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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 (I.R.S. Employer
incorporation or 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 NOVEMBER 7, 2002, WAS 5,475,670.
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 XV
of this Report, and is incorporated herein by reference.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF GENERAL OPERATIONS.
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The following is a discussion of Daugherty Resources' financial
condition and results of operations. This discussion should be read in
conjunction with the Financial Statements of Daugherty Resources described in
Item 1 of this report. Reliance upon such information involves risks and
uncertainties, including those created by general market conditions, competition
and the possibility that events may occur which could limit the ability of
Daugherty Resources to maintain or improve its operating results or execute its
primary growth strategy. Although management believes that the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could be inaccurate, and there can be no assurances that the forward-looking
statements included herein will prove to be accurate. The inclusion of such
information should not be regarded as a representation by management or any
other person that the objectives and plans of Daugherty Resources will be
achieved. Moreover, such forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements that speak only as of the date hereof. Statements
contained in this "Management's Discussion and Analysis of Financial Condition
and Results of General Operations," which are not historical facts may be
forward-looking statements (See "Forward-Looking Statements" herein at page 9).
Daugherty Resources, Inc. ("Daugherty Resources"), formerly Alaska
Apollo Resources Inc., is a diversified natural resources company with assets in
oil and gas, and gold and silver prospects. Originally formed in 1979 to develop
gold properties, Daugherty Resources, in the fourth quarter of 1993, acquired
its wholly-owned subsidiary, Daugherty Petroleum, Inc. ("Daugherty Petroleum").
The purchase of Daugherty Petroleum has given Daugherty Resources a diversified
revenue and asset base that is primarily located in Appalachia.
Since acquiring Daugherty Petroleum, Inc., Daugherty Resources has
increased its reserves through the acquisition of oil and gas properties in the
Appalachian and Illinois Basins, and the drilling of wells in the Appalachian
Basin through joint venture and turnkey drilling programs, where Daugherty
Petroleum, Inc. is the primary decision maker. The Company continues to
aggressively seek acquisitions and drilling programs.
LIQUIDITY
For the nine-month period ending September 30, 2002, Daugherty
Resources drilled nineteen (19) natural gas wells (5.0125 net wells), all of
which were capable of producing natural gas. By comparison, for the same period
of 2001, Daugherty Resources drilled sixteen (16) natural gas wells (4.2975 net
wells). Drilling operations for the first nine months of 2002 were primarily
related to three (3) year-end private placement drilling programs for 2001 and
two (2) joint venture drilling partnerships for 2001.
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.
2
Daugherty Resources has primarily concentrated in drilling wells on
prospects it generates in the Appalachian Basin. Historically, a major portion
of Daugherty Resources' revenue 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 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 a total 23
natural gas wells during the last quarter of 2001 and the first quarter of 2002,
with 17 of those wells being drilled in the first quarter of 2002. Daugherty
Petroleum participated for a 25.75% interest in the partnership drilling
programs and a 45% 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. 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. As of November 12, 2002, drilling operations have begun on six (6) of the
program wells. Therefore, Daugherty Resources anticipates that it will drill 24
additional wells by March 31, 2003 and retain interests ranging from 25% to
25.75% of each well it drills. This estimate is based upon the two (2) current
private placement drilling programs covering the drilling and completion of up
to 30 wells. Discussion with potential joint venture partners, and formation of
additional year-end programs, could result in additional wells being drilled.
Working capital as of September 30, 2002 was negative $1,774,801
compared to December 31, 2001, when working capital was negative $2,003,165.
Current assets as of September 30, 2002 were $1,068,098 compared to
$2,900,470 as of December 31, 2001. During the nine-month period ending
September 30, 2002, as compared to December 31 2001, the changes in the
composition of Daugherty Resources' current assets were: cash balances decreased
$1,942,003 from $2,244,420 to $302,417; accounts receivable balances decreased
$232,054 from $423,359 to $191,305. Other current assets such as pre-paids, and
notes receivable increased $341,685 from $232,691 to $574,376. Overall, current
assets decreased by $1,832,372 to $1,068,098 from $2,900,470.
Current liabilities as of September 30, 2002 were $2,842,899 compared
to $4,903,635 as of December 31, 2001. During the nine-month period ending
September 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 $31,939 from $379,847 to $347,908, customer drilling
deposits decreased $2,334,250 from $2,854,700 to $520,450, accounts payable and
accrued liabilities increased $305,453 from $1,669,088 to $1,974,541. Overall,
current liabilities decreased by $2,060,736.
