DRAFT 05/24/04
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
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DAUGHERTY RESOURCES, INC.
(Name of Registrant as Specified in its Charter)
and
(Name of Person(s) Filing Proxy Statement)
- --------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction
applies: Common Stock, no par value
2) Aggregate number of securities to which transaction applies:
_________ shares
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11. Set forth amount
on which filing fee is calculated and state how it was
determined:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11 (a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
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4) Date Filed:
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DAUGHERTY RESOURCES, INC.
120 PROSPEROUS PLACE, SUITE 201 - LEXINGTON, KENTUCKY 40509
NOTICE OF ANNUAL GENERAL AND SPECIAL
MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that an annual general and special meeting of
shareholders of Daugherty Resources, Inc. will be held at 10:00 a.m. (Vancouver,
British Columbia time) on June 24, 2004 at 625 Howe Street, 10(th) Floor,
Vancouver, British Columbia, Canada V6C 2T6, for the following purposes:
1. To approve a special resolution authorizing our transition to the
new corporate law in British Columbia, Canada, our jurisdiction of
incorporation (the "Corporate Transition").
2. To approve a provision in our governing articles increasing the
quorum requirement for shareholder meetings from 10% to one-third of
the outstanding shares.
3. To approve a provision in our articles decreasing the supermajority
voting threshold from three-fourths of the shares voting to two
-thirds.
4. To approve a provision in our articles authorizing our board of
directors to create one or more series of preferred shares with
special rights or restrictions.
5. To approve a new incentive stock award and stock option plan.
6. To fix the size of the board of directors.
7. To elect directors.
8. To ratify the appointment of auditors for 2004.
The board of directors has fixed the close of business on May 14,
2004 as the record date for determining shareholders entitled to notice of and
to vote at the meeting and any adjournment. A list of our shareholders as of the
record date will be available for inspection at least ten days prior to the
meeting during normal business hours at our offices in Lexington, Kentucky.
If you were a registered holder of our common stock at the close of
business on the record date, you are entitled to notice of the meeting and to
vote on the matters to be acted on at the meeting. If any shareholder transfers
shares after the record date and the transferee, at least 48 hours before the
meeting, produces properly endorsed share certificates to our corporate
secretary or transfer agent or otherwise establishes ownership of the shares,
the transferee may vote the shares.
Shareholders are cordially invited to attend the meeting in person.
Your vote is important. If you do not plan to attend the meeting , please
complete, sign and date the accompanying proxy card and return it before the
meeting in the envelope provided. Proxies must be deposited with the office of
our transfer agent, Pacific Corporate Trust Company, 625 Howe Street, 10th
Floor, Vancouver, British Columbia V6C 2T6, by the second business day preceding
the meeting or any adjournment. Your proxy may be revoked at any time before its
exercise by giving a notice of revocation, by delivering a subsequent proxy card
or by voting in person at the meeting.
Lexington, Kentucky BY ORDER OF THE BOARD OF DIRECTORS
May __, 2004
William S. Daugherty
Chairman of the Board, President and Chief
Executive Officer
TABLE OF CONTENTS
PAGE
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The Annual Meeting.......................................................................................... 1
Proposal 1 - Corporate Transition and Related Name Change................................................... 3
Proposal 2 - Increase in Quorum Requirement................................................................. 6
Proposal 3 - Reduction in Supermajority Voting Threshold.................................................... 6
Proposal 4 - "Blank Check" Preferred........................................................................ 7
Proposal 5 - Incentive Plan................................................................................. 8
Proposal 6 - Fixing the Size of the Board................................................................... 9
Proposal 7 - Election of Directors.......................................................................... 10
Proposal 8 - Ratification of Auditors...................................................................... 11
Price Range of Common Stock................................................................................. 12
Management.................................................................................................. 13
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.............. 16
Certain Relationships and Related Transactions.............................................................. 17
Shareholder Proposals for 2005 Annual Meeting............................................................... 18
Incorporation of Certain Documents by Reference............................................................. 18
Other Matters............................................................................................... 18
Attachment A Special Resolutions for the Corporate Transition
Attachment B Proposed Articles
Attachment C Audit Committee Charter
Attachment D Form of Proxy Card
DAUGHERTY RESOURCES, INC.
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509
PROXY STATEMENT
THE ANNUAL MEETING
GENERAL
This proxy statement is being furnished to our shareholders in
connection with the solicitation by our board of directors of proxies for use at
our annual general and special meeting to be held at 625 Howe Street, Suite 700,
Vancouver, British Columbia, Canada V6C 2T6, at 10:00 a.m. (Vancouver, British
Columbia time) on June 24, 2004. The approximate date of mailing this proxy
statement and the accompanying proxy card is May 26, 2004. We previously mailed
to our shareholders a copy of our annual report for 2003 and quarterly report
for the first quarter of 2004.
Our board of directors has unanimously approved the special
resolutions authorizing our transition to the new corporate law in British
Columbia, Canada, our jurisdiction of incorporation (the "Corporate
Transition"), and our adoption of the governing articles authorized in the
special resolutions.(the "Articles") Copies of the special resolutions and
related Articles are included as Attachment A and B to this proxy statement. The
board has also unanimously approved a new incentive stock award and stock option
plan and a proposal to fix the size of the board at four members. The board
recommends that you vote in favor of these proposals as well as the nominees for
director and ratification of auditors.
RECORD DATE
The board has set the close of business on May 14, 2004 as the
record date for the meeting. Registered holders of our common stock at the close
of business on the record date or their transferees who produce proper evidence
of ownership of the transferred shares at least 48 hours before the meeting and
who request that their name
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be included on the list of shareholders will be entitled to vote at the meeting.
If you are included on that list, you may vote your shares at the meeting, but
the previous owners may not.
QUORUM AND VOTING REQUIREMENTS
As of the record date, there were 14,253,681 shares of our common
stock issued and outstanding, and no shares of our preferred stock were
outstanding. Each share of common stock has the right to one vote on each matter
that properly comes before the meeting. The presence, in person or by proxy, of
holders of at least 10% of the outstanding shares of our common stock is
necessary to constitute a quorum at the meeting. We will hold the meeting on the
scheduled date as long as this quorum requirement is met. We will count your
shares toward the quorum requirement as long as we receive your signed proxy
card, even if you vote to abstain on the proposals or fail to vote. If your
shares are held in "street name" by a broker, bank or other nominee, they should
give you instructions for voting the shares. Usually, they will vote the shares
on your behalf and at your direction. Your broker or other nominee may refrain
from voting your shares held in its street name if you do not tell the nominee
how to vote those shares. In that case, they will be treated as broker nonvotes.
Any broker nonvotes will count for the quorum requirement but not for approval
of the proposals.
Approval of the Corporate Transition and each of the three other
proposals relating to the Corporate Transition requires affirmative votes by
holders of at least three-fourths of our common shares voting on the proposal at
the meeting in person or by proxy. The proposals for approving incentive plan,
fixing the size of our board and ratifying its selection of auditors require
simple majority votes, and directors are elected by plurality votes.
SOLICITATION AND REVOCATION OF PROXIES
To vote your shares at the meeting, you must attend the meeting or
appoint a proxy to vote on your behalf by completing and mailing your proxy
card. You will find a proxy card accompanying this proxy statement. For your
proxy to be valid and used at the meeting, it must be received by our stock
transfer agent, Pacific Corporate Trust Company, 625 Howe Street, 10th Floor,
Vancouver, British Columbia V6C 2T6, by the second business day preceding the
meeting or, if the meeting is adjourned or postponed, by the second business day
preceding the adjourned or postponed meeting. Proxies will be solicited
primarily by mail and may also be solicited by our directors or officers.
All shares represented at the meeting by properly executed proxies
will be voted in accordance with the instructions specified on the proxy card.
IF NO SPECIFICATION IS MADE, IT WILL BE VOTED BY THE NAMED PROXY HOLDER IN FAVOR
OF THE COTPOTATE TRANSITION, EACH OF THE OTHER PROPOSALS RELATING TO THE
CORPORATE TRANSITION AND THE INCENTIVE PLAN.
The accompanying proxy card, when properly signed, confers
discretionary authority to the named proxy holder on any other matters that may
properly be brought before the meeting. We are not aware that any matters to be
presented at the meeting other than the proposals in this proxy statement. See
"Other Matters."
Each shareholder may vote in person or by proxy. To be valid, a
proxy card must be signed by the shareholder or by the shareholder's attorney,
duly authorized in writing. A shareholder who has given a proxy may revoke it at
any time before its use by:
- completing, signing, dating and delivering a new proxy no later than
two business days before the meeting;
- personally attending the meeting and voting in person;
- sending an instrument in writing signed by the shareholder or by his
duly authorized attorney to Pacific Corporate Trust Company, 625
Howe Street, 10th Floor, Vancouver, British Columbia V6C 2T6, at
least two business days before the date of the meeting; or
- giving an instrument in writing signed by the shareholder or his
duly authorized attorney to the chairman of the meeting on the day
of the meeting or any adjournment thereof.
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PROXY MATERIALS
Upon request, additional proxy materials will be furnished without
cost to brokers and other nominees for forwarding to beneficial owners of shares
held in their names. We will also honor requests from shareholders for copies of
our previously mailed 2003 ANNUAL report and quarterly report for the first
quarter of 2004. Requests should be made in writing to Daugherty Resources,
Inc., Shareholder Services, 120 Prosperous Place, Suite 201, Lexington, Kentucky
40509, or by calling us at (859) 263-3948.
COST OF PROXY SOLICITATION
The cost of preparing and mailing this proxy statement to our
shareholders is estimated at approximately $125,000. In addition to the use of
the mails for distribution of this proxy statement, proxies for the meeting may
be solicited by our directors and officers, without additional compensation, by
personal interview, telephone or otherwise.
PROPOSAL 1 - CORORATE TRANSITION AND RELATED NAME CHANGE
BACKGROUND
Daugherty Resources was incorporated in February 1979 under the laws
of British Columbia, Canada. We commenced oil and gas operations in 1993 with
the acquisition of Daugherty Petroleum, Inc. ("DPI"). At that time, the primary
assets of Daugherty Resources were inactive gold and silver prospects in Alaska.
Since that time, we have operated as an independent energy and natural resources
company focused on natural gas development and production in the Appalachian
Basin, primarily in eastern Kentucky. Our common stock is listed and traded
under the symbol "NGAS" on the Nasdaq SmallCap Market, and our principal and
administrative offices are located in Lexington, Kentucky, near our core
operating areas. We maintain a website with information about us at
www.ngas.com. Unless otherwise indicated, references in this proxy statement to
Daugherty Resources, the "Company," "we," "our" or "us" include Daugherty
Resources, Inc. as well as DPI and its interests in sponsored drilling programs.
During the last several years, our board of directors considered
changing our jurisdiction of incorporation from British Columbia to the State of
Delaware in a transaction known as a domestication under Delaware law. The board
considered that potential investors and strategic partners in the United States
are more comfortable dealing with U.S. corporations than British Columbia or
other foreign corporations. The board also considered that the more favorable
corporate environment generally associated with incorporation in Delaware could
help us compete more effectively with other public companies, many of which are
incorporated in Delaware, in raising capital and in attracting and retaining
skilled, experienced outside directors.
During 2003, our operating and financial performance continued to
benefit from the success of our significant ongoing drilling initiatives in the
Appalachian Basin. We increased our oil and gas production by 51% and our total
revenues by 227% over 2002 levels. We also added 9,854 million cubic feet of
natural gas equivalents to our estimated proved reserves. To support our growth,
we doubled our capital base during 2003, while earning $0.47 per weighted
average basic share outstanding for the year. Our performance was reflected in
the market price of our common stock, which increased from a high bid price of
$1.17 per share on the Nasdaq SmallCap Market during the first quarter of 2003
to a high of $6.14 during the fourth quarter of the year. See "Price Range of
Common Stock."
During the first quarter of 2004, our board determined to forego
seeking shareholder approval for a domestication to Delaware. The primary reason
was adverse tax consequences under Canada's corporate emigration tax rules.
Under these rules, we would be deemed to have completed a tax year immediately
prior to implementing a domestication, and our assets at that time, primarily
our investment in DPI, would be deemed to have been disposed of at fair market
value. Since this would be determined on the basis of our market capitalization
rather than the book value of our assets, we could expect to recognize
significant gains on the deemed disposition of those assets, and the
hypothetical gains would be subject to the emigration tax at an effective rate
of 16.8% in 2004. As a result, we could expect to incur substantial liability
for Canadian emigration taxes if we completed a domestication under prevailing
market conditions.
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The other reason for the board's decision to abandon its plans for a
corporate domestication was a recent modernization of the corporate law in the
Province of British Columbia, our jurisdiction of incorporation. As of March 29,
2004, the British Columbia Company Act (the "Company Act") was replaced by the
British Columbia Business Corporations Act (the "BCCA"). The BCCA is the first
major reform of the corporate law in British Columbia in 30 years. It is
intended to modernize and streamline the corporate law and provide British
Columbia corporations with more flexibility and less governmental regulation
than the Company Act. Our board determined that our Corporate Transition under
the BCCA with several optional changes to our governing instruments could
provide some of the advantages contemplated by the domestication with none of
the adverse tax consequences.
HIGHLIGHTS OF THE BCCA
Significant reforms adopted under the BCCA that affect our corporate
governance are listed below.
- Under the Company Act, we were required to maintain a board of
directors with at least three members, composed of a majority of
Canadian residents and at least one British Columbia resident. The
BCCA eliminates these residency requirements for directors.
- The BCCA does not make significant changes to the liability of
directors, but statutory limitations on director liability are
slightly expanded.
- Court approval is no longer needed for indemnification of directors
and officers. In some instances, indemnification is mandatory under
the BCCA.
- The requirement to hold meetings of shareholders in British Columbia
has been removed under the BCCA.
- The BCCA changes the procedures for including shareholder proposals
at an annual general meeting and for exercising dissent rights.
