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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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 MARCH 31, 2002, WAS 5,346,600.
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
XVIII of this Report, and is incorporated herein by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF GENERAL OPERATIONS.
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 three months ending March 31, 2002, Daugherty Resources drilled
seventeen (17) natural gas wells (4.45 net wells), all of which were capable of
producing natural gas. By comparison, for the same period of 2001, Daugherty
Resources drilled eleven (11) natural gas wells (2.8175 net wells). Drilling
operations for the first three months of 2002 were primarily related to three
year-end private placement drilling programs on Daugherty Resources' farm out
acreage acquired from Equitable Resources Energy Corporation and two joint
venture drilling partnerships.
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, well drilling and completions for partnerships sponsored by Daugherty
Petroleum, and gas distributed by Sentra Corporation, a wholly owned subsidiary
of Daugherty Petroleum.
Daugherty Resources continues to review additional opportunities for
acquisitions of oil and gas properties. Previous acquisitions have been
completed using Daugherty Resources stock, in whole or part, to pay for the
acquisitions. Generally, acquisitions include interests in the wells and the
right to operate the wells. Daugherty
2
Resources generally participates in less than a majority interest in those wells
drilled by programs or joint ventures sponsored by Daugherty Petroleum.
During the fourth quarter of 2001 Daugherty Petroleum finalized three
(3) private placement drilling programs and two (2) joint venture partnerships
totaling $5.8 million that allowed Daugherty Petroleum to drill twenty-three
(23) natural gas wells during the last quarter of 2001 and the first quarter of
2002. Daugherty Petroleum participated for a 26% interest in the partnership
drilling programs and a 50% interest in a one (1) well joint venture partnership
and a 20% interest in another one (1) well joint venture partnership.
Daugherty Resources 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.
Daugherty Resources plans to drill 30 additional wells during the last
three quarters of 2002 and first quarter of 2003 and retain interests ranging
from 25% to 33% of each well it drills. This estimate is based upon two planned
private placement drilling programs covering the drilling and completion of up
to 30 wells. Discussion with potential joint venture partners could result in
additional wells being drilled.
Working capital as of March 31, 2002 was a negative $1,253,976
compared to December 31, 2001, when working capital was negative $2,003,165.
Current assets as of March 31, 2002 were $1,345,927 compared to
$2,900,470 as of December 31, 2001. During the three-month period ending March
31, 2002, as compared to December 31 2001, the changes in the composition of
Daugherty Resources' current assets were: cash balances decreased $1,486,640
from $2,244,420 to $757,780; accounts receivable balances decreased $69,538 from
$423,359 to $353,821. Other current assets such as pre-paids, and notes
receivable increased $1,635 from $232,691 to $234,326. Overall, current assets
decreased by $1,554,543 to $1,345,927 from $2,900,470.
Current liabilities as of March 31, 2001 were $2,599,903 compared to
$4,903,635 as of December 31, 2001. During the three- month period ending March
31, 2001, as compared to December 31, 2001, the changes in the composition of
current liabilities were: short-term loans and current portion of long-term debt
decreased $320 from $379,847 to $379,527 customer drilling deposits decreased
$2,703,000 from $2,854,700 to $151,700, accounts payable and accrued liabilities
increased $399,588 from $1,669,088 to $2,068,676. Overall, current liabilities
decreased by $2,307,732.
Management does not believe that its working capital deficit will have
a material or substantial negative impact on Daugherty Resources' financial
position, result of operations or liquidity in future periods due to the
following:
- The drilling activity in 2001 and first quarter 2002 will
result in substantially more oil and gas production to our
Company. In the last quarter 2001 and the first quarter 2002
Daugherty Petroleum drilled a total of twenty-three (23)
successful wells. At the end of the year 2001 gas prices had
decreased, however, as of March 29, 2002, prices have
rebounded to reflect higher market demand and these increased
prices will positively affect oil and gas revenue.
- Procurement of additional reserves by drilling and
acquisitions is expected to enhance the ability of Daugherty
Resources to secure long term financing, increased lines of
credit, and equity participation with industry partners.
