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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
COMMISSION FILE NO. 0-12185
NGAS RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PROVINCE OF BRITISH COLUMBIA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509-1844
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (859) 263-3948
(Former name or former address, if changed since the last report)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months and
(2) has been subject to those filing requirements for the preceding 90 days.
Yes [X] No [ ]
Indicate by check mark whether the issuer is an accelerated filer under Rule
12b-2. Yes [X] No [ ]
Number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT MAY 10, 2005
COMMON STOCK 15,994,381
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NGAS Resources, Inc. (the "Company") is an independent energy company
focused on natural gas development and production in the Appalachian Basin,
primarily in eastern Kentucky. The Company is amending its quarterly report on
Form 10-Q for the quarter ended March 31, 2005 (the "Report") in response to
review comments on the Report by the staff of the Securities and Exchange
Commission. In response to review comments, this amendment reflects an
adjustment to the condensed consolidated statements of operations included in
the Report to eliminate the line item for gross profit, which was previously
reported before accounting for depreciation, depletion and amortization
attributable to cost of sales, other than depreciation of equipment, as a
component of direct sales. In addition, the Company's gas compression and
transmission revenues and direct expenses previous reported in its condensed
consolidated statements of operations and deficit for the three months ended
March 31, 2005 have been restated to reflect various adjustments to
inter-company accounts for managed Drilling Programs. The Company is modifying
the disclosure in Management's Discussion and Analysis of Financial Condition
and Results of Operations to reflect these adjustments and amending the notes to
its condensed consolidated financial statements included in the Report to expand
the summary of accounting policies in Note 1 relating to the reported
adjustments.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REVIEW ENGAGEMENT REPORT
To the Directors of
NGAS RESOURCES, INC.
We have reviewed the condensed consolidated balance sheet of NGAS RESOURCES,
INC. as at March 31, 2005 and the condensed consolidated statements of
operations and deficit and cash flows for the three months then ended. Our
review was made in accordance with generally accepted standards for review
engagements in Canada and the United States of America and accordingly consisted
primarily of enquiry, analytical procedures and discussion related to
information supplied to us by the Company.
A review does not constitute an audit and, consequently, we do not express an
audit opinion on these condensed consolidated financial statements.
Based on our review, nothing has come to our attention that causes us to believe
that these condensed consolidated financial statements are not, in all material
respects, in accordance with Canadian generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) and with generally accepted
auditing standards in Canada, the consolidated balance sheet as at December 31,
2004 and the related consolidated statements of operations and deficit and cash
flows for the year then ended (not presented herein) and, in our report dated
March 14, 2005, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 2004 is fairly stated in all
material respects in relation to the balance sheet from which it has been
derived.
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
May 10, 2005, except for
Note 1(e), which is
as at August 8, 2005
1
NGAS RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(U.S. FUNDS)
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash ................................................................ $ 16,703,019 $ 11,849,372
Accounts receivable ................................................. 2,806,950 2,281,715
Prepaid expenses and other current assets ........................... 2,149,194 2,152,174
Loans to related parties (Note 4) ................................... 124,657 142,718
------------- -------------
Total current assets .............................................. 21,783,820 16,425,979
Bonds and deposits .................................................... 210,045 124,650
Oil and gas properties (Note 2) ....................................... 74,536,635 68,156,790
Property and equipment (Note 3) ....................................... 2,349,064 2,668,908
Loans to related parties (Note 4) ..................................... 281,413 357,175
Investments (Note 5) .................................................. 55,454 55,454
Deferred financing costs (Note 6) ..................................... 1,406,240 1,024,810
Goodwill (Note 7) ..................................................... 313,177 313,177
------------- -------------
Total assets .................................................... $ 100,935,848 $ 89,126,943
============= =============
LIABILITIES
Current liabilities:
Accounts payable .................................................... 4,640,170 3,381,726
Accrued liabilities ................................................. 5,905,094 3,537,576
Customers' drilling deposits (Note 8) ............................... 11,677,600 12,652,001
Long term debt, current portion (Note 9) ............................ 41,917 121,247
------------- -------------
Total current liabilities ......................................... 22,264,781 19,692,550
Future income taxes ................................................... 2,671,933 2,053,432
Long term debt (Note 9) ............................................... 31,948,195 25,870,498
Deferred compensation ................................................. 477,973 368,935
------------- -------------
Total liabilities ............................................... 57,362,882 47,985,415
------------- -------------
SHAREHOLDERS' EQUITY
Capital stock (Note 10)
Authorized:
5,000,000 Preferred shares, non-cumulative, convertible
100,000,000 Common shares
Issued:
15,936,691 Common shares (December 31, 2004 - 15,605,208) ........ 56,385,121 54,929,887
21,100 Common shares held in treasury, at cost ............... (23,630) (23,630)
Paid-in capital - options and warrants ................ 1,818,616 1,796,504
To be issued:
61,990 Common shares (December 31, 2004 - 10,070) ............ 267,376 50,350
------------- -------------
58,447,483 56,753,111
Deficit ............................................................... (14,874,517) (15,611,583)
------------- -------------
Total shareholders' equity ...................................... 43,572,966 41,141,528
------------- -------------
Total liabilities and shareholders' equity ...................... $ 100,935,848 $ 89,126,943
============= =============
See Notes to Condensed Consolidated Financial Statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(U.S. FUNDS) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2005 2004
------------ ------------
REVENUE
Contract drilling .................................................... $ 16,677,000 $ 14,326,125
Oil and gas production ............................................... 2,875,788 791,289
Gas transmission and compression ..................................... 457,458 448,468
------------ ------------
Total revenue ...................................................... 20,010,246 15,565,882
------------ ------------
DIRECT EXPENSES
Contract drilling .................................................... 12,369,805 10,135,062
Oil and gas production ............................................... 758,821 285,312
Gas transmission and compression ..................................... 392,784 408,866
------------ ------------
Total direct expenses .............................................. 13,521,410 10,829,240
------------ ------------
OTHER INCOME (EXPENSES)
Selling, general and administrative .................................. (3,506,825) (3,185,518)
Options, warrants and deferred compensation .......................... (252,608) (30,074)
Depreciation, depletion and amortization ............................. (1,046,555) (206,111)
Interest expense ..................................................... (508,753) (89,168)
Interest income ...................................................... 37,740 86,862
Other, net ........................................................... 143,732 7,746
------------ ------------
Total other income (expenses) ...................................... (5,133,269) (3,416,263)
------------ ------------
INCOME BEFORE INCOME TAXES .............................................. 1,355,567 1,320,379
------------ ------------
INCOME TAX EXPENSE
Current .............................................................. -- 110,416
Future ............................................................... 618,501 442,722
------------ ------------
618,501 553,138
------------ ------------
NET INCOME .............................................................. 737,066 767,241
DEFICIT, beginning of period ............................................ (15,611,583) (17,223,284)
------------ ------------
DEFICIT, end of period .................................................. $(14,874,517) $(16,456,043)
============ ============
NET INCOME PER SHARE
Basic ................................................................ $ 0.05 $ 0.06
============ ============
Diluted .............................................................. $ 0.04 $ 0.05
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
Basic ................................................................ 15,689,872 12,052,183
============ ============
Diluted .............................................................. 17,463,618 15,633,855
============ ============
See Notes to Condensed Consolidated Financial Statements.