- The BCCA eases various regulatory burdens for some types of mergers,
acquisitions and business combination transactions.
- Under the BCCA, the board of directors has the power to fill
vacancies on the board without shareholder approval. As a result, an
incumbent board, not a potential raider, would have control over
board positions in the period between annual meetings of
shareholders. Our board of directors has no current plans to
implement any measures that could have an anti-takeover effect.
- The BCCA requires a pre-existing British Columbia corporation to
adopt various mandatory changes to its articles, which are the
equivalent of bylaws under most state corporate laws in the United
States. The articles may also include various optional corporate
governance provisions as long as they are consistent with the BCCA.
The optional provisions of our proposed Articles are covered in
Proposals 2 through 4 of this proxy statement.
BCCA TRANSITION APPLICATION
The BCCA requires all British Columbia corporations to change their
organizational instruments and take other steps to conform with the new statute
no later than March 29, 2006. If a corporation fails to complete the transition
process by that date, it can be dissolved by the Registrar of Companies
appointed under the BCCA (the "Registrar"). The transition process is called a
transition rollover under the BCCA. For clarity in this proxy statement, we
refer to our transition rollover under the BCCA as the Corporate Transition.
The first step in a transition rollover under the BCCA is the filing
a transition application with the Registrar. Under the Company Act, each British
Columbia corporation had a memorandum, which was the equivalent of a certificate
of incorporation under most state corporate laws in the United States. Under the
BCCA, the memorandum is replaced by a notice of articles ("NOA"). The NOA must
be filed electronically with the Registrar as part of the transition
application. It must specify the company's name, address of registered office
and
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records office, its authorized share structure and the name and business address
of each director. The NOA must also indicate whether any provisions for issuing
classes or series of shares with special rights or restrictions are included in
the corporation's articles.
Either the board of directors or the shareholders of a pre-existing
British Columbia corporation can authorize the filing of a transition
application. On the basis of our board's authorization of our Corporate
Transition, we filed a transition application and related NOA with the Registrar
in the prescribed form during May 2004. Under the NOA, our share structure
remains unchanged from our memorandum. Our authorized capital continues to
consist of 100,000,000 shares of common stock, no par value, and 5,000,000
shares of preferred stock, no par value.
BCCA PROVISIONS WITH POSSIBLE ANTI-TAKEOVER EFFECTS
Our proposed Articles incorporate provisions of the BCCA that will
give our board of directors the power to fill vacancies on the board without
shareholder approval. As a result, an incumbent board, not a potential raider,
would have control over board positions in the period between annual meetings of
shareholders. Our board of directors has no current plans to formulate or
implement any measures that could have an anti-takeover effect.
PRE-EXISTING COMPANY PROVISIONS
The BCCA provides that a pre-existing British Columbia corporation,
even after filing a transition application, remains subject to various
restrictions called pre-existing company provisions, or "PCPs," until the
transition process is completed by shareholders approval of a special resolution
authorizing removal of the PCPs. See "Removal of Pre-Existing company
Provisions" below. Most of the PCPs do not affect publicly held reporting
companies like Daugherty Resources. The PCPs that do apply to reporting
companies, pending their removal by special resolution of the shareholders, are
summarized below.
- Certain types of proposals required shareholder approval under the
Company Act by vote of the holders of three-fourths of the shares
voting on the proposals. The BCCA allows this threshold to be
reduced to a minimum of two-thirds. Our proposed Articles adopt the
two-thirds voting threshold. See "Proposal 3 - Reduction in
Supermajority Voting Threshold." However, the ability to reduce the
voting threshold is suspended until the PCPs are removed.
- The issue price for shares without par value must be set by special
resolution of the shareholders unless the articles in effect prior
to adoption of the BCCA in March 2004 provided otherwise. Since our
articles under the Company Act authorize our board of directors, not
the shareholders, to determine the consideration to be received for
the issuance of new shares, this PCP restriction does not apply to
us.
- Under the Company Act, any share repurchase offers or redemptions
were required to be made ratably to all shareholders of a British
Columbia corporation unless its articles provided otherwise. Our
articles under the Company Act exempted us from this requirement as
long as we remained a reporting company. The PCPs reinstate the
requirement for any repurchase offers or redemptions to be ratably
until the shareholders authorize removal of the PCPs. Accordingly,
while removal of the PCPs will eliminate the requirement for any
share repurchase offers or redemptions to be made ratably to all
shareholders, it will not change the share repurchase requirements
that applied to us under our Company Act articles.
- A pre-existing British Columbia corporation is prohibited from
adopting any changes to the NOA filed with its transition
application under the BCCA until the PCPs are removed. This includes
any change in corporate name.
REMOVAL OF PRE-EXISTING COMPANY PROVISIONS
One of the steps required to complete a transition rollover under
the BCCA is the approval of a special resolution by shareholders of a
pre-existing British Columbia corporation authorizing the removal of the PCPs.
The special resolutions adopted by our board of directors for our Corporate
Transition include a proposal for the removal of the PCPs by our shareholders. A
copy of the special resolutions to be voted on by the shareholders for the
Corporate Transition, including the special resolution for removal of the PCPs,
is attached to this proxy statement as Attachment A.
Once a special resolution for removal of the PCPs is approved by the
shareholders of a pre-existing British Columbia corporation, the BCCA permits
the corporation's board of directors to adopt certain changes to the
corporation's governing instruments, including changes in its corporate name,
without shareholder approval, unless its articles provide otherwise. Under our
proposed Articles, shareholder approval is not required for a board resolution
to change our corporate name. If the special resolution for removing the PCPs in
our Corporate Transition is approved at the meeting, our board intends to change
our corporate name to ""NGAS Resources, Inc.''
CHANGE IN CORPORATE NAME
Our board believes its contemplated change in our corporate name to
"NGAS Resources, Inc." is in the best interest of the Company for several
reasons. First, the new name reflects our focus on natural gas development and
production. Since 1993, we have structured our business to achieve capital
appreciation through growth in our natural gas reserves and production,
concentrating on geographic areas of the Appalachian Basin where we have
established expertise. As of December 31, 2003, natural gas represented 98% of
our estimated proved oil and gas reserves on an energy equivalent basis. In
addition, we are commonly associated with the NGAS acronym from its use as the
Nasdaq trading symbol for our common stock and the Internet address of our
website. We expect to adopt the name change throughout our organization, with a
view to building a consistent and recognizable corporate identity. Required
clearance for the proposed name has been obtained from the office of the
Registrar.
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IMPLEMENTATION
If the special resolution for removal of the PCPs is approved at the
meeting, we will immediately file with the Registrar a notice of alteration of
our NOA to reflect their removal and the change in our corporate name. Under the
BCCA, our ability to alter our NOA to reflect a change in our corporate name is
conditioned upon removal of the PCPs, although passage of the special resolution
to remove the PCPs is not dependent upon shareholder approval of any of the
other proposals relating to the Corporate Transition. Implementation of the name
change in connection with the Corporate Transition will not interrupt our
corporate existence, operations or trading market for our common stock. Our
common stock will remain traded on the Nasdaq SmallCap Market under the trading
symbol "NGAS." The existing stock certificates representing our common shares
will continue to represent the same number of common shares without any action
on your part. You will not have to exchange any share certificates. We will
issue new certificates to you representing shares of common stock of the Company
under its new name upon transfers or at your request.
VOTE REQUIRED
The special resolution authorizing removal of the PCPs requires
affirmative votes from holders of at least three-fourths of our common shares
voting on the proposal in person or by proxy at the meeting. OUR BOARD OF
DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO REMOVE THE
PCPS IN CONNECTION WITH OUR CORPORATE TRANSITION UNDER THE BCCA.
PROPOSAL 2 - INCEASE IN QUORUM REQUIREMENT
GENERAL
Our existing articles under the Company Act provide that a quorum
for meetings of shareholders consists of at least two shareholders, present in
person or represented by proxy, holding at least 10% of the shares entitled to
vote. Under the BCCA, a British Columbia corporation is permitted to establish
the quorum requirement in its articles, as long as the threshold is not less
than 5% of the shares entitled to vote.
Under our proposed Articles, the holders of at least one-third of
the voting power of our outstanding shares entitled to vote generally in the
election of directors, represented in person or by proxy, constitutes a quorum
for the transaction of business at a meeting of shareholders. When specified
business is to be voted on by a class or series voting as a class, the Articles
also provide that the holders of one-third of the voting power of the
outstanding shares of that class or series constitutes a quorum for the
transaction of the business to be voted on by that class or series.
A copy of the new Articles proposed by the board of directors in
connection with our Corporate Transition is this attached to this proxy
statement as Attachment B. The quorum requirement is established in section 3.5
of the proposed Articles.
VOTE REQUIRED
The proposal to increase the quorum requirement for shareholder
meetings from 10% under our existing articles to one-third of the shares
entitled to vote requires affirmative votes from holders of at least
three-fourths of our common shares voting on the proposal in person or by proxy
at the meeting. OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO INCREASE THE QUORUM REQUIREMENT IN CONNECTION WITH OUR CORPORATE
TRANSITION UNDER THE BCCA.
PROPOSAL 3 - REDUCTION IN SUPERMAJORITY VOTING THRESHOLD
GENERAL
Under both the Company Act and the BCCA, routine matters submitted
to shareholders of a British Columbia corporation are considered general
business and are decided by a simple majority vote. These include business
relating to the conduct of the meeting, proposals for employee benefits plans,
the election of directors and ratification of auditors. Under both statutes,
other types of proposals are considered special business, requiring a higher
threshold, often referred to as a "supermajority." Under the Company Act,
special resolutions for this type of
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proposal required approval by vote of the holders of three-fourths of the shares
voting on the proposal. Under the BCCA, a British Columbia corporation may
reduce this supermajority voting threshold in its articles to a minimum of
two-thirds.
Our proposed Articles adopt the minimum two-thirds supermajority
voting threshold for any proposal requiring passage of a special resolution or
exceptional resolution of shareholders under the BCCA. These include special
resolutions for most changes to the articles, for issuance of shares
representing 20% or more of the shares outstanding and for most mergers or other
extraordinary transactions. Our proposed Articles do not change the types of
matters requiring supermajority voting under the BCCA, only the voting threshold
required for their passage. The supermajority voting threshold is established in
section 3.8(b) of the proposed Articles.
VOTE REQUIRED
The proposal to reduce our supermajority voting threshold to the
two-thirds minimum permitted under the BCCA requires affirmative votes from
holders of at least three-fourths of our common shares voting on the proposal in
person or by proxy at the meeting. OUR BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO REDUCE THE SUPERMAJORITY VOTING
THRESHOLD UNDER THE ARTICLES ADOPTED IN CONNECTION WITH OUR CORPORATE TRANSITION
UNDER THE BCCA.
PROPOSAL 4 - "BLANK CHECK" PREFERRED
GENERAL
As permitted by the BCCA, our proposed Articles authorize our board
of directors to provide for the issuance of shares of preferred stock from time
to time in one or more series, to establish the number of shares to be included
in each series and to fix the designation, powers, preferences and relative,
participating, optional and other special rights of the shares of each series
and any qualifications, limitations or restrictions. Because the board of
directors has the power or so-called "blank check" to establish the powers,
preferences and rights of each series of preferred stock without shareholder
approval, it may afford the holders of preferred stock preferences, powers and
rights, including voting rights, senior to the rights of the holders of our
common stock.
POSSIBLE ANTI-TAKEOVER EFFECTS
The broad powers conferred on board under the proposed Articles to
fix by resolution the powers, preferences and rights, and the qualifications,
limitations and restrictions on our preferred stock could be used to create a
class of preferred stock that, because of its rights, could discourage a
potential takeover. Our board of directors has no current plans to authorize any
class or series of preferred stock or formulate any other measures that could
have an anti-takeover effect.
VOTE REQUIRED
The proposal to include a provision in our Articles authorizing our
board of directors to create one or more series of preferred shares with special
rights or restrictions requires affirmative votes from holders of at least
three-fourths of our common shares voting on the proposal in person or by proxy
at the meeting. OUR BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
THE PROPOSAL TO INCLUDE PROVISIONS FOR "BLANK CHECK" PREFERRED STOCK IN THE
ARTICLES ADOPTED IN CONNECTION WITH OUR CORPORATE TRANSITION UNDER THE BCCA.
PROPOSAL 5 - THE INCENTIVE PLAN
GENERAL
We currently maintain two stock option plans for the benefit of our
directors, officers, employees and, in the case of the second plan, our
consultants and advisors. See "Management - Executive Compensation - Stock
Options." As of May 14, 2004, there were outstanding options to purchase a total
of 1,755,000 common shares under these plans, with options for an additional
785,300 common shares available for future grants.
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REASONS FOR ADOPTION OF THE INCENTIVE PLAN
Our board believes we should have a pool of common shares and
additional options available for future grants as a way to provide compensation
and additional incentives to our directors, officers, employees and selected
consultants, without reducing working capital for natural gas development
activities. The board adopted the 2003 Incentive Stock and Stock Option Plan
(the "Incentive Plan") for that purpose, subject to approval by our shareholders
at the meeting. Our Board recommends approval of the Incentive Plan as a means
our reducing our cash compensation expenses and offering our directors,
officers, employees and eligible consultants an opportunity to acquire or
increase their proprietary interests in the Company, adding to their incentive
to contribute to our performance and growth.
TERMS OF THE INCENTIVE PLAN
Covered Shares. The Incentive Plan authorizes the grant of stock
awards and stock options for an aggregate of 4,000,000 common shares. Stock
awards under the Incentive Plan may be subject to any vesting conditions and
trading restrictions specified at the time of grant. Options may be granted
under the Incentive Plan either as incentive stock options ("ISOs") within the
meaning of the Internal Revenue Code or as nonqualified stock options ("NSOs").