However, significant decreases in the price of natural gas may
result in a decrease in drilling activity, resulting in fewer
reserves being acquired and may lessen the ability of
Daugherty Resources to attract and secure financing, lines of
credit or equity partners.
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 obtain additional capital on
attractive terms is also substantially
3
dependent upon oil and gas prices. Prices for oil and natural 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.
A significant amount of revenue is received from related party
transactions whereby Daugherty Petroleum sponsors and conducts development
drilling programs for its own account and for others. Generally, most of the
revenue from contract drilling activity is received from drilling partnerships
formed and managed by Daugherty Petroleum as managing general partner.
Typically, the investor partners own a 75% interest in the partnerships and
Daugherty Petroleum retains a 25% interest for its equity contribution to each
drilling program. Daugherty Petroleum may also enter into joint venture
arrangements with industry partners or a small group of investor partners and
retain up to a 50% working interest in any wells drilled. As a result, Daugherty
Petroleum is subject to substantial cash commitments at the closing of the
partnership or joint ventures.
Upon the closing of a drilling partnership or joint venture each
program will execute a Turnkey Drilling Contract and Operating Agreement with
Daugherty Petroleum to drill and operate the partnership wells at costs and fees
comparable to those of other independent oil and gas companies drilling and
operating similar wells in the same geographical area. Most of the drilling and
development funds are received by Daugherty Petroleum under the Turnkey Drilling
Contract upon partnership funding but because the wells produce for a number of
years Daugherty Petroleum will continue in a fiduciary relationship as the
managing or co-managing general partner and as operator of the wells.
In addition, Daugherty Petroleum also receives production revenue from
its equity position in each well together with revenue associated with the
transmission and compression of the natural gas. A portion the natural gas
production is handled by Knox Compression, a limited liability company owned by
the management of Daugherty Petroleum.
Although Daugherty Petroleum believes that all transactions involving
or related to the drilling partnerships, including the costs, expenses and fees
charged by Daugherty Petroleum, are comparable with the transactions of
companies similarly situated and represent the conditions of competitive free
market dealings the transactions involve related parties and cannot be presumed
to be carried out on an arm's length basis.
To a large extent, the level of the drilling and development activity
of Daugherty Petroleum is dependent upon the amount of subscriptions in its
drilling partnerships and the level of participation with other joint venture
partners. Daugherty Petroleum benefits through such arrangements by its receipt
of revenue from the contract drilling activities and through its share in the
revenues produced by the developed properties. No assurance can be given that
Daugherty Resources will continue to have access to funds generated through
these financing vehicles.
Daugherty Resources believes its cash flow resulting in operating
revenues will contribute significantly to its short-term financial commitments
and operating costs, and has continued to refine its long-term strategy in 2001
to meet the financial obligations of Daugherty Resources. This strategy
includes:
- INCREASING PARTNERSHIP AND JOINT VENTURE DRILLING. Although
natural gas prices decreased significantly in 2001 during the
first quarter of 2002 there has been a continued increase in
oil and gas prices and this, together with the public
awareness of possible natural gas shortages, has 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 surplus of natural
gas could result in a decrease in the interest and investment
in drilling programs 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.
4
- ACQUISITION OF REVENUE PRODUCING PROPERTIES. Daugherty
Resources continues to review existing oil and gas properties
for acquisition in its areas of interest.
- 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 reports from two independent consultants 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 has 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.
RESULTS OF OPERATIONS
For the three-month period ending March 31, 2002, Daugherty Resources'
gross revenues increased $744,578 to $3,962,525 from $3,217,947 for the same
period in 2001. Daugherty Resources experienced net income before taxes from
continuous operations of $963,192 for the three-month period ending March 31,
2002 compared to net income of $985,916 for the same period in 2001.
Daugherty Resources' gross revenues were derived from drilling contract
revenues of $3,484,000 (87.92%), natural gas and oil operations and production
revenues of $194,148 (5.57%), and natural gas distribution revenues of $284,377
(7.10%).
The increase in gross revenues of $744,578 was primarily attributable
to an increase in contract drilling revenue and an increase in gas transmission
and compression revenue during the first quarter of 2002. Revenues from oil and
gas production activities decreased $62,013 to $194,148 for the three-month
period ending March 31, 2002 from $256,161 for the same period in 2001. The
decrease in revenues from oil and gas production activities was primarily
attributable to lower oil and gas prices in the first quarter of 2002.
