1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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): MAY 24, 1999
DAUGHERTY RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
PROVINCE OF BRITISH COLUMBIA, CANADA
(State or Other Jurisdiction of Incorporation)
0-12185 NOT APPLICABLE
(Commission File No.) (I.R.S. Employer Identification No.)
120 PROSPEROUS PLACE, SUITE 201
LEXINGTON, KENTUCKY 40509-1844
(Address of Principal Executive Offices)
(606) 263-3948
(Registrant's Telephone Number, Including Area Code)
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ITEM 5. OTHER EVENTS.
The shareholders of the Registrant at the Annual General Meeting to be
held June 30, 1999 (the "Meeting") will be asked to vote on the approval of an
acquisition of various oil and gas properties and collateral rights by the
Registrant's wholly-owned subsidiary, Daugherty Petroleum, Inc., from
Environmental Energy Partners I, Ltd., Environmental Energy Partners II, Ltd.,
Environmental Operating Partners, Ltd., Environmental Holding Company, LLC,
Environmental Processing Partners, Ltd., Environmental Energy, Inc., and
Environmental Operating, Inc. (collectively, the "Sellers"), pursuant to an
Agreement of Purchase and Sale dated as of January 26, 1999 (the "Acquisition
Agreement"), but only to be effective upon the approval by the Registrant's
shareholders. At the Meeting, in connection with the Acquisition Agreement, the
shareholders will also be asked to approve an increase in the authorized shares
of the common stock and the preferred stock of the Registrant (individually, the
"Common Stock," and the "Preferred Stock") and modify the terms of the Preferred
Stock to be in compliance with the Acquisition Agreement.
PRELIMINARY AGREEMENT
On November 3, 1997, management of the Registrant and the Sellers
executed an Agreement for the Acquisition of Certain Oil and Gas Interests (the
"Preliminary Agreement") by which the Registrant manifested its intent to
purchase certain oil and gas interests and related assets owned by the Sellers
and its affiliates. At the time the Preliminary Agreement was executed, the
final terms of the proposed asset transaction, including the identification of
specific oil and gas interests, the valuation of such interests, and the terms
of purchase, had yet to be negotiated by the parties. As consideration for the
transfer of the assets to the Registrant pursuant to the Preliminary Agreement,
management proposed to issue a combination of warrants for the purchase of
shares of the Common Stock and shares of the Preferred Stock to the Sellers.
In anticipation of consummating the transaction contemplated under the
Preliminary Agreement, management proposed, and the shareholders approved, an
amendment to the Registrant's Articles to expand the Registrant's equity
structure. The amendment was formally approved at the 1998 Annual General
Meeting of Shareholders and created a class of 6,000,000 shares of Preferred
Stock (subsequently reduced to 1,200,000 shares pursuant to a one share for five
share capital consolidation).
AGREEMENT FOR PURCHASE AND SALE
On January 26, 1999, Daugherty Petroleum, Inc., as purchaser, and the
Registrant, as accommodation party, entered into the Acquisition Agreement with
the Sellers to effect the transaction originally contemplated by the Preliminary
Agreement. Under the terms and conditions of the Acquisition Agreement,
Daugherty Petroleum, Inc. will acquire a significant number of producing and
non-producing oil and gas leaseholds, including related equipment and other
interests, located in Kentucky, Tennessee and Louisiana.
