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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 JUNE 30, 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 .
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THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF
COMMON STOCK, AS OF JUNE 30, 2002, WAS 5,350,670.
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 six months ending June 30, 2002, Daugherty Resources drilled
seventeen (17) natural gas wells (4.5625 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 six 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.
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.
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 a total
twenty-three (23) natural gas wells during the last quarter of 2001 and the
first quarter of 2002 with seventeen (17) wells being drilled in 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.
During the second quarter of 2002 Daugherty Petroleum entered into a joint
venture drilling program whereby Daugherty Petroleum will receive a 25% interest
in up to 15 natural gas wells. As of August 15, 2002, drilling operations have
begun on two of the program wells. In addition, Daugherty Petroleum began a 15
well private placement partnership drilling program during the second quarter of
2002 and will participate for a 25.75% interest in up to 15 natural gas wells.
Therefore, Daugherty Resources anticipates that it will drill 30 additional
wells during the last two 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 the two current private placement drilling programs covering the drilling
and completion of up to 30 wells. Discussion with potential joint venture
partners, and additional year-end programs, could result in additional wells
being drilled.
Working capital as of June 30, 2002 was a negative $1,596,549 compared
to December 31, 2001, when working capital was negative $2,003,165.
Current assets as of June 30, 2002 were $801,437 compared to $2,900,470
as of December 31, 2001. During the six-month period ending June 30, 2002, as
compared to December 31 2001, the changes in the composition of Daugherty
Resources' current assets were: cash balances decreased $2,079,238 from
$2,244,420 to $165,182; accounts receivable balances decreased $84,071 from
$423,359 to $339,208. Other current assets such as pre-paids, and notes
receivable increased $64,276 from $232,691 to $296,967. Overall, current assets
decreased by $2,099,033 to $801,437 from $2,900,470.
Current liabilities as of June 30, 2002 were $2,397,986 compared to
$4,903,635 as of December 31, 2001. During the six- month period ending June 30,
2002, 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 $5,380 from $374,467 to $379,527, customer drilling deposits decreased
$2,703,000 from $2,854,700 to $151,700, accounts payable and accrued liabilities
increased $202,731 from $1,669,088 to $1,871,819. Overall, current liabilities
decreased by $2,505,649.
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 conducted during 2001 and the first
quarters of 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 June 30, 2002, prices
have rebounded to reflect higher market demand and these
increased prices will positively affect oil and gas revenue. If
the maximum subscriptions are received and accepted for the two
current drilling programs Daugherty will receive contract
drilling revenue from an additional 30 wells and will receive a
minimum 25% interest in each well drilled.
3
- 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.
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 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. For 2001, Daugherty Petroleum sponsored a total of three
drilling programs and two joint ventures that raised a total of $5.8 million
that allowed Daugherty Petroleum to drill a total of thirty-five (35) wells by
March 31, 2002. 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 ownership in each well, together with revenue associated with the
transmission and compression of the natural gas. The compression for
approximately 2.7% of the natural gas operated by Daugherty Petroleum is
provided 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 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 early 2001, during
the first six-months 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
4
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 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.
- 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. Since Daugherty Resources does not
have current plans to develop the properties itself 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 June 30, 2002, Daugherty Resources'
gross revenues decreased $114,357 to $403,800 from $518,157 for the same period
in 2001. For the six-month period ending June 30, 2002, Daugherty Resources'
gross revenue increased $630,221 to $4,366,325 from $3,736,104 for the same
period in 2001. Daugherty Resources experienced a net loss before taxes of
$378,003 for the three-month period ending June 30, 2002 compared to a net loss
before taxes of $801,279 for the same period in 2001. For the six-month period
ending June 30, 2002, Daugherty Resources experienced net income before taxes of
$585,189 compared to net income before taxes of $184,637 for the same period in
2001.
Daugherty Resources' gross revenues for the six-month period ending
June 30, 2002 were derived from drilling contract revenues of $3,484,000
(79.79%), natural gas and oil operations and production revenues of $387,062
(8.86%), and natural gas transmission and compression revenues of $495,263
(11.34%).
The six-month increase in total gross revenues of $630,221 was
primarily attributable to an increase in contract drilling revenue in the first
quarter and an increase in gas transmission and compression revenue during the
first and second quarter of 2002. Revenues from oil and gas production
activities decreased $31,564 to $192,914 for the three-month period ending June
30, 2002 from $224,478 for the same period in 2001. For the six-month period
ending June 30, 2002, gross revenue from oil and gas production decreased
$93,577 to $387,062 from $480,639 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 as compared to the same
period for 2001.