Net gas and oil production for the first quarter of 2002 was 80,759
Mcfe (Mcf equivalents), compared to 73,547 Mcfe for the first quarter of 2001.
The average price of gas and oil for the first quarter of 2002 was $2.52/Mcf and
$19.50/barrel, respectively, compared to $5.49/Mcf and $25.66/barrel for the
first quarter of 2001.
During the three-month period ended March 31, 2002, total direct costs
increased by $739,623 to $2,257,792 compared to $1,518,169 in 2001. Contract
drilling expenses increased $560,916 from $1,345,204 for the quarter ending
March 31, 2001 compared to $1,906,120 for the quarter ending March 31, 2002. Oil
and gas production expenses increased $23,327 from $105,030 for the quarter
ending March 31, 2001 compared to $128,357 for the quarter ending March 31,
2002. Gas transmission and compression costs increased $155,380 from $67,935 for
the quarter ending March 31,2001, compared to $223,315 for the quarter ended
March 31, 2002. The increase in overall direct costs was primarily due to the
drilling and related costs for seventeen (17) natural gas wells in the first
quarter of 2001 compared to eleven (11) in the same period of 2001 and
additional transmission and marketing expenses related to Sentra Corporation.
For the period ending March 31, 2002, Sentra Corporation, Daugherty
Resources' natural gas utility subsidiary, had sales of $65,289 compared with
sales of $42,916 for the first three months of 2001. In the first quarter of
2002, Sentra installed approximately 1,675 feet of transmission line and 1,285
feet of distribution line. As of March 31, 2002, Sentra has 134 customers, 41 of
which are commercial and agri-business accounts. In addition, Sentra has 53
applications from customers requesting service. 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 an agreement with Clay Gas Utility
District of Celina, Tennessee to manage its business, which currently consists
of 157 customers, including 28 industrial, commercial and agri-
5
business connections. Sentra also reads Clay Gas' meters, issue its bills and
collects its receivables. On February 1, 2001, Daugherty Petroleum entered into
agreements with Sentra and Clay Gas Utility District to supply natural gas to
the two utilities. 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. The two
contracts have subsequently been extended and are scheduled to expire July 31,
2003.
Daugherty Resources believes there are several factors that will
increase revenues in the year 2002, including increased oil and gas production
from its interests in the wells drilled in 2001 and the first quarter of 2002,
and the resulting expansion of its gas gathering system to allow more gas
production to be transported to market. In addition, increased natural gas
prices should create more interest in Daugherty Resources drilling programs,
which would increase turnkey drilling revenues.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 5. OTHER INFORMATION.
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED WITH THIS REPORT.
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PAGE
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(1) Balance Sheet for the Period Ended March 31, 2002.........II-III
Income Statement for the Period Ended March 31, 2002........... V
Segmented Information.........................................XIV
Computation of Per Share Earnings..............................IV
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.
6
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 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
7
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.
No schedules are required, as all information required has
been presented in the unaudited financial statements.
FORWARD-LOOKING STATEMENTS
This Form 10-KSB 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.
8
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: May 15,2002.
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 May 15, 2002
William S. Daugherty
/s/ James K. Klyman *
- --------------------------- Director of the Registrant May 15, 2002
James K. Klyman
/s/ Charles L. Cotterell
- --------------------------- Director of the Registrant May 15, 2002
Charles L. Cotterell
*By /s/ William S. Daugherty
---------------------------
William S. Daugherty
Attorney-in-Fact
9
DAUGHERTY RESOURCES INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
MARCH 31, 2002
DAUGHERTY RESOURCES INC.
MARCH 31, 2002
CONTENTS
PAGE
REVIEW ENGAGEMENT REPORT I
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet II-III
Statement of Operations and Deficit IV
Statement of Cash Flows V
Notes to Financial Statements VI-XVIII
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 March 31, 2002 and the condensed consolidated statements of
operations and deficit and cash flows for the three months ended. 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, 2001 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, 2002, 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, 2001, is fairly stated in all material respects in relation to the
balance sheet from which it has been derived.