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 three
quarters of 2002 will result in substantially more oil and gas
production to our Company. In the last quarter of 2001 and the first
quarter of 2002 Daugherty Petroleum drilled a total of 23 successful
wells. For the nine-month period ending September 30, 2002, the
Company drilled a total of 19 wells, with an additional six (6) wells
drilled through November 12, 2002. At the end of the year 2001, gas
prices had decreased, however, as of September 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 (2) current
drilling programs Daugherty will receive contract drilling revenue
from 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, increasing to 40% upon return of partners' investment. For
2001, Daugherty Petroleum sponsored a total of three (3) drilling programs and
two (2) joint ventures that raised a total of $5.8 million that allowed
Daugherty Petroleum to drill a total of 23 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/or compression of the natural gas. The compression for
approximately 3.1% 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 on an arm's length basis, the transactions involve related
parties and are not negotiated with independent third parties.
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 2002
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
nine 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
4
drilling programs to increase drilling revenue, cash flow from sale
of production and increase its natural gas and oil reserves. A
decrease in the price of natural gas and/or a surplus of natural gas
could result in a decrease in the interest and investment in drilling
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 September 30, 2002, Daugherty
Resources' gross revenues decreased $445,032 to $1,068,548 from $1,513,580 for
the same period in 2001. For the nine-month period ending September 30, 2002,
Daugherty Resources' gross revenue increased $352,939 to $5,434,873 from
$5,081,934 for the same period in 2001. Daugherty Resources experienced a net
loss before taxes of $319,392 for the three-month period ending September 30,
2002 compared to a net loss before taxes of $207,629 for the same period in
2001. For the nine-month period ending September 30, 2002, Daugherty Resources
experienced net income before taxes of $265,797 compared to net loss before
taxes of $190,742 for the same period in 2001.
Daugherty Resources' gross revenues for the nine-month period ending
September 30, 2002 were derived from drilling contract revenues of $4,040,733
(74.35%), natural gas and oil operations and production revenues of $678,534
(12.48%), and natural gas transmission and compression revenues of $715,606
(13.17%).
The nine-month increase in total gross revenues of $352,939 was
primarily attributable to an increase in contract drilling revenue in the first
quarter of 2002, an increase in gas transmission and compression revenue during
the first and second quarters of 2002 and increased oil and gas production
revenue in the third quarter of 2002. Revenues from oil and gas production
activities increased $183,403 to $291,472 for the three-month period ending
September 30, 2002, from $108,069 for the same period in 2001. Partially
offsetting this increase was a decrease in the Company's equity share in
earnings from undivided interest in oil and gas properties of $30,549, from
$59,530 for the three-month period ending September 30, 2001 to $28,981 for the
same period in 2002. For the nine-month period ending September 30, 2002, gross
revenue from oil and gas production increased $89,826 to $678,534 from $588,708
for the same period in 2001, partially offset by a $79,225 decrease in the
Company's equity share in earnings from undivided interest in oil and gas
properties compared to the same period in 2001. The overall increase in revenue
from oil and gas production activities was primarily attributable to increased
oil and gas production in the first nine months of 2002 as compared to the same
period for 2001. Net oil and gas production for the third quarter of 2002 was
107,846 Mcfe (Mcf equivalents), compared to 80,488 Mcfe for the third quarter of
2001.
During the three-month period ending September 30, 2002, total direct
expenses decreased by $117,619 to $774,721 compared to $892,340 in 2001. For the
nine-month period ending September 30, 2002, total direct expenses increased
$376,836 to $3,297,533 from $2,920,697 for the same period in 2001. Contract
drilling expenses decreased $160,383 from $637,414 for the quarter ending
September 30, 2001 compared to $477,031 for the quarter ending September 30,
2002. Oil and gas production expenses increased $79,022 from $146,540 for the
5
quarter ending September 30, 2001 compared to $225,562 for the quarter ending
September 30, 2002. Gas transmission and compression expenses decreased $36,258
from $108,386 for the quarter ending September 30, 2001, compared to $72,128 for
the quarter ending September 30, 2002. The increase in overall direct expenses
for the nine months ended September 30, 2002 and 2001 was primarily due to the
drilling and related costs for nineteen (19) natural gas wells in 2002 compared
to sixteen (16) in the same period of 2001.
