugherty Resources, Inc. located on Unga Island,
Alaska. We also consent to all references to us in such Form 10-KSB, including
references to us as experts.
STEFFEN ROBERTSON AND KIRSTEN (U.S.), INC.
By: /s/ William Crowl
-----------------
William Crowl
Principal Geologist
Lakewood, Colorado
April 5, 2000
<PAGE> 1
Exhibit 23(f)
CONSENT OF INDEPENDENT MINERAL ECONOMICS CONSULTING FIRM
--------------------------------------------------------
We hereby consent to the use in the Form 10-KSB of Daugherty Resources,
Inc. (File No. 0-12185 ) for the fiscal year ended December 31, 2000, of our
appraisal report dated April 5, 2000, relating to the gold and silver projects
of Daugherty Resources, Inc. located on Unga Island, Alaska. We also consent to
all references to us in such Form 10-KSB, including references to us as experts.
BALFOUR HOLDINGS, INC.
By: /s/ Douglas B. Silver
---------------------
Douglas B. Silver
President
Engelwood, Colorado
April 5, 2000
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, Daugherty Resources, Inc., a British Columbia corporation (the
"Company"), intends to issue and Option Certificate to Environment Energy, Inc.
for the purchase of up to 1,120,000 shares of common stock of the Company at the
purchase price of $1.00 per share for the option period of August 20, 1999
(conditioned upon the delivery at the closing of the Agreement for Purchase and
Sale between Daugherty Petroleum, Inc. and Environmental Energy, Inc. and its
affiliated partnerships) and the expiration date of August 19, 2004 a draft of
which has been previously reviewed by the undersigned;
NOW, THEREFORE, the undersigned in his capacity as a director or
officer or both, as the case may be, of the Company, does hereby constitute and
appoint William S. Daugherty and D. Michael Wallen, and each of them severally,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to do any and all acts and things in his name
and on his behalf in his capacity as a director or officer or both, as the case
may be, of the Company, as fully and to all intents and purposes as the
undersigned might or could do in person, and to execute any and all instruments
for the undersigned and in his name in any and all capacities which such person
may deem necessary or advisable to enable the Company to comply with the
issuance of the above described Option Certificate, including specifically, but
not limited to, power and authority to sign for the undersigned, in his capacity
as a director or officer or both, as the case may be, any and all other
documents which such person may deem necessary or advisable in connection
therewith; and the undersigned does hereby ratify and confirm all that such
person shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 26th day of May, 1999.
/s/ Charles L. Cotterell
------------------------
CHARLES L. COTTERELL
<PAGE> 2
EXHIBIT 24
POWER OF ATTORNEY
WHEREAS, Daugherty Resources, Inc., a British Columbia corporation (the
"Company"), intends to issue and Option Certificate to Environment Energy, Inc.
for the purchase of up to 1,120,000 shares of common stock of the Company at the
purchase price of $1.00 per share for the option period of August 20, 1999
(conditioned upon the delivery at the closing of the Agreement for Purchase and
Sale between Daugherty Petroleum, Inc. and Environmental Energy, Inc. and its
affiliated partnerships) and the expiration date of August 19, 2004 a draft of
which has been previously reviewed by the undersigned;
NOW, THEREFORE, the undersigned in his capacity as a director or
officer or both, as the case may be, of the Company, does hereby constitute and
appoint William S. Daugherty and D. Michael Wallen, and each of them severally,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to do any and all acts and things in his name
and on his behalf in his capacity as a director or officer or both, as the case
may be, of the Company, as fully and to all intents and purposes as the
undersigned might or could do in person, and to execute any and all instruments
for the undersigned and in his name in any and all capacities which such person
may deem necessary or advisable to enable the Company to comply with the
issuance of the above described Option Certificate, including specifically, but
not limited to, power and authority to sign for the undersigned, in his capacity
as a director or officer or both, as the case may be, any and all other
documents which such person may deem necessary or advisable in connection
therewith; and the undersigned does hereby ratify and confirm all that such
person shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 26th day of May, 1999.
/s/ James K. Klyman
-------------------
JAMES K. KLYMAN
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,250,004
<SECURITIES> 0
<RECEIVABLES> 244,971
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,494,975
<PP&E> 11,527,887
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,022,862
<CURRENT-LIABILITIES> 5,311,662
<BONDS> 1,706,381
0
650,000
<COMMON> 22,080,728
<OTHER-SE> (15,725,909)
<TOTAL-LIABILITY-AND-EQUITY> 14,022,862
<SALES> 1,416,725
<TOTAL-REVENUES> 1,416,725
<CGS> 779,580
<TOTAL-COSTS> 779,580
<OTHER-EXPENSES> 8,278,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,686
<INCOME-PRETAX> (7,892,135)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 671,215
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,220,920)
<EPS-BASIC> ($3.19)
<EPS-DILUTED> ($3.19)
</TABLE>