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
May 8, 2002
PAGE II
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
MARCH 31, 2002
ASSETS
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
CURRENT
Cash and cash equivalents $ 757,780 $ 2,244,420
Accounts receivable 353,821 423,359
Prepaid expense and other asset 203,650 202,015
Loans to related parties (Note 4) 30,676 30,676
----------- -----------
1,345,927 2,900,470
BONDS AND DEPOSITS 41,000 41,000
OIL AND GAS PROPERTIES (Note 2) 9,103,705 8,834,087
PROPERTY AND EQUIPMENT (Note 3) 840,753 820,769
LOANS TO RELATED PARTIES (Note 4) 731,348 533,051
INVESTMENT (Note 5) 69,347 109,254
DEFERRED FINANCING COSTS 64,186 71,066
GOODWILL 313,177 313,177
----------- -----------
$12,509,443 $13,622,874
=========== ===========
See accompanying notes to condensed 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)
MARCH 31, 2002
LIABILITIES
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
CURRENT
Bank loans (Note 5) 141,247 146,067
Accounts payable 714,573 875,953
Accrued liabilities 1,354,103 793,135
Customers' drilling deposits 151,700 2,854,700
Long-term debt (Note 6) 238,280 233,780
------------ ------------
2,599,903 4,903,635
LONG-TERM DEBT (Note 6) 3,418,101 3,455,642
------------ ------------
6,018,004 8,359,277
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 7)
AUTHORIZED
5,000,000 Preferred shares, non-voting, non-cumulative, convertible
100,000,000 Common shares
ISSUED
562,546 Preferred shares (2001 - 563,249) 1,801,245 1,802,542
5,346,600 Common shares (2001 - 4,959,112) 24,450,145 24,184,198
21,000 Common shares held in treasury, at cost (23,630) (23,630)
Capital stock to be issued 55,226 55,226
------------ ------------
26,282,986 26,018,336
DEFICIT (19,791,547) (20,754,739)
------------ ------------
6,491,439 5,263,597
------------ ------------
$ 12,509,443 $ 13,622,874
============ ============
See accompanying notes to condensed consolidated financial statements.
PAGE IV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(U.S. FUNDS)
FOR THE THREE MONTH
PERIOD ENDED MARCH 31
2002 2001
------------ ------------
REVENUE
Contract drilling (Not less than 95% attributable to related
party transactions) 3,484,000 2,825,499
Oil and gas production 194,148 256,161
Gas transmission and compression 284,377 136,287
------------ ------------
3,962,525 3,217,947
------------ ------------
DIRECT EXPENSES
Contract drilling 1,906,120 1,345,204
Oil and gas production 128,357 105,030
Gas transmission and compression 223,315 67,935
------------ ------------
2,257,792 1,518,169
------------ ------------
GROSS PROFIT 1,704,733 1,699,778
------------ ------------
EXPENSES
Selling, general and administrative 585,025 502,332
Depreciation, depletion and amortization 139,380 218,618
Interest 58,539 52,442
------------ ------------
782,944 773,392
------------ ------------
INCOME BEFORE THE FOLLOWING 921,789 926,386
Equity share in earnings from undivided interest in
oil and gas properties 41,403 59,530
------------ ------------
NET INCOME FOR THE PERIOD 963,192 985,916
DEFICIT, beginning of period (20,754,739) (20,427,481)
------------ ------------
DEFICIT, end of period $(19,791,547) $(19,441,565)
============ ============
NET INCOME PER SHARE (Note 8)
Basic $ 0.19 $ 0.29
============ ============
Fully diluted $ 0.18 $ 0.27
============ ============
See accompanying notes to condensed consolidated financial statements
PAGE V
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. FUNDS)
FOR THE THREE MONTH
PERIOD ENDED MARCH 31
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income for the period $ 963,192 $ 985,916
Equity share in earnings from undivided interest in oil
and gas properties (41,403) (59,530)
Amortization and depletion 139,380 218,618
Change in non-cash components of working capital
(Increase) decrease in prepaid expenses and other asset (1,635) 1,471
Decrease in accounts receivable 69,538 40,889
Increase (decrease) in accounts payable (161,380) 193,519
Increase in accrued liabilities 560,968 98,269
Decrease in customers' drilling deposits (2,703,000) (1,185,165)
----------- -----------
(1,174,340) 293,987
----------- -----------
FINANCING ACTIVITIES
Decrease in long-term debt (33,041) (61,780)
