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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-KSB/A
Amendment No. 1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 0-12185
ALASKA APOLLO RESOURCES INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
BRITISH COLUMBIA NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
131 PROSPEROUS PLACE, SUITE 17-A
LEXINGTON, KENTUCKY 40509-1844
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (606) 263-3948.
----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON
STOCK, NO PAR VALUE PER SHARE.
CHECK 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 (OR FOR SUCH
SHORTER PERIOD THAT THE ISSUER WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS
BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X. NO .
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO
ITEM 405 OF REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL
BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB
OR ANY AMENDMENT TO THIS FORM 10-KSB. [X]
THE ISSUER REVENUES FOR THE YEAR ENDED DECEMBER 31, 1997 WERE
$4,846,157.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
COMPUTED BY REFERENCE TO THE PRICE AT WHICH STOCK WAS SOLD, OR THE AVERAGE BID
AND ASKED PRICES OF SUCH STOCK, AS OF APRIL 6, 1998 WAS: $3,987,632.
THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF MARCH 2, 1998, WAS: 9,821,754.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I......................................................................................... 1
Item 1. Business........................................................................ 1
Item 2. Properties...................................................................... 10
Item 3. Legal Proceedings............................................................... 10
Item 4. Submission of Matters to a Vote of Securities................................... 10
PART II........................................................................................ 10
Item 5. Market for the Registrant's Common Equity and Related Stockholders Matters ..... 10
Item 6. Selected Financial Data......................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................... 12
Item 8. Financial Statements and Supplementary Data..................................... 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................. 14
PART III....................................................................................... 14
Item 10. Directors and Executive Officers of the Registrant.............................. 15
Item 11. Executive Compensation.......................................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and Management.................. 19
Item 13. Certain Relationships and Related Transactions.................................. 20
PART IV ....................................................................................... 21
Item 14. Exhibits, Financial Statement Schedules and Report on Form 8-K.................. 21
SIGNATURES..................................................................................... 23
</TABLE>
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PART I
ITEM 1. BUSINESS.
GENERAL
Alaska Apollo Resources Inc. (the "Company" or the "Registrant") is a
diversified natural resources company with assets in oil and gas, gold
prospects, and a hardwood manufacturing facility. Originally formed in 1979 to
develop gold properties in Alaska, the Company, through its 1993 acquisition of
Daugherty Petroleum, Inc., has acquired substantial oil and gas interests in the
Appalachian and Illinois Basins. In 1996, Daugherty Petroleum, Inc. concluded
its acquisition of an 80 percent interest in Red River Hardwoods, Inc., a lumber
drying and dimensional hardwood manufacturing facility based in Kentucky.
The Company's strategy is to continue to expand its base in natural
resources in the eastern part of the United States. To implement this strategy,
the Company emphasizes the following elements:
- Diversification of the Company's assets to take advantage of
natural resources located in the vicinity of its operations.
- Reserve growth through high potential developmental drilling.
- Balance between development drilling and acquisitions of
proved oil and gas properties.
- A dedication to research and development in the energy field.
- Conversion of the non-income producing gold assets to income
producing assets.
- Equity ownership and incentives to attract and retain
employees.
The Company has focused on its oil and gas drilling efforts through its
subsidiary Daugherty Petroleum, Inc. in the Appalachian and Illinois Basins.
Management has extensive experience in both basins, and the Company believes
that there are significant undiscovered reserve potential and opportunities in
the basins. The Company's concentration on these two basins helps keep
operational expenses to a minimum.
FORWARD-LOOKING STATEMENTS
This Report on Form 10-KSB contains certain forward-looking statements,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects" and words of similar import. Such forward- looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, financial condition, performance or
achievements of the performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
adverse changes in the industries the Company participates in, commodity price
risk, environmental risk, competition, the impact of present or future
environmental legislation and compliance with environmental risk, competition,
the impact of present or future environmental legislation and compliance with
environmental laws, the ongoing need for capital improvements, the availability
and replacement costs for rig related equipment, spare parts and supplies,
financing costs, changes in operating expenses, attraction and retention of
skilled employees, adverse changes in applicable tax laws, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, acts of war,
and other factors referenced in this Report. Certain of these factors are
discussed in more detail elsewhere in this Report, including, without
limitation, "Description of Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." Given these uncertainties,
readers are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such
forward-looking statements to reflect Future events or developments.
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OIL AND GAS EXPLORATION AND PRODUCTION
The Company is engaged through Daugherty Petroleum, Inc., which was
incorporated in 1984, in the business of acquiring properties for the
exploration and development of oil and gas, including lease acquisitions,
participation in ventures involving other oil and gas companies and investors,
and in farmins from other producers. Daugherty Petroleum, Inc. performs these
services on behalf of the Company, investors in specific programs, and on a
turnkey basis for other oil and gas companies. Daugherty Petroleum, Inc. has
also acquired producing properties, both to operate and to resell. These
acquisitions often require workover attempts and the purchase of these
properties is usually based upon an assumed return on investment to the Company
of four years or less. During 1997, the Company acquired mineral leases in its
area of operations and expanded its reserve base through the drilling of 12
natural gas wells.
Daugherty Petroleum, Inc. continues to construct a natural gas pipeline
gathering system and in 1997 completed 37,000 feet in the Appalachian Basin.
This system has allowed Daugherty Petroleum, Inc. to extend its operations and
will allow further exploration into areas previously inaccessible to pipeline
gathering systems.
Daugherty Petroleum, Inc. is active in gas exploration, development and
production in the western edge of the Appalachian Basin in eastern and
southeastern Kentucky. The Appalachian Basin, which has relatively shallow
production, is the oldest and, geographically, one of the largest producing
regions in the United States. In the Appalachian Basin, Daugherty Petroleum,
Inc. operates gas wells in Whitley and Knox Counties, Kentucky. The wells range
between 1,500 and 4,000 feet in depth with daily production ranging between 20
and 200 Mcf per day. The gas produced in the fields is of a good quality and
dry. The proximity of the gas fields to the northeastern United States market
has generally resulted in higher than average natural gas prices.
The majority of Daugherty Petroleum, Inc.'s oil is produced from leases
located in the western Kentucky portion of the Illinois Basin. The wells in
which Daugherty Petroleum, Inc. owns interests are less than 2,500 feet deep,
and each well typically produces one to five barrels daily. Daugherty Petroleum,
Inc. acquired most of its oil production through acquisitions. Most fields in
the Illinois Basin are eventually produced by waterflooding (secondary recovery
methods), and it is the intention of the Company to waterflood some of its
properties that have the characteristics to flood well. In addition to
waterflooding to enhance production, the Company intends to drill on proven
undeveloped leases that the Company owns.
Daugherty Petroleum, Inc. owns a net 9.4 Bcf or its equivalent of
proven natural gas reserves. The Company purchased .449 Bcf gas reserves in 1997
from Equitable Resources Energy Company. The Company sold its interests in 28
gas wells that contained 0.597 Bcf. For information relating to Daugherty
Petroleum, Inc.'s proven reserves and proven undeveloped reserves, see the
Consolidated Financial Statements incorporated by reference in Item 8 hereof.
Dominion Reserves, Inc. On June 16, 1995, Daugherty Petroleum, Inc.
signed a joint venture agreement with Dominion Reserves, Inc. to drill 15 wells
in Knox County, Kentucky. The agreement also gave Dominion Reserves, Inc. a
first option to drill additional wells in an area of mutual interest with the
Company. Fourteen wells have successfully been drilled and the remaining one
well will be drilled in 1998.
Los Alamos National Laboratory and University of Houston's Oil Recovery
Center Research Project. On September 5, 1995, the Company signed a Cooperative
Research and Development Contract with Los Alamos National Laboratory and the
Regents of the University of California. The scope of the new contract is to
"investigate the design of a development drilling program for gas fields." The
Company continues to transmit data on field geology and well production to the
Los Alamos Laboratory for digitization. After all the information is obtained
and digitized, analysis will be performed to study areas for potential
development and assist the Company in selecting drilling locations for greater
enhancement of natural gas reserves.
Equitable Resources Energy Company Farmout Agreement. On April 12,
1996, Daugherty Petroleum, Inc. entered into a Farmout Agreement with Equitable
Resources Energy Company to develop 5,400 acres in Knox and Bell Counties,
Kentucky. On October 3, 1997, Daugherty Petroleum, Inc. exercised its right
pursuant to the terms of the farmout, to acquire an additional block of 8,500
acres contiguous to the original farmout acreage. Daugherty
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Petroleum, Inc. has negotiated drilling programs totaling 120 wells, some of
which will be drilled on the farmout acreage. To date, 14 wells have been
successfully drilled on the farmout acreage.
Enron Capital & Trade Reserves, Inc. On December 11, 1996, Daugherty
Petroleum, Inc. entered into a loan agreement with Joint Energy Development
Investments Limited Partnership, a Delaware limited partnership managed by Enron
Capital & Trade Resources, Inc., to fund four wells to be drilled on the EREC
farmout acreage during the first quarter of 1997. On March 21, 1997, Daugherty
Petroleum, Inc. drew the initial funds on the line of credit.
Environmental Energy, Inc. Oil and Gas Assets Acquisition. On November
3, 1997, Daugherty Petroleum, Inc. signed a Letter of Intent to acquire oil and
gas producing properties and to enter into an extensive oil and gas exploration
and financing program with Environmental Energy, Inc. The Agreement provides
that the Company issue 6,000,000 shares of convertible Preferred Stock for oil
and gas assets located in Kentucky, Louisiana and Tennessee. The preferred stock
is convertible to common stock on a share-for-share basis within two years.
Also, Alaska Apollo will issue warrants for 6,000,000 shares of the Common
Stock. Half will be exercisable at $1.00 per share and the remaining 3,000,000
will be exercisable at $1.25 per share.
Environmental Energy, Inc. Agreement to Build Utility Franchise. On
November 3, 1997, Daugherty Petroleum, Inc. signed an agreement to build and
operate a natural gas utility in Southern Kentucky that is owned by
Environmental Energy and its affiliates. Under the Agreement, Daugherty
Petroleum, Inc. will be responsible for the design installation, construction
and subsequent operation of the utility. Alaska Apollo will issue two million
options to Environmental Energy for Environmental's contribution of easements
and engineering. The options are exercisable at $1.00 per share and will expire
in 2002.
Niagara Oil, Inc. During 1996, Daugherty Petroleum, Inc. entered into
an agreement to sell its subsidiary, Niagara Oil, Inc. and to perform certain
rework services on the wells and waterflood equipment. The agreement requires
Daugherty Petroleum, Inc. to conclude negotiations with the United States
Environmental Protection Agency relating to the terms of an Administrative
Order, necessitated by violations of the prior operator, while detailing future
operations of the wells. The EPA has tendered a draft Administrative Order and
Daugherty Petroleum, Inc. has delivered its response. It is anticipated that,
following public hearing, the Administrative Order will be issued and Daugherty
Petroleum, Inc.'s sale of Niagara Oil, Inc. will be consummated during mid 1998.
Production and Sales. During 1997, thirty-one percent of the Company's
operating revenues were derived from its oil and gas related activities. The
Company's oil and gas gross revenues totaled $1,515,208 and were comprised of
turnkey contract revenues of $1,116,890 (69 percent); oil and gas production
revenues of $304,775 (20 percent); and operating revenues of $93,543 (six
percent). Gas sales are dependent on a variety of factors beyond the control of
the Company, including competition with other gas suppliers, seasonal demand for
gas and access to gas markets through transportation systems owned by third
parties. The Company sells its natural gas production on one and two year sales
contracts. During the past several years there had been a worldwide surplus of
oil that placed downward pressure on oil prices.
Productive Wells and Acreage. Daugherty Petroleum, Inc. owns fractional
working interests (cost bearing interests) in 74 gross (25 net) producing gas
wells and in 48 gross (17.4 net) producing oil wells. The majority of Daugherty
Petroleum, Inc.'s gas production is located in southeastern Kentucky, in Whitley
and Knox Counties. Oil production is located primarily in Henderson and Hopkins
Counties in the western Kentucky portion of the Illinois Basin.
A "gross well" is a well in which the Company owns a working interest.
A "net well" is deemed to exist when the sum of the fractional working interests
owned by the Company in gross wells equals one.
As of December 31, 1997, Daugherty Petroleum, Inc., owned natural gas
and oil mineral leases covering 36,000 gross (30,600 net) acres of land. In
1997, Daugherty Petroleum, Inc. had a budget of $50,000 for drilling exploratory
wells, and $450,000 for drilling developmental wells.
A "gross acre" is an acre in which a working interest is owned. The
number of gross acres represents the sum of acres in which a working interest is
owned. A "net acre" is deemed to exist when the sum of the fractional working
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interests in gross acres equals one. The number of net acres is the sum of the
fractional working interests in gross acres expressed in whole numbers or
fractions thereof.
Drilling Activity. During 1997, Daugherty Petroleum, Inc., participated
in the drilling of twelve gross (3.24 net) wells and the deepening of one
existing well. All of these wells were completed as wells capable of producing
gas or oil in commercial quantities.
Natural Gas and Oil Reserves. The following table sets forth
information as to the Company's proved and proved developed reserves of natural
gas and oil and of December 31, 1997, 1996, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
GAS LIQUIDS
TOTAL PROVED RESERVES AS OF: (MCF) (BBL)
---------------------------- ----- ------
<S> <C> <C>
December 31, 1997 9,379,587 68,744
December 31, 1996 14,509,433 285,252
December 31, 1995 10,353,988 201,491
December 31, 1994 7,844,657 130,912
December 31, 1993 970,753 171,388
</TABLE>
As used herein, the term "Mcf" means thousand cubic feet, the term
"MMcf" means million cubic feet, the term "Bcf" means billion cubic feet, and
the term "Bbl" means barrel. Liquids include crude oil, condensate and natural
gas liquids.