Shares covered by the Incentive Plan may be either previously unissued or
reacquired shares. Shares that cease to be subject to a stock award that expires
unvested or to an option that expires or terminates unexercised will again be
available for the grant of stock awards or options until termination of the
Incentive Plan.
Administration. The Incentive Plan will be administered by the
Compensation Committee of our board of directors. The Compensation Committee
will have sole discretion to select grantees, determine the number of shares
subject to each grant and prescribe the other terms and conditions of each
award. All of our directors, officers and other employees as well as selected
consultants will be eligible to receive stock awards and options under the
Incentive Plan, except that any person who owns more than 10% of our outstanding
common shares may only receive options in the form of NSOs. The Incentive Plan
provides for the Compensation Committee, in making these determinations, to
consider the position held by each eligible participant, the nature and value of
his or her services and accomplishments, the present and potential contribution
of the individual to our success and any other factors that the Compensation
Committee considers relevant. The grant of stock awards or options under the
Incentive Plan is subject to approval of the plan by our shareholders at the
meeting.
Exercise Price of Options. The exercise price of each option granted
under the Incentive Plan must be equal to the fair market value of our common
stock at the time the option is granted. Payment in full of the exercise price
must be made upon the exercise of each option in cash or, if permitted by the
Compensation Committee at the time of the grant, in shares of our common stock
already owned by the grantee, valued at their market price at the time of
exercise. The proceeds received by us upon the exercise of options granted under
the Incentive Plan will be used for general corporate purposes.
Termination. Options granted under the Incentive Plan may not be
transferred except to the personal representative of a deceased grantee. The
Incentive Plan provides for a period of three months during which an option, to
the extent vested, may be exercised after the termination of a holder's
employment for any reason other than cause, as defined in the Incentive Plan. No
options may be granted under the Incentive Plan after the tenth anniversary of
its approval by our shareholders, although the expiration date of previously
granted options may extend beyond that date. The maximum term of any option is
ten years.
Adjustments. The number of common shares covered by the Incentive
Plan and the exercise price of outstanding options are subject to customary
anti-dilution adjustments in the event of any recapitalization or similar change
affecting our common stock. In the event we sell all or substantially all our
consolidated assets, dissolve, merge or consolidate with another company or are
involved in a tender offer for all or a substantial portion of our common stock,
the Compensation Committee may amend all outstanding options to:
- permit their exercise prior to the effective date of the
transaction;
- require the forfeiture of all options, provided we pay each grantee
the excess of the fair market value of the common stock on that date
over the option exercise price; or
8
- make other provisions that the Compensation Committee deems
equitable.
Plan Amendments. The Compensation Committee may amend the Incentive
Plan without further shareholder action, except for a modification that would:
- increase the number of covered shares;
- extend the maximum option term or the expiration date of the
Incentive Plan;
- permit grants below the fair market value of the common stock on the
date of grant; or
- materially increase the benefits or modify the eligibility
requirements under the Incentive Plan.
INITIAL AWARDS UNDER PLAN
During 2003, initial stock awards were made under the Incentive
Plan, subject to its approval by our shareholders. Pending shareholder approval,
the awarded shares are subject to "lock-up" arrangements restricting any sale or
transfer of the shares. The following table presents information about the
initial awards.
INITIAL AWARDS UNDER INCENTIVE PLAN
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------
NUMBER OF % OF TOTAL MARKET MARKET
COMMON SHARES VALUE ON VALUE ON
SHARES AWARDED TO DATE OF DECEMBER 31,
NAME AWARDED EMPLOYEES AWARD(1) 2003(2)
- ------------------------------- --------- ---------- --------- ------------
William S. Daugherty........... 110,000 31.12% $ 126,600 $ 574,200
D. Michael Wallen.............. 110,000 31.12 126,000 574,200
Michael P. Windisch............ 25,000 7.07 25,500 130,500
All employees.................. 108,500 30.69 111,150 566,370
- --------------------
(1) Valued at $1.02 per share for awards of 50,000 shares to Messrs. Daugherty
and Wallen and 25,000 shares to Mr. Windisch on January 2, 2003 and at
$1.26 per share for awards of 60,000 shares to Messrs. Daugherty and Wallen
on April 2, 2003. See "See "Management - Executive Compensation."
(2) Based on the closing price of $5.22 for our common stock on the Nasdaq
SmallCap Market on December 31, 2003.
FEDERAL INCOME TAX MATTERS
Stock Awards. A grantee of a stock award under the Incentive Plan
will be in receipt of taxable income in an amount equal to the market value of
the awarded shares at the time of the grant or, if the grant is conditioned upon
the lapse of time or other condition, at the time that condition is satisfied.
We will be entitled to a federal income tax deduction in the same amount. Upon
sale of the awarded stock, the grantee will generally recognize capital gain or
loss equal to the difference between the sale proceeds and the market price of
the shares when awarded or later vested.
ISOs. An employee receiving an ISO under the Incentive Plan will not
be in receipt of taxable income upon the grant of the ISO or upon its timely
exercise except under alternative minimum tax rules. Generally, exercise of an
ISO will be timely if made during its term and if the optionee remains a
director, officer or employee at all times from the date of grant until three
months before the date of exercise. When the stock received upon exercise of an
ISO is sold, the optionee will generally recognize long term capital gain or
loss equal to the difference between the sale proceeds and the option exercise
price. Under these circumstances, we will not be entitled to any federal income
tax deduction in connection with either the exercise of the ISO or the sale of
the underlying stock by the optionee.
For purposes of the alternative minimum tax, an employee exercising
an ISO will have alternative minimum taxable income resulting from the exercise
unless the shares are subject to a substantial risk of forfeiture. The amount of
the alternative minimum taxable income and the tax basis in the shares received
upon exercise of an
9
ISO will be determined in the year of exercise unless the shares received upon
exercise are sold to an unrelated party in the same tax year. In that event,
there will generally be no adverse effect because the alternative minimum
taxable income will then be limited to the taxable gain on the sale as
determined for regular tax purposes.
NSOs. A director, officer, employee or consultant receiving an NSO
or electing to sell option shares from an ISO less than two years from the grant
date or within one year from the exercise date (a "Disqualified ISO") will not
recognize taxable income upon the grant of the NSO or ISO. Upon exercise of the
NSO or Disqualified ISO, unless the acquired stock is subject to a substantial
risk of forfeiture, the optionee will recognize ordinary income to the extent of
the difference between the option exercise price and the fair market value of
the stock on the date the option is exercised (the "Compensation Element"). Upon
sale of the stock received upon exercise, the optionee will generally recognize
capital gain or loss equal to the difference between the sale proceeds and the
fair market value of the common stock on the date of exercise. We will be
entitled to a federal income tax deduction equal to the Compensation Element
upon the exercise of an NSO or Disqualified ISO. If an ISO is exercised by a
former employee more than three months after his termination of employment, the
ISO will be treated as a Disqualified ISO for federal income tax purposes.
Use of Stock for Exercise of Options. If an optionee uses previously
owned common shares to exercise an ISO or NSO, the transaction will be a taxable
disposition of the previously owned shares. Moreover, if the previously owned
shares had been acquired upon exercise of a prior tax qualified stock option and
the holding period requirement for those tendered shares was not satisfied at
the time they were used to exercise an ISO, the use of the tendered shares would
cause the ISO to be treaded as a Disqualified ISO for federal income tax
purposes.
VOTE REQUIRED
Approval of the Incentive Plan requires the affirmative vote by
holders of a majority of our common shares voting on the proposal in person or
by proxy at the meeting. Our board believes the supplemental and flexible
noncash incentive compensation provided by the Incentive Plan will be useful in
enabling us to attract and retain qualified executives and other employees and
consultants who can make important contributions to our success. THE BOARD
RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE THE INCENTIVE
PLAN.
PROPOSAL 6 - FIXING THE SIZE OF THE BOARD
GENERAL
The Company Act and the BCCA both require the size of the board of
directors of a British Columbia corporation to be fixed by general resolution at
the annual meeting of the corporation's shareholders. Under the BCCA, the board
can expand its size during the ensuring year by no more than one-third. In April
2004, our board added a new member, increasing the size of the board to four
directors. See Proposal 4 - Election of Directors. The board expects to maintain
its current size for the ensuring year, subject to the its authority under the
BCCA to add one additional member prior to the next annual general meeting of
shareholders.
VOTE REQUIRED
Approval of the proposal to fix the size of the board of directors
at four members for the ensuring year requires the affirmative vote by holders
of a majority of our common shares voting on the proposal in person or by proxy
at the meeting. THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL
TO FIX THE SIZE OF THE BOARD AT FOUR DIRECTORS.
PROPOSAL 7 - ELECTION OF DIRECTORS
GENERAL
Our board of directors is currently composed of four members. The
term of office for each incumbent director expires at the 2004 annual general
meeting. Each director elected at the meeting will hold office until the next
annual general meeting of shareholders or until his successor is elected or
appointed.
10
NOMINEES
The following incumbent directors have been nominated for reelection
at the meeting. A summary of their business experience and background is set
forth below.
WILLIAM S. DAUGHERTY, age 49, has served as the our President, Chief
Executive Officer and member of our board of directors since September 1993, as
well as our Chairman of the Board since 1995. He has also served as President of
DPI since 1984. Mr. Daugherty currently serves as the Governor of Kentucky's
Official Representative to the Interstate Oil and Gas Compact Commission and as
a member of the Board of Directors of the Independent Petroleum Association of
America. He is a past president of the Kentucky Oil and Gas Association and the
Kentucky Independent Petroleum Producers Association. Mr. Daugherty holds a B.S.
Degree from Berea College, Berea, Kentucky.
JAMES K. KLYMAN, age 49, has served as a director of the Company
since May 1992. For the past nine years, he has worked in various executive
capacities with computer software firms specializing in digital media, computer
and electronic arts. Mr. Klyman received a B.A. Degree from York University in
Toronto, Canada.
CHARLES L. COTTERELL, age 79, has served as a member of our board of
directors since June 1994. Mr. Cotterell has been involved in the natural
resources industry and has participated in the natural gas and oil industries in
Western Canada and the United States, particularly in Kentucky, for over 40
years. He is a past Vice President of Konal Engineering Co., Ltd., a former
director of Mariner Mines, Ltd., Nordustrial, Ltd., Goliath Boat Co. and
Dominion Power Press Equipment Co., Ltd., as well as the past President of Smith
Press Automation Co., Ltd.
THOMAS F MILLER, age 58, was appointed as a director of the Company
in May 2004. In February 2003, he joined Rural Development and Finance
Corporation, a provider of housing development and community loans in the border
region of Texas and on Indian reservations in Montana, serving as Chief
Operating Officer since December 2003. Prior to joining that firm, he served for
two years, beginning in April 2001, as Senior Vice President of Low Income
Investment Fund, a provider of investment capital for affordable housing and
community facilities. From 1973 through 2001, Mr. Miller was engaged in various
economic development, job creation and poverty reduction projects, initially
with Kentucky Highland Investment Corporation, a development venture capital
group focused in Appalachian Kentucky, where he served as President for ten
years, followed by fifteen years of service with the Ford Foundation both in the
United States and East Africa. Before entering project finance, Mr. Miller was
employed by Arthur Andersen & Co. for five years, receiving his CPA certificate
in 1972. He holds a B.A. Degree from Marietta College, Marietta, Ohio.
ADDITIONAL INFORMATION ABOUT THE BOARD
Actions by the Board in 2003. During 2003, our board of directors
took action, either at meetings or by consent, on a total of 18 occasions. No
director attended or participated in fewer than 75% of those meetings or actions
by consent.
Committees and Committee Meetings. Our board of directors has a
nominating committee comprised of William S. Daugherty and Charles L. Cotterell.
The board also has an audit committee and a compensation committee, both
comprised of Charles L. Cotterell and James K. Klyman, with the addition of
Thomas F. Miller to the audit committee in May 2004. See "Management - Board
Committees." During 2003, the nominating committee held one meeting, the audit
committee held four meetings, and the compensation committee held three
meetings.
Compensation of Directors. No cash fees were paid to our directors
during 2003. In lieu of cash fees, each of our outside directors received common
stock awards of 3,000 shares during 2003 with a market value of $3,060 on the
date of issuance, plus options to purchase 25,000 common shares at an exercise
price of $1.02 per share. We also reimburse our outside directors for the
expenses they incur in attending meetings of the board or its committees.
11
VOTE REQUIRED
Under the BCCA, the four nominees for directors receiving the
greatest number of votes cast will be elected as directors. THE BOARD RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" THE NOMINEES.
PROPOSAL 8 - RATIFICATION OF AUDITORS
GENERAL
Subject to ratification by our shareholders as required under the
BCCA, our board of directors has appointed Kraft, Berger, Grill, Schwartz, Cohen
& March, LLP ("Kraft Berger") as our auditors for 2004. Kraft Berger is a firm
of chartered accountants based in Toronto, Ontario, and we are required by the
BCCA to engage independent Canadian accountants to audit our financial
statements. Kraft Berger has served as the Company's independent public
accountants since 1992. Representatives of Kraft Berger are not expected to be
present at the meeting.
AUDIT FEES AND SERVICES
The engagement of Kraft Berger for the audit of our consolidated
financial statements for 2004 was approved by the audit committee of our board
of directors, subject to ratification by our shareholders. The audit committee's
approval covered audit fees and tax fees we will incur for these services from
Kraft Berger for 2004. The following table shows the fees we were billed for
professional services rendered Kraft, Berger for each of the last two years.
Kraft Berger did not provide any information technology or other products or
services to us in 2003 or 2002, and we did not incur any fees for any of their
products or services for those years except as listed below.
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
------- --------
Audit fees(1)........... $49,628 $ 35,120
Audit related fees(2)... -- --
Tax fees(3)............. 8,542 7,160
- ------------------
(1) Reflects profession fees billed for the audit of our consolidated financial
statements and review of our quarterly condensed consolidated financial
statements, but does not include additional fees of $37,000 for 2003 and
$51,914 for 2002 billed by Hall, Kistler & Company LLP, certified public
accountants, for audits of our United States operations.
(2) Reflects fees, if any, for assurance and consulting services related to the
audit of our consolidated financial statements and reviews of our quarterly
condensed consolidated financial statements.
(3) Reflects tax compliance fees for the preparation of Canadian tax returns
and consulting fees for tax planning services.
PROCEDURES FOR APPROVAL OF AUDIT FEES AND SERVICES
The engagement of Kraft Berger for the audit of our consolidated
financial statements for 2003 was approved by the audit committee of our board
of directors and ratified by our shareholders at the 2003 annual meeting. The
audit committee's approval covered the audit fees and tax fees we incurred for
these services from Kraft Berger for 2003. A copy of the Audit Committee Charter
is included as Attachment C to this proxy statement.
VOTE REQUIRED
Ratification of Kraft Berger as our independent public accountants
for 2004 requires the affirmative vote by holders of a majority of our common
shares voting in person or by proxy at the meeting. THE BOARD RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO RATIFY ITS ENGAGEMENT OF KRAFT BERGER TO
AUDIT OUR FINANCIAL STATEMENTS FOR 2004.
12
PRICE RANGE OF OUR COMMON STOCK
TRADING MARKET
Our common stock trades on the Nasdaq SmallCap Market in the United
States under the symbol "NGAS." There is no trading market for the common stock
in Canada. The following table sets forth the range of high and low bid prices
for the common stock and average daily trading volume as reported on the Nasdaq
SmallCap Market for the periods indicated. The Nasdaq SmallCap Market quotations
represent inter-dealer prices, without mark-ups or commissions, and they may not
necessarily be indicative of actual sales prices.
BID PRICES
-------------------- AVERAGE DAILY
HIGH LOW VOLUME
------ ------- -------------
2002
First quarter........................ $ 1.09 $ 0.63 6,188
Second quarter....................... 1.47 0.75 18,308
Third quarter........................ 0.91 0.55 7,355
Fourth quarter....................... 1.17 0.65 8,689
2003
First quarter........................ $ 2.05 $ 0.99 31,510
Second quarter....................... 6.72 1.26 243,045
Third quarter........................ 5.49 3.55 213,821
Fourth quarter....................... 6.14 3.75 183,446
2004
First quarter........................ $ 7.00 $ 3.80 451,859
Second quarter (through May 14th).... 6.94 4.53 336,765
------ ------- -------
SECURITY HOLDERS
As of May 14, 2004, there were 3,091 holders of record of our common
stock.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. Our current
policy is to retain any future earnings to finance the acquisition and
development of additional oil and gas reserves. Any future determination about
the payment of dividends will be made at the discretion of our board of
directors and will depend on our operating results, financial condition, capital
requirements, restrictions in debt instruments, general business conditions and
other factors the board of directors deems relevant.
13
MANAGEMENT
EXECUTIVE OFFICERS
The following table lists the executive officers of Daugherty
Resources, together with their ages as of the date of this proxy statement and
their tenure with the Company.
OFFICER OR
DIRECTOR
NAME AGE POSITION SINCE
- ------------------------- --- ----------------------------------------------- ----------
William S. Daugherty..... 49 Chairman of the Board, President and
Chief Executive Officer 1993
D. Michael Wallen........ 49 Vice President - Engineering and Secretary 1995
William G. Barr, III..... 54 Vice President - Acquisitions and Legal Affairs 2004
Michael P. Windisch...... 29 Chief Financial Officer 2002
Information about Mr. Daugherty is provided above under the caption
"Proposal 4 - Election of Directors." A summary of the business experience and
background of our other executive officers is set forth below.
D. MICHAEL WALLEN joined DPI in March 1995 as Vice President of
Engineering and has served as a Vice President and Secretary of the Company
since March 1997. For six years before joining DPI, he served as the Director of
the Kentucky Division of Oil and Gas, prior to which he was employed by various
operating companies in the Appalachian Basin as a well drilling and completion
specialist and as a gas production engineer. Mr. Wallen recently served as
President of the Kentucky Oil and Gas Association. He holds a B.S. Degree from
Morehead State University, Morehead, Kentucky.
WILLIAM G. BARR, III has served as the our Vice President -
Acquisitions and Legal Affairs since 2004, and he has served in that position
with DPI since 1993. He has over 25 years of experience in the corporate and
legal sectors of the oil and gas industry, having served in senior management
positions with several oil and gas exploration and production companies and in
private practice specializing in energy and natural resource law before joining
DPI. Mr. Barr is currently the Governing Member Trustee for the Energy and
Mineral Law Foundation and sits on the Board of Directors of the Kentucky Oil &
Gas Association, also serving as Chairman of its Legislative Committee. He holds
a J.D. Degree from the University of Kentucky.
MICHAEL P. WINDISCH joined the Company in September 2002 as Chief
Financial Officer. Prior to that time, Mr. Windisch was employed by
PricewaterhouseCoopers LLP, participating for five years in the firms' audit
practice. He is a member of the American Institute of Certified Public
Accountants and holds a B.S. Degree from Miami University, Oxford, Ohio.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based on a review of reporting forms filed with the Securities and
Exchange Commission (the "SEC") to disclose changes in beneficial ownership of
our common stock, none of our officers or directors failed to file any required
reports on a timely basis during 2003.
BOARD COMMITTEES
Nominating Committee. The nominating committee of our board of
directors is responsible for recommending nominees for election to the board by
our shareholders and candidates to fill any vacancies on the board between
annual meetings of shareholders. As part of its procedures for reviewing the
structure of the board and qualifications of its members, the committee will
consider any candidates recommended by shareholders of the Company. Any
shareholder recommendations for nominees to the board for consideration at the
2005 annual general meeting of our shareholders should be provided to our
corporate secretary by March 1, 2005.
Audit Committee Report. The audit committee of our board of
directors is responsible for monitoring the Company's internal controls and
financial reporting process. Prior to the filing our annual report on Form
10-KSB
14
for the year ended December 31, 2003, the audit committee recommended to the
board that our audited financial statements be included in the report for filing
with the SEC. The committee's recommendation was based on its review and
discussions with management and our independent auditors about the financial
statements as well as our internal controls and financial reporting process The
committee also reviewed the written disclosures and letter from the auditors
required by Independence Standards Board Standard No. 1, and its discussions
with our auditors included the matters required to be covered under that
Standard and by the Statement of Auditing Standards No. 61.
This report has been approved by the following
members of the 2003 audit committee: JAMES K. KLYMAN CHARLES L. COTTERELL
Compensation Committee Interlocks and Insider Participation. The
compensation committee of our board of directors is responsible for evaluating
compensation arrangements for all officers and key employees and for
administering our employee benefit plans. The compensation committee is
comprised of Messrs. Klyman and Cotterell. Neither of these directors has ever
served as an officer of the Company or any of its subsidiaries or had any
related party transactions with the Company in 2003.
EXECUTIVE COMPENSATION
Compensation of Named Executive Officers The following table sets
forth the total remuneration paid during the last three years to our executive
officers who earned over $100,000 in any of those years. None of the named
executive officers received perquisites with a value exceeding 10% of their
salary and bonus during any of the last three years.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES (#)
NAME AND ---------------------------------- STOCK UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) AWARDS(2) OPTION/SARs(3)
- ------------------------- ------------ ------------ ------- -------- ---------- --------------
William S. Daugherty 2003........ $ 185,385 $90,000 $ 4,231 110,000 100,000
President and CEO 2002........ 144,616 -- 3,890 20,000 --
2001........ 131,250 -- 3,030 37,000 --
D. Michael Wallen 2003........ 135,385 90,000 1,330 110,000 100,000
Vice President and 2002........ 100,000 -- 1,211 20,000 --
Secretary 2001........ 77,110 -- 974 37,000 --
Michael P. Windisch 2003........ 67,500 15,000 -- 25,000 50,000
Chief Financial Officer 2002........ 15,777(4) -- -- -- --
- -----------------
(1) Represents assumed interest at a market rate of 4.75% per annum on
unsecured, non-interest bearing loans. See "Certain Relationships and
Related Transactions."
(2) Valued at $1.02 per share for awards of 50,000 shares to Messrs. Daugherty
and Wallen and 25,000 shares to Mr. Windisch on January 2, 2003, at $1.26
per share for awards of 60,000 shares to Messrs. Daugherty and Wallen on
April 2, 2003, at $0.63 per share for awards in 2002 and $1.50 per share
for awards in 2001.
(3) Issued on January 2, 2003 under a shareholder approved stock option plan,
exercisable for five years at $1.02 per share.
(4) Reflects salary from September 23, 2002, when Mr. Windisch commenced
employment.
Stock Options. We maintain two stock option plans for the benefit of
our directors, officers, employees and, in the case of the second plan, certain
consultants and advisors. The first plan, adopted in 1997, provides for the
grant of options to purchase up to 600,000 common shares at prevailing market
prices, vesting over a period of up to five years and expiring no later than six
years from the date of grant. The second plan, adopted in 2001, provides for the
grant of options to purchase up to 3,000,000 common shares at prevailing market
prices, expiring no later than ten years from the date of grant. During 2003,
our board of directors also adopted the Incentive Plan, subject to approval of
our shareholders, providing for the grant of stock awards and stock option
grants for an aggregate of up to 4,000,000 common shares to our officers,
directors and consultants, as determined by the compensation committee of the
board of directors. See Proposal 2 - The Incentive Plan."
15
The following tables provides information about stock options
granted to our named executive officers during 2003 and their exercise of any
stock options during the year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARs EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS/SARs EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH) DATE
- ------------------------------- ------------ ------------ -------- ----------
William S. Daugherty........... 100,000 28.6% $ 1.02 01/02/08
D. Michael Wallen.............. 100,000 28.6 1.02 01/02/08
Michael P. Windisch............ 50,000 14.3 1.02 01/02/08
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
VALUE OF
SHARES NUMBER OF UNEXERCISED
ACQUIRED UNEXERCISED IN-THE-MONEY
UPON VALUE OPTIONS AT OPTIONS AT
NAME EXERCISE REALIZED YEAR END YEAR END(1)
- ----------------------------------------- -------- ---------- ----------- ------------
William S. Daugherty..................... 59,807 $ 186,000 110,000 $ 422,200
D. Michael Wallen........................ 59,807 186,000 105,000 421,100
Michael P. Windisch...................... 5,000 15,300 45,000 189,000
- ---------------------
(1) Based on the closing price of $5.22 for our common stock on the Nasdaq
SmallCap Market on December 31, 2003.
Change of Control Agreements. During 2004, the Company entered into
change of control agreements with Messrs. Daugherty, Barr, Wallen and Windisch,
entitling them to severance benefits if their employment is terminated without
cause or they resign for good reason following a change of control. For this
purpose, a change of control is generally defined as the acquisition of 20% or
more of our voting stock by any person or group, the sale or lease of all or
substantially all our assets to any person other than a subsidiary or the
reconstitution of our board of directors during any period of 12 consecutive
months with individuals who were not directors at the beginning of that period
or whose nomination was not approved by a majority of the directors in office at
the beginning of that period. Cause is defined in the agreements as conviction
of a felony of any nature or a misdemeanor involving embezzlement of corporate
property. Good reason is generally defined as diminution of the officer's
authority, reduction of his compensation or failure to grant salary increases at
least substantially comparable with our other senior executives. The severance
benefits amount to four times the officer's annual compensation, payable in a
lump sum or installments at the officer's election.
Long Term Incentive Agreements. During 2004, the Company entered
into long term incentive agreements with Messrs. Daugherty, Barr, Wallen and
Windisch, entitling them to incentive awards if they continue to serve as
executive officers for five years or until their employment is terminated
without cause or they resign for good reason following a change of control. For
this purpose, a change of control, a termination without cause or a resignation
for good reason have the same definitions used in their change of control
agreements described above. The long term incentive awards amount to a cash
bonus of one times the officer's annual compensation, payable in a lump sum or
installments at his election, and a vesting of stock options to be issued in
connection with the incentive agreements under the Company's 2003 incentive
stock award and stock option plan, which is subject to shareholder approval. See
Proposal 2 - The Incentive Plan" and "Stock Options" above.
Indemnification Agreements. During 2004, the Company entered into
indemnification agreements with Messrs. Daugherty, Barr, Wallen and Windisch,
entitling them to advancement or reimbursement of their legal expenses, to the
fullest extent permitted by law, if they are involved in litigation as a result
of performing services for the Company or other enterprise at its request. The
right to indemnification under the agreements is conditioned
16
on the meeting a specified standard of care, generally requiring the officer to
have acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company.
Compensation Committee Report. The Company's executive compensation
reflects below market levels of cash compensation, augmented with equity
incentives through stock awards and stock option grants designed to attract and
retain qualified executives with interests, as co-owners of the Company,
identical to those of our unaffiliated shareholders. The board's objective,
reflected in recommendations by the compensation committee, is to integrate
these compensation components with the annual and long term performance of the
Company as well as the achievements and contributions of the individual
executives. In this way, the committee believes that our compensation program
enables us to balance the relationship between compensation and performance in
the best interests of the shareholders.
The committee recommended that our senior management receive stock
awards and option grants as a major form of their compensation for 2003.
Continuing this policy from prior years, the awards provided a means of reducing
the Company's cash compensation expenses while offering our chief executive
officer and other named officers an opportunity to increase their proprietary
interests in the Company, adding to their incentive to contribute to our
performance and growth. For 2003, our chief executive officer received stock
awards totaling 110,000 common shares and five-year options to purchase 100,000
common shares at $1.02 per share, reflecting the market price of our common
stock at the time of the grant. See "Summary Compensation Table" and "Stock
Options" above.
The committee believes that the executive compensation policies
implemented for 2003 through its recommendations serve the best interests of the
Company's shareholders and the long range goals of the Company.
This report has been approved by the following
members of the compensation committee: JAMES K. KLYMAN CHARLES L. COTTERELL
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS
5% BENEFICIAL OWNERS
As of April 30, 2004, there were no persons known to beneficially
own more than 5% of our common shares, other than William S. Daugherty, our
president and Chief Executive Officer. As of that date, there were no shares of
our preferred stock issued or outstanding.
MANAGEMENT OWNERSHIP
The following table shows the amount of common stock beneficially
owned as of April 30, 2004 by each of our directors and named executive officers
and by our directors and named executive officers as a group. Each of our
directors and named executive officers listed below has an address c/o Daugherty
Resources, Inc., 120 Prosperous Place, Suite 201, Lexington, KY 40509.
17
COMMON STOCK
BENEFICIALLY PERCENTAGE
NAMED EXECUTIVE OFFICERS AND DIRECTORS OWNED OF CLASS
- --------------------------------------------------------------------------- ------------- ----------
William S. Daugherty....................................................... 797,307(1) 6.34%
D. Michael Wallen.......................................................... 483,307(2) 3.84
Michael P. Windisch........................................................ 155,000(3) 1.25
Charles L. Cotterell....................................................... 60,000(4) 0.49
James K. Klyman............................................................ 35,000(5) 0.28
All named executive officers and directors
as a group (5 persons)................................................... 1,530,614(6) 11.75
- ---------------------
(1) Includes 110,000 shares issuable upon the exercise of vested stock options
and 150,000 shares issuable upon the exercise of unvested stock options.
(2) Includes 105,000 shares issuable upon the exercise of vested stock options
and 150,000 shares issuable upon the exercise of unvested stock options.
(3) Includes 45,000 shares issuable upon the exercise of vested stock options,
75,000 shares issuable upon the exercise of unvested stock options and
5,000 shares issuable upon conversion of 10% convertible notes due May 1,
2007.
(4) Includes 25,000 shares issuable upon the exercise of vested stock options
and 10,000 shares issuable upon the exercise of unvested stock options.
(5) Reflects 15,000 shares issuable upon the exercise of vested stock options
and 10,000 shares issuable upon the exercise of unvested stock options.
(6) Includes 310,000 shares issuable upon the exercise of vested stock
options, and 395,000 shares issuable upon the exercise of unvested stock
options and 5,000 shares issuable upon conversion of 10% convertible notes
due May 1, 2007.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO RELATED PARTIES
As of December 31, 2003, current and former directors, officers and
employees were indebted to Daugherty Resources in the aggregate amount of
$546,220. The following table shows the amount of the indebtedness from our
named executive officers.
INVOLVEMENT OF LARGEST AMOUNT AMOUNT OUTSTANDING
NAME AND PRINCIPAL POSITION ISSUER OR SUBSIDIARY OUTSTANDING IN 2003 AT DECEMBER 31, 2003
- --------------------------- ---------------------- ---------------------- ---------------------
William S. Daugherty Lender $ 244,329 $ 205,559(1)
Chairman, President and CEO
D. Michael Wallen Lender 173,361 138,395(2)
Vice President
- ------------------
(1) Represents the remaining unpaid balance of (i) five loans from 1998
through 2002 originally aggregating $194,433,bearing interest at 6% per
annum and secured by Mr. Daugherty's interest in Drilling Programs, and
(ii) non-interest bearing, unsecured loans made throughout the course of
his employment, originally aggregating $89,075. See "Executive
Compensation - Summary Compensation Table."
(2) Represents the remaining unpaid balance of (i) five loans from 1998
through 2002 originally aggregating $183,268,bearing interest at 6% per
annum and secured by Mr. Wallen's interest in Drilling Programs, and (ii)
non-interest bearing, unsecured loans made throughout the course of his
employment, originally aggregating $28,000. See "Executive Compensation -
Summary Compensation Table."
LEASE AND SALE OF GAS COMPRESSORS FROM RELATED PARTIES
A limited liability company owned by a director and two officers of
the Company has historically leased natural gas compressors to DPI. For each of
the years ended December 31, 2002 and 2001, DPI leased one or more natural gas
compressors from the related party for $6,000 during 2003 and for $15,000 during
both 2002 and 2001.
18
Based on an independent appraisal, DPI acquired the previously leased equipment
from the related party for $50,000 during 2003.
SHAREHOLDER PROPOSALS FOR 2005 ANNUAL MEETING
Any proposal that a shareholder wishes to present for consideration
at our 2005 annual general meeting must be received by the Company at its
principal executive offices no later than March 1, 2005. This date will provide
sufficient time for consideration of the proposal for inclusion in our 2005
proxy materials.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate certain information or documents by
reference into this proxy statement. This means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be a part of
this proxy statement, except for any information that is superseded by more
current information included directly in this proxy statement.
This proxy statement incorporates by reference the flowing documents
that we previously filed with the SEC. They contain important information about
the Company and its business.
- Annual Report on Form 10-KSB for the fiscal year ended December 31,
2003; and
- Quarterly Report on Form 10-QSB for the quarter ended March 31,
2004.
Documents incorporated by reference, as well as additional copies of
this proxy statement, are available from us without charge by writing us at
Daugherty Resources, Inc., 120 Prosperous Place, Suite 201, Lexington, Kentucky
40509, Attention Secretary, or by calling our office in Lexington, Kentucky at
(859) 263-3948.
OTHER MATTERS
The board of directors has approved this proxy statement and the
accompany proxy card for solicitation of shareholder approval of the proposals
presented in these materials at our 2004 annual general and special meeting. The
board knows of no other matters to be presented at the meeting. If any
additional matter should be presented properly, it is intended that proxies will
be voted in accordance with the discretion of the named proxy holder.
Lexington, Kentucky BY ORDER OF THE BOARD OF DIRECTORS
May __, 2004
William S. Daugherty
Chairman of the Board, President and
Chief Executive Officer
19
ATTACHMENT A
SPECIAL RESOLUTIONS
FOR CORPORATE TRANSITION
ADOPTED BY THE BOARD OF DIRECTORS OF
DAUGHERTY RESOURCES, INC.
WHEREAS over the last several years, the Board of Directors (the
"Board") of Daugherty Resources, Inc., a British Columbia corporation (the
"Company"), has considered changing the Company's jurisdiction of incorporation
from British Columbia to the State Delaware, but has determined to forego plans
to seek shareholder approval for a domestication based on its adverse tax
consequences under Canada's corporate emigration tax rules and also on the
recent modernization of the corporate law in the Province of British Columbia;
WHEREAS on March 29, 2004 (the "Enactment Date"), the British
Columbia Company Act (the "Company Act") was replaced by the British Columbia
Business Corporations Act (the "BCCA"), which is intended to modernize and
streamline the corporate law and provide British Columbia corporations with more
flexibility and less governmental regulation than the Company Act;
WHEREAS the BCCA requires pre-existing British Columbia corporations
to take various steps to complete the transition prescribed thereunder at any
time within two years of the Enactment Date and permits several optional changes
to the transitioning corporation's governing instruments if approved by special
resolutions of its shareholders;
WHEREAS the Board has determined that a corporate transition to the
BCCA with certain optional changes to the Company's governing instruments could
provide some of the advantages contemplated by the domestication with none of
the adverse tax consequences;
WHEREAS in accordance with the requirements for charter transition
under Part 14, Division 1 of the BCCA, the Board has heretofore authorized its
transfer agent, Pacific Corporate Trust Company, to supplement the information
registered in the Company's central securities register under section 111(1) of
the BCCA by registering therein the common shares that were held by shareholders
of the Company as of the Enactment Date; and
WHEREAS the Board desires to provide for and, subject to the
requisite approval of its shareholders, adopt the special resolutions set forth
herein for the Company's transition under Part 14 of the BCCA (the "Corporate
Transition"), including adoption of the governing instruments authorized in the
special resolutions.
NOW THEREFORE BE IT:
RESOLVED that the Company is hereby authorized, as soon as
practicable after the date hereof, to file electronically a transition
application in compliance with section 437(2) of the BCCA (the "Transition
Application"); and further
RESOLVED that the Transition Application shall be in the form
prescribed by the Registrar of Companies under the BCCA (the "Registrar") and
shall contain the Company's notice of articles (the "NOA") that (a) sets out (i)
the name and prescribed address of each individual who was, immediately before
the time of the filing, a director of the Company, (ii) the mailing address and
delivery address of the office that was, immediately before the time of the
filing, the registered office of the Company, (iii) the mailing address and
delivery address of the office that was, immediately before the time of the
filing, the records office of the Company and (iv) the name that the Company had
as its corporate name immediately before the time of the filing, (b) indicates,
in respect of each class and series of shares, whether there are special rights
or restrictions attached to the shares of that class or series, (c) includes all
of the information required to comply with section 11(g) of the BCCA that was
contained in the Company's memorandum or articles immediately before the time of
the filing, (d) indicates that the provisions from Table III of
the regulations adopted under the BCCA (the "Pre-Existing Company Provisions")
apply to the Company and (e) does not contain any other information; and further
RESOLVED that that Company shall hold an annual general and special
meeting of shareholders (the "Annual Meeting") to act upon the proposals
involving the special resolutions relating to the Corporate Transition set forth
below and the other proposals involving the ordinary resolutions hereinafter set
forth; and further
RESOLVED that the record date for the Annual Meeting is hereby set
as the close of business on May 14, 2004 (the "Record Date"); and further
RESOLVED that the Annual Meeting shall be held at 625 Howe Street,
Suite 700, Vancouver, British Columbia, Canada V6C 2T6, at 10:00 a.m.
(Vancouver, British Columbia time) on June 24, 2004, subject to adjournment or
postponement at the discretion of the Board; and further
RESOLVED that in connection with the Corporate Transition, a special
resolution shall be presented at the Annual Meeting for shareholders to approve
the removal of the Pre-Existing Company Provisions from the Company's articles;
and further
RESOLVED that in connection with the Corporate Transition, a special
resolution shall be presented at the Annual Meeting for shareholders to approve
the proposed new articles of the Company in substantially the form annexed
hereto (the "Articles"), which (a) incorporate changes required by the BCCA and
(b) include alterations permitted by section 259 of the BCCA (i) reducing the
voting threshold for shareholder approval of proposals requiring special
resolutions from three-fourths to two-thirds of the shares voting on the
proposals, (ii) increasing the quorum requirement for shareholder meetings from
10% of the shares entitled to vote under the Company Act to one-third of the
shares entitled to vote, (iii) authorizing the Board to a change the Company's
corporate name without further shareholder approval and (iv) authorizing the
Board, without further shareholder approval, to provide for the Company's
issuance of preferred shares from time to time in one or more series, to
establish the number of shares to be included in each series and to fix the
designation, powers, preferences and relative, participating, optional and other
special rights of the shares of each series and any qualifications, limitations
or restrictions thereon; and further
RESOLVED that the Company is hereby authorized, upon approval of the
special resolutions relating to the Corporate Transition by the requisite
majority of the Company's shareholders, to immediately thereafter file with the
Registrar a notice of alteration of the NOA to reflect (a) the removal of the
Pre-Existing Company Provisions, (b) the adoption of the Articles and (c) the
Board's adoption of a change in the Company's corporate name to "NGAS Resources,
Inc." in accordance with the Articles; and further
RESOLVED that the Board shall solicit shareholders for approval at
the Annual Meeting of proposals for (a) adoption of the Company's 2003 Incentive
Stock and Stock Option Plan heretofore authorized by the Board, (b) in
accordance with the recommendations of its audit committee (the "Audit
Committee"), ratification of the Board's appointment of Kraft, Berger, Grill,
Schwartz, Cohen & March, LLP as the Company's auditors for 2004 and (c) in
accordance with the recommendations of its nominating committee, (i) fixing the
size of the Board for the ensuing year at four members and (ii) electing William
S. Daugherty, Charles L. Cotterell, James K. Klyman and Thomas F. Miller as
directors of the Company to serve in accordance with the Articles until their
successors are elected or appointed; and further
RESOLVED that, based on the Audit Committee's review and assessment
of the adequacy of its formal written charter (the "Audit Committee Charter")
with a view to ensuring its compliance with applicable Marketplace Rules of the
Nasdaq Stock Market, Inc. and regulations under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Board hereby adopts, effective
January 15, 2004, the amended and restated Audit Committee Charter in the form
annexed hereto; and further
RESOLVED that William S. Daugherty, in his capacity as President and
Chief Executive Officer of the Company, and any other officers of the Company
designated by him (collectively, the "Proper Officers") are hereby authorized
and directed, in the name and on behalf of the Company, to arrange for the
preparation and filing with the Securities and Exchange Commission of a proxy
statement of the Company on Schedule 14A under the Exchange Act, to solicit
proxies on behalf of the Board from holders of the Company's common stock as of
the Record Date
2
for voting their common shares at a Annual Meeting on the foregoing proposals,
all of which pertaining to the Corporate Transition shall be considered special
resolutions for purposes of the BCCA; and further
RESOLVED that, upon receipt of the requisite vote of the Company's
shareholders for approval of the Corporate Transition, the Proper Officers are
hereby authorized and directed, in the name and on behalf of the Company, to
arrange for the preparation and filing with the Registrar of a notice of
alteration of the NOA to reflect (a) the removal of the Pre-Existing Company
Provisions, (b) the adoption of the Articles and (c) the Board's adoption of a
change in the Company's corporate name to "NGAS Resources, Inc." in accordance
with the Articles; and further
RESOLVED that the Company is hereby authorized to incur and bear
such fees, costs and expenses as may be required or appropriate in connection
with the Corporate Transition and the performance of all actions contemplated by
the foregoing resolutions; and further
RESOLVED that the Proper Officers are hereby authorized and
directed, on behalf of the Company, to take or cause to be taken any and all
actions and to enter into, execute and deliver any and all acknowledgments,
agreements, certificates, contracts, instruments, notices, statements and other
documents, or to effect any necessary filings with any and all appropriate
regulatory authorities, state and federal, as may be required or as any of the
Proper Officers may deem necessary, advisable or appropriate to effectuate and
carry out the actions contemplated by and the purposes and intent of the
foregoing resolutions, all such actions to be performed in such manner and all
such acknowledgments, agreements, certificates, contracts, instruments, notices,
statements and other documents to be executed and delivered in such form as the
officer performing or executing the same shall approve, such officer's
performance or execution and delivery thereof to be conclusive evidence of such
approval and the approval of this Board; and further
RESOLVED that the Secretary of the Company is hereby authorized and
directed, on behalf of the Company, to certify and attest any documents deemed
necessary, advisable or appropriate to consummate the actions contemplated by
the foregoing resolutions, provided that such attestation shall not be required
for the due authorization, execution and delivery or validity of the particular
document; and further
RESOLVED that the authority granted to each of the Proper Officers
under the foregoing resolutions shall be deemed to include, in the case of each
such resolution, the authority to perform such further acts and deeds for and on
behalf of the Company as may be necessary, advisable or appropriate, in the
judgment of that officer, to carry out the transactions contemplated thereby,
and all acts and deeds previously performed by any of the Proper Officers or by
counsel to the Company prior to the date hereof that are within the authority
conferred by the foregoing resolutions shall be, and they hereby are, approved,
ratified and confirmed in all respects as the authorized acts and deeds of the
Company.
3
ATTACHMENT B
ARTICLES
OF
DAUGHERTY RESOURCES, INC.
(Under the British Columbia Business Corporations Act)
Daugherty Resources, Inc. (the "Company") was incorporated in
British Columbia under the name Alaska Apollo Resources, Inc. on February 9,
1979 and subsequently changed its name to Daugherty Resources, Inc. In May 2004,
the Company filed a transition application with the Registrar of Companies (the
"Registrar") in compliance with section 437(2) of the British Columbia Business
Corporations Act (the "BCCA") containing the Company's notice of articles (the
"NOA") in the form prescribed by the BCCA. By special resolution of the
Company's shareholders approved in June 2004, the Company amended and restated
its articles as hereinafter set forth (the "Articles") in accordance with the
BCCA.
ARTICLE 1 - CAPITAL STOCK
1.1 Authorized Capital Stock. In accordance with the NOA, the
total number of shares of capital stock that the Company shall have authority to
issue is 105,000,000, consisting of 100,000,000 shares of common stock, no par
value (the "Common Stock"), and 5,000,000 shares of preferred stock, no par
value (the "Preferred Stock"). The powers, designations, preferences, rights and
qualifications, limitations or restrictions of the Common Stock and the
Preferred Stock are set forth or provided in this Article 1.
1.2 Issuance of Shares. Subject to the applicable provisions of
the BCCA, the Company may issue shares of its Common Stock and Preferred Stock
from time to time, for such consideration as may be fixed by the board of
directors of the Company (the "Board"), which is expressly authorized to fix the
same in its sole and absolute discretion. Shares so issued, for which the
consideration has been paid or delivered to the Company, shall be deemed fully
paid stock and shall not be subject to any future call or assessment thereon,
and the holders thereof shall not be liable for any further payments in respect
thereof.
1.3 Common Stock. The shares of authorized Common Stock shall be
identical in all respects and shall have equal rights and privileges as follows:
(a) After the requirements for preferential dividends on the
shares of any outstanding series of Preferred Stock shall have been met and the
Company shall have complied with all of the requirements, if any, for sinking
funds or redemption or purchase accounts and satisfied any other conditions that
may be fixed in accordance with these Articles or the provisions of any
resolutions adopted by the Board pursuant to Article 1.4, then the holders of
Common Stock shall be entitled to receive any dividends declared from time to
time by the Board on the Common Stock, which dividends shall be paid out of
assets legally available for the payment of dividends and shall be distributed
to the holders of Common Stock pro rata in accordance with the number of shares
of Common Stock held by each of them.
(b) After distribution in full of the preferential amounts,
if any, to be distributed to the holders of the shares of any outstanding series
of Preferred Stock in the event of voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding up of the Company, the
holders of Common Stock shall be entitled to receive all the remaining assets of
the Company, tangible and intangible, of whatever kind, available for
distribution to shareholders, which assets shall be distributed to the holders
of Common Stock pro rata in accordance with the number of shares of Common Stock
held by each of them.
(c) Except as may otherwise be required by law, these
Articles or the provisions of any resolutions adopted by the Board pursuant to
Article 1.4, each holder of Common Stock shall have one vote per share of Common
Stock on each matter voted upon by the shareholders.
1.4 Preferred Stock. Authority is hereby granted to the Board,
subject to the provisions of this Article 1, to authorize the issue of one or
more series of Preferred Stock and to fix, by resolution providing for the issue
of each such series, the powers, designations, preferences and relative,
participating, optional or other special rights of the series, and the
qualifications, limitations or restrictions thereof, if any, including the
following:
(a) The number of shares comprising the series and the
distinctive designation thereof;
(b) The dividend rate or rates (which may be contingent upon
the happening of certain events), if any, on the shares of the series, the date
or dates from which dividends shall accrue, the dates on which dividends
thereon, if declared, shall be payable and a statement whether or not or in what
circumstances dividends may be cumulative;
(c) Whether or not the shares of the series shall be
redeemable and, if so, the limitations and restrictions on redemption, the
manner of selecting shares of the series to be redeemed and the amount, if any,
in addition to any accrued and unpaid dividends thereon that the holders of
shares of the series shall be entitled to receive upon redemption thereof, which
amount may vary at different redemption dates and may be different for shares
redeemed through the operation of any purchase, retirement or sinking fund;
(d) The amount, if any, in addition to any accrued and
unpaid dividends thereon that the holders of shares of the series shall be
entitled to receive upon the voluntary or involuntary liquidation, dissolution
or winding up of the Company, which amount shall not be less than the par value
but otherwise may vary depending upon whether the liquidation, dissolution or
winding up is voluntary or involuntary and, if voluntary, may vary at different
dates;
(e) Whether or not the shares of the series shall be subject
to the operation of a purchase, retirement or sinking fund and, if so, whether
the purchase, retirement or sinking fund shall be cumulative or noncumulative,
the extent to and the manner in which the fund shall be applied to the purchase
or redemption of shares of the series for retirement or for other corporate
purposes and the terms and provisions for the operation thereof;
(f) Whether or not the shares of the series shall be
convertible into or exchangeable for shares of capital stock of any other class
or series or for other securities or property of the Company and, if so
convertible or exchangeable, the terms and conditions of conversion or exchange
and the method, if any, of adjusting the same;
(g) The voting powers, if any, of shares of the series; and
(h) Any other powers, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof.
All shares of any one series of Preferred Stock shall be identical
in all respects, except that shares of any one series issued at different times
may have different dates from which dividends thereon shall accrue, and all
series shall rank equally and be identical in all respects, except as provided
in accordance with this Article 1. Shares of Preferred Stock that have been
redeemed, repurchased or retired through the operation of a purchase, retirement
or sinking fund or shares of Preferred Stock that have been converted into
shares of any other class of capital stock of the Company or exchanged for any
other securities of the Company, upon compliance with any applicable provisions
of the BCCA, shall have the status of authorized but unissued shares of
Preferred Stock and may be reissued (x) as part of the series in which they were
originally included (if the terms of that series do not prohibit the
reissuance), (y) as part of a new series of Preferred Stock to be created by
resolution of the Board or (z) as part of any other series of Preferred Stock
the terms of which do not prohibit the reissuance.
1.5 Denial of Preemptive Rights. No shareholder of the Company
shall by reason of his holding shares of any class have any preemptive or
preferential right to purchase or subscribe to any shares of any class of the
Company now or hereafter authorized or any notes, debentures, bonds or other
securities convertible into or carrying options or warrants to purchase shares
of any class now or hereafter authorized, whether or not the issuance of those
shares, notes, debentures, bonds or other securities would adversely affect
dividend or voting rights of such shareholder, other than such rights, if any,
as the Board in its discretion may fix; and the Board may provide for the
issuance of shares of any class of the Company, or any notes, debentures, bonds
or other securities convertible into
2
or carrying options or warrants to purchase shares of any class, without
offering them either in whole or in part to the existing shareholders of any
class.
ARTICLE 2 - STOCK CERTIFICATES AND TRANSFERS
2.1 Stock Certificates. The interest of each shareholder of the
Company shall be evidenced by certificates for shares of stock in such form as
the Board may from time to time prescribe, consistent with Part 4 of the BCCA.
The certificates shall be signed, countersigned and registered in such manner as
the Board may by resolution prescribe, which resolution may permit all or any of
the signatures on the certificates to be in facsimile. In case any officer who
has signed or whose facsimile signature has been placed upon a certificate has
ceased to act in that capacity before the certificate is issued, it may be
issued by the Company or its transfer agent with the same effect as if he
continued in that capacity at the date of issuance.
2.2 Transfers. The central securities register of the Company
shall be maintained by its designated stock transfer agent and registrar
appointed under section 111 of the BCCA. In accordance therewith, shares of the
capital stock of the Company shall be transferred on the books of the Company by
the holder thereof in person or by such person's attorney, upon surrender for
cancellation of certificates for the same number of shares, with an assignment
and power of transfer endorsed thereon or attached thereto, duly executed, with
such proof of the authenticity of the signature as the Company or its agents may
reasonably require.
ARTICLE 3 - MEETINGS OF SHAREHOLDERS
3.1 Annual General Meetings. Subject to the requirements of Part
5, Division 6 of the BCCA, annual general meetings of shareholders of the
Company shall be held at such place, either within or without the Province of
British Columbia, and at such time and date as the Board, by resolution, shall
determine for the purpose of fixing the size of the board, electing directors
and transacting other business properly brought before the meeting. Unless an
annual general meeting is deferred or waived in accordance with section 182 of
the BCCA, annual general meetings shall be held at least once in each calendar
years and not more than 15 months after the last annual general meeting.
3.2 Special Meetings. Subject to the rights of the holders of any
series of Preferred Stock to elect additional directors under specific
circumstances, special meetings of the shareholders may be called by the Board
or, subject to the requirements for requisitions under section 167 of the BCCA,
by one or more shareholders holding at least 5% of the shares entitled to vote
at any the meeting.
3.3 Place of Meetings. The Board may designate the place of
meeting for any meeting of the shareholders. If no designation is made by the
Board, the place of meeting shall be the principal place of business of the
Company.
3.4 Notice of Meetings. Written notice, stating the place, day and
hour of a general or special meeting of shareholders and the purpose or purposes
for which the meeting is called, shall be prepared and delivered by the Company,
in accordance with Part 5, Division 6 of the BCCA, not less than 20 days nor
more than two months days before the date of the meeting, either personally or
by mail, to each shareholder of record entitled to vote at the meeting. If
mailed, the notice shall be deemed to be delivered when deposited in the United
States mail with postage thereon prepaid, addressed to the shareholder at the
shareholder's address as it appears on the stock transfer books of the Company.
Any previously scheduled meeting of the shareholders may be postponed by
resolution of the Board upon public notice given prior to the time previously
scheduled for the meeting.
3.5 Quorum and Adjournment. In accordance with section 172(1)(a)
of the BCCA, the holders of at least one-third of the voting power of the
outstanding shares of capital stock of the Company entitled to vote generally in
the election of directors (the "Voting Stock"), represented in person or by
proxy, shall constitute a quorum for the transaction of business at a meeting of
shareholders, except when specified business is to be voted on by a class or
series of shares voting as a class, in which case the holders of one-third of
the voting power of the outstanding shares of that class or series shall
constitute a quorum for the transaction of specified business to be voted on by
that class. The chairman of the meeting or the holders of a majority of the
shares of Voting Stock so represented may adjourn the meeting from time to time,
whether or not there is a quorum (or, in the case of specified business to be
voted on by a class or series, the chairman or a majority of the shares of that
class or series so represented may adjourn the meeting with respect to that
business). No notice of the time and place of adjourned meetings need be
3
given except as required by law. The shareholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
3.6 Proxies. Concurrent with sending notice of a meeting of
shareholders, the Company shall send to each shareholder entitled to vote at the
meeting a form of proxy that complies with applicable requirements under the
BCCA. At all meetings of shareholders, a shareholder may vote by proxy executed
in writing by the shareholder or as may be permitted by law, or by the
shareholder's duly authorized attorney-in-fact. Proxies must be filed with the
Secretary of the Company or its stock transfer agent or other designated agent
at least two business days before the meeting.
3.7 Shareholder Proposals.
(a) Annual General Meetings of Shareholders. A shareholder
may propose Board nominations or other business to be brought before an annual
general meeting of the Company's shareholders (a "Proposal") only if (i) the
shareholder meets the requirements for status as a qualified shareholder under
section 187 of the BCCA (a "Qualified Shareholder"), (ii) the Qualified
Shareholder complies with the notice procedures under section 188 of the BCCA
and (iii) the Proposal is a proper matter for shareholder action under Part 5,
Division 7 of the BCCA and is required to be included in the Company's proxy
statement for the meeting pursuant to Rule 14a-8 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and section 189 of the BCCA. If a
Proposal for an annual general meeting meets the requirements of this Article
3.7(a), the Company shall include in its proxy statement for the meeting all of
the information pertaining to the Proposal prescribed by Rule 14a-8 under the
Exchange Act and section 189 of the BCCA.
(b) Special Meetings of Shareholders. The only business to
be conducted at a special meeting of shareholders shall be the matters specified
in the Company's notice of meeting pursuant to Article 3.4. If that business
includes the election of directors, nominations of persons for election to the
Board may be made only (i) pursuant to the Company' notice of meeting or (ii) by
a Qualified Shareholder who has complied with the notice procedures under
section 188 of the BCCA.
(c) Notice to Submitters. If the Company does not intend to
process a Proposal under this Article 3.7, it will provide written notice to the
shareholder who submitted the Proposal in accordance with section 191 of the
BCCA the applicable requirements under the Exchange Act.