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As consideration for the sale of the assets pursuant to the Acquisition
Agreement, the Registrant will issue to the Sellers the following securities:
1. 1,024,924 SHARES OF LIMITED SERIES NON-CUMULATIVE, NON-VOTING
PREFERRED STOCK. In addition to being non-voting and having other general
characteristics as specified in the Company's Articles, the Preferred Stock will
be:
- Convertible by the Sellers into shares of the Common Stock, on
a share for share basis, at any time within a period of two
years from the date of issuance. Upon the expiration of the
two year period, all unconverted shares of the Preferred Stock
will automatically convert into shares of the Common Stock. In
addition, the Sellers will receive a conversion bonus of
shares of the Common Stock equal to 12 percent of the number
of shares of the Preferred Stock unconverted on the second
anniversary date; or
- Convertible by the Registrant if the last sales price of the
Common Stock equals or exceeds $10.00 for at least 20 trading
days and proper notice of conversion is provided to the
holder. In the event the Registrant elects to convert, the
Sellers will receive a conversion bonus of shares of the
Common Stock equal to one half of one percent per month of the
number of shares of the Preferred Stock which were converted,
times the number of months from issuance of the Preferred
Stock to the date of conversion.
The Sellers will not have any preemptive rights to acquire additional
shares of the Preferred Stock or Common Stock, upon conversion.
2. 170,821 UNITS OF ACQUISITION WARRANTS. Each single Unit of
Acquisition Warrants consists of the following number and types of warrants to
acquire shares of the Common Stock within a period of five years from the date
of issuance of the warrant:
- Two Series A Acquisition Warrants entitling the holder to
purchase one share of the Common Stock at a price of $1.75 per
share;
- One Series B Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $2.00 per
share;
- One Series C Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $2.50 per
share;
- One Series D Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $3.00 per
share;
- One Series E Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $3.50 per
share;
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- One Series F Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $4.00 per
share; and
- One Series G Acquisition Warrant entitling the holder to
purchase one share of the Common Stock at a price of $4.50 per
share.
The exercise price of each of the Acquisition Warrants will
automatically be reduced to $1.00 per share during any period the Registrant's
Common Stock becomes and remains delisted from The Nasdaq SmallCap Market.
The Registrant can redeem each series of Acquisition Warrants, as an
entire series, at a price of $0.05 per Acquisition Warrant if the last sales
price of the Common Stock equals or exceeds 200 percent of the exercise price of
the series of Acquisition Warrants being redeemed for 20 consecutive trading
days and proper notice of redemption is provided to the holder. The Registrant
is not required to establish a sinking fund for the redemption of the shares.
All shares of the Common Stock acquired by the Sellers pursuant to the
conversion of the Preferred Stock or the Acquisition Warrants will be subject to
the terms of a voting trust until such time as the shares are distributed to the
various interest holders of the Sellers. A panel of trustees will be appointed
by the Sellers to hold title to the shares of the Common Stock and shall have
discretionary authority to vote the same as a majority of the trustees shall
determine. The voting trust shall terminate upon the earlier of distribution or
10 years from the date of its creation.
While the Registrant is under no obligation to register the Preferred
Stock or any shares of the Common Stock which may be issued upon the conversion
of the Preferred Stock or the exercise of an Acquisition Warrant, in the event
the Registrant files a registration statement during the period when the
securities are restricted, the securities will have certain "piggyback" rights
to participate in the registration.
Dilutive Effect. The issuance of the Preferred Stock and the
Acquisition Warrants will have a dilutive effect on the present owners of the
Common Stock. Upon full conversion of the Preferred Stock, the Sellers will own
at least 1,024,924 shares of the Common Stock. The holders of the Preferred
Stock will also receive an additional number of shares at the time of conversion
as a bonus depending on the timing and manner of conversion. Excluding the
conversion bonus shares of the Common Stock, but including the shares underlying
the Acquisition Warrants, the Sellers will own approximately 16.8 percent of the
voting stock of the Registrant, calculated on a current fully diluted basis,
immediately following conversion of the Preferred Stock. Assuming that the
Sellers also fully exercise their rights to purchase shares of the Common Stock
under the Acquisition Warrants, the Sellers' ownership percentage of the Common
Stock could rise to approximately 39.4 percent based on a current fully diluted
calculation.