3
NGAS RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. FUNDS) (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income ........................................................... $ 737,066 $ 767,241
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Incentive bonus paid in common shares .............................. 217,026 --
Compensation from options and warrants ............................. 252,608 30,074
Depreciation, depletion and amortization ........................... 1,046,555 253,129
Notes issued in kind for interest on long term debt ................ -- 37,202
Gain on sale of assets ............................................. (12,568) (4,600)
Future income taxes ................................................ 618,501 442,722
Changes in assets and liabilities:
Accounts receivable .............................................. (525,235) (255,871)
Prepaid expenses and other current assets ........................ 2,980 (39,287)
Accounts payable ................................................. 1,258,444 811,672
Accrued liabilities .............................................. 2,367,518 811,551
Income taxes payable ............................................. -- 40,416
Customers' drilling deposits ..................................... (974,401) (7,175,000)
------------ ------------
Net cash provided by (used in) operating activities ................ 4,988,494 (4,280,751)
------------ ------------
INVESTING ACTIVITIES
Proceeds from sale of assets ......................................... 273,600 4,600
Purchase of property and equipment ................................... (45,102) (115,146)
Increase in bonds and deposits ....................................... (85,395) --
Additions to oil and gas properties, net ............................. (7,252,420) (6,266,134)
------------ ------------
Net cash used in investing activities .............................. (7,109,317) (6,376,680)
------------ ------------
FINANCING ACTIVITIES
Decrease in loans to related parties ................................. 93,823 35,199
Proceeds from issuance of common shares .............................. 1,248,776 3,438,317
Payments of deferred financing costs ................................. (451,496) --
Proceeds from issuance of long term debt ............................. 6,168,696 --
Payments of long term debt ........................................... (85,329) (22,870)
------------ ------------
Net cash provided by financing activities .......................... 6,974,470 3,450,646
------------ ------------
Change in cash .......................................................... 4,853,647 (7,206,785)
Cash, beginning of period ............................................... 11,849,372 22,594,993
------------ ------------
Cash, end of period ..................................................... $ 16,703,019 $ 15,388,208
============ ============
SUPPLEMENTAL DISCLOSURE
Interest paid ........................................................... $ 524,964 $ 43,314
Income taxes paid ....................................................... -- 70,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Common shares issued upon conversion of notes ........................... 85,000 1,457,640
See Notes to Condensed Consolidated Financial Statements.
4
NGAS RESOURCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 - (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General. The accompanying unaudited condensed consolidated
financial statements of NGAS Resources, Inc., a British Columbia corporation
(the "Company"), have been prepared in accordance with generally accepted
accounting principles in Canada. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) necessary to fairly present the
Company's condensed consolidated financial position at March 31, 2005 and its
condensed consolidated results of operations and deficit and cash flows for the
interim periods presented. The condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and related notes included in its Annual Report on Form 10-KSB for
the year ended December 31, 2004, as amended by Amendment No. 1 on Form
10-KSB/A.
(b) Basis of Consolidation. The consolidated financial statements
include the accounts of the Company, its wholly owned subsidiary, Daugherty
Petroleum, Inc. ("DPI"), a Kentucky corporation, and DPI's wholly owned
subsidiaries, Sentra Corporation, NGAS Securities, Inc. and NGAS Gathering, LLC.
DPI conducts all of the Company's oil and gas drilling and production
operations. Sentra Corporation owns and operates natural gas distribution
facilities for two communities in Kentucky. NGAS Securities. Inc. provides
marketing support services for private placement financings by the Company and
DPI. NGAS Gathering, LLC operates gas gathering systems. The condensed
consolidated financial statements also reflect DPI's interests in a total of 27
drilling programs that it has sponsored and managed to conduct drilling
operations on its prospects (the "Drilling Programs"). DPI maintains a combined
interest as both general partner and an investor in each Drilling Program
ranging from 25.75% to 66.67%, subject to specified increases after certain
distribution thresholds are reached. The Company accounts for those interests
using the proportionate consolidation method, combining DPI's share of assets,
liabilities, income and expenses of the Drilling Programs with those of its
separate operations. All material inter-company accounts and transactions for
the periods presented in the condensed consolidated financial statements have
been eliminated on consolidation.
(c) Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in Canada requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
balance sheet date and the reported amounts of revenues and expenses during the
periods presented in the condensed consolidated financial statements. Actual
results could differ from those estimates.
