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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
COMMISSION FILE NUMBER: 0-12185
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DAUGHERTY RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PROVINCE OF BRITISH COLUMBIA NOT APPLICABLE
(State or other jurisdiction of incorporation or (I.R.S. EMPLOYER
organization) IDENTIFICATION NO.)
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509-1844
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (859) 263-3948
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES
OF COMMON STOCK, AS OF SEPTEMBER 30, 2001, WAS 4,895,397.
Transitional Small Business Disclosure Format (check one): Yes No. X.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The information required by this Item 1 appears on pages I through XV
of this Report, and is incorporated herein by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF GENERAL OPERATIONS.
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The following is a discussion of Daugherty Resources' financial
condition and results of operations. This discussion should be read in
conjunction with the Financial Statements of Daugherty Resources described in
Item 1 of this report. 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
Daugherty Resources 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 Daugherty Resources will be
achieved. Moreover, such forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof. 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 (See "Forward-Looking Statements" herein at page 8).
Daugherty Resources, Inc. ("Daugherty Resources"), formerly Alaska
Apollo Resources Inc., is a diversified natural resources company with assets in
oil and gas, and gold and silver prospects. Originally formed in 1979 to develop
gold properties, Daugherty Resources in the fourth quarter of 1993, acquired its
wholly owned subsidiary, Daugherty Petroleum, Inc. ("Daugherty Petroleum"). The
purchase of Daugherty Petroleum has given Daugherty Resources a diversified
revenue and asset base that is primarily located in Appalachia.
Since acquiring Daugherty Petroleum, Inc., Daugherty Resources has
increased its reserves through the acquisition of oil and gas properties in the
Appalachian and Illinois Basins, and the drilling of wells in the Appalachian
Basin through joint venture and turnkey drilling programs, where Daugherty
Petroleum, Inc. is the primary decision maker. The Company continues to
aggressively seek acquisitions and drilling programs.
LIQUIDITY
For the nine months ending September 30, 2001, Daugherty Resources
drilled sixteen (16) natural gas wells (4.2 net wells), all of which were
capable of producing natural gas, and completed twenty-two (22) natural gas
wells. By comparison, for the same period of 2000, Daugherty Resources drilled
twenty-three (23) natural gas wells (5.92 net wells). Drilling operations for
the first nine months of 2001 were primarily related to 2000 year-end private
placement drilling programs on Daugherty Resources' farmout acreage acquired
from Equitable Resources Energy Corporation.
Daugherty Resources funds its operations through a combination of
cash flow from operations, capital raised through drilling partnerships and the
sale of stock. Operational cash flow is generated by sales of natural gas and
oil from interests Daugherty Resources owns in wells, well operations of
partnership wells, and well drilling and completions for partnerships sponsored
by Daugherty Petroleum, and gas distributed by Sentra Corporation, a wholly
owned subsidiary of Daugherty Petroleum.
On July 19, 2001, Daugherty Petroleum executed a new credit facility
with KeyBank National Association that provides line of credit up to $10,000,000
with immediate access to $2,250,000 and increases based upon periodic reviews of
the financial position of Daugherty Petroleum. The facility is for a term of 36
months with interest at
2
KeyBank's Base Lending Rate plus 1.25%. The Base Lending Rate is defined as that
interest rate established from time to time as the KeyBank's Base Lending Rate,
whether or not such rate is publicly announced. The credit facility is secured
by a first mortgage on the oil and gas properties owned by Daugherty Petroleum
and a guarantee executed by Daugherty Resources. This line of credit allowed
Daugherty Petroleum in the third quarter of 2001 to payoff its short-term loan
to Compass Bank, and will provide capital for drilling new wells, extending its
gas gathering system, and constructing additional distribution lines for Sentra.
Daugherty Petroleum continues to review additional opportunities for
acquisitions of oil and gas properties. Previous acquisitions have been
completed using Daugherty Resources stock in part to pay for the acquisitions.
Generally, acquisitions include interests in the wells and the right to operate
the wells. Although Daugherty Petroleum generally participates in less than a
majority interest in the wells drilled by programs or joint ventures that it
sponsors, it always serves as managing general partner of the partnerships or
joint ventures.
On May 1, 2001 Daugherty Petroleum began two new drilling programs, one
of which was a 15 well program and the other was a 10 well program. The 15 well
program closed on November 5, 2001 with $3,225,000 in subscriptions for
partnership units. This program allowed Daugherty Petroleum to drill 4 natural
gas wells for the partnerships during the third quarter of 2001, with an
additional two wells having been drilled as of November 14, 2001. (1.5 net
wells). Daugherty Petroleum participated for a 25% interest in the program.
Daugherty Petroleum started sales on another 15 well program on November 14,
2001 and is continuing sales on its 10 well program. If it is successful in
closing these programs, Daugherty Petroleum expects to drill up to an additional
25 wells through the first quarter of 2002 (6.25 net wells).
In addition, Daugherty Petroleum participated in a one-well joint
venture that was drilled in the third quarter of 2001, in which it retained 45%
working interest.
Daugherty Petroleum has primarily concentrated in drilling wells on
prospects it generates in the Appalachian Basin. Historically, a major portion
of Daugherty Resources' revenues has been from its activities as "turnkey
driller" and operator of drilling programs and joint ventures in the Appalachian
Basin sponsored by Daugherty Petroleum.
Working capital as of September 30, 2001, was a negative $1,113,805
compared to December 31, 2000, when working capital was negative $2,657,222.
Current assets as of September 30, 2001 were $1,119,645 compared to
$813,004 as of December 31, 2000. During the nine-month period ending September
30, 2001, as compared to December 31, 2000, the changes in the composition of
Daugherty Resources' current assets were: cash balances decreased $32,160 from
$426,660 to $394,500; accounts receivable balances increased $10,638 from
$350,704 to $361,343. Other current assets such as prepaids, inventory, and
notes receivable increased $328,162 from $35,640 to $347,266. Overall, current
assets increased by $306,641 to $1,119,645 from $813,004.