During the three-month period ending September 30, 2002, other expenses
decreased by $246,199 to $642,200 compared to $888,399 in 2001. For the
nine-month period ending September 30, 2002, other expenses decreased $559,661
to $1,970,908 from $2,530,569 for the same period in 2001. Selling, general and
administrative expenses decreased $158,225 from $613,211 for the quarter ending
September 30, 2001 compared to $454,986 for the quarter ending September 30,
2002. Depreciation, depletion and amortization decreased $79,238 from $218,618
for the quarter ending September 30, 2001 compared to $139,380 for the quarter
ending September 30, 2002. Net interest expense decreased $8,736 from $56,570
for the quarter ending September 30, 2001, compared to $47,834 for the quarter
ended September 30, 2002. Overall, the decreases in other expenses for the three
and nine-month periods ended September 30, 2002, compared to the same periods in
2001, were driven by the Company's ability to contain corporate costs and the
lack of amortization expense relating to goodwill, in accordance with the
adoption of CICA Handbook Section 3062, "Goodwill and Other Intangible Assets"
on January 1, 2002.
Sentra Corporation, Daugherty Resources' natural gas utility
subsidiary, had revenue for the three and nine-months ended September 30, 2002
of $18,342 and $107,848, compared with $23,242 and $95,030 for the three and
nine-months ended September 30, 2001. In the third quarter of 2002, Sentra
installed an additional 6,555 feet of transmission line and 621 feet of
distribution line for a cumulative total of 100,595 and 30,260 feet,
respectively, at September 30, 2002. As of September 30, 2002, Sentra had 159
customers, 49 of which were 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 152 customers, including 27 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 three quarters 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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6
PAGE
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(1) Condensed Consolidated Balance Sheet as of September 30, 2002 II-III
Condensed Consolidated Statement of Operations and Deficit
for the three and nine months ended September 30, 2002 IV
Condensed Consolidated Statement of Cash Flows for the three
and nine months ended September 30, 2002 V
Notes to Condensed Consolidated Financial Statements VI-XV
All schedules have been omitted since the information required to be
submitted has been included in the financial statements or notes or has been
omitted as not applicable or not required.
(2) Exhibits--
The exhibits indicated by an asterisk (*) are incorporated by
reference.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
3(a)* Memorandum and Articles for Catalina Energy & Resources Ltd., a
British Columbia corporation, dated January 31, 1979, filed as an
exhibit to Form 10 Registration Statement filed May 25, 1984. File
No. 0-12185.
3(b)* Certificate for Catalina Energy & Resources Ltd., a British
Columbia corporation, dated November 27, 1981, changing the name of
Catalina Energy & Resources Ltd. to Alaska Apollo Gold Mines Ltd.,
and further changing the authorized capital of the Company from
5,000,000 shares of common stock, without par value per share, to
20,000,000 shares of common stock, without par value per share,
filed as an exhibit to Form 10 Registration Statement filed May 25,
1984. File No. 0-12185.
3(c)* Certificate of Change of Name for Alaska Apollo Gold Mines Ltd., a
British Columbia corporation, dated October 14, 1992, changing the
name of Alaska Apollo Gold Mines Ltd. to Alaska Apollo Resources
Inc., and further changing the authorized capital of the Company
from 20,000,000 shares of common stock, without par value per
share, to 6,000,000 shares of common stock, without par value per
share.
3(d)* Altered Memorandum of Alaska Apollo Resources Inc., a British
Columbia corporation, dated September 9, 1994, changing the
authorized capital of the Company from 6,000,000 shares of common
stock, without par value per share, to 20,000,000 shares of common
stock, without par value per share.
3(e)* Certificate of Change of Name for Alaska Apollo Resources Inc., a
British Columbia corporation, dated June 24, 1998, changing the
name of Alaska Apollo Resources Inc. to Daugherty Resources, Inc.
and further changing the authorized capital of the Registrant from
20,000,000 shares of common stock, without par value per share, to
50,000,000 shares of common stock, without par value, and
authorizing the creation of 6,000,000 shares of preferred stock,
without par value per share. (File No.0-12185).
3(f)* Altered Memorandum of Daugherty Resources, Inc., a British Columbia
corporation, dated June 24, 1998, changing the authorized common
stock of the Registrant from 50,000,000 shares of common stock,
without par value per share, to 10,000,000 shares of common stock,
without par value. (File No.0-12185).
7
3(g)* Altered Memorandum of Daugherty Resources, Inc., a British Columbia
corporation, dated June 25, 1998, changing the authorized preferred
stock of the Registrant from 6,000,000 shares of preferred stock,
without par value per share, to 1,200,000 shares of preferred
stock, without par value. Filed as an exhibit to Form 8-K, by the
Company for reporting an event on June 29, 1998. (File No.0-12185).