(d) Change in Accounting Policy. Effective January 1, 2004, the Company
adopted the fair value provisions of Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3870, "Stock-Based Compensation and Other Stock-Based
Payments" and related interpretations for the recognition and measurement of
compensation costs associated with employee stock options. See Note 10 - Capital
Stock.
(e) Reclassifications and Adjustments. Certain amounts reported in the
condensed consolidated financial statements for the interim period in 2004 have
been reclassified to conform with the presentation in the current period. In
addition, the condensed consolidated statements of operations and deficit
previously issued by the Company for the three months ended March 31, 2005 and
2004 have been adjusted to eliminate the line item for gross profit, which was
previously reported before accounting for depreciation, depletion and
amortization ("DD&A") attributable to cost of sales, other than depreciation of
equipment, as a component of direct expenses. The inclusion of all items of DD&A
as a direct expense would have the following effects on gross profit, as
previously reported:
5
THREE MONTHS ENDED MARCH 31,
2005 2004
------------ ------------
Gross profit, as reported......................................................... $ 6,410,604 $ 4,736,642
Less DD&A, as a component of direct expenses,
net of depreciation of equipment previously included in direct expenses...... (968,323) (206,111)
------------ ------------
Gross profit, as restated......................................................... $ 5,442,281 $ 4,530,531
============ ============
The Company has also restated gas transmission and compression revenues
as well as oil and gas production expenses previously reported in its condensed
consolidated statements of operations and deficit for the three months ended
March 31, 2005 to reflect various adjustments to inter-company eliminations for
operating fees from managed Drilling Programs ("Elimination Adjustments").
Related adjustments to inter-company eliminations for all prior reported periods
are immaterial. The following table shows the Elimination Adjustments, together
with reclassification adjustments for depreciation of equipment previously
reported as a component of direct expenses for the three months ended March 31,
2005.
THREE MONTHS ENDED MARCH 31, 2005
--------------------------------------------------------------------
PREVIOUSLY DD&A ELIMINATION AS
REPORTED DJUSTMENT ADJUSTMENT RESTATED
----------- --------- ----------- -----------
REVENUE
Contract drilling ................................ $16,677,000 $ -- $ -- $16,677,000
Oil and gas production ........................... 2,875,788 -- -- 2,875,788
Gas transmission and compression ................. 700,128 -- (242,670) 457,458
----------- -------- --------- -----------
Total revenue .................................. 20,252,916 -- (242,670) 20,010,246
----------- -------- --------- -----------
DIRECT EXPENSES
Contract drilling ................................ 12,417,991 (48,186) -- 12,369,805
Oil and gas production ........................... 1,013,537 (12,046) (242,670) 815,521
Gas transmission and compression ................. 410,784 (18,000) -- 392,784
----------- -------- --------- -----------
Total direct expenses .......................... 13,842,312 (78,232) (242,670) 13,521,410
----------- -------- --------- -----------
OTHER INCOME (EXPENSES)
Selling general and administrative................ (3,506,825) -- (3,506,825)
Options warrants and deferred
compensation.................................... (252,608) -- (252,608)
Depreciation, depletion and amortization.......... (968,323) (78,232) (1,046,555)
Interest expense.................................. (508,753) -- (508,753)
Interest income................................... 37,740 -- 37,740
Other, net........................................ 143,732 -- 143,732
----------- -------- -----------
Total other income (expenses)................... (5,055,037) (78,232) (5,133,269)
----------- -------- -----------
INCOME BEFORE INCOME TAXES........................... 1,355,567 1,355,567
INCOME TAX EXPENSE (Future).......................... (618,501) (618,501)
----------- -----------
NET INCOME........................................... $ 737,066 $ 737,066
=========== ===========
NOTE 2. OIL AND GAS PROPERTIES
(a) Acquisitions. In two separate transactions during August 2004, DPI
acquired oil and gas interests covering approximately 14,737 acres in Leslie and
Bell Counties, Kentucky for a total of $7.8 million. In October 2004, DPI
acquired additional oil and gas interests covering 75,000 acres from Stone
Mountain Energy Company, L.C. in Bell, Harlan and Leslie Counties, Kentucky and
Lee County, Virginia for $27 million. As part of these transactions, DPI assumed
future obligations of the sellers under oil and gas leases, farm-out agreements
and
6
operating contracts. The Company accounted for these acquisitions under the
purchase method. The purchase price for the acquired assets was allocated among
the assets as of the respective closing dates.
(b) Capitalized Costs and DD&A. Capitalized costs and accumulated DD&A
relating to the Company's oil and gas producing activities, all of which are
conducted within the continental United States, are summarized below.
MARCH 31, 2005 DECEMBER 31,
------------------------------------------------ 2004
ACCUMULATED -----------
COST DD&A NET NET
----------- ----------- ----------- -----------
Proved oil and gas properties ........................... $68,886,652 $(4,593,466) $64,293,186 $59,387,998
Unproved oil and gas properties ......................... 1,902,038 -- 1,902,038 1,838,038
Gathering lines and well equipment ...................... 8,799,847 (458,436) 8,341,411 6,930,754
----------- ----------- ----------- -----------
Total oil and gas properties ............................ $79,588,537 $(5,051,902) $74,536,635 $68,156,790
=========== =========== =========== ===========
NOTE 3. PROPERTY AND EQUIPMENT
The following table presents the capitalized costs and accumulated
depreciation for the Company's property and equipment as of March 31, 2005.