Issue of capital stock 264,650 1,694
Decrease in bank loans (4,820) (4,276)
----------- -----------
226,789 (64,362)
----------- -----------
INVESTING ACTIVITIES
Increase (decrease) in property and equipment (42,484) 2,954
Increase in loans to related parties (198,297) (222,535)
Additions to oil and gas properties, net (338,215) (80,930)
Decrease in investment 39,907 -
----------- -----------
(539,089) (300,511)
----------- -----------
CHANGE IN CASH AND CASH EQUIVALENTS (1,486,640) (70,886)
CASH AND CASH EQUIVALENTS, beginning of period 2,244,420 426,660
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 757,780 $ 355,774
=========== ===========
SUPPLEMENTAL DISCLOSURE
Interest paid $ 91,540 $ 74,889
=========== ===========
Income taxes paid $ - $ -
=========== ===========
See accompanying notes to condensed consolidated financial statements.
PAGE VI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These condensed consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles,
which 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
condensed consolidated 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 March 31,
2002 and consolidated results of operations and deficit and
cash flows for the three months then ended.
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 condensed 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 in consolidation.
(c) 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 are particularly significant as they relate
to the determination of the reserves of oil and gas
properties. In connection with the determination of these
carrying amounts, management must make estimates relating to
future production, future product prices and operating
expenses.
PAGE VII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
2. OIL AND GAS PROPERTIES
MARCH 31, DECEMBER 31
2002 2001
--------------------------------------------- ----
ACCUMULATED
COST AMORTIZATION NET NET
----------- ----------- ----------- -----------
Proved properties $ 7,573,145 $ 1,458,606 $ 6,114,539 $ 6,146,723
Wells and related equipment 683,252 124,955 558,297 563,695
----------- ----------- ----------- -----------
8,256,397 1,583,561 6,672,836 6,710,418
----------- ----------- ----------- -----------
EQUITY IN OIL AND GAS PARTNERSHIP
Equity, beginning of period 2,123,669 1,283,769
Additional investment 307,200 933,002
Withdrawals (41,403) (331,221)
Share in partnership's earnings 41,403 238,119
----------- -----------
Equity, end of period 2,430,869 2,123,669
----------- -----------
TOTAL OIL AND GAS PROPERTIES $ 9,103,705 $ 8,834,087
=========== ===========
3. PROPERTY AND EQUIPMENT
MARCH 31, DECEMBER 31,
2002 2001
-------------------------------------------- ----
ACCUMULATED
COST AMORTIZATION NET NET
---- ------------ --- ---
Land $ 12,908 $ - $ 12,908 $ 12,908
Buildings 6,239 1,456 4,783 4,887
Machinery and equipment 664,102 97,511 566,591 550,499
Office furniture, fixtures and equipment 97,568 80,502 17,066 17,406
Aircraft 125,000 4,167 120,833 122,396
Vehicles 267,463 148,891 118,572 112,673
----------- --------- ---------- ---------
$ 1,173,280 $ 332,527 $ 840,753 $ 820,769
=========== ========= ========== =========
PAGE VIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
4. LOANS TO RELATED PARTIES
The loans to related parties represent loans receivable from officers
of the Company and certain shareholders totalling $353,951 and
$240,560, respectively, bearing 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. The loans are
collateralized by the officers' ownership interest in drilling
partnerships with DPI. The loans receivable from the officers of DPI
totalling $167,513 are non-interest bearing and unsecured.
5. BANK LOANS
MARCH 31, DECEMBER 31
2002 2001
--------- ---------
NOTE PAYABLE bearing interest at 4.71% per annum, maturing January 15,
2003 and is collateralized by a certificate of deposit amounting to
$135,367 $ 134,162 $ 134,162
NOTE PAYABLE bearing interest at prime plus 6% per annum, due on
September 22, 2002 and is collateralized by 200,000 shares of stock
owned by a director of the company 7,085 11,905
--------- ---------
$ 141,247 $ 146,067
========= =========
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.