Net gas and oil production for the second quarter of 2002 was 96,631
Mcfe (Mcf equivalents), compared to 73,481 Mcfe for the second quarter of 2001.
The average price of gas and oil for the second quarter of 2002 was $3.72/Mcf
and $23.48/barrel, respectively, compared to $5.54/Mcf and $26.09/barrel for the
second quarter of 2001.
During the three-month period ended June 30, 2002, total direct costs
decreased by $245,168 to $265,020 compared to $510,188 in 2001. For the
six-month period ending June 30, 2002, total direct expenses increased $494,455
to $2,522,812 from $2,028,357 for the same period in 2001. Contract drilling
expenses decreased $193,466 from $193,466 for the quarter ending June 30, 2001
compared to $0 for the quarter ending June 30, 2002. Oil and gas production
expenses increased $44,054 from $108,448 for the quarter ending June 30, 2002
compared to $152,502 for the quarter ending June 30, 2002. Gas transmission and
compression costs decreased $95,756 from $208,274 for the quarter ending June
30, 2001, compared to $112,518 for the quarter ended June 30, 2002. The
5
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 2002 compared
to eleven (11) in the same period of 2001.
For the period ending June 30, 2002, Sentra Corporation, Daugherty
Resources' natural gas utility subsidiary, had sales of $89,506 compared with
sales of $71,888 for the first six months of 2001. In the second quarter of
2002, Sentra installed an additional 1,220 feet of transmission line and 3,375
feet of distribution line for cumulative total of 94,040 feet of transmission
line and 29,639 feet of distribution line being installed by Sentra Corporation
as of June 30, 2002. As of June 30, 2002, Sentra has 162 customers, 50 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 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-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 June 30, 2002 II-III
Statement of Operations and Deficit for the period ending June 30, 2002 IV
Statement of Cash Flows V
Notes to Financial Statements VI-XVII
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.
6
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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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 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)
7
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).
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-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.
8
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: August 14, 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 August 14, 2002
William S. Daugherty
/S/ James K. Klyman * Director of the Registrant August 14, 2002
- ---------------------
James K. Klyman
/S/ Charles L. Cotterell Director of the Registrant August 14, 2002
- ------------------------
Charles L. Cotterell
*By /S/ William S. Daugherty
------------------------
William S. Daugherty
Attorney-in-Fact
10
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
JUNE 30, 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-XVII
I
[KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP LETTERHEAD]
REVIEW ENGAGEMENT REPORT
To the Directors of
DAUGHERTY RESOURCES INC.
We have reviewed the condensed consolidated balance sheet of DAUGHERTY RESOURCES
INC. as at June 30, 2002 and the condensed consolidated statements of operations
and deficit, and cash flows for the six months ended June 30, 2002 and for the
three months ended June 30, 2002. Our review was made in accordance with
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 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.
/s/ KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
August 2, 2002
II
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
ASSETS
June 30, December 31,
2002 2001
-------------- --------------
(Unaudited)
CURRENT
Cash and term deposits $ 165,182 $ 2,244,420
Accounts receivable 339,288 423,359
Prepaid expenses and other assets 288,855 202,015
Loans to related parties (Note 4) 8,112 30,676
------------ ------------
801,437 2,900,470
BONDS AND DEPOSITS 41,000 41,000
OIL AND GAS PROPERTIES (Note 2) 9,063,725 8,834,087
PROPERTY AND EQUIPMENT (Note 3) 845,621 820,769
LOANS TO RELATED PARTIES (Note 4) 755,413 533,051
INVESTMENT 69,347 109,254
DEFERRED FINANCING COSTS 57,306 71,066
GOODWILL 313,177 313,177
------------ ------------
$11,947,026 $ 13,622,874
============ ============
See accompanying notes to condensed consolidated financial statements.
III
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
LIABILITIES
June 30, December 31,
2002 2001
-------------- --------------
(Unaudited)
CURRENT
Bank loans (Note 5) $ 134,162 $ 146,067
Accounts payable 749,029 875,953
Accrued liabilities 1,147,160 793,135
Customers' drilling deposits 151,700 2,854,700
Current portion of long-term debt (Note 6) 240,305 233,780
--------------- ---------------
2,422,356 4,903,635
LONG-TERM DEBT (NOTE 6) 3,411,234 3,455,642
--------------- ---------------
5,833,590 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
558,476 Preferred shares (2001 - 563,249) 1,784,493 1,802,542
5,350,670 Common shares (2001 - 4,959,112) 24,466,897 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 (20,169,550) (20,754,739)
---------------- ----------------
6,113,436 5,263,597
---------------- ----------------
$ 11,947,026 $ 13,622,874
=============== ===============
See accompanying notes to condensed consolidated financial statements.
