(AMENDED: Part I, Item 7 - Auditors Report)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended 12/31/95 Commission File No. 0-9416
FRANKLIN CONSOLIDATED MINING CO., INC.
--------------------------------------
(name of small business issuer in its charter)
Delaware 13-2878202
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
76 Beaver Street, New York, New York 10005
------------------------------------------
(Address of principal executive offices)
Issuers telephone number: 212-344-2828
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act: Common
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 such shorter
period that the registrant 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 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. [ ]
State issuer's revenues for its most recent fiscal year. $ 1,060.00
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days $12,974,174
DOCUMENTS INCORPORATED BY REFERENCE IN PART III
Proxy Statement furnished to Security holders of the Company in connection with
the 1995 Annual Meeting of Shareholders of the Company, held November 30, 1995
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
(Item 7)
PAGE
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2/4
BALANCE SHEET
F-5
DECEMBER 31, 1995
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1995 F-6
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1995 F-7/13
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1995 F-14/15
NOTES TO FINANCIAL STATEMENTS F-16/29
F-I
<PAGE>
J. H. COHN & COMPANY
75 EISENHOWER PARKWAY LAWRENCEVILLE, NJ
ROSELAND, NJ 07068-1697 NEW YORK, NY
(201) 228-3500 ROSELAND, NJ
SAN DIEGO, CA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders Franklin Consolidated Mining, Co.,
Inc.
We have audited the accompanying balance sheet of FRANKLIN CONSOLIDATED MINING
CO., INC. (A Development Stage Enterprise) as of December 31, 1995, and the
related statements of operations, stockholders' equity and cash flows for the
year ended December 31, 1995 and for the period from December 1, 1976
(inception) to December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
Those standards require that we plan, and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Consolidated Mining
Co. , Inc. as of December 31, 1995, and its results of operations and cash flows
for the year ended December 31, 1995 and for the period from December 1, 1976
(inception) to December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 6, the Company has been notified by agencies of the State
of Colorado that it must correct violations of certain environmental regulations
and increase its land reclamation bond from $93,000 to $252,000 to maintain
certain mining permits. As of April 10, 1996, the Company had not posted the
required bond. In addition, management had not been able to determine what the
ultimate costs of correcting the violations will be or what the ultimate
effects, if any, will be on The Company's financial statements if the Company is
not able to post the bond and take the appropriate corrective actions. No
provision has been made in the accompanying financial statements for any
liability or asset impairment that may result from this matter.
F-2
<PAGE>
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note 1 to the
financial statements, the Company is a development stage enterprise whose
operations have generated recurring losses and cash flow deficiencies from its
inception and a substantial working capital deficiency as of December 31, 1995.
As a result, it is in default with respect to payments on its outstanding
convertible debentures, delinquent with respect to the payment of real estate
taxes, in need of financing in connection with the reclamation bond and the
costs of eliminating the violations of environmental regulations described in
the preceding paragraph and substantially dependent on its joint venture partner
for financing. Such matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ J. H. Cohn & Company
------------------------
J. H. COHN & COMPANY
Roseland, New Jersey
March 23, 1996, except for the
environmental matters described
in Note 6 as to which the date
is April 10, 1996
F-3
<PAGE>
5 North Village Avenue
Rockville Centre
New York 11570
(516) 536-0770
Fax: (516) 536-5753
Wolinetz,Gottlieb & Lafazan, P. C.
Certified Public Accountants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Franklin Consolidated Mining Co., Inc.
New York, New York
We have audited the accompanying statement of operations, stockholders' equity,
and cash flows of Franklin Consolidated Mining Co., Inc. (A Development Stage
Enterprise for the year ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects the results of operations and cash flows of Franklin
Consolidated Mining Co., Inc. (A Development,Stage Enterprise) for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
/s/ Wolinetz, Gottlieb & Lafazan, P.C.
---------------------------------------
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
March 8, 1995
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
Current assets - cash $ 118,176
Mining, milling and other property and equipment, net of
accumulated depreciation and depletion of $1,715,194 3,848,114
Mining reclamation bonds 45,000
------
Total 4,011,290
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible debentures $ 145,000
Accounts payable and accrued expenses 298,016
Loans payable to joint venture partner 313,688
---------
Total current liabilities 756,704
Convertible notes 200,000
Excess of equity in net losses of joint venture
over investment 120,270
---------
Total liabilities 1,076,974
---------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.Ol per share; 100,000,000
shares authorized; 69,135,920 shares issued and
outstanding 691,359
Additional paid-in capital 12,471,502
Deficit accumulated in the development stage (10,228,545)
-----------
Total stockholders' equity 2,934,316
-----------
Total 4,011,290
=========
See Notes to Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., Inc
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Cumulative
from
1995 1994 Inception
----------- --------- ----------
<S> <C> <C> <C>
Revenues:
Sales $ 876,082
Interest income $ 1,060 $851 538,536
other income 75,000
----------- --------- ----------
Totals 1,060 851 1,489,618
----------- --------- ----------
Expenses:
Mine expenses 3,360,793
Write-down of inventories 223,049
Depreciation, depletion and amortization 122,143 121,855 1,910,543
General and administrative expenses 227,287 151,062 4,297,731
Interest 92,434 67,861 493,600
Amortization of debt issuance expense 6,843 683,047
Equity in net loss of joint venture 15,540 34,826 120,270
Loss on settlement of claims
by joint venture partner 468,000 468,000
Loss on settlement of litigation 100,000
Loss on investment in oil and gas wells 61,130
----------- --------- ----------
Totals 925,404 382,447 11,718,163
----------- --------- ----------
Net loss $ (924,344) $(381,596) $(10,228,545)
========== ========= ============
Weighted average shares outstanding 49,035,351 48,556,123
========== ==========
Net loss per common share $(.02) $(.01)
===== =====
See Notes to Financial Statements.