Current liabilities as of September 30, 2001 were $2,233,450 compared
to $3,470,226 as of December 31, 2000. During the nine-month period ending
September 30, 2001, as to compared December 31, 2000, the changes in the
composition of current liabilities were: short-term loans and current portion of
long-term debt decreased $1,015,971 from $1,286,934 to $270,963, customer
drilling deposits decreased $122,417 from $558,986 to $436,569, accounts payable
and accrued liabilities decreased $98,387 from $1,580,561 to $1,482,174.
Management does not believe that its working capital deficit will have
a material or substantial negative impact on Daugherty Resources' financial
position, results of operations or liquidity in future periods due to the
following:
- The turnkey drilling contracts associated with the various
drilling programs sponsored by Daugherty Petroleum will result in
increased drilling revenue and profits.
- The higher natural gas prices experienced in 2000 will result in
significantly higher future revenues from the sale of natural gas.
If the higher natural gas prices experienced in 2000 are
maintained in the future it is expected to result in increased
interest in drilling partnerships, which directly result in an
3
increase in revenue from drilling activities. Conversely, if gas
prices decrease significantly in the future it is expected that
future revenues from the sale of natural gas will decrease
significantly and interest in drilling partnerships may also
decrease significantly.
- Acquisitions of additional reserves through additional future
drilling is expected to enhance the ability of Daugherty Resources
to secure long term financing, increased lines of credit, and
equity participation with industry partners. Significant decreases
in the price of natural gas may result in a decrease in drilling
activity resulting in fewer reserves being acquired which may
lessen the ability of Daugherty Resources to attract and secure
financing, lines of credit or equity partners.
The new $10,000,000 credit facility executed with KeyBank National
Association on July 19, 2001, allowed Daugherty Petroleum to convert its
short-term debt at Compass Bank that was secured by its oil and gas assets to
long-term debt and increase its line of credit, reduce working capital deficit,
insure financial liquidity, and enhance the balance sheet.
Daugherty Resources believes its cash flow resulting from operating
revenues will contribute significantly to its short-term financial commitments
and operating costs, and continues to refine its long-term strategy to meet the
financial obligations of Daugherty Resources. This strategy includes:
- INCREASING PARTNERSHIP AND JOINT VENTURE DRILLING. Increased
public awareness of natural gas shortages and the resulting
higher prices during the winter of 2000 - 2001 sparked an
increased interest in partnership drilling. Daugherty Petroleum
plans to increase its sponsorship of drilling programs to
increase drilling revenue, cash flow from sale of production
and increase its natural gas and oil reserves. A decrease in
the price of natural gas and/or a surplus of natural gas could
result in a decrease in the interest and investment in drilling
program sponsored by Daugherty Petroleum with a resulting
decrease in contract drilling revenue and cash flow from the
sale of production. However, Daugherty Resources believes that
investments in drilling programs are, in part, influenced by
favorable tax treatment under the federal income tax laws and
will continue to be a source of funds to Daugherty Resources.
- ACQUISITION OF REVENUE PRODUCING PROPERTIES. Daugherty
Resources continues to review existing oil and gas properties
for acquisitions in its areas of interest. In addition to
reviewing new properties, Daugherty Petroleum intends to
conclude the Ken-Tex acquisition in 2001.
- GOLD AND SILVER PROPERTIES. It is the objective of Daugherty
Resources to realize the value of its gold and silver
properties by 1) obtaining a joint venture partner to provide
funds for additional exploration on its prospects or 2)
divesting of its gold and silver properties. Subsequent to
obtaining the SRK report and the Balfour appraisal management
prepared and distributed summary material to various
individuals and firms associated with the gold and silver
mining sector with the intent of soliciting an interest in
acquiring part or all of the property or providing capital as a
joint venture partner. Daugherty Resources had several
discussions with the principals of those responding to the
summary material and Daugherty Resources continues to solicit
interest from those in the gold and silver industry with the
current intent of not developing the properties itself.
The production, revenue, profitability and future rate of growth of
Daugherty Resources are substantially dependent upon the prevailing prices of,
and demand for natural gas and oil. The ability of Daugherty Resources to
maintain or increase its borrowing capacity and to acquire additional capital on
attractive terms is also substantially dependent upon oil and gas prices. Prices
for oil and gas are subject to wide fluctuation in response to relatively minor
changes in supply of and demand for gas, market uncertainty and a variety of
other factors that are beyond the control of Daugherty Resources.
Daugherty Resources believes there are several factors that will
increase revenues in the year 2001. Daugherty Resources will receive additional
revenues from the oil and gas well properties it acquired and drilled during
2000 and the first and third quarters of 2001. The expansion of its natural gas
gathering system completed in
4
2000 and 2001, and the additional expansion planned in 2001 should increase
Daugherty Petroleum's ability to transport natural gas.
RESULTS OF OPERATIONS
For the three-month period ending September 30, 2001, Daugherty
Resources' total gross revenue increased $127,643 to $1,573,110 from $1,445,467
for the same period in 2000. For the nine-month period ending September 30,
2001, Daugherty Resources' total gross revenues increase $121,802 to $5,260,524
from $5,138,772 for the same period in 2000. For the three month period ending
September 30, 2001, compared to the same period in 2000, Daugherty Resources'
gross revenue from contract drilling activity decreased $12,670 from $1,219,270
to $1,206,600, gross revenue from oil and gas production decreased $14,375 from
$181,974 to $167,599 and gross revenue from gas transmission and compression
increased $154,688 from $44,223 to $198,911. For the nine month period ending
September 30, 2001, as compared to the same period in 2000 gross revenue from
contract drilling activity decreased $634,971 from $4,551,067 to $3,916,096,
gross revenue from oil and gas production increased $332,009 from $435,289 to
$767,298 and gross revenue from gas transmission and compression increased
$424,764 from $152,366 to $577,130.