3(h)* Special Resolution of Daugherty Resources, Inc., a British Columbia
corporation, dated June 30, 1999, changing the authorized capital
of the Registration from 10,000,000 shares of common stock, without
par value per share, to 100,000,000 shares of common stock, without
par value per share, and from 1,200,000 shares of preferred stock,
without par value per share, to 5,000,000 shares of preferred
stock, without par value per share. Altered Memorandum of Daugherty
Resources, Inc., dated June 30, 1999, changing the authorized
capital of the Company to 105,000,000 shares divided into 5,000,000
shares of preferred stock, without par value and 100,000,000 common
shares without par value. Special Resolution of Daugherty
Resources, Inc., a British Columbia corporation, dated June 30,
1999, altering Article 23.1(b) of the Company Articles by
substituting a new Article 23.1(b) that sets forth the conditions
and terms upon which the preferred shares can be converted to
common stock. Filed as an exhibit to Form 8-K, for the Company for
reporting an event on October 25, 1999. (File No.0-12185).
4* See Exhibit No. 3(a), (b). (c), (d), (e), (f), (g) and (h).
10(a)* Alaska Apollo Resources Inc. 1997 Stock Option Plan, filed as
Exhibit 10(a) to Form 10-K for the Company for the fiscal year
ended December 31, 1996. (File No. 0-12185).
10(b)* Incentive Stock Option Agreement by and between Alaska Apollo
Resources Inc. and William S. Daugherty dated March 7, 1997, filed
as Exhibit 10(b) to Form 10-K for the Company for the fiscal year
ended December 31, 1996. (File No. 0-12185).
10(c)* Agreement of Purchase and Sale by and between Environmental Energy
Partners I, Ltd., Environmental Energy Partners II, Ltd,
Environmental Operating Partners, Ltd., Environmental Holding, LLC,
Environmental Processing Partners, Ltd., Environmental Energy,
Inc., and Environmental Operating, Inc., as Sellers and Daugherty
Petroleum, Inc., as Buyer, and Daugherty Resources, Inc. as
Accommodating Party, dated as of January 26, 1999, filed as an
Exhibit to Form 8-K by the Company for reporting an event on May
25, 1999 (File No. 0-12185).
10(d)* Agreement for the Purchase and Sale by and between H&S Lumber,
Inc., Buyer, and Daugherty Petroleum, Inc., Seller, for the sale of
Red River Hardwoods, Inc., an 80% subsidiary of Daugherty
Petroleum, Inc., which was effective June 30, 1999, and closed
December 1, 1999, filed as Exhibit 10.1 to Form 8-K by the Company
for reporting an event on December 9, 1999 (File No. 0-12185).
24 Powers of Attorney.
(b) Reports on Form 8-K.
None
8
FORWARD-LOOKING STATEMENTS
This Form 10-QSB contains forward-looking statements within meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities
Exchange Act of 1934, including statements regarding, among other items, our
growth strategies, anticipated trends in our business and our future results of
operations, market conditions in the oil and gas industry, our ability to make
and integrate acquisitions and the outcome of litigation and the impact of
governmental regulation. These forward-looking statements are based largely on
our expectations and are subject to a number of risks and uncertainties, many of
which are beyond our control. Actual results could differ materially from these
forward-looking statements as a result of, among other things:
- A decline in oil and/or gas production or prices.
- Incorrect estimates of required capital expenditures.
- Increases in the cost of drilling, completion and gas collection or
other costs of production and operations.
- An inability to meet growth projections.
- Government regulations.
- Other risk factors discussed or not discussed herein.
In addition, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect" and similar expressions, as they
relate to Daugherty Petroleum and/or Daugherty Resources, our business or our
management, are intended to identify forward-looking statements.
Daugherty Resources believes that the expectations reflected in the
forward-looking statements and the basis of the assumptions of such
forward-looking statements are reasonable. However, in light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
report may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.
Daugherty Resources claims the protection of the safe harbor for
forward-looking statements combined in the Private Securities Litigation Reform
Act of 1995 for these statements.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf of the
undersigned hereunto duly authorized.
DAUGHERTY RESOURCES, INC.
By: /S/ William S. Daugherty
------------------------
William S. Daugherty, President & CEO
Dated: November 12, 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, November 12, 2002
- ------------------------ Director of the Registrant
William S. Daugherty
/s/ James K. Klyman * Director of the Registrant November 12, 2002
- ---------------------
James K. Klyman
/s/ Charles L. Cotterell * Director of the Registrant November 12, 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)
SEPTEMBER 30, 2002
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
SEPTEMBER 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-XV
REVIEW ENGAGEMENT REPORT
To the Directors of
DAUGHERTY RESOURCES, INC.