The 1997 oil and gas reserves were prepared by Wright and Company,
Inc., Nashville, Tennessee. The 1995 and 1996 oil and gas reserves were prepared
by the Company. No estimates of the Company's proved net oil and gas reserves
have been filed with or included in reports to any federal authority or agency.
Certain Factors Affecting Reserves. There are numerous uncertainties
inherent in estimating quantities of proved reserves, including many factors
beyond the control of the producer. The reserve data set forth herein represents
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of crude oil and natural gas that cannot be measured
in an exact manner, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. As a result, estimates of different engineers often vary. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revision of such estimate. Accordingly, reserve
estimates are often different from the quantities of crude oil and natural gas
that are ultimately recovered. The meaningfulness of such estimates is highly
dependent upon the accuracy of the assumptions upon which they were based.
Marketing. The revenues generated by the Company's exploration and
production operations are highly dependent upon the prices of, and demand for,
natural gas, and to a lesser extent, crude oil. For the last several years,
prices of natural gas and crude oil have reflected a worldwide surplus of supply
over demand. The Company saw higher prices for its natural gas beginning in 1996
and in December 1997, signed a one year contract for up to 1.5 MMcf per day at
$2.47 per Mcf. The Company's efforts to expand its gathering system has improved
its access to new markets where prices more closely reflect the Appalachian hub
prices received by other operators in the Appalachian Basin.
Market conditions for oil and gas are the result of a number of factors
outside the control of the Company, including changing economic conditions,
seasonal weather conditions, loss of markets to alternative fuels, increased
foreign production, and governmental regulation. Historically, demand for, and
prices of, natural gas are seasonal, generally peaking in the winter when
heating requirements are highest.
Most of the Company's natural gas production is sold to Southern Gas
Company. A gas market is available through other potential customers, including
The Wiser Oil Company and Delta Natural Gas Company. The Company sells
approximately 60 percent of its crude oil production to Indiana Farm Bureau,
Inc., with the balance being sold
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to refineries such as Marathon Oil, South Kentucky Purchasing and Bear Creek
Oil. The Company believes that the loss of any purchaser of the Company's oil
and gas production would not have a materially adverse affect on the Company.
Competition. The oil and gas industry is highly competitive. The
Company encounters competition from other oil and gas companies in all areas of
its operations, including the acquisition of producing properties. The Company's
competitors include major integrated oil and gas companies, numerous independent
oil and gas companies, individuals, and drilling and income programs. Many of
the Company's competitors are large, well-established companies with
substantially larger operating staffs and greater capital resources than the
Company. Such companies may be able to pay more for productive oil and gas
properties and exploratory prospects and to define, evaluate, bid for, and
purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and discover reserves in the future will depend upon its ability to
evaluate and select suitable properties and to consummate transactions in a
highly competitive environment.
Government Regulation. The Company's oil and gas operations are subject
to extensive state and federal regulations which have increased the cost of
doing business by requiring additional equipment or methods to eliminate or
reduce pollution and have increased financial exposure as in the case of federal
laws and regulations which may result in absolute liability for cleanup or
removal of contamination. Consequently, governmental agencies may from time to
time suspend or curtail operations considered to be detrimental to the ecology
or which may jeopardize public safety. The Company does not anticipate any
material adverse effect on its financial or competitive position as a result of
compliance with such laws and regulations.
GOLD AND SILVER PROPERTIES.
The Company's mining properties are located on the southeastern end of
Unga Island in the Shumagin Islands group of the Aleutian Islands, approximately
579 miles southwest of Anchorage, Alaska. The mining properties cover over 381
acres, and are situated on 15 federal patented lode claims and one federal
patented millsite claim (the "Apollo- Sitka Claims," which consist of
approximately 280 acres) and six State of Alaska mining claims (the "Shumagin
Claims," which consist of approximately 101 acres). A three mile road connects
the two claim groups.
The Aleutians East Borough (the "AEB") made application to the State of
Alaska for surface rights on the Company's Shumagin Claims under the State
Municipal Entitlements Act of 1989. The stated purpose of the AEB's selection
was to obtain a land base which could support economic development. The Company
was notified of this selection and the state's proposed conveyance of the
surface land on December 1, 1994. The Company filed comments with the State of
Alaska. The Company simultaneously notified the Alaska Department of Natural
Resources, Division of Mining, of its intention to file an application to
convert the Shumagin Claims to a State Upland Mining Lease. The latter
application was subsequently submitted.
A Final Finding and Decision on the AEB's application, issued January
18, 1996, contained a provision making the application subject to valid existing
rights, easements, and reservations, including the Shumagin Claims. The grant
Decision became final after expiration of an appeal period February 7, 1996. The
Company retains the right to enter the land for drilling, developing, and
otherwise operating its mineral holding. No adverse impact on the Company's
Shumagin Claims or other exploration, development and mining activities on Unga
Island is anticipated as a result of the Shumagin Claims' surface rights being
transferred to the AEB. The Company's application for conversion of its Shumagin
Claims to a State Upland Mining Lease is pending.
Beginning in 1994, and continuing through 1996, the Company
aggressively pursued the development of its mining properties and expanded its
activities from those of simple maintenance of the physical property to
preparing for its future development. In 1996, an update of the engineering data
was completed to address reserve estimates as well as to review operational
considerations and issues which were addressed in a number of meetings held in
Anchorage, Alaska.
Certain Factors Affecting Reserves and the Indicated Resources. The
Company's Unga Island activities on the Apollo-Sitka and Shumagin Claims have
brought the project to the mid-exploration stage. The reserves and
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indicated resources are estimates based on surface and underground sampling,
drilling, and geologic inference. Complete assurance cannot be given that all of
the reserves and indicated resources are recoverable. Metal price fluctuations,
variations in production costs and mine/mill recoveries, environmental
considerations, the results of exploration work and geologic interpretation, and
other factors may require restatement of the reserves and indicated resources.
Neither the reserves, indicated resources, nor projections of future operations
should be interpreted as assurances of the economic life or profitability of
future operations.
Gold Price Volatility. The Company's anticipated profitability with
respect to potential production mining activities, which could be initiated
after completion of further exploration work, would be significantly affected by
variations in the market price of gold. Gold prices can fluctuate widely and are
affected by factors such as inflation, interest rates, currency exchange rates,
central bank sales, forward selling by producers, supply and demand, global or
regional political and economic crises and production costs in major gold
producing regions such as South Africa and the republics of the former Soviet
Union. The aggregate effect of these factors, all of which are beyond the
Company's control, is impossible for management to predict.
The volatility of gold prices is illustrated by the following table of
the high, low and average afternoon fixing prices of gold per ounce in United
States dollars on the London Bullion Market:
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High $361 $415 $396 $396 $409
Low $283 $368 $372 $371 $326
Average $322 $391 $384 $384 $360
</TABLE>
Factors in Bringing a Mineral Project into Production. The Company's
decisions as to whether the mining properties contain mineable ore deposits and
whether any property should be placed in production will depend on the results
of phased exploration programs and feasibility studies, the recommendations of
management and technical support, and the willingness and capability of the
Company's co-venturers or other participants to proceed. This decision will
involve consideration and evaluation of several significant factors, including,
but not limited to (i) costs of bringing a property into production, including
exploration, preparation of feasibility studies, development work, and the
construction of exploration, development, and production mine/mill facilities;
(ii) availability and costs of financing; (iii) production costs; (iv) metal
market prices; (v) compliance requirements for environmental and mine safety and
health regulations; and (vi) political climate and governmental regulations.
Exploration and development of the properties may be expensive and take a number
of years. There is no assurance that the Company, its co- venturers, or other
participants will have the necessary funds for any of these activities.
THE MINING CLAIMS
The Apollo-Sitka Claims and Millsite. Development of the Apollo-Sitka
Claims started in 1887. The Claims were in production from 1891 through 1904.
During this period, 500,000 tons of ore were extracted with a recovery of
approximately 145,138 equivalent ounces of gold (0.29 ounces of equivalent gold
per ton). Approximately 17,000 feet of underground working were driven during
the mining of and search for oxide gold ore. A 60 stamp mill, located on the
property, recovered approximately 75 to 80 percent of the gold contained in the
oxide ore. Low recoveries of the lead, zinc, and copper sulfides contained in
the ore were made. Mining operations were shut down in 1904 after the
free-milling oxide reserve was depleted and exploratory work discovered only
precious metal-bearing copper-lead- zinc sulfide ores, which were uneconomical
to process with mill technology available at the time. The development of the
flotation mineral recovery process and improvements in that process over the
years may possibly have rendered the current Apollo-Sitka reserves and indicated
resources economical at current metal prices, although the Company has made no
efforts to determine the viability of the Apollo-Sitka Claims.
The Apollo-Sitka Claims contain attractive precious/base metal
exploration targets. Exploration would be conducted with a phased program
involving surface and underground diamond drilling, further rehabilitation and
equipping of the existing shafts, and level rehabilitation and geologic sampling
and mapping. The existing mine workings, including those rehabilitated by the
Company over 1980-1982, will be valuable during future underground exploration
and development work on the Apollo-Sitka Claims.
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Apollo-Sitka Reserves. The following table sets forth information as to
the Company's probable reserves of gold and silver as of December 31, 1996, with
respect to the Apollo-Sitka Claims:
<TABLE>
<CAPTION>
APOLLO-SITKA INDICATED RESOURCES AND RESERVES
BLOCK OUNCES PER TON Gold Silver Classification
----- -------------- ---- ------ --------------
<S> <C> <C> <C> <C>
Apollo (1) 2,250,000 0.145(2) 8.0 Indicated Resource
Sitka (3)
A 7,000 0.203 2.67 Proven
B 1,650 0.188 2.42 Proven
C 8,150 0.131 1.73 Proven
----- ----- ----
Total/Average 16,800 0.167 2.19
======
D 1,560 0.212 2.85 Probable
E 2,390 0.096 1.45 Probable
F 3,680 0.002 0.22 Probable
G 14,670 0.001 1.02 Probable
------ ----- ----
Total/Average 22,300 0.026 1.06
======
- -----------------------
<FN>
(1) Based solely on Frank R. Brown's report, APOLLO CONSOLIDATED GOLD
MINING COMPANY, 1935. Mr. Brown classified the reserve as "Probable."
The reserve is re-classified as an INDICATED RESOURCE, which conforms
to current guidelines for reporting resources and reserves.
(2) Based on the assumption that Mr. Brown used a $20.67 per ounce gold
price in his 1935 report.
(3) Alaska Apollo Gold Mines, Ltd., internal report, December 1983.
</FN>
</TABLE>
The Shumagin Claims. The Shumagin Claims are located approximately 2.5
miles north of the Apollo-Sitka Claims and consist of six State of Alaska mining
claims. They are connected to the Apollo-Sitka Claims by a three- mile road.
Gold and silver mineralization was encountered on the Shumagin Claims in 1983,
when the Company diamond drilled 3,190 feet. From its discovery in 1983 to
December 31, 1995, management estimates that the Company has spent $5.5 million
on exploration of the Shumagin Claims. Funds for this exploration were provided
by a party interested in the exploration of the claims (approximately $350,000
in 1989) and the balance through the sale of the Company's Common Stock in 1983
($3,002,272), 1985 ($416,305) and 1987 ($1,613,382).
An independently prepared reserve estimate, incorporating the ore
intercept in a deep 1990 diamond drill hole as well as the previous Company's
raw drill hole and trench data, was completed by Edward O. Strandberg, Jr.,
P.E., Mining Engineer, on March 30, 1995. The ore reserves are defined by 17,963
feet of diamond drilling, 1,827 feet of percussion drilling, 1,017 feet of
trenching, 286 feet of crosscuts, and 641 feet of drift. The reserves appear to
be contained in six ore shoots ranging over 1,334 feet vertically and 1,782 feet
horizontally. Strong structural control of the ore deposit is evident. The
deposit is open in all quadrants and at depth.
Ore continuity determined by the exploration work allows classification
of a reserve as drill/trench-inferred and inferred ore. Drill/trench-inferred
reserves are determined based upon geologic inference and drilling and/or
trenching. The inferred reserve is estimated by projection from or between
drill/trench-inferred ore blocks. Reserves in both classifications are mineable
reserves, based on a current site specific operating cost estimate for
underground cut and fill mining of the ore with shaft access.
A break-even cutoff grade of 0.27 ounces of gold per ton was determined
at a 200 ton per day cut and fill ore production rate and a $375 gold price. The
break-even grade is sensitive to mining and milling costs, the gold price, and
mill recovery. Fixed costs, such as royalties and gold refining charges further
impact the break-even cutoff grade. A minimum mining width of four feet and a
tonnage factor of 12 cubic feet per ton were employed.
Additional exploration work is necessary in order to verify the
reserves as demonstrated mineable reserves in the proven and probable measured
reserve categories, and to expand reserves. It is anticipated that this work
will include surface exploration, diamond drilling, shaft sinking and
exploration drifting, crosscutting, raising, and
8
<PAGE> 11
diamond drilling from underground drill stations. A decision to place the ore
deposit in production is contingent upon favorable completion of further
exploration and preliminary and final feasibility studies.
The Aleut Corporation controls approximately 10 percent of the
Company's drill/trench-inferred gold reserves and approximately 31 percent of
the Company's inferred gold reserves. This distribution is based on vertical
claim line boundaries on the Shumagin patented claim pattern. The Aleut
Corporation's share in current gold reserves is assumed to be in ore outside the
vertical downward projection of the patented claim pattern. The ore reserve
division assumes no assertion of extralateral rights by either the Company or
the State of Alaska.
The increase in reserves over 1993-1994 levels reflected in the March
30, 1995, estimate is the result of the incorporation of a deep 1990 diamond
drill hold drill log and assay data and additional geologic interpretation in
the reserve analysis. Classification of the reserve as drill/trench-inferred and
inferred ore in the 1995 reserve estimate is consistent with current industry
practice.