Daugherty Resources experienced net income (loss) from continuous
operations of $(207,629) for the quarter ending September 20, 2001 and
$(190,742) for the nine-month period ending September 30, 2001 compared to net
income (loss) of $(468,980) and $(184,489) for the same periods in 2000.
Daugherty Resources' gross revenues for the nine-month period ending
September 30, 2001 were derived from drilling contract revenues of $3,916,096
(74.44%) natural gas and oil operations and production revenues of $767,298
(14.59%), and natural gas transmission and compression of $577,130 (10.97%).
The increase in total gross revenues of $127,643 for the three months
ending September 30, 2001, was primarily attributable to an increase in
transmission and compression revenues. Revenues from oil and gas production
activities increased by $332,009 to $767,298 from $435,289 for the nine-month
period ending September 30, 2001 for the same period in 2000. The increase in
revenues from oil and gas production activities was primarily attributable to
increased oil and gas production and higher oil and gas prices. The decrease in
revenue from contract drilling activity for the three and nine month periods
ending September 30, 2001, as compared to the same periods for 2000 was due to
the fact that Daugherty drilled 16 wells in the first three quarters of 2001
compared to 23 wells being drilled in the same periods in 2000.
During the three month period ended September 30, 2001, compared to
the same period in 2000, total expenses decreased $446 to $892,340 from
$892,786. For the nine month period ended September 30, 2001, compared to the
same period in 2000, total expenses decreased $431,923 to $2,920,697 from
$3,352,620. During the three month period ended September 30, 2001, compared to
the same period in 2000, expenses related to contract drilling activity
decreased $93,600 to $637,414 from $731,014, expenses related to oil and gas
production increased $9,018 to $146,540 from $137,062 and expenses relating to
gas transmission and compression activity increased from $83,676 to $108,386
from $24,710. For the nine month period ending September 30, 2001, compared to
the same period for 2000, expenses relating to contract drilling activity
decreased $580,853 to $1,887,368 from $2,468,221, expenses relating to oil and
gas production decreased $158,010 to $638,655 from $796,655 and expenses
relating to gas transmission and compression increased $306,930 to $394,674 from
$87,744.
The decrease in total direct costs, that includes drilling and
related costs for natural gas wells, is attributable to the fact that in the
first three quarters of 2001 Daugherty Petroleum drilled 16 wells compared to 23
wells during in the same periods of 2000. The overall decrease in production
expense for the three and nine month periods of 2001 as compared to the same
period in 2000 was due to the completion of pipeline and compression facilities
that made operations more efficient.
The increase in gas transmission and compression expense for the
three and nine month periods of 2001 as compared to the same period in 2000 was
due to and increase in gas marketing and other related expenses of Sentra.
5
Sentra Corporation, Daugherty Resources' natural gas utility
subsidiary, had sales for the three and nine-months ended September 30, 2001 of
$23,242 and $95,030 compared with sales of $2,726 and $39,035 for the three and
nine months ended September 30, 2000. As of September 30, 2001, Sentra has 141
customers, 37 of which are commercial and agri-business accounts. Sentra expects
high demand for natural gas service because of the ease of usage, economy and
reliability of natural gas. Further, demand is expected to increase because of
continued growth and acceptance of natural gas by the chicken industry that is a
major segment the economy in Sentra's service areas.
On March 8, 2001, Sentra entered into a six-month agreement with Clay
Gas Utility District of Celina, Tennessee to manage its business, which
currently consists of 143 customers, including 30 industrial, commercial and
agri-business connections. Sentra also reads Clay Gas' meters, issue its bills
and collects its receivables. On June 5, 2001, this contract was extended
through July 31, 2002.
On February 1, 2001, Daugherty Petroleum entered into agreements with
Sentra and Clay Gas Utility District to supply natural gas to the two companies
natural gas utilities operations through July 31, 2001. On June 5, 2001, these
agreements were extended through July 31, 2002. Daugherty purchases the natural
gas it sells to the utilities from a gas marketing company that delivers the gas
to the utilities' sales meter on the Texas Eastern Transmission line in Monroe
County, Kentucky.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
(a) Recent Sales of Unregistered Securities
On July 31, 2001, Grammer Industries, Inc. an Indiana Corporation
executed a Subscription Agreement for the purchase of 62,500 shares
of restricted common stock in total consideration of $125,000.
On July 13, 2001, Daugherty Petroleum purchased from Sentra Utility
Development Group, L.P. all rights title and interest in and to
certain oil and gas reserves and rights to prepaid drilling funds. In
consideration of the assets purchased the Company issued to the
sellers 227,051 shares of non-cumulative convertible preferred stock
and 37,816 units of acquisition Warrants ranging from $1.75 to $4.50
per share expiring July 14, 2006.
6
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED WITH THIS REPORT.
PAGE
(1) Financial Statements, Daugherty Resources, Inc. and subsidiary companies
Cover Page
Table of Contents
Condensed Consolidated Balance Sheet - September 30, 2001................................. II-III
Condensed Consolidated Statement of Operations and Deficit - September 30, 2001 .............IV-V
Condensed Consolidated Statement of Cash Flows - September 30, 2001 ...........................VI
Notes to Condensed Consolidated Financial Statements .....................................VII-XIX
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.
(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.
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.
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
7
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 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), (g) and (h)
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).
11 Computation of Per Share Earnings.
24 Powers of Attorney.
(b)* Reports on Form 8-K.
None
(c) Financial Statement Schedules.
8
No schedules are required, as all information required has
been presented in the unaudited financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements within meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934, including statements regarding, among other items, our
growth strategies, anticipated trends in our business and our future results of
operations, market conditions in the oil and gas industry, our ability to make
and integrate acquisitions and the outcome of litigation and the impact of
governmental regulation. These forward-looking statements are based largely on
our expectations and are subject to a number of risks and uncertainties, many of
which are beyond our control. Actual results could differ materially from these
forward-looking statements as a result of, among other things:
- A decline in oil and/or gas production or prices.