MARCH 31, 2005 DECEMBER 31,
-------------------------------------------------- 2004
ACCUMULATED ------------
COST DEPRECIATION NET NET
---------- --------- ---------- ----------
Land .......................................... $ 12,908 $ -- $ 12,908 $ 12,908
Building improvements ......................... 20,609 (4,720) 15,889 16,234
Machinery and equipment ....................... 1,868,967 (421,152) 1,447,815 1,706,238
Office furniture and fixtures ................. 83,570 (26,806) 56,764 59,308
Computer and office equipment ................. 406,700 (158,384) 248,316 257,977
Vehicles ...................................... 826,573 (259,201) 567,372 616,243
---------- --------- ---------- ----------
Total property and equipment .................. $3,219,327 $(870,263) $2,349,064 $2,668,908
========== ========= ========== ==========
NOTE 4. LOANS TO RELATED PARTIES
Loans to related parties represent loans receivable from certain
shareholders and officers of the Company, payable monthly from production
revenues for periods ranging from five to ten years, with a balloon payment at
maturity. The loans receivable from shareholders aggregated $234,641 at March
31, 2005 and $328,464 at December 31, 2004. These loans bear interest at 6% per
annum and are collateralized by ownership interests in Drilling Programs. The
loans receivable from officers totaled $171,429 at March 31, 2005 and December
31, 2004. These loans are non-interest bearing and unsecured.
NOTE 5. INVESTMENTS
The Company has investments of $119,081 in three series of bonds issued
by the City of Galax, Virginia Industrial Development Authority, bearing
interest at rates ranging from 7% to 8.25% per annum and maturing through July
1, 2010. During 2004, the Company recorded a write-down of $63,627 in the
carrying value of the bonds to reflect a permanent decline in value.
7
NOTE 6. DEFERRED FINANCING COSTS
The Company incurred financing costs for convertible note and secured
bank financing transactions aggregating $451,496 in the first quarter of 2005
and $986,478 in 2004. See Note 9 - Long Term Debt. These financing costs have
been capitalized and are being amortized at rates based on the stated terms of
the debt instruments. At March 31, 2005, amortization of these costs totaled
$114,543, leaving $1,323,431 of deferred financing costs from these
transactions.
During 2003, the Company incurred financing costs of $601,886 in
connection with the issuance of $5,000,000 principal amount of its 7%
convertible notes due September 5, 2008. See Note 9 - Long term Debt. These
costs were initially capitalized and were expected to be amortized ratably over
the life of the notes. In the fourth quarter of 2003, $2,800,000 principal
amount of the notes were converted into common shares and added to equity, net
of $318,087, representing a proportionate amount of the original financing
costs. Additional notes in the principal amount of $1,301,721 were converted
into common shares during 2004 and added to equity, net of proportionate
financing costs of $129,081. See Note 10 - Capital Stock. Accumulated
amortization for the remaining financing costs aggregated $71,909 at March 31,
2005 and $65,933 at December 31, 2004.
NOTE 7. GOODWILL
In connection with the acquisition of DPI in 1993, the Company recorded
goodwill of $1,789,564, which was amortized over ten years on a straight-line
basis. Unamortized goodwill at December 31, 2001 was $313,177. At the beginning
of 2002, the Company adopted CICA Handbook Section 3062, "Goodwill and Other
Intangible Assets," which is the Canadian equivalent of SFAS No. 142 for
accounting standards generally accepted in the United States. Under the adopted
standard, goodwill is no longer amortized but is instead tested for impairment
upon adoption and at least annually thereafter. The Company's annual analyses
indicated that no impairment charges were required. Accordingly, accumulated
amortization of goodwill remained at $1,476,387 as of March 31, 2005 and
December 31, 2004.
NOTE 8. CUSTOMER DRILLING DEPOSITS
At the commencement of operations, each Drilling Program acquires
drilling rights for specified wells from DPI and enters into a turnkey drilling
contract with DPI for drilling and completing the wells at specified prices.
Upon the closing of Drilling Program financings, DPI receives the net proceeds
from the financings as customers' drilling deposits under the turnkey drilling
contracts. These payments totaled $12,250,000 in the three months ended March
31, 2005 and $31,278,330 in 2004. The Company recognizes revenues from drilling
operations on the completed contract method as the wells are drilled, rather
than when funds are received. Customer drilling deposits aggregating $11,677,600
at March 31, 2005 and $12,652,001 at December 31, 2004 represent unapplied
turnkey payments for wells that were not yet drilled as of the balance sheet
dates.
NOTE 9. LONG TERM DEBT
(a) Credit Facility. The Company maintains a credit facility for up to
$20 million with KeyBank NA. The borrowing base for the facility is determined
semiannually by the bank. At March 31, 2005 and December 31, 2004, both the
borrowing base and total borrowings under the facility were $15,000,000. The
interest rate under the facility fluctuates at 1% above the bank's prime rate,
amounting to 6.75% at March 31, 2005.
(b) Convertible Notes. The Company has issued several series of
convertible notes in private placements to finance a substantial part of its
drilling and acquisition activities. The notes are convertible by the holders
into the Company's common stock at fixed rates (subject to anti-dilution
adjustments) and are generally redeemable by the Company at 100% of their
principal amount plus accrued interest through the date of redemption. The most
recent series of notes due March 31, 2010 were issued in the fourth quarter of
2004 in the aggregate principal amount of $1,831,304 and in the first quarter of
2005 in the aggregate principal amount of $6,168,696. A prior series of notes
due September 5, 2008 originally issued during September 2003 in the aggregate
principal amount of $5,000,000 required the payment of interest in kind through
September 30, 2004, resulting in the issuance of additional paid-in-kind notes
aggregating $178,924.
8
The terms of the various series of Company's convertible notes
outstanding at March 31, 2005 and December 31, 2004 are summarized below.