The Shumagin Gold and Silver Reserves. The following table sets forth
information as to the Company's reserves of gold and silver as of December 30,
1995, with respect to the Shumagin Claims.
<TABLE>
<CAPTION>
SHUMAGIN RESERVES (UNCUT AND UNDILUTED)
OUNCES PER TON OUNCES
-------------- ------
TONS GOLD SILVER GOLD SILVER
---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Drill/Trench Inferred 149,283 0.891 4.24 133,005 633,081
Inferred 131,052 0.700 3.00 91,755 392,794
------- ----- ---- ------ -------
Total/Average 280,335 0.802 3.66 224,760 1,025,875
======= ======= =========
</TABLE>
The Shumagin reserve estimate was prepared by Edward O. Strandberg,
Jr., P.E., independent consulting mining engineer and documented in a report
dated March 30, 1995. Since March 30, 1995, no major favorable or adverse event
has occurred which the Company believes significantly affects or changes
estimated reserve quantities as of that date except for the lower market price
of gold.
Climate. The climate relating to the mining properties is relatively
mild due to the proximity of the Japanese current. The temperature rarely falls
below zero degrees Fahrenheit and the ocean has a mean temperature of 53 degrees
Fahrenheit. The annual average rainfall on Unga Island is between 45 and 50
inches, one-third of this falling as snow. Unga Island is on the same latitude
as Ireland and Denmark.
Competition. The mining industry is intensely competitive. The Company
competes with numerous individuals and companies, including major mining
companies which have greater technical and financial resources than the Company.
The level of competition for desirable mining leases, suitable prospects for
drilling operations, and for project funds is high.
Permitting. Various permits are required from governmental bodies for
exploration, development, and mining operations to be conducted. No assurance
can be given that such permits will be received, or that environmental standards
imposed by federal, state, or local authorities will not be changed with
material adverse effects on the Company's activities. Compliance with such laws
may cause delays and require additional capital. The Company may be subject to
environmental damage liability which it may elect not to insure against due to
prohibitive premium costs and other reasons. The Company continues to respect
and make every effort to preserve the environment and terrain of Unga Island.
The Company is in material compliance with all federal, state and local laws
relating to current activities.
RED RIVER HARDWOODS, INC.
On November 18, 1996, pursuant to a plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code, Daugherty Petroleum, Inc. acquired an 80
percent interest in Red River Hardwoods, Inc., a lumber dimension production
facility located in Clay City, Kentucky. Red River Hardwoods, Inc. produces
rough semi-machined and
9
<PAGE> 12
fully-machined wood component products for the construction and furniture
industries. These components include interior trim and mouldings, hardwood
flooring, and furniture parts. The Company purchases green lumber from local saw
mills and kiln dries the lumber used in its operations.
Subsequent to the bankruptcy, Daugherty Petroleum, Inc., assigned 20
percent of the outstanding common stock in the Company, or 4,000 shares, to
Shareholder Trio Growth Trust. Additionally, Trio Growth Trust was granted an
option to acquire 2,660 additional shares of common stock, to bring its
percentage ownership to 33.3 percent.
EMPLOYEES
At December 31, 1997, the Company employed 65 persons.
ITEM 2. PROPERTIES.
In addition to the properties discussed above with respect to each
business segment, the Company leases office space in Lexington, Kentucky, for
its executive offices pursuant to a lease which will expire in June 1997. The
Company maintains customary compensation, liability, and property insurance for
all of its operations, which also includes well coverage for oil and gas
exploration and production activities.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of its business. The
Company maintains insurance coverage against potential claims in an amount which
it believes to be adequate. The Company believes that it is not presently a
party to any litigation the outcome of which would have a material adverse
effect on its results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock trades on the Nasdaq SmallCap Market in the
United States. There is no trading of the Common Stock in Canada. The range of
the high and low bid information for the Common Stock for each full quarterly
period within the two most recent fiscal years is shown on the following table.
As of December 31, 1997, the Company was authorized to issue 20,000,000 shares
of the Common Stock, of which there were issued and outstanding 9,821,754
shares. No dividends were declared or paid during 1997.
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, June 30, Mar. 31,
QUARTER ENDED 1997 1997 1997 1997 1996 1996 1996 1996
------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Low Bid Price 0.375 0.375 0.500 0.281 0.125 0.25 0.3125 0.4375
High Bid Price 0.219 0.281 0.406 0.281 0.3125 0.4375 0.5625 0.53125
</TABLE>
As of March 31, 1998, the high and low bids with respect to the price
of the Common Stock were $0.281 and $0.250, respectively. The Nasdaq SmallCap
Market quotations represent interdealer prices, without mark-ups, commissions,
etc., and they may not necessarily be indicative of actual sales prices.
As of December 31, 1997, there were 2,890 holders of record of the
Common Stock, of whom 2,809 were United States shareholders holding a total of
8,174,917 shares or approximately 83.23 percent of the issued and outstanding
shares of the Common Stock.
10
<PAGE> 13
FOREIGN LAWS AFFECTING THE COMMON STOCK
Exchange Controls and Other Limitations. There are no governmental
laws, decrees or regulations in Canada relating to restrictions on the
import/export of capital or affecting the remittance of interest, dividends or
other payments to non-resident holders of the shares of the Common Stock. Any
such remittances to United States residents, however, are subject to a 15
percent withholding tax pursuant to Article X of the reciprocal tax treaty
between Canada and the United States. (See below).
Except as provided in the Investment Canada Act, there are no
limitations under the laws of Canada, the Province of British Columbia or in the
charter or any of the constituent documents of the Company on the right of
foreigners to hold and/or vote shares of the Common Stock.
The Investment Canada Act essentially requires a non-Canadian making an
investment to acquire control of a Canadian business, the investment in which
exceeds $150,000,000, to file an application for review with Investment Canada,
the Canadian federal agency created by the Investment Canada Act. Where the
acquisition of control is indirect and made by a non-Canadian (other than an
American, as defined) (for example by the purchase of shares in a controlling
parent corporation which has a Canadian business subsidiary) the threshold is
$500 million. For Americans, there is no review of such indirect acquisitions.
The proposed investment, if above the threshold, may not proceed unless the
Investment Canada agency and its responsible minister are satisfied that the
investment will be of benefit to Canada.
A Canadian business is defined in the Investment Canada Act as a
business carried on in Canada that has a place of business in Canada, an
individual or individuals in Canada who are employed or self-employed in
connection with the business, and assets in Canada used in carrying on the
business. An American, as defined in the Investment Canada Act, includes an
individual who is a United States citizen or a lawful permanent resident of the
United States, a government or governmental agency of the United States, an
American-controlled entity, corporation or limited partnership, and a
corporation, limited partnership or trust of which two-thirds of its directors,
general partners or trustees, as the case may be, are Americans.
The acquisitions of certain Canadian businesses are excluded from the
$150,000,000 threshold and remain subject to review in any event. These excluded
businesses are oil, gas, uranium, financial services (except insurance),
transportation services and cultural and broadcast media services (i.e., the
publication, distribution or sale of books, magazines, periodicals, other than
printing or typesetting businesses, television and radio services).
Taxation. Generally, dividends paid by Canadian corporations to
non-resident shareholders are subject to a withholding tax of 25 percent of the
gross amount of such dividends. However, Article X of the reciprocal tax treaty
between Canada and the United States reduces to 15 percent the withholding tax
on the gross amount of dividends paid to residents of the United States. A
further five percent reduction in the withholding rate on the gross amount of
dividends is applicable when a United States corporation owns at least 10
percent of the voting stock of the Canadian corporation paying the dividends.
A non-resident of Canada who holds shares of the Common Stock of the
Company as capital property will not be subject to tax on capital gains realized
on the disposition of such shares unless such shares are "taxable Canadian
property" within the meaning of the Canadian Income Tax Act and no relief is
afforded under any applicable tax treaty. The shares of the Common Stock would
be "taxable Canadian property" of a non-resident if at any time during the five
year period immediately preceding a disposition by the non-resident of such
shares not less than 25 percent of the issued shares of any class of the Company
belonged to the non-resident, the person with whom the non-resident did not deal
at arm's length, or to the non-resident and any person with whom the
non-resident did not deal at arm's length.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain selected financial information
for the periods presented and should be read in conjunction with the
Consolidated Financial Statements of the Company and the related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in this Report.
11
<PAGE> 14
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
INCOME STATEMENT DATA: 1997 1996(2) 1995 1994 1993 (1)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gross Revenues $4,846,157 $2,147,606 $2,052,222 $2,458,835 $71,838
Direct Expenses 4,156,795 1,437,958 1,660,043 1,156,648 -0-
Operating Income (loss) (1,708,411) (742,107) (1,437,437) (173,335) (258,861)
Income (loss) From
Continuing Operations (1,708,411) (733,973) (1,440,03) (174,832) (251,026)
Per Share Income
(Loss from Continuing Oper.) ($0.19) ($0.09) ($0.19) ($0.02) ($0.06)
CASH FLOW DATA:
Capital Expenditures 682,775 473,325 197,354 3,781,088 2,734,235
BALANCE SHEET DATA:
Working Capital (1,478,498) (527,308) (692,600) 226,174 228,212
Property & Equipment, net 17,136,154 17,646,004 15,657,153 15,678,048 12,019,231
Total Assets 21,262,670 20,882,719 18,220,555 18,701,045 14,383,366
Current Maturities of
Long-Term Debt 652,071 399,889 218,458 86,304 66,052
Long-Term Debt 3,263,209 3,561,254 913,986 849,025 687,760
Stockholders' Investment 14,017,795 15,292,247 15,573,940 16,730,196 13,337,171
- --------------------
<FN>
(1) Financial data for 1993 reflects the acquisition of Daugherty Petroleum, Inc. by the Company.
(2) Financial data for 1996 reflects the acquisition of Red River Hardwoods, Inc. by the Company effective
November 17, 1996.
(3) Financial data for 1997 reflects the consolidation of Red River Hardwoods, Inc. financial data.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following is a discussion of the Company's financial condition and
results of operations. This discussion should be read in conjunction with the
Consolidated Financial Statements incorporated by reference in Item 8 hereof.
RESULTS OF OPERATIONS
Fiscal 1997 - 1996
With the acquisition of Daugherty Petroleum, Inc. in the fourth quarter
of 1993, the Company began a strategy of aggressively acquiring natural gas and
oil properties in southeastern and western Kentucky. Daugherty Petroleum, Inc.
has provided the Company with a diversified asset base which includes natural
resources other than its prospective gold and silver mining properties and has
also increased the Company's asset base. During 1997, management continued to
invest in areas it deemed critical in developing an infrastructure suitable to
support its future growth. These areas included ongoing expenses in management,
professional and operational personnel and other expenses deemed necessary to
position the Company for future acquisitions and financing. Also, on November
17, 1996, Daugherty Petroleum, Inc. acquired an 80 percent interest in Red River
Hardwoods, Inc., a dimensional hardwood manufacturing company.
Historically, the Company's revenues have been realized from two
primary sources. The first is from its interests in the producing natural gas
and oil wells it operates and in which it owns interests. The second source of
revenue for the Company has been derived from its activities as "turnkey
driller" and operator for various drilling programs in its geographic area.
During 1996 and 1997, Daugherty Petroleum, Inc. reduced its dependence on
activities as "turnkey driller" for private investors and instead concentrated
on joint ventures with industry partners. In 1997, approximately 23.05 percent
of the Company's revenues were derived from joint venture and partnership
drilling. Natural gas and oil operations and revenues accounted for 8.22 percent
of the revenues. Lumber sales and manufacturing sales related to Red River
Hardwoods, Inc. accounted for 68.73 percent.
For the year ending December 31, 1997, the Company's gross revenues
increased 125.65 percent to $4,846,157 from $2,147,606 for the same period in
1996. The Company's gross revenues were derived from turnkey contract revenues
of $1,116,890 ( 23.05 percent); natural gas and oil production revenues of
$304,775 (6.29 percent); operating revenues of $93,543 (1.93 percent); and
lumber sales of $3,330,949 (68.73 percent). The increase in gross revenues was
attributable primarily to an increase in lumber sales related to Red River
Hardwoods, Inc. Lumber sales increased by $2,626,175 from $704,774 in 1996 to
$3,330,949 in 1997. Contract revenues from turnkey drilling
12
<PAGE> 15
activities increased by $89,239 from $1,027651 in 1996 to $1,116,890 in 1997.
The Company concentrated on developing drilling prospects for its own drilling
efforts during 1997.
During 1997, total operating expenses were $2,397,780 compared to
$1,451,755, for an increase of $946,025. Consulting and management fees
increased by $94,513 due to additional out-sourcing and management bonuses.
Goodwill increased by $28,359 to $210,467 due to Red River Hardwoods, Inc. Legal
fees increased due to the Company's decision to proceed with moving the
Company's domicile from British Columbia to Delaware.
The Company experienced a net loss of $1,708,418 in 1997 compared to a
net loss of $733,973 in 1996. The increase in net loss was primarily a result of
increased interest, consulting, promotional expenses, and losses on disposition
of assets.
The Company believes there are four factors that will increase its
revenues and reduce losses. First, the natural gas gathering systems completed
in 1997 and currently under construction will allow the Company to increase its
natural gas flow. Second, the drilling contracts signed in late 1997 and 1998,
and Letters of Intent to drill up to 120 wells will allow the Company to
increase both its turnkey contract revenues and its natural gas production
revenues. Third, natural gas prices in Appalachia have remained strong for 1998,
and Daugherty Petroleum, Inc. signed a one year gas sales contract for 1998
production for $2.47 per MCF. Fourth, Red River Hardwoods, Inc., an 80 percent
owned subsidiary, has experienced increased sales in the first quarter of 1998.