We have reviewed the condensed consolidated balance sheet of DAUGHERTY
RESOURCES, INC. as at September 30, 2002 and the condensed consolidated
statements of operations and deficit, and cash flows for the nine months ended
September 30, 2002 and for the three months ended September 30, 2002. 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
November 7, 2002
II
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
ASSETS
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
CURRENT
Cash and term deposits $ 302,417 $ 2,244,420
Accounts receivable 191,305 423,359
Prepaid expenses and other assets 557,625 202,015
Loans to related parties (Note 4) 16,751 30,676
----------- -----------
1,068,098 2,900,470
BONDS AND DEPOSITS 41,000 41,000
OIL AND GAS PROPERTIES (Note 2) 9,115,921 8,834,087
PROPERTY AND EQUIPMENT (Note 3) 980,178 820,769
LOANS TO RELATED PARTIES (Note 4) 733,577 533,051
INVESTMENT 69,347 109,254
DEFERRED FINANCING COSTS 50,426 71,066
GOODWILL (Note 5) 313,177 313,177
----------- -----------
$12,371,724 $13,622,874
=========== ===========
The accompanying Notes to Condensed Consolidated Statements
are an integral part of these financial statements.
III
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONDENSED CONSOLIDATED BALANCE SHEET
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
LIABILITIES
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
CURRENT
Bank loans (Note 6) $ 134,162 $ 146,067
Accounts payable 1,108,540 875,953
Accrued liabilities 866,001 793,135
Customers' drilling deposits 520,450 2,854,700
Current portion of long-term
debt (Note 7) 213,746 233,780
---------- ----------
2,842,899 4,903,635
LONG-TERM DEBT (NOTE 7) 3,632,281 3,455,642
---------- ----------
6,475,180 8,359,277
---------- ----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (NOTE 8)
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
5,475,670 Common shares (2001 - 4,959,112) 24,569,397 24,184,198
21,100 Common shares held in treasury, at cost (23,630) (23,630)
TO BE ISSUED
24,887 Common shares to be issued 55,226 55,226
------------- --------------
26,385,486 26,018,336
DEFICIT (20,488,942) (20,754,739)
------------- --------------
5,896,544 5,263,597
------------- --------------
$ 12,371,724 $ 13,622,874
============= ==============
The accompanying Notes to Condensed Consolidated Statements
are an integral part of these 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 September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
------------- ---------------- -------------- --------------
REVENUE
Contract drilling (not less than 95%
attributable to related party transactions) $ 556,733 $ 1,206,600 $ 4,040,733 $ 3,916,096
Oil and gas production 291,472 108,069 678,534 588,708
Gas transmission and compression 220,343 198,911 715,606 577,130
-------------- ---------------- -------------- --------------
1,068,548 1,513,580 5,434,873 5,081,934
-------------- ---------------- -------------- --------------
DIRECT EXPENSES
Contract drilling 477,031 637,414 2,383,151 1,887,368
Oil and gas production 225,562 146,540 506,421 638,655
Gas transmission and compression 72,128 108,386 407,961 394,674
-------------- ---------------- -------------- --------------
774,721 892,340 3,297,533 2,920,697
-------------- ---------------- -------------- --------------
GROSS PROFIT 293,827 621,240 2,137,340 2,161,237
-------------- ---------------- -------------- --------------
EXPENSES
Selling, general and administrative 454,986 613,211 1,407,465 1,723,784
Depreciation, depletion and amortization 139,380 218,618 418,140 655,854
Interest, net 47,834 56,570 145,303 150,931
-------------- ---------------- -------------- --------------
642,200 888,399 1,970,908 2,530,569
-------------- ---------------- -------------- --------------
INCOME (LOSS) BEFORE THE FOLLOWING (348,373) (267,159) 166,432 (369,332)
Equity share in earnings from undivided
interest in oil and gas properties 28,981 59,530 99,365 178,590
-------------- ---------------- -------------- --------------
NET INCOME (LOSS) FOR THE PERIOD (319,392) (207,629) 265,797 (190,742)
DEFICIT, BEGINNING OF PERIOD (20,169,550) (20,410,594) (20,754,739) (20,427,481)
-------------- ---------------- -------------- --------------
DEFICIT, END OF PERIOD $ (20,488,942) $ (20,618,223) $ (20,488,942) $ (20,618,223)
============== ================ ============== ==============
NET INCOME (LOSS) PER SHARE
BASIC $ (0.06) $ (0.05) $ 0.05 $ (0.05)
-------------- ---------------- -------------- --------------
FULLY DILUTED $ (0.06) $ (0.05) $ 0.05 $ (0.05)
-------------- ---------------- -------------- --------------
The accompanying Notes to Condensed Consolidated Statements are an integral
part of these 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 September 30, Nine Months Ended September 30,
2002 2001 2002 2001
------------- ------------- --------------- ---------------
OPERATING ACTIVITIES