PAGE IX
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
6. LONG-TERM DEBT (Continued)
The obligation is stated at its remaining face value of $458,818 and
has not been discounted.
MARCH 31, DECEMBER 31
2002 2001
----------- -----------
NOTE PAYABLE as outlined above 458,818 462,818
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
NOTE PAYABLE TO KEYBANK NATIONAL ASSOCIATION. Variable interest at the
bank's prime rate plus 1.25%, which may vary based upon certain
conditions in the credit agreement is payable monthly. The interest
rate at March 31, 2002 was 6%. The total available credit under the
terms of the note is $10,000,000. The maximum amount of funding
available is limited to the Company's borrowing base, which is
redetermined semi-annually. The borrowing base at March 31, 2002 was
$2,050,123. The note is secured by a general lien on all corporate
assets, a first mortgage on oil and gas interests and pipelines, and
assignments of major oil and gas and transportation contracts. 2,006,734 2,006,734
VARIOUS NOTES PAYABLE, bearing interest ranging from 5.0% to 9.5% per
annum, payable monthly in varying amounts up to 2005, collateralized
by the equipment and vehicles acquired 117,913 128,107
NON-INTEREST BEARING NOTE, secured by 25% of production on 15
gas wells payable monthly at $2,796, maturing in 2003 14,322 23,117
----------- -----------
Carried forward......... $ 3,447,787 $ 3,470,776
=========== ===========
PAGE X
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
6. LONG-TERM DEBT (Continued)
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
Brought forward...... $ 3,447,787 $ 3,470,776
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
NOTE PAYABLE TO A CERTAIN INDIVIDUAL, bearing interest at 8% per annum,
payable in 60 instalments of $1,370, including interest,
maturing in February 2005 45,763 47,898
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 up to June 17, 2003, collateralized by
receivables and various vehicles 73,402 81,320
UNSECURED LOAN PAYABLE TO TRIO GROWTH, bearing interest at 10%
per annum, principal and interest due currently 24,650 24,650
----------- -----------
3,656,381 3,689,423
Less: Current portion 238,280 233,781
----------- -----------
$ 3,418,101 $ 3,455,642
=========== ===========
Principal repayments for the next five years are as follows:
2002 $ 238,280
2003 115,536
2004 2,902,165
2005 33,460
2006 24,000
Thereafter 342,940
----------
$3,656,381
==========
PAGE XI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
7. CAPITAL STOCK
(a) PREFERRED SHARES ISSUED
SHARES AMOUNT
---------- --------
# $
Balance, March 31, 2002 1,100,672 620,844
Converted to common shares (1,100,672) (620,844)
Issued for acquisition of oil and gas interest 563,249 1,802,541
---------- ---------
Balance, December 31, 2001 563,249 1,802,541
Converted to common shares (703) (1,296)
---------- ---------
Balance, December 31, 2001 562,546 1,801,245
========== =========
(b) COMMON SHARES ISSUED
SHARES AMOUNT
---------- --------
# $
Balance, December 31, 2000 3,442,852 23,113,991
Issued for cash 62,500 125,000
Issued to employees as incentive bonus 157,000 235,500
Issued for exercise of options and warrants 26,109 26,360
Issued for conversion of preferred shares 1,229,502 620,844
Issued for payment of accounts payable 40,066 60,099
Issued for acquisition of oil and gas 1,083 2,404
--------- ----------
Balance, December 31, 2001 4,959,112 24,184,198
Issued to employees as incentive bonus 174,000 109,620
Issued for payment of accounts payable 212,785 155,031
Issued for conversion of preferred stock 703 1,296
--------- ----------
Balance, March 31, 2002 5,346,600 24,450,145
========= ==========
PAGE XII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
7. CAPITAL STOCK (Continued)
(c) SHARES TO BE ISSUED
24,887 COMMON SHARES to be issued in connection with the purchase of
Ken-tex oil and gas property in 1999 $ 55,226
========
(d) STOCK OPTIONS
WEIGHTED
AVERAGE
ISSUED EXERCISABLE PRICE EXPIRY
------ ----------- ----- ------
$
Balance, December 31, 2000 2,521,726 2,406,170 1.98
========== ===========
2001 - issued for consulting services 65,607 (i)
- exercised (26,373)
- expired (74,000) 0.38-1.25
----------
Balance, December 31, 2001 2,486,960 2,442,515 2.02
========== ===========
- expired (415,000) 1.54
----------
Balance, March 31, 2002 2,071,960 2,071,960 2.12
========== ========= ===========
(i) These options were granted to four individuals for
services performed on behalf of the Company. The
options, which were paid in addition to cash
compensation, were exercisable immediately, expire on
October 27, 2003 and have exercise prices ranging
from $1.50 to $2.13.