Financial Information. The Registrant employed the independent public
accounting firm of Hall, Kistler & Company, LLP to prepare an audited report
regarding the combined statement of revenues and direct operating expenses for
the oil and gas interests to be acquired by the
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Registrant pursuant to the Acquisition Agreement. The report covers the fiscal
period ended December 31, 1998 and is attached hereto as an exhibit. In
addition, the Registrant has prepared pro forma financial information,
consisting of a pro forma consolidated balance sheet and consolidated statements
of operation, taking into account the effects of the Acquisition Agreement on
the financial condition of the Registrant. A copy of the Pro Forma Consolidated
Financial Statements (Unaudited) is attached hereto as an exhibit.
Federal Income Tax Consequences of the Transaction; Accounting
Treatment. For U.S. federal income tax purposes, the transaction will be treated
as a taxable asset acquisition by Daugherty Petroleum, Inc., the Company's
wholly-owned U.S. subsidiary, using the stock of its parent as consideration for
the assets to be acquired. Daugherty Petroleum, Inc. will be treated as
acquiring the stock of the Company immediately before the purchase either as a
contribution to capital or in a IRC Section 351 exchange. Therefore, Daugherty
Petroleum, Inc. will take a carryover basis in the Company's stock, which is
deemed to be zero. When Daugherty Petroleum, Inc. transfers (or is treated as
transferring) the parent stock in exchange for the assets, there is some risk
that Daugherty Petroleum will recognize gain on the transfer in an amount equal
to the value of the assets to be acquired. This is due to the fact that the
provisions of IRC Section 1032, which extend non-recognition treatment to
corporations on the sale of their own stock, will not specifically apply to
subsidiaries in the transfer of the stock of a parent until the finalization of
Proposed Treasury Regulation Section 1.1032-3. Nevertheless, any gain
attributable to the Company as a result of the acquisition will likely be
offset by operating loss carryforwards and, as such, will have no economic
impact on the Company or Daugherty Petroleum, Inc.
The Registrant is not aware of any additional federal or state
regulatory requirements that must be complied with or any approvals that must be
obtained from any governmental agencies as a condition precedent to the
transaction, other than the approval required of the shareholders.
Purpose for the Transaction. The assets to be acquired by Daugherty
Petroleum, Inc. pursuant to the Acquisition Agreement are expected to enhance
the Registrant's current portfolio of proved oil and gas producing wells and
serve to bolster its inventory of properties held for future development.
Management believes that the decision to enter into the Acquisition Agreement is
consistent with the Registrant's strategy of balancing developmental drilling
efforts with strategic acquisitions of proved properties. In addition,
management believes that the amount of consideration to be provided for the
acquisition is reasonable and represents a fair value for such interests, based
upon the valuations provided by Wright & Company, Inc.
Vote Required. Rule 4310 of the Marketplace Rules of The Nasdaq Stock
Market requires the Registrant to obtain shareholder approval of a transaction
involving the issuance of securities in connection with the acquisition of
assets of another company when, as in this case, where, due to the present or
potential issuance of common stock, or securities convertible into or
exercisable for common stock, the common stock has or will have upon issuance
voting power equal to or in excess of 20 percent of the voting power outstanding
before the issuance of stock or securities convertible into or exercisable for
common stock. Based on the requirements of Rule 4310, an affirmative vote of a
majority of the total number of shares of the Common Stock present in person or
represented by proxy at the Meeting is required to approve the Acquisition
Agreement. To that end, the Board of Directors has placed the matter of the
Acquisition
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Agreement on the agenda for a vote at the Meeting. The Board of
Directors will recommend a vote FOR the approval of the Acquisition Agreement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED. See attached Pages
FS-1 through FS-5.
(b) PRO FORMA FINANCIAL INFORMATION. See attached Pages PF-1 through
PF-6.
(c) EXHIBITS. The exhibits indicated by an asterisk (*) are
incorporated by reference.