Net income (loss) for the period $ (319,392) $ (207,629) $ 265,797 $ (190,742)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 139,380 218,618 418,140 655,854
Equity share in earnings from undivided interest
in oil and gas properties (28,981) (59,530) (99,365) (178,590)
Incentive bonus paid by common shares - - 109,620 235,500
Changes in assets and liabilities:
Accounts receivable 147,983 (55,797) 232,054 (10,639)
Prepaid expenses and other assets (268,770) (281,017) (355,610) (359,395)
Accounts payable 359,511 (85,263) 387,617 5,882
Accrued liabilities (281,159) (208,475) 72,866 (104,269)
Customers' drilling deposits 368,750 573,500 (2,334,250) (122,417)
------------- ------------- --------------- ---------------
Net cash provided by (used in)
operating activities 117,322 (105,593) (1,303,131) (68,816)
------------- ------------- --------------- ---------------
INVESTING ACTIVITIES
Change in oil and gas properties (133,215) (233,010) (512,469) (258,339)
Change in property and equipment (157,057) (133,500) (226,909) (216,762)
Change in loans to related parties 13,197 (28,947) (186,601) (211,859)
Change in bonds and other deposits - (109,254) 39,907 (109,254)
------------- ------------- --------------- ---------------
Net cash used in investing activities (277,075) (504,711) (886,072) (796,214)
------------- ------------- --------------- ---------------
FINANCING ACTIVITIES
Issuance of common stock 102,500 145,285 102,500 211,216
Decrease in bank loans - (972,165) (11,905) (976,441)
Change in long-term liabilities 194,488 1,607,871 156,605 1,621,725
Purchase of treasury stock - (23,630) - (23,630)
------------- ------------- --------------- ---------------
Net cash provided by financing activities 296,988 757,361 247,200 832,870
------------- ------------- --------------- ---------------
CHANGE IN CASH AND CASH EQUIVALENTS 137,235 147,057 (1,942,003) (32,160)
CASH AND CASH EQUIVALENTS
Beginning of period 165,182 247,443 2,244,420 426,660
------------- ------------- --------------- ---------------
CASH AND CASH EQUIVALENTS
End of period $ 302,417 $ 394,500 $ 302,417 $ 394,500
============= ============= =============== ===============
SUPPLEMENTAL DISCLOSURE
Interest paid $ 79,665 $ 66,990 $ 196,960 $ 183,445
------------- ------------- --------------- ---------------
Income taxes paid $ - $ - $ - $ -
============= ============= =============== ===============
The accompanying Notes to Condensed Consolidated Statements are an integral
part of these statements.
VI
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Canada,
which except as described in Note 11, confirm, 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
September 30, 2002 and condensed consolidated results of
operations and cash flows for the three and nine-month periods
ended September 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)
September 30, 2002
2. OIL AND GAS PROPERTIES
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------------------------------------------- -------------------
ACCUMULATED
COST AMORTIZATION NET NET
--------------- ------------------ --------------- -------------
Proved properties $ 7,610,036 $ 1,669,806 $ 5,940,230 $ 6,146,723
Wells and related equipment 785,809 144,445 641,364 563,695
--------------- --------------- --------------- --------------
8,395,845 1,814,251 6,581,594 6,710,418
--------------- --------------- --------------- --------------
Equity in oil and gas partnership
Equity, beginning of period 2,123,669 1,283,769
Additional investment 410,658 933,002
Withdrawals (99,365) (331,221)
Share in partnership's income 99,365 238,119
--------------- --------------
Equity, end of period 2,534,327 2,123,669
-------------- --------------
Total Oil and Gas Properties $ 9,115,921 $ 8,834,087
============== ==============
3. PROPERTY AND EQUIPMENT
SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------------------------------------------------- -------------------
ACCUMULATED
COST AMORTIZATION NET NET
--------------- ------------------ --------------- -------------
Land $ 12,908 $ - $ 12,908 $ 12,908
Buildings 6,239 1,664 4,575 4,887
Machinery and equipment 721,764 115,973 605,791 550,499
Office furniture, fixtures and equipment 102,588 83,502 19,086 17,406
Aircraft 125,000 7,293 117,707 122,396
Vehicles 365,533 145,422 220,111 112,673
--------------- --------------- -------------- --------------
Total Property and Equipment $ 1,334,032 $ 353,854 $ 980,178 $ 820,769
=============== =============== ============== ==============
VIII
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
4. LOANS TO RELATED PARTIES
The loans to related parties represent loans receivable from officers
of the Company and certain shareholders totaling $582,387 and $430,643
at September 30, 2002 and December 31, 2001, respectively, bearing
interest at 6% per annum, 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 totaling $167,941 and $133,084 are non-interest
bearing and unsecured.