SHARES
ISSUABLE AT
PRINCIPAL AMOUNT OUTSTANDING AT MARCH 31,
----------------------------------- 2005
MARCH 31, DECEMBER 31, CONVERSION UPON
TITLE OF NOTES 2005 2004 PRICE CONVERSION
- -------------- ------------- ------------- ---------- -----------
10% Convertible Notes
due May 1, 2007............... $ 515,500 $ 560,500 $ 1.50 343,666
8% Convertible Notes
due April 10, 2008............ 705,925 745,925 1.90 371,539
8% Convertible Notes
due May 1, 2008............... 188,750 188,750 2.25 83,888
7% Convertible Notes
due September 5, 2008......... 1,077,202 1,077,202 4.50 239,378
7% Convertible Notes
due October 4, 2009........... 6,100,000 6,100,000 6.00 1,016,666
7% Convertible Notes
due March 31, 2010............ 8,000,000 1,831,304 6.00 1,333,333
------------- ------------ -----------
Total......................... $ 16,587,377 $ 10,503,681 3,388,470
============= ============ ===========
(c) Acquisition Debt. The Company issued a note in the principal amount
of $854,818 to finance its 1986 acquisition of mineral property on Unga Island,
Alaska. The debt is repayable without interest in monthly installments of $2,000
and is secured by liens on the acquired property and related buildings and
equipment. Although the purchase agreement for the acquisition provides for
royalties at 4% of net smelter returns or other production revenues, the
property has remained inactive. The acquisition debt is recorded at its
remaining face value of $384,818 at March 31, 2005 and $390,818 at December 31,
2004.
(d) Miscellaneous Debt. The following table summarizes other
outstanding debt obligations of the Company at March 31, 2005 and December 31,
2004.
PRINCIPAL AMOUNT OUTSTANDING AT
TERMS OF DEBT MARCH 31, DECEMBER 31,
- ------------- 2005 2004
--------- ------------
Notes issued to finance equipment and vehicles, payable monthly in various
amounts through 2005, with interest ranging from 8.68% to 9.5% per annum,
collateralized by the acquired equipment and vehicles..................... $ 2,523 $ 4,451
Loan payable to unaffiliated company, bearing interest
at 10% per annum payable quarterly, collateralized
by assets of subsidiary guarantor......................................... -- 64,779
Note payable to unaffiliated individual, payable in
60 installments of $1,370, together with interest at 8%
per annum, through 2005................................................... -- 4,964
Loans payable to various banks, payable monthly in
various amounts, together with interest at rates ranging
from 4% to 9.75% per annum, through 2005,
collateralized by receivables and various vehicles........................ 15,394 23,052
--------- --------
Total........................................................................ $ 17,917 $ 97,246
========= ========
(e) Total of Long Term Debt. The following table summarizes the
Company's total long term debt at March 31, 2005 and December 31, 2004.
9
PRINCIPAL AMOUNT OUTSTANDING AT
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
Total long term debt (including current portion)......................... $ 31,990,112 $ 25,991,745
Less current portion..................................................... 41,917 121,247
------------- -------------
Total long term debt.................................................. $ 31,948,195 $ 25,870,498
============= =============
NOTE 10. CAPITAL STOCK
(a) Preferred and Common Shares. The Company has 5,000,000 authorized
shares of preferred stock, none of which were outstanding at March 31, 2005 or
December 31, 2004. The following table reflects transactions involving the
Company's common stock during the reported periods.
NUMBER OF
COMMON SHARES ISSUED SHARES AMOUNT
- -------------------- ----------- -------------
Balance, December 31, 2003............................................ 10,676,030 $ 36,244,623
Issued for cash.......................................................... 2,557,665 12,200,886
Issued to employees as incentive bonus................................... 157,250 674,905
Issued upon exercise of stock options and warrants....................... 1,520,936 3,507,493
Issued upon conversion of convertible notes.............................. 560,601 1,688,590
Issued for settlement of accounts payable................................ 46,352 181,520
Issued for contract settlement........................................... 86,374 431,870
----------- -------------
Balance, December 31, 2004............................................ 15,605,208 54,929,887
Issued upon exercise of stock options and warrants....................... 280,431 1,370,234
Issued upon conversion of convertible notes.............................. 51,052 85,000
----------- -------------
Balance, March 31, 2005............................................... 15,936,691 $ 56,385,121
=========== =============
NUMBER OF
COMMON SHARES TO BE ISSUED SHARES AMOUNT
- -------------------------- ----------- -------------
Balance, December 31, 2003............................................ 1,403,335 $ 5,917,958
Issued in contract settlement(1)......................................... (86,374) (431,870)
Contract settlement in cash in lieu of common shares..................... (3,556) (17,780)
Issued in financing transaction(2)....................................... (1,303,335) (5,417,958)
----------- -------------
Balance, December 31, 2004............................................ 10,070 50,350
Grants to employees as incentive bonus................................... 51,920 217,026
----------- -------------
Balance at March 31, 2005............................................. 61,990 $ 267,376
=========== =============
- -----------------
(1) Reflects shares issuable in a contract settlement, of which 3,335
shares were settled in cash during 2004 and 10,070 shares remained
unissued at March 31, 2005 and December 31, 2004.
(2) Reflects shares issuable under a securities purchase agreement dated
December 31, 2003, providing for an institutional private placement of
common stock and warrants. A portion of the proceeds from the financing
were received in January 2004, resulting in the classification of all
the shares subscribed in the financing as common shares to be issued at
December 31, 2003.
PAID IN CAPITAL - OPTIONS AND WARRANTS AMOUNT
- -------------------------------------- ------------
Balance, December 31, 2003...................................................................... $ 1,140,321
Issued............................................................................................. 676,433
Exercised.......................................................................................... (20,250)
------------
Balance, December 31, 2004...................................................................... 1,796,504
Issued............................................................................................. 143,570
Exercised.......................................................................................... (121,458)
------------
Balance, March 31, 2005......................................................................... $ 1,818,616
============
10
(b) Stock Options and Awards. The Company maintains three stock plans
for the benefit of its directors, officers, employees and, in the case of the
second and third plans, its 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. The third plan, adopted in 2003, provides for the grant of
stock awards and stock options for an aggregate of up to 4,000,000 common
shares. Stock awards may be subject to vesting conditions and trading
restrictions specified at the time of grant. Option grants must be at prevailing
market prices and may be subject to vesting requirements over a period of up to
ten years from the date of grant. During 2003, initial stock awards were made
under the third plan for a total of 353,500 shares, subject to shareholder
approval of the plan, which was received in June 2004. During 2004, stock awards
for an additional 166,489 shares were made under the plan.