F-6
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 155,000 $1,550 $41,550 $ 43,100
Noncash - related
parties in 925,000 9,250 9,250
in exchange
for shares of
Gold Developers
and Producers, Inc. 1,095,000 10,950 6,484 17,434
Net loss (45,584) (45,584)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1977 2,175,000 21,750 48,034 (45,584) 24,200
Issuance of common stock:
Pursuant to public
offering, net of
underwriting expenses
of $11,026 588,200 5,882 278,113 283,995
Cash 225,000 2,250 240,627 242,877
Noncash 5,000 50 4,950 5, 000
Not loss (66,495) (66,495)
--------- --------- --------- --------- --------- ---------
Balance, December 31,1978 2,993,200 29,932 571,724 (112,079) 489,577
Issuance of common stock:
Cash 231,850 2,318 438,932 441,250
Noncash - related parties 40,000 400 59,600 60,000
Noncash - other 6,675 67 13,283 13,350
Net loss (128,242) (128,242)
--------- --------- --------- --------- --------- ---------
Balance, December 31,1979 3,271,725 32,717 1,083,539 (240,321) 875,935
Issuance of common stock:
Cash 289,750 2,898 837,102 840, 000
Noncash 59,500 595 118,405 119,000
Not loss (219,021) (219,021)
--------- --------- --------- --------- --------- ---------
Balance, December 31,1980 3,620,975 36,210 2,039,046 (459,342) 1,615,914
F-7
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 65,625 $656 $261,844 $262,500
--------- --------- --------- --------- --------- ---------
Balance, pre-stock split 3,686,600 36,866 2,300,890 $(459,342) 1,878,414
Issuance of common stock:
Pursuant to a four-for-one
stock split 11,059,800 110,598 (110,598)
Cash 578,000 5,780 552,220 558,000
Noncash 104,000 1,040 102,960 104,000
Commission on sale
of common stock (57,300) (57,300)
Net loss (288,105) (288,105)
--------- --------- --------- --------- --------- ---------
Balance, December
31,1981 15,428,400 154,284 2,788,172 (747,447) 2,195,009
Issuance of common stock:
Cash 861,006 8,610 755,516 764,126
Noncash 162,000 1,620 160,380 162,000
Commission on
sale of common
stock (56,075) (56,075)
Net loss (287,291) (287,291)
--------- --------- --------- --------- --------- ---------
Balance, December, 31,1982 16,451,406 164,514 3,647,993 (1,034,738) 2,777,769
Issuance of common stock:
Cash 1,273,134 12,732 1,176,818 1,189,550
Noncash 70,834 708 70,126 70,834
Exercise of stock
options by:
Related parties 267,500 2,675 264,825 267,500
Others 4,000 40 3,960 4,000
Commission on sale
of common stock (124,830) (124,830)
Net loss (749,166) (749,166)
--------- --------- --------- --------- --------- ---------
Balance, December 31,1983 18,066,874 180,669 5,038,892 (1,783,904) 3,435,657
F-8
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 1,201,700 $12,017 $ 1,139,683 $1,151,700
Noncash 27,500 275 27,225 27,500
Exercise of stock options
by related parties 200,000 2,000 198,000 200,000
Commission on sale
of common stock (90,950) (90,950)
Not loss (301,894) (301,894)
--------- --------- --------- --------- --------- ---------
Balance, December
31,1984 19,496,074 194,961 6,312,850 (2,085,798) 4,422,013
Issuance of Common stock:
Cash 421,308 4,213 295,866 300,079
Noncash 10,000 100 7,400 7,500
Exercise of
stock op-
tions by:
Related par-
ties 200,000 2,000 148,000 150,000
Others 1,000 10 740 750
Commission on sale
of common stock (3,462) (3,462)
Net loss (133,929) (133,929)
--------- --------- --------- --------- --------- ---------
Balance, December
31,1985 20,128,382 201,284 6,761,394 (2,219,727) 4,742,951
Issuance of common stock:
Cash 569,000 5,690 294,810 300,500
Noncash - related parties 160,000 1,600 78,400 80,000
Noncash - others 135,000 1,350 52,650 54,000
Net loss (227 788) (227,788)
--------- --------- --------- --------- --------- ---------
Balance, December 31,1986 20,992,382 209,924 7,187,254 (2,447,515) 4,949,663
F-9
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 2,604,368 $ 26,044 $ 1,261,257 $1,287,301
Noncash - related parties 202,000 2,020 68,880 70,900
Noncash - other 37,500 375 36,875 37,250
Commission on sale
of common stock (110,243) (110,243)