(e) WARRANTS
WEIGHTED
AVERAGE
ISSUED PRICE EXPIRY
------ ----- ------
$
Balance, December 31, 2000 2,470,091 2.65
- issued for acquisition of oil and gas
property (Note 2a) 302,528 1.75-4.50 (i)
- issued for consulting services 195,222 1.22-2.20 (ii)
- exercised (320) 1.00-1.75
- expired (23,800) 2.50
----------- ----------
Balance, December 31, 2001 (Carried forward...) 2,943,721 2.61
PAGE XIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
7. CAPITAL STOCK (Continued)
(e) WARRANTS (Continued)
WEIGHTED
AVERAGE
ISSUED PRICE EXPIRY
------ ----- ------
$
Balance, December 31, 2001 (Brought forward...) 2,943,721 2.61
- expired (500,000) .65-2.50
------------ ------------
Balance, March 31, 2002 2,443,721 2.76
============ ============
(i) These warrants expire July 14, 2006
(ii) These warrants expire December 31, 2004
8. INCOME PER SHARE
(a) BASIC
Income per share is calculated using the weighted average
number of shares outstanding during the period. The weighted
average of common shares was 5,071,319 (2001 - 3,446,533).
(b) FULLY DILUTED INCOME PER SHARE
Fully diluted income per share have been calculated on the
same basis with the weighted average number of shares
outstanding during the period totalling 5,384,810 (2001 -
3,760,025) and potential common shares outstanding during the
period.
9. 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 XIV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
9. RELATED PARTY TRANSACTIONS (Continued)
(b) Lease of Gas Compressors
A limited liability company owned by a director and two
officers of the company leased two natural gas compressors for
$1,800 in 2002 (2001 - $3,850) to DPI.
(c) DPI invests in various company sponsored partnerships and
joint ventures by making capital contributions in exchange for
an equity interest typically represented by undivided working
interests up to 33% in the partnerships and up to 50% in a
joint venture. The portion of profit on drilling contracts
attributable to the company's ownership interest has been
eliminated. During period ended March 31, 2002, the company
executed and performed turnkey drilling contracts with company
sponsored partnerships totalling $3,484,000 (2001 -
$2,825,499), respectively, not less than 95% of which is
attributable to related party transactions.
10. SEGMENTED INFORMATION
FOR THE THREE MONTH
OIL AND PERIOD ENDED MARCH 31,
GAS 2002 2001
DEVELOPMENT CORPORATE TOTAL TOTAL
----------- ---------- ------------ -----------
Revenue (net) $ 4,003,928 $ - $ 4,003,928 $ 3,277,477
----------- ---------- ------------ -----------
Direct expenses 2,257,792 - 2,257,792 1,518,169
General corporate expenses - 585,025 585,025 502,332
Interest on long-term debt 41,387 17,152 58,539 52,442
Amortization and depletion 132,500 6,880 139,380 218,618
----------- ---------- ------------ -----------
2,431,679 609,057 3,040,736 2,291,561
Income before income taxes 1,572,249 (609,057) 963,192 985,916
=========== ========== ============ ===========
Identifiable assets 9,482,447 3,026,996 12,509,443 11,195,828
=========== ========== ============ ===========
Capital expenditures 338,215 - 338,215 80,930
=========== ========== ============ ===========
PAGE XV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
11. UNITED STATES ACCOUNTING PRINCIPLES
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.