- Incorrect estimates of required capital expenditures.
- Increases in the cost of drilling, completion and gas
collection or other costs of production and operations.
- An inability to meet growth projections.
- Government regulations.
- Other risk factors discussed or not discussed herein.
In addition, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect" and similar expressions, as they
relate to Daugherty Petroleum and/or Daugherty Resources, our business or our
management, are intended to identify forward-looking statements.
Daugherty Resources believes that the expectations reflected in the
forward-looking statements and the basis of the assumptions of such
forward-looking statements are reasonable. However, in light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
Daugherty Resources claims the protection of the safe harbor for
forward-looking statements combined in the Private Securities Litigation Reform
Act of 1995 for these statements.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned hereunto duly authorized.
DAUGHERTY RESOURCES, INC.
By: /s/ William S. Daugherty
------------------------
William S. Daugherty, President
Dated: November 14, 2001
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.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ William S. Daugherty Chairman of the Board, President,
- ------------------------- Director of the Registrant November 14, 2001
William S. Daugherty
/S/ James K. Klyman * Director of the Registrant November 14, 2001
- -------------------------
James K. Klyman
November 14, 2001
/S/ Charles L. Cotterell* Director of the Registrant
- -------------------------
Charles L. Cotterell
*By /S/ William S. Daugherty
------------------------
William S. Daugherty
Attorney-in-Fact
10
DAUGHERTY RESOURCES INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
DAUGHERTY RESOURCES INC.
SEPTEMBER 30, 2001
CONTENTS
PAGE
REVIEW ENGAGEMENT REPORT I
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet II-III
Statement of Deficit IV
Statement of Operations V
Statement of Cash Flows VI
Notes to Financial Statements VII-XIX
[Craft, Berger, Grill, Schwartz, Cohen & March LLP Letterhead]
PAGE I
REVIEW ENGAGEMENT REPORT
To the Directors of DAUGHERTY RESOURCES INC.
We have reviewed the condensed consolidated balance sheet of DAUGHERTY RESOURCES
INC. as at September 30, 2001 and the condensed consolidated statements of
deficit, operations and cash flows for the nine months ended September 30, 2001
and for the three months ended September 30, 2001. Our review was made in
accordance with Canadian generally accepted standards for review engagements and
accordingly consisted primarily of enquiry, analytical procedures and discussion
related to information supplied to us by the company.
A review does not constitute an audit and consequently we do not express an
audit opinion on these condensed consolidated financial statements.
Based on our review, nothing has come to our attention that causes us to believe
that these condensed consolidated financial statements are not, in all material
respects, in accordance with Canadian generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in Canada, the balance sheet as at December 31, 2000 and the related
statements of operations and deficit and cash flows for the year then ended (not
presented herein) and, in our report dated March 28, 2001, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet, as of
December 31, 2000, is fairly stated in all material respects in relation to the
balance sheet from which it has been derived.
/s/ Kraft, Berger, Grill, Schwartz, Cohen & March LLP
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
November 12, 2001, except for Notes 10(c), 12(a), 13 and 14 which are as at
March 8, 2002
PAGE II
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
ASSETS
SEPTEMBER 30 DECEMBER 31
2001 2000
-------------- --------------
(Unaudited)
CURRENT
Cash and cash equivalents $ 394,500 $ 426,660
Accounts receivable 361,343 350,704
Prepaid expense and other asset 363,802 4,407
Loans to related parties -- 31,233
-------------- --------------
1,119,645 813,004
BONDS AND DEPOSITS 150,254 41,000
OIL AND GAS PROPERTIES (Note 2) 8,140,186 7,896,469
CAPITAL (Note 3) 457,746 279,984
LOANS TO RELATED PARTIES (Note 4) 599,905 356,813
DEFERRED FINANCING COSTS 77,946 98,586
GOODWILL, net of accumulated amortization of $1,431,649
(2000 - $1,297,432) 357,916 492,133
-------------- --------------
$ 10,903,598 $ 9,977,989
============== ==============
See accompanying notes to consolidated financial statements.
APPROVED ON BEHALF OF THE BOARD:
/s/ William S. Daugherty /s/ Charles L. Cotterell
- ------------------------------- ----------------------------------
Director Director
PAGE III
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
SEPTEMBER 30, 2001
LIABILITIES
SEPTEMBER 30 DECEMBER 31
2001 2000
-------------- --------------
(Unaudited)
CURRENT
Bank loans (Note 5) $ 155,357 $ 1,131,798
Accounts payable 667,630 661,748
Accrued liabilities 814,544 918,813
Customers' drilling deposits 436,569 558,986
Long-term debt (Note 6) 115,605 155,136
Loan payable (Note 7) 43,745 43,745
-------------- --------------
2,233,450 3,470,226
LONG-TERM DEBT (Note 6) 3,270,278 1,759,022
-------------- --------------
5,503,728 5,229,248
-------------- --------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 8)
AUTHORIZED
5,000,000 Preferred shares, non-voting, non-cumulative, convertible
100,000,000 Common shares
ISSUED
- Preferred shares (2000 - 1,100,672) -- 620,844
4,895,397 Common shares (2000 - 3,442,852) 24,056,552 23,113,991
Capital stock to be issued 1,985,171 1,441,387
21,000 Common shares held in treasury, at cost (23,630) --
-------------- --------------
26,018,093 25,176,222
DEFICIT (20,618,223) (20,427,481)
-------------- --------------
5,399,870 4,748,741
-------------- --------------
$ 10,903,598 $ 9,977,989
============== ==============
See accompanying notes to financial statements.