1. Agreement of Purchase and Sale dated as of January
26, 1999 by and between Environmental Energy Partners
I, Ltd., Environmental Energy Partners II, Ltd.,
Environmental Operating Partners, Ltd., Environmental
Holding Registrant, LLC, Environmental Processing
Partners, Ltd., Environmental Energy, Inc., and
Environmental Operating, Inc., as Sellers and
Daugherty Petroleum, Inc., as Buyer, and Daugherty
Resources, Inc., as Accommodation Party.
2. Consent of Hall, Kistler & Company, LLP.
3.* Consent of Wright and Company, Inc. described in
Exhibit 23(d) to Form 10-KSB for the Company for the
fiscal year ended December 31, 1998. (File No.
0-12185).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DAUGHERTY RESOURCES, INC.
Date: May 25, 1999 By /s/ William S. Daugherty
--------------------------
William S. Daugherty,
Chairman of the Board and President
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daugherty Resources, Inc.:
We have audited the accompanying combined statement of revenues and
direct operating expenses for certain oil and gas interests of Environmental
Energy, Inc. and its affiliates, Environmental Operating, Inc. and affiliated
limited partnerships ("Environmental Interest") to be acquired from the
Environmental Interest Owners for the year ended December 31, 1998. This
statement is the responsibility of Environmental Energy, Inc.'s management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 that our audit provides a reasonable basis for our opinion.
The statement of revenues and direct operating expenses for the
Environmental Interests acquired from the Environmental Interest Owners was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission as described in Note A and are not intended
to be a complete presentation of revenues and expenses.
In our opinion, the statement referred to above presents fairly, in all
material respects, the revenues and direct operating expenses of the
Environmental Interests acquired from the Environmental Interest Owners for the
year ended December 31, 1998, in conformity with generally accepted accounting
principles.
Hall, Kistler & Company, LLP
Certified Public Accountants
Canton, Ohio
April 19, 1999
FS-1
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COMBINED STATEMENT OF REVENUES
AND DIRECT OPERATING EXPENSES
ENVIRONMENTAL INTERESTS
YEAR ENDED DECEMBER 31, 1998
Revenues ........................................ $ 281,217
Direct operating expenses ....................... (59,688)
---------
Excess of revenues over direct operating expenses $ 221,529
=========
The accompanying notes are an integral part of this statement.
FS-2
9
NOTES TO COMBINED STATEMENT
OF REVENUE AND DIRECT OPERATING EXPENSES
ENVIRONMENTAL INTERESTS
DECEMBER 31, 1998
NOTE A Summary of Significant Accounting Policies.
------------------------------------------
Basis of Presentation.
----------------------
The accompanying statements present the revenues and direct operating
expenses of certain oil and gas interests ("Environmental Interests") of
Environmental Energy, Inc. and its affiliates, Environmental Operating, Inc.,
and Environmental Holding Company, LLC, and affiliated limited partnerships:
Environmental Energy Partners I, LTD., Environmental Energy Partners II, LTD.,
Environmental Operating Partners, LTD., Environmental Processing Partners, LTD.,
(collectively referred to as "Sellers") , which are to be acquired by Daugherty
Resources, Inc. ("DRI") pursuant to an Agreement for Purchase and Sale dated
January 26, 1999 ("Agreement"). Under the terms of the Agreement, DRI is to
acquire working interests in various wells in exchange for 1,024,924 shares of
Limited Series Non-Cumulative, Non-Voting Preferred Stock (DRI Preferred") and
170,821 Units of Acquisitions Warrants ("DRI Warrants"). The DRI Preferred are
convertible on a share for share basis into Common Stock of DRI ("DRI Common").