5. GOODWILL
In conjunction with Daugherty Resources' 1993 acquisition of its
wholly-owned subsidiary, Daugherty Petroleum, the Company recorded
goodwill of $1,789,564, which was recorded at cost and amortized over
10 years on a straight-line basis. Unamortized goodwill as of December
31, 2001 was $313,177. On January 1, 2002, the Company adopted CICA
Handbook Section 3062, "Goodwill and Other Intangible Assets", which
is the Canadian equivalent of Statement of Financial Accounting
Standards No. 142 for accounting principles generally accepted in the
United States (see Note 12). In accordance with this pronouncement,
goodwill amortization ceased upon adoption.
For the three and nine-month periods ended September 30, 2001, net
loss as reported was $207,629 and $190,742, respectively. Had Section
3062 been in effect in the prior year, net loss would have decreased
by $44,739 and $134,217 for the three and nine-month periods ended
September 30, 2001, to $162,890 and $56,525, respectively. Basic and
fully diluted loss per share would have been $0.04 and $0.02 for the
three and nine-months ended September 30, 2001, as compared to net
loss per share of $0.05 for each period, as reported.
6. BANK LOANS
SEPTEMBER 30, 2002 DECEMBER 31, 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, collateralized by 200,000 shares
of stock owned by a director of the Company. - 11,905
-------------------- -------------------
$ 134,162 $ 146,067
==================== ===================
IX
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
7. 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 $444,818 at
September 30, 2002 ($462,818 at December 31, 2001) and has not been
discounted.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ ------------------
NOTE PAYABLE as outlined above $ 444,818 $ 462,818
10% CONVERTIBLE NOTES, maturing July 31, 2004, collateralized by DPI's
gold and silver 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 maturity date of the puts,
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, bearing interest at the
bank's prime rate plus 1.25% payable monthly. The interest rate at
September 20, 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 September 30, 2002 was
$2,350,000. 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. 2,247,984 2,006,734
----------- -----------
Carried forward $ 3,542,802 $ 3,319,552
----------- -----------
X
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
7. LONG-TERM DEBT (continued)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Brought forward... $ 3,542,802 $ 3,319,552
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. 93,121 128,107
NON-INTEREST BEARING NOTE, secured by 25% of production on 15 gas
wells payable monthly at $2,796, maturing in 2003. 559 23,117
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. 39,186 47,897
LOANS PAYABLE TO VARIOUS BANKS with interest rates ranging from 8.45%
to 11% annum, payable in 60 installments of $1,370, including
interest, maturing on February 2005. 80,930 81,320
UNSECURED LOAN PAYABLE TO TRIO GROWTH, bearing interest at 10% per
annum, principal and interest due currently. 24,650 24,650
----------- ------------
3,846,027 3,689,422
213,746 233,780
----------- ------------
Less: Current portion $ 3,632,281 $ 3,455,642
=========== ============
XI
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
8. CAPITAL STOCK
(a) PREFERRED SHARES
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 shares (4,773) (18,048)
-------------- ---------------
Balance, September 30, 2002 558,476 1,784,493
============== ===============
(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 stock options 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 for cash 125,000 102,500
Issued to employees as incentive bonus 174,000 109,620
Issued for conversion of preferred shares 4,773 18,048
Issued for settlement of accounts payable 212,785 155,031
-------------- ---------------
Balance, September 30, 2002 5,475,670 24,569,397
============== ===============
(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)
SEPTEMBER 30, 2002
8. CAPITAL STOCK (continued)
(d) STOCK OPTIONS
Weighted Average
Issued Exercisable Price Expiry
----------- ----------- ---------------- -------
Balance, December 31, 2000 2,521,726 2,406,170 $ 1.98
=========== ==============
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, September 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 2,943,721 $ 2.61
Expired (500,000) $ .65 - 2.50
--------------- ---------------
Balance, September 30, 2002 2,443,721 $ 2.76
=============== ===============
(i) These warrants expire July 14, 2006
(ii) These warrants expire December 31, 2004
XIII
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
9. 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
5,460,724 and 5,294,499 for the three and nine months ended
September 30, 2002, respectively, and 4,218,704 and 3,742,724
for the three and nine months ended September 30, 2001,
respectively.