PAGE IV
DAUGHERTY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENT OF DEFICIT
(U.S. FUNDS)
(UNAUDITED)
FOR THE THREE MONTH FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30 PERIOD ENDED SEPTEMBER 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
DEFICIT, beginning of period, as
previously reported $(15,492,633) $(15,197,418) $(15,677,270) $(15,725,909)
Write-off of mining property and related
expenditures (Note 13) (4,450,000) (4,450,000) (4,450,000) (4,450,000)
Correction of errors (Note 14) (467,961) (244,000) (300,211) --
------------ ------------ ------------ ------------
DEFICIT, beginning of period,
as restated (20,410,594) (19,891,418) (20,427,481) (20,175,909)
Net loss for the period (207,629) (468,980) (190,742) (184,489)
------------ ------------ ------------ ------------
DEFICIT, end of period $(20,618,223) $(20,360,398) $(20,618,223) $(20,360,398)
============ ============ ============ ============
See accompanying notes to financial statements.
PAGE V
DAUGHERTY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(U.S. FUNDS)
(UNAUDITED)
FOR THE THREE MONTH FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30 PERIOD ENDED SEPTEMBER 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUE
Contract drilling $ 1,206,600 $ 1,219,270 $ 3,916,096 $ 4,551,067
Oil and gas production 167,599 181,974 767,298 435,289
Gas transmission and compression 198,911 44,223 577,130 152,366
------------ ------------ ------------ ------------
1,573,110 1,445,467 5,260,524 5,138,722
------------ ------------ ------------ ------------
DIRECT EXPENSES
Contract drilling 637,414 731,014 1,887,368 2,468,221
Oil and gas production 146,540 137,062 638,655 796,655
Gas transmission and compression 108,386 24,710 394,674 87,744
------------ ------------ ------------ ------------
892,340 892,786 2,920,697 3,352,620
------------ ------------ ------------ ------------
GROSS PROFIT 680,770 552,681 2,339,827 1,786,102
------------ ------------ ------------ ------------
EXPENSES
Selling, general and administrative 613,211 829,183 1,723,784 1,328,736
Depreciation, depletion and amortization 218,618 139,311 655,854 445,854
Interest 56,570 53,167 150,931 196,001
------------ ------------ ------------ ------------
888,399 1,021,661 2,530,569 1,970,591
------------ ------------ ------------ ------------
NET LOSS FOR THE PERIOD $ (207,629) $ (468,980) $ (190,742) $ (184,489)
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING 4,218,704 3,001,053 3,742,724 2,222,172
============ ============ ============ ============
LOSS PER SHARE
Basic and fully diluted $ (0.05) $ (0.16) $ (0.05) $ (0.08)
============ ============ ============ ============
See accompanying notes to financial statements.
PAGE VI
DAUGHERTY RESOURCES INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. FUNDS)
(UNAUDITED)
FOR THE THREE MONTH FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30 PERIOD ENDED SEPTEMBER 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
OPERATING ACTIVITIES
Net loss for the period $ (207,629) $ (468,980) $ (190,742) $ (184,489)
Amortization, depletion and depreciation 218,618 139,311 655,854 445,855
(Increase) decrease in:
Accounts receivable (55,797) 783 (10,639) 28,883
Prepaid expense and other asset (281,017) (1,287) (359,395) (5,726)
Increase (decrease) in:
Accounts payable (85,263) 195,173 5,882 (145,732)
Accrued liabilities (208,475) 1,508 (104,269) 499,902
Drilling prepayments 573,500 -- (122,417) (1,921,373)
------------ ------------ ------------ ------------
(46,063) (133,492) (125,726) (1,282,680)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Change in oil and gas properties (292,540) (388,994) (436,929) (1,297,103)
Change in property and equipment (133,500) (9,571) (216,762) (187,717)
Change in bonds and other deposits (109,254) 12,000 (109,254) 17,842
Change in loans to related parties (28,947) -- (211,859) --
------------ ------------ ------------ ------------
(564,241) (386,565) (974,804) (1,466,978)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Decrease in bank loans (972,165) (3,994) (976,441) (19,843)
Issuance of common stock 20,286 751,079 321,717 1,062,466
Change in long-term liabilities 1,607,871 (50,049) 1,621,725 32,072
Change in payable to related party -- (49,834) -- (141,532)
Capital stock to be issued 124,999 -- 124,999 --
Purchase of treasury stock (23,630) -- (23,630) --
------------ ------------ ------------ ------------
757,361 647,202 1,068,370 933,163
------------ ------------ ------------ ------------
CHANGE IN CASH AND CASH
EQUIVALENTS 147,057 127,145 (32,160) (1,816,495)
CASH AND CASH EQUIVALENTS,
beginning of period 247,443 333,467 426,660 2,277,107
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 394,500 $ 460,612 $ 394,500 $ 460,612
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
Interest paid $ 66,990 $ 64,324 $ 183,445 $ 196,001
============ ============ ============ ============
Income taxes paid $ -- $ -- $ -- $ --
============ ============ ============ ============
See accompanying notes to financial statements.
PAGE VII
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These condensed consolidated financial statements have been prepared in
accordance with generally accepted in Canada, which except as described
in Note 11, conform, in all material respects, with the accounting
principles generally accepted in the United States.
(a) GENERAL
In the opinion of the company, the accompanying unaudited
financial statements contain all adjustments (consisting of
only normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the consolidated
financial position as at September 30, 2001 and consolidated
results of operations for the three and nine month periods
ended September 30, 2001 and 2000 and consolidated statements
of cash flows for the three and nine months ended September
30, 2001 and 2000.
While the company believes that the disclosures presented are
adequate to make the information not misleading, it is
suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated
financial statements and the notes included in the company's
latest annual report on Form 20-F.
(b) 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.
