Filed with the Securities and Exchange Commission on December 16, 1996
Registration No. 333-16589
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Amendment No. 1 to
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FRANKLIN CONSOLIDATED MINING CO., INC.
(Name of small business issuer)
Delaware 1070 13-2878202
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
76 Beaver Street
Suite 500
New York, New York 10005
212-344-2828
J. Terry Anderson
President
(Name, address, including zip code, and telephone
number, including area code, of agent for
service of process)
Approximate date of proposed sale to the public: As soon as practicable after
the registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
1
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class Number of Shares Proposed Total Aggregate Amount of
of Securities to be to be Registered Offering Price Offering Price Registration
Registered Per Share Fee
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 9,200,000 $.0625 (1) $575,000 $383.33
par value $.01
per share
<FN>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon
the average high and low prices reported on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") as of December 13,
1996.
The registration statement shall become effective in accordance with Section
8(a) of the Securities Act of 1933, as amended, or until the registration
statement shall become effective on such date as the Commission, acting pursuant
to said Section 8(a) may determine.
</FN>
</TABLE>
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<PAGE>
Cross Reference Sheet Showing location in the Prospectus of Information required
by Items in Part I of Form SB-2
Form SB-2 Item Number and Caption Prospectus Caption
1. Front of the Registration Statement
and Outside Front Cover Page of Prospectus. Outside Front Cover Page
2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back
Prospectus................................. Cover Page
3. Summary Information and Risk Factors........ Prospectus Summary, High
Risk Factors
4. Use of Proceeds............................. Use of Proceeds
5. Determination of Offering Price............. Outside Front Cover Page,
High Risk Factors
6. Dilution.................................... Not Applicable
7. Selling Security Holder..................... Selling Security Holder
8. Plan of Distribution........................ Plan of Distribution
9. Legal Proceedings........................... Legal Proceedings
10. Directors, Executive Officers
Promoters and Control Persons.......... Management
11. Security Ownership of Certain Beneficial Security Ownership of certain
Owners and Management ................. beneficial Owners and
Management
12. Description of the Securities Registered.... Description of Securities
13. Interest of Named Experts and Counsel....... Experts and Counsel
14. Statement as to Indemnification............. Disclosure of Commission
Position on Indemnification
for Securities Act liabilities.
15. Organization Within Last Five Years........ Not Applicable
16. Description of Business..................... Prospectus Summary,
Description of Business
17. Management's Discussion and Analysis or Management's Discussion
Plan of Operation........................ And Analysis or Plan of
Operation
18. Description of Property..................... Description of Property
19. Certain Relationships and Related
Transactions.............................. Certain Transactions
20. Market for Common Equity and Related Market for Common Equity
Stockholder Matters Information........ and Related Matters.
21. Executive Compensation...................... Executive Compensation
22. Financial Statements........................ Financial Statements
23. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure. Changes in and Disagreements
with accountants on accounting
and financial disclosure
3
<PAGE>
DATED DECEMBER 16th, 1996
PROSPECTUS
FRANKLIN CONSOLIDATED MINING CO., INC.
9,200,000 Shares
Common Stock
par value $.01 per share
This prospectus relates to the offer and sale of up to an aggregate of
9,200,000 shares (the "Shares") of Common Stock, par value $.01 per share (the
"Common Stock") of Franklin Consolidated Mining Co., Inc., a Delaware
corporation (the "Company" or "Franklin") by a Selling Security Holder (the
"Selling Security Holder") of Franklin. See "Selling Security Holder."
An investment in the Shares is subject to a high degree of risk. See
"Investment Considerations."
The Selling Security Holder acquired the Shares pursuant to a private
transaction with the Company. See "Recent Sales of Unregistered Securities" in
Part II. Information not required in Prospectus in the Registration Statement.
The consideration for the sale of the Shares to the Selling Security Holder
was determined through registration with the Company after consideration by the
Company of certain factors such as market price for the Common Stock, lack of
immediate liquidity of the Shares and prevailing market conditions. The Selling
Security Holder will arbitrarily determine the selling price of the Shares based
upon certain factors such as the market price for the common stock and
prevailing general market conditions.
The Company will not receive any of the proceeds from the sale of any of
the Shares. The Company, however, has agreed to bear certain expenses in
connection with the registration of the Shares being offered and sold by the
Selling Security Holder. See "Other Expenses of Issuance and Distribution" in
Part II Information not Required in Prospectus in the Registration Statement.
The Common Stock is quoted on the NASDAQ Stock Market under the symbol
"FKCM." On December 13, 1996, the last reported sale price of the Common Stock
was $.0625 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.
Investors should carefully review the risk factors set forth in the prospectus
before investing in the securities offered hereby.
The date of this Prospectus is DECEMBER 16th, 1996.
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<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.
Washington, D.C. 20549. Documents filed by the Company can also be inspected at
the offices of the National Association of Securities Dealers, Inc., located at
1735 K Street N.W., Washington, D.C. 20006, on which exchange the Company's
Common Stock is listed.
Recently the Company has commenced filing its reports, proxy statements and
other information with the Commission electronically. The Commission maintains a
web site that contains such reports, proxy and information statements and other
information filed electronically by the Company which can be accessed at
http://www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-9416) are incorporated in this Prospectus by reference and hereby made a part
hereof:
1994 Annual Report to Stockholders and Definitive Proxy Materials
distributed to the Stockholders of the Company on November 4, 1995 in connection
with Annual Meeting of Shareholders held on November 30, 1995
Annual Report of the Company on Form 10-KSB as filed with the Securities
and Exchange Commission for the fiscal year ended December 31, 1995
Quarterly Report of the Company on From 10-QSB as filed with the Securities
and Exchange Commission for the quarter ended March 31, 1996
Quarterly Report of the Company on From 10-QSB as filed with the Securities
and Exchange Commission for the quarter ended June 30, 1996
Quarterly Report of the Company on From 10-QSB as filed with the Securities
and Exchange Commission for the quarter ended September 30, 1996
All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of the shares of Common Stock shall be deemed to be
incorporated by reference herein and to be a part here of from the date of the
filling of such reports and documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated or deemed to be incorporated by reference superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
then exhibits to such documents (except for exhibits that are specifically
incorporated by reference herein). Requests for such copies should be directed
to the Company principal executive offices located at 76 Beaver Street, Suite
500, New York, New York, 10005, to the attention of Robert Waligunda, Secretary
(telephone no. (212) 344-2828).
No underwriter, dealer, salesman or other person has been authorized to
give any information or to make any representation other than those contained in
this Prospectus, in connection with the offering described herein, and given or
made, such information or representation other than those contained in this
Prospectus, in connection with the offering described herein, an if given or
made, such information or representation must not be relied upon as having been
authorized by the Company the deliver of this Prospectus at any time does not
imply that there has not been any change in the information set forth herein or
in the affairs of the company since the date hereof. This Prospectus does not
constitute any offer to sell or a solicitation of an offer to buy any security
other than the securities offered hereby, or an offer to sell or a solicitation
of an offer to buy any security other than the securities offered hereby or an
offer to sell or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to any person to whom
such offer or solicitation would be unlawful.
5
<PAGE>
9,200,000
Shares of Common Stock
of
FRANKLIN CONSOLIDATED
MINING CO., INC.
Table of Contents Page
Additional Information
Documents Incorporated by Reference
Summary Information
Investment Considerations
Selling Security Holder
Plan of Distribution
Legal Proceedings
Directors, Executive Officers, Promoters
and Control Persons
Security Ownership of Certain Beneficial
Owners and Management
Description of Securities
Interest of Named Experts and Counsel
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
Description of the Business
Management's Discussion and Analysis
or Plan of Operation
Description of Property
Certain Relationships and Related
Transactions
Market for Common Equity and
Related Stockholder Matters
Executive Compensation
Financial Statements
Changes In and Disagreements With
Accountants and Financial Disclosure
6
<PAGE>
THE COMPANY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and consolidated financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Franklin Consolidated Mining Co., Inc. "Franklin" or, (the "Company") is a
development stage Delaware corporation organized for the purpose of acquiring
and developing mineral resource properties. Among the Company's assets are (i)
the leasehold rights (the "Hayden/Kennec Leases") to explore and develop 28
patented mining claims comprising approximately 322 acres of property in Clear
Creek County, Colorado and leasehold and/or ownership interest in the adjacent
mining claims comprising approximately 23 additional acres (collectively, the
"Franklin Mines"), (ii) a crushing and flotation mill on the site of the
Franklin Mines having a capacity to process approximately 150 tons of ore 24
hour period (the "Franklin Mill"), (iii) a fully permitted modern milling
facility located in the Gold Hill mining region, and (iv) a 20% interest in a
company which owns certain mining properties in the Spencer Mountain region of
Colorado . The principal minerals found at the Franklin Mines are gold, silver,
lead, zinc and copper.
In February 1993, the Company and Island Investment Corp. ("Island") formed
Zeus No. 1 Investments (the "Joint Venture" or "Zeus Joint Venture"), a
California general partnership, to develop the Franklin Mines and the related
assets of the Company. Shortly thereafter, Island assigned its rights to the
Joint Venture to Gems & Minerals Corp., a subsidiary of Island ("Gems").
Presently, the Company maintains a 17.5% interest in the Joint Venture and Gems
maintains an 82.5% interest. Neither the Franklin Mines nor the Franklin Mill
has commenced production to date.
The Zeus Joint Venture was primarily formed to develop the Franklin Mines
and Franklin Mill 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 those lease rights and/or to otherwise acquire the rights to the use of
such properties and the extraction of the related resources. Pursuant to the
Hayden/Kennec Leases, the Company has the exclusive right to explore, develop
and mine and to extract any minerals found in the mines, lodes, veins and dumps
located thereon.
On July 3, 1996, Franklin acquired the Gold Hill Mill, a permitted modern
milling facility located in Boulder County, Colorado (the "Gold Hill Mill") from
Colina Oro Molina, Inc. ("COM, Inc.") for a $2,500,000 note. COM, Inc. is an
affiliate of Gems and Island. The Gold Hill Mill is located within close
proximity to the Franklin Mine and Franklin Mill as well as the Mogul Mines (as
defined below) and will afford the Company the opportunity to expand its
geographic reach into the Gold Hill Mining region. Although the Gold Hill Mill
has not been commercially operated in the past or is currently operational,
management contemplates that milling will occur at the Gold Hill Mill and
Franklin Mill at a combined initial rate of 200 tons per day in fiscal year
1997. The Company anticipates that such capacity will be increased in the future
upon the installation of additional equipment at the facilities and receipt of
the appropriate regulatory approvals, if necessary.
On September 26, 1996, the Company acquired from Gems a 20% interest in a
start up entity, Newmineco, LLC, a Colorado limited liability company
("Newmineco" or "LLC") which owns the rights to the mining properties known as
the Mogul Mines which consist of the Mogul Tunnel and the surrounding claims in
the Spencer Mountain region the ("Mogul Mines"). The Mogul Mines, which are
located in Eldora, Boulder County Colorado, are well known in the region as a
historic gold resource and recently produced during bulk testing an estimated
100 tons of gold ore with an average grade of approximately 1 ounce per ton.
Although the Mogul Mines were not operating when the Company acquired the 20%
interest in Newmineco and are not operating currently, Newmineco has informed
the Company that it is anticipating a target production rate of approximately
100 tons per day at the Mogul Mines and has informed the Company of its
intention to transport such materials to the Franklin milling facilities for
crushing and processing upon obtaining the appropriate regulatory approvals. As
with the Gold Hill Mill, the Newmineco has no operating history to date and its
projected production is predicated on obtaining all regulatory approvals and
permits from various regulatory authorities.
7
<PAGE>
The Company is a Delaware corporation incorporated on December 1, 1976. The
executive offices of the Company are located at 76 Beaver Street, Suite 500, New
York, New York 10005, telephone number 212-344-2828.
8
<PAGE>
INVESTMENT CONSIDERATIONS
In addition to the other information set forth in the prospectus,
prospective investors should carefully consider the following factors prior to
making any investment in the Shares.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage and has suffered operating losses
through September, 1996 due to its inability to effectively develop and operate
its mining properties. The Company's future success is highly dependent upon the
successful funding of its operations, including primarily, the successful
funding and operation of the Zeus Joint Venture in which the Company has a
minority profit interest. It is anticipated that the Zeus Joint Venture will
have the technological and financial support necessary to bring certain of the
Company's mining properties into operation; however, there is no certainty that
such financing will be available and there can be no certainty that the mines
will go into operation or that, if operations commence, the operations will
continue or be conducted profitably. Moreover, the Gold Hill Mill and the Mogul
Mines do not have any operating history; therefore, the Company's projections
have no historical basis . The likelihood of the success of the Company must be
considered in light of the problems, expenses, difficulties, complications and
delays frequently encountered in connection with the development of any new
business, particularly those associated with mining business. No assurance may
be given that the Company's proposed business plan will succeed or that
significant revenues will be achieved, or that the Company will ever become
profitable. Further, it is possible that the Company will encounter delays,
difficulties in obtaining additional financing, governmental interference
through regulations or otherwise, or other factors which could cause significant
delays to the Company. Such delays, if they occur, could have a material adverse
effect on the potential success of the Company and on the ability of the Company
to achieve profitable operations.
MANAGEMENT; DEPENDENCE ON JOINT VENTURE PARTNER
The Company's success is largely dependent upon the efforts and activities
of a very small management team with limited expertise in the operation of a
mining business. Moreover, the Company is highly dependent upon Gems, its joint
venture partner and outside consultants to develop, manage and, in the future,
operate the mining properties presently leased and/or owned by the Company.
While the Company anticipates that qualified personnel will be available to it,
there can be no assurance that the Company will be able to successfully retain
such consultants. Nonetheless, the loss of the Company's joint venture partner
would have a material adverse effect on the Company's ability to implement its
business plan and/or develop and operate its mining properties. At this time,
there is no current arrangement to hire additional management or any
negotiations with respect to entering into other joint venture arrangements.
Therefore, the Company will be dependent upon the general business acumen and
expertise of its current officers and directors and its joint venture partner.
If the Zeus Joint Venture should terminate, no assurance can be given that the
Company could find a suitable replacement therefor or that the Company's
business and operations would not be adversely affected if such relationship
were to be terminated for any reason. The Company has no current cash flow and
depends entirely upon the Joint Venture (which has no operating history to date)
and its joint venture partner, for repayment of the Company's obligations to
investors and to others. Moreover, the Gold Hill Mill and the Mogul Mines do not
have any operating history. There can be no certainty that the Company will
generate any income or cash flow to pay its obligations. See Investment
Considerations-Joint Venture Arrangements.
9
<PAGE>
COMPETITION
The Company, through its joint venture relationship, expects to be engaged
in a highly competitive industry. Nearly all of the Company's competitors will
have substantially greater capital, research and development, marketing and
human resources and experience than the Company. While none of the Company's
competitors have a large presence in the regions in which the Company maintains
its properties, competitive forces may establish businesses in Colorado mining
areas in the future and may represent significant long-term competition to the
Company. Accordingly, future competitive forces could have a material adverse
effect on the Company's viability and profitability.
ADDITIONAL FUNDING
The Company expended, and will continue to expend in the future, directly
or through the Joint Venture substantial funds to develop its mining properties
as currently contemplated. The Company will not receive any of the proceeds from
this offering and the Company has no current arrangement with respect to
additional financing. Additionally, the Company remains highly dependent on its
joint venture partner and the success of each of the Zeus Joint Venture and
Newmineco. No assurance can be given that additional financing will be available
to the Company on acceptable terms, if at all, or that its joint venture
partner, the Zeus Joint Venture or Newmineco will continue to provide the
support necessary for the Company to develop its mining properties. If
additional funding becomes necessary and is not available to the Company, it
could cause the Company to significantly curtail its efforts with respect to the
development of its mining properties and preclude the Company from fulfilling
certain of its obligations, including its obligations with respect to the Zeus
Joint Venture and Newmineco.
DEPENDENCE ON SINGLE BUSINESS SEGMENT
The Company currently has only one business segment and has no present
plans or capital available to explore alternative business ventures.
Accordingly, the Company's success depends entirely on its ability to develop
its mining properties. There can be no assurance that the Company will be able
to successfully develop its mining properties into a commercially viable
business.
10
<PAGE>
RECENT LOSSES
The Company is a development stage company. It has not had any significant
revenues from its interest in its mines and mills and, as a result, it has
experienced losses for each of the last five years. For the year ended December
31, 1995, the Company reported a net loss of approximately $ 924,000 or $.02 per
common share compared to a net loss of $381,200 or $.01 per common share for
1994. The net loss resulted primarily from the Company's inability to bring the
Franklin Mines and the Franklin Mill into operation. No assurance can be given
that full scale operations will commence at the Mogul Mines or that the Company
will realize any income from its investment in Newmineco in the near future.
LACK OF PRODUCTION
The Company's future production will be dependent upon the Company's
success in bringing the Franklin Mines and the Franklin Mill into production as
well as its development of new reserves, its ability to acquire new properties
containing adequate reserves and the successful operation of the Franklin Mill.
Although the Company has acquired an interest in the Mogul Mines through its
acquisition of a 20% interest in Newmineco, neither the Franklin Mines, the
Franklin Mill nor the Mogul Mines have begun full scale commercial operations.
There can be no assurance that any of the Company's mining properties will ever
come into operation or be able to produce adequate amounts of concentrates to
become commercially viable ventures.
PROJECT DEVELOPMENT
Currently, the Company's projects in development are the Franklin Mines
project, the Mogul Mines project and the Gold Hill Mill project. The Company has
a 20% ownership interest in Newmineco and it is anticipated that the Mogul Mines
project will be placed into full production during the fourth quarter of 1996 or
the first quarter of 1997. The Company owns a 17.5% interest in the Franklin
Mines project through its participation in the Zeus Joint Venture. The Company
incurred capital expenditures for the Franklin Mines project of approximately
$234,000 in 1995 and expects to expend approximately $150,000 in 1996. It is
further estimated that capital expenditures for the Gold Hill Mill will be less
than $50,000 for the last two quarters of 1996.
With respect to such projects, the Company's estimated capital expenditures
for its mining projects are based upon available data and could increase or
decrease depending upon a number of factors beyond the Company's control. In
addition, the Company will not be able to commence production until virtually
all of the capital expenditures have been incurred. Thus, if capital
expenditures are higher than currently estimated, the Company may not be able to
begin mining and/or milling operations until such time as additional financing
is arranged, and there an be no assurance that additional financing will be
available.
11
<PAGE>
Particularly in development projects, reserve estimates are, to a large
extent, based upon data from drill holes and different results may be
encountered when the ore bodies are exposed and mining begins. Although the
Company has engaged in feasibility and engineering activities at the Franklin
Mines, including testing to determine recovery rates of metals from the ore,
since development projects usually have no prior operating history, it is
possible that the Company may experience different economic returns from such
projects than it currently forecasts. The Company has been advised that similar
testing has been conducted at the Mogul Mines thereby creating similar
difficulties. It is not unusual in new mining operations to experience
unexpected problems during the development phase. As described under "Investment
Considerations-Mining Risks and Insurance," the business of mining is subject to
a number of risks and hazards, and there can be no assurance that these risks
and hazards can be avoided in development of the Franklin Mines project.
EXPLORATION
Mineral exploration, particularly for gold and silver, is highly
speculative in nature, involves many risks and frequently is nonproductive.
There can be no assurance that the Company's mineral exploration efforts will be
successful. Once mineralization is discovered, it may take a number of years
from the initial phases of drilling until production is possible, during which
time the economic feasibility of production may change. Substantial expenditures
are required to establish ore reserves through drilling to determine
metallurgical processes to extract the metals from the ore, and, in the case of
these uncertainties, no assurance can be given that the Company's exploration
programs will result in profitable operations at the Franklin Mines, the Mogul
Mine or other properties which the Company may acquire in the future.
METAL PRICE VOLATILITY
Because substantially all of the Company revenues will be derived from the
sale of gold, and perhaps in the future, silver, lead, copper and/or zinc, if
the market price for these metals falls below the Company's estimated production
costs and remains at such level for any sustained period, the Company may
experience losses and may determine to discontinue development of a project or
mining at the Franklin Mines, the Mogul Mine or other properties which may be
acquired by the Company in the future. As described above under "Investment
Considerations-Recent Losses," the Company has experienced losses from
operations in each of the last five years due to the Company's inability to
commence operations at the Franklin Mines and the Franklin Mill. While the
Company hopes to be able to reduce its exposure to the volatility of gold,
silver, lead, copper and/or zinc prices once the Franklin Mines and Mogul Mines
are operational, there can be no assurance that it will be able to do so
effectively.
12
<PAGE>
COMPETITION FOR PROPERTIES
Because mines have limited lives based on proven and probable ore reserves,
the Company must continually seek to replace and expand its reserves. While the
Company is one of the few mining companies operating in its Colorado mining
region to date, the Company may encounter strong competition from other mining
companies in connection with the acquisition of properties procuring or capable
of producing gold, silver, lead, zinc and industrial minerals should competitors
wish to establish operations in Colorado. In the event that such competition
will develop, most of which will be with companies having greater financial
resources than the Company, the Company may be unable to acquire attractive
mining properties on terms it considered acceptable. In addition, there are a
number of uncertainties inherent in any program relating to the location of
economic ore reserves, the development of appropriate metallurgical processes,
the receipt of necessary governmental permits and the construction of mining and
processing facilities. Accordingly, there can be no assurance that the Company's
programs will yield new reserves to replace and expand current reserves. The
mining properties upon which the Zeus Joint Venture and Newmineco are based are
leased from a third party, and the lease must be renewed or the Company must
exercise its option to purchase the mining rights represented thereby.
RESERVES
The ore reserve figures for the ore bodies comprising the Franklin Mines
presented in this prospectus are, in large part, estimates made on behalf of the
Company and no assurance can be given that the indicated level of recovery of
these metals will be realized. Reserves estimated for the Franklin Mines may
require revision based on actual production experience as these properties have
not yet commenced production. Market price fluctuations of the Company metals as
well as increased production costs or reduced recovery rates, may render ore
reserves containing relatively lower grades of mineralization uneconomic and may
ultimately result in a restatement of reserves. Moreover, short-term operating
factors relating to the ore reserves, such as the need for sequential
development of ore bodies and the processing of new or different ore grades, may
adversely affect the Company's profitability in any particular accounting
period.
With respect to the Mogul Mines, reports have been done in the past with
respect to the geology and deposits located thereat. However, such reports were
conducted several years ago and the Company has been advised by Newmineco that
it intends to conduct its own testing to generate information regarding basic
line data with respect to geology and possible reserves. Therefore, there can be
no assurance that the Company will have ore reserve figures available to it with
respect to the Mogul Mines or that such figures will indicate that commercial
production at the Mogul Mines will be economically feasible.
13
<PAGE>
JOINT VENTURE ARRANGEMENTS
The Franklin Mines project is being conducted through the Company's joint
venture arrangements with Gems. As a matter of partnership law, if a joint
venture partner fails to honor its obligation (including as a result of
insolvency), the Company could incur losses in excess of its pro rata share of
the joint venture.
The Company estimates of its development costs and capital expenditures
assume that its joint venture partner will not default in its obligations to
contribute its respective portions of such costs and expenditures as set forth
in the partnership agreement. If there is such a default, there can be no
assurance that the Company will have the resources available to contribute
additional capital to the project. Accordingly, there can be no assurance that
the Company's cash flow from operations and its capital resources will be
sufficient to achieve planned levels of expenditures.
GOVERNMENT REGULATION AND LEGAL PROCEEDINGS
The Company's mining activities are subject to extensive federal, state and
local laws and regulations controlling not only the mining of and exploration
for mineral properties, but also the possible effects of such activities upon
the environment. Permits from a variety of regulatory authorities are required
for many aspects of mine and mill operation and reclamation. Further,
legislation and regulations could cause additional expense, capital
expenditures, restrictions and delays in the development of the Company's
properties, the extent of which cannot be predicted. In the context of
environmental permitting, including the approval of reclamation plans, the
Company must comply with known standards, existing laws and regulations which
may entail greater or lesser costs and delays depending on the nature of the
activity to be permitted and how stringently the regulations are implemented by
the permitting authority. It is possible that the costs and delays associated
with the compliance with such laws, regulations and permits could become such
that the Company would not proceed with the development or operation of a mine.
TITLE TO PROPERTIES
The validity of unpatented mining claims is often uncertain and may be
contested. Although the Company has attempted to acquire satisfactory title to
its undeveloped properties, the Company, in accordance with mining industry
practice, does not generally obtain title opinions until a decision is made to
develop a property, with the attendant risk that some title, particularly titles
to undeveloped properties, may be defective. However, with respect to the
Franklin Mines and the Mogul Mines, the Company has procured title policies and,
despite some minor defects with respect to the Franklin Mines, believes that it
will not have any issues with respect to defective title.
14
<PAGE>
MINING RISKS AND INSURANCE
The business of mining is generally subject to a number of risks and
hazards, including environmental hazards, industrial accidents, labor disputes,
encountering unusual or unexpected geologic formations, cave-ins, flooding and
periodic interruptions due to inclement or hazardous weather conditions. Such
risks could result in damage to, or destruction of , mineral properties or
producing facilities, personal injury, environmental damage, delays in mining,
monetary losses and possible legal liability. Although the Company maintains
insurance within the ranges of industry practice, no assurance can be given that
such insurance will be available at economically feasible premiums. Insurance
against environmental risks (including potential for pollution or other hazards
as a result of disposal waste products occurring form exploration and
production) is not generally available to the Company or to other companies
within the industry. To the extent that the Company is subject to environmental
liabilities, the payment of such liabilities would reduce the funds available to
the Company. Should the Company be unable to fund fully the cost of remedying an
environmental problem, the Company might be required to suspend operations or
enter into interim compliance measures pending completion of the required
remedy.
SMELTING CAPACITY
The Company intends to sell substantially all of its metallic concentrates
to smelters which are subject to extensive regulations including environmental
protection laws. The Company has no control over the smelters' operations or
their compliance with environmental laws and regulations. If smelting capacity
should be severely reduced, unavailable to the Company or otherwise, it is
possible that the Company's operations could be adversely affected.
15
<PAGE>
SELLING SECURITY HOLDER
(a) The following table sets forth certain information with respect to
shares held by the Selling Security Holder. The shares may be offered from time
to time by the Selling Security Holder. See "Plan of Distribution".
Security Holder Shs. Beneficially owned Shares Shares Beneficially Owned
Name Prior to the Offering Offered after the Offering
- ---- --------------------- ------- ------------------
Number Percent Number Percent
------ ------- ------ -------
Gems & Minerals 12,827,577 14.2% 9,200,000 3,627,577 4%
Corp.(1)
(1) Gems has been Joint venture partner of the Company since 1993 owning
82.5% of the Zeus joint venture. Gems also has a 51% interest in Newmineco LLC,
a limited liability company in which the Company owns a 30% interest.
(b) The following table sets forth certain information with respect to
other security holders of the Company who have the right to participate in this
Registration. As of the date hereof, the Company has not received the required
information for such persons to be permitted to participate in this
registration, but such security holders may complete the exercise of their
rights to participate in this registration at any time.
Name of Security Holder Number of Shares Entitled to Participate
in the Registration
Gems & Minerals Corp.(1)(9) 3,627,577
J. Terry Anderson(2) 1,138,140
Anderson Chemical Company(3) 861,520
Bruce R. Anderson(4) 1,138,140
Lindsay Anderson(4) 1,138,140
Leif E. Anderson(4) 1,138,140
Carlo Sgrizzi 1,138,140
Saul Horing(5) 1,000,000
Martin Eisner 295,372
Sam and Lana Kwock 1,088,000
Lawrence McReynolds 1,039,471
Lawrence McReynolds, Pension Plan 360,201
Andrew and Veronica Liu 839,811
John B. Damonte, Trustee 362,187
Barton N. Dreyer 326,257
Pauline Gilmore, Trustee 798,768
John Miele 400,000
Michael Gleason 691,634
Carl F. Clinger 808,704
Cazmo Lukrich 2,126,046
George Lukrich 489,342
Thomas H. Thiersch 1,091,922
Ruth D. Anderson 255,888
Thaddas Myrl Kitchens 317,864
Warren Serenbetz 800,000
John Miner(6) 428,000
Barbara Brodzinski 135,372
Alan Prachar 135,372
Ank Prachar 135,372
Robert Hamilton 512,820
D & K Construction Co., Inc. 1,088,021
CTS Capital Corp. 2,152,441
Barry Wolinetz(7) 15,700
Benson Lafazan(7) 15,700
Irving Wolinetz(7) 19,000
Carl Preiser(7) 5,600
Ernest Haenggi 200,000
Catherine Lowe 70,588
Andrew Liu 141,176
Maria Lopez 94,118
Alan Mencher 24,000
George & Beverly Lukrich 94,118
Aaron Kamins 188,235
Olethea Partnership 1,200,000
Redstone Securities, Inc.(8) 2,500,000
Stephen Barbuto 400,000
(1) See table and footnotes in item (a) above.
(2) Mr. J. Terry Anderson is a director and officer of the Company. See
"Management", "Security Ownership of Certain Beneficial Ownership and
Management".
(3) Mr. J. Terry Anderson, an officer and director of the Company, serves as
Chairman, President, a director and a principal stockholder of Anderson Chemical
Company.
(4) Mr. Anderson is the brother of J. Terry and Anderson, and officer and
director of the Company.
(5) Mr. Horing has formerly acted as legal counsel to the Company within the
past three years.
(6) Mr. Miner presently serves as a consultant to the Company, Gems, the Joint
Venture and Newmineco in connection with operations at the Franklin Mines, the
Franklin Mill and the Mogul Mine project.
(7) Associated with, and received shares as a result of services performed by
Wolinetz, Gottlieb & Lafazan, P.C., former independent public accountants to the
Company.
(8) Redstone Securities is currently acting as the company's investment banker
and financial advisor in accordance with the terms of an Investment Baking
Agreement entered into between the Company and Redstone in August, 1996. See
"Recent Sales of Unregistered Securities" in Part II Information not Required in
this Prospectus of the Registration Statement of the Company on Form SB-2.
(9) Includes 3,600,000 shares pledges as collateral to secure certain
indebtedness of the Company and Gems.
16
<PAGE>
PLAN OF DISTRIBUTION
The Shares offered hereby may be sold from time to time by the Selling
Security Holder acting as principal for its own account. The Company will
receive none of the proceeds from the offering of the Shares. Pursuant to
certain agreements between the Company and Selling Security Holder, the Company
agreed, at its expense, to file this Registration Statement and to take certain
other actions to permit the Selling Security Holder to sell the Shares under the
Securities act of 1933 and applicable state securities laws. The Selling
Security Holder will pay or assume brokerage commissions, discounts or other
charges and expenses incurred in the sale of the Shares.
The distribution of the Shares by the Selling Security Holder is not
subject to any underwriting agreement. The Shares covered by this prospectus may
be sold by the Selling Security Holder. The Shares offered by the Selling
Security Holder may be sold from time to time at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. In addition, the Selling
Security Holder may sell the Shares covered by this prospectus through
broker-dealers acting as agents or brokers who may then resell the Shares, or a
private sale or otherwise, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
Selling Security Holder may effect such transactions by selling Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of underwriting discounts, concessions, commissions or fees from the
Selling Security Holder and/or purchasers of the Shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation to a particular broker-dealer might be in excess of
customary commissions). Any broker-dealers that participate with the Selling
Security Holder in the distribution of Shares may be deemed to be underwriters
and any commissions received by them and any profit on the resale of Shares
positioned by them might be deemed to be underwriting discounts and commissions
within the meaning of the Securities Act of 1933, in connection with such sales.
If and when any shares covered by this prospectus qualify for sale pursuant
to Rule 144 under the Securities Act of 1933, they may be sold under Rule 144
rather than pursuant to this prospectus.
The Selling Security Holder is not restricted as to the price or prices at
which the Selling Security Holder may sell Shares. Sales of such Shares at less
than the market prices may depress the market price of the Company securities.
Moreover, the Selling Security Holder is not restricted as to the number of
Shares which may be sold at any one time, and it is possible that a significant
number of Shares could be sold at the same time which may also have a depressive
effect on the market price on the Company's securities. It is anticipated that
the sale of the Shares will be made over a three year period commencing with the
date of this prospectus.
The Selling Security Holder will be subject to applicable provisions of the
Securities Exchange act of 1934, as amended, and the rules and regulations
thereunder, including, without limitation, Rules 10b-2, 10b-5, 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of the Shares by
the Selling Security Holder.
17
<PAGE>
The Company is permitted to suspend the use of this Prospectus in
connection with sale of the Shares the Selling Security Holder during certain
periods of time under certain circumstances relating to pending corporate
developments and public filings with the Commission and similar events.
18
<PAGE>
LEGAL PROCEEDINGS
Friedman Litigation
On or about June 28, 1995, the Company issued a promissory note for $90,000
(the "Friedman Note") and a share warrant exercisable for up to 500,000 shares
of the Company to Charles J. Friedman, P.C. ("Friedman"), a former corporate
counsel of the Company, for payment of legal fees, provided that certain
conditions relating to work to be performed by such counsel. On or about
February 14, 1996, Friedman commenced an action against the Company in the
District Court for Clear Creek County, Colorado claiming an alleged default by
the Company of its obligations pursuant to the Friedman Note. Friedman seeks
payment of damages in the principal amount of the Friedman Note plus interest,
costs and attorney's fees and has retained certain of the Company's books,
records and other material documentation claiming that such documentation is
subject to an attorney's lien for failure to pay for legal services. The Company
has retained local counsel in this matter and was granted its motion to remove
the case from the Clear Creek County District Court to United States District
Court for the State of Colorado. The Company maintains that Friedman is not
entitled to payment under the Friedman Note in that the conditions precedent set
forth in the relevant documentation executed in connection with the Friedman
Note were not satisfied. Moreover, the Company has asserted counterclaims
against Friedman for damages suffered as a result of his failure to timely
perform legal services and his refusal to return the Company's books, records
and material documentation. The Company has also demanded a full accounting of
all Company materials which Friedman presently has in his possession and that
such documentation be returned immediately.
12 1/4 Convertible Debentures
As of the date hereof, the Company remains in default with respect to its
121/4% Convertible Debentures (the "Debentures") which matured on December 31,
1994. In 1994 and again in 1995, the Company asked the holders to approve
alternative payment arrangements in an effort to cure the defaults and
ultimately pay, in full, $ 145,000 principal amount of the Debentures, together
with all accrued and unpaid interest thereon. However, throughout these periods,
a series of unforeseen circumstances caused cash flow shortages which prevented
the Company from bringing such holders current. As of September 30, 1996, the
Company owed approximately $26,645 in accrued and unpaid interest to such
holders.
As a result of its default and its continued failure to comply with the
1994 and December 1995 agreements, the Company may be subject to legal
proceedings by the Transfer Agent/Trustee under the Indenture or from holders
seeking immediate payment of the $145,000 outstanding, plus related interest and
other costs and expenses associated therewith as well as penalties and other
legal remedies available to such holders under the law. As of the date hereof,
however, no litigation has been commenced against the Company with respect to
the Debentures. While the Company is currently attempting to cure the default,
there can be no assurance that the funds will be available in the future to meet
all of the Company's obligations. The Company is hopeful that it will generate
sufficient funds prior to December 31, 1996 to pay the balance of the interest
payments which become due in 1996, together with the outstanding principal
balance after payment of the $26,645 currently in arrears as intended by the
Company's past agreements. Management is hopeful that such action will greatly
diminish the possibility of legal action in the future; however, there can be no
assurance that the Company will have adequate funds available to make the
payments or that the commencement of legal proceedings will not have a material
adverse effect on the Company.
19
<PAGE>
Leadville Mining and Milling Dispute
In June 1996, each of Leadville Mining & Milling Corporation ("Leadville")
and its principal officer, Gifford A. Dieterle commenced actions against the
Company in District Court, Clear Creek County Colorado with respect to certain
monies advanced by Leadville on behalf of the Company in connection with
expenses allegedly attributable to the Company with respect to common office
space and certain consulting fees which Mr. Dieterle claims are allowed by the
Company for his services as a geologist. The aggregate amount of the claims are
approximately $33,000 plus interest accruing at 8% per annum and attorney's
fees.
On July 10, 1996, the Company entered into a Settlement Agreement with each
of Leadville and Mr. Dieterle pursuant to which it was agreed that the Company
would settle all claims involved for $22,000 and each of Leadville and Dieterle
will, as soon as possible, (i) discontinue each of the actions against the
Company as well as withdraw any motions filed with respect thereto, (ii) remove
any liens or other encumbrances which may have been filed against the assets of
the Company and (iii) execute releases with respect to such claims. As of
November 15, 1996, the Company has paid Mr. Dieterle $4,000 as payment in full
of his personal claims and Leadville $9,000 of the $18,000 owed under the
Settlement Agreement.
Environmental Matters
On November 4, 1993, the Company was notified by the DMG that the Company
failed to timely file a plan in the form of a technical revision in connection
with continuation of the Company's state mining permit. Such technical revision
plan was required to address erosion, sedimentation and run-off matters arising
from the upper pyritic tailings pile located at the property. The DMG set the
matter down for a hearing to determine if a violation existed in connection with
the Company's permit and what, if any, action was required. As a result of such
hearing, the Company increased its existing land reclamation bond from $29,000
to $45,000. In addition, the Company was required to take certain remedial
action to address the erosion, sedimentation and run- off concerns which action
had been taken and approved by the DMG. A formal hearing was held in June, 1994
to determine what, if any, fine should be levied against the Company in the
matter. A fine of $5,000 was assessed and paid by the Company.
In August, 1994, the Company received an informal notice from the DMG
of additional violations at the Franklin Mine relating to water run-off from the
upper pyritic tailings and a filled sediment pond. The Company thereafter
attempted to rectify such violations in a timely manner, however, in order to
complete certain of the remedial work required to correct such violations, the
Company was required to perform work outside the boundaries of its current
permits. Therefore, in order to perform the required technical and remediation
work, the Company was first required to formally amend its current permit to
extend its boundaries to include those sections of the mining properties to be
used in the performance of the remediation work. In subsequent meetings with the
DMG, the Company and the Joint Venture had received positive feedback with
respect to its plans to comply with the above-referenced violations. Further,
the Company had agreed that it would refrain from any mining or milling
operations at the Franklin Mine until such time as the DMG shall (i) amend the
Company's permit to perform the required technical and remediation work and (ii)
determine that all the Company's required work was properly completed.
20
<PAGE>
In March, 1996, the Company was notified that it would be required, to
further increase its land reclamation bond. In an effort to comply with such
requests, the Company posted an additional $48,000 increasing it land
reclamation bond from $45,000 to $93,000. On or about March 28, 1996 at a
hearing before the MLRB and the DMG, the Company received a temporary cease and
desist order prohibiting it from conducting mining and/or milling operations at
the Franklin Mine until such time as all of the violations cited by the DMG were
satisfied. Additionally, the MLRB determined that the Company's reclamation bond
should be increased to approximately $252,000 on or before April 5, 1996.
The Company was able to post the required bond with the DMG in May of 1996
and has received official notification from such agency that all of the
violations at the Franklin Mine have been remedied and the Cease and Desist is
no longer in effect.
As of the date hereof, the Company has no formal violations outstanding
against it with respect to the Franklin Mines and Franklin Mill. The Company has
recently completed all of the documentation required to expand its permits to
increase the capacity of production at the Franklin Mill and continues to take
remedial action with respect to the tailings and sediment pond to correct any
remaining run-off problems. While there are no outstanding violations against
the Company at this time, there can be no assurance that future violations will
not arise and that such violations will not lead to interruptions in operations
at the Franklin Mines or Franklin Mill.
Joint Venture Obligations
As of December 31, 1995, outstanding obligations of the Joint Venture
totaled $190,485 and as a General Partner, the Company may be liable to
creditors or others for unsatisfied debts and unspecified liabilities of the
Zeus Joint Venture. Additionally, as of September 30, 1996, the Company owed
Gems and its subsidiary approximately $1,500,000 which includes monies advanced
by Gems on behalf of the Company in connection with the Zeus Joint Venture and
amounts owed with respect to the Gold Hill Mill and Newmineco acquisitions.
Delinquent Real Property Taxes
As set forth in the Hayden/Kennec Leases, the Company is required to pay
all real property taxes assessed to the properties covered by such leasehold
agreement. As of the date hereof, the real estate taxes presently due and owing
on the properties that comprise the Franklin Mines and Mill are approximately
$44,000 for the years ended 1993, 1994 and 1995. Moreover, the taxes assessed
for the year ended 1993 and 1994 in the amount of approximately $24,000 have
been sold at auction to a third party. The Company has been informed by the
requisite taxing authorities that it must pay the 1993 and 1994 amounts on or
before August 1997 to avoid being subject to enforcement proceedings to collect
such obligations. No partial payments are accepted with respect to the 1993 and
1994 tax liabilities. The Company is hopeful that it will be able to pay such
taxes out of the proceeds of the Company's operations.
21
<PAGE>
Durango Litigation.
On or about February 1, 1996, Newmineco, Island, Gems and Zeus entered into
a series of transactions with Durango Metals, Inc., a Colorado Corporation
("Durango") Thames Hartley, the president of Durango (Hartley") and J. Wayne
Tatman ("Tatman"), an agent of Durango and Hartley and president of Consolidated
Milling, Inc. ("Consolidated Milling") to develop certain mining properties,
including the Mogul Mines. See Description of the Business-Newmineco. On or
about March 1996, Island acquired a lease known as the Rugg Lease at the Mogul
Mine in Boulder Colorado from Charles R. Rugg and his daughter, Cindy McCollum
(collectively the "Ruggs") through a Novation Agreement by which the predecessor
lessee, Durango, Hartley and/or its representative Tatman, agreed to release
their leasehold interest in the Rugg properties in exchange for the agreements
of each of Island and the Ruggs to allow Island to become the lessee of the
properties and to take over all of the rights and obligations of the parties
under the original lease which included payment by Island of certain financial
obligations owed by Durango, Hartley and/or Tatman to the Ruggs under the
original lease. The Rugg Lease was then renegotiated and renewed with the Ruggs
and Island, solely, as lessee for a ten year period which lease is currently in
effect and which was later assigned to Newmineco. Thereafter, Island and Gems
notified the Company that Tatman, Hartley and Durango and certain other parties
to the Newmineco venture breached their agreements and as a result, Island
terminated all such venture agreements involving these persons and Newmineco.
Island thereafter assigned its interest in Newmineco to Gems.
In June, Durango and/or Hartley served a series of Notices of Intent to
Lien properties owned or leased by each of Gems, Island and the Company,
including the Company's newly acquired Gold Hill Mill. Thereafter, on or about
October 15, 1996, Jane A. Wood and David C. Sutton, each the owner of claims
located on the properties comprising the Mogul Mines (the "Delaware Claim" and
the "Bonanza Claims", respectively) and Durango, the purported lessee of such
claims, commenced an action in District Court, Boulder County, Colorado, against
the Ruggs, Island, Newmineco, the Company and any other unknown parties of
interest to quiet title to each of the Delaware Claim and Bonanza Claims
(hereinafter the "Disputed Claims"). The complaint further alleges that the
defendants have removed ore mined from the Disputed Claims and that, as a result
of trespass and conversion of certain equipment of Plaintiff Durango, plaintiffs
have been further damaged in the amount of approximately $800,000. In addition
to the actions for quiet title and for the adjudication of the ownership of the
Disputed Claims, Plaintiffs requested damages for conversion of Plaintiff
Durango's equipment, seeks a full accounting of the ore removed from the
premises and request all other damages, costs and expenses, including attorney's
fees incurred with respect to this dispute.
The Company, as well as its co-defendants retained local Colorado counsel
and intend to rigorously defend this action. In addition, on or about October
30, 1996, each of Com, Inc., a previous owner of the Gold Hill Mill, Gems,
Island, the Company, Audrey I. Hayden and Dorothy Kennec commenced an action
against each of Durango, Hartley, Consolidated Milling and Tatman in District
Court, Boulder County Colorado claiming, amount other things, that (i) all of
the liens filed against the plaintiff's properties are without merit, null and
void and should be removed from the public record, (ii) damages were incurred
for the filing of excessive liens together with costs and expenses, including
reasonable attorneys fees incurred in connection therewith, (iii) breach of
contract with respect to the Newmineco venture agreements, (iv) damages were
incurred for loss of business opportunities and interference in plaintiffs'
contractual relationships and (v) defendants slandered plaintiffs' title to
property causing them damages.
22
<PAGE>
MANAGEMENT
The information required by this item as it relates to Messrs. Anderson and
Waligunda is set forth in the Company's definitive proxy statement relating to
the Company's 1995 Annual Meetings of Stockholders under the captions "Election
of Directors " and Executive Officers." Such information is incorporated herein
by reference. The executive officers of the Company are appointed annually by
the Board of Directors and serve an indefinite term.
Name Age Position
J. Terry Anderson 48 Chairman, President,
Treasurer, Director
Robert L. Waligunda 50 Secretary, Director
Robert J. Levin 49 Vice President-Finance
Richard Brannon 47 Vice President-West
Coast Operations
Anthony C. DiMatteo 46 Former Director,
Secretary and Treasurer
J. Terry Anderson. Mr. Anderson has served as a director of the Company
since August, 1991, as the Company's Chairman of the Board since June, 1993, as
the Company's President since June, 1994, and as the Company's Treasurer since
August, 1995. From 1977 to the present, Mr. Anderson has served as chairman,
president, a director and a principal stockholder of Anderson Chemical Company,
a privately-held company located in Litchfield, Minnesota which is engaged in
the manufacture and marketing of sanitation and water treatment chemicals. Mr.
Anderson has also served as a member of the advisory local board of Norwest
Bank, Minnesota Central, N.A., Litchfield, Minnesota. Mr. Anderson received a
Bachelor of Arts degree in theology from Ambassador College in Big Sandy, Texas
in 1972. Prior to that time, Mr. Anderson pursued a degree in Business
Administration from the University of Minnesota from 1965 to 1968.
Robert L. Waligunda. Mr. Waligunda has served as a director of the Company
since 1985 and as Secretary of the Company since August, 1995. From 1965 to the
present, Mr. Waligunda has served as founder, president and principal
stockholder of Sky Promotions, Inc., a Pittstown, New Jersey marketing and
management company involved in sales, advertising and marketing of hot air
balloons and inflatable products. He is a founder and director of the
International Professional Balloon Pilots Racing Association, a member of the
advisory board of Aerostar International, Inc., the world's oldest and largest
balloon manufacturing company, and a member of the National Aeronautic
Association, the Experimental Aircraft Association, and the Airplane Owner and
Pilots Association. Mr. Waligunda received a Masters of Science degree in
guidance and psychological services from Springfield College in 1968.
23
<PAGE>
Robert J. Levin Mr. Levin has served as the Vice President-Finance of the
Company since December, 1995. From January 1984 through July 1990 , Mr. Levin
served as a Senior Partner in the accounting firm of Levin, Pascale & Co. From
July 1990 to December 1995, Mr. Levin operated a private accounting practice.
Mr. Levin is a Certified Public Accountant.
Richard Brannon Mr. Brannon has served as the Vice President-West Coast
Operations since February, 1996. Mr. Brannon is a California licensed real
estate broker and 100% owner of A Reel Mortgage, Inc., a mortgage and loan
servicing company organized in 1991. Mr. Brannon is a founding director of the
California Trustee Mortgage Broker Association, a not-for-profit corporation.
Anthony C. DiMatteo Mr. DiMatteo served as the Secretary/Treasurer and as a
Director of the Company from June 1993 until his resignation from the Board of
Directors and from his offices in August 1995. Mr. DiMatteo has acted as a sales
manager for Four Color Lithograph since 1972 and was a director of Leadville
Mining and Milling Corp., a public mining company from 1987 through July 1993.
To the Company's knowledge and based solely on a review of such materials
as are required by the Securities and Exchange Commission, each officer,
director or beneficial holder of more than ten percent of the Company's issued
and outstanding shares of Common stock timely filed all forms and reports
required to be filed pursuant to Section 16(a) of the Securities and Exchange
Act of 1934, as amended, during the fiscal year ended December 31, 1995; except,
with respect to Messrs. Brannon and Levin who have not made any required filings
under Section 16(a).
24
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Certain Beneficial Owners of Common Stock
Name and Amount and Percentage
Address of Nature of of Class
Beneficial Beneficial
Owner Owner
Gems & Minerals
Corp.; Island Investment
Corp.; Whitey Bear Trust,
as a group (1) 12,827,577 14.2%
(1) Gems has the sole right to direct the voting or disposition of the
12,827,577 shares of the Common Stock and to receive or direct the receipt of
dividends from, or the proceeds from the sale of, any such shares. Through its
ownership of the controlling interest in Gems (91% of the voting stock), Island
has the power to direct Gems' actions with respect to such shares. Through its
ownership of the controlling interest in Island (91% of the voting stock), the
Trust indirectly has the same power. Such power of the Trust would be exercised
by the Trustee in his capacity as sole Trustee of the Trust.
(2) Such member may be subsequently reduced upon the sale of shares by selling
security holders pursuant to this registration statement.
(b) Security Ownership of Management of Common Stock
Name and Amount and Percentage
Address of Nature of of Class
Beneficial Beneficial
Owner(1) Owner
J. Terry Anderson 4,189,660(2) 4.6%
Robert L. Waligunda 192,000(3) 0%(4)
Directors and Executive
Officers as a Group 4,381,660 4.8%
(1) Does not include 30,000 owned by Mr. DiMatteo, a former officer and director
of the Company.
(2) Includes 1,688,140 shares owned by Mr. Anderson, 10,000 shares owned by
Bruce E. Anderson Trust under which Mr. Anderson acts as Trustee and 2,491, 520
owned by Anderson Chemical Company for which Mr. Anderson serves as a director
and president and owns approximately 21% of the outstanding shares. Mr. Anderson
disclaims any beneficial ownership with respect to shares of the Company owned
by his brothers.
(3) Includes 30,000 shares pledged as collateral to a non-affiliate individual.
(4) Less than 1%.
25
<PAGE>
DESCRIPTION OF SECURITIES
The following statements with respect to the Company's Common Stock
describe the material terms but are subject to the detailed provisions of the
Company's Certificate of Incorporation, and by-laws, as amended. These
statements do not purport to be complete and are qualified in their entirety by
reference to the terms of the Certificate of Incorporation and by-laws, which
are incorporated by reference in this Prospectus.
The Company is authorized to issue 100 million shares of Common stock,
$0.01 par value per share, of which 86,855,020 shares of Common Stock were
issued as of September 30, 1996.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding shares of Common Stock
can elect all of the directors then standing for election. Holders of Common
stock are entitled to such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefore.
Holders of Common stock have no conversion, redemption or preemptive rights
to subscribe to any securities of the Company. All outstanding shares of Common
Stock are fully paid and nonassessable. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, holders of the Common
stock will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors.
The Certificate of Incorporation of the Company provides that directors of
the Company shall not be personally liable to the company or its stockholders
for monetary damages for breach of fiduciary duties as a director except to the
extent otherwise required by Delaware law. The By-laws of the Company provide
for indemnification of the officers and directors of the Company to the full
extent permitted by Delaware law.
The transfer agent and registrar for the Common stock is American Stock
Transfer and Trust Company, located at 40 Wall Street - 46 Floor, New York, New
York 10005.
26
<PAGE>
EXPERTS AND COUNSEL
Legal Matters
Certain legal matters with respect to the validity of the securities being
registered will be passed upon for the Company by Falcone, Houdek, Bailey & Curd
LLP.
Experts
The financial statements of the Company included in this prospectus as of
and for the year and period ended December 31, 1995 have been included herein in
reliance on the report of J.H. Cohn LLP, independent public accountants,
appearing elsewhere herein (which expresses an unqualified opinion and includes
explanatory paragraphs referring to uncertainties about certain environmental
regulatory violations and the ability of the Company to continue as a going
concern) and upon the authority of that firm as experts in accounting and
auditing. The financial statements of the Company included in this Prospectus
for the year ended December 31, 1994 have been included herein in reliance on
the report of Wolinetz, Gottlieb & Lafazan, P.C. ("WGL"), independent certified
public accountants, appearing elsewhere herein (which expresses an unqualified
opinion and includes an explanatory paragraph referring to uncertainties about
the ability of the Company to continue as a going concern) and upon the
authority of that firm as experts in accounting and auditing.
Interest in Named Experts and Counsel
No expert or counsel to the Company, hired on a contingent basis, will
receive a direct or indirect interest in the Company or is acting as a promoter,
underwriter, voting trustee, director, officer, or employee, of the Company;
except with respect to certain partners of WGL who were issued approximately
56,000 shares of Common Stock of the Company as a partial payment of outstanding
fees owed to WGL for services rendered to the Company.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company,
the Company has been advised that in the opinion of the commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
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DESCRIPTION OF THE BUSINESS
General
The Company, originally incorporated on December 1, 1976 under the laws of
the State of Delaware, is engaged in the exploration, development and mining of
precious and nonferrous metals, including gold, silver, lead, copper and zinc.
The Company owns or has an interest in a number of precious and nonferrous
metals properties. The Company's principal mining properties are (i) the
Franklin Mines, located near Idaho Springs in Clear Creek County, Colorado, for
which the Company acquired the exclusive right to explore, develop, mine and
extract all minerals located in 28 patented mining claims comprising
approximately 322 acres and 23 additional owned or leased mining claims, (ii)
the Franklin Mill, a crushing and flotation mill which is located on the site of
the Franklin Mines and (iii) the Gold Hill Mill, a fully permitted modern
facility located in Boulder County, Colorado. The Company has also acquired a
20% interest in the Mogul Mines, which consists of the Mogul Tunnel and the
surrounding claims located in the Spencer Mountain region through its investment
in Newmineco and a 17.5% interest in the Gold Hill Dumps, which consists of mine
dump materials located on fourteen dump sites in close proximity to the Gold
Hill Mill through its participation in the Zeus Joint Venture. While none of its
properties were operational in fiscal year 1995 and the three quarters ended
September 30, 1996, the Company has made significant strides in rehabilitating
certain of its mining properties and expanding its operations through its
relationship with its joint venture partner, Gems.
The Zeus Joint Venture
In February 1993, the Company and Island Investment Corp. ("Island") formed
Zeus No. 1 Investments (the "Joint Venture" or "Zeus Joint Venture"), a
California general partnership, to develop the Franklin Mines and the related
assets of the Company. Shortly thereafter, Island assigned its rights to the
Joint Venture to Gems & Minerals Corp., a subsidiary of Island ("Gems").
Presently, the Company maintains a 17.5% interest in the Joint Venture and Gems
maintains an 82.5% interest.
The Company anticipates that it will continue to rely upon its Joint
Venture partner to provide the funding, technical data and personnel necessary
to continue the planned operating program at certain of its mining properties
until such time as such properties become operational and can adequately fund
their operations independently.
Operations at the Franklin Mine
As previously explained, the Zeus Joint Venture was originally formed to
develop the Franklin Mines located in Idaho Springs, Clear Creek County,
Colorado. During 1993, operations at the mining properties consisted primarily
of the efforts by the Joint Venture to develop and improve mineral recovery
methodology. Such activities were financed primarily by cash capital supplied by
Island, and later Gems. The mineral recovery methodology consisted primarily of
repair and remediation work necessary for compliance with environmental
regulatory requirements, further site preparation, metallurgical analysis and
the planning of an exploratory drilling program to further prove reserves. The
Company continued these efforts throughout 1994 and 1995.
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Although there are extensive shafts, tunnels and a mill in place at the
Franklin Mines, the Company has not conducted any significant commercial mining
operations and, as a result, had not generated sufficient revenues from
operations. Therefore, the Company remains in the development stage. Based on
available geological data and reports, the management of Gems has informed the
Company that the application of proprietary technologies and processes available
to the Joint Venture should result in economically viable commercial mining
operations at the Franklin Mines in the future.
After completion of preliminary evaluations in 1993, it was determined that
the economic recovery of metals could better be achieved by adding a closed
circuit cyanide recovery system and carbon/leach recovery system to the
flotation process already in place at the Franklin Mill. Accordingly, such
systems were constructed at the mill site and placed into operation on a test
basis through October, 1993 and all active mining and milling operations were
suspended at the Franklin Mines until repair and maintenance work and final
comprehensive metallurgical studies were completed. Ultimately, it was
determined that the more appropriate course of action would be to commence a
core drilling program to further develop proven and probable reserves prior to
recommencing mining and milling activities prior to expending additional
resources to the Franklin Mines (the "Analysis Program").
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 Company's mining facilities for the commencement of commercial
mining operations, it wished to conduct a comprehensive core drilling and
analysis program (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. In December 1994, the Company
entered into a Standard Drilling Contract with American Mine Services, Inc. to
commence a drilling program to prove additional ore reserves. The Analysis
Program commenced in January, 1995 and was completed in early summer, 1995. As a
result of the reports arising out of the Analysis Program, and based upon
previously available geological data and reports, Gems advised the Company that
the proven and probable reserves at the Franklin Mine previously reported by the
Company were accurate and confirmed and the application of its proprietary
technologies and processes should result in economically viable operations at
the Franklin Mines.
In addition to the Analysis Program, Zeus continued to perform the remedial
work and technical revisions, which it commenced in 1994, addressing erosion,
sedimentation and run-off matters arising from the upper pyritic tailings pond
located at the property and other items which the DMG required in connection
with the Company's mining permits.
In 1994, the Company believed that the Zeus Joint Venture had completed
remedial work necessary to preserve the Company's state mining permit after the
Colorado Division of Minerals and Geology ("DMG") had required technical
revision and remedial work to be performed to address erosion, sedimentation and
run-off matters arising from the upper pyritic tailings pond located at the
property. The tailings pond is the location where waste products from the
Franklin Mill are to be deposited after the milling process is completed. As of
December 31, 1994, Gems reported to the Company that it had incurred
expenditures of approximately $1,200,000, including approximately $781,000 in
mine and mill improvements.
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The Company has confirmed, through the Analysis Program, proven ore
reserves estimated at 166,698 tons having a grade of approximately .315 per
ounce of gold and 6.740 per ounce of silver per ton computed in accordance with
SX standards. Moreover, the dump sites at the Franklin Mines may provide an
additional opportunity for production. The Company as been advised by its
consultants the Franklin dump sites are estimated to contain in excess of
100,000 tons of dump material with a grade estimated at .15 to .25 ounces per
ton.
To date, the Joint Venture has expended approximately $780,000 on mine and
mill improvements and $450,000 on maintenance expenses. This is in addition to
the approximate $13,400,000 spent by the Company since its inception on various
exploration, remediation and rehabilitation programs as well as costs associated
with the reconstruction and restoration of some of the shafts and tunnels
located in the Franklin Mines. Further, the Company completed the Analysis
Program in mid 1995 which further substantiated proven and probable reserves and
addressed other matters which the DMG required of the Company in connection with
its mining and milling permits. Management has been advised by the Joint Venture
that the bulk of the programs instituted to restore both the Franklin Mines and
Franklin Mill to operational status have been successfully completed and that it
is optimistic that the Franklin Mill and Mine will become operational in the
near future.
Newmineco
On or about February 1, 1996, Island acquired a 51% interest in Newmineco,
LLC, a Colorado limited liability company which had an agreement in principal to
acquire ownership interests in the Lincoln Mine, a Colorado mining property
("Lincoln Mine") and the Gold Hill Mill. The management committee of the LLC was
comprised of two members, who are also members of the management committee of
the Joint Venture. In addition, the LLC acquired an exclusive assignable
contract right to receive and process, at cost, all of the ore produced from a
third mine, the Mogul Mine, the rights to which were then owned by Durango
Metals, Inc. ("Durango") and a 10% profit interest in net smelter returns
received from the ore mined from the Mogul Mine (the "Process/Profit Interest
Contract"). No operations had been conducted at the Mogul Mine at the time of
these agreements. In exchange for the Process/Profit Interest Contract, the LLC
agreed to finance future mining operations at the Mogul Mine, satisfy certain
obligations owed by Durango to a third party and obtain the exclusive right to
hire Durango to mine the Lincoln and Franklin Mines at cost plus 10%, subject to
management and control of all mining/milling operations by the Company. The
Process/Profit Interest Contract was thereafter to be assigned to the Joint
Venture and the Company was to retain the exclusive right to mill and process
all ore produced from Durango as well as all mines owned and/or controlled by
each of the LLC and/or the Joint Venture.
Under this operational structure for milling and mining the properties
described above, it was anticipated that, once the mining properties become
operational, the Franklin Mill would process ore from each of the Mogul Mine ,
the Franklin Mine and the Lincoln Mine in return for which the Joint Venture
will receive a 10% profit interest in all monies realized by the LLC in the
Mogul Mine (of which the Joint Venture is entitled to 10% of net smelter
returns) and the Lincoln Mine operations (of which the Joint Venture is entitled
to 100% of all net smelter returns). Moreover, the LLC had agreed to perform any
and all work required to increase the milling capacity at the Franklin Mill from
150 tons per day to 1000 tons per day without cost to the Company. The Company
was to retain its 17.5% interest in profits under the Zeus Joint Venture thereby
entitling it to receive its portion of all monies realized by the Joint Venture
in connection with the Process/Profit Interest Contract as well as any future
contractual arrangements of Zeus whereby the Company will exclusively mill and
process ore.
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<PAGE>
On or about February 9, 1996, the Company received permission from the DMG
to commence prospecting and testing procedures at the Franklin Mill under a
prospecting permit issued to Durango for Mogul Mines operations not to exceed
250 tons per day (the "Durango Prospecting Permit"). The Durango Prospecting
Permit permits the mining of not more than 1800 tons of ore for prospecting
purposes. It was thereafter expected that the Franklin Mill will begin crushing
ore from the Mogul Mine on the limited basis set forth by the parameters of the
Durango Prospecting Permit.
Gems thereafter advised the Company that Island successfully completed the
acquisition of 100% of the outstanding shares of COM, Inc., which owned the Gold
Hill Mill. In addition, the Company has been further advised that Island
acquired 100% of the mining rights to the Mogul Mines pursuant to the Rugg/Mogul
Lease. For further information regarding the terms of the Rugg/Mogul Lease. See
Description of Property. The acquisition by Island of all of the rights to the
Rugg/Mogul Lease permitted the Company, Island and Gems to recommence
negotiations so as to permit the Company to realize greater financial benefit of
the profits generated by the Mogul Mines.
In Spring, 1996, the Company was notified by Gems that Island intended to
attempt to recommence its production plans at the Mogul Mines. The Mogul Mines
are located in a region known as an historic gold resource and recently produced
during bulk testing an estimated 100 tons of gold ore with an average grade of
approximately 1 ounce per ton. Although the Mogul Mines had not been operational
in the past, Gems informed the Company that it anticipated an initial target
production rate of approximately 100 tons per day and further informed the
Company of Island's intention to transport such materials to the Franklin
milling facilities for crushing and processing.
In March, 1996, the Company was notified that it would be required, to
further increase its land reclamation bond. In an effort to comply with such
requests, the Company posted an additional $48,000 increasing it land
reclamation bond from $45,000 to $93,000. On or about March 28, 1996 at a
hearing before the Mine Land Reclamation Board (the "MLRB") and the DMG, the
Company received a temporary cease and desist order prohibiting it from
conducting mining and/or milling operations at the Franklin Mine until such time
as all of the violations cited by the DMG were satisfied. Crushing activities
being conducted at the Franklin Mill pursuant to the Durango Prospecting Permit
were excluded from such order. Additionally, the MLRB determined that the
Company's reclamation bond should be increased to approximately $252,000 on or
before April 5, 1996.
The Company was able to post the required bond with the DMG in May of 1996
and has received verbal assurances from such agency that all of the violations
at the Franklin Mine have been remedied and the Cease and Desist is no longer in
effect. The DMG confirmed such assurances through official notification thereof
on or about June 7, 1996.
During the period in which the Cease and Desist order was in effect, Island
and Gems notified the Company that certain of the participants in the LLC
structure had defaulted on their agreements with Island. As a result, the
parties terminated the joint venture arrangements with Durango represented by
Newmineco and Island's entire interest in Newmineco was thereafter assigned to
Gems and its subsidiary. See Legal Proceedings - Durango Litigation.
On September 26, 1996, the Company acquired a 20% interest in Newmineco
from Gems for a purchase price of $600,000 evidenced by an interest only note
bearing interest at 9.5% per annum. Payments of interest are to be made
quarterly, the first payment being due on December 31, 1996. The principal
amount of the note is due on June 30, 1997. The Company may, at its option,
convert the principal and interest payments due under the note into the
Company's Common Stock on or after January 1, 1997 at a conversion rate of $.078
per share. Additionally, the Company has acquired the right to receive the first
$500,000 of profits distributed by Newmineco, but thereafter, will receive only
that portion of such profits to which the Company would be entitled in respect
of the aforesaid 20% ownership interest.
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Acquisition of Gold Hill Mill
On June 5, 1996 the Company entered into a non-binding letter of intent
with Gems to acquire certain assets of Gems in exchange for stock equal to
approximately 67% of the outstanding shares of the Company, which together with
the 18% presently held by Gems will equal approximately 85% of the outstanding
shares of the Company. The assets included Gems' 82.5% interest in the Zeus
Joint Venture of which the Company presently retains 17.5%, the Hayden interest
in the Hayden/Kennec Leases for which Gems entered into a purchase agreement in
December 1995, the Rugg/Mogul Mine Leases relating to the Mogul Mine and the
Gold Hill Mill. The consummation of the transactions were predicated upon the
completion of customary due diligence, the obtaining or making of any other
consents, filings, instruments or regulatory approvals necessary to consummate
the transaction, the execution of definitive agreements, the approval of
Franklin stockholders of an increase in capitalization of the Company and the
approval of the stockholders of Gems, and each of the partie's respective boards
of directors of the transactions on or before September 3, 1996.
After conducting preliminary due diligence, it was determined by both Gems
and the Company that it would not be in the best interest of either parties to
pursue the transactions set forth in the June 5 Letter of Intent. Thus, the
parties mutually agreed not to proceed with the acquisition plans on the terms
set forth in the Letter of Intent and allowed the Letter of Intent to expire.
As an alternative to the acquisition structure outlined in the Letter of
Intent, the Company acquired the Gold Hill Mill from COM, Inc. for a $2,500,000
interest only note (the "Gold Hill Note"). COM, Inc. is now a wholly owned
subsidiary of Gems. The Gold Hill Note bears interest at a rate of 8% per annum
with interest payments of $50,000 payable quarterly and is secured by a mortgage
on the property in favor of COM, Inc. The principal amount of the Gold Hill Note
is due June 3, 1999.
In July, 1996, the Company commenced an offering of its Common Stock to
purchase certain assets from third parties in exchange for Common Stock of
Franklin. Island and its affiliates agreed to further purchase such assets from
the Company in exchange for a reduction in the indebtedness of the note issued
in connection with the sale of the Gold Hill Mill. Such shares of Common Stock
would be restricted and not transferable unless registered in accordance with
the Securities Act of 1933, as amended or pursuant to an available exemption
therefrom. The Company has further agreed to file a registration statement with
respect to such shares within 45 to 60 days from the date upon which the
offering terminated (which has not been timely). As a result of the offering,
the Company through the issuance of common stock, was able to reduce the Gold
Hill Note by approximately $1,400,000.
The Gold Hill Mill is located within close proximity to the Franklin Mines
and Mill as well as the Mogul Mine and, if the same becomes operational, will
afford the Company the opportunity to expand its geographic reach into the Gold
Hill Mining region. Although the Gold Hill Mill has not been operational, it is
contemplated that milling will occur at the Gold Hill Mill and Franklin Mill at
a combined initial rate of 200 tons per day. The Company anticipates that such
capacity will be increased in the future upon the installation of additional
equipment at the facilities and obtaining the appropriate regulatory approvals.
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On July 8, 1996, the Joint Venture acquired the rights to certain
agreements which would allow it to mill mine dump material located on 14 mine
dumps (the "Gold Hill Dumps") in the immediate vicinity of the Gold Hill Milling
facility. The agreements provide Zeus Joint Venture with the right to mill or
process the Gold Hill Dumps which the Company has been advised are estimated to
contain an aggregate of approximately 590,000 tons of material grading 0.15 to
0.18 ounces of gold per ton (opt gold) of dump material.
As part of the agreement, the lessor of the Gold Hill Dumps and Zeus agreed
to perform certain sample testing of the dump material and, upon the completion
of such testing, Zeus would make a $30,000 payment to lessor. Although the
parties have not yet acted on the terms of the Agreement, within the prescribed
term, the Company has been advised by Zeus that, to the best of its knowledge,
no default or termination has been declared with respect to the Agreement and
Zeus is hopeful that each of the parties will continue negotiations and to work
together under the terms of the Agreement with respect to the Gold Hill Dumps.
The dump material will be screened on site, separating the coarse barren
and low grade fine material from that material to be milled. The Company has
been furnished an estimate that approximately 50% of the total dump material, or
approximately 295,000 tons, can be milled at a grade of approximately 0.26 opt
gold. Total operating costs are estimated by the Company based on information
furnished to it to date at approximately $196 per ounce of gold recovered.
Assuming a recovery rate of approximately 90%, the result would be an estimated
69,000 ounces of gold produced at a net value of $174 per ounce or $12,000,000,
calculated at a $390 per ounce gold price with allowance for smelter charges.
Regulatory Issues and Permits
The Company has been permitted to operate the Franklin Mine and Franklin
Mill in accordance with its M83083 permit, which it acquired in 1983. The
Company is continuing its work with the Colorado state government to further
modify and update its mining-reclamation permit in preparation and anticipation
of full-scale operations at the Franklin Mill. The Company intends to commence
full-scale operations at the mill upon the expansion of the capacity of the mill
following the receipt of all necessary approvals by the State of Colorado of its
modified mining-reclamation permit authorizing such activities.
On or about February 9, 1996, the Company received permission from the DMG
to commence prospecting and testing procedures at the Franklin Mill with respect
to ore being shipped to the Franklin Mill from Durango in accordance with the
arrangements of Zeus with the LLC. Crushing operations at the Franklin Mill are
not to exceed 250 tons per day under the Durango Prospecting Permit. Earlier
this year, the Company has begun crushing ore from the Mogul Mine at the
Franklin Mill on the limited basis set forth by the parameters of the Durango
Prospecting Permit presently in effect; however, since Durango has defaulted on
its agreements with respect to the LLC and no longer maintains the rights to the
Mogul Mines, it is no longer a participant in the Mogul Mine project. Therefore,
while each of Newmineco and the Franklin Mill are permitted to continue
prospecting operations at the Mogul Mines under the Durango Prospecting Permit
as a successor in interest thereto, the Company has been informed by Newmineco
that it is in the process of applying to the DMG for an operating permit in the
name of the LLC and is optimistic that it will be able to secure the appropriate
permits to allow for continued operations at the Mogul Mines separate and apart
from Durango.
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Water, Utilities and Refining Contracts
The Company has historically purchased power from Public Service Company of
Colorado at its published rates. Moreover, the Company's management believes
that sufficient water for present and future operations may be obtained from the
City of Idaho Springs at its normal rates or from other nearby sources at
reasonable rates. The Company's management does not anticipate any difficulty in
obtaining sufficient water and power sources for its future mining and milling
operations.
In the past, the Company has entered into refining agreements with Zinc
Corporation of America and ASARCO Incorporated for the sale and refining of
lead, zinc and copper concentrates produced from the Franklin Mine in Colorado.
The Company's management expects that at such time as it recommences active
mining and milling operations, the Company will not have difficulties in
renewing or renegotiating contracts with either ASARCO or Zinc Corporation of
America or entering into new contracts with their competitors.
Employees and Technical Consultants
The Company presently has no full-time employees at this time. Three of the
Company's executive officers serve as needed on a part- time basis and one of
the Company's executive officers serves on a full time basis, each for no
compensation. With respect to operations at the Franklin Mine and Franklin Mill,
the Company, through the Zeus Joint Venture, hires technical personnel on a
contract or consulting basis as needs arise. Management anticipates that as the
Company's business develops, additional technical staff will be hired and that
obtaining the services of qualified geological and technical consultants will
pose little difficulty.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The Company is engaged in the business of investing in and participating in
the development of commercial mining and milling operations primarily at leased
properties in or near Idaho Springs, Colorado. The Company holds a 17.5%
interest in the Zeus Joint Venture which has been developing the Franklin Mine
and the Franklin Mill. The Company acquired a 20% interest in Newmineco, LLC in
September 1996, which is a newly-formed entity that has commenced the
development of the Mogul Mines. In addition, the Company purchased the Gold Hill
Mill in July 1996, which is an inactive permitted milling facility that the
Company will attempt to develop and operate in the future.
During the months of September and October 1996, remediation work was
performed at the Franklin Mine and Mill in preparation of accommodating the
mining operations of both the Franklin and Mogul Mines. Approximately 100 tons
of ore were mined at the Mogul Mines and shipped to the Franklin site where the
ore was crushed and milled. Although assays on the resulting concentrates have
not been completed, management is hopeful that the mineral content will meet
it's expectations.
The Company and its investees are in the development stage and have not
generated significant revenues on a sustained basis since the inception of their
development. The Company will not recognize any revenues based on sales made by
the Zeus Joint Venture and Newmineco; instead, the Company will recognize income
or losses based primarily on its proportionate equity interest in the net income
or loss of each of the investees. Accordingly, the Company will not recognize
any income from such investments until such time, if any, as the Zeus Joint
Venture or Newmineco begins production and generates sales revenues and net
profits.
Results of Operations
The Company and the Zeus Joint Venture had no active mining or milling
operations during the nine months ended September 30, 1996 and the years ended
December 31, 1995 and 1994.
The Company had a net loss of $609,048 for the nine months ended September
30, 1996 as compared to a net loss of $359,059 during the same period in 1995.
This net increase was primarily attributable to an increase in interest expense
of approximately $26,500 and an increase in general and administrative expenses
approximating $220,000.
General and administrative expenses were $434,570 for the nine months ended
September 30, 1996 as compared with $214,574 during the same period in 1995 due
primarily to an increase in professional fees. Interest expense was $80,199
during the six months ended June 30, 1996 as compared to $53,641 during the same
period in 1995. The increase in interest was primarily due to interest incurred
in connection with the Gold Hill Mill in July 1996.
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Operations of the Joint Venture at the Franklin Mine and Mill during the
nine months ended September 30, 1996 were restricted by the cease and desist
order issued in March 1996 by the Colorado Division of Minerals and Geology (the
"DMG") for permit violations that was not vacated until June 7, 1996. As a
result, the Company's equity in the net loss of the Zeus Joint Venture
approximated only $3,100 in that period.
The Company had a net loss of approximately $924,000 for the year ended
December 31, 1995 compared with a net loss of $382,000 for 1994. The increased
loss was substantially due to a fee of $468,000 which was a non-cash charge paid
through the issuance of stock to the Company's joint venture partner, Gems. This
fee, which was in the form of 6,000,000 shares of common stock, was paid
pursuant to the terms of a Binding Exchange Letter Agreement.
General and administrative expenses were approximately $227,000 in 1995 as
compared with $151,000 in 1994, such increase being a result of an increase in
professional fees. Depreciation of equipment was approximately $122,000 during
1995 and 1994. Mine and Mill improvements were not amortized in 1995 and 1994.
Interest expense was approximately $92,000 in 1995 compared to $68,000 in 1994.
Operations of the Joint Venture at the Franklin Mine and Mill during 1995
consisted primarily of a comprehensive core drilling and analysis program (the
"Analysis Program") which further substantiated proven and probable reserves
along with remedial work and technical revisions addressing erosion,
sedimentation and run-off matters as well as other matters which were required
to be performed by the DMG. Such operations during 1994 consisted primarily of
repair and remediation work to comply with environmental regulatory
requirements, further site preparation, metallurgical analysis and the planning
of the Analysis Program. The Company's equity in the net loss of the Zeus Joint
Venture was $15,540 in 1995 and $34,826 in 1994.
Liquidity and Capital Resources and Plan of Operations
As explained above, the Company and its investees are in the development
stage and have not generated significant revenues on a sustained basis since the
inception of their development. Accordingly, the Company has not generated any
cash flows from operating activities. Instead, it has financed its operations
principally through equity and debt financing, including financing derived from
its relationships with its joint venture partners.
As further explained below, the Company financed its operations primarily
through loans from Gems, its joint venture partner, of $331,980 and $156,581
during the years ended December 31, 1995 and 1994, respectively; raised $200,000
from the private placement of convertible notes in the fourth quarter of 1995;
raised another $200,000 from the private placement of convertible notes and sold
1,753,411 shares of unregistered common stock for $302,600 during the nine
months ended September 30, 1996; and issued notes to related parties in the
aggregate principal amount of $3,100,000 to acquire the Gold Hill Mill and the
20% interest in Newmineco but, effectively, reduced the obligations incurred by
approximately $1,400,000 through the issuance of 9,366,919 shares of common
stock during the period from July 1, 1996 through September 30, 1996.
The Company used the cash obtained through the loans from Gems and the sale
of the notes and the stock primarily to (i) partially finance its operating
losses in each year or period; (ii) increase deferred mine development costs by
$234,435 in 1995; (iii) increase the net amount of mining reclamation bonds on
deposit by $80,000 in order to get the cease and desist order vacated June 1996;
and (iv) reduce the balance payable to Gems arising from previous operating
loans by approximately $139,000 during the nine months ended September 30, 1996.
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Upon the approval of the increase in the capitalization of the Company by
its shareholders on November 30, 1995, the Company was able to eliminate certain
of its liabilities by converting certain debt into common stock. In May, 1992,
the Company entered into a Loan Agreement with Mr. Anderson, an officer and
director of the Company, Mr. Anderson's brothers, Anderson Chