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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 12, 2004
NGAS RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PROVINCE OF BRITISH COLUMBIA 0-12185 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (COMMISSION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) FILE NUMBER) IDENTIFICATION NO.)
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509-1844
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (859) 263-3948
(Former name or former address, if changed since the last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2 below):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14a-12 under the
Exchange Act (17 CFR 240.14d-2[b]]
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4[c])
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ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
On October 13, 2004, NGAS Resources, Inc. (the "Company") filed a
current report on Form 8-K covering its acquisition of substantially all the oil
and gas assets of Stone Mountain Energy Company, L.C. ("SME") located in Bell,
Harlan, and Leslie Counties, Kentucky, and Lee County, Virginia (the "Acquired
Business"). The Company is amending that report to include financial statements
for the Acquired Business and unaudited pro forma financial information for the
transaction required under Item 9.01 of Form 8-K.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
PAGE
Independent Auditors' Report.............................................................................. F-1
Statements of Combined Revenues and Direct Operating Expenses of the Acquired Business for the
nine months ended September 30, 2004 (unaudited) and the years ended December 31, 2003 and 2002........ F-2
Notes to Statements of Combined Revenues and Direct Operating Expenses.................................... F-3
Unaudited Pro Forma Balance Sheet as of September 30, 2004 and Statements of Operations
for the nine months ended September 30, 2004 and the years ended December 31, 2003 and 2002............ F-6
Notes to Unaudited Pro Forma Consolidated Financial Statements............................................ F-11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to current report to be signed on
its behalf by the undersigned thereunto duly authorized.
NGAS RESOURCES, INC.
Date: December 10, 2004 By: /s/ William S. Daugherty
-----------------------------------
William S. Daugherty
Chief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer)
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
NGAS RESOURCES, INC.
We have audited the accompanying statements of combined revenues and direct
operating expenses of the oil and gas properties purchased by NGAS RESOURCES,
INC. (the "Company") from Stone Mountain Energy, L.C. for the years ended
December 31, 2003 and 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
The accompanying statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Company's current report on Form 8-K relating to the Company's purchase of
the properties described above, and they are not intended to be a complete
financial presentation of those properties.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined revenues and direct operating expenses of
the oil and gas properties purchased by NGAS Resources, Inc. from Stone Mountain
Energy, L.C. for the years ended December 31, 2003 and 2002 in conformity with
generally accepted accounting principles in the United States.
HALL, KISTLER & COMPANY LLP
Canton, Ohio
November 17, 2004
F-1
STATEMENTS OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES PURCHASED BY NGAS RESOURCES, INC.
FROM STONE MOUNTAIN ENERGY, L.C.
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
-------------------------------------------- SEPTEMBER 30,
2003 2002 2004
------------------ ----------------- ------------------
(UNAUDITED)
Revenues......................................$ 5,819,624 $ 6,120,179 $ 4,594,069
Direct operating expenses..................... 2,536,978 3,196,134 1,289,595
-------------- ------------- -------------
Excess of revenues over direct
operating expenses.........................$ 3,282,646 $ 2,924,045 $ 3,304,474
============== ============= =============
See Notes to Statements of Combined Revenues and Direct Operating Expenses
F-2
NOTES TO STATEMENTS OF COMBINED REVENUES AND DIRECT OPERATING EXPENSES
OF THE OIL AND GAS PROPERTIES PURCHASED BY NGAS RESOURCES, INC.
FROM STONE MOUNTAIN ENERGY, L.C.
NOTE 1 - SUMMARY OF THE TRANSACTION
On October 12, 2004, NGAS Resources, Inc. (together with its
subsidiaries, "NGAS") acquired oil and gas assets from Stone Mountain Energy,
L.C. ("SME") located in Bell, Harlan and Leslie Counties, Kentucky and Lee
County, Virginia (the "SME Properties"). NGAS completed the purchase of the SME
Properties through Daugherty Petroleum, Inc., its wholly owned operating
subsidiary ("DPI"), for a purchase price of $27 million. As part of the
acquisition of the SME Properties, DPI assumed specified obligations of SME,
including future obligations under its oil and gas leases, farm-out arrangements
and operating agreements. No SME debt was assumed in the transaction.
NOTE 2 - BASIS OF PRESENTATION
The accompanying statements of combined revenues and direct operating
expenses of the SME Properties for the nine months ended September 30, 2004
(unaudited) and the years ended December 31, 2003 and 2002 were derived from the
historical accounting records of the SME and reflect the revenues and direct
operating expenses of the oil and gas producing properties of SME comprising the
SME Properties. The statements do not include depreciation, depletion and
amortization (DD&A"), selling, general and administrative ("SG&A") expenses,
income taxes or interest expense for the SME Properties for the periods
presented since they cannot be accurately quantified and may not be comparable
to the expenses expected to be incurred in the operation of the SME Properties
by NGAS.
Revenues and direct operating expenses included in the accompanying
statements represent operating results from the working interests acquired by
NGAS in the SME Properties for the most recent interim period and the two years
prior to the closing of the acquisition and are presented on an accrual basis of
accounting. Direct operating expenses include all costs associated with lifting,
field processing and transportation of oil and gas production from the SME
Properties, as well as associated gas marketing costs and direct overhead. No
costs are included for general corporate overhead or activities of SME not
directly related to production operations for the SME Properties.
NGAS is unable to quantify the expenses omitted from the accompanying
statements for various reasons. DD&A is omitted because its computation is
dependent on certain historical information that is unavailable to NGAS,
including SME's historical costs and prior depletion rates. Interest expense,
SG&A and income taxes are omitted because they are dependent on SME's overall
costs, financing structure and general overhead burden for its entire business,
which included operations and properties in addition to the SME Properties
acquired by NGAS. Quantifying a portion of the omitted expenses would therefore
require allocations not previously performed by SME to determine the costs
attributable solely to the SME Properties. NGAS has estimated these amounts
based on its anticipated costs for integrating and developing the SME Properties
under its own corporate and financing structure, based on the purchase price
paid for the SME Properties and the successful efforts accounting method applied
to the SME Properties.
The accompanying statements of combined revenues and direct operating
expenses are not necessarily indicative of the results of operations for the SME
Properties in future periods. For future periods, operations of the SME
Properties will result in DD&A, interest expense, SG&A expenses and income taxes
that are not reflected in the accompanying statements. The amount of these
expenses allocable to the SME Properties in future periods will be based on the
purchase price paid for the acquired properties and will be directly affected by
the acquisition financing, corporate structure, future capital development and
successful efforts accounting method applied by NGAS in its future operation of
the SME Properties.
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Under the acquisition agreement for the SME Properties, any obligations
relating to the operation of the SME Properties prior to the acquisition date
are retained by SME, which has indemnified NGAS against liabilities
F-3
and claims arising from those operations prior to the acquisition date. During
2003, SME settled its future delivery obligations under a natural gas financial
hedging arrangement under which its production had been sold at average prices
of $4.60 per Mcf in 2003 and $3.16 per Mcf in 2002. NGAS is not aware of any
current liabilities, environmental or other claims or contingencies affecting
the SME Properties that would have a material effect on the accompanying
statements of combined revenues and direct operating expenses.
NOTE 4 - SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
(a) General. This Note provides information about the estimated net
proved oil and gas reserves attributable to the SME Properties and the present
value of estimated cash flows from those reserves in accordance with SFAS No.
69, "Disclosures about Oil and Gas Producing Activities." The oil and gas
reserve information is based on estimates by Wright & Company, Inc., independent
petroleum engineers, for the year ended December 31, 2003 and by NGAS for the
year ended December 31, 2002, in accordance with regulations of the Securities
and Exchange Commission, using market or contract prices at the end of each of
the years presented below. These prices were held constant over the estimated
life of the reserves. There are numerous uncertainties inherent in estimating
quantities and values of proved oil and gas reserves and in projecting future
rates of production and the timing of development expenditures, including
factors involving reservoir engineering, pricing and both operating and
regulatory constraints. All reserve estimates are to some degree speculative,
and various classifications of reserves only constitute attempts to define the
degree of speculation involved. Accordingly, oil and gas reserve information
represents estimates only and should not be construed as being exact.
(b) Estimated Oil and Gas Reserve Quantities. The following table
summarizes the estimated quantities of proved oil and gas reserves from the SME
Properties, all of which are located in the continental United States, and
changes in net proved reserves for each of the years presented below.
NATURAL GAS CRUDE OIL AND LIQUIDS
(Mcf) (Bbls)
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- ------------- --------------
Proved developed and undeveloped reserves:
Beginning of year............................. 37,384,528 62,651,280 190,428 137,168
Production.................................... (1,091,420) (1,667,729) (30,338) (37,161)
Revisions of previous estimates............... (13,820,579) (32,248,017) (30,818) (71,909)
Extensions, discoveries and additions......... -- 8,648,994 -- 162,330
------------- -------------- ------------- --------------
End of year................................... 22,472,529 37,384,528 129,272 190,428
============= ============== ============= ==============
Proved developed reserves........................ 10,801,233 12,394,228 129,272 190,428
============= ============== ============= ==============
(c) Standardized Measure of Discounted Future Net Cash Flows. The
following table presents the standardized measure of discounted future net cash
flows from the proved oil and gas reserves estimated for the SME Properties as
of the end of the years presented below. The standardized measure of future net
cash flows are calculated using weighted average prices in effect at year end.
Those prices were $6.44 and $4.83, respectively, per Mcf of natural gas as of
December 31, 2003 and 2002 and $30.00 and $28.35, respectively, per barrel of
oil as of those dates. The resulting estimated future cash inflows are reduced
by estimated future costs to develop and produce the estimated proved reserves
based on year-end cost levels. Future income taxes are based on year-end
statutory rates. The future net cash flows are reduced to present value by
applying a 10% annual discount rate.
The standardized measure of discounted future net cash flows from the
proved oil and gas reserves estimated for the SME Properties is provided for the
financial statement user as a common base for comparing oil and gas reserves of
enterprises in the industry and may not represent the fair market value of the
oil and gas reserves from the SME Properties or the present value of future cash
flows of equivalent reserves due to various uncertainties inherent in making
these estimates. Those factors include changes in oil and gas prices from
year-end prices used in the estimates, unanticipated changes in future
production and development costs and other uncertainties in estimating
quantities and present values of oil and gas reserves. Accordingly, the
following standardized measure of discounted future net cash flows is not
intended to represent the replacement cost or fair market value of the SME
Properties.
F-4
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002
--------- ---------
Future cash flows...................................................................$ 136,694 $ 218,759
Future production costs............................................................. (55,157) (45,386)
Future development costs............................................................ (13,565) (20,575)
--------- ---------
Future net cash flows before tax expense............................................ 67,972 152,798
Future income taxes................................................................. (16,179) (34,818)
--------- ---------
Future net cash flows after tax expense............................................. 51,793 117,980
Annual discount at 10%.............................................................. (24,269) (52,226)
--------- ---------
Standardized measure of discounted future net cash flows...........................$ 27,524 $ 65,754
========= =========
(d) Changes in Standardized Measure of Discounted Future Net Cash
Flows. The following table summarizes the changes in the standardized measure of
discounted future net cash flows from the proved oil and gas reserves estimated
for the SME Properties after income taxes for each of the years presented below.
Sales of oil and gas, net of production costs, are based on historical pre-tax
results. Extensions and discoveries and the changes due to revisions in
standardized variables are reported on a pre-tax discounted basis, while the
accretion of discount is presented after tax.
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2003 2002
--------- ---------
Balance, beginning of year..........................................................$ 65,754 $ 32,375
Increase (decrease) due to operations in the reported year:
Sales and transfer of oil and gas, net of production costs....................... (3,283) (2,924)
Net changes in anticipated prices and production costs........................... (7,016) 27,434
Extensions and discoveries, less related costs................................... -- 23,079
Increase (decrease) due to changes in standardized variables:
Revisions of previous quantity estimates......................................... (17,516) (30,800)
Accretion of discount............................................................ 6,575 3,238
Net change in future income taxes................................................ (15,292) 13,352
Changes in production rates (timing) and other..................................... (1,698) --
--------- ---------
Balance, end of year................................................................$ 27,524 $ 65,754
========= =========
F-5
NGAS RESOURCES, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following Unaudited Pro Forma Financial Statements set forth
certain pro forma financial information with respect to the purchase by NGAS
Resources, Inc. (together with its subsidiaries, "NGAS") of substantially all
the oil and gas assets of Stone Mountain Energy, L.C. ("SME") located in Bell,
Harlan, and Leslie Counties, Kentucky, and Lee County, Virginia (the "SME
Properties"). NGAS completed the purchase of the SME Properties through
Daugherty Petroleum, Inc., its wholly owned operating subsidiary ("DPI"), on
October 12, 2004. The purchase price for the SME Properties was $27 million.
Funding was provided from working capital, borrowings of $15 million under DPI's
secured credit facility and proceeds from an institutional private placement of
7% convertible notes of NGAS in October 2004. The purchase price was allocated
among the SME Properties as of the closing date.
As part of the acquisition of the SME Properties, DPI added field
employees of SME to its staff and assumed specified obligations of SME,
including future obligations under its oil and gas leases, farmout arrangements
and operating agreements. No SME debt was assumed in the transaction.
The Unaudited Pro Forma Financial Statements are derived from the
Consolidated Balance Sheet of NGAS as of September 30, 2004 (unaudited),
Consolidated Statements of Operations of NGAS for the nine months ended
September 30, 2004 (unaudited) and the years ended December 31, 2003 and 2002
and the Statements of Combined Revenues and Direct Operating Expenses of the SME
Properties for the nine months ended September 30, 2004 (unaudited) and the
years ended December 31, 2003 and 2002. The Unaudited Pro Forma Balance Sheet
has been prepared as if NGAS purchased the SME Properties as of September 30,
2004, and the Unaudited Pro Forma Statements of Operations have been prepared as
if NGAS purchased the SME Properties as of January 1, 2002.
Future results may vary significantly from the amounts reflected in the
following information due to economic factors, production or price declines,
future activities of NGAS and other matters. The Unaudited Pro Forma Financial
Statements should be read in conjunction with the accompanying Notes and the
Statements of Combined Revenues and Direct Operating Expenses of the SME
Properties and notes thereto.
F-6
NGAS RESOURCES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2004
ASSETS NGAS ADJUSTMENTS PRO FORMA
------------- ----------- --------------
Current assets:
Cash...................................................$ 10,638,758 $ (6,619,046)(1) $ 4,019,712
Accounts receivable.................................... 1,613,629 1,613,629
Prepaid expenses and other current assets.............. 1,012,922 1,012,922
Loans to related parties............................... 185,974 185,974
------------- ------------- --------------
Total current assets................................. 13,451,283 (6,619,046) 6,832,237
Bonds and deposits....................................... 124,400 124,400
Oil and gas properties................................... 35,589,214 27,000,000(2) 62,589,214
Property and equipment................................... 2,022,422 2,022,422
Loans to related parties................................. 349,598 349,598
Investments.............................................. 55,454 55,454
Deferred financing costs................................. 94,761 769,272(3) 864,033
Goodwill................................................. 313,177 313,177
------------- ------------- --------------
Total assets.............................................$ 52,000,309 $ 21,150,226 $ 73,150,535
============= ============= ==============
LIABILITIES
Current liabilities:
Accounts payable.......................................$ 2,324,531 $ 2,324,531
Accrued liabilities.................................... 2,405,217 2,405,217
Income taxes payable................................... 3,107 3,107
Customers' drilling deposits........................... 5,071,100 5,071,100
Long term debt, current portion........................ 376,995 376,995
------------- --------------
Total current liabilities............................ 10,180,950 10,180,950
Future income taxes...................................... 674,542 674,542
Long term debt........................................... 3,025,848 $ 20,847,954(4) 23,873,802
Deferred compensation.................................... 214,595 214,595
------------- ------------- --------------
Total liabilities........................................ 14,095,935 20,847,954 34,943,889
------------- ------------- --------------
SHAREHOLDERS' EQUITY
Capital stock
Issued:
Common shares........................................ 52,578,020 52,578,020
Common shares held in treasury, at cost.............. (23,630) (23,630)
Paid-in capital - options and warrants............... 1,332,926 302,272(5) 1,635,198
To be issued:
Common shares (62,850 shares)........................ 247,650 247,650
------------- ------------- --------------
54,134,966 302,272 54,437,238
Deficit.................................................. (16,230,592) (16,230,592)
------------- ------------- --------------
Total shareholders' equity............................... 37,904,374 302,272 38,206,646
------------- ------------- --------------
Total liabilities and shareholders' equity...............$ 52,000,309 $ 21,150,226 $ 73,150,535
============= ============= ==============
See Notes to Unaudited Pro Forma Financial Statements.
F-7
NGAS RESOURCES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
SME
NGAS PROPERTIES ADJUSTMENTS PRO FORMA
------------- -------------- ------------- --------------
REVENUE
Contract drilling..............................$ 27,927,475 $ -- 27,927,475
Oil and gas production......................... 3,230,351 4,594,069 7,824,420
Gas transmission and compression............... 1,093,296 -- 1,093,296
------------- -------------- --------------
Total revenue................................ 32,251,122 4,594,069 36,845,191
------------- -------------- --------------
DIRECT EXPENSES
Contract drilling.............................. 20,499,504 -- 20,499,504
Oil and gas production......................... 1,187,200 1,289,595 $ 354,240(1) 2,831,035
Gas transmission and compression............... 686,724 -- 686,724
------------- -------------- ------------- --------------
Total direct expenses........................ 22,373,428 1,289,595 354,240 24,017,263
------------- -------------- ------------- --------------
GROSS PROFIT..................................... 9,877,694 3,304,474 (354,240) 12,827,928
------------- -------------- ------------- --------------
OTHER INCOME (EXPENSES)
Selling, general and administrative............ (6,831,254) -- (6,831,254)
Compensation cost.............................. (427,450) -- (427,450)
Depreciation, depletion and amortization....... (833,550) -- (1,015,773)(2) (1,849,323)
Interest expense............................... (284,253) -- (967,125)(3) (1,251,378)
Interest income................................ 248,282 -- (79,650)(4) 168,632
Other, net..................................... 76,275 -- 76,275
------------- -------------- ------------- --------------
Total other income (expenses)................ (8,051,950) -- (2,062,548) (10,114,498)
------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES....................... 1,825,744 3,304,474 (2,416,788) 2,713,430
INCOME TAX EXPENSE............................... 833,052 -- 355,075(5) 1,188,127
------------- -------------- ------------- --------------
NET INCOME.......................................$ 992,692 $ 3,304,474 $ (2,771,863) $ 1,525,303
============= ============== ============= ==============
See Notes to Unaudited Pro Forma Financial Statements.
