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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-KSB
[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, 1998
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
DAUGHERTY 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
120 Prosperous Place, Suite 201
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. [ ]
The Issuer revenues for the year ended December 31, 1998, were $5,943,921.
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 March 29, 1999, was: $2,221,136.
The number of shares outstanding of each of the Issuer's classes of common
equity, as of March 29, 1999, was: 2,183,783.
Documents incorporated by reference: None.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<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 Security Holders..................... 10
PART II................................................................................ 10
Item 5. Market for the Registrant's Common Equity
and Related Stockholder 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............................. 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................. 16
PART III............................................................................... 16
Item 10. Directors and Executive Officers of the Registrant...................... 16
Item 11. Executive Compensation.................................................. 17
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 18
Item 13. Certain Relationships and Related Transactions.......................... 20
PART IV................................................................................ 21
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 21
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Daugherty 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. The Company officially
changed its name in 1998 from Alaska Apollo Resources Inc. to Daugherty
Resources, Inc. 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; and
-- 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.
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 farm-ins 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.
EXPLORATION AND DEVELOPMENT
The Company has focused its efforts on acquiring drilling rights to as much
acreage in the Appalachian Basin as possible. Management has chosen to
prioritize its efforts in this area as the proven way to build potential value
for its shareholders while also creating an expanding reserve base from which
its drilling programs can be continually expanded. In 1998, the Company
acquired drilling rights to 9,378 gross acres. These properties, farmed-in from
Equitable Resources Energy Company and The Wiser Oil Company, are in an area
that the Company believes has significant potential for future development. The
Company's 1998 drilling activity began to prove up this acreage. Coupled with
the farm-ins received by the Company in 1996 and 1997, the Company believes it
is now in a position for significant growth in activity and revenue enhancement.
The Company's strategy now focuses on increasing its natural gas and oil
reserves, as well as production, and drilling and operating revenues by the
drilling and development of the acreage it has acquired. While the Company is
pursuing its strategy of increasing reserves through
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drilling and development of its acreage through drilling programs and joint
ventures, it continues to review potential acquisitions, including other oil and
gas companies or partnerships and producing properties.
AREAS OF OPERATION
The Appalachian Basin is located in close proximity to major natural gas
markets in the northeastern United States. This proximity to a substantial
number of large commercial and industrial gas markets, coupled with the
relatively stable nature of Appalachian Basin production and the availability of
transportation facilities has resulted in generally higher wellhead prices than
in other areas of the United States. The Appalachian Basin is the oldest gas
and oil producing region in the United States and includes Ohio, Pennsylvania,
New York, West Virginia, Kentucky, and Tennessee. Historically, most of the
production in the Appalachian Basin has been from wells drilled to a number of
relatively shallow blanket formations at depths of 1,000 to 7,500 feet. These
formations are generally characterized as long-lived reserves that produce for
more than 20 years.
To date, the Company's drilling operations in the Appalachian Basin have
principally involved drilling the Mississippian and Devonian formations in
southeastern Kentucky and northeastern Tennessee. These formations are
generally limestones and shales and underlie all of the area of the Company's
acreage. These formations have varying thicknesses and are located at depths
ranging generally from 2,000 feet to 4,400 feet. Substantially all the wells
the Company drills have depths of between 2,200 feet and 3,800 feet. These
formations are generally characterized by low permeability and low porosity.
Although these formations generally produce for many years, a substantial
portion of the total well production can be expected within the first several
years.
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.
ACQUISITION OF PROPERTIES
Daugherty Petroleum, Inc. continually evaluates properties, both developed
and undeveloped, and prospects originated by its staff and outside independent
geologists as well as other oil and gas companies.
The Company has focused on accumulation of an acreage position in an area
of the Appalachian Basin that it believes will provide significant benefits over
the next several years. The Company continues to evaluate the properties for
potential drilling. Substantially all of the Company's drilling operations are
currently conducted on the acreage position it has acquired.
In 1993, the Company acquired certain oil and gas interests in Whitley and
Knox Counties in southeastern Kentucky from a private company and also acquired
interests in wells in the same area from partnerships.
In 1997, the Company acquired the total working interest in a well from
Equitable Resources Energy Company.
On November 3, 1997, the Company 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 assets
are located in Kentucky, Tennessee, and Louisiana. As of December 31, 1998,
this acquisition has not been finalized but it is anticipated that the
acquisition will be finalized by the Company's annual meeting expected to be
held in May of 1999.
The Company intends to continue to review potential acquisitions but had no
commitment with respect to any material acquisition as of December 31, 1998,
other than the Environmental Energy, Inc. acquisition referenced above.
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DRILLING SERVICES
The Company enters into turnkey contracts with other companies and joint
venture partnerships to drill wells. Pursuant to these contracts, the Company is
responsible for the drilling and development of the wells. The Company
subcontracts with third parties for the performance of a substantial portion of
the operations required to drill, complete and equip these wells for production.
Although the Company manages and supervises all necessary drilling and related
service and equipment operations on these wells, there are a number of third
party services to obtain, including contract drilling, fracturing, logging and
pipeline construction which are performed by subcontractors who specialize in
those operations. Since the Company contracts with the partnerships on a turnkey
basis, the Company is responsible for drilling and completing the wells,
regardless of the actual cost. Consequently, the Company is subject to the risk
that prices incurred in the actual drilling and development operations could
increase beyond its contract price thereby rendering its drilling contracts less
profitable or unprofitable. Moreover, difficulties encountered in drilling and
completion operations can substantially increase costs sometimes without
recourse to the Company. The Company continually monitors the cost incurred in
drilling, completion and production operations and reviews its turnkey contract
prices for each partnership in order to reduce the risk of unprofitable drilling
operations. These turnkey drilling prices are subject to change based on
competition, the return sought by the partnerships, the Company's revenue and
profit considerations and other industry conditions.
OIL AND GAS FIELD OPERATIONS
As of December 31, 1998, the Company operates 127 wells, all of which are
located in Kentucky. As an operator of producing wells, the Company is
responsible for the maintenance and verification of all production records,
contracting for oil and gas sales, distribution of production proceeds and
information, and compliance with various state and federal regulations.
The Company receives a monthly operating fee for each well it operates and
is reimbursed for most third party costs associated with operations and
production of the wells. Most partnerships pay the Company their specified
operating fee based upon the aggregate interest in the wells.
MARKETS
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 signed a one year contract for up to 1.5 MMcf per day at $2.05 per
MMBtu. 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 to refineries or marketers 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
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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.
REGULATION
The Company's 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.
The Company does not believe that its environmental risks are materially
different from those of comparable companies. The Company believes its present
activities substantially comply, in all material respects, with existing
environmental laws and regulations. Nevertheless, no assurance can be given
that environmental laws will not, in the future, result in a curtailment of
production or material increase in the cost of production, development or
exploration or otherwise adversely affect the Company's operations and financial
condition. Although the Company maintains liability insurance coverage for
certain liabilities from pollution, such environmental risks generally are not
fully insurable; the amount of such coverage is currently $2,000,000 and is
provided on a "claims made" basis.
OIL AND GAS PROPERTIES
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, Bell 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, 1998, Daugherty Petroleum, Inc. owned natural gas and
oil mineral leases covering 34,400 gross (29,240 net) acres of land. In 1998,
Daugherty Petroleum, Inc. had a budget of $60,000 for drilling exploratory
wells, and $510,000 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 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 1998, Daugherty Petroleum, Inc. participated in the drilling of
14 gross (3.5125 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.
OIL AND GAS PRODUCTION AND SALES
During 1998, 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 $2,363,681 consisting of turnkey contract
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revenues of $1,879,980 (79.5 percent); oil and gas production revenues of
$312,769 (13.2 percent); and operating revenues of $170,932 (7.2 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 year sales contracts. During the
past several years there had been a worldwide surplus of oil that placed
downward pressure on oil prices. In fact, crude oil prices in 1998 were at an
adjusted all time low price.