At March 31, 2005, the exercise prices of options outstanding under the
Company's stock option plans ranged from $1.02 to $4.09 per share, and their
weighted average remaining contractual life was 4.22 years. The following table
reflects transactions involving the Company's stock options during 2004 and the
first quarter of 2005.
WEIGHTED AVERAGE
STOCK OPTIONS ISSUED EXERCISABLE EXERCISE PRICE
- ------------- --------- ----------- ----------------
Balance, December 31, 2003.................. 1,119,331 1,119,331 1.10
----------
Issued(1)...................................... 2,015,000 4.05
Exercised...................................... (311,480) 1.00
Expired........................................ (437,851) 1.23
---------- -------
Balance, December 31, 2004.................. 2,385,000 370,000 3.58
----------
Exercised...................................... (25,000) 1.02
---------- -------
Balance, March 31, 2005..................... 2,360,000 491,250 $ 3.61
========== ========== =======
- -----------------
(1) Granted to employees and directors under stock option plans at exercise
prices ranging from $4.03 to $4.09 per share and vesting in increments
from February 25, 2005 through February 25, 2009.
In accounting for stock options, the Company follows the retroactive
method under CICA Handbook Section 3870. For fiscal years beginning after
December 15, 2003, the statement requires the fair value method of accounting
for stock options, consistent with the recognition and measurement provisions of
SFAS Nos. 123 and 148, "Accounting for Stock-Based Compensation." Under the fair
value method, employee stock options are valued at grant date using the
Black-Scholes valuation model, and the compensation cost is recognized ratably
over the vesting period. For the periods presented in the condensed consolidated
financial statements, the fair value estimates for each option grant assumed a
risk free interest rate of 4.5%, a dividend yield of 0%, a theoretical
volatility of 0.30 and an expected life ranging from one to five years based on
the option's vesting provisions. For the three months ended March 31, 2005 and
2004, this resulted in non-cash charges for options and warrants of $143,570 and
$30,074, respectively.
(c) Common Stock Purchase Warrants. The Company has issued common stock
purchase warrants in various financing transactions. The exercise prices of
warrants outstanding at March 31, 2005 ranged from $1.26 to $6.25 per share, and
their weighted average remaining contractual life was 2.46 years. The following
table reflects transactions involving the Company's common stock purchase
warrants during 2004 and the first quarter of 2005.
11
WEIGHTED AVERAGE
COMMON STOCK PURCHASE WARRANTS ISSUED EXERCISABLE EXERCISE PRICE
- ------------------------------ ------------------ ----------- ----------------
Balance, December 31, 2003.................. 3,333,523 3,333,523 $ 3.43
----------
Issued in financing transactions(1)............ 966,460 6.09
Issued for consulting services(2).............. 20,000 4.03
Exercised...................................... (1,209,456) 2.63
Expired........................................ (689,062) 3.06
----------- -------
Balance, December 31 2004................... 2,421,465 2,421,465 4.96
----------
Exercised...................................... (255,431) 4.79
----------- -------
Balance, March 31, 2005..................... 2,166,034 2,166,034 $ 4.98
=========== ========== =======
- -----------------
(1) Expiring from September 13, 2006 through December 31, 2008
(2) Expiring from April 3, 2004 through April 2, 2008.
NOTE 11. INCOME PER SHARE
The Company follows CICA Handbook Section 3500, "Earnings per Share."
The statement requires the presentation of both basic and diluted earnings per
share ("EPS") in the statement of operations, using the "treasury stock" method
to compute the dilutive effect of stock options and warrants and the "if
converted" method for the dilutive effect of convertible instruments. For the
three months ended March 31, 2005 and 2004, the assumed exercise of outstanding
stock options and warrants and conversion of outstanding convertible notes would
have a dilutive effect on EPS because the exercise or conversion prices of some
of these instruments were below the average market price of the common stock
during the periods. The following table sets forth the computation of dilutive
EPS for the three months ended March 31, 2005 and 2004.
THREE MONTHS ENDED
MARCH 31,
2005 2004
----------- -----------
NUMERATOR:
Net income as reported for basic EPS .................................... $ 737,066 $ 767,241
Adjustments to income for diluted EPS ................................... 20,061 48,039
----------- -----------
Net income for diluted EPS ........................................... $ 757,127 $ 815,280
=========== ===========
DENOMINATOR:
Weighted average shares for basic earnings per share .................... 15,689,872 12,052,183
Effect of dilutive securities:
Stock options ........................................................ 661,908 1,082,535
Warrants ............................................................. 270,936 1,019,569
Conversion of debt instruments ....................................... 840,902 1,479,568
----------- -----------
Adjusted weighted average shares and assumed conversions for EPS ........ 17,463,618 15,633,855
=========== ===========
Basic EPS ............................................................... $ 0.05 $ 0.06
=========== ===========
Diluted EPS ............................................................. $ 0.04 $ 0.05
=========== ===========
NOTE 12. RELATED PARTY TRANSACTIONS
(a) General. Because the Company operates through its subsidiaries and
affiliated Drilling Programs, its holding company structure causes various
agreements and transactions in the normal course of business to be treated as
related party transactions. It is the Company's policy to structure any
transactions with related parties only on terms that are no less favorable to
the Company than could be obtained on an arm's length basis from unrelated
parties. Significant related party transactions not disclosed elsewhere in these
notes are summarized below.