The DRI Preferred may be converted (1) by the Sellers at any time within two
years of issuance, and (2) by DRI at any time within two years of issuance if
last sales price of DRI Common equals or exceeds Ten Dollars ($10.00) for at
least 20 consecutive trading days and notice of conversion is given to Sellers
no sooner than ten days after the 20th consecutive trading day equaling or
exceeding Ten Dollars ($10.00). Any DRI Preferred so converted will receive a
Conversion Bonus of DRI Common of one half of one percent of the number of DRI
Preferred converted times the number of months from issuance to the date of
conversion. Any DRI Preferred that has not been converted before the second
anniversary date of its issue shall be converted on a share for share basis by
DRI into DRI Common and the Holders will receive a Conversion Bonus of DRI
Common equal to 12% of the number of DRI Preferred so converted. The DRI
Preferred and DRI Common shall bear Rule 144 restrictive legends and shall be
subject to the requirements of Rule 144. The Units of Acquisition Warrants shall
consist of two (2) Series A Acquisition Warrants, one (1) Series B Acquisition
Warrant, one (1) Series C Acquisition Warrant, one (1) Series D Acquisition
Warrant, one (1) Series E Acquisition Warrant, one (1) Series F Acquisition
Warrant, and one (1) Series G Acquisition Warrant with the following features:
FS-3
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WARRANTS HOLDER MAY PURCHASE PRICE EXPIRY
-------- ------------------- ----- ------
Series A One Share of DRI Common $1.75 5 years from issuance
Series B One Share of DRI Common $2.00 5 years from issuance
Series C One Share of DRI Common $2.50 5 years from issuance
Series D One Share of DRI Common $3.00 5 years from issuance
Series E One Share of DRI Common $3.50 5 years from issuance
Series F One Share of DRI Common $4.00 5 years from issuance
Series G One Share of DRI Common $4.50 5 years from issuance
Each Series of Acquisition Warrants is redeemable by DRI as an entire
series, at a price of $.05 per Acquisition Warrant, at the option of DRI if (1)
the last sales price of DRI Common equals or exceeds 200% of the exercise price
of the Series of Acquisition Warrants being redeemed for 20 consecutive trading
days and (2) notice of redemption is given to the Warrantholder no sooner than
one day after and no later than ten days after the 20th consecutive trading day.
The notice of redemption must give a minimum of 90 days notice to the
Warrantholder and the Warrantholder shall have the right to exercise the Warrant
until the close of business of the date fixed for redemption in the notice.
Omitted Historical Financial Information
----------------------------------------
Full historical financial statements, including general and
administrative expenses and interest expense, have not been presented due to the
fact that (a) the sellers of the Environmental Interests cannot make a
practicable determination of the portion of their general and administrative
expenses, interest expense or other indirect expenses which is attributable to
the properties subject to the above transactions, and (b) the property interests
acquired pursuant to the above transactions are primarily fully developed
producing properties in which DRI has had no management involvement. Total
incurred exploration and development costs associated with the Environmental
Energy, Inc. Interests through December 31, 1998 were approximately $12,500,000.
Accrual Basis Statements
------------------------
Memorandum adjustments have been made to the financial information
derived from the Sellers in order to present the accompanying statements in
accordance with generally accepted accounting principles.
NOTE B Unaudited Supplemental Oil and Gas Information.
----------------------------------------------
The determination of oil and gas reserves is complex and highly
interpretive. Assumptions used to estimate reserve information may significantly
increase or decrease such reserves in future periods. The estimates of reserves
are subject to continuing changes and therefore, an accurate determination of
reserves may not be possible for many years because of the time needed for
development, drilling, testing and studies of the reservoirs. Net proved oil and
gas reserves and the discounted future net cash flows related to the acquired
properties were estimated by the Company's petroleum engineers as of December
31, 1998 in accordance with
FS-4
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Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and
Gas Producing Activities." Since reserve evaluations for earlier dates had not
been prepared, it is not practical to include any information as to changes in
reserve quantities, nor any change in present value disclosures. At December 31,
1998, net proved reserves for the acquired properties were estimated as 4.9
MBbls of oil and 334 MMcf of natural gas. Net production for the year ended
December 31, 1998, was 2.7 MBbls of oil and 114.2 MMcf of natural gas.