(a) 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 intrinsic 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. There were no options issued during both quarters.
(b) 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 years ended
December 31, 2001, 2000 and 1999, the company's comprehensive
income was the same as net earnings.
PAGE XVI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
11. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(c) RECENT ACCOUNTING PRONOUNCEMENTS
(i) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133
(SFAS 133)
The company is currently reviewing SFAS 133 and
subsequent release SFAS 137 and SFAS 138, "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 June 18, 2000 and earlier
application is permitted as of the beginning of any
fiscal quarter subsequent to June 15, 2000.
The company intends to adopt the provisions of this
statement as of January 1, 2001. The company does not
anticipate any material impact to its results of
operations, financial position or cash flows upon the
adoption of SFAS No. 133.
(ii) FASB INTERPRETATION NO. 44
In March 2000, the FASB issued Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No.
25. This interpretation provides guidance on the
application of APB Opinion No. 25, including (i) the
definition of an employee, (ii) the criteria for
determining whether a plan qualifies as a
non-compensatory plan, (iii) the accounting
consequence of various modifications to the terms of
a previously fixed stock option or award and (iv) the
accounting for an exchange of stock compensation
awards in a business combination. This interpretation
is effective July 1, 2000 and the effects of applying
the interpretation are recognized on a prospective
basis. The adoption of this interpretation are
recognized on a prospective basis. The adoption of
this interpretation did not have a material impact on
the company's results of operations or financial
condition.
(iii) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 140
(SFAS 140)
In September 2000, the FASB issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125. This statement provides
accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of
liabilities. The statement provides consistent
standards for distinguishing transfers of financial
assets that are sales from transfers that are secured
borrowings. The statement is effective for transfers
and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The
statement is effective for recognition and
reclassification of collateral and for disclosures
relating to securitization transactions and
collateral for fiscal years ended after December 15,
2000. The adoption of SFAS No. 140 did not have a
material impact on the results of its operations or
financial position.
PAGE XVII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
11. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(c) RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
(iv) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 141
(SFAS 141) (Continued)
Statement 141 requires that (1) all business
combinations be accounted for by a single method -
the purchase method, (2) all intangible assets
acquired in a business combination are to be
recognized as assets apart from goodwill if they meet
one of two criteria - the contractual-legal criterion
or the separability criterion and (3) in addition to
the disclosure requirements in Opinion 16, disclosure
of the primary reasons for a business combination and
the allocation of the purchase price paid to the
assets acquired and liabilities assumed by major
balance sheet caption. When the amounts of goodwill
and intangible assets acquired are significant in
relation to the purchase price paid, disclosure of
other information about those assets is required,
such as the amount of goodwill by reportable segment
and the amount of the purchase price assigned to each
major intangible asset class. The provisions of
Statement 141 apply to all business combinations
initiated after June 30, 2001. The Company adopted
the provisions of Statement 1441 as of July 30, 2001
for all of its future acquisitions.
(v) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 142
(SFAS 142)
In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 142, "Goodwill and Other
Intangibles" ("Statement 142"). Under Statement 142,
goodwill and indefinite lived intangible assets are
no longer amortized but are reviewed annually (or
more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be
amortized over their estimated useful lives. The
adoption of this statement as of January 1, 2002 will
not have a material impact on the Company's results
of operations or financial condition.
(vi) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 143
(SFAS 143)
In August 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations," which
addresses financial accounting and reporting for
obligations associated with the retirement of
tangible long-lived assets and related asset
retirement costs. SFAS No. 143 is effective for
financial statements with fiscal years beginning
after June 15, 2002. This Statement is not expected
to have a material impact on the Company's financial
statements.
PAGE XVIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
MARCH 31, 2002
11. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(e) RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
(vii) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 144
(SFAS 144)
In October 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"),
which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets.
Statement 144 is effective for fiscal years beginning
after January 1, 2002. The Company will adopt
Statement 144 as of January 1, 2002 and it does not
expect that the adoption of the Statement will have a
significant impact on the Company's financial
position and results of operations.