3.8 Voting Requirements.
(a) General Business. Each of the following matters
submitted to the shareholders at a general or special meeting shall be
considered general business and shall be decided by a majority of the votes cast
on that matter:
(i) business relating to the conduct of the meeting;
(ii) business arising from any reports of directors or
auditors;
(iii) fixing or changing the number of directors
constituting the Board;
(iv) subject to the rights of the holders of any series
of Preferred Stock to elect additional directors under specific circumstances,
the election or appointment of directors;
(v) the appointment of auditors and approval of
arrangements for remuneration of auditors; and
(vi) any other business that does not require passing a
special resolution or an exceptional resolution under the BCCA or the BCCA
Regulations.
(b) Special Business. Any matter submitted to the
shareholders at a general or special meeting other than the matters listed in
Article 3.8(a) shall be considered special business and shall be decided by a
two-thirds majority of the votes cast on that matter.
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3.9 Inspectors of Elections. The Board shall appoint one or more
inspectors, who may include officers, employees, agents or other representatives
of the Company, to act at a meeting of shareholders and make a written report
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed are
unable to act at a meeting of shareholders, the chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
discharging his duties, shall take and sign an oath to faithfully execute the
duties of inspector with strict impartiality and according to the best of his
ability. The inspectors shall have the duties prescribed by the BCCA.
3.10 Polls and Procedures. The Board shall appoint chairman, who
shall be the chairman of the board or president of the Company, to preside at
meetings of shareholders, and a secretary, who may be an officer, employee,
agent or other representative of the Company, to announce at the meeting the
date and time of the opening and the closing of the polls for each matter upon
which the shareholders will vote at a meeting. Conduct of the meeting, polls for
voting on matters brought before the meeting and related procedures shall be
conducted in the manner determined by the Board, consistent with Part 5,
Division 6 of the BCCA.
ARTICLE 4 - BOARD OF DIRECTORS
4.1 General. The business and affairs of the Company shall be
managed by or under the direction of the Board. In addition to the powers and
authorities expressly conferred upon them by these Article, the Board may
exercise all the corporate powers and prerogatives that are not required by law
or by these Article to be exercised or by the shareholders.
4.2 Number, Tenure and Qualifications. Subject to the rights of
the holders of any series of Preferred Stock to elect directors under specific
circumstances, the number of directors shall be fixed from time to time by
resolution adopted by the Board or by ordinary resolution of the shareholders,
but shall consist of not less than three directors. Notwithstanding any
shareholder action fixing the size of the Board at an annual general meeting,
the Board may thereafter increase the size of the Board and appoint additional
directors to fill the resulting vacancy or vacancies in accordance with Article
4.7, provided that the number of additional directors may not exceed, at any
time prior to the next annual general meeting of shareholders, one-third the
number of directors elected at the preceding annual general meeting. Each
director shall hold office for a term expiring at the next annual general
meeting of shareholders or until his successor shall have been duly elected and
qualified. Qualification to serve as a director shall not be contingent upon
ownership of the Company's capital stock but shall be subject to the limitations
set forth in section 124 of the BCCA.
4.3 Regular Meetings. A regular meeting of the Board may be held
without notice immediately after, and at the same place as, each annual general
meeting of shareholders. The Board may, by resolution, provide the time and
place for the holding of additional regular meetings without notice other than
the resolution.
4.4 Special Meetings. Special meetings of the Board shall be
called at the request of the Chairman of the Board, the Chief Executive Officer
or directors constituting a majority of the Board. The person or persons
authorized to call special meetings of the Board may fix the place and time of
the meetings.
4.5 Notice. Notice of any special meeting of the Board shall be
given to each director at the director's business or residence in writing or by
mail, telephone, facsimile or electronic transmission. If mailed, the notice
shall be deemed adequately delivered when deposited in the United States mail so
addressed, with postage thereon prepaid, at least five days before the meeting.
If by facsimile or electronic transmission, the notice shall be transmitted at
least 24 hours before the meeting. If by telephone, the notice shall be given at
least 12 hours prior to the time set for the meeting. To be effective, the
notice need not state the business to be transacted at a regular or special
meeting of the Board or the purposes for calling the meeting. A meeting may be
held at any time without notice if all the directors are present or if those not
present waive notice of the meeting in writing, either before or after the
meeting.
4.6 Quorum. A majority of the members of the Board shall
constitute a quorum for the transaction of business at any meeting of the Board,
but if less than a quorum are present, a majority of the directors present may
adjourn the meeting from time to time without further notice. The act of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board. The directors present at a duly organized
5
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough directors to leave less than a quorum.
4.7 Vacancies. Subject to the rights of the holders of any series
of Preferred Stock to elect additional directors under specific circumstances,
and unless the Board otherwise determines, vacancies resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
and newly created directorships resulting from any increase in the authorized
number of directors, shall be filled by the affirmative vote of a majority of
the remaining directors, though less than a quorum of the Board, and directors
so chosen shall hold office for a term expiring at the next annual general
meeting of shareholders and until such director's successor shall have been duly
elected and qualified. No decrease in the number of authorized directors shall
shorten the term of any incumbent director.
4.8 Executive and Other Committees.
(a) Powers of Committees. The Board may, by resolution
adopted by a majority of the whole Board, designate an executive committee and
one or more additional committees to exercise, subject to applicable provisions
of law, any powers of the Board in the management of the business and affairs of
the Company set forth in the designating resolution. The Executive Committee and
each such other committee shall consist of two or more directors of the Company.
The Board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of any member of a committee,
the other member or members thereof present at any meeting and not disqualified
from voting, whether or not constituting a quorum, may unanimously appoint
another member of the Board to act at the meeting in the place of the absent or
disqualified member. Each committee shall keep written minutes of its
proceedings and shall report its proceedings to the Board.
(b) Procedures of Committees. A majority of any committee
may determine its action and fix the time and place of its meetings, unless the
Board shall otherwise provide. Notice of committee meetings shall be given to
each member of the committee in the same manner provided for in Article 4.5. The
Board shall have power at any time to fill vacancies in, to change the
membership of, or to dissolve any committee.
(c) Advisory Committees. The Board may appoint one or more
advisory committees consisting in whole or in part of persons who are not
directors of the Company; provided that no advisory committee shall have or
exercise any authority of the Board.
4.9 Removal. Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specific circumstances, any
director or the entire Board may be removed from office at any time, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors.
4.10 Exculpation of Directors. A director of the Company shall not
be personally liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director, provided that this Article 4.10 shall
not eliminate or limit the liability of a director (a) for any breach of the
director's duty of loyalty to the Company or shareholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under section 154 of the BCCA or (d) for any transaction
from which the director derived an improper personal benefit. If the BCCA is
amended after the date of filing of adoption of these Articles to authorize
corporate action further limiting or eliminating the personal liability of a
director, then the liability of the directors of the Company shall be limited or
eliminated to the fullest extent permitted by the BCCA as so amended. Any repeal
or modification of this Article by the shareholders of the Company or otherwise
shall not adversely affect any right or protection of a director of the Company
existing at the time of the repeal or modification.
4.11 Related Party Transactions. Interested directors may be
counted in determining the presence of a quorum at a meeting of the Board or of
a committee thereof. No contract or transaction between the Company and one or
more of its directors or officers, or between the Company and any other
corporation, partnership or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer is present at or participates in the meeting of the Board or
committee which authorizes the contract or
6
transaction, or solely because his or their votes are counted for such purpose,
if (a) the material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board or the
committee, and the Board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum, (b)
the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by a vote of the shareholders or (c) the contract or transaction is fair as to
the Company as of the time it is authorized, approved or ratified by the Board,
an authorized committee of the Board or the shareholders.
ARTICLE 5 - OFFICERS
5.1 Elected Officers. The elected officers of the Company shall be
a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary
and any other officers as the Board from time to time may deem proper. The Chief
Executive Officer may also serve as the Chairman of the Board and as the
President. The Chairman of the Board, if appointed, shall be chosen from the
directors. All officers shall each have the powers and duties generally
pertaining to their respective offices.
5.2 Election and Term of Office. The elected officers of the
Company shall be elected annually by the Board at the regular meeting of the
Board held at the time of each annual general meeting of the shareholders. If
the election of officers is not held at that meeting, the election shall be held
as soon thereafter as convenient. Subject to Article 5.8, each officer shall
hold office until such officer's successor shall have been duly elected and
shall have qualified or until the officer's death, resignation or removal by the
Board.
5.3 Chairman of the Board. The Chairman of the Board, if
appointed, shall preside at all meetings of the shareholders and of the Board.
The Chairman shall make reports to the Board and the shareholders and shall
perform any other duties properly delegated to him by the Board.
5.4 Chief Executive Officer. The Chief Executive Officer shall be
responsible for the general management of the affairs of the Company and shall
perform all duties incidental to that office as required by law and assigned by
the Board. The Chief Executive Officer shall see that all orders and resolutions
of the Board and each committee thereof are carried into effect. The Chief
Executive Officer may sign, alone or with the Secretary, or an Assistant
Secretary, or any other proper officer of the Company authorized by the Board,
all certificates, contracts and other instruments of the Company as authorized
by the Board.
5.5 President. The President shall act in a general executive
capacity in the management of the affairs of the Company and shall perform all
duties incidental to that office as required by law and assigned by the Board.
If the Company has a Chairman of the Board or Chief Executive Officer other than
the President, then the President shall assist them in the administration and
operation of the Company' business and general supervision of its policies and
affairs. The President may sign, alone or with the Secretary, or an Assistant
Secretary, or any other proper officer of the Company authorized by the Board,
all certificates, contracts and other instruments of the Company as authorized
by the Board.
5.6 Vice Presidents. Each Vice President shall have the powers and
perform the duties assigned to him from time to time by the Board or delegated
to him by the Chief Executive Officer or the President. The Board may assign to
any Vice President general supervision and charge over any functional division
of the business and affairs of the Company specified by the Board.
5.7 Secretary. The Secretary shall give notice of all meetings of
shareholders and directors and all other notices required by law or by these
Article, shall record all the proceedings of the meetings of the Board, any
committees thereof and the shareholders of the Company in minute books to be
kept for that purpose, and shall perform such other duties as may be assigned to
him by the Board, the Chairman of the Board or the Chief Executive Officer. The
Secretary shall have the custody of the seal of the Company and shall affix the
same to all instruments requiring it, when authorized by the Board, the Chairman
of the Board or the Chief Executive Officer, and attest to the same.
5.8 Removal. Any officer elected by the Board may be removed by a
majority of the members of the whole Board whenever, in their judgment, the best
interests of the Company would be served thereby. No elected
7
officer shall have any contractual rights against the Company for compensation
by virtue of his election after his removal , except as otherwise provided in an
employment contract.
5.9 Vacancies. A newly created office and a vacancy in any office
because of death, resignation or removal may be filled by the Board for the
unexpired portion of the term at any meeting of the Board.
ARTICLE 6 - INDEMNIFICATION
6.1 Mandatory Indemnification. Subject to the requirements and
restrictions of Part 5, Division 5 of the BCCA, the Company shall indemnify and
hold harmless each person (each, an "Eligible Party") who was or is made a party
or is threatened to be made a party, or who was or is a witness without being
named a party, to any threatened, pending or completed action, claim, suit or
proceeding, whether civil, criminal, administrative or investigative, any appeal
in such an action, suit or proceeding, and any inquiry or investigation that
could lead to such an action, suit or proceeding (a "Proceeding"), by reason of
the fact that the Eligible Party is or was a director or officer of the Company,
or while a director or officer of the Company is or was serving at the request
of the Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another corporation, partnership,
trust, employee benefit plan or other enterprise (an "Associated Company"), from
and against any judgments, penalties (including excise taxes), fines, amounts
paid in settlement and reasonable expenses (including court costs and attorneys'
fees) actually incurred by the Eligible Party in connection with the Proceeding
if it is determined that he acted in good faith and reasonably believed (a) in
the case of conduct in his official capacity on behalf of the Company or
Associated Company that his conduct was in the Company's best interests, (b) in
all other cases, that his conduct was not opposed to the best interests of the
Company, and (c) with respect to any Proceeding that is a criminal action, that
he had no reasonable cause to believe his conduct was unlawful, provided that in
the event a determination is made that the Eligible Party is liable to the
Company or is found liable on the basis that personal benefit was improperly
received by the Eligible Party, the indemnification is limited to reasonable
expenses actually incurred by the Eligible Party in connection with the
Proceeding and shall not be made in respect of any Proceeding in which the
Eligible Party shall have been found liable for willful or intentional
misconduct in the performance of his duty to the Company. The termination of any
Proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not of itself be determinative of whether the
person did not act in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any Proceeding that is a criminal action, had no reasonable cause to believe
that his conduct was unlawful. An Eligible Party shall be deemed to have been
found liable in respect of any claim, issue or matter only after he shall have
been so adjudged by a court of competent jurisdiction after exhaustion of all
available appeals.
6.2 Determination of Indemnification. Any indemnification under
the Article 6.1 (unless ordered by a court of competent jurisdiction) shall be
made by the Company only upon a determination that an Eligible Party has met the
applicable standard of conduct. That determination shall be made (a) by a
majority vote of a quorum consisting of directors who at the time of the vote
are not named defendants or respondents in the Proceeding; (b) if such quorum
cannot be obtained, by a majority vote of a committee of the Board, designated
to act in the matter by a majority of all directors, consisting solely of two or
more directors who at the time of the vote are not named defendants or
respondents in the Proceeding; (c) by special legal counsel (in a written
opinion) selected by the Board or a committee of the Board by a vote as set
forth in clause (a) or (b) of this Article 6.2, or, if such quorum cannot be
obtained and such committee cannot be established, by a majority vote of all
directors (in which directors who are named defendants or respondents in the
Proceeding may participate); or (d) by the shareholders of the Company in a vote
that excludes the shares held by directors who are named defendants or
respondents in the Proceeding.