Fiscal 1996 - 1995
For the year ending December 31, 1996, the Company's gross revenues
increased 4.65 percent to $2,147,606 from $2,052,222 for the same period in
1995. The Company's gross revenues were derived from turnkey contract revenues
of $902,140 (42.01 percent); natural gas and oil production revenues of $458,618
(21.35 percent); operating revenues of $82,074 (3.8 percent); and lumber sales
of $704,774 (32.82 percent). The increase in gross revenues was attributable
primarily to an increase in lumber sales related to Red River Hardwoods, Inc..
Lumber sales increased by $476,581 from $228,303 in 1995 to $704,774 in 1996.
Contract revenues from turnkey drilling activities declined by $377,975 from
$1,280,115 in 1995 to $902,140 in 1996. The Company concentrated on developing
drilling prospects for its own drilling efforts in the last half of 1996,
therefore, reducing prospects available for drilling partnerships.
During 1996, total operating expenses were $1,451,755 compared to
$1,829,616, in 1995 for a decrease of $377,861. Total operating expenses
included Red River Hardwoods, Inc.'s expenses from November 18, 1996, the date
of the acquisition, to year end 1996. Consulting and management fees decreased
by $114,872. Goodwill amortization increased marginally by $3,152 to $182,108
due to the acquisition of Red River Hardwoods, Inc. Legal fees and advertising
and promotion expenses decreased due to the Company's decision not to sponsor a
year end drilling program.
The Company experienced a net loss of $733,973 in 1996 compared to a
net loss of $1,440,003 in 1995. The decrease in net loss was primarily a result
of increased revenues as a result of lumber sales related to Red River
Hardwoods, Inc. and decreased expenses.
LIQUIDITY AND CAPITAL RESOURCES
Working capital for the period ending December 31, 1997, was a negative
$1,478,498, compared to the same period in 1996, when working capital was a
negative $527,308.
During 1997, the major changes in the composition of the Company's
current assets were: cash balances increased $968,470 from $271,090 to
$1,239,560; accounts receivable balances decreased $198,606 from $692,328 to
$493,722; inventories increased $97,829 from $580,315 to $678,144; and other
current assets such as prepaids and notes receivable increased $10,402 from
$51,760 to $64,662. The increase in cash balances was a result of prepaid
drilling money received late in 1997.
Current liabilities increased $1,957,796 from $1,996,790 to $3,954,586.
The major components of this growth were from the Company's increase in the
current portion of long term debt by $252,182 from $399,889 to $652,071,
13
<PAGE> 16
an increase in accounts payable, prepaid drilling monies and accrued liabilities
of $1,718,114 from $1,518,301 to $3,236.415. Prepaid drilling monies accounted
for $1,403,306 of this increase. Short term bank loans decreased $12,500 from
$78,600 to $66,100.
During 1997, the Company held negotiations with several financial
institutions and potential investors with the intent of securing financing
necessary to provide credit facilities for the Company to support existing and
future capital requirements. In December, 1996, Daugherty Petroleum, Inc. signed
a loan agreement with a subsidiary of Enron Capital and Trade Resources, Inc.,
in the amount of $340,000 providing financing for one well to be acquired and 50
percent of the drilling and completion costs of four natural gas wells. As of
December 31, 1997, Daugherty Petroleum, Inc. owed $197,647 on this credit line.
It is expected that, in addition to this credit facility, Daugherty Petroleum,
Inc. will secure additional loans to develop its existing natural gas leasehold
interests. The Company will see increased natural gas revenue when pipeline
facilities are installed to allow gas flow from wells drilled in 1997 that have
not been connected to the gas gathering system.
In 1997, operating capital was improved by the issuance of 1,086,467
shares of Common Stock valued at $457,974 in lieu of cash payments to various
consultants for services rendered. These shares reflected a total value of
$457,974 and were issued, without discount, at market bid prices ranging from $
0.38 to $0.50 per share under Form S-8 registration statements filed by the
Company.
While management believes that the cash flow resulting in its operating
revenues will contribute significantly to its short-term financial commitments
and operating costs, its has developed a plan in 1998 to meet its financial
obligations. The plan includes:
* Installation of additional natural gas gathering system. The Company
plans to expand its natural gas pipeline by 45,000 feet in 1998. The
extension will allow for substantially more natural gas to be
transported to market from wells drilled on farmouts acquired from
Equitable Resources Corporation.
* Additional funding for Red River Hardwoods, Inc. The Company is
negotiating additional inventory loans for Red River Hardwoods, Inc.
that will allow it to increase its inventory, thereby increasing its
revenues.
The Company plans to drill 36 wells during 1998 and will attempt to
earn interests ranging from 12.5 percent to 50 percent interest in each well it
drills. The Company's interest in these wells is expected to be financed by an
energy lender.
Due to losses experienced by the Company in 1997, it did not utilize
any of the net operating loss carryforwards available to it for U.S. and
Canadian tax purposes. As of December 31, 1997, the Company has $6,678,358 in
net loss carry-forwards in the U.S. that will expire from 1998 through 2012. In
addition, for Canadian federal tax purposes, these carry-forwards are Canadian
$1,796,142 and expire at periods through 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item 8 appears on pages 26 through 48
of this Report, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the directors and executive officers of the
Company, together with their ages as of the date of this Report. Each director
is elected for a one year term and serves until his successor is elected and
qualified.
14
<PAGE> 17
<TABLE>
<CAPTION>
NAME Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <S>
William S. Daugherty 43 Chairman of the Board, President
and Chief Executive Officer September 1993
James K. Klyman 43 Director May 1992
Charles L. Cotterell 73 Director June 1994
D. Michael Wallen 43 Vice President and Secretary January 1997
Daryl J. Greattinger 43 Chief Financial Officer June 1997
</TABLE>
A description of the business experience during the past several years
for each of the directors and executive officers of the Company and certain
significant employees of the Company is set forth below.
William S. Daugherty, age 43, has served as Director, President and
Chief Operating Officer of the Company since September 1993. Mr. Daugherty has
served as President of Daugherty Petroleum, Inc. since 1984. In 1995, Mr.
Daugherty was elected as Chairman of the Board of the Company. Mr. Daugherty is
past president of the Kentucky Oil and Gas Association and the Kentucky
Independent Petroleum Producers Association. Mr. Daugherty also serves as the
Governor's Official Representative to the Interstate Oil and Gas Compact
Commission.
James K. Klyman, age 43, has been a director since May 1992. For the
past six years Mr. Klyman has been a computer software designer and programmer
specializing in applied information technology.
Charles L. Cotterell, age 73, has been a director since June 1994. Mr.
Cotterell has been involved in the resources industry and has participated in
the natural gas and oil industries in Western Canada and the United States. He
is vice president at Konal Engineering Company, Ltd., is a past director Mariner
Mines, Ltd., Industrial Ltd., Goliath Boat Co., and Dominion Power Press
Equipment Co., Ltd., and the past President of Smith Press Automation Co., Ltd.
D. Michael Wallen, age 43, joined Daugherty Petroleum, Inc. in March
1995 as Vice President of Engineering and was elected a Vice President of the
Company in March 1997. Prior to joining the Company, Mr. Wallen served as the
Director of the Kentucky Division of Oil and Gas for six years. Prior to serving
as Director of the Kentucky Division of Oil and Gas, he worked as well drilling
and completion specialist and as a gas production engineer in the Appalachian
Basin for various operating companies.
Daryl Greattinger, CPA, age 43, joined the Company and has served as
Chief Financial Officer since June 1997. For the past fifteen years, Mr.
Greattinger has been the owner and a practicing accountant of Greattinger and
Crowley, a CPA practice located in Monticello, Kentucky. Previously, Mr.
Greattinger held accounting positions at Petro 7, Inc., an independent oil and
gas company, and International Harvester.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than 10 percent of a registered class of the Company's equity securities,
to file with the Securities and Exchange Commission (the "Commission") and the
Nasdaq Stock Market initial reports of ownership and reports of changes in
ownership of the Common Stock and other equity securities of the Company.
Directors, officers and greater than 10 percent shareholders are required by the
Commission's regulations to furnish the Company with copies of all Section 16(a)
forms they file.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information regarding annual and
long-term compensation with respect to the fiscal years ended December 31, 1996,
1995 and 1994 for services in all capacities rendered to the Company by William
S. Daugherty, the Chief Executive Officer of the Company. There was no other
person serving as an executive officer of the Company at December 31, 1997,
whose total annual salary and bonus exceeded $100,000.
15
<PAGE> 18
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS #
- --------------------------- ---- ------ --------- ---------
<S> <C> <C> <C> <C>
William S. Daugherty 1997 75,000 12,500(1) 2,000,000(3)
Chairman and President 1996 86,538 -0- 200,000(4)
1995 100,000 19,000(2) 400,000(5)
<FN>
(1) The bonus was in the form of 25,000 shares of the Common Stock valued at $0.50 (U.S.) per share. The shares
represent bonuses approved by the Board of Directors on June 25, 1997. The shares were issued June 27, 1997.
(2) The bonus was in the form of 50,000 shares of the Common Stock valued at $0.38 (U.S.)per share. The shares
represent bonuses approved by the Board of Directors in February and December 1995 for the years 1994 and
1995. The shares were issued July 18, 1996.
(3) These options were approved on March 7, 1997 by the Board of Directors pursuant to the Alaska Apollo
Resources Inc. 1997 Stock Option Plan, are exercisable at $0.309375 (U.S.) per share and vest over a five (5)
year period with 355,555 vesting during 1997. the options expire on March 6, 2002. Vesting is subject to Mr.
Daugherty's continued employment.
(4) These options were approved on June 28, 1996 by the Board of Directors and are exercisable at $1.00 (U.S.)
per share. The options vest over a four (4) year period and expire five (5) years from the date of vesting.
Vesting is subject to Mr. Daugherty's continued employment.
(5) These options were approved on December 27, 1995 by the Board of Directors and are exercisable at $1.00
(U.S.) per share. The options vest over a four (4) year period and expire five (5) years from the date of
vesting. Vesting is subject to Mr. Daugherty's continued employment.
</FN>
</TABLE>
While the officers of the Company receive benefits in the form of
certain perquisites, the individual identified in the foregoing table has not
received perquisites which exceed in value the lesser of $50,000 or 10 percent
of such officer's salary and bonus.
OPTION GRANTS IN 1997
The following table provides details regarding the stock options
indicated in the Summary Compensation Table as having been granted to the named
executive officer in 1997. In addition, in accordance with the rules of the
Commission, there are shown hypothetical gains or "option spreads" that could be
realized for the respective options, based on arbitrarily assumed rates of
annual compound stock price appreciation of five percent and 10 percent from the
date the options were granted over the full five-year term of the options. No
gain to the optionees is possible without an increase in the stock price which
will benefit all shareholders proportionately.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE APPRECIATION
INDIVIDUALS GRANTS FOR OPTION TERMS (1)
- --------------------------------------------------------------- -------------------------------------------
PERCENT OF
TOTAL OPTIONS
NUMBER OF SHARES GRANTED TO EXERCISE OR
UNDERLYING EMPLOYEES BASE PRICE EXPIRATION 5% 10%
NAME OPTIONS GRANTED IN 1997 ($ PER SHARE) DATE ($) ($)
---- --------------- ------- ------------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
W.S. Daugherty (2) 2,000,000 93.02% $0.309375 12-31-2007 $180,202 $389,429
- ---------------
<FN>
(1) These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises or
stock holdings are dependent on the future performance of the shares of the common stock and overall stock market
conditions. There can be no assurance that the amounts reflected in this table will be achieved.
(2) On June 25, 1997, the Board of Directors of the Company authorized the granting of incentive stock options covering
2,000,000 shares of the Common Stock for Mr. Daugherty vesting and exercisable in increments of 355,555 on March 7, 1997
and January 1, 1998, 1999, 2000, and 2001, with a final increment of 222,225 on January 1, 2002. All options authorized
in favor of Mr. Daugherty in 1997 are exercisable at $0.309375 per share, expire five years from the date of vesting and
are contingent upon Mr. Daugherty's employment at the time of vesting. As of April 10, 1998, these options have not been
issued; however, the Company is obligated to issue them to Mr. Daugherty.
</FN>
</TABLE>
16
<PAGE> 19
The following table shows the number of shares of the Common Stock
underlying all exercisable and non- exercisable stock options held by the named
executive officer as of December 31, 1997.
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------- -----------------------------------
<S> <C> <C>
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------------------- -------------------------
WILLIAM S. DAUGHERTY 805,555/1,994,445 $1289/$5961(1)
- --------------
<FN>
(1) The closing market price for the shares of Common Stock at December 31,
1997 was $0.313. Only the options granted in 1997 to Mr. Daugherty were
in-the-money as of the end of the fiscal year.
</FN>
</TABLE>
Mr. Daugherty received options to purchase 200,000 shares of the Common
Stock in 1994 exercisable at $1.90 per share in increments of 50,000 shares each
on December 10, 1994, 1995, 1996, and 1997. These options expire December 10,
1998. In February 1995, the Board of Directors of the Company authorized the
granting of incentive stock options covering 200,000 shares of the Common Stock
for Mr. Daugherty vesting and exercisable in 50,000 share increments on February
27, 1995, 1996, 1997 and 1998. Additionally, on December 27, 1995, the Board of
Directors of the Company authorized the granting of incentive stock options
covering 200,000 shares of the Common Stock for Mr. Daugherty vesting and
exercisable in 50,000 share increments on December 27, 1995, 1996, 1997 and
1998. All options authorized in favor of Mr. Daugherty in 1995 are exercisable
at $1.00 per share, expire five years from the date of vesting and are
contingent upon Mr. Daugherty's employment at the time of vesting. As detailed
above, on June 28, 1996, the Board of Directors authorized the granting of
incentive stock options to Mr. Daugherty covering 200,000 shares of the Common
Stock. On March 7, 1997, pursuant to an Incentive Stock Option Agreement between
the Company and Mr. Daugherty, the Administrative Committee of the Alaska Apollo
Resources Inc. 1997 Stock Option Plan granted Mr. Daugherty options to purchase
2,000,000 shares of the Common Stock exercisable at $0.309375 per share. Options
for 355,555 shares vested on March 7, 1997, with 355,555 shares vesting on
January 1, 1998, 1999, 2000, and 2001, and the remaining 222,225 shares vesting
on January 1, 2002. These options are contingent upon Mr. Daugherty's employment
with the Company on the vesting dates. They expire on March 7, 2002.
COMPENSATION OF DIRECTORS
The Company compensates its non-employee directors for their services
to the Company in the form of S-8 stock. The Company also reimburses its
directors for expenses incurred in attending board meetings. The Company paid
the non-employee directors the following amounts during fiscal year 1997:
Charles L. Cotterell and James Klyman (formerly Klyman-Mowczan) each received
5,000 shares of common stock valued at $0.50 (U.S.) per share. Further, the
Company has granted options to acquire shares of the Common Stock to the
following current directors of the Company, other than Mr. Daugherty: Charles L.
Cotterell and James Klyman (formerly Klyman-Mowczan) each received options for
10,000 shares of the Common Stock exercisable at $0.65 (U.S.) per share which
vested on June 25, 1997 and expire on June 24, 2002.
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------- -----------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------- ----------------------------
<S> <C> <C>
James K. Klyman 40,000/0 -0-
Charles L. Cotterell 40,000/0 -0-
<FN>
- --------------
(1) The market price for the shares of the Common Stock at December 31, 1997 was
below the option price for each share of the Common Stock.
</FN>
</TABLE>
17
<PAGE> 20
In 1993, Mr. Klyman was granted options to purchase 10,000 shares of the
Common Stock exercisable at $1.90 per share and expiring December 10, 1998. On
June 15, 1994, the Board of Directors approved the reduction of the exercise
price of these options to $1.00. On June 15, 1994, Mr. Cotterell was granted an
option to purchase 10,000 shares of the Common Stock in 1994 exercisable at
$1.00 per share expiring December 10, 1998. On February 27, 1995, the Board of
Directors approved the grant of options to Messrs. Klyman and Cotterell to
purchase 10,000 shares of the Common Stock each exercisable at $1.00 per share
and expiring February 27, 2000. On June 28, 1996, the Board of Directors
approved the grant of options to Messrs. Klyman and Cotterell to purchase 10,000
shares of the Common Stock each exercisable at $1.00 per share and expiring June
28, 2001. On June 25, 1997, the Board of Directors approved the grant of options
to Messrs. Klyman and Cotterell to purchase 10,000 shares of the Common stock
each exercisable at $0.65 (U.S.) per share and expiring June 24, 2002.
18
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table indicates the number of shares of the Common Stock
owned beneficially as of March 31, 1998 by (i) each person known to the Company
to beneficially own more than five percent of the outstanding shares of the
Common Stock, (ii) each director, (iii) the officers of the Company, and (iv)
all directors and executive officers as a group. Except to the extent indicated
in the footnotes to the following table, each of the persons or entities listed
therein has sole voting and sole investment power with respect to the shares of
the Common Stock which are deemed beneficially owned by such person or entity.
<TABLE>
<CAPTION>
SHARES OWNED PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OF CLASS
-------------- ---------------- ------------ --------
<S> <C> <C> <C>
Common Stock................................ William S. Daugherty 2,349,555 (1) 14.02
131 Prosperous Place, Suite 17-A
Lexington, Kentucky 40509
Trio Growth Trust 2,000,000 (2) 11.93
18 York Valley Crescent
Willowdale, Ontario M2P 1A7
GraceChurch Securities Ltd. 803,000 4.79
21 Abbotsbury House, Abbotsbury Road
London W14 8EN, England
Alaska Investments Limited 1,013,334 6.04
Ospery House, 5 Old Street
St. Helier, Jersey, Channel Islands, U.K.
Exergon Capital S.A. 1,000,000 (3) 5.97
Dufourstrasse 101
Zurich 8008, Switzerland
Jayhead Investments Limited 500,000 (4) 2.98
18 York Valley Crescent
Willowdale, Ontario M2P 1A7
Charles L. Cotterell 84,200 (5) *
James K. Klyman 40,000 (6) *
Environmental Energy, Inc. 2,000,000 (7) 11.93
Directors and executive officers as a group
(5 persons) 2,753,255 (8) 16.42
<FN>
- ---------------------
* Represents ownership of less than one percent.
(1) Includes 1,325,000 shares of the Common Stock, warrants to purchase 119,000 shares of the Common Stock and options to
acquire 905,555 shares of the Common Stock which are currently exercisable.
(2) Consists of warrants to purchase 2,000,000 shares of the Common Stock which are currently exercisable.
(3) Includes 500,000 shares of the Common Stock and warrants to purchase 500,000 shares of the Common Stock which are
currently exercisable.
(4) Consists of warrants to purchase 500,000 shares of the Common Stock which are currently exercisable.
(5) Includes 44,200 shares of the Common stock and options to purchase 40,000 shares of the Common Stock which are currently
exercisable.
(6) Consists of options to purchase 40,000 shares of the Common Stock which are currently exercisable.
(7) Includes 1,423,700 shares of the Common Stock, options to purchase 1,085,555 shares of the Common Stock which are
currently exercisable, options to purchase 125,000 shares of the Common Stock which are exercisable within
60 days, and warrants to purchase 119,000 shares of the Common Stock which
are currently exercisable.
</TABLE>
19
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INDEBTEDNESS OF DIRECTORS, OFFICERS AND EMPLOYEES
As of March 31, 1998, the aggregate indebtedness to the Company and to
any other person which is the subject of a guarantee, support agreement, letter
of credit or other similar arrangement or understanding provided by the Company
of all present and former directors, officers and employees of the Company was
$68,536.00.
<TABLE>
<CAPTION>
LARGEST AMOUNT
NAME AND INVOLVEMENT OF OUTSTANDING DURING AMOUNT OUTSTANDING
PRINCIPAL POSITION ISSUER OR SUBSIDIARY LAST COMPLETED FISCAL YEAR AS OF MARCH 31, 1998
- ------------------ -------------------- -------------------------- --------------------
<S> <C> <C> <C>
William S. Daugherty (1) Lender $47,923 $43,657
President and Chief
Executive Officer
<FN>
- ----------------
(1) Part of the indebtedness of Mr. Daugherty to the Company is evidenced by a
promissory note dated September 23, 1993 in the principal amount of
$50,000. The debt was incurred to assist Mr. Daugherty in the payment of
his legal expenses resulting from the acquisition by the Company of
Daugherty Petroleum, Inc. By the terms of the note, the unpaid principal
bears interest at the rate of six percent per annum and is repayable in
monthly instalments of not less than $1,000 per month. Repayment commenced
in November 1993. As of December 31, 1997, the unpaid principal balance
due on the note was $6,554.00 The note was originally due on December 31,
1997, has been extended until June 30, 1998. The note is unsecured. As of March
31, 1998, the unpaid principal balance of the note was $43,657. As of
December 31, 1997, and March 31, 1998, Renfro Valley Broadcasting, Inc., a
company wholly-owned by Mr. Daugherty was indebted to Daugherty Petroleum,
Inc. in the amount of $17,556.
</TABLE>
LEASE OBLIGATION OF THE COMPANY
As of December 31, 1997, the Company was a tenant in a building owned
by a partnership in which William S. Daugherty, a director and the Chief
Executive Officer of the Company and Timothy F. Guthrie, a former officer of the
Company, each owned a 50 percent interest. The rent was $2,600 per month. Mr.
Daugherty has sold his interest in the partnership as of December 31, 1997. The
Company has plans to move its offices in the near future and has given
notice to vacate effective May 31, 1998.
INDEBTEDNESS OF THE COMPANY TO A SHAREHOLDER
Niagara Oil, Inc., a subsidiary of Daugherty Petroleum, Inc., is
indebted to Jayhead Investments Limited., an affiliate of Alaska Investments
Limited. The remaining balance of the indebtedness is $64,779.00 and bears
interest at a rate of 10 percent beginning April 1, 1995. Payment terms are
based on quarterly payments of interest only with the total principal and
interest, if any, due in full June 1, 1998. This indebtedness is secured by the
assets of Niagara Oil, Inc., as well as the corporate guarantee of Daugherty
Petroleum, Inc.
FINANCING COMMITMENTS
On January 6, 1997, Trio Growth Trust agreed to act as the underwriter
in a private placement of up to $1,000,000 for the Company's wholly-owned
subsidiary, Red River Hardwoods, Inc. In consideration for such underwriting,
the Company agreed to issue to Trio Growth Trust immediately exercisable
warrants for the purchase of 1,500,000 shares of the Common Stock, such warrants
having an exercise price of $0.125 per share pursuant to a Warrant Agreement
dated March 7, 1997 between the Company and Trio Growth Trust. As a result of
the underwriting agreement, Trio Growth Trust acquired a beneficial ownership of
11.93 percent of the Common Stock of the Company. In addition to the
underwriting commitment of Trio Growth Trust, Exergon Capital S.A. agreed to
participate in the underwriting of Red River Hardwoods, Inc., and in
consideration thereof received immediately exercisable warrants for the purchase
of 500,000 shares of the Common Stock, such warrants having an exercise price of
$0.125 per share, pursuant to a Warrant Agreement dated March 7, 1997 between
the Company and Exergon Capital S.A. As a result of said Warrant Agreement,
Exergon Capital S.A. is the beneficial owner of 5.97 percent of the Common Stock
of the Company.
20
<PAGE> 23
<TABLE>
<CAPTION>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Documents Filed with this Report.
----------------------------------------- PAGE
----
<S> <C> <C>
(1) Financial statements, Alaska Apollo Resources Inc. and subsidiary companies--
Report of Kraft, Rothman, Berger, Grill, Schwartz & Cohen,
independent chartered accountants, dated March 26, 1998................................... I
Balance Sheet-December 31, 1997............................................................. II
Statement of Deficit for the year ended December 31, 1997................................... IV
Statement of Loss for the year ended December 31, 1997...................................... V
Statement of Cash Flow for the year ended December 31, 1997................................. VI
Notes to Financial Statements............................................................... VII
</TABLE>
All schedules have been omitted since the information required to be
submitted has been included in the financial statements or notes or has been
omitted as not applicable or not required.
(2) Exhibits--
The exhibits indicated by an asterisk (*) are incorporated by
reference.
EXHIBIT
NUMBER
------
DESCRIPTION OF EXHIBIT
----------------------
3(a)* Memorandum and Articles for Catalina Energy & Resources
Ltd., a British Columbia corporation, dated January 31,
1979, filed as an exhibit to Form 10 Registration
Statement filed May 25, 1984. File No. 0-12185.
3(b)* Certificate for Catalina Energy & Resources Ltd., a
British Columbia corporation, dated November 27, 1981,
changing the name of Catalina Energy & Resources Ltd. to
Alaska Apollo Gold Mines Ltd., and further changing the
authorized capital of the Company from 5,000,000 shares
of common stock, without par value per share, to
20,000,000 shares of common stock, without par value per
share, filed as an exhibit to Form 10 Registration
Statement filed May 25, 1984. File No. 0-12185.
3(c)* Certificate of Change of Name for Alaska Apollo Gold
Mines Ltd., a British Columbia corporation, dated
October 14, 1992, changing the name of Alaska Apollo
Gold Mines Ltd. to Alaska Apollo Resources Inc., and
further changing the authorized capital of the Company
from 20,000,000 shares of common stock, without par
value per share, to 6,000,000 shares of common stock,
without par value per share, filed as Exhibit 3(c) to
Form 10-K/A, amendment No. 1, for the Company for the
fiscal year ended December 31, 1993. (File No. 0-12185).
3(d)* Altered Memorandum of Alaska Apollo Resources Inc., a
British Columbia corporation, dated September 9, 1994,
changing the authorized capital of the Company from
6,000,000 shares of common stock, without par value per
share, to 20,000,000 shares of common stock, without par
value per share, filed as Exhibit 3(d) to Form 10-K/A,
Amendment No. 1, for the Company for the fiscal year
ended December 31, 1993. (File No. 0-12185).
4* See Exhibit No. 3(a).
10(a)* Alaska Apollo Resources Inc. 1997 Stock Option Plan,
filed as Exhibit 10(a) to Form 10-K for the Company for
the fiscal year ended December 31, 1996.
(File No. 0-12185).
21
<PAGE> 24
10(b)* Incentive Stock Option Agreement by and between Alaska
Apollo Resources Inc. and William S. Daugherty dated
March 7, 1997, filed as Exhibit 10(b) to Form 10-K for
the Company for the fiscal year ended December 31, 1996.
(File No. 0-12185).
10(c)* Warrant Agreement by and between Alaska Apollo Resources
Inc. and Jayhead Investments Limited dated March 7,
1997, filed as Exhibit 10(c) to Form 10-K for the
Company for the fiscal year ended December 31, 1996.
(File No. 0-12185).
10(d)* Warrant Agreement by and between Alaska Apollo Resources
Inc. and Trio Growth Trust dated March 7, 1997, filed as
Exhibit 10(d) to Form 10-K for the Company for the
fiscal year ended December 31, 1996. (File No. 0-12185).
10(e)* Warrant Agreement by and between Alaska Apollo Resources
Inc. and Exergon Capital S.A. dated March 7, 1997, filed
as Exhibit 10(e) to Form 10-K for the Company for the
fiscal year ended December 31, 1996. (File No. 0-12185).
21 Subsidiaries of the Company:
- Niagara Oil, Inc., a Kentucky corporation.
- Daugherty Petroleum, Inc., a Kentucky corporation.
- Red River Hardwoods, Inc., a Kentucky corporation.
23(a)* Consent of Richard M. Russell & Associates, Inc.
described in Exhibit 23(a) to Form 10-K for the Company
for the fiscal year ended December 31, 1993. (File No.
0-12185).
23(b)* Consent of Kraft, Rothman, Berger, Grill, Schwartz &
Cohen described in Exhibit 23(b) to Form 10-KSB for the
Company for the fiscal year ended December 31, 1997.
(File No. 0-12185).
23(c)* Consent of Edward O. Strandberg, Jr., P.E. described in
Exhibit 23(c) to Form 10-K for the Company for the
fiscal year ended December 31, 1993. (File No. 0-12185).
23(d) 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, 1997. (File No. 012185).
24 Powers of Attorney.
27* Financial Data Schedule described in Exhibit 23(b) to
Form 10-KSB for the Company for the fiscal year ended
December 31, 1997. (File No. 0-12185).
(b) Reports on Form 8-K.
-------------------
None
(c) Financial Statement Schedules.
-----------------------------
No schedules are required as all information required
has been presented in the audited financial statements.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALASKA APOLLO RESOURCES INC.
By /s/ William S. Daugherty
----------------------------------------------
William S. Daugherty, Chairman of the Board
April 15, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----- ----
<S> <C> <C>
/s/ William S. Daugherty Chairman of the Board, President, May 4, 1998
- --------------------------------- Director of the Registrant
WILLIAM S. DAUGHERTY
/s/ James K. Klyman* Director of the Registrant May 4, 1998
- ---------------------------------
JAMES K. KLYMAN
/s/ Charles L. Cotterell* Director of the Registrant May 4, 1998
- ---------------------------------
CHARLES L. COTTERELL
/s/ Daryl J. Greattinger Chief Financial Officer May 4, 1998
- ---------------------------------
DARYL J. GREATTINGER, CPA
*By /s/ William S. Daugherty
------------------------
William S. Daugherty,
Attorney-in-Fact
</TABLE>
23
<PAGE> 26
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1997
<PAGE> 27
ALASKA APOLLO RESOURCES INC.
DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AUDITORS' REPORT I
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet II-III
Statement of Deficit IV
Statement of Loss V
Statement of Cash Flow VI
Notes to Financial Statements VII-XXII
</TABLE>
<PAGE> 28
PAGE I
AUDITORS' REPORT
To The Shareholders Of
ALASKA APOLLO RESOURCES INC.
We have audited the consolidated balance sheets of ALASKA APOLLO RESOURCES INC.
as at December 31, 1997 and 1996 and the consolidated statements of deficit,
loss and cash flow for the three years ended December 31, 1997. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1997
and 1996 and the results of its operations and cash flow for the three years
ended December 31, 1997 in accordance with generally accepted accounting
principles in Canada.
KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 26, 1998
COMMENTS BY AUDITORS FOR U.S. READERS ON
CANADA-UNITED STATES REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by significant uncertainties such as those described in
Note 1(d) to the consolidated financial statements relating to the company's
ability to recover mineral property costs incurred in connection with resource
property exploration activities. Our report to the shareholders dated March 26,
1998, is expressed in accordance with Canadian reporting standards which do not
permit a reference to such uncertainties in the auditor's report when the
uncertainties are adequately disclosed in the financial statements.
KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 26, 1998
<PAGE> 29
PAGE II
ALASKA APOLLO RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CURRENT
Cash $ 1,239,560 $ 271,090
Accounts receivable (net of allowance for doubtful accounts of $14,637;
1996 - $2,610) 493,722 566,817
Inventories (Note 3) 678,144 580,315
Prepaid expense 6,173 4,248
Other receivable 51,935 33,597
Notes receivable (Note 7) 6,554 13,415
----------- -----------
2,476,088 1,469,482
BONDS AND DEPOSITS 54,224 57,643
MINING PROPERTY AND RELATED EXPENDITURES (Note 4) 11,232,229 11,231,247
OIL AND GAS PROPERTIES - net (Note 5) 3,971,101 4,270,907
CAPITAL (Note 6) 1,932,824 2,143,850
NOTES RECEIVABLE - 4,377
LOANS TO RELATED PARTIES (Note 8) 26,632 40,512
INVESTMENTS (Note 9) 260,129 144,791
OTHER ASSET 19,003 19,003
GOODWILL (net of accumulated amortization $795,226; 1996 - $584,759) 1,290,440 1,500,907
----------- -----------
$21,262,670 $20,882,719
=========== ===========
</TABLE>
See accompanying notes to financial statements.
APPROVED ON BEHALF OF THE BOARD:
/s/ W. S. Daugherty /s/ Charles L. Cottrell
- ------------------------------- -----------------------------
Director Director
<PAGE> 30
PAGE III
ALASKA APOLLO RESOURCES INC.
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1997
LIABILITIES
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT
Bank loans (Note 10) $ 44,500 $ 57,000
Accounts payable 1,472,712 884,038
Accrued liabilities 360,396 634,263
Customers' drilling deposits 1,403,307 -
Long-term debt (Note 11) 652,071 399,889
Loan payable (Note 12) 21,600 21,600
------------ ------------
3,954,586 1,996,790
LOAN PAYABLE (Note 12) 26,323 31,671
LONG-TERM DEBT (Note 11) 3,263,209 3,561,254
NON-CONTROLLING INTEREST 757 757
------------ ------------
7,244,875 5,590,472
------------ ------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 13)
AUTHORIZED
20,000,000 Common shares
ISSUED
9,821,754 Common shares (1996 - 8,504,954) 20,954,436 20,395,470
SUBSCRIBED AND TO BE ISSUED
500,000 Common shares - 125,000
DEFICIT (6,936,641) (5,228,223)
------------ ------------
14,017,795 15,292,247
------------ ------------
$ 21,262,670 $ 20,882,719
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 31
PAGE IV
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED STATEMENT OF DEFICIT
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
DEFICIT, beginning of year, as previously reported $(5,050,087) $(4,494,250) $(3,054,247)
Prior period adjustment (Note 20) (178,136) - -
----------- ----------- -----------
DEFICIT, beginning of year, as restated (5,228,223) (4,494,250) (3,054,247)
Net loss for the year (1,708,418) (733,973) (1,440,003)
----------- ----------- -----------
DEFICIT, end of year $(6,936,641) $(5,228,223) $(4,494,250)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 32
PAGE V
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED STATEMENT OF LOSS
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
GROSS REVENUE $ 4,846,157 $ 2,147,606 $ 2,052,222
DIRECT EXPENSES 4,156,795 1,437,958 1,660,043
----------- ----------- -----------
689,362 709,648 392,179
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE COSTS
Salaries 358,134 267,527 288,701
Interest on long-term debt 294,836 182,972 51,814
Amortization - goodwill 210,467 182,108 178,956
- capital assets 191,991 57,549 53,982
- oil and gas equipment 26,865 12,309 8,660
Consulting and management fees 276,204 81,691 196,563
Legal fees 165,220 129,215 188,411
Depletion - oil and gas properties 146,212 132,425 155,607
Office and general 111,355 104,504 141,608
Trust and stock exchange company fees 2,867 8,997 22,632
Advertising and promotion 96,876 51,622 98,354
Insurance 86,124 46,195 41,716
Audit and accounting 75,920 118,087 128,737
Shareholders' information 68,314 88,333 117,930
Property and payroll taxes 33,875 21,002 37,230
Rent 30,697 33,012 33,716
Bad debts 25,484 91,276 137,632
Repairs and maintenance 8,827 5,648 11,344
Engineering - 2,523 18,241
----------- ----------- -----------
2,210,268 1,616,995 1,911,834
----------- ----------- -----------
Less: Interest and other income 11,669 47,951 4,089
Miscellaneous 11,504 35,569 78,129
Gain on sale of subsidiary - 65,271 -
Gain (loss) on sale of capital assets (210,685) 16,449 -
----------- ----------- -----------
(187,512) 165,240 82,218
----------- ----------- -----------
2,397,780 1,451,755 1,829,616
----------- ----------- -----------
LOSS BEFORE INCOME TAXES (1,708,418) (742,107) (1,437,437)
Deferred income taxes (recovered) - (8,891) 2,566
----------- ----------- -----------
LOSS BEFORE THE UNDERNOTED (1,708,418) (733,216) (1,440,003)
Non-controlling interest - (757) -
----------- ----------- -----------
NET LOSS FOR THE YEAR (1,708,418) (733,973) (1,440,003)
=========== =========== ===========
NET LOSS PER SHARE (Note 14) $ (0.19) $ (0.09) $ (0.19)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 33
PAGE VI
ALASKA APOLLO RESOURCES INC.
CONSOLIDATED STATEMENT OF CASH FLOW
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the year $(1,708,418) $ (733,973) $(1,440,003)
Amortization and depletion 575,535 384,391 397,205
Deferred income taxes (recovered) - (8,891) 2,566
(Gain) loss on sale of assets 210,685 (134,345) -
Non-controlling interest - 757 -
(Increase) decrease in prepaid expenses (1,925) 7,173 (259)
Decrease in accounts receivable 198,606 210,124 281,489
Increase in inventories (97,829) (37,790) (80,890)
Prior period adjustment (178,136) - -
(Increase) decrease in other receivable (18,338) 42,307 (75,904)
(Increase) decrease in bonds and deposits 3,419 500 (1,500)
Increase (decrease) in accounts payable 588,674 (160,450) 379,550
Increase (decrease) in accrued liabilities (221,242) 18,654 (42,636)
Customers' drilling deposits 1,403,307 - -
----------- ----------- -----------
754,338 (411,543) (580,382)
----------- ----------- -----------
FINANCING ACTIVITIES
Issue of capital stock 433,966 327,280 283,747
(Increase) decrease in loans to related parties 13,880 (22,956) (20)
(Increase) decease in notes receivable 11,238 280,584 (72,744)
Proceeds from capital stock subscribed - 125,000 -
Increase (decrease) in loan payable (5,348) 53,271 (5,000)
Increase (decrease) of long-term debt (45,863) 351,006 197,079
----------- ----------- -----------
407,873 1,114,185 403,062
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of assets 593,717 324,394 -
Net assets acquired - 95,015 -
Goodwill acquired - (315,105) -
Increase in mining property (982) (19,785) (52,881)
Purchase of capital assets (54,918) (11,967) (144,473)
Investment (115,338) (144,791) -
Additions to oil and gas properties, net (603,720) (401,086) -
----------- ----------- -----------
(181,241) (473,325) (197,354)
----------- ----------- -----------
CHANGE IN CASH AND BANK LOANS 980,970 229,317 (374,674)
CASH AND BANK LOANS, beginning of year 214,090 (15,227) 359,447
----------- ----------- -----------
CASH AND BANK LOANS, end of year $ 1,195,060 $ 214,090 $ (15,227)
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE
Interest paid during the year $ 275,241 $ 186,959 $ 50,123
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 34
PAGE VII
ALASKA APOLLO RESOURCES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada,
which, except as described in Note 17 conform in all material respects
with accounting principles generally accepted in the United States.
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
the company and its wholly-owned subsidiary, Daugherty
Petroleum Inc. ("DPI") and its 80% owned subsidiary. All
material inter-company accounts and transactions have been
eliminated on consolidation.
(b) ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Material estimates that are particularly susceptible to
significant change related to the determination of inventory
carrying value. In connection with the determination of
inventory carrying values, management must make estimates
relating to yield factors and amounts of overhead to be
applied. Other material estimates are described in oil and gas
properties.
(c) INVENTORIES
Inventories are carried at the lower of cost and net
realizable value. Cost has been determined by the first-in,
first-out method.
(d) MINING PROPERTY AND RELATED EXPENDITURES
The company defers all costs relating to mining properties by
project area until such time as the properties are put into
commercial production, sold or abandoned. Costs deferred
include acquisition costs, exploration and development
expenditures and cost of assets permanently dedicated to
exploration and development. Buildings, equipment and
machinery will not be amortized until the mine achieves
commercial production.
The ultimate realization of the deferred costs and
expenditures is dependent upon the discovery of commercially
exploitable ore bodies, at which time such costs and
expenditures will be charged against income using an
appropriate method and rate to be determined.
<PAGE> 35
PAGE VIII
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) MINING PROPERTY AND RELATED EXPENDITURES (Continued)
When evaluation of a project area discloses possible
impairment, the deferred costs and expenditures thereon are
written down to the recoverable amount. Unsuccessful projects
are written off when abandoned.
(e) OIL AND GAS PROPERTIES
(i) ACCOUNTING TREATMENT FOR COSTS INCURRED
The company uses the successful efforts method of
accounting for oil and gas producing activities.
Costs to acquire mineral interest in oil and gas
properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip
development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of
carrying and retaining unproved properties are
expensed.
Unproved oil and gas properties that are individually
significant are periodically assessed for impairment
of value and a loss is recognized at the time of
impairment by providing an impairment allowance.
Other unproved properties are amortized based on the
company's experience of successful drilling and
average holding period.
Capitalized costs of producing oil and gas
properties, after considering estimated dismantlement
and abandonment costs and estimated salvage values,
are depreciated and depleted by the
unit-of-production method. Support equipment and
other property and equipment are depreciated over
their estimated useful lives.
On the sale or retirement of a complete unit of a
proved property, the cost and related accumulated
depreciation, depletion and amortization are
eliminated from the property accounts and the
resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved
property, the cost is charged to accumulated
depreciation, depletion and amortization with a
resulting gain or loss recognized in income.
On the sale of an entire interest in an unproved
property for cash or cash equivalent, gain or loss on
the sale is recognized taking into consideration the
amount of any recorded impairment if the property had
been assessed individually. If a partial interest in
an unproved property is sold, the amount received is
treated as a reduction of the cost of the interest
retained.