(b) FULLY DILUTED INCOME (LOSS) PER SHARE
Fully diluted income (loss) per share is calculated on the
same basis with the weighted average number of shares
outstanding during the period totaling 5,294,499 for the nine
months ended September 30, 2002. The exercise of options and
the convertible notes had no dilutive effects on income (loss)
per share for other periods.
10. RELATED PARTY TRANSACTIONS
The Company is party to certain agreements and transactions in the
normal course of business. Significant related party transactions not
disclosed elsewhere include the following:
(a) SHAREHOLDER INFORMATION
During 1993, a shareholder expended, on behalf of the Company,
shareholder information expenses in the amount of $75,000. The
Company has recorded a reserve provision against payment of
this amount until the Company's mining operations commence
production.
(b) LEASE OF GAS COMPRESSORS
A limited liability company owned by a director and two
officers of the Company has historically leased natural gas
compressors to Daugherty Petroleum. For the nine-month period
ended September 30, 2002, Daugherty Petroleum leased one
natural gas compressor for $12,000 from the related party. For
the nine-month period ended September 30, 2001, Daugherty
Petroleum leased two natural gas compressors for $11,550 from
the related party.
(c) COMPANY SPONSORED PARTNERSHIPS
Daugherty Petroleum 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 of 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 and
nine-month periods ended September 30, 2002, the Company
executed and performed turnkey drilling contracts with Company
sponsored partnerships totaling $556,733 and $4,040,733,
respectively. During the three and nine-month periods ended
September 30, 2001, the Company executed and performed turnkey
drilling contracts with Company sponsored partnerships
totaling $1,206,600 and $3,916,096, respectively. Not less
than 95% of these contracts were attributable to related party
transactions.
XIV
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U. S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
11. SEGMENTED INFORMATION
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2002 2001 2002 2001
----------------- -------------- -------------- ---------------
$ $ $ $
REVENUE (NET)
Oil and Gas 1,097,529 1,573,110 5,534,238 5,260,524
Corporate - - - -
----------------- -------------- -------------- ---------------
1,097,529 1,573,110 5,534,238 5,260,524
================= ============== ============== ===============
INTEREST, DEPLETION AND DEPRECIATION
Oil and Gas 167,851 222,717 505,488 631,368
Corporate 19,363 52,471 57,955 175,417
----------------- -------------- -------------- ---------------
187,214 275,188 563,443 806,785
================= ============== ============== ===============
INCOME (LOSS) BEFORE INCOME TAXES
Oil and Gas (123,566) 129,475 1,003,007 701,453
Corporate (195,826) (337,104) (737,210) (892,195)
----------------- -------------- -------------- ---------------
(319,392) (207,629) 265,797 (190,742)
================= ============== ============== ===============
IDENTIFIABLE ASSETS
Oil and Gas 9,115,921 8,140,186 9,115,921 8,140,186
Corporate 3,255,803 2,763,412 3,255,803 2,763,412
----------------- -------------- -------------- ---------------
12,371,724 10,903,598 12,371,724 10,903,598
================= ============== ============== ===============
CAPITAL EXPENDITURES
Oil and Gas 162,196 292,540 611,834 436,929
Corporate 157,057 133,500 226,909 216,762
----------------- -------------- -------------- ---------------
319,253 426,040 838,743 653,691
================= ============== ============== ===============
XV
DAUGHERTY RESOURCES, INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
(UNAUDITED)
SEPTEMBER 30, 2002
12. 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,
"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
September 30, 2002 and 2001 the company's comprehensive income
was the same as net income.
(b) RECENT ACCOUNTING PRONOUNCEMENTS
(i) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142
(SFAS 142)
On January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets." Under the new standard,
goodwill is no longer amortized, but rather is tested
for impairment upon adoption and at least annually
thereafter. The annual test may be performed at
anytime during the fiscal year, but must be performed
at the same time each year. The Company will perform
its annual goodwill impairment test before the end of
the year. The Company does not expect the annual test
to indicate any impairment, however, any such future
impairment would be reflected in continuing
operations.
(ii) STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 143
(SFAS 143)
In August 2001, the FASB issued Statement of
Financial Accounting Standards 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 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.
CERTIFICATIONS
I, William S. Daugherty, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Daugherty
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ William S. Daugherty
- ---------------------------
William S. Daugherty
President & CEO
CERTIFICATIONS
I, Michael P. Windisch, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Daugherty
Resources, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
d. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weakness in
internal controls; and
e. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Michael P. Windisch
- ---------------------------
Michael P. Windisch
Chief Financial Officer