6.3 Advance of Expenses. Reasonable expenses, including court
costs and attorneys' fees, incurred by an Eligible Party in a Proceeding shall
be paid by the Company at reasonable intervals in advance of the final
disposition of the Proceeding, and without the determination specified in the
Article 6.2, upon receipt by the Company of a written affirmation by the
Eligible Party of his good faith belief that he has met the standard of conduct
necessary for indemnification under this Article 6 and a written undertaking by
the Eligible Party to repay the amounts paid or reimbursed by the Company if it
is ultimately determined that the payment of expenses is prohibited under
section 163 of the BCCA. The written undertaking shall be an unlimited
obligation of the Eligible Party and may be accepted without reference to
financial ability to make repayment.
8
6.4 Permissive Indemnification. The Board may authorize the
Company to indemnify employees or agents of the Company, and to advance their
reasonable expenses, to the same extent, following the same determinations and
upon the same conditions for mandatory indemnification of directors and officers
under this Article 6 if the indemnification is not prohibited under section 163
of the BCCA.
6.5 Nature of Indemnification. The indemnification and advancement
of expenses provided under this Article 6 shall not be deemed exclusive of any
other rights to which those seeking indemnification may be entitled under the
BCCA, any agreement, vote of shareholders or disinterested directors or
otherwise.
6.6 Insurance. The Company shall have the power and authority to
purchase and maintain insurance or another arrangement on behalf of any person
who is or was a director, officer, employee or agent of the Company, or who is
or was serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise against any
liability, claim, damage, loss or risk asserted against such person and incurred
by such person in any such capacity or arising out of the status of such person
as such, irrespective of whether the Company would have the power to indemnify
and hold such person harmless against such liability under the provisions
hereof. If the insurance or other arrangement is with a person or entity that is
not regularly engaged in the business of providing insurance coverage, the
insurance or arrangement may provide for payment of a liability with respect to
which the Company would not have the power to indemnify the person only if
including coverage for the additional liability has been approved by the
shareholders of the Company. Without limiting the power of the Company to
procure or maintain any kind of insurance or other arrangement, the Company may,
for the benefit of persons indemnified by the Company, (a) create a trust fund;
(b) establish any form of self-insurance; (c) secure its indemnity obligation by
grant of a security interest or other lien on the assets of the Company; or (d)
establish a letter of credit, guaranty, or surety arrangement. The insurance or
other arrangement may be procured, maintained, or established within the Company
or with any insurer or other person deemed appropriate by the Board regardless
of whether all or part of the stock or other securities of the insurer or other
person are owned in whole or part by the Company. In the absence of fraud, the
judgment of the Board as to the terms and conditions of the insurance or other
arrangement and the identity of the insurer or other person participating in the
arrangement shall be conclusive and the insurance or arrangement shall not be
voidable and shall not subject the directors approving the insurance or
arrangement to liability, on any ground, regardless of whether directors
participating in the approval are beneficiaries of the insurance or arrangement.
6.7 Notice. Any indemnification or advance of expenses to a
present or former director of the Company in accordance with this Article 6
shall be reported in writing to the shareholders of the Company with or before
the notice or waiver of notice of the next shareholders' meeting or with or
before the next submission of a consent to action without a meeting and, in any
case, within the next twelve month period immediately following the
indemnification or advance.
6.8 Change of Control. Following any "change of control" of the
Company of the type required to be reported under Item 1 of Form 8-K promulgated
under the Exchange Act, any determination concerning an Eligible Party's
entitlement to indemnification shall be made by independent legal counsel
selected by the Eligible Party and retained for that purpose by the Board on
behalf of the Company.
6.9 Amendment. Any amendment or repeal of this Article 6 shall not
adversely affect any right or protection existing hereunder in respect of any
act or omission occurring prior to the amendment or repeal.
ARTICLE 7 - MISCELLANEOUS PROVISIONS
7.1 Fiscal Year. The fiscal year of the Company shall be
determined by resolution of the Board.
7.2 Audits. The accounts, books and records of the Company shall
be audited upon the conclusion of each fiscal year by an independent certified
public accountant selected by the Board, and it shall be the duty of the Board
to cause the audit to be made annually in accordance with the requirements of
the Exchange Act and the BCCA.
7.3 Waiver of Notice. Whenever any notice is required to be given
to any shareholder or director of the Company under the provisions of the BCCA,
a waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of notice.
9
Neither the business to be transacted at, nor the purpose of, any annual general
or special meeting of the shareholders or of the Board need be specified in any
waiver of notice of the meeting.
7.4 Resignations. Any director or any officer, whether elected or
appointed, may resign at any time by serving written notice of resignation on
the Chairman of the Board, the Chief Executive Officer, the President, if any,
or the Secretary, and the resignation shall be deemed to be effective as of the
close of business on the date the notice is so delivered or any later date
specified therein.
ARTICLE 8 - AMENDMENTS
These Article may be amended, supplemented, rescinded or repealed by
the type of resolution specified in the BCCA for the subject matter of the
amendment or, if not so specified in the BCCA, by a two-thirds majority of the
votes cast on the matter at a general or special meeting of the shareholders.
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ATTACHMENT C
AUDIT COMMITTEE CHARTER
The Audit Committee (the "Committee"), of the Board of Directors
(the "Board") of Daugherty Resources, Inc. (the "Company"), has reviewed and
assessed the adequacy of its formal written charter (the "Audit Committee
Charter") with a view to ensuring its compliance with applicable Marketplace
Rules of the Nasdaq Stock Market, Inc. ("Marketplace Rules") and regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
accordance therewith, the Audit Committee Charter has been amended and restated,
effective January 15, 2004, as set forth below.
COMPOSITION
The Committee will be comprised of two or more directors, each of
whom (i) is independent, as defined under Marketplace Rule 4200(a)(15), (ii)
meets the criteria for independence set forth in Rule 10A-3(b)(1) under the
Exchange Act, (iii) has not participated in the preparation of the financial
statements of the Company or any subsidiary at any time during the past three
years and (iv) is able to read and understand fundamental financial statements,
as required by Marketplace Rule 4350(d)(2). In addition, by July 31, 2005 or
such earlier date as the Company ceases to be a small business reporting company
under the Exchange Act, the Committee will be comprised of three or more members
of the Board, each of whom meets the foregoing criteria and at least one of whom
has past employment experience in finance or accounting, or any other comparable
experience or background that results in the individual's financial
sophistication, including being or having been a chief executive officer, chief
financial officer or other senior official with financial oversight
responsibilities. The members of the Committee will be elected annually at the
organizational meeting of the Board and will appoint one of its members to serve
as Chairman of the Committee.
RESPONSIBILITIES RELATING TO AUDITORS
In its capacity as a committee of the Board, the Committee is
responsible for (i) the appointment and retention of the firm of independent
registered or chartered public accountants (the "Auditors") engaged for the
purpose of auditing the Company's annual financial statements and issuing an
audit report thereon, for reviewing the Company's quarterly financial statements
and, unless the Company ceases to be a small business reporting company under
the Exchange Act, issuing a review report thereon and for performing related
audit, review or attest services for the Company ("Audit Services") and any
necessary tax compliance and tax planning or related services ("Tax Services"),
(ii) review and evaluation of the written disclosures from the Auditors required
by Independence Standards Board Standard No. 1, which will include discussions
with the Auditors on the matters required to be covered under that Standard and
by the Statement of Auditing Standards No. 61, (iii) approval of the Company's
compensation arrangements with the Auditors for Audit Services and Tax Services,
(iv) oversight of the work performed by the Auditors in connection with the
Audit Services and (v) review and resolution of any disagreements between
management and the Auditors on financial reporting matters.
RESPONSIBILITIES RELATING TO INTERNAL CONTROLS AND PROCEDURES
In its capacity as a committee of the Board, the Committee is
responsible for (i) monitoring the Company's internal controls and financial
reporting process, (ii) assessing whether the internal controls over financial
reporting provide reasonable assurances on the reliability of the Company's
financial reporting and the preparation of its financial statements for external
purposes in accordance with generally accepted accounting principles and (iii)
prior to the filing of the Company's annual report under the Exchange Act with
the Securities and Exchange Commission (the "SEC"), based on the Committee's
review and discussions with management and representatives of the Auditors about
the financial statements and the underlying internal controls and financial
reporting process, making a recommendation to the Board whether the audited
financial statements in the form presented to the Committee should be included
in the report for filing with the SEC.
PROCEDURES FOR RESOLVING COMPLAINTS
The Committee will establish and maintain procedures for (i) the
receipt, retention and treatment of any complaints received by the Company on
accounting, internal accounting controls or auditing matters and (ii) the
confidential, anonymous submission by employees of the Company of any concerns
about questionable accounting or auditing matters, with due regard for
preventing retaliation against any employee for doing so in good faith.
AUTHORITY TO ENGAGE ADVISERS
The Committee is authorized to engage independent counsel and any
other advisers it deems necessary in performing its duties under this Audit
Committee Charter.
FUNDING
The Company will provide appropriate funding, as determined by the
Committee, in its capacity as a committee of the Board, for payment of (i)
professional fees to the Auditors for Audit Services and Tax Services, (ii)
professional fees to any advisers engaged by the Committee and (iii) ordinary
administrative expenses of the Committee that are necessary or appropriate for
carrying out its duties under this Audit Committee Charter.
2
ATTACHMENT D
FORM OF PROXY CARD
FRONT:
DAUGHERTY RESOURCES, INC.
(THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)
PROXY FOR THE ANNUAL GENERAL AND SPECIAL MEETING OF SHAREHOLDERS AT 2:00 P.M.
(VANCOUVER, BRITISH COLUMBIA TIME) ON JUNE 24, 2004, AT
625 HOWE STREET, SUITE 700, VANCOUVER, BRITISH COLUMBIA, CANADA V6C 2T6
The undersigned hereby appoints and directs William S. Daugherty (or,
alternatively, the following nominee of the undersigned: _________________) as
proxy holder to vote the common shares held by the undersigned in Daugherty
Resources at its 2004 annual general and special meeting, and any adjournment,
on the matters set forth below, as follows:
1. Approval of a special resolution authorizing a corporate transition
of Daugherty Resources under the new British Columbia Business Corporations Act,
including a change in corporate name.
9 FOR 9 AGAINST 9 ABSTAIN
2. Approval of a provision in the governing articles of Daugherty
Resources increasing the quorum requirement for shareholder meetings to
one-third of the shares entitled to vote.
9 FOR 9 AGAINST 9 ABSTAIN
3. Approval of a provision in the governing articles of Daugherty
Resources reducing the supermajority voting threshold to two-thirds of the
shares voted.
9 FOR 9 AGAINST 9 ABSTAIN
4. Approval of a provision in the governing articles of Daugherty
Resources authorizing its board of directors to create one or more series of
preferred shares with special rights or restrictions.
9 FOR 9 AGAINST 9 ABSTAIN
5. Approval of the 2003 Incentive Stock Award and Stock Option Plan.
9 FOR 9 AGAINST 9 ABSTAIN
6. Fixing the size of the Board of Directors at four:
9 FOR 9 AGAINST 9 ABSTAIN
7. Election of Directors: Charles C. Cotterell, William S. Daugherty,
James K. Klyman and Thomas F. Miller
9 FOR ALL NOMINEES WITHHOLD 9 vote
9 FOR ALL NOMINEES, except the following:________________________
8. Ratification of Auditors: Kraft, Berger, Grill, Schwartz, Cohen &
March LLP
9 FOR WITHHOLD 9 vote
This Proxy will be voted as specified. If no specification is made, it will be
voted FOR the proposals and at the discretion of the proxy holder if any other
business is properly brought before the meeting.
BACK:
A Proxy will not be valid unless it is dated, duly executed and delivered to the
office of Pacific Corporate Trust Company, 625 Howe Street, 10th Floor,
Vancouver, British Columbia, Canada V6C 2T6, not less than 48 hours (excluding
weekends and holidays) before the date of the meeting. Any Proxy previously
given by the undersigned for the meeting is hereby revoked. Receipt of the
Notice of Annual General and Special Meeting and accompanying Proxy Statement
for the meeting is hereby acknowledged.
Please mark, sign, date and return the Proxy Card promptly using the enclosed
envelope.
DATED: _____________________, 2004
___________________________________
SIGNATURE
___________________________________
Print Name (and title, if required)
(Joint owners must EACH sign. Please sign EXACTLY as your name(s) appear(s) on
the card. When signing as attorney, trustee, executor, administrator, guardian
or corporate officer, please give your FULL title.)
SHAREHOLDER INFORMATION
ANNUAL MEETING LOCATION
700 Standard Life Building
625 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 2T6
CORPORATE OFFICES
Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
TRANSFER AGENT AND REGISTRAR
Pacific Corporate Trust Company
625 Howe Street, 10th Floor
Vancouver, British Columbia
Canada V6C 2T6
Tel: (604) 689-9853
Fax: (604) 689-8144
Email: pacific@pctc.com
ANALYST INQUIRIES
Michael P. Windisch
Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Tel: (859) 263-3948
Fax: (859) 263-4228
Email: ngas@ngas.com
REGISTERED AND RECORDS OFFICE
Maitland & Company
700 Standard Life Building
625 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 2T6
CANADIAN COUNSEL
Ronald Paton, Barrister & Solicitor
Maitland & Company
700 Standard Life Building
625 Howe Street, Suite 700
Vancouver, British Columbia
Canada V6C 2T6
U.S. COUNSEL
Gary M. Smith
Attorney at Law
1941 Bishop Lane, Suite 1020
Louisville, Kentucky 40218
COMMON STOCK LISTING
Nasdaq SmallCap Market
Trading Symbol: NGAS
Newspaper Listing: NGAS
SHAREHOLDER INQUIRIES
Shareholder Administration
Daugherty Resources, Inc.
120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Tel: (859) 263-3948
Fax: (859) 263-4228
Email: ngas@ngas.com