The standardized measure of discounted future net cash flows at
December 31, 1998, related to the estimated proved oil and gas reserves is as
follows:
Future net revenue $ 814,316
Future production costs (168,424)
Future development costs (8,039)
Future income taxes -0-
---------
Future net cash flows $ 637,853
Discount (209,017)
---------
Standardize measure of discounted future net cash flows $ 428,836
=========
The calculated weighted average sales prices utilized for the purposes
of estimating the acquired properties' proved reserves and future net revenue
were $11.98 per barrel of oil and between $2.17 and $2.25, per Mcf of natural
gas. Total estimated future net cash flows before income taxes, discounted at
10% per annum, was $428,836 as of December 31, 1998.
During 1998, $42,000 was expended for capital improvements to the
properties, none of which related to exploration.
FS-5
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PRO FORMA FINANCIAL INFORMATION
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying pro forma consolidated balance sheet and pro forma
consolidated statements of operations give effect to Daugherty Resources, Inc.'s
("Company") acquisition of the oil and gas Interests of Environmental Energy,
Inc. and its affiliates Environmental Operating, Inc. and affiliated limited
partnerships ("Environmental Interests"), and are based upon assumptions set
forth in the notes to such statements.
The pro forma consolidated financial statements comprise historical
data which have been retroactively adjusted or combined to reflect the effects
of the above mentioned transaction on the historical consolidated financial
statements. The historical information assumes that the transaction for which
pro forma effects are shown was consummated on March 31, 1999 for the pro forma
consolidated balance sheet and January 1 of each period presented for the pro
forma consolidated statements of operations. Such pro forma information should
be read in conjunction with the related historical financial information and is
not necessarily indicative of the results which would actually have occurred had
the transaction been in effect on the date or the beginning of the periods
indicated or which may occur in the future due to several factors, including,
but not limited to, commencement of production from new wells that has occurred
subsequent to the dates of the periods presented.
PF-1
13
PRO FORMA CONSOLIDATED BALANCE SHEET
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
MARCH 31, 1999
(UNAUDITED, IN THOUSANDS)
ENVIRONMENTAL
HISTORICAL INTERESTS PRO
COMPANY ACQUISITION FORMA
(a)
ASSETS
------
CURRENT ASSETS
- --------------
Cash $ 298 $ -0- $ 298
Accounts receivable 336 -0- 336
Inventory 397 -0- 397
Other current assets 20 -0- 20
-------- ------ --------
TOTAL CURRENT ASSETS 1,051 -0- 1,051
OIL AND GAS PROPERTIES (NET) 4,637 650 5,287
- ---------------------------
MINING PROPERTY (NET) 11,232 -0- 11,232
- ---------------------
PROPERTY AND EQUIPMENT (NET) 1,738 -0- 1,738
- ---------------------------
OTHER ASSETS
- ------------
Related party loans 96 -0- 96
Bonds and deposits 54 -0- 54
Other assets 266 -0- 266
Goodwill, net of amortization of $848 1,028 -0- 1,028
-------- ------ --------
1,444 -0- 1,444
-------- ------ --------
TOTAL ASSETS $ 20,102 $ 650 $ 20,752
======== ====== ========
LIABILITIES AND
---------------
STOCKHOLDER'S EQUITY
--------------------
CURRENT LIABILITIES
- -------------------
Short-term loans and notes $ 879 $ -0- $ 879
Current portion of long-term debt 1,151 -0- 1,151
PF-2
14
Accounts payable 1,465 -0- 1,465
Accrued liabilities 751 -0- 751
Drilling prepayments 824 -0- 824
-------- ------ --------
TOTAL CURRENT LIABILITIES 5,070 -0- 5,070
LONG-TERM LIABILITIES 2,554 -0- 2,554
- ---------------------
PAYABLE TO RELATED PARTIES 25 -0- 25
- --------------------------
7,649 -0- 7,649
MINORITY INTEREST -0- -0- -0-
STOCKHOLDER'S EQUITY
- --------------------
Common stock 21,210 -0- 21,210
Common stock subscribed -0- -0- -0-
Preferred stock -0- 650 650
Additional paid in capital -0- -0- -0-
Retained earnings (deficit) (8,505) -0- (8,505)
Current income (loss) (252) -0- (252)
-------- ------ --------
12,453 650 13,103
-------- ------ --------
TOTAL LIABILITIES AND
- ---------------------
STOCKHOLDER'S EQUITY $ 20,102 $ 650 $ 20,752
======== ====== ========
The accompanying notes are an integral part of this pro forma financial
statement.