RESERVES
The following table sets forth information as to the Company's proved and
proved developed reserves of natural gas and oil as of December 31, 1998, 1997,
1996, 1995, and 1994:
<TABLE>
<CAPTION>
TOTAL PROVED RESERVES AS OF: GAS (Mcf) LIQUIDS (Bbls)
<S> <C> <C>
December 31, 1998 10,959,130 86,083
December 31, 1997 9,379,597 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
</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 1998 oil and gas reserves were prepared by Wright and Company, Inc.,
Nashville, Tennessee, as was the 1997 oil and gas reserve report. 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.
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
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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 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. The Company has extended no work on the properties since 1996
because of the low price of gold.
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 as of December 31 in each of the years
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
HIGH $311 $361 $415 $396 $396
LOW $273 $283 $368 $372 $371
AVERAGE $294 $322 $391 $384 $384
</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:
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-- 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;
-- Availability and costs of financing;
-- Production costs;
-- Metal market prices;
-- Compliance requirements for environmental and mine safety and health
regulations; and
-- 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, 1998, with
respect to the Apollo-Sitka Claims:
APOLLO-SITKA INDICATED RESOURCES AND RESERVES
<TABLE>
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
======
</TABLE>
(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.
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
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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, 1998, with respect to the Shumagin Claims.
SHUMAGIN RESERVES (UNCUT AND UNDILUTED)
OUNCES PER TON
<TABLE>
<CAPTION>
TONS GOLD SILVER GOLD SILVER
------- ----- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Drill/Trench 149,283 0.891 4.24 133,005 633,081
Inferred
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 Trio Growth
Trust, a shareholder of Red River Hardwoods, Inc. 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 in Red River Hardwoods, Inc.
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 October, 2003. 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, 1998, the Company was authorized to issue 10,000,000 shares
of the Common Stock, of which there were issued and outstanding 2,183,783
shares. No dividends were declared or paid during 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30 June 30, Mar. 31,
QUARTER ENDED 1998 1998 1998 1998(1) 1997(1) 1997(1) 1997(1) 1997(1)
Low Bid Price 0.3133 0.625 1.375 1.250 1.875 1.875 2.50 1.405
High Bid Price 0.5000 0.750 1.625 1.565 1.095 1.405 2.03 1.405
</TABLE>
[FN]
_____________
(1) The Low and High Bid Prices for the quarters ending March 31, 1998,
December 31, 1997, September 30, 1997, June 30, 1997, and March 31, 1997,
have been adjusted to reflect the impact of the one for five consolidation
of the Common Stock which was effective June 29, 1998.
</FN>
As of March 29, 1999, the high and low bids with respect to the price of
the Common Stock were $1.188 and $1.125, 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, 1998, there were 2,777 holders of record of the Common
Stock, of whom 2,701 were United States shareholders holding a total of
1,935,495 shares representing approximately 88.63 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
11
<PAGE> 14
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Report.
<TABLE>
Year Ended December 31,
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: 1998 1997 1996(1) 1995 1994
---- ---- ------- ---- ----
Gross Revenues $ 5,943,921 $ 4,846,157 $ 2,147,606 $ 2,052,222 $ 2,458,835
Direct Expenses 5,201,340 4,156,795 1,437,958 1,660,043 1,156,648
Operating Income (loss) (1,550,102) (1,708,411) (742,107) (1,437,437) (173,335)
Income (loss) From Continuing
Operations (1,550,102) (1,708,411) (733,973) (1,440,003) (174,832)
Per Share Income (Loss from
Continuing Oper.)(2) ($0.77) ($0.93) ($0.46) ($0.95) ($0.10)
CASH FLOW DATA:
Capital Expenditures 790,492 682,775 473,325 197,354 3,781,088
BALANCE SHEET DATA:
Working Capital (3,605,450) (1,478,498) (527,308) (692,600) 226,174
Property & Equipment, net 17,690,553 17,136,154 17,646,004 15,657,153 15,678,048
Total Assets 20,488,132 21,262,670 20,882,719 18,220,555 18,701,045
Current Maturities of Long-Term Debt 1,167,962 652,071 399,889 218,458 86,304
Long-Term Debt 2,736,051 3,263,209 3,561,254 913,986 849,025
Stockholders' Investment 12,704,832 14,017,795 15,292,247 15,573,940 16,730,196
</TABLE>
[FN]
_____________________
(1) Financial data for 1996 reflects the acquisition of Red River Hardwoods,
Inc. by the Company.
(2) Restated to reflect one for five reverse stock split.
</FN>
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. Statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are not
historical facts, may be forward-looking statements. Reliance upon such
information involves risks and uncertainties, including those created by general
market conditions, competition and the possibility that events may occur which
could limit the ability of the Company to maintain or improve its operating
results or execute its primary growth strategy. Although management believes
that the assumptions underlying the forward-looking statements are reasonable,
any of the assumptions could be inaccurate, and there can be no assurances that
the forward-looking statements included herein will prove to be accurate. The
inclusion of such information should not be regarded as a representation by
management or any other person that the objectives and plans of the Company will
be achieved. Moreover, such forward-looking statements are subject to certain
risks and uncertainties which could cause actual results to differ materially
from those projected. Readers are cautioned not to place undue reliance on these
forward-looking statements.
Daugherty Resources, Inc., formerly Alaska Apollo Resources Inc., (the
"Company" or the "Registrant") is a diversified natural resources company with
assets in oil and gas, wood products, manufacturing, and gold prospects.
Originally formed in 1979 to develop gold properties, the Company in the fourth
quarter of 1993, acquired its wholly owned subsidiary, Daugherty Petroleum, Inc.
The purchase of Daugherty Petroleum, Inc. and the subsequent purchase of 80
percent of Red River Hardwoods, Inc. in the fourth quarter of 1996 have given
the Company a diversified revenue and asset base that is primarily located in
Appalachia.
FISCAL 1998 - 1997
Since acquiring Daugherty Petroleum, Inc., the Company has increased its
reserves through the acquisition of oil and gas properties in the Appalachian
and Illinois Basins, and the drilling of wells through joint venture and turnkey
drilling programs, where Daugherty Petroleum, Inc. is the primary decision
maker. The Company continues to aggressively seek acquisitions and drilling
programs.
At the Annual General Meeting held on June 22, 1998, shareholders approved
special resolutions, effective June 29, 1998, including one that changed the
Company's name from Alaska Apollo Resources Inc. to Daugherty
12
<PAGE> 15
Resources, Inc., a name that management believes more closely represents the
Company's current revenue generating activities. Further, special resolutions
were approved that increased the Company's capital structure as follows:
-- The Company's authorized common shares were increased from 20,000,000
common shares without par value, of which 10,141,331 are issued, to
50,000,000 common shares without par value, of which 10,141,331 will
be issued;
-- The Memorandum of the Company was altered so that the authorized
capital was increased by creating 6,000,000 preferred shares without
par value;
-- Special rights and restrictions were attached to the common shares and
preferred shares; and
-- The 50,000,000 common shares and 6,000,000 preferred shares were
consolidated by a one for five reverse stock split, resulting in the
authorized capital of the Company being 11,200,000 shares, divided
into 10,000,000 common shares without par value, with 2,028,266 common
shares issued and outstanding and 1,200,000 preferred shares without
par value.
The issuance of preferred stock by the Company will allow the planned
acquisition of certain operating wells in Kentucky, Louisiana and Tennessee.
Management believes this acquisition will close in the second quarter of 1999.
In addition, the Company has signed a program agreement to drill 100 wells in
southeastern Kentucky, in which the Company will retain from 15 percent to 50
percent working interests.