12
(b) Drilling Programs. DPI invests in sponsored Drilling Programs on
substantially the same terms as unaffiliated investors, contributing capital in
proportion to its partnership interest. DPI also maintains a 1% interest as
general partner in each Drilling Program, resulting in a combined interest of at
least 25.75% in each Drilling Program organized as a limited partnership and up
to 66.67% in each Drilling Program organized as a joint venture. The agreements
for both the limited partnership and joint venture Drilling Programs generally
provide for specified increases in DPI's program interests, up to 15% of the
total program interests, after program distributions reach "payout," which
ranges from 100% to 110% of partners' investment. The partnership agreements
also provide for each Drilling Program to enter into turnkey drilling contracts
with DPI for all wells to be drilled by that Drilling Program. The portion of
the profit on drilling contracts attributable to DPI's ownership interest in the
Drilling Programs has been eliminated on consolidation for the interim periods
presented in the Company's condensed consolidated financial statements. The
following table sets forth the total revenues recognized from the performance of
turnkey drilling contracts with sponsored Drilling Programs for the reported
periods.
REPORTING PERIOD DRILLING CONTRACT REVENUE
---------------- -------------------------
Three months ended March 31, 2005............................... $ 16,677,000
Three months ended March 31, 2004............................... 14,326,125
NOTE 13. SEGMENT INFORMATION
The Company has two reportable segments based on management
responsibility and key business operations. The following table presents
summarized financial information for the Company's business segments.
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2005 2004
------------ ------------
REVENUE:
Oil and gas development ............................................................. $ 20,252,916 $ 15,565,882
Corporate ........................................................................... -- --
------------ ------------
Total ............................................................................ 20,252,916 15,565,882
------------ ------------
DD&A:
Oil and gas development ............................................................. 963,310 219,000
Corporate ........................................................................... 83,245 34,129
------------ ------------
Total ............................................................................ 1,046,555 253,129
------------ ------------
INTEREST EXPENSE:
Oil and gas development ............................................................. 266,099 13,291
Corporate ........................................................................... 242,654 75,877
------------ ------------
Total ............................................................................ 508,753 89,168
------------ ------------
NET INCOME (LOSS):
Oil and gas development ............................................................. 1,149,335 992,195
Corporate ........................................................................... (412,269) (224,954)
------------ ------------
Total ............................................................................ 737,066 767,241
------------ ------------
CAPITAL EXPENDITURES:
Oil and gas development ............................................................. 7,286,247 6,342,898
Corporate ........................................................................... 11,275 38,382
------------ ------------
Total ............................................................................ $ 7,297,522 $ 6,381,280
============ ============
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
IDENTIFIABLE ASSETS:
Oil and gas development............................................................. $ 93,211,369 $ 82,380,938
Corporate........................................................................... 7,724,479 6,746,005
------------ ------------
Total............................................................................ $100,935,848 $ 89,126,943
============ ============
13
NOTE 14. UNITED STATES ACCOUNTING PRINCIPLES
(a) Differences Reflected in Consolidated Financial Statements. The
Company follows accounting principles generally accepted in Canada ("Canadian
GAAP"), which are different in some respects than accounting principles
generally accepted in the United States of America ("U.S. GAAP"). None of these
differences would have any effects on the Company's financial position, results
of operations or cash flows, as reported under Canadian GAAP at and for the
three months ended March 31, 2005 or 2004.
(b) Recent Accounting Pronouncements. Recent accounting pronouncements
followed by the Company under U.S. GAAP are summarized below.
(i) SFAS No. 148. SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," was issued in December 2002 to amend
the transition and disclosure provisions of SFAS No. 123. Effective January 1,
2004, the Company adopted the statement to account for its employee stock
options under the fair market value method. See Note 10 - Capital Stock.
(ii)SFAS No. 149. SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," was issued in April 2003 to
amend and clarify accounting for hedging activities and derivative instruments,
including certain derivative instruments embedded in other contracts. The
statement is effective for contracts entered into or modified after September
30, 2003 and did not have a material impact on the Company's condensed
consolidated financial statements.
(iii) SFAS No. 150. SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," was
issued in May 2003. It establishes standards for classifying and measuring
certain financial instruments with characteristics of both debt and equity. It
requires many financial instruments previously classified as equity to be
reclassified as liabilities and is generally effective for financial instruments
entered into or modified after May 31, 2003 and otherwise at the beginning of
the first interim period beginning after September 15, 2003. The statement did
not have a material impact on the Company's condensed consolidated financial
statements.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
* * *
RESULTS OF OPERATIONS
Revenues. Total revenues for the quarter ended March 31, 2005 were
$20,010,246, an increase of 29% from $15,565,882 in the same quarter last year.
Our revenue mix for the first quarter of 2005 was 83% contract drilling, 15% oil
and gas production and 2% natural gas transmission and compression. For the
first quarter of 2004, our total revenues were derived 92% from contract
drilling, 5% from oil and gas production and 3% from natural gas transmission
and compression activities.
Contract drilling revenues were $16,677,000 for the first quarter of
2005, up 16% from $14,326,125 in the first quarter of 2004. This reflects both
the size and the timing of Drilling Program financings, from which we derive
substantially all our contract drilling revenues. Upon the closing of Drilling
Program financings, DPI receives the net proceeds from these financings as
customers' drilling deposits under turnkey drilling contracts with the programs.
We recognize revenues from drilling operations on the completed contract method
as the wells are drilled, rather than when funds are received. Drilling
operations for our 2004 year-end Drilling Program were ongoing during the first
quarter of 2005, when we drilled 57 gross (16.7549 net) natural gas wells.
Production revenues were $2,875,788 for the first quarter of 2005, an
increase of 263% from $791,289 in the first quarter of 2004. This reflects an
increase of 175% in our production volumes to 396.8 Mmcfe in the first quarter
of 2005 from 144.1 Mmcfe in the same quarter last year. Our growth in production
volumes resulted from new wells brought on line since March 31, 2004 and wells
added from property acquisitions in the second half of 2004. The growth in
production revenues also reflects a 32% increase in our average sales price of
natural gas (before certain transportation charges) to $7.26 per Mcf in the
first quarter of 2005 from $5.51 per Mcf in same quarter last year, reflecting
continued strength in natural gas prices. Principal purchasers of our natural
gas production are gas marketers and customers with transmission facilities near
our producing properties. During the first quarter of 2005, approximately 45% of
our natural gas production was sold under fixed-price contracts and the balance
primarily at prices determined monthly under formulas based on prevailing market
indices.
Gas transmission and compression revenues were $457,458 during the
first quarter of 2005, up 2% from $448,468 in the first quarter of 2004. This
reflects continued reliance on our own gathering systems for our new wells,
generating transmission and compression revenues from the Drilling Programs, net
of our working interests in those wells. During the first quarter of 2005, we
extended our natural gas gathering systems for new wells by approximately 29
miles. Our gas transmission and compression revenues for the first quarter of
2005 also reflect a contribution of $149,141 from gas utility sales, up 29% from
$115,752 in the same quarter last year.
Expenses. Total direct expenses increased by 25% to $13,521,410 for the
first quarter of 2005 compared to $10,829,240 for the first quarter of 2004. Our
direct expense mix for the current reported quarter was 91% contract drilling,
6% oil and gas production and 3% natural gas transmission and compression. For
the first quarter of 2004, our total direct expenses were incurred 93% in
contract drilling, 3% in oil and gas production and 4% in natural gas
transmission and compression.
Contract drilling expenses were $12,369,805 during the first quarter of
2005, an increase of 22% from $10,135,062 in the same quarter last year. This
primarily reflects the substantial level of drilling activities on behalf of our
sponsored Drilling Programs and an increase in the average depth of our new
wells. The greater well depth adds incrementally to variable costs for outside
contractors, well completion complexities and expenditures and steel casing
requirements, prices for which have increased substantially. In response to
these developments, we increased the price established for drilling and
completing new wells under turnkey drilling contracts for our most recent
Drilling Programs.
Production expenses were $758,821 in the first quarter of 2005,
compared to $285,312 in the same quarter last year, reflecting our substantial
growth in production volumes. In addition to lifting costs, production expenses
include field operating and maintenance costs, related overhead, third-party
transportation fees and lease operating
15
expenses. As a percentage of oil and gas production revenues, production
expenses decreased to 26% in the first quarter of 2005 from 36% in the same
quarter last year.
Gas transmission and compression expenses in the first quarter of 2005
were $392,784, compared to $408,866 in the same quarter last year. As a
percentage of gas transmission and compression revenues, these expenses
decreased to 76% in the current reported quarter from 91% in the first quarter
of 2004, reflecting economies of scale and field operating efficiencies. Gas
transmission and compression expenses do not reflect capitalized costs of
$1,506,427 in the first quarter of 2005 for extensions of our gas gathering
systems and additions to dehydration and compression capacity required to bring
new wells on line.
Selling, general and administrative ("SG&A") expenses were $3,506,825
in the first quarter of 2005, an increase of 10% from $3,185,518 in the same
quarter last year, primarily reflecting the timing and extent of our selling and
promotional costs for sponsored Drilling Programs. The higher SG&A expenses for
the first quarter of 2005 also reflect costs for supporting expanded operations
as a whole, including additions to our staff and technology infrastructure as
well as increased salary and other employee related expenses. With the expansion
of our operations, we also achieved various economies of scale, reflected by a
decrease in SG&A expenses as a percentage of total revenues to 17% in the
current reported quarter compared to 20% in the first quarter of 2004.
Beginning in 2004, we adopted the fair value method of accounting for
employee stock options. Under the new method, employee stock options are valued
at the grant date using the Black-Scholes valuation model, and the compensation
cost is recognized ratably over the vesting period. In addition to an accrual of
$109,038 for deferred compensation costs, we recognized $143,570 in the first
quarter of 2005 from fair value accounting for employee stock options, compared
to $30,074 in the same quarter last year.
Depreciation, depletion and amortization ("DD&A") was $1,046,555 in the
first quarter of 2005, compared to $206,111 in the same quarter of 2004. The
increase in DD&A reflects additions of $48.0 million to oil and gas properties
and $6.3 million to gas gathering systems and well equipment since March 31,
2004.
Interest expense for the first quarter of 2005 was $508,753, compared
to $89,168 in the first quarter of 2004. This reflects higher total debt to
support our SME acquisition in October 2004, when we added $14.7 million of bank
debt and $6.1 million of convertible debt, together with our most recent
convertible note financing of $8.0 million to support ongoing drilling and gas
gathering initiatives. See "Liquidity and Capital Resources" below.
We recognized income tax expense of $618,501 in the first quarter of
2005, all of which was recorded as a future tax liability. This primarily
reflects a 15% allocation of intangible drilling costs from our Drilling
Programs, which reduces our cash outlays that would otherwise be required for
current income taxes.
Net Income. We realized net income of $737,066 for the first quarter of
2005, compared to $767,241 in the first quarter of 2004, reflecting the
foregoing factors. Basic earnings per share were $0.05 based on 15,689,872
weighted average common shares outstanding in the first quarter of 2005,
compared to $0.06 per share based on 12,052,183 weighted average common shares
outstanding in the same quarter last year.
The results of operations for the quarter ended March 31, 2005 are not
necessarily indicative of results to be expected for the full year.
* * *
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to its quarterly report to be
signed on its behalf by the undersigned thereunto duly authorized.
NGAS RESOURCES, INC.
Date: August 11, 2005 By: /s/ William S. Daugherty
----------------------------------
William S. Daugherty
Chief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer)
17