Net loss $(730,116) (730,116)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1987 23,836,250 238,363 8,444,023 (3,177,631) 5,504,755
Issuance of common stock
- noncash - related
parties 200,000 2,000 48,000 50,000
Net loss (386,704) (386,704)
Purchase of 50,000 shares of
treasury stock - at cost $(12,500) (12,500)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1988 24,036,250 240,363 8,492,023 (3,564,335) (12,500) 5,155,551
Issuance of common
stock:
Cash 678,000 6,780 103,720 110,500
Noncash - others 283,666 2,836 31,030 33,866
Noncash - related parties 210,000 2,100 29,400 31,500
Private placement:
Cash 2,275,000 22,750 22,750
Debt issuance
expense 455,000 455,000
Conversion of debentures 1,050,000 10,500 94,500 105,000
Exercise of stock options 300,000 3,000 42,000 45,000
Commission on sale
of common stock (1,500) (1,500)
F-10
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Compensation re-
sulting from
stock options
granted $39,000 39,000
Net loss $(1,279,804) (1,279,804)
--------- --------- --------- --------- --------- ---------
Balance, December
31,1989 28,832,916 288,329 9,285,173 (4,844,139) $(12,500) 4,716,863
Sale of Under-
writer's stock
warrants 100 100
Issuance of common
stock:
Cash 335,000 3,350 41,875 45,225
Noncash - others 39,855 399 5,579 5,978
Conversion of
debentures 160,000 1,600 30,400 32,000
Net loss (1,171,962) (1,171,962)
--------- --------- --------- --------- --------- ---------
Balance, December
31,1990 29,367,771 293,678 9,363,127 (6,016,101) (12,500) 3,628,204
Issuance of common stock:
Cash - others 1,799,576 17,996 78,935 96,931
Cash - related parties 1,800,000 18,000 72,000 90,000
Noncash - others 1,183,724 11,837 47,350 59,187
Conversion of debentures 3,731,000 37,310 588,690 626,000
Exercise of stock options 250,000 2,500 10,000 12,500
Conversion of notes payable 250,000 2,500 12,500 15,000
Net loss (764,926) (764,926)
--------- --------- --------- --------- --------- ---------
Balance, December 31,1991 38,382,071 383,821 10,172,602 (6,781,027) (12,500) 3,762,896
issuance of common
stock:
Cash - others 2,021,923 20,219 149,389 169,608
Cash - related parties 630,000 6,300 42,700 49,000
Noncash - others 1,729,609 17,296 348,762 366,058
Noncash - related parties 12,120 121 485 606
F-11
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Noncash - exercise of
options by related parties 2,050,000 $ 20,500 $82,000 $102,500
Conversion of debentures 540,000 5,400 156,600 162,000
Commission on sale of common
stock - related parties (7,123) (7,123)
Net loss $(1,343,959) (1,343,959)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1992 45,365,723 453,657 10,945,415 (8,124,986) (12,500) 3,261,586
Issuance of common stock:
Cash - others 873,400 8,734 125,230 133,964
Cash - related parties 777,000 7,770 69,930 77,700
Noncash - others 150,000 1,500 13,500 15,000
Noncash - settlement of litigation 1,000,000 10,000 90,000 100,000
Noncash - exercise of options by
related parties 200,000 2,000 8,000 10,000
Conversion of debentures 140,000 1,400 33,600 35,000
Conversion of loan 100,000 1,000 9,000 10,000
Net loss (797,619) (797,619)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1993 48,606,123 486,061 11,294,675 (8,922,605) (12,500) 2,845,631
Retirement of treasury stock (50,000) (500) (12,000) 12,500
Not loss (381,596) (381,596)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 48,556,123 485,561 11,282,675 (9,304,201) 2,464,035
F-12
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
&ND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Settlement of claims by
joint venture partner 6,000,000 60,000 408,000 468,000
Repayments of loan from
joint venture partner 3,200,000 32,000 217,600 249,600
Repayments of long-term debt
and accrued interest -
related parties 8,679,797 86,798 590,227 677,025
Exchange of shares for
profit participation
interests 2,700,000 27,000 (27,000)
Net loss $(924,344) (924,344)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 69,135,920 $691,359 $12,471,502 $(10,228,545) - $2,934,316
========== ======== =========== ============ ========= =========
See Notes to Financial Statements.
F-13
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Cumulative
from
1995 1994 Inception
---------- ---------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss $(924,344) $(381,596) $(10,228,545)
Adjustments to reconcile net
loss to net cash used in operating activities:
Depreciation and depletion 122,143 121,855 1,910,543
Amortization of debt issuance expense 6,843 683,047
Value of common stock issued for:
Services 970,277
Settlement of litigation 100,000
Settlement of claims by joint venture partner 468,000 468,000
Compensation resulting from stock options granted 311,900
Value of stock options granted for services 112,500
Equity in net loss of joint venture 15,540 34,826 120,270
Other (7,123)
Changes in operating assets and liabilities:
Other current assets 71 924
Accounts payable and accrued expenses 138,3O5 72,164 461,749
---------- ---------- ----------
Net cash used in operating activities (180,285) (144,984) (5,097,392)
---------- ---------- ----------
Investing activities:
Purchases and additions to mining,
milling and other property and equipment (5,035,354)
Purchases of mining reclamation bonds (16,000) (45,000)
Decrease in security deposits 3,667
Deferred mine development costs and other expenses (234,435) (255,319)
---------- ---------- ----------
Net cash used in investing activities (234,435) (12,333) (5,335,673)
---------- ---------- ----------
F-14
<PAGE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1995
Cumulative
from
1995 1994 Inception
---------- ---------- ----------
<S> <C> <C> <C>
Financing activities:
Issuances of common stock $ 8,460,657
Issuance of Underwriter's stock
warrants 100
Commissions on sales of common
stock (381,660)
Purchases of treasury stock (12,500)
Payments of deferred under-
writing costs (63,814)
Proceeds from exercise of
stock options 306,300
Issuance of convertible de-
bentures and notes $ 200,000 1,305,000
Proceeds of loans from joint
venture partner 331,980 156,581 526,288
Payments of debt issuance
expenses (164,233)
Proceeds of other notes and
loans payable 6,000 688,000
Repayments of other notes and
loans payable (10,000) (120,000)
Proceeds of loans from affiliate 3,475 55,954
Repayments of loans from affili-
ate (48,661)
Net cash provided by financ-
ing activities 531,980 156,056 10,551,231
-------- -------- -------
Increase (decrease) in cash 117,260 (1,261) 118,176
Cash, beginning of period 916 2,177 -
-------- -------- -------
Cash, end of period 118,176 $916 118,176
======== ======== =======
Supplemental disclosure of cash flow data:
Interest paid $4,441 $ 19,577 298,868
======== ======== =======
See Notes to Financial Statements.
F-15
</TABLE>
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation:
Organization:
Franklin Consolidated Mining Co. , Inc. (the "Company") which was
originally incorporated on December 1, 1976 under the laws of the State of
Delaware, is principally engaged in the exploration, development and mining of
precious and nonferrous metals, including gold, silver, lead, copper and zinc.
The company owns directly or has an indirect interest in a number of precious
and:nonferrous metals properties.
The Company holds the exclusive right to explore, develop, mine and extract
all minerals located in 28 patented mining claims comprising approximately 322
acres, in which the Company holds 100% lease interests (the "Hayden/Kennec
Leases") and 23 additional owned or leased mining properties (collectively, the
"Franklin Mine") , all of which are located near Idaho Springs in Clear Creek
County, Colorado. It also constructed a crushing and floatation mill which is
located on the site of the Franklin Mine (the "Franklin ").
During February 1993, the Company entered into a Joint Venture Agreement
with Island Investment Corp. ("Island") , which at the time was an unaffiliated
company, and formed Zeus No. 1 Investments (the "Joint Venture"), a California
general partnership, for the purpose of developing the Franklin Mine and Mill.
Among other things, the Zeus Joint Venture Agreement (i) required Island to
provide both technical and financial support to the Joint Venture, (ii) required
the Company to contribute to the Joint Venture the rights to the exclusive use
of its assets (including its lease interests) related to the Franklin Mine and
Mill and (iii) originally provided that after the return of any initial capital
contributions and certain priority payments, Island and the Company would
receive 50% of any partnership income until each party had received $15,000,000;
thereafter Island and the Company would receive 73% and 27%, respectively, of
any partnership income. In May 1993, Island assigned its interest in the Joint
Venture to its 91%-owned subsidiary, Gems & Minerals Corp. ("Gems").
Effective in August 1994, the Company and Island agreed to amend the Zeus
Joint Venture Agreement to provide for, among other things, the waiver of
priority payments and an adjustment to the distribution arrangement whereby 70%
and 30% of the Joint Venture's income or loss (as defined) would be allocated to
Gems and the Company, respectively. Effective in September 1995, the Company,
Island and Gems agreed to further amend the Zeus Joint Venture Agreement to
provide for, among other things, the allocation of 82.5% and 17.5% of the Joint
Venture's income or loss (as defined) to Gems and the Company, respectively (see
Note 4)-
F-16
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES To FINANCIAL STATEMENTS
Note I - Organization and basis of presentation (continued):
Organization (concluded):
During 1993, operations at the mining properties consisted primarily of the
efforts by the Joint Venture to develop and improve mineral recovery
methodology, which were financed primarily by Island's cash capital
contributions of approximately $430,000. During 1994, such operations consisted
primarily of repair and remediation work to comply with environmental regulatory
requirements, further site preparation, metallurgical analysis and the planning
of an exploratory drilling program to further prove the Company's reserves.
During 1995, such operations consisted primarily of a comprehensive core
drilling and analysis program (the "Analysis Program").
Although there are extensive shafts, tunnels and a mill in Place on the
Franklin Mine site which management believes would support a 150 ton per day
operation, the Joint Venture and the Company had not conducted any significant
commercial mining operations and had not generated any significant revenues
through December 31, 1995 and, therefore, the Company and the Joint Venture are
still in the development stage. Although management of the Company expects the
Joint Venture to commence some commercial mining and milling activities at the
Franklin Mine during 1996, it does not anticipate that the Company will derive
any significant revenues or cash flows from its 17.5% interest in such start-up
operations during 1996.
Basis of presentation:
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, the Company is a development
stage enterprise whose operations have generated recurring losses and cash flow
deficiencies from its inception. As of December 31, 1995, it had an accumulated
deficit of approximately $10,229,000 and a working capital deficiency of
$639,000. As explained in Note 5, the Company was in default with respect to the
payment of the principal of and the accrued interest on its outstanding
convertible debentures which totaled $158,000 as of December 31, 1995. As
explained in Note 6, the Company was delinquent with respect to the payment of
$44,000 of real estate taxes as of December 31, 1995 and was subject to a
regulatory order to increase its land reclamation bond by $159, 000 and complete
the remediation of certain violations of environmental regulations as of April
10, 1996. The Company is substantially dependent on its Joint Venture partner
for its short-term financing and the funding of the development of its principal
mining and milling properties which were not operational as of December 31,
1995. Such matters raise substantial doubt about the Company's ability to
continue as a going concern.
F-17
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STA TEMENTS
Note - I Organization and basis of presentation (concluded):
Basis of presentation (concluded):
The Company's ability to continue as a going concern will depend,
primarily, on whether it can obtain additional debt or equity financing from its
Joint Venture partner or from other sources to fund its existing obligations and
the additional obligations it will incur while its mining resources are being
developed, the continued forbearance of the holders of its convertible
debentures and, ultimately, the ability of the Joint Venture, in which it holds
a 17.5% interest and to which it has committed substantially all of its
resources, to conduct profitable mining and milling operations on a sustained
basis. As also explained in Note 5, the Company did obtain approximately
$200,000 from the private placement of convertible notes subsequent to December
31, 1995. Management of the Company does not believe that operations of the
Joint Venture will generate any significant profits or cash flows for the
Company during 1996. However, management believes, but cannot assure, that the
Company's Joint Venture partner will continue to provide the remainder of the
funds the Company will need to operate through December 31, 1996. Accordingly,
the accompanying financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Note 2 Summary of significant accounting policies:
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Mining, milling and other property and equipment:
Mining, milling and other property and equipment is recorded at cost. Costs
incurred to improve and develop mining and milling properties are capitalized.
Mine development expenditures incurred substantially in advance of production
are capitalized.
Depletion of mining and milling improvements and mine development
expenditures is computed using the units of production method based on probable
reserves (there were no charges for depletion in 1995 and 1994 since the
company's principal mining and milling facilities were not in operation) .
Depreciation of equipment is computed using the straight-line method over the
estimated useful lives of the related assets.
F-18
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 2 Summary of significant accounting policies (continued):
Joint Venture:
The Company accounts for its investment in the Joint Venture pursuant to
the equity method. As a general partner in the Joint Venture, the Company would
be A liable 'to creditor s and certain other parties for any obligations - the
Joint Venture might ultimately be unable to satisfy. Accordingly, the Company
records its equity in the net losses of the Joint Venture even though they
exceed the Company's total investment.
Revenue recognition:
Revenues from sales of mineral concentrates will be recognized by the
Company and the Joint Venture only upon receipt of final settlement funds from
the smelter.
Environmental remediation:
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures and, generally, charged to expense as
incurred.
Issuances of common stock:
Noncash issuances of common stock in exchange for assets and services are
recorded at their estimated fair market values.
Income taxes:
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which utilizes an
asset and liability approach to financial accounting and reporting for income
taxes. Under this approach, deferred income tax assets and liabilities are
computed annually for temporary differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The income tax provision or credit
is the tax payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
F-19
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 2 Summary of significant accounting policies (concluded):
Recent pronouncements affecting accounting standards:
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed at," and Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation. "Statement No. 121 prescribes the method to be used in the
evaluation of long-lived and certain identifiable intangible assets for
impairment and the method to be used in accounting for any such impairment.
Statement No. 123 requires certain disclosures related to the estimated fair
value at the date of grant of certain equity instruments issued to employees.
The Company has not determined the effects, if any, of these pronouncements
which it will be required to implement during 1996.
Note 3 - Mining, milling and other property and equipment:
Mining, milling and other property and equipment consisted of the following
at December 31, 1995:
Machinery and equipment $1,219,220
Mine and mill improvements 4,248,278
Furniture and fixtures 11,714
Automotive equipment 84,096
----------
5,563,308
Less accumulated depreciation and depletion 1,715,194
----------
Total $3,848,114
==========
Note 4 - Status of the Zeus Joint Venture Agreement:
The Zeus Joint Venture Agreement, as amended effective August 31, 1994,
required (i) Gems to provide both technical and financial support to the Joint
Venture; (ii) the Company to contribute to the Joint Venture the rights to the
exclusive use of its lease interests and other assets related to the mining
properties in Clear Creek County, Colorado; (iii) the potential transfer of the
Company's assets to the Joint venture; (iv) the issuance to Gems of 6,000,000
common shares of the Company, subject to the authorization by the stockholders
of the Company of a sufficient number of shares for such issuance and certain
other conditions; and (v) the allocation of 70% and 30% of the Joint Venture's
income or loss (as defined) to Gems and the Company, respectively.
F-20
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Status of the Zeus Joint Venture Agreement (continued):
During the latter part of 1994, the management of Gems informed the Board
of Directors of the Company that prior to allocating substantial additional
resources to the mining facilities owned by the Company (which the Joint Venture
is responsible for developing) and the commencement of commercial mining
operations, it wished to (i) more clearly define the relationships between
the:parties to the Zeus Joint Venture Agreement, as amended effective August 31,
1993, and (ii) conduct the Analysis Program to ascertain the scope and extent of
proven and probable reserves of mine ore containing economically recoverable
minerals not previously identified or reported.
Effective in December 1994, the Company, Island and Gems entered into a
Binding Exchange Letter Agreement. Pursuant to such Binding Exchange Letter
Agreement, Gems agreed that, upon consummation of a final agreement, it would
transfer, in a tax free exchange, certain of its assets for approximately
270,000,000 newly issued common shares of the Company, together with certain
demand and piggyback registration rights and anti-dilution rights. The assets
that were to be exchanged by Gems included (i) Gems' 70% interest in the Joint
Venture; (ii) the exclusive rights to the use of Gems proprietary processes,
technologies and techniques; and (iii) property rights acquired by Gems pursuant
to a November 1994 agreement in principle related to the Hayden lease (see Note
6).
The Binding Exchange Letter Agreement further provided that if a definitive
Exchange Agreement was not consummated and approval of the Company's
stockholders was not obtained in a timely fashion, then the Company would be
obligated to issue 6,000,000 shares to Gems or, if that were not possible, Pay
Gems at least $1,500,000 as a priority payment.
The Company was unable to obtain the approval of its stockholders in a
timely fashion and Gems made certain claims for compensation under the Exchange
Agreement. As a result, in September 1995, the Company, Island and Gems entered
into an agreement (the "Settlement Agreement") whereby the parties acknowledged
that the Exchange Agreement was not timely consummated due to the failure of the
Company to obtain the approval of its stockholders for an increase in its
authorized capital stock in a timely manner. In settlement of the parties'
claims against the Company for such failure to perform, the Company agreed to
issue 6,000,000 shares of its common stock to Gems or, in the alternative, to
F-21
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Status of the Zeus Joint Venture Agreement (continued):
pay $1,500,000 as Upset compensation to Gems (the "Upset Fee"). The Company
further agreed to use its best efforts to cause its stockholders to
approve an increase in its authorized capital stock from 50,000,000 to
100,000,000 shares of common stock at an annual meeting of stockholders in
November 1995 to enable the Company to issue the shares to Gems. In the event
that the Company, after using .'its best efforts, was unable to obtain the
requisite approval of its stockholders, Gems agreed to reduce the Upset Fee to
$600,000. The parties further agreed to convert $249,600 of the total amount
previously advanced to the Company by Gems to cover operating expenses into
3,200,000 additional shares of its common stock, subject to the approval of the
Company's stockholders of the increase in its authorized capital stock referred
to above. Finally, as further consideration for the settlement of their claims,
Gems' interest in the Joint Venture was increased to 82.5% and the Company's
interest was reduced to 17.5%. Gems was also given certain demand and piggyback
registration rights with respect to shares to be issued under the Settlement
Agreement.
On November 30, 1995, the stockholders of the Company apProved the proposed
increase in the authorized capital stock of the Company and, as required by the
Settlement Agreement, in December 1995, the Company issued to Gems 3,200,000
shares of its common stock to reduce outstanding advances by $249,600 and
6,000,000 shares of its common stock as additional consideration for the
settlement of claims by Gems. Based on an estimated fair market value of $.078
per share, the Company recognized a loss on settlement of claims by its Joint
Venture partner of $468,000 for the issuance of the 6,000,000 shares to Gems.
Based on information developed through the Analysis Program and previously
available geological data and reports, the management of the Joint Venture
believes that the application of the Company's proprietary technologies and
processes should result in economically viable commercial mining operations at
the Franklin Mine.
Pursuant to the terms at the Zeus Joint Venture Agreement, Gems has
provided advances to the Company of $563,288 since the inception of the
agreement, including $331,980 and $156,581 in 1995 and 1994, respectively. As a
result of the noncash transaction described above whereby the Company issued
3,200,000 shares of its common stock to Gems in December 1995 to reduce
outstanding advances by $249,600, the balance of the loans payable Co the
Company's Joint Venture partner totaled $313,688 at December 31, 1995. Such
balance is noninterest bearing and without a specific due date. In addition,
Gems has guaranteed the payment of the Company's Outstanding convertible
promissory notes (see Note 5) . The Joint Venture is also a development stage
company. The Company's investment in the Joint Venture as of December 31, 1995,
and the Joint Venture's results of operations for the year then ended in
relation to those of the Company, were not material.
F-22
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 5 - Convertible debt:
The Company's convertible debt at December 31, 1995 consisted of the
following:
12.25% convertible debentures (a) $145,000
15% convertible promissory notes (b) 200,000
-------
Total $345,000
========
(a) As of December 31, 1995, the Company was in default with respect to the
payment of the $145,000 principal balance of the debentures and $13,321 of
accrued interest payable for the quarters subsequent to March 31, 1995. The
Company sent notices to its debentureholders in December 1995 asking for their
consent by February 15, 1996 to the further extension of the maturity date to
December 31, 1996. It was also contemplated that conversion rights would also be
extended at the previous rate of $.50 per share. The Company also agreed that it
would make all interest payments due to such holders through December 31, 1995,
prepay interest which will become due at the end of the first quarter of 1996
and set up a fund with the Trustee to secure the timely payment of the principal
balance of the debentures on December 31, 1996. Only one holder of a $1,000
debenture rejected the Company's request.
While it is the intention of management and the Company to comply with the
terms of the agreements with the debentureholders, the Company has been unable
to comply as a result of the liquidity and cash flow problems described in Note
1. As a result of its default and its continued failure to comply with the
December 1995 agreements, the Company may be subject to legal proceedings by the
Transfer Agent/Trustee under the Indenture Agreement or from debentureholders
seeking immediate repayment of principal plus interest and penalties. Management
cannot assure that there will be funds available for the required payments or
what the effects of any actions brought by or on behalf of the debentureholders
will be.
F-23
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 5 - Convertible debt (concluded) :
(b) In December 1995, the Company commenced an offering exempt from
registration pursuant to Rule 505 of Regulation D of the 15% secured convertible
promissory notes in the aggregate principal amount of $1,500,000. The Company
terminated the offering on February 5, 1996 after selling convertible notes in
the aggregate principal amount of $400,O00, of which $200,000 was outstanding at
December 31, 1995 as shown above. Each convertible note will mature 18 months
from the date of its issuance. The notes will be convertible into shares of the
Company's common stock after April 1, 1996 at a conversion price based on 75% of
the average market price of the Company's common stock (as defined) for a
specified period prior to conversion. Noteholders have unlimited piggyback
registration rights and, commencing one year after issuance and subject to
certain conditions, will have demand registration rights with respect to the
common stock underlying the convertible notes. The convertible notes are
guaranteed by Gems and secured by Gems' profit interest in the Joint Venture.
Note 6 - Commitments and contingencies: Lease commitments:
The Joint Venture was primarily formed to develop the mining properties
pursuant to the Company's rights under the HaYden/Kennec Leases, and the future
success of its operations is dependent on its ability to utilize and extend
those lease rights and/or to otherwise acquire the rights to the use of such
properties and the extraction of the related resources.
The Company entered into the Hayden/Kennec Leases with the fee owners of 28
patented mining claims in Clear Creek County on November 12, 1976. Under the
provisions of these leases, Franklin has the exclusive right to explore for,
develop and mine and to extract any minerals found in the mines, lodes, veins
and dumps located thereon. In addition, Franklin has certain water and mill
operating rights.
The initial terms of the Hayden/Kennec Leases were for 20 years at
aggregate monthly rentals equal to the greater of $2,000 or 5% of realized
proceeds from the sale of minerals derived from the leased property. In
addition, the Company is required to pay all related property taxes and
insurance. Rentals amounted to $24,000 in 1995 and were paid by the Joint
Venture.
F-24
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES To FINANCIAL STATEMENTS
Note 6 - Commitments and contingencies (continued):
Lease commitments (concluded):
The Hayden/Kennec Leases grant the Company the right to purchase the
mineral rights to the leased property upon the payment of $1,250,000 less any
previous rental payments.
In the event that the Hayden/Kennec Leases are terminated, any leasehold or
other improvements on the mining properties made by Gems, the Joint Venture or
the Company become the property of the lessors without compensation to Gems, the
Joint Venture or the Company. The Company has the right to assignment under the
lease.
As of December 31, 1995, the Company was delinquent in paying approximately
$44,000 of the required taxes due (including interest) . Clear Creek County has
filed liens on those taxes in arrears. Certain of these liens were sold under
auction during October 1994 and the Company has three years from the date of
sale to redeem them.
To further secure the ability of the Joint Venture partners to exploit the
Clear Creek County mining properties, Gems entered into an agreement on December
21, 1995 to purchase all of the right title and interest of Audry Hayden in and
to all mining claims and properties located on the property which is subject to
the Hayden/Kennec Lease as well as Hayden's interest under the Hayden Lease with
the Company (the "Hayden Interests") for a purchase price of $75,000). In
addition, Gems agreed to pay Hayden $5,000 representing payment in full of back
payments due and owing to Hayden by the Company on the Hayden Lease and further
agreed to Pay to Hayden $1,000 per month for a period of 12 months commencing on
the date of the Purchase Agreement. on the date upon which the final $1,000
installment is due to Hayden, Gems will pay the remaining principal balance of
the purchase price which will consist of $75,000 less the initial payment of
$5,000 advanced for back payments on the Hayden Lease. The management of Gems
has informed the Company that it believes that as a result of the acquisition of
the Hayden Interests, the interest in the surface rights held by the Hayden
Lease and the provisions of the Kennec Lease that permit the exploration and
development of such properties by any method of mining, the Joint Venture will
have adequate access to the minerals during the term of the Kennec Lease and on
a continuing basis even if the Kennec Lease should expire and not be renewed by
the Company.
Legal proceedings:
The Company is a party to various legal proceedings in the normal course of
business. It is the opinion of management that these actions are routine in
nature and their disposition will not have any material adverse effects on the
Company's financial position or results of operations.
F-25
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES To FINANCIAL STATEMENTS
Note 6 - Commitments and contingencies (continued):
Environmental matters:
During November 1993, the Company was notified by the State of Colorado
Division of Minerals and Geology (the "DMG") that the Joint Venture had failed
to file a plan in the form of a Technical Revision to address erosion,
sedimentation and run-off matters at the Franklin mine in connection with
continuation of the Company's state mining permit. As a result, the Company had
to take certain remedial actions, increase its reclamation bond from $29,000 to
$45,000 and pay a $5,000 fine during 1994.
In August 1994, the Company received an informal notice from the DMG of an
additional violation at the Franklin Mine related to water run-off matters. The
Company attempted to rectify the violations cited by the DMG but was unable to
do so in a timely manner because such corrections required performance of work
outside the boundaries of its then current permit. The Company agreed that it
would refrain from any mining or milling operations at the Franklin Mine until
the DMG (i) amended the Company's permit to enable it to perform the required
technical and remediation work and (ii) determined that all required work was
completed.
In February 1996, the DMG permitted the Company to commence crushing
activity at the Franklin Mine pursuant to another prospecting permit. In March
1996, the Company was notified that it would be required to increase.its land
reclamation bond by an amount that would be determined subsequently. In an
effort to comply, the Company increased its reclamation bond from $45,000 to
$93,000. On or about March 28, 1996, the Company received a temporary cease and
desist order prohibiting it from conducting mining and milling operations at the
Franklin Mine until such time as all of the violations cited by the DMG are
corrected. However, management believes that the cease and desist order will
have minimal effects on the prospecting and testing activities that are in
process at the Franklin Mill since they are being conducted pursuant to a permit
that is specifically excluded from such order. In addition, the Mined Land
Reclamation Bureau of Colorado determined that the Company's reclamation bond
should be further increased to approximately $252,000 by April 5, 1996.
F-26
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 6 - Commitments and contingencies (concluded):
Environmental matters (concluded):
The Company had not posted the required bond as of April 10, 1996. In
addition, management cannot determine what the ultimate costs will be of
rectifying the violations cited by the DMG and complying with environmental
regulations. In addition, management cannot assure that the Company will be able
to obtain the funds necessary for the required increase in the reclamation bond
and the additional expenditures for the required corrective actions, and it
cannot determine what the effects, if any, will be on the Company's financial
statements if such financing is not obtained and the corrective actions are not
taken.
Note 7 -Income taxes:
As of December 31, 1995, the Company had net operating loss carry forwards
of approximately $9, 512, 000 available to reduce future Federal taxable income
which, if not used, will expire at various dates through December 31, 2010. Due
to changes in the ownership of the Company, the utilization of these loss carry
forwards may be subject to substantial annual limitations.
The Company has offset the deferred tax asset of $3,234,000 attributable to
the potential benefits from such net operating loss carryforwards as of December
31, 1995 by an equivalent valuation allowance due to the uncertainties related
to the extent and timing of its future taxable income. There were no other
material temporary differences as of that date.
The expected Federal income tax benefit, computed based on the Company's
pre-tax losses in 1995 and 1994 and the statutory Federal income tax rate, is
reconciled to the actual tax benefit reflected in the accompanying financial
statements as follows:
1995 1994
-------- --------
Expected tax benefit at statutory rates $314,000 $130,000
Decrease resulting from valuation
allowance for benefits from net
operating loss carryforwards (314,000) (130,000)
-------- --------
Totals $ - $ -
======== ========
F-27
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Stockholders' equity:
Issuance of common stock to convert debt and other equity interests:
In May 1992, the Company issued a series of promissory notes to related
parties and others in the aggregate principal amount of $504,000 that bore
interest at 3% above a specified prime rate. In addition, the holders of notes
in the principal amount of $450,000 were entitled, under certain conditions, to
a 1% interest in the profits (as defined) of the Company for each $50,000 of
principal amount held and, accordingly, held total. profit participation
interests of 9%. In July 1993, Gems was assigned notes in the principal amount
of $200,000 and the related 4% profit participation interests.
During 1995, the Company entered into agreements for the conversion of all
of the notes, the accrued interest thereon and the profit participation
interests whereby (i) the entire principal balance and the accrued interest
payable at the respective dates of conversion which totaled $677,025 was
converted at $.078 per share (the estimated fair market value of the
unregistered shares) into a total of 8,679,797 shares of common stock and (ii)
all of the profit participation interests were converted at the rate of 300,000
shares for each 1% profit participation interest held into a total of 2,700,000
shares of common stock. These conversions were noncash transactions and,
accordingly. they are not reflected in the accompanying 1995 statement of cash
flows.
Common stock reserved for issuance:
During 1995, the Company issued warrants for the purchase of 500,000 shares
of common stock at an exercise price of $.0l per share as part of the
consideration for services provided to the Company. In the opinion of
management, the fair value of the warrants was not material and the Company did
not recognize any expense related to such issuance.
At December 31, 1995, shares of common stock were reserved for issuance
upon exercise of outstanding debentures, notes and warrants as follows:
Convertible debentures 290,000
Convertible promissory notes (a) 1,066,667
Warrants 500,000
---------
Total 1,856,667
=========
(a) Computed based on the fair market value of the company's common stock as of
December 31, 1995 (see Note 5).
F-28