Red River Hardwoods, Inc. has continued to diversify the Company by adding
lumber activities. Since its acquisition by the Company, Red River Hardwoods
has experienced increased revenues that are reflected on the consolidated
financial statement. Management has initiated a change in Red River's product
mix from primarily oak furniture to poplar mouldings and furniture parts.
Poplar, a predominant species in eastern Kentucky, has increasingly become a
substitute for western pine in the wood products industry. With its close
proximity to significant supplies of poplar, Red River will continue to
manufacture good quality, price-competitive products.
Along with revenues from Red River's operations, the Company continues its
tradition of realizing revenues from its oil and gas operations. For the year
ending December 31, 1998, the Company drilled 14 natural gas wells.
Additionally, the Company extended its gas gathering system located in Knox
County, Kentucky by 27,500 feet. By comparison, for the same period of 1997,
the Company drilled 12 natural gas wells. Drilling operations for 1998 were
primarily related to a joint venture on the Company's farmout acreage acquired
from Equitable Resources Energy Corporation.
For the year ending December 31, 1998, the Company's gross revenues
increased $1,097,764 to $5,943,921 from $4,846,157 for the same period in 1998.
The Company experienced a net loss of $1,568,348 in 1998 compared to a net loss
of $1,708,418 in 1997.
The Company's gross revenues were derived from drilling contract revenues
of $1,879,980 (30 percent) from natural gas and oil operations and production
revenues of $483,728 (eight percent) and lumber sales and product manufacturing
revenues of $3,580,240 (60 percent).
The increase in gross revenues of $1,097,764 was primarily attributable to
the increased drilling activities during the year. Contract revenues from
drilling activities increased by $763,090 from $1,116,890 in 1997 to $1,879,980
in 1998. Manufacturing revenues related to Red River Hardwoods increased by
$249,291 from $3,330,949 in 1997 to $3,580,240 in 1998.
During 1998, total direct costs increased by $1,044,545 to $5,201,340
compared to $4,156,795 in 1997. These direct costs included Red River
Hardwoods' expenses and drilling costs for 14 natural gas wells.
The Company believes there are several factors that will increase revenues
for 1999. First, the Company will receive additional revenues from the pending
acquisition of oil and gas properties. Second, the natural gas gathering
13
<PAGE> 16
system expansion planned for 1999 will dramatically increase Daugherty
Petroleum's ability to transport natural gas to the market. Third, the
commencement of drilling on the 100 well drilling contract should positively
impact earnings for 1999. Furthermore, the increased manufacturing orders at
Red River Hardwoods, Inc. should dramatically affect that subsidiary's revenues.
FISCAL 1997 - 1996
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 activities increased
by $89,239 from $1,027,651 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.
LIQUIDITY
The Company continues to acquire natural gas and oil properties. During
1998, management continued to invest in areas it deemed crucial in developing an
infrastructure suitable to support 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.
Historically, the Company's revenues have been from its interests in the
producing natural gas and oil wells, from its activities as "turnkey driller"
and operator for various drilling programs in its geographic area, and sales of
wood products. Daugherty Petroleum, Inc. has reduced its dependence on
activities as "turnkey driller" for private investors and instead concentrated
on joint ventures with industry partners. During 1998, approximately 32 percent
of the Company's revenues were derived from joint venture drilling. Natural gas
and oil operations and revenues accounted for eight percent of the revenues.
Manufacturing sales related to Red River accounted for 60 percent of the
revenues.
The Company plans to drill 36 wells during 1999 and will attempt to earn
interests ranging from 12.5 percent to 50 percent interest in each well it
drills.
Working capital for the year ending December 31, 1998, was a negative
$3,605,450 compared to December 31, 1997, when working capital was a negative
$1,478,498.
During 1998, and compared to 1997, the changes in the composition of the
Company's current assets were: cash balances decreased $549,274 from $1,077,940
to $528,666; accounts receivable balances decreased $82,226 from $493,722 to
$411,496; and inventories decreased $245,676 from $678,144 to $432,468. Other
current assets such as prepaids and notes receivable decreased $167,821 from
$226,282 to $58,461. Overall, current assets decreased by $1,044,997 to
$1,431,091.
14
<PAGE> 17
Current liabilities for the year ended December 31, 1998, were $5,036,541
compared to $3,635,344 for the year ended December 31 1997. Short term bank
loans accounted for $869,507 of the increase and the current portion of long
term debt accounted for $515,891 of the increase.
While management believes that its cash flow resulting in operating
revenues will contribute significantly to its short-term financial commitments
and operating costs, it has continued to refine its long range strategy to meet
the Company's financial obligations. This strategy involves:
- Acquisition of Revenue-Producing Properties. In November 1997, Daugherty
Petroleum signed a Letter of Intent to acquire producing oil and gas
properties in Kentucky, Louisiana and Tennessee. Management believes
that the addition of these properties will favorably impact the
Company's cash flow. Daugherty Petroleum is continually reviewing
existing properties in its area of interest that are for sale.
- Acquiring a Line of Credit. The Company currently has a $1,000,000 line
of credit from Compass Bank of Houston, Texas. In order to take
advantage of acquisitions and additional drilling opportunities,
Daugherty Resources, Inc. will attempt to increase its line of credit.
- Installation of Additional Natural Gas Gathering System. The Company
plans to expand its natural gas pipeline by 40,000 feet in 1999. The
extension will allow for substantially more natural gas to be
transported to market from wells drilled in 1997 and 1998.
- Additional Funding for Red River Hardwoods, Inc. The Company is seeking
additional capital for Red River Hardwoods, Inc. that will allow it to
increase its inventory, which would permit Red River to operate at a
more efficient capacity, and thereby increase its revenues.
Y2K INFORMATION
The Company's field and administrative operations have been reviewed for
Year 2000 compliance. The normal upgrades will result in its essential
operations being Year 2000 compliant. Some remaining operations, such as
non-essential personal computers and non-financial software products, can be
easily upgraded at nominal costs and inconvenience. The Company has contacted
its gas purchaser and third party software and service vendors concerning Year
2000. Those third parties not already compliant have indicated that they are
working to be compliant. The Company will be preparing contingency plans
regarding those third parties that do not currently meet Year 2000 compliance.
Costs incurred to date, future costs, implementation of contingency plans and
completion of modifications or replacements have not been and are not expected
to be material or pose a material risk.
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 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 other, 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 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.
15
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 appears on pages I through XXI of
this Report, and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 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.
<TABLE>
<CAPTION>
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
William S. Daugherty 44 Chairman of the Board, September 1993
President and Chief
Executive Officer
James K. Klyman 44 Director May 1992
Charles L. Cotterell 74 Director June 1994
D. Michael Wallen 44 Vice President and N/A
Secretary
</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 44, 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, the Kentucky Independent Petroleum
Producers Association, and also serves as the Governor's Official Representative
to the Interstate Oil and Gas Compact Commission. Mr. Daugherty holds a B. S.
Degree from Berea College, Berea, Kentucky.
James K. Klyman, age 44, has been a director since May 1992. For the past
seven years Mr. Klyman has been a computer software designer and programmer
specializing in applied information technology.
Charles L. Cotterell, age 74, 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,
particularly in Kentucky. He is a Vice President of Konal Engineering Co., Ltd.,
is a past director of Mariner Mines, Ltd., Nordustrial, 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 44, 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. Mr. Wallen holds a B. S. Degree from Morehead
State University, Morehead, Kentucky.
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
16
<PAGE> 19
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, 1998, 1997 and
1996 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, 1998, whose total
annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- -----------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS #
- --------------------------- ---- ------ --------- ---------
<S> <C> <C> <C> <C>
William S. Daugherty 1998 $75,000 $12,500(1) -0-
Chairman and President 1997 75,000 12,500(2) 400,000(3)
1996 86,538 -0- 40,000(4)
</TABLE>
___________
(1) The bonus was in the form of 12,500 shares of the Common Stock valued at
$1.00(U.S.) per share.