F-8
NGAS RESOURCES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
SME
NGAS PROPERTIES ADJUSTMENTS PRO FORMA
------------- -------------- ------------- --------------
REVENUE
Contract drilling..............................$ 23,640,000 $ -- 23,640,000
Oil and gas production......................... 2,550,040 5,819,624 8,369,664
Gas transmission and compression............... 1,254,393 -- 1,254,393
------------- -------------- --------------
Total revenue................................ 27,444,433 5,819,624 33,264,057
------------- -------------- --------------
DIRECT EXPENSES
Contract drilling.............................. 12,207,772 -- 12,207,772
Oil and gas production......................... 958,081 2,536,978 $ 448,704(1) 3,943,763
Gas transmission and compression............... 587,644 -- 587,644
------------- -------------- ------------- --------------
Total direct expenses........................ 13,753,497 2,536,978 448,704 16,739,179
------------- -------------- ------------- --------------
GROSS PROFIT..................................... 13,690,936 3,282,646 (448,704) 16,524,878
------------- -------------- ------------- --------------
OTHER INCOME (EXPENSES)
Selling, general and administrative............ (7,532,554) -- (7,532,554)
Compensation cost.............................. (742,800) -- (742,800)
Depreciation, depletion and amortization....... (911,089) -- (1,474,149)(2) (2,385,238)
Interest expense............................... (493,441) -- (1,350,500)(3) (1,843,941)
Interest income................................ 176,334 -- (106,200)(4) 70,134
Other, net..................................... (125,149) -- (125,149)
------------- -------------- ------------- --------------
Total other income (expenses)................ (9,628,699) -- (2,930,849) (12,559,548)
------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES....................... 4,062,237 3,282,646 (3,379,553) 3,965,330
INCOME TAX EXPENSE............................... 402,097 -- 402,097
------------- -------------- ------------- --------------
NET INCOME.......................................$ 3,660,140 $ 3,282,646 $ (3,379,553) $ 3,563,233
============= ============== ============= ==============
See Notes to Unaudited Pro Forma Financial Statements.
F-9
NGAS RESOURCES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
SME
NGAS PROPERTIES ADJUSTMENTS PRO FORMA
------------- -------------- ------------- --------------
REVENUE
Contract drilling..............................$ 6,269,598 $ -- 6,269,598
Oil and gas production......................... 1,204,111 6,120,179 7,324,290
Gas transmission and compression............... 930,934 -- 930,934
------------- -------------- --------------
Total revenue................................ 8,404,643 6,120,179 14,524,822
------------- -------------- --------------
DIRECT EXPENSES
Contract drilling.............................. 2,916,348 -- 2,916,348
Oil and gas production......................... 673,227 3,196,134 $ 426,269(1) 4,295,630
Gas transmission and compression............... 494,525 -- 494,525
------------- -------------- ------------- --------------
Total direct expenses........................ 4,084,100 3,196,134 426,269 7,706,503
------------- -------------- ------------- --------------
GROSS PROFIT..................................... 4,320,543 2,924,045 (426,269) 6,818,319
------------- -------------- ------------- --------------
OTHER INCOME (EXPENSES)
Selling, general and administrative............ (2,898,632) -- (2,898,632)
Depreciation, depletion and amortization....... (652,069) -- (1,318,590)(2) (1,970,659)
Interest expense............................... (249,267) -- (1,449,000)(3) (1,698,267)
Interest income................................ 45,261 -- (45,261)(4) --
Other, net..................................... 69,114 -- 69,114
------------- -------------- ------------- --------------
Total other income (expenses)................ (3,685,593) -- (2,812,851) (6,498,444)
------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES....................... 634,950 2,924,045 (3,239,120) 319,875
INCOME TAX EXPENSE............................... -- -- --
------------- -------------- ------------- --------------
NET INCOME.......................................$ 634,950 $ 2,924,045 $ (3,239,120) $ 319,875
============= ============== ============= ==============
See Notes to Unaudited Pro Forma Financial Statements
F-10
NGAS RESOURCES, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying Unaudited Pro Forma Financial Statements reflect the
purchase by NGAS Resources, Inc. (together with its subsidiaries, "NGAS") of
substantially all the oil and gas assets of Stone Mountain Energy, L.C. ("SME")
located in Bell, Harlan, and Leslie Counties, Kentucky, and Lee County, Virginia
(the "SME Properties"). The Unaudited Pro Forma Financial Statements are derived
from the Consolidated Balance Sheet of NGAS as of September 30, 2004
(unaudited), the Consolidated Statements of Operations of NGAS for the nine
months ended September 30, 2004 (unaudited) and the years ended December 31,
2003 and 2002 and the Statements of Combined Revenues and Direct Operating
Expenses of the SME Properties for the nine months ended September 30, 2004
(unaudited) and the years ended December 31, 2003 and 2002. The Unaudited Pro
Forma Balance Sheet has been prepared as if NGAS purchased the SME Properties as
of September 30, 2004, and Unaudited Pro Forma Statements of Operations have
been prepared as if NGAS purchased the SME Properties as of January 1, 2002. The
closing of the transaction occurred on October 12, 2004.