IV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
(U.S. Funds)
(Unaudited)
Three Months Ended June 30 Six Months Ended June 30
2002 2001 2002 2001
---- ---- ---- ----
REVENUE
Contract drilling (not less than 95% attributable
to related party transactions) $ - $ 51,747 $ 3,484,000 $ 2,877,246
Oil and gas production 192,914 224,478 387,062 480,639
Gas transmission and compression 210,886 241,932 495,263 378,219
------------ ------------ ------------ ------------
403,800 518,157 4,366,325 3,736,104
------------ ------------ ------------ ------------
DIRECT EXPENSES
Contract drilling - 193,466 1,906,120 1,538,670
Oil and gas production 152,502 108,448 280,859 213,478
Gas transmission and compression 112,518 208,274 335,833 276,209
------------ ------------ ------------ ------------
265,020 510,188 2,522,812 2,028,357
------------ ------------ ------------ ------------
GROSS PROFIT 138,780 7,969 1,843,513 1,707,747
------------ ------------ ------------ ------------
EXPENSES
Selling, general and administrative 367,454 608,241 952,479 1,110,573
Depreciation, depletion and amortization 139,380 218,618 278,760 437,236
Interest 38,930 41,919 97,469 94,361
------------ ------------ ------------ ------------
545,764 868,778 1,328,708 1,642,170
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE THE
FOLLOWING (406,984) (860,809) 514,805 65,577
Equity share in earnings from undivided
interest in oil and gas properties 28,981 59,530 70,384 119,060
------------ ------------ ------------ ------------
NET INCOME (LOSS) FOR THE PERIOD (378,003) (801,279) 585,189 184,637
DEFICIT, BEGINNING OF PERIOD (19,791,547) (19,441,565) (20,754,739) (20,427,481)
------------ ------------ ------------ ------------
DEFICIT, END OF PERIOD $(20,169,550) $(20,242,844) $(20,169,550) $(20,242,844)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE (NOTE 8)
BASIC $ (0.07) $ (0.23) $ 0.11 $ 0.05
------------ ------------ ------------ ------------
FULLY DILUTED $ (0.07) $ (0.23) $ 0.11 $ 0.05
------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
V
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(U.S. FUNDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2002 2001 2002 2001
---- ---- ---- ----
OPERATING ACTIVITIES
Net income (loss) for the period $ (378,003) $ (801,279) $ 585,189 $ 184,637
Depreciation, depletion, and amortization 139,380 218,618 278,760 437,236
Equity share in earnings from undivided interest
in oil and gas properties (28,981) (59,530) (70,384) (119,060)
Incentive bonus paid by common shares - 235,500 109,620 235,500
(Increase) decrease in:
Accounts receivable 14,533 4,270 84,071 45,159
Prepaid expenses and other assets (85,205) (32,080) (86,840) (30,609)
Increase (decrease) in:
Accounts payable 34,456 (42,275) 28,106 151,244
Accrued liabilities (206,943) (10,598) 354,025 87,671
Drilling prepayments - 489,248 (2,703,000) (695,917)
----------- ----------- ----------- -----------
(510,763) 1,874 ,420,453) 295,861
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Change in oil and gas properties (41,039) (112,151) (379,254) (193,081)
Change in property and equipment (27,368) (86,216) (69,852) (83,262)
Change in bonds and other deposits - - 39,907 -
----------- ----------- ----------- -----------
(68,407) (198,367) (409,199) (276,343)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Issuance of common stock - 4,138 - 5,832
Decrease in bank loans (7,085) - (11,905) (4,276)
Change in long-term liabilities (4,842) 75,634 (37,883) 13,854
Change in payable to related party (1,501) 8,390 (199,798) (214,145)
----------- ----------- ----------- -----------
(13,428) 88,162 (249,586) (198,735)
----------- ----------- ----------- -----------
CHANGE IN CASH AND CASH
EQUIVALENTS (592,598) (108,331) (2,079,238) (179,217)
CASH AND CASH EQUIVALENTS,
beginning of period 757,780 355,774 2,244,420 426,660
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 165,182 $ 247,443 $ 165,182 $ 247,443
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE
Interest paid $ 25,755 $ 41,919 $ 117,295 $ 94,361
----------- ----------- ----------- -----------
Income taxes paid $ - $ - $ - $ -
=========== =========== =========== ===========
See accompanying notes to financial statements.
VI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accountings principles 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
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 condensed consolidated financial position as at
June 30, 2002 and condensed consolidated results of operations
and cash flows for the three and six month periods ended June
30, 2002 and 2001.
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.
(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.
VII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
2. OIL AND GAS PROPERTIES
JUNE 30, DECEMBER 31,
2002 2001
---------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET NET
---------------------------------------------------------
Proved properties $7,585,571 $ 1,559,806 $ 6,025,765 $ 6,146,723
Wells and related equipment 740,846 133,755 607,091 563,695
---------- ------------ ------------ ------------
$8,326,417 $1,693,561 6,632,856 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 (70,384) (331,221)
Share in partnership's income 70,384 238,119
------------- -------------
Equity, end of period 2,430,869 2,123,669
------------- -------------
TOTAL OIL AND GAS PROPERTIES $ 9,063,725 $ 8,834,087
------------- -------------
3. PROPERTY AND EQUIPMENT
JUNE 30, DECEMBER 31,
2002 2001
----------------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET NET
----------------------------------------------------------
Land $ 12,908 $ - $ 12,908 $ 12,908
Buildings 6,239 1,560 4,679 4,887
Machinery and equipment 665,908 106,742 559,166 550,499
Office furniture, fixtures and equipment 100,760 82,002 18,758 17,406
Aircraft 125,000 5,730 119,270 122,396
Vehicles 289,833 158,993 130,840 112,673
----------- ------------- ------------ ----------
$ 1,200,648 $ 355,027 $ 845,621 $ 820,769
----------- ------------- ------------ -----------
VIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
4. LOANS TO RELATED PARTIES
The loans to related parties represent loans receivable from officers
of the Company and certain shareholders totalling $352,789 and
$242,796, respectively, bearing interest at 6% per annum, 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
related parties ownership interest in drilling partnerships with DPI.
The loans receivable from the officers of DPI totalling $167,940 are
non-interest bearing and unsecured.
5. BANK LOANS
JUNE 30 DECEMBER 31
2002 2001
----------- -------------
NOTE PAYABLE bearing interest at 4.71% per annum, maturing January 15,
2003, is collateralized by 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, is collateralized by 200,000 shares of stock
owned by a director of the company - 11,905
----------- -------------
$ 134,162 $ 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.
The obligation is stated at its remaining face value of $454,818 and
has not been discounted.
IX
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
6. LONG-TERM DEBT (Continued)
JUNE 30, DECEMBER 31,
2002 2001
----------- ---------------
NOTE PAYABLE as outlined above $ 454,818 $ 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 interest and a premium equal to 25% of principal, payable in
put shares. After the put's maturity date, the company may redeem the
note in whole or in 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 June 30, 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
determined semi-annually. The borrowing base at June 30, 2002 was
$2,050,000. 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 105,063 128,107
NON-INTEREST BEARING NOTE, secured by 25% of production on 15 gas
wells payable monthly at $2,796, maturing in 2003 8,877 23,117
----------- -------------
Carried forward......... $ 3,425,492 $ 3,470,776
----------- -------------
X
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
6. LONG-TERM DEBT (Continued)
Brought forward $ 3,425,492 $ 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,
collateralized by the assets and the corporate guarantee of a
wholly-owned subsidiary, payable in quarterly payments of
Interest only. Principal is due currently. $ 42,507 $ 47,897
LOANS PAYABLE TO VARIOUS BANKS with interest rates ranging from 8.45%
to 11% annum, payable in 60 instalments of $1,370, including
interest, maturing in February 2005 94,111 81,320
UNSECURED LOAN PAYABLE TO TRIO GROWTH, bearing interest at 10%
per annum, principal and interest due currently 24,650 24,650
----------- --------------
3,651,539 3,689,424
Less: Current portion 240,305 233,780
----------- --------------
$ 3,411,234 $ 3,455,642
-------------- --------------
Principal repayments for the next five years are as follows:
2003 $ 240,305
2004 115,536
2005 2,902,165
2006 33,460
2007 24,000
Thereafter 3,336,539
--------------
$ 6,652,005
--------------
XI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
7. 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)
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 share (4,773) (18,048)
------------ --------------
Balance, June 30, 2002 558,476 1,784,493