(ii) REVENUE AND EXPENSE RECOGNITION
Revenue on turnkey drilling contracts is recognized
upon substantial completion of the well. Oil and gas
revenue is recognized when sold. All income and
expense items are recognized pursuant to the accrual
method of accounting.
<PAGE> 36
PAGE IX
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) OIL AND GAS PROPERTIES (Continued)
(iii) WELLS AND RELATED EQUIPMENT
Wells and related equipment are recorded at cost. All
items are amortized on the straight-line method over
the estimated useful life of the asset being seven
years.
(f) GOODWILL
Goodwill is recorded at cost and is being amortized over 10
years on a straight-line basis. The goodwill arose on the
acquisition of DPI and Red River Hardwoods Inc. (Note 2). The
management determines the potential permanent impairment in
value of goodwill and its estimated useful life, annually,
based on estimation of fair value.
(g) CAPITAL ASSETS
Capital assets are stated at cost. Amortization is being
provided for on a straight-line basis over the useful life of
the asset ranging from five to thirty-one years.
(h) INVESTMENTS
(i) The investment in partnerships engaged in drilling
and completion of wells on a turnkey basis is
accounted for based on the equity method of
accounting.
(ii) Investment in a 50% owned limited liability company
is accounted for on the equity method of accounting.
(i) CONCENTRATIONS OF CREDIT RISKS
The company grants credit to its customers, primarily located
in the northeastern and central United States, during the
normal course of business. The company performs ongoing credit
evaluations of its customers' financial conditional and
generally requires no collateral from its customers. At times
throughout the year, the company may maintain certain bank
accounts in excess of FDIC insured limits.
2. ACQUISITION AND DISPOSITION
RED RIVER HARDWOODS INC. ("RRH")
On November 18, 1996, pursuant to a plan of reorganization under
chapter 11 of the U.S. Bankruptcy Code, DPI acquired an 80% interest in
RRH, a company engaged in selling lumber products to furniture and
cabinet manufacturers and wholesale distribution companies both in the
United States and overseas. The purchase has been accounted for by the
purchase method and, as such, results of operations for this business
have been included for the period beginning November 18, 1996.
<PAGE> 37
PAGE X
2. ACQUISITION AND DISPOSITION (Continued)
RED RIVER HARDWOODS INC. ("RRH") (Continued)
The supplemental pro-forma results of operations, as though the
companies had combined at the beginning of the year, have not been
disclosed as they do not provide meaningful information. The
acquisition was paid for in cash as noted below.
<TABLE>
<S> <C>
Net assets (liabilities) acquired
Total identifiable assets $2,159,831
Total identifiable liabilities 2,235,843
----------
(76,012)
Goodwill (amortized over 10 years) 296,102
----------
Consideration given - cash $ 220,090
==========
</TABLE>
As part of this acquisition, DPI issued a guarantee to Powell County
Industrial Development Authority ("PCIDA") in the amount of $250,000 to
secure the liabilities owing by RRH to PCIDA. The guarantee will expire
when such liabilities have been fully paid.
NIAGARA OIL, INC. ("NOI")
During 1996, DPI entered into an agreement to sell its wholly-owned
subsidiary, NOI, and to perform certain rework services on the wells
and waterfloor equipment. The agreement required DPI to conclude
negotiations with the United States Environmental Protection Agency
relating to the terms of an Administrative Order, necessitated by
violations of the prior operator, which details future operations of
the wells. The EPA has tendered a draft Administrative Order and DPI
has delivered its response. It is anticipated that, following public
hearing, the Administrative Order will be issued and DPI's sale of NOI
will be consummated during mid 1998.
A summary of net assets, disposed of at assigned values, is as follows.
<TABLE>
<S> <C>
Cash $ 1,330
Oil and gas properties 43,351
Receivable from related parties 58,707
Accrued liabilities (8,577)
Long-term debt (115,000)
---------
(20,189)
Investment 72,293
Proceeds from sale 117,375
---------
Gain on sale of subsidiary $ 65,271
=========
</TABLE>
<PAGE> 38
PAGE XI
3. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials - Green Lumber $ 26,605 $ 53,802
- Kiln Dried Lumber 152,937 255,128
Supplies 12,600 -
Work in process 295,482 271,385
Finished goods 190,520 -
-------- --------
$678,144 $580,315
======== ========
</TABLE>
4. MINING PROPERTY AND RELATED EXPENDITURES
<TABLE>
<CAPTION>
UNGA ISLAND
ALASKA MINERAL DEFERRED BUILDING
PROPERTY EXPENDITURES EQUIPMENT
COSTS (SEE BELOW) AND MACHINERY TOTAL
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $1,010,000 $9,424,401 $ 777,061 $11,211,462
1996 additions - 19,785 - 19,785
---------- ---------- ------------ -----------
Balance, December 31, 1996 1,010,000 9,444,186 777,061 11,231,247
1997 additions - 982 - 982
---------- ---------- ------------ -----------
Balance, December 31, 1997 $1,010,000 $9,445,168 $ 777,061 $11,232,229
========== ========== ============ ===========
</TABLE>
Deferred expenditures on the Unga Island resource property consist of
the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Legal $ - $19,785
Miscellaneous 982 -
------- -------
$ 982 $19,785
======= =======
</TABLE>
<PAGE> 39
PAGE XII
5. OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
1997 1996
---- ----
ACCUMULATED
COST AMORTIZATION NET NET
---- ------------ --- ---
<S> <C> <C> <C> <C>
Proved properties $4,196,085 $384,060 $3,812,025 $4,184,390
Unproved properties - - - 5,130
Wells and related equipment 213,837 54,761 159,076 81,387
---------- -------- ---------- ----------
$4,409,922 $438,821 $3,971,101 $4,270,907
========== ======== ========== ==========
</TABLE>
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
ACCUMULATED
COST AMORTIZATION NET NET
---- ------------ --- ---
<S> <C> <C> <C> <C>
Land $ 113,801 $ - $ 113,801 $ 113,801
Buildings 947,301 27,846 919,455 1,019,492
Machinery and equipment 870,514 151,146 719,368 823,098
Office furniture, fixtures and equipment 87,684 44,905 42,779 40,035
Vehicles 115,521 61,855 53,666 57,875
Equipment under capital lease 91,369 7,614 83,755 89,549
---------- -------- ---------- ----------
$2,226,190 $293,366 $1,932,824 $2,143,850
========== ======== ========== ==========
</TABLE>
The company leases two pieces of equipment under a capital lease
expiring in 1999. The assets and liabilities under the capital lease
are recorded at fair value in the appropriate asset and liability
accounts. The assets are amortized over their estimated productive
lives. Amortization of assets under the capital lease is included in
amortization expense.
7. NOTES RECEIVABLE
Notes receivable from a director of the company bear interest at 6% per
annum and are repayable at $1,000 per month.
8. LOANS TO RELATED PARTIES
Included in the loans is a receivable from a company owned by a
director of this company in the amount of $17,586 which is non-interest
bearing with no specific terms of repayment. The company expects to be
paid by the debtor when financing for its operations is obtained.
<PAGE> 40
PAGE XIII
9. INVESTMENTS
(a) During 1997, DPI made additional contributions of $174,990 to
the drilling partnerships. These partnerships were contracted
for the drilling and completion of the wells on a turnkey
basis. All of the partnerships has reached the operating stage
and generated revenues of $43,336. These investments are being
accounted for based on the equity method of accounting and the
net investment amounted to $159,567 as of December 31, 1997.
(b) During 1997, DPI's 80% owned subsidiary acquired a 50%
interest in a Kentucky limited liability company. The
investment is accounted for on the equity method.
10. BANK LOANS
The bank loans bear interest at 7.3% and 10.5% per annum, payable
semi-annually, and mature March 23, 1998 and March 10, 1998. One of the
loans is guaranteed by a director and secured by the common stock owned
by that director. Subsequent to the year-end, the loans were renewed
with similar terms and conditions.
11. LONG-TERM DEBT
On July 8, 1986, the company purchased the mineral property on Unga
Island, Alaska for debt in the amount of $854,818. The debt is
non-interest bearing, payable at $2,000 per month, of which only
$10,000 was paid during the year, until fully paid, and is secured by
deeds of trust over the Unga Island mineral claims and certain
buildings and equipment located thereon.
The purchase agreement also provides for the payment of monthly
royalties at 4% of net smelter returns or net revenue, as defined in
the agreement. Any royalties paid reduce the amount of the purchase
price payable above.
The obligation is stated at its remaining face value of $570,818 and
has not been discounted.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Note payable as outlined above $ 570,818 $ 580,818
Unsecured loans bearing interest at 10% per annum, principal and
interest due on May 18, 1998. Subsequent to the year-end, the
maturity date of the loan was extended to June 1, 1999 450,000 450,000
Loans bearing interest at rates ranging from 9% to 11% per annum,
payable in monthly instalments of $9,583, maturing at various dates up
to and including December 22, 2001. The loans are collateralized
by specific assets of the company. 299,728 386,295
---------- ----------
Carried forward............ $1,320,546 $1,417,113
---------- ----------
</TABLE>
<PAGE> 41
PAGE XIV
11. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Brought forward............ $1,320,546 $1,417,113
Mortgages payable, secured by real estate, bearing interest at rates
ranging from 8% to 9.25% per annum, payable in monthly instalments of
varying amounts and mature on December 22, 2001 and in
in November 2002 165,000 189,580
Unsecured loan bearing interest at 6.27% per annum, payable in
monthly instalments of $1,771 and matures on August 9, 2000 79,688 79,688
Loan to a non-affiliated company, bearing interest at .5% over prime
per annum (prime was 8.5% on December 31, 1997), payable in monthly
instalments of $10,294 plus interest, secured by production on
certain wells 197,647 -
Loan payable to a non-affiliated company, collateralized by the assets
and the corporate guarantee of a wholly-owned subsidiary, bearing
interest at 10% per annum with quarterly payments of interest only
beginning April 1, 1996. Principal is due currently. 64,779 64,779
Mortgage note bearing interest at 9.5% per annum, secured by first
mortgages on real estate and certain equipment, payable in
monthly payments of $8,898, maturing on June 30, 2013 867,575 872,506
Line of credit in the amount of $251,230, bearing interest at prime
plus 1% per annum, secured by accounts receivable, work in process
and inventory, final payment due November 1999 251,230 248,460
Instalment note bearing interest at 5% per annum, secured by machinery
and equipment, payment of interest only through November 1997, monthly
payment of principal and interest of $8,147 due starting December 1997
with final payment due March 2004 510,745 528,276
Instalment note bearing interest at 9% per annum, secured by machinery,
payment of interest only in the amount of $2,513 through April 2002,
thereafter $2,196 through October 2002 and $1,879 through April 2003 124,235 124,235
RRH capital leases, payable monthly in amounts of $1,941 and $340
through April 1999 and August 1999, respectively 38,164 62,585
RRH capital investment payable, non-interest bearing, payable in
monthly instalment of $1,325, maturing in October 2001 60,941 -
---------- ----------
Carried forward........... $3,680,550 $3,587,222
---------- ----------
</TABLE>
<PAGE> 42
PAGE XV
11. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Brought forward............ $3,680,550 $3,587,222
RRH payables to creditors under plan of bankruptcy
- to government entities bearing interest at 8% per annum,
payable $1,606 monthly through March 2002 83,613 88,058
- to a county bearing interest at 5% per annum, payable monthly
at differing amounts through December 2001 15,566 15,566
- to certain creditors bearing interest at 10% per annum, payable
$922 per month over a period of ten years 96,616 110,694
- to certain creditors, non-interest bearing, payable in 1997 9,090 10,388
Gas prepayment contract payable, collateralized by production
non-interest bearing, payable in monthly instalments of $10,416
out of production, matures April 1, 1998 29,845 149,215
---------- ----------
3,915,280 3,961,143
Less: Current portion 652,071 399,889
---------- ----------
$3,263,209 $3,561,254
========== ==========
</TABLE>
Principal repayments for the next five years are as follows:
<TABLE>
<S> <C>
1998 $ 652,071
1999 1,112,740
2000 335,229
2001 278,431
2002 261,028
Thereafter 1,275,781
---------
$3,915,280
==========
</TABLE>
Minimum future lease payments under the capital lease are as follows:
<TABLE>
<S> <C>
1998 $27,371
1999 10,793
-------
$38,164
=======
</TABLE>
Interest expense for the year ended December 31, 1997 was $294,836
(1996 - $182,972). There was no interest capitalized during these
years.
<PAGE> 43
PAGE XVI
12. LOAN PAYABLE
This loan payable to a director of the company bears interest at 9.75%
per annum and is payable in monthly instalments of $1,800.
13. CAPITAL STOCK
(a) COMMON SHARES ISSUED
<TABLE>
<CAPTION>
SHARES AMOUNT
--------- ----------
# $
<S> <C> <C>
Balance, December 31, 1995 7,742,710 20,068,190
Issued to employees as incentive bonuses 204,000 77,500
Issued for settlement of debt 558,244 249,780
--------- ----------
Balance, December 31, 1996 8,504,954 20,395,470
Issued to employees as incentive bonuses 118,500 59,250
Issued for settlement of debt 1,198,300 499,716
--------- ----------
Balance, December 31, 1997 9,821,754 20,954,436
========= ==========
</TABLE>
(b) Stock options and warrants have been granted and approved by
the shareholders to purchase common shares of the company as
follows.