NOTE 2 - PRO FORMA ADJUSTMENTS
Pro Forma Balance Sheet. The pro forma adjustments to the consolidated
balance sheet of NGAS as of September 30, 2004 necessary to reflect the
acquisition of the SME Properties on a pro forma basis as of that date are
summarized below.
(1) To reflect the use of cash balances of $6,152,046 to finance part
of the purchase price for the SME Properties.
(2) To reflect the purchase price for the SME Properties.
(3) To reflect deferred financing costs recorded for an institutional
private placement of a 7% convertible note of NGAS in October 2004, proceeds
from which were used to fund part of the purchase price for the SME Properties.
(4) To reflect indebtedness incurred by NGAS to finance part of the
purchase price for the SME Properties, consisting of (a) borrowings of $15
million under DPI's secured credit facility and (b) proceeds from an
institutional private placement of a 7% convertible note of NGAS in October
2004.
(5) To account of common stock purchase warrants issued with the
institutional private placement of the 7% convertible note of NGAS in October
2004.
Pro Forma Statements of Operations. The pro forma adjustments to the
consolidated statements of operations of NGAS for the nine months ended
September 30, 2004 (unaudited) and the years ended December 31, 2003 and 2002
necessary to reflect the acquisition of the SME Properties on a pro forma basis
as of January 1, 2002 are summarized below.
(1) To increase production expenses to reflect salary and other
benefits for field employees of SME added to the NGAS staff in connection with
the acquisition.
(2) To reflect (a) depletion on developed SME Properties computed under
the units-of-production method and (b) depreciation of acquired gathering
systems and equipment.
(3) To reflect interest on indebtedness incurred by NGAS to finance
part of the purchase price for the SME Properties, consisting of (a) borrowings
of $15 million under DPI's secured credit facility, which bears interest at 1%
above the bank's prime rate, and (b) proceeds from an institutional private
placement of a 7% convertible note of NGAS in October 2004.
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(4) To reflect lower interest income from a reduction in cash balances
used to finance part of the purchase price for the SME Properties.
(5) To reflect additional income tax expense for the nine months ended
September 30, 2004 on net revenues of SME for the interim period at statutory
rates after direct expenses and additional expenses reflected in the foregoing
pro forma adjustments.
NOTE 3 - PRO FORMA OIL AND GAS DISCLOSURES
The following tables set forth certain pro forma oil and gas
disclosures of NGAS reflecting the purchase of the SME Properties as of December
31, 2003.
HISTORICAL AND PRO FORMA RESERVE QUANTITIES
AS OF DECEMBER 31, 2003
HISTORICAL PRO FORMA
---------- ---------
Natural gas (Mcf):
Proved developed..................................................................... 12,345,355 23,146,588
Proved undeveloped................................................................... 18,454,309 30,125,605
------------ ------------
Total proved....................................................................... 30,799,664 53,272,193
============ ============
Crude oil and liquids (Bbl):
Proved developed..................................................................... 85,253 214,525
Proved undeveloped................................................................... 9,992 9,992
------------ ------------
Total proved....................................................................... 95,245 224,517
============ ============
HISTORICAL AND PRO FORMA ESTIMATED FUTURE NET CASH FLOWS FROM PROVED RESERVES
AS OF DECEMBER 31, 2003
(IN THOUSANDS)
HISTORICAL PRO FORMA
---------- ---------
Undiscounted future net cash flows from estimated production
of proved reserves...................................................................$ 86,878 $ 138,671
Standardized measure of discounted future
net cash flows(1)....................................................................$ 33,597 $ 61,121
- ---------------------
(1) The present value (discounted at 10% per annum) of estimated future net
cash flows from proved reserves of NGAS and the SME Properties is based upon
assumptions regarding prices and production rates including those relating to
gas subject to long-term contracts. Future changes in markets and prices or
actions taken by purchasers of production could cause these assumptions to
change, in which event the present value of estimated future net cash flows from
the estimated proved reserves could be adversely affected.
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