(2) 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.
(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 $1.546875 (U.S.) per share after giving effect to the one
for five consolidation of Common Shares that was effective June 29, 1998.
The options vest over a five year period with 71,111 vesting during 1997
through 2001 and 44,445 vesting in 2002. 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 $5.00 (U.S.) per share after giving effect to the one
for five consolidation of Common Shares that was effective June 29, 1998.
The options vest over a four year period and expire five years from the
date of vesting. Vesting is subject to Mr. Daugherty's continued
employment.
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 $50,000 or 10 percent of such
officer's salary and bonus.
STOCK OPTIONS
No stock options were granted by the Company during 1998. The following
table shows the number of shares of the Common Stock underlying all exercisable
and non-exercisable stock options held by William S. Daugherty as of December
31, 1998.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
------------------------------ ---------------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
William S.
Daugherty 252,222/267,778 -0-
</TABLE>
___________
(1) The closing market price for the shares of Common Stock at December 31,
1998, was $0.50. None of the options granted to Mr. Daugherty were
in-the-money as of the end of the fiscal year 1998.
The following is a summary of options which have been granted by the
Company to William S. Daugherty during the course of his employment. In all
instances the number of shares have been reduced and the exercise price
increased to reflect the effect of the one for five consolidation of the Common
Stock which was effective June 29, 1998.
Mr. Daugherty received options to purchase 40,000 shares of the Common
Stock in 1994 exercisable at $9.50 per share in increments of 10,000 shares each
on December 10, 1994, 1995, 1996, and 1997. These options expired December 10,
1998. In February 1995, the Board of Directors of the Company authorized the
granting of incentive stock options covering 40,000 shares of the Common Stock
for Mr. Daugherty vesting and exercisable in 10,000 share
17
<PAGE> 20
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 40,000 shares of the Common Stock for
Mr. Daugherty vesting and exercisable in 10,000 share increments on December 27,
1995, 1996, 1997, and 1998. All options authorized in favor of Mr. Daugherty in
1995 are exercisable at $5.00 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 40,000 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 400,000 shares of the Common Stock exercisable at $1.546875
per share. Options for 71,111 shares vested on March 7, 1997, with 71,111
shares vesting on January 1, 1998, 1999, 2000, and 2001, and the remaining
44,445 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 shares of the Common Stock registered pursuant to
Form S-8 promulgated by the Commission. 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 1998:
Charles L. Cotterell and James Klyman (formerly Klyman-Mowczan) each received
2,000 shares of the Common Stock valued at $1.00 (U.S.) per share.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END (#) OPTIONS AT FISCAL YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------------------------ ---------------------------------
<S> <C> <C>
James K. Klyman 6,000/0 -0-
Charles L. Cotterell 6,000/0 -0-
<FN>
__________
(1) The market price for the shares of the Common Stock at December 31, 1998,
was below the option price for each share of the Common Stock.
</FN>
</TABLE>
The following is a summary of options which have been granted by the
Company to the non-employee directors during the course of their respective
tenures. In all instances the number of shares have been reduced and the
exercise price increased to reflect the effect of the one for five consolidation
of the Common Stock which was effective June 29, 1998.
In 1993, Mr. Klyman was granted options to purchase 2,000 shares of the
Common Stock exercisable at $9.50 per share that expired December 10, 1998. On
June 15, 1994, the Board of Directors approved the reduction of the exercise
price of these options to $5.00. On June 15, 1994, Mr. Cotterell was granted an
option to purchase 2,000 shares of the Common Stock in 1994 exercisable at $5.00
per share that expired December 10, 1998. On February 27, 1995, the Board of
Directors approved the grant of options to Messrs. Klyman and Cotterell to
purchase 2,000 shares of the Common Stock each exercisable at $5.00 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 2,000
shares of the Common Stock each exercisable at $5.00 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 2,000 shares of the Common
stock each exercisable at $3.25 (U.S.) per share and expiring June 24, 2002.
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, 1999, 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.
18
<PAGE> 21
<TABLE>
<CAPTION>
SHARES OWNED PERCENT
TITLE OF CLASS BENEFICIAL OWNER BENEFICIALLY OF CLASS
- -------------- ---------------- ------------ --------
<S> <C> <C> <C>
Common Stock William S. Daugherty 624,633 (1) 24.7
121 Prosperous Place, Suite 201
Lexington, Kentucky 40509
Trio Growth Trust 400,000 (2) 15.5
18 York Valley Crescent
Willowdale, Ontario M2P 1A7
GraceChurch Securities Ltd. 160,600 7.4
21 Abbotsbury House, Abbotsbury Road
London W14 8EN, England
Alaska Investments Limited 202,669 9.3
Ospery House, 5 Old Street
St. Helier, Jersey, Channel Islands, U.K.
Exergon Capital S.A. 200,000 (3) 8.8
Dufourstrasse 101
Zurich 8008, Switzerland
Charles L. Cotterell 19,540 (4) *
James K. Klyman 6,000 (5) *
Environmental Energy, Inc. 440,000 (6) 17.0
8001 Irvine Center Drive
Suite 1040
Irvine, California 92618
Directors and executive officers as a group 718,273 (7) 27.8
<FN>
__________
* Represents ownership of less than one percent.
(1) Includes 277,500 shares of the Common Stock, warrants to purchase 23,800 shares of the Common Stock and options to acquire
323,333 shares of the Common Stock which are currently exercisable.
(2) Consists of warrants to purchase 400,000 shares of the Common Stock which are currently exercisable.
(3) Includes 100,000 shares of the Common Stock and warrants to purchase 100,000 shares of the Common Stock which are currently
exercisable.
(4) Includes 13,540 shares of the Common stock and options to purchase 6,000 shares of the Common Stock which are currently
exercisable.
(5) Consists of options to purchase 6,000 shares of the Common Stock which are currently exercisable.
(6) Includes 40,000 shares of the Common Stock and options to purchase 400,000 shares of the Common Stock which are currently
exercisable.
(7) Includes 314,140 shares of the Common Stock, options to purchase 380,333 shares of the Common Stock which are currently
exercisable, and warrants to purchase 23,800 shares of the Common Stock which are currently exercisable.
</FN>
</TABLE>
19
<PAGE> 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF DIRECTORS, OFFICERS AND EMPLOYEES
As of March 31, 1999, 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
$158,603.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LARGEST AMOUNT
NAME AND INVOLVEMENT OF OUTSTANDING DURING AMOUNT OUTSTANDING
PRINCIPAL POSITION ISSUER OR SUBSIDIARY LAST COMPLETED FISCAL YEAR AS OF MARCH 31, 1999
- ------------------ -------------------- -------------------------- --------------------
William S. Daugherty(1) Lender $33,500 $59,750
President and Chief
Executive Officer
</TABLE>
[FN]
_____________
(1) The indebtedness of Mr. Daugherty consists primarily of two promissory
notes in the principal amount of $26,250 and $21,600, dated January 1,
1999, and January 1, 1998, bearing interest at the rate of six percent per
annum. The notes are secured by Mr. Daugherty's interest in oil and gas
partnerships sponsored by the Company's subsidiary, Daugherty Petroleum.
Inc.
</FN>
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, 1999. This indebtedness is secured by the assets of Niagara Oil,
Inc., as well as the corporate guarantee of Daugherty Petroleum, Inc.