PF-3
15
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED, IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ENVIRONMENTAL
HISTORICAL INTERESTS PRO
COMPANY ACQUISITION ADJUSTMENTS FORMA
(c)
GROSS REVENUE $ 1,360 $ 48 -0- $ 1,408
- -------------
DIRECT EXPENSES 1,207 15 (b) 42 1,264
- --------------- -------
GROSS PROFIT (LOSS) 153 33 (42) 144
GENERAL AND ADMINISTRATIVE
- --------------------------
EXPENSES 340 -0- -0- 340
--------
OTHER INCOME (EXPENSE) (65) -0- -0- (65)
- --------------------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAX AND OTHER $ (252) $ 33 $ (42) $ (261)
- --------------------
Income tax expense (benefit) -0- -0- -0- -0-
------- ------- ------- -------
NET INCOME (LOSS) $ (252) $ 33 $ (42) $ (261)
======= ======= ======= =======
Shares outstanding 2,184 2,184
Earnings per share $ (.12) $ (.12)
The accompanying notes are an integral part of this pro forma financial
statement.
PF-4
16
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED, IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ENVIRONMENTAL
HISTORICAL INTERESTS PRO
COMPANY ACQUISITION ADJUSTMENTS FORMA
(c)
GROSS REVENUE $ 5,944 $281 $ -0- $ 6,225
- -------------
DIRECT EXPENSES 5,201 59 (b) 156 5,416
- ---------------
GROSS PROFIT 743 222 (156) 809
GENERAL AND ADMINISTRATIVE
- --------------------------
EXPENSES 2,436 -0- -0- 2,436
--------
OTHER INCOME (EXPENSE) 143 -0- -0- 143
- ---------------------
INCOME (LOSS) BEFORE
INCOME TAX AND OTHER (1,550) 222 (156) (1,484)
- --------------------
Income tax expense
(benefit) -0- -0- -0- -0-
MINORITY PORTION (18) -0- -0- (18)
- ---------------- ---- ----- -------
NET INCOME (LOSS) $(1,568) $222 $(156) $(1,502)
======= ==== ===== =======
Shares outstanding 2,184 2,184
Average number of shares
outstanding for 1998 2,035 2,035
Earnings per share (.77) (.74)
The accompanying notes are an integral part of this pro forma financial
statement.
PF-5
17
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
DAUGHERTY RESOURCES, INC. AND SUBSIDIARIES
(UNAUDITED)
(a) To reflect Daugherty Resources acquisition of oil and gas
properties from the Environmental Interest owners and the related issuance of
preferred stock. Due to the restrictions on the preferred stock to be issued,
the marketable value of the preferred stock was undeterminable. The fair market
value of the underlying assets was used to estimate the value of the preferred
stock. The fair market value of oil and gas working interests were based upon
the Company's petroleum engineers reserves analysis and the other non-producing
properties were based on managements estimates of fair market value.
(b) Represents the increase in depreciation, depletion expense
resulting from the inclusion of the Environmental Interests acquisition computed
on the straight line and units of production method.
(c) Pro forma financial data are not expected by the Company to be
representative of future operating results.
PF-6