A. OPTIONS
<TABLE>
<CAPTION>
ISSUED EXERCISABLE PRICE EXPIRY
------ ----------- ----- ------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 1,250,000 425,000 $1.00-1.90 (i)
=========
1996 - granted 620,000 1.00 (ii)
- expired (200,000)
---------
Balance, December 31, 1996 1,670,000 770,000
=========
1997 - granted 4,403,000 0.31-1.00 (iii)
- expired (233,000)
---------
Balance, December 31, 1997 5,840,000 3,980,555
========= =========
</TABLE>
<PAGE> 44
PAGE XVII
13. CAPITAL STOCK (Continued)
A. OPTIONS (Continued)
(i) 33,000 of these options expired during the year. The
balance of 900,000 are exercisable at the rate of
225,000 shares per year. The first block of 225,000
shares is exercisable immediately and expires five
years after vesting. Vesting is subject to continued
employment of the various exercise dates. The
remaining options were vested and exercisable in the
year of issue and expire on February 28, 2000.
(ii) 600,000 of these options are exercisable at the rate
of 150,000 shares per year. The first block of
150,000 shares is exercisable immediately and expires
five years after vesting. Vesting is subject to
continued employment on the various exercise dates.
The remaining options were vested and exercisable in
the year of issue and expire on June 28, 2001.
(iii) 2,000,000 of these options were granted to
Environmental Energy Inc. (Note 21(b)), exercisable
immediately at $1.00 per share and will expire in
November 2002. Another 2,000,000 options were granted
to the president of the company exercisable over a
period of six years commencing in 1997 at $0.31 per
share and will expire in March 2002. The balance of
403,000 options are exercisable immediately at $0.65
per share.
B. WARRANTS
<TABLE>
<CAPTION>
ISSUED PRICE EXPIRY
------ ----- ------
$
<S> <C> <C> <C>
Balance, December 31, 1995 526,667 0.5-3.6 (i)
1996 - granted 119,800 0.5 (ii)
---------
Balance, December 31, 1996 646,467
1997 - granted 2,500,000 0.125 (iii)
---------
Balance, December 31, 1997 3,146,467
=========
</TABLE>
(i) 26,667 of these warrants expire on March 30, 1998 and
the balance on October 30, 2000.
(ii) These warrants expire on June 28, 2001.
(iii) These warrants expire on March 6, 2002.
14. LOSS PER SHARE
Loss per share is calculated using the weighted average number of
shares outstanding during the year. The weighted average of common
shares was 9,159,632 (1996 - 8,050,840; 1995 - 7,605,840). Outstanding
stock options and warrants have no dilutive effect on the loss per
share.
<PAGE> 45
page xviii
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, other receivable,
accounts payable and accrued liabilities approximate fair value due to
the short-term maturity of these instruments. Other note receivable,
bonds and deposits, loans receivable and payable, other long-term debt
payable approximate fair value since they bear interest at variable
rates. At December 31, 1997, the financial instruments with a carrying
value different from their fair value include the following.
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- --------
<S> <C> <C>
Loan receivable from a related party $ 17,586 $ 11,232
Long-term debt 768,465 372,196
</TABLE>
The fair values of loan receivable and long-term debt are based upon
discounted future cash flows using discount rates that reflect current
market conditions for instruments having similar terms and conditions.
16. RELATED PARTY TRANSACTIONS
The company is party to certain agreements and transactions in the
normal course of business. Significant related party transactions not
disclosed elsewhere include the following.
(a) OFFICERS' REMUNERATION
The accounts of the company include consulting and management
fees paid or payable to officers and directors for the three
years ended December 31, 1997.
On April 7, 1989, the company entered into an agreement with
Arizona Desert Minerals (ADM), a company related to a director
of this company, whereby the company will pay ADM management
fees of $60,000 annually, $12,000 of which is to be deferred
until the company starts to generate revenue from its mining
operations. On May 8, 1992, the agreement was amended and
calls for an annual $30,000 deferral. This agreement was
terminated on November 15, 1996. As at December 31, 1996, the
total deferral amount is $128,250. The management fees
deferred have not been recorded on the books of the company.
(b) SHAREHOLDER INFORMATION
During 1993, a shareholder expended, on behalf of the company,
shareholder information expenses in the amount of $75,000. The
company has recorded a reserve provision against payment of
this amount until the company's mining operations commence
production.
<PAGE> 46
PAGE XIX
16. RELATED PARTY TRANSACTIONS (Continued)
(c) OCCUPANCY COSTS
Occupancy costs include rent of approximately $30,000 (1996 -
$31,200) paid to a company which is 50% owned by a director
and an officer of this company. The lease expires July 1,
1998.
(d) CONSULTING AND MANAGEMENT FEES
Consulting and management fees were paid to companies owned by
former senior officers of the company.
17. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
MINING
EXPLORATION OIL AND
AND GAS WOOD 1997 1996
DEVELOPMENT DEVELOPMENT PRODUCTS CORPORATE TOTAL TOTAL
----------- ----------- -------- --------- ----- -----
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Revenue (net) - 338,472 350,890 - 689,362 709,648
---------- --------- --------- --------- ---------- ----------
General corporate expenses - - - 1,527,409 1,527,409 885,562
Interest on long-term debt - 40,010 146,527 108,299 294,836 181,802
Amortization - equipment - 26,865 151,198 40,793 218,856 69,858
- goodwill - 178,956 31,511 - 210,467 182,108
Depletion - 146,212 - - 146,212 132,425
---------- --------- --------- --------- ---------- ----------
- 392,043 329,236 1,676,501 2,397,780 1,451,755
---------- --------- --------- --------- ---------- ----------
Income (loss) before income taxes - (53,571) 21,654 (1,676,501) (1,708,418) (742,107)
========== ========= ========= ========= ========== ==========
Identifiable assets 11,227,733 4,143,480 2,955,059 2,935,998 21,262,270 20,882,719
========== ========= ========= ========= ========== ==========
Capital expenditures 982 626,876 36,617 18,300 682,775 432,838
========== ========= ========= ========= ========== ==========
</TABLE>
18. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES
(a) Financial Accounting Standards No. 109 "Accounting for Income
Taxes" requires the use of an asset and liability approach for
accounting for income taxes. There would be no effect from the
adoption of the statement, nor would the results of operations
be different than those reported under Canadian GAAP. Under
FAS 109, the company would have reported the following
deferred income tax asset at December 31, 1997 and 1996.
<PAGE> 47
PAGE XX
18. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES (Continued)
(a) (Continued)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Total deferred tax assets $2,840,014 $3,222,702
Less: Valuation allowance 418,022 818,222
---------- ----------
2,421,992 2,404,480
Total deferred tax liabilities 2,421,992 2,404,480
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
(b) FAS 121
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED
The 1997 fiscal year is the initial year of application of FAS
121 "accounting for the impairment of long-lived assets and
for long-lived assets to be disposed". If FAS 121 had been
applied as at December 31, 1996 and 1995, there would have
been no material effect on the company's financial position or
results of operations.
(c) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES
REQUIRED UNDER SFAS 123
Issued by the Financial Accounting Standards Board in October,
1995, SFAS 123 established financial accounting and reporting
standards for stock-based employee compensation plans as well
as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees.
This statement defines a fair value based method of accounting
for employee stock option or similar equity instruments, and
encourages all entities to adopt that method of accounting for
all their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost of
those plans using the intristic value based method of
accounting prescribed by APB Opinion No. 25, Accounting for
Stock Issued to Employees. Entities electing to remain with
the accounting in Opinion 25 must make pro-forma disclosures
of net income and, if presented, earnings per share, as if the
fair value based methods of accounting defined by SFAS 123 had
been applied. SFAS 123 is applicable to fiscal years beginning
after December 15, 1995.
The company accounts for its stock options under Canadian
GAAP, which, in the company's circumstances are not materially
different from the amounts that would be determined under the
provisions of the Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its stock option
plan.
<PAGE> 48
18. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES (Continued)
(c) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES
REQUIRED UNDER SFAS 123 (continued)
No compensation expense has been charged to the consolidated
statement of loss for the plan for the years ended December
31, 1997 and 1996. Had compensation expense for the company's
stock-based compensation plan been determined based on the
fair value at the grant dates for awards under the Plan
consistent with the method under the Financial Accounting
Standards Board Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-based Compensation" ("SFAS
123"), the company's net loss and loss per share would have
been reported as the pro-forma amounts indicated in the table
below. The fair value of each option grant was estimated on
the date the grants are exercisable using the fair value
recognition method, with the following assumptions: risk free
interest rate of 6% dividend yield of 0%, theoretical
volatility assumption of .30, with vesting provisions and the
expected lives of options of five years.
<TABLE>
<CAPTION>
1997 1996 1995
AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA AS REPORTED PRO-FORMA
----------- --------- ----------- --------- ----------- ---------
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)
- U.S. GAAP (1,708,418) (1,797,064) (733,973) (733,973) (1,440,003) (1,463,803)
Net earnings (loss) per share
Basic (0.19) (0.20) (0.09) (0.09) (0.19) (0.19)
Weighted average fair value
of options granted during
this period 0.00 0.024 0.00 0.00 0.00 0.056
</TABLE>
19. INCOME TAXES
As at December 31, 1997, the company had net operating loss
carry-forwards in the U.S. for income tax purposes of approximately
$6,678,358 which expire from 1998 to 2012 and investment tax credits of
$18,408 which will expire in the years 1998 - 2000.
For Canadian federal income tax purposes, net operating loss
carry-forwards of approximately $1,796,142 expire at various dates
through 2004.
In addition, the company has approximately $75,000 of cumulative
Canadian exploration and development expenses and Canadian oil and gas
property expenses available to reduce future years' taxable income.
The potential benefit of the losses on earnings has not been reflected
in these consolidated financial statements.
<PAGE> 49
PAGE XXII
20. PRIOR PERIOD ADJUSTMENT
Recognition of income before substantial completion of contracts, as
well as the non-accrual of finder's fees related to the sale of a
subsidiary, resulted in the understatement of the reported net loss in
DPI's previously issued 1996 financial statements. These have been
corrected in the current year. Accordingly, the comparative figures
have been restated.
21. COMMITMENT
ENVIRONMENTAL ENERGY, INC. OIL AND GAS ASSETS ACQUISITION
On November 3, 1997, DPI signed a letter of intent to acquire oil and
gas producing properties and to enter into an extensive oil and gas
exploration and financing program with Environmental Energy, Inc. The
agreement provides that DPI issue six million (6,000,000) shares of
non-cumulative, non-voting convertible preferred stock for oil and gas
assets located in Kentucky, Louisiana and Tennessee. The preferred
stock is convertible to common stock on a share-for-share basis within
two years. DPI will issue warrants for six million (6,000,000) shares
of common stock. Half are exercisable at $1.00 per share and the
remaining three million (3,000,000) are exercisable at $1.25 per share.
As of the date of this report, DPI is in the process of due diligence
and the final agreements are being negotiated.
22. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
with the current year's presentation.
<PAGE> 1
POWER OF ATTORNEY
WHEREAS, Alaska Apollo Resources Inc., a British Columbia corporation
(the "Company"), intends to file with the Securities and Exchange Commission
(the "Commission") under the Securities Exchange Act of 1934, as amended (the
"Act") a Form 10-KSB for the fiscal year ended December 31, 1997, a draft of
which has been previously reviewed by the undersigned (the "Form 10-KSB"),
together with any and all exhibits and other documents having relation to the
Form 10-KSB.
NOW, THEREFORE, the undersigned in his capacity as a director or
officer or both, as the case may be, of the Company, does hereby constitute and
appoint William S. Daugherty and D. Michael Wallen, and each of them severally,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to do any and all acts and things in his name
and on his behalf in his capacity as a director or officer or both, as the case
may be, of the Company, as fully and to all intents and purposes as the
undersigned might or could do in person, and to execute any and all instruments
for the undersigned and in his name in any and all capacities which such person
may deem necessary or advisable to enable the Company to comply with the Act
and any rules, regulations and requirements of the Commission, in connection
with the filing of the form 10-KSB, including specifically, but not limited to,
power and authority to sign for the undersigned, in his capacity as a director
or officer or both, as the case may be, of the Company, the Form 10-KSB and any
and all other documents (including, without limitation, any amendments to the
Form 10-KSB or to such other documents) which such person may deem necessary
or advisable in connection therewith; and the undersigned does hereby ratify
and confirm all that such person shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 15th day of April, 1998.
/s/ James K. Klyman
-----------------------------
JAMES K. KLYMAN
<PAGE> 2
POWER OF ATTORNEY
WHEREAS, Alaska Apollo Resources Inc., a British Columbia corporation
(the "Company"), intends to file with the Securities and Exchange Commission
(the "Commission") under the Securities Exchange Act of 1934, as amended (the
"Act"), a Form 10-KSB for the fiscal year ended December 31, 1997, a draft of
which has been previously reviewed by the undersigned (the "Form 10-KSB"),
together with any and all exhibits and other documents having relation to the
Form 10-KSB.
NOW, THEREFORE, the undersigned in his capacity as a director or
officer or both, as the case may be, of the Company, does hereby constitute and
appoint William S. Daugherty and D. Michael Wallen, and each of them severally,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, to do any and all acts and things in his name
and on his behalf in his capacity as a director or officer or both, as the case
may be, of the Company, as fully and to all intents and purposes as the
undersigned might or could do in person, and to execute any and all instruments
for the undersigned and in his name in any and all capacities which such person
may deem necessary or advisable to enable the Company to comply with the Act
and any rules, regulations and requirements of the Commission, in connection
with the filing of the Form 10-KSB, including specifically, but not limited to,
power and authority to sign for the undersigned, in his capacity as a director
or officer or both, as the case may be, of the Company, the Form 10-KSB and any
and all other documents (including, without limitation, any amendments to the
Form 10-KSB or to such other documents) which such person may deem necessary or
advisable in connection therewith, and the undersigned does hereby ratify and
confirm all that such person shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
as of the 15th day of April, 1998.
/s/ Charles L. Cotterell
--------------------------------
CHARLES L. COTTERELL