On October 30, 1995, Trio Growth Trust, an Ontario trust, loaned the
Company's subsidiary, Daugherty Petroleum, Inc., the sum of $130,000. The
indebtedness bears interest at the rate of 10 percent per annum and is due and
payable in full on June 30, 2001. On February 6, 1996, Trio Growth Trust loaned
Daugherty Petroleum, Inc. an additional $320,000 bearing interest at the rate of
10 percent per annum and is due and payable in full on June 30, 2001. The loans
were in conjunction with the acquisition by Daugherty Petroleum, Inc. of Red
River Hardwoods, Inc. and are secured by certain inventory and accounts
receivable of Red River Hardwoods, 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 300,000 shares of the Common Stock, such warrants having an exercise
price of $0.625 per share (after adjustment for the one for five consolidation
effective June 29, 1999) pursuant to a Warrant Agreement dated March 7, 1997,
between the Company and Trio Growth Trust. As a result of the underwriting
agreement, and its ownership of other warrants for the purchase of 100,000
shares of the Common Stock, Trio Growth Trust is the beneficial owner of 15.5
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 100,000 shares of
the Common Stock, such warrants having an exercise price of $0.625 per share
(after adjustment for the one for five consolidation effective June 29, 1999)
pursuant to a Warrant Agreement dated March 7, 1997, between the Company and
Exergon Capital S.A. Due to the Warrant Agreement and its ownership of 100,000
shares of the Common Stock, Exergon Capital S.A. is the beneficial owner of 8.8
percent of the Common Stock of the Company.
20
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed with this Report.
<TABLE>
Page
----
<S> <C>
(1) Financial statements, Daugherty Resources, Inc. and
subsidiary companies-
Cover Page 24
Table of Contents 25
Report of Kraft, Rothman, Berger, Grill, Schwartz &
Cohen, independent chartered accountants, dated
March 9, 1999 I
Balance Sheet-December 31, 1998 II
Statement of Deficit for the year ended
December 31, 1998 IV
Statement of Loss for the year ended
December 31, 1998 V
Statement of Cash Flow for the year ended
December 31, 1998 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.
<TABLE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<S> <C>
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).
3(e)* Special Resolution of Alaska Apollo Resources Inc., a British
Columbia corporation, dated June 22, 1998, changing the name of
Alaska Apollo Resources Inc. to Daugherty Resources, Inc., and
further changing the authorized capital of the Registrant from
20,000,000 shares of common stock, without par value per share,
to 50,000,000 shares of common stock, without par value per
share, and authorizing the creation of 6,000,000 shares of
preferred stock, without par value per share. Altered Memo-
</TABLE>
21
<PAGE> 24
randum of Daugherty Resources, Inc., a British Columbia
corporation, dated June 24, 1998, changing the authorized
common stock of the Registrant from 50,000,000 shares of
common stock, without par value per share, to 10,000,000
shares of common stock, without par value per share. Special
Resolution of Alaska Apollo Resources Inc., a British Columbia
corporation, dated June 22, 1998, consolidating the authorized
preferred shares of 6,000,000 shares to 1,200,000 shares.
Altered Memorandum of Daugherty Resources, Inc., a British
Columbia corporation, dated June 25, 1998, changing the
authorized preferred stock of the Registrant from 6,000,000
shares of preferred stock, without par value per share, to
1,200,000 shares of preferred stock, without par value per
share. Filed as an exhibit to Form 8-K, for the Company for
reporting an event on June 29, 1998. (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).
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).
11 Statement of Earnings Per Share.
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.
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.
24 Powers of Attorney.
27 Financial Data Schedule.
22
<PAGE> 25
(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.
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.
Daugherty Resources, Inc.
By /s/ William S. Daugherty
--------------------------------------
William S. Daugherty,
Chairman of the Board
March 31, 1999
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>
William S. Daugherty Chairman of the Board, President, March 31, 1999
- ------------------------- Director of the Registrant
WILLIAM S. DAUGHERTY
James K. Klyman* Director of the Registrant March 31, 1999
- -------------------------
JAMES K. KLYMAN
Charles L. Cotterell* Director of the Registrant March 31, 1999
- -------------------------
CHARLES L. COTTERELL
*By /s/ William S. Daugherty March 31, 1999
-------------------------
William S. Daugherty,
Attorney-in-Fact
</TABLE>
23
<PAGE> 26
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1998
24
<PAGE> 27
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
DECEMBER 31, 1998
CONTENTS
PAGE
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-XXI
25
<PAGE> 28
PAGE I
AUDITORS' REPORT
To The Shareholders Of
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
We have audited the consolidated balance sheets of DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.) as at December 31, 1998 and 1997 and the
consolidated statements of deficit, loss and cash flow for the three years ended
December 31, 1998. 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, 1998
and 1997 and the results of its operations and cash flow for the three years
ended December 31, 1998 in accordance with generally accepted accounting
principles in Canada.
/s/ Kraft, Rothman, Berger, Grill, Schwartz & Cohen Llp
KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 9, 1999
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 9,
1999, 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.
/s/ Kraft, Rothman, Berger, Grill, Schwartz & Cohen Llp
KRAFT, ROTHMAN, BERGER, GRILL, SCHWARTZ & COHEN LLP
CHARTERED ACCOUNTANTS
Toronto, Ontario
March 9, 1999
<PAGE> 29
PAGE II
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1998
ASSETS
<TABLE>
<CAPTION>
1998 1997
----------- ------------
CURRENT
<S> <C> <C>
Cash $ 528,666 $ 1,077,940
Accounts receivable (net of allowance for doubtful accounts of nil;
1997 - $14,637) 411,496 493,722
Inventories (Note 3) 432,468 678,144
Prepaid expense 51,277 226,282
Loans to related parties (Note 7) 7,184 -
----------- ------------
1,431,091 2,476,088
BONDS AND DEPOSITS 54,224 54,224
MINING PROPERTY AND RELATED EXPENDITURES (Note 4) 11,232,229 11,232,229
OIL AND GAS PROPERTIES - net (Note 5) 4,651,103 4,138,984
CAPITAL (Note 6) 1,807,221 1,932,824
LOANS TO RELATED PARTIES (Note 7) 105,031 26,632
INVESTMENT (Note 8) 127,260 92,246
OTHER ASSET - 19,003
GOODWILL (net of accumulated amortization $1,005,693; 1997 - $795,226) 1,079,973 1,290,440
----------- ------------
$20,488,132 $21,262,670
=========== ============
</TABLE>
See accompanying notes to financial statements.