2. OIL AND GAS PROPERTIES
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------------------------------- -------
ACCUMULATED
COST DEPLETION NET NET
---------- ---------- ---------- ----------
Proved properties $7,726,425 $1,585,226 $6,141,199 $5,922,999
Wells and related equipment 733,436 136,878 596,558 689,701
---------- ---------- ---------- ----------
$8,459,861 $1,722,104 $6,737,757 $6,612,700
========== ========== ========== ==========
PAGE VIII
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
2. OIL AND GAS PROPERTIES (Continued)
SEPTEMBER 30, DECEMBER 31,
2001 2000
----- -----
Brought forward $ 6,737,757 $ 6,612,700
----------- -----------
Equity in oil and gas partnership
Equity, beginning of period, as previously reported 2,361,532 132,569
Prior period adjustment (1,077,763) --
----------- -----------
Equity, beginning of period, as restated 1,283,769 132,569
Additional investments 118,660 1,143,135
Withdrawals -- (98,191)
Share in partnership's income -- 106,256
----------- -----------
Equity, end of period 1,402,429 1,283,769
----------- -----------
TOTAL OIL AND GAS PROPERTIES $ 8,140,186 $ 7,896,469
=========== ===========
3. CAPITAL ASSETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------------------------------- ----------------
ACCUMULATED
COST AMORTIZATION NET NET
Land $ 12,908 $ -- $ 12,908 $ 12,908
Buildings 6,239 936 5,303 5,303
Machinery and equipment 338,787 42,828 295,959 111,013
Office furniture, fixtures and equipment 101,354 71,854 29,500 18,184
Vehicles 251,463 137,387 114,076 132,576
----------- ----------- ----------- -----------
$ 710,751 $ 253,005 $ 457,746 $ 279,984
=========== =========== =========== ===========
4. LOANS TO RELATED PARTIES
The loans to officers of the company are collateralized by the
officers' ownership interest in drilling partnerships with DPI. These
loans bear interest at 6% per annum and are payable monthly from
production revenues for a period of five to ten years with a balloon
payment at maturity date.
PAGE IX
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
5. BANK LOANS
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
REVOLVING LOAN FACILITY bore interest at 10% per annum, was
secured by a first mortgage on producing gas interests
and was guaranteed by an unrelated third party $ -- $ 972,165
NOTE PAYABLE bearing interest at 7.50% per annum and is
collateralized by a certificate of deposit amounting to $135,367 134,162 134,162
NOTE PAYABLE bearing interest at prime plus 2% per annum and is
collateralized by 200,000 shares of stock owned by a director of
the company
21,195 25,471
------------- -------------
$ 155,357 $ 1,131,798
============= =============
6. 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 and has not been
discounted.
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
NOTE PAYABLE as outlined above $ 472,818 $ 488,818
10% CONVERTIBLE NOTES mature July 31, 2004, collateralized by
DPI's mining properties. Interest is payable semi-annually on
February 1 and 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, 2000 (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
850,000 850,000
------------- -------------
Carried forward 1,322,818 1,338,818
============= =============
PAGE X
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
6. LONG-TERM DEBT (Continued)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -------------
Brought forward ................. $ 1,322,818 $ 1,338,818
REVOLVING LOAN FACILITY that provided a $10 million line of
credit, payable interest only at prime plus 1.25% per annum, is
secured by a first mortgage on producing gas interests and is
guaranteed by an unrelated third party. The principal balance is
payable on July 30, 2004 1,656,734 --
ENVIRONMENTAL ENERGY INC., unsecured and non-interest bearing
advance for a future project -- 150,000
VARIOUS NOTES PAYABLE, bearing interest ranging from 6.9% to 11%
per annum, payable monthly in varying amounts up to 2005,
collateralized by the equipment and vehicles acquired 316,902 335,911
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. Principal is due currently 64,779 64,779
UNSECURED LOAN PAYABLE TO TRIO GROWTH, bearing interest at 10%
per annum, principal and interest due in October 29, 2001 24,650 24,650
------------- -------------
3,385,883 1,914,158
Less: Current portion 115,605 155,136
------------- -------------
3,270,278 1,759,022
============= =============
Principal repayments for the next five years are as follows:
2002 $ 115,605
2003 399,013
2004 2,129,047
2005 199,451
2006 542,767
-------------
$ 3,385,883
=============
PAGE XI
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
7. LOAN PAYABLE
This loan payable to a limited liability corporation being controlled
by a director and two officers of the company bears interest at 9% per
annum. The principal and the accrued interest are due on July 18, 2001.
8. CAPITAL STOCK
(a) PREFERRED SHARES ISSUED
SHARES AMOUNT
------ ------
# $
Balance, December 31, 2000 1,100,672 620,844
Converted to common shares (1,100,672) (620,844)
Balance, September 30, 2001 -- --
========== ==========
(b) COMMON SHARES ISSUED
SHARES AMOUNT
------ ------
# $
Balance, December 31, 2000 3,442,852 23,113,991
Issued for conversion of preferred shares 1,229,502 620,844
Issued to employees as incentive bonus 157,000 235,500
Issued for settlement of accounts payable 40,066 60,099
Issued for exercise of stock option and warrants 25,977 26,118
---------- ----------
Balance, September 30, 2001 4,895,397 24,056,552
========== ==========
A. OPTIONS
ISSUED EXERCISABLE PRICE EXPIRY
------ ----------- ----- ------
Balance, December 31, 2000 2,587,333 2,471,777 1.00 - 9.50
Exercised (26,373) 1.00
Expired (54,000) 5.00
------------
Balance, September 30, 2001 2,506,960 2,462,515 1.00 - 9.50 (i)
============ ============
(i) These options have expiry dates ranging from 2002 through
2005.
PAGE XII
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
8. CAPITAL STOCK (Continued)
B. WARRANTS
ISSUED PRICE EXPIRY
------ ----- ------
Balance, December 31, 2000 2,079,770 0.625 - 4.50
Issued 692,848 1.75 - 4.50
Exercised (188) 1.75
Expired (23,800) 2.50
---------
Balance, September 30, 2001 2,748,630 0.625 - 4.50 (i)
==========
(i) These warrants have expiry dates ranging from 2002
through 2006.