----------- -------------
(b) COMMON SHARES ISSUED
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 stock option and warrants 26,109 26,360
Issued for conversion of preferred shares 1,229,502 620,844
Issued for settlement 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 4,773 18,048
----------- -------------
Balance, June 30, 2002 5,350,670 24,466,897
----------- ----------
(c) SHARES TO BE ISSUED
Common Shares to be issued in connection with
the purchase of Ken-tex oil and gas property in 1999 24,887 $ 55,226
----------- -------------
XII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
7. CAPITAL STOCK (Continued)
(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 (474,000) 1.54
---------- ----
Balance, June 30, 2002 2,012,960 2,012,960 2.07
---------- --------- ----
(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 302,528 1.75 - 4.50 (i)
Issued for consulting services 195,222 1.22 - 2.20 (ii)
Exercised (320) 1.00
Expired (23,800) 2.50
------------- -----------
Balance, December 31, 2001 (carried forward..) 2,943,721 2.61
XIII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 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, June 30, 2002 2,443,721 2.76
--------- ----------
(i) These warrants expire July 14, 2006
(ii) These warrants expire December 31, 2004
8. INCOME (LOSS) PER SHARE
(a) BASIC
Income (loss) per share is calculated using the weighted
average number of shares outstanding during the period. The
weighted average of common shares outstanding amounted to
5,346,689 and 5,209,765 for the three and six months ended
June 30, 2002, respectively, and 3,559,130 and 3,500,824 for
the three and six months ended June 30, 2001, respectively.
(b) FULLY DILUTED INCOME PER SHARE
Fully diluted income per share is calculated on the same basis
with the weighted average number of shares outstanding during
the period totalling 5,523,256 for the six months ended June
30, 2002. The exercise of options and the convertible notes
had no dilutive effects on earning (loss) per share for other
periods.
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.
XIV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
9. RELATED PARTY TRANSACTIONS (Continued)
(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.
(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 the three months ended June 30, 2002 there
were no turnkey drilling contracts with company sponsored
partnerships (2001 - $2,877,246) not less than 95% of which is
attributable to related party transactions.
10. SEGMENTED INFORMATION
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
2002 2001 2002 2001
------- ------- ------- -------
$ $ $ $
REVENUE (NET)
Oil and gas 432,781 577,687 4,436,709 3,855,164
Corporate - - - -
----------- ----------- ---------- -----------
432,781 577,687 4,436,709 3,855,164
=========== =========== ========== ===========
INTEREST, DEPLETION AND DEPRECIATION
Oil and gas 163,750 210,187 337,637 408,651
Corporate 14,560 50,350 38,592 122,946
----------- ----------- ---------- -----------
178,310 260,537 376,229 531,597
=========== =========== ========== ===========
INCOME (LOSS) BEFORE INCOME TAXES
Oil and gas (184,271) (523,452) 1,126,573 739,728
Corporate (193,732) (277,827) (541,384) (555,091)
----------- ----------- ---------- -----------
(378,003) (801,279) 585,189 184,637
============ =========== ========== ===========
XV
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
10. SEGMENTED INFORMATION (Continued)
IDENTIFIABLE ASSETS
Oil and gas 9,063,725 9,090,273 9,063,725 9,090,273
Corporate 2,883,301 2,055,923 2,883,301 2,055,923
---------- ---------- ---------- ----------
11,947,026 11,146,196 11,947,026 11,146,196
========== ========== ========== ==========
CAPITAL EXPENDITURES
Oil and gas 41,039 171,681 379,254 312,141
Corporate 69,852 83,262 69,852 83,262
---------- ---------- ---------- ----------
110,891 254,943 449,106 395,403
========== ========== ========== ==========
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) 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 periods ended
June 30, 2002 and 2001 the company's comprehensive income was
the same as net earnings.
(b) RECENT ACCOUNTING PRONOUNCEMENTS
(i) 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.
XVI
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
11. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(II) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 141
(SFAS 141)
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 141 as of July 30, 2001
for all of its future acquisitions.
(III) 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.
(IV) 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.
XVII
DAUGHERTY RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
JUNE 30, 2002
11. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(v) 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 adoption of statement 144
did not have any significant impact on the Company's
financial position and results of operations.