APPROVED ON BEHALF OF THE BOARD:
/s/ William S. Daugherty /s/ Charles L. Cotterell
- ------------------------------------ ------------------------------------
Director Director
<PAGE> 30
PAGE III
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
(INCORPORATED UNDER THE COMPANY ACT OF BRITISH COLUMBIA)
CONSOLIDATED BALANCE SHEET
(U.S. FUNDS)
DECEMBER 31, 1998
LIABILITIES
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT
Bank loans (Note 9) $ 914,007 $ 44,500
Accounts payable 1,161,422 1,153,470
Accrued liabilities 851,130 360,396
Customers' drilling deposits 922,510 1,403,307
Long-term debt (Note 10) 1,167,962 652,071
Loan payable (Note 11) 19,510 21,600
----------- -----------
5,036,541 3,635,344
LOAN PAYABLE (Note 11) 10,708 26,323
LONG-TERM DEBT (Note 10) 2,736,051 3,582,451
NON-CONTROLLING INTEREST - 757
----------- -----------
7,783,300 7,244,875
----------- -----------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 12)
AUTHORIZED
1,200,000 Preferred shares
10,000,000 Common shares
ISSUED
2,183,783 Common shares (1997 - 1,964,351) 21,209,821 20,954,436
DEFICIT (8,504,989) (6,936,641)
----------- -----------
12,704,832 14,017,795
----------- -----------
$20,488,132 $21,262,670
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 31
PAGE IV
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
CONSOLIDATED STATEMENT OF DEFICIT
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DEFICIT, beginning of year, as previously reported $(6,936,641) $(5,050,087) $(4,494,250)
Prior period adjustment - (178,136) -
----------- ----------- -----------
DEFICIT, beginning of year, as restated (6,936,641) (5,228,223) (4,494,250)
Net loss for the year (1,568,348) (1,708,418) (733,973)
----------- ----------- -----------
DEFICIT, end of year $(8,504,989) $(6,936,641) $(5,228,223)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 32
PAGE V
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
CONSOLIDATED STATEMENT OF LOSS
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
GROSS REVENUE $ 5,943,921 $ 4,846,157 $ 2,147,606
DIRECT EXPENSES 5,201,340 4,156,795 1,437,958
----------- ----------- -----------
742,581 689,362 709,648
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE COSTS
Salaries 463,643 358,134 267,527
Interest on long-term debt 334,811 294,836 182,972
Office and general 223,906 111,355 104,504
Amortization - goodwill 210,467 210,467 182,108
- capital assets 198,029 191,991 57,549
- oil and gas equipment 9,877 26,865 12,309
Depletion - oil and gas properties 180,633 146,212 132,425
Bad debts 171,146 25,484 91,276
Consulting and management fees 141,892 276,204 81,691
Legal fees 111,375 165,220 129,215
Audit and accounting 100,289 75,920 118,087
Advertising and promotion 74,476 96,876 51,622
Shareholders' information 58,363 68,314 88,333
Rent 53,600 30,697 33,012
Property and payroll taxes 48,291 33,875 21,002
Insurance 41,396 86,124 46,195
Repairs and maintenance 8,621 8,827 5,648
Trust and stock exchange company fees 4,740 2,867 8,997
Engineering - - 2,523
----------- ----------- -----------
2,435,555 2,210,268 1,616,995
----------- ----------- -----------
Less: Interest and other income 29,653 11,669 47,951
Miscellaneous 113,219 11,504 35,569
Gain on sale of subsidiary - - 65,271
Gain (loss) on sale of capital assets - (210,685) 16,449
----------- ----------- -----------
142,872 (187,512) 165,240
----------- ----------- -----------
2,292,683 2,397,780 1,451,755
LOSS BEFORE THE FOLLOWING (1,550,102) (1,708,418) (742,107)
Deferred income taxes recovered - - (8,891)
----------- ----------- -----------
LOSS BEFORE THE UNDERNOTED (1,550,102) (1,708,418) (733,216)
Non-controlling interest (18,246) - (757)
----------- ----------- -----------
NET LOSS FOR THE YEAR (1,568,348) (1,708,418) (733,973)
=========== =========== ===========
NET LOSS PER SHARE (Note 14) $(0.77) $(0.93) $(0.46)
====== ====== ======
</TABLE>
See accompanying notes to financial statements.
<PAGE> 33
PAGE VI
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
CONSOLIDATED STATEMENT OF CASH FLOW
(U.S. FUNDS)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the year $(1,568,348) $(1,708,418) $ (33,973)
Amortization and depletion 599,006 575,535 384,391
Deferred income taxes recovered - - (8,891)
(Gain) loss on sale of assets 3,034 210,685 (134,345)
Non-controlling interest 18,246 - 757
(Increase) decrease in prepaid expenses and other asset 175,005 (181,883) 49,480
Decrease in accounts receivable 82,226 198,606 210,124
(Increase) decrease in inventories 245,676 (97,829) (37,790)
Prior period adjustment - (178,136) -
Decrease in bonds and deposits - 3,419 500
Increase (decrease) in accounts payable 7,952 269,432 (160,450)
Increase (decrease) in accrued liabilities 490,734 (221,242) 18,654
Customers' drilling deposits (480,797) 1,403,307 -
---------- ----------- ----------
(427,266) 273,476 (411,543)
---------- ----------- ----------
FINANCING ACTIVITIES
Bank loans 869,507 (12,500) (97,207)
Issue of capital stock 255,385 433,966 327,280
(Increase) decrease in loans to related parties (85,583) 13,880 (22,956)
Decease in notes receivable - 11,238 280,584
Proceeds from capital stock subscribed - - 125,000
Increase (decrease) in loan payable (17,705) (5,348) 53,271
Increase (decrease) of long-term debt (330,509) 273,379 351,006
---------- ----------- ----------
691,095 714,615 1,016,978
---------- ----------- ----------
INVESTING ACTIVITIES
Proceeds from sale of assets 12,404 593,717 324,394
Investment in Red River Hardwoods Inc. - - (220,090)
Increase in mining property - (982) (19,785)
Purchase of capital assets (87,865) (54,918) (11,967)
Investment (35,014) (92,246) -
Additions to oil and gas properties, net (702,628) (626,812) (545,877)
---------- ----------- ----------
(813,103) (181,241) (473,325)
---------- ----------- ----------
CHANGE IN CASH (549,274) 806,850 132,110
CASH, beginning of year 1,077,940 271,090 138,980
---------- ----------- ----------
CASH, end of year $ 528,666 $ 1,077,940 $ 271,090
========== =========== ==========
SUPPLEMENTAL DISCLOSURE
Interest paid during the year $ 301,163 $ 275,241 $ 186,959
========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 34
PAGE VII
DAUGHERTY RESOURCES INC.
(FORMERLY ALASKA APOLLO RESOURCES INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. FUNDS)
DECEMBER 31, 1998
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's mining properties are in the development stage
and all costs relating to mining properties by project area
are deferred 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 follows the successful effort method of
accounting. Accordingly, property acquisition costs,
costs of successful exploration wells and development
costs and the cost of support equipment and
facilities are capitalized. Costs of unsuccessful
exploratory wells are expensed when determined to be
non-productive. The costs associated with drilling
and equipping wells not yet completed are capitalized
as uncompleted wells, equipment and facilities.
Production costs, overhead and all exploration costs,
other than costs of exploratory drilling, are charged
to expense as incurred.
Depletion on developed properties is computed using
the units-of-production method, using the reserves
underlying the proved developed oil and gas
properties.
The company assesses impairment of oil and gas
properties to the extent that the aggregate net value
of oil and gas properties exceeds the future net
revenues relating to oil and gas reserves.
Significant estimates by the company's management are
involved in determining oil and gas reserve volumes
and values. Such estimates are primary factors in
determining the amount of depletion expense and
whether or not oil and gas properties are impaired.
(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.
(iii) WELLS AND RELATED EQUIPMENT
Wells and related equipment are recorded at cost and
are amortized using the units-of-production method,
using the reserves underlying the proved developed
oil and gas properties.
<PAGE> 36
PAGE IX
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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) INVESTMENT
Investment in a 50% owned limited liability company is
accounted for on the equity method of accounting.
(i) FUTURE INCOME TAXES
In fiscal 1998, the company adopted the asset and liability
method, required by the Canadian Institute of Chartered
Accountants (CICA) Handbook section 3465, to provide for
income taxes on all transactions recorded in the financial
statements. The asset and liability method requires that
income taxes reflect the expected future tax consequences of
temporary differences between the carrying amounts of assets
or liabilities and their tax bases. Future income tax assets
and liabilities are determined for each temporary difference
based on the tax rates which are expected to be in effect when
the underlying items of income and expense are expected to be
realized. There was no material impact of the financial
statements from the retroactive application of the new
standard.
(j) 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.
<PAGE> 37
PAGE X
2. ACQUISITION AND DISPOSITION (Continued)
RED RIVER HARDWOODS INC. ("RRH") (Continued)
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.
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 1999.