9. LOSS PER SHARE
(a) BASIC
The weighted average number of shares outstanding amounted to
4,218,704 and 3,742,724 for the three and nine months ended
September 30, 2001, respectively, and 3,001,053 and 2,222,172,
for the three and nine months ended September 30, 2000,
respectively.
(b) DILUTED EARNINGS PER SHARE
The Company adopted the recommendations of CICA Handbook
Section 3500, Earnings per Share (EPS), effective January 1,
2001. The revised section requires the presentation of both
basic and diluted EPS on the face of the income statement
regardless of the materiality of the difference between them
and requires the use of the treasury stock method to compute
the dilutive effect of options as opposed to the former
inputted earnings approach.
The weighted average number of shares for diluted earnings per
share amounted to 10,481,124 and 9,117,084 for the three
months ended September 30, 2001 and 2000, respectively and
10,005,144 and 8,338,203 for the nine months ended September
30, 2001 and 2000, respectively.
10. 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) 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.
PAGE XIII
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
10. RELATED PARTY TRANSACTIONS (Continued)
(b) Lease of Gas Compressors
A limited company owned by a director and two officers of the
company leased two natural gas compressors for $10,800 during
2000 to DPI.
(c) DPI invests in various company sponsored partnerships.
Typically, DPI participates in the partnerships by retaining
up to 33% undivided working interest. The portion of profit on
drilling contracts attributable to the company's ownership
interest has been eliminated (Note 14).
11. SEGMENTED INFORMATION
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
$ $ $ $
REVENUE (NET)
Oil and gas 1,573,110 1,445,467 5,260,524 5,138,722
Mining -- -- -- --
Corporate -- -- -- --
----------- ----------- ----------- -----------
1,573,110 1,445,467 5,260,524 5,138,722
=========== =========== =========== ===========
INTEREST, AMORTIZATION, DEPLETION
AND DEPRECIATION
Oil and gas 224,549 141,702 631,368 459,316
Mining -- -- -- --
Corporate 30,377 50,776 175,417 182,539
----------- ----------- ----------- -----------
254,926 192,478 806,785 641,855
=========== =========== =========== ===========
INCOME (LOSS) BEFORE INCOME TAXES
Oil and gas 129,475 (10,200) 701,453 731,954
Mining -- -- -- --
Corporate (337,104) (458,780) (892,195) (916,443)
----------- ----------- ----------- -----------
(207,629) (468,980) (190,742) (184,489)
=========== =========== =========== ===========
IDENTIFIABLE ASSETS
Oil and gas 8,140,186 6,942,928 8,140,186 6,942,928
Mining -- -- -- --
Corporate 2,763,412 1,952,937 2,763,412 1,952,937
----------- ----------- ----------- -----------
10,903,598 8,895,865 10,903,598 8,895,865
=========== =========== =========== ===========
PAGE XIV
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
11. SEGMENTED INFORMATION (Continued)
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2001 2000 2001 2000
--------- --------- --------- ---------
$ $ $ $
CAPITAL EXPENDITURES
Oil and Gas 292,539 388,994 436,930 1,297,103
Mining -- -- -- --
Corporate 133,500 9,771 216,762 187,917
--------- --------- --------- ---------
426,039 398,765 653,692 1,485,020
========= ========= ========= =========
12. UNITED STATES ACCOUNTING PRINCIPLES
(a) The company follows accounting principles generally accepted
in Canada. Differences between generally accepted accounting
principles in Canada and those applicable in the United States
are summarized below.
The company capitalized the cost of mining properties acquired
and other related exploration expenditures. For U.S. GAAP
purposes, these properties are considered exploration stage
properties and, therefore, all exploration costs are expensed
as incurred.
The company recorded an impairment loss of $6,782,229 in 1999
and wrote off the remaining balance of $4,450,000 in 2000
under Canadian GAAP. For U.S GAAP purposes, these were
reversed and were accounted for as adjustment to the 1998
opening deficit. The quarterly financial statements have been
restated to reflect these adjustments.
The following table reconciles the net income (loss), deficit
and total assets as reported in accordance with Canadian GAAP
to the net income (loss), deficit and total assets that would
have been reported had the financial statements been prepared
in accordance with U.S. GAAP.
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2001 2000 2001 2000
-------- -------- -------- --------
$ $ $ $
NET INCOME (LOSS) SHOWN IN THE FINANCIAL
STATEMENTS
As previously reported under Canadian
GAAP (131,379) (392,730) 53,258 135,761
Correction of errors (76,250) (76,250) (244,000) (320,250)
-------- -------- -------- --------
As restated according to U.S. GAAP (207,629) (468,980) (190,742) (184,489)
======== ======== ======== ========
PAGE XV
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
12. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
FOR THE THREE MONTH PERIOD FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2001 2000 2001 2000
----------- ----------- ----------- -----------
$ $ $ $
NET LOSS PER SHARE
Basic and fully diluted (0.05) (0.16) (0.05) (0.08)
=========== =========== =========== ===========
DEFICIT, BEGINNING OF PERIOD
As previously reported under
Canadian GAAP (15,492,633) (15,197,418) (15,677,270) (15,725,909)
Expensing of previously capitalized
exploration costs (Note 13) (4,450,000) (4,450,000) (4,450,000) (4,450,000)
Correction of errors (Note 14) (467,961) (244,000) (300,211) --
----------- ----------- ----------- -----------
As restated according to U.S.
GAAP (20,410,594) (19,891,418) (20,427,481) (20,175,909)
Net loss for the period according
to U.S. GAAP (207,629) (468,980) (190,742) (184,489)
----------- ----------- ----------- -----------
DEFICIT, END OF PERIOD (20,618,223) (20,360,398) (20,618,223) (20,360,398)
=========== =========== =========== ===========
SEPTEMBER 30
2001 2000
------------ ------------
TOTAL ASSETS
As previously reported under Canadian GAAP $ 16,770,724 $ 13,666,115
Expensing of previously capitalized exploration costs (Note 13) (4,450,000) (4,450,000)
Correction of errors (Note 14) (1,417,126) (320,200)
------------ ------------
As restated according to U.S. GAAP $ 10,903,598 $ 8,895,915
============ ============
(b) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES
REQUIRED UNDER SFAS 123
Entities electing to remain with the accounting in APB 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.