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>
1998 1997
-------- --------
<S> <C> <C>
Raw materials - Green Lumber $ 51,843 $ 26,605
- Kiln Dried Lumber 56,391 152,937
Supplies 13,653 12,600
Work in process 264,064 295,482
Finished goods 46,517 190,520
-------- --------
$432,468 $678,144
======== ========
</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, 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
1998 additions - - - -
---------- --------- ------- ----------
Balance, December 31, 1998 $1,010,000 9,445,168 777,061 11,232,229
========== ========= ======= ==========
</TABLE>
5. OIL AND GAS PROPERTIES
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ----------
ACCUMULATED
COST AMORTIZATION NET NET
---- ------------ --- ---
<S> <C> <C> <C> <C>
Proved properties $4,990,465 $564,692 $4,425,773 $3,979,908
Wells and related equipment 289,968 64,638 225,330 159,076
---------- --------- ------- ----------
$5,280,433 $629,330 $4,651,103 $4,138,984
========== ======== ========== ==========
</TABLE>
<PAGE> 39
PAGE XII
6. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ----
ACCUMULATED
COST AMORTIZATION NET NET
---- ------------ --- ---
<S> <C> <C> <C> <C>
Land $ 113,801 $ - $ 113,801 $ 113,801
Buildings 923,521 50,904 872,617 919,455
Machinery and equipment 889,313 276,479 612,834 719,368
Office furniture, fixtures and equipment 103,063 61,691 41,372 42,779
Vehicles 158,037 68,166 89,871 53,666
Equipment under capital lease 91,369 14,643 76,726 83,755
---------- --------- ---------- ----------
$2,279,104 $ 471,883 $1,807,221 $1,932,824
========== ========= ========== ==========
</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. LOANS TO RELATED PARTIES
The loan to related parties represent loans receivable from officers of
the company bearing interest at 6% per annum and are payable monthly
from production revenues for a period of five years with a balloon
payment at maturity date. These are collateralized by the officers'
ownership interest in drilling partnerships with DPI.
8. INVESTMENT
DPI's 80% owned subsidiary acquired a 50% interest in a Kentucky
limited liability company. The investment is accounted for on the
equity method.
9. BANK LOANS
The revolving bank loan facility with a balance of $772,177 is payable,
interest only, at prime plus 1% per annum (8.75% at December 31, 1998),
is secured by a first mortgage on producing gas interests. The facility
will expire in September 1999 at which time the oil and gas reserves
that are used as collateral will be evaluated.
The loan of $134,830 is payable, interest only, at 7.28% per annum,
matures on January 15, 1999 and is collateralized by a certificate of
deposit.
The loan of $7,000 bears interest at 8.5% per annum, matures on March
23, 1999 and is collateralized by a certificate of deposit.
<PAGE> 40
PAGE XIII
10. 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, 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 $534,818 and
has not been discounted.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Note payable as outlined above $ 534,818 $ 570,818
Mortgage notes bearing interest from 8% to 9.5% per annum, secured by
first and second mortgages on real estate and certain equipment,
payable in total monthly instalments of
$12,253 with maturities from August 2002 to March 2013 1,002,194 1,032,575
Loans payable to various banks with interest rates ranging from 8.45%
to 11% per annum, payable in total monthly instalments totalling $4,508
with maturities from September 1, 2000 to
June 17, 2003, collateralized by receivables and various vehicles 105,593 123,056
Loan payable to Summit Funding, Inc., collateralized by production,
bearing interest at 9.25% per annum, payable in
monthly instalments of $5,252, maturing March 25, 2001 142,320 176,672
Unsecured loan payable to Trio Growth, bearing interest at 10%
per annum, principal and interest due June 30, 2001 450,000 450,000
Environmental Energy, unsecured and non-interest bearing 100,000 -
Loan payable to non-affiliated company, bearing interest at 10% per
annum, collateralized by the assets and the corporate guarantee of a
wholly-owned subsidiary, payable in quarterly payments of interest
only. Principal is due currently. 64,779 64,779
---------- ----------
Carried forward............ $2,399,704 $2,417,900
========== ==========
</TABLE>
<PAGE> 41
PAGE XIV
10. LONG-TERM DEBT (Continued)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Brought forward................ $2,399,704 $2,417,900
Unsecured loan payable to Ridgecrest Enterprises, Inc.
bearing interest at 6.27% per annum, payable in monthly
instalments of $1,771, maturing August 9, 2000 79,688 79,688
Line of credit in the amount of $251,230, bearing interest at 1% over
prime per annum, secured by accounts receivable, work
in process and inventory and is due November 1999 251,230 251,230
Instalment note, bearing interest at 5% per annum, secured by machinery
and equipment, monthly payment of principal and
interest of $8,147 through March 2004 480,995 510,745
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 100,605 124,235
RRH capital leases and capital investments payable monthly in amounts
of $1,941 and $340 through April 1999 and August 1999,
respectfully, with capital investment portion non-current 10,870 38,164
Unsecured payable to a vendor bearing interest at 7% per annum
maturing in 1999 228,642 214,366
Unsecured, non-interest baring note payable to a vendor which
matures in 1999 167,236 104,876
Pre-petition debt due in 1999 126,911 126,911
Loans from non-affiliated companies - 282,794
IRS note, interest at 8% per annum, monthly payment of $1,529
through May 2003 58,132 83,613
---------- ----------
3,904,013 4,234,522
Less: Current portion 1,167,962 652,071
---------- ----------
$2,736,051 $3,582,451
========== ==========
</TABLE>
<PAGE> 42
PAGE XV
10. LONG-TERM DEBT (Continued)
Principal repayments for the next five years are as follows:
<TABLE>
<S> <C>
1999 $1,167,962
2000 400,017
2001 712,947
2002 225,497
2003 192,908
Thereafter 1,204,682
----------
$3,904,013
==========
Interest expense for the year ended December 31, 1998 was $334,811
(1997 - $294,836). There was no interest capitalized during these
years.
11. 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.
12. CAPITAL STOCK
On June 22, 1998, the company's capital stock was amended as follows.
(i) The authorized capital stock was increased from 20,000,000
common shares, without par value, to 50,000,000 common shares,
without par value, which were then consolidated into
10,000,000 common shares, without par value.
(ii) Another class of capital stock was authorized by creating
6,000,000 preferred shares, which were then consolidated into
1,200,000 preferred shares. The preferred shares are
non-voting, non-cumulative and are convertible into common
shares, on a share for share basis, at any time within two
years of the date of issue of the preferred shares if certain
conditions are met.
(a) COMMON SHARES ISSUED
SHARES AMOUNT
--------- ----------
# $
<S> <C> <C>
Balance, December 31, 1996 1,700,991 20,395,470
Issued to employees as incentive bonuses 23,700 59,250
Issued for settlement of debt 239,660 499,716
--------- ----------
Balance, December 31, 1997 1,964,351 20,954,436
Issued to employees as incentive bonuses 65,500 65,500
Issued for settlement of debt 153,932 189,885
--------- ----------
Balance, December 31, 1998 2,183,783 21,209,821
========= ==========
</TABLE>
<PAGE> 43
PAGE XVI
12. CAPITAL STOCK (Continued)
(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, 1996 334,000 154,000 5.00-9.50 (i)
=======
1997 - granted 880,600 1.55-5.00 (ii)
- expired (46,600)
---------
Balance, December 31, 1997 1,168,000 754,111
=======
1998 - expired (66,000)
---------
Balance, December 31, 1998 1,102,000 819,222
========= =======
</TABLE>
(i) A total of 112,600 options expired during 1998 and
1997. The balance of 221,400 are exercisable at the
rate of 75,000 shares per year. The first block of
75,000 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 up to June 28, 2001.
(ii) 400,000 of these options were granted to
Environmental Energy Inc. (Note 21), exercisable
immediately at $5.00 per share and will expire in
November 2002. Another 400,000 options were granted
to the president of the company exercisable over a
period of six years commencing in 1998 at $1.55 per
share and will expire in March 2002. The balance of
80,600 options are exercisable immediately at $3.25
per share.
B. WARRANTS
<TABLE>
<CAPTION>
ISSUED PRICE EXPIRY
------ ----- ------
<S> <C> <C>
Balance, December 31, 1996 129,293 2.500 (i)
1997 - granted 500,000 0.625 (ii)
Balance, December 31, 1997 629,293
1998 - expired (5,333)
-------
Balance, December 31, 1998 623,960
=======
</TABLE>
<PAGE> 44
PAGE XVII
12. CAPITAL STOCK (Continued)
B. WARRANTS (Continued)
(i) 5,333 of these warrants expired on March 30, 1998,
100,000 warrants will expire on October 30, 2000 and
the balance on June 28, 2001.
(ii) These warrants expire on March 6, 2002.
13. INCOME TAXES
Income tax expense for the year ended December 31, 1998, consist of the
following components.
<TABLE>
<S> <C>
Current $ -
Deferred $ -
-----------
Total income tax expense $ -
===========
FUTURE INCOME TAX ASSETS
Net operating loss carry-forward $ 4,186,304
Investment tax credits $ 3,473
-----------
$ 4,189,777
Less: Valuation allowance $ 1,767,835
-----------
$ 2,421,942
===========
Future income tax liabilities $(2,421,924)
===========
NET DEFERRED TAX ASSETS $ -
===========
</TABLE>
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 2,035,188 (1997 - 1,831,926; 1996 - 1,610,168). Outstanding
stock options and warrants have no dilutive effect on the loss per
share.
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, 1998, the financial instruments with a carrying
value different from their fair value include the following.
<PAGE> 45
PAGE XVIII
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
<S> <C> <C>
Loan receivable from a related party $ 25,815 $ 18,702
Long-term debt 634,818 343,447
</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, 1998.
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, 1995. As at December 31, 1995, 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.
(c) OCCUPANCY COSTS
Occupancy costs include rent of approximately $15,600 (1997 -
$30,000) paid to a company which is 50% owned by a director
and an officer of this company. The lease expired July 1,
1998.
(d) INVESTMENT IN LLC
Red River Hardwoods, Inc. (RRH), a subsidiary of Daugherty
Petroleum, Inc., was a fifty percent (50%) member in
Appalachian Moulding & Millwork, LLC. (AMM). As of December
31, 1998, RRH owed AMM $210,687 for charges related to RRH's
use of AMM's finger jointer.
<PAGE> 46
PAGE XIX
17. SEGMENTED INFORMATION
<TABLE>
<CAPTION>
MINING
EXPLORATION OIL AND
AND GAS WOOD 1998 1997
DEVELOPMENT DEVELOPMENT PRODUCTS CORPORATE TOTAL TOTAL
----------- ----------- -------- --------- ----- -----
$ $ $ $ $ $
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Revenue (net) - 705,474 37,107 - 742,581 689,362
---------- --------- --------- --------- ---------- ----------
General corporate expenses - - - 1,364,674 1,364,674 1,527,409
Interest on long-term debt - 54,676 166,440 113,695 334,811 294,836
Amortization - equipment - 26,902 157,495 35,947 220,344 218,856
- goodwill - 189,460 21,007 - 210,467 210,467
Depletion - 180,633 - - 180,633 146,212
---------- --------- --------- --------- ---------- ----------
- 451,671 344,942 1,514,316 2,310,929 2,397,780
---------- --------- --------- --------- ---------- ----------
Income (loss) before income
taxes - 253,803 (307,835) (1,514,316) (1,568,348) (1,708,418)
========== ========= ========= ========== ========== ==========
Identifiable assets 11,227,733 4,348,721 2,571,760 2,339,918 20,488,132 21,262,270
========== ========= ========= ========= ========== ==========
<S> <C> <C> <C> <C> <C>
Capital expenditures - 702,628 20,218 67,646 790,492 682,775
========== ========= ========= ========= ========== ==========
</TABLE>
18. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES
(a) 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, 1997 and 1996, there would have
been no material effect on the company's financial position or
results of operations.
(b) 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.
<PAGE> 47
PAGE XX
18. RECONCILIATION OF DIFFERENCES BETWEEN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES IN CANADA AND IN THE UNITED STATES
(Continued)
(b) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES
REQUIRED UNDER SFAS 123
(Continued)
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.
No compensation expense has been charged to the consolidated
statement of loss for the plan for the years ended December
31, 1998, 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>
1998 1997 1996
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 (1,568,348) (1,590,539) (1,708,418) (1,797,064) (733,973) (733,973)
Net earnings (loss) per share
Basic (0.77) (0.78) (0.93) (0.98) (0.46) (0.46)
Weighted average fair value
of options granted during
this period 0.00 0.17 0.00 0.024 0.00 0.00
</TABLE>
(c) RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging
activities. SFAS 133 is effective for the company's 1999
fiscal year.
<PAGE> 48
PAGE XVII
19. 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 1997. Accordingly, the comparative figures have been
restated.
20. COMMITMENT
OPERATING LEASE
The company is committed to a lease for its office space for an annual
rent of $51,117 under an agreement expiring May 30, 2003.
21. SUBSEQUENT EVENT
On January 26, 1999, DPI signed final documents with partnerships and
working interest owners in programs organized by Environmental Energy,
Inc. to acquire oil and gas producing properties for up to 1,200,000
shares of non-cumulative, non-voting convertible preferred stock. As of
the date of this report, conditions precedent to closing have not been
met by the partnerships and a portion of the working interest owners.
The company expects the conditions will be met by the selling parties
and stock will be issued by May 1, 1999.
22. COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
with the current year's presentation.
<PAGE> 1
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
(United States Dollars)
The table below presents information necessary for the computation of loss
per share of the common stock, on both a primary and fully diluted basis
for the years ended December 31, 1998, 1997 and 1996. The computations
below reflect the 1 for 5 stock consolidation effective June 29, 1998.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to share of
Common Stock and Common
Stock equivalents $(1,568,348) $(1,708,418) $ (733,973)
Average number of shares of
Common Stock Outstanding 2,035,188 1,831,926 1,610,168
Common Stock equivalents 1,448,355 1,353,244 283,293
Total shares of Common Stock
and Common Stock equivalents 3,483,543 3,185,170 1,893,461
Primary loss per share of
Common Stock $ (0.77) $ (0.93) $ (0.46)
Fully diluted loss per share of
Common Stock $ (0.45) $ (0.54) $ (0.39)
______________
Common Stock equivalents are considered anti-dilutive because of the
net losses incurred by the Company.
</TABLE>
<PAGE> 1
Exhibit 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in the Form
10-KSB of Daugherty Resources, Inc. (File No. 0-12185) for the fiscal year ended
December 31, 1998, of our report dated March 9, 1999, on the consolidated
financial statements and schedules of Daugherty Resources, Inc. and Subsidiary
Companies at December 31, 1998. We also consent to all references to us in such
Form 10-KSB, including references to us as experts.
Kraft, Rothman, Berger, Grill
Schwartz & Cohen
By: /s/ Bernard Kraft
--------------------------------
Bernard Kraft, C.A.
March 29, 1999
Markham, Ontario
<PAGE> 1
Exhibit 23(d)
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
We hereby consent to the use in the Form 10-KSB of Daugherty Resources,
Inc. (File No. 0-12185) for the fiscal year ended December 31, 1998, of our
analysis relating to the 1998 oil and gas reserves at December 31, 1998, of
Daugherty Resources, Inc. We also consent to all references to us in such Form
10-KSB, including references to us as an expert.
WRIGHT AND COMPANY, INC.
By: /s/ Randall Wright
----------------------
Randall Wright
President
Nashville, Tennessee
March 29, 1999
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
WHEREAS, Daugherty 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, 1998, 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 29th day of March, 1999.
/s/ Charles L. Cotterell
---------------------------
Charles L. Cotterell
<PAGE> 2
Exhibit 24
POWER OF ATTORNEY
WHEREAS, Daugherty 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, 1998, 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 29th day of March, 1999.
/s/ James K. Klyman
--------------------------
James K. Klyman