PAGE XVI
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
12. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(b) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES
REQUIRED UNDER SFAS 123 (Continued)
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 APB 25 and related interpretations in
accounting for its stock option plan. No compensation expense
has been charged to the consolidated statement of operations
for the plan for the three and six months ended September 30,
2001 and 2000. 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 SFAS 123, the company's net
income (loss) and income (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.
(c) EARNINGS PER SHARE
Earnings per share calculations under U.S. GAAP reflecting the
Statement of Financial Accounting Standards No. 128 (SFAS
128), for the three and nine months ended September 30, 2001
and 2000 would not differ materially from the calculations
required by the pronouncements of CICA handbook section 3500
which was adopted at the commencement of fiscal 2001.
(d) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income" establishes standards for the
reporting and display of comprehensive income and its
components and requires restatement of all previously reported
information for comparative purposes. For the three and six
months ended September 30, 2001 and 2000, the company's
comprehensive income was the same as net earnings.
(e) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 (SFAS 133)
The company has reviewed SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 133 becomes
effective for all fiscal quarters of fiscal years beginning
after September 18, 2000.
PAGE XVII
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
12. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(f) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 (SFAS 133)
(Continued)
The company has adopted the provisions of this statement as of
January 1, 2001. The adoption of SFAS 133 does not have any
material impact on the company's results of operations,
financial position or cash flows.
(g) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 141 (SFAS 141)
AND NO. 142 (SFAS 142)
On September 29, 2001, the FASB approved its proposed
Statements of Financial Accounting Standards No. 141 (SFAS
141), Business Combinations and SFAS 142, Goodwill and Other
Intangible Assets. The provisions of SFAS 141 and SFAS 142 are
effective for fiscal years beginning on or after January 1,
2002 with early adoption permitted under certain
circumstances. In all cases, the standard must be adopted at
the beginning of a fiscal year. Retroactive adoption is not
permitted.
SFAS 141 requires all business combinations to be accounted
for under the purchase method and requires the separate
recognition of intangible assets apart from goodwill if
criteria are met. SFAS 142 prohibits the amortization of
goodwill and indefinite life intangible assets. Instead,
goodwill and intangible assets are to be written down whenever
carrying value exceeds fair value. Intangible assets that do
not have an indefinite life must continue to be amortized.
13. PRIOR PERIOD ADJUSTMENT
The company adopted the provisions of Accounting Guideline AcG-11 in
assessing the recoverability of the carrying amount of the mining
property and related expenditures that were previously capitalized.
Absence of a projection as required by AcG-11 and the lack of an
operating track record of the company in this industry, the company
wrote off the remaining cost of mining property in 2000. In accordance
with the AcG-11 guidelines, the write-off has been accounted for as a
change in accounting policy and applied retroactively without
restatement of the financial statements of prior periods. Accordingly,
the 2000 opening balance of deficit has been increased by $4,450,000 in
which the requirements of AcG-11 are first applied.
14. CORRECTION OF ERRORS
Subsequent to the 2000 fiscal year-end, a correction was made in the
accounting for DPI's oil and gas partnerships ("partnerships") and
turnkey drilling revenues to eliminate the turnkey drilling profit
applicable to their proportionate partnership interest. DPI
participates in the partnerships by retaining up to 33% undivided
working interest. Also, DPI enters into turnkey drilling agreements
with the partnerships for the total of all drilling and completion
costs. During 2000, DPI recorded their proportionate partnership
interests at their percentage of the total turnkey price charged to the
partnership, this amounted to $1,208,416 which included $335,500 of
turnkey drilling profit on completed wells and $872,916 of customer
drilling deposits on wells not completed.
PAGE XVIII
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
14. CORRECTION OF ERRORS (Continued)
The financial statements have been restated to correct these errors.
The restatement of income for 2000 is as follows:
SEPTEMBER 30, 2000
---------------------- YEAR ENDED
THREE NINE DECEMBER
MONTHS MONTHS 31, 2000
--------- --------- ---------
Net income (loss) per previous report $(392,730) $ 135,761 $ 48,639
Decrease in turnkey drilling revenue (76,250) (320,250) (335,500)
Decrease in cost depletion -- -- 18,754
Decrease in income taxes -- -- 16,535
--------- --------- ---------
Net loss, as restated $(468,980) $(184,489) $(251,572)
========= ========= =========
The restatement of the 2000 balance sheet resulted in the following
changes:
SEPTEMBER 30, DECEMBER 31,
2000 2000
---- ----
Decrease in oil and gas properties $ (320,250) $(1,208,416)
Decrease in accumulated depletion -- 18,754
Decrease in customers' drilling deposits (320,250) 872,916
During the period, DPI recorded their proportionate partnership
interest at their percentage of the total turnkey price charged
to the partnership, which included $244,000 of turnkey profit on
completed wells.
The September 30, 2001 financial statements have been restated to
correct this error. The restatement of income for the three and
nine months ended September 30, 2001 is a follows:
SEPTEMBER 30, 2001
------------------
THREE NINE
MONTHS MONTHS
--------- ---------
Net income (loss) per previous report $(131,379) $ 53,258
Decrease in turnkey drilling revenue (76,250) (244,000)
--------- ---------
Net loss, as restated $(207,629) $(190,742)
========= =========
PAGE XIX
DAUGHERTY RESOURCES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2001
14. CORRECTION OF ERRORS (Continued)
The restatement of the September 30, 2001 balance sheet to reflect the
prior period and the current period's error resulted in the following
changes.
Decrease in oil and gas properties $(1,452,416)
Decrease in accumulated depletion 18,754
Decrease in customers' drilling deposit 872,916
15. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
with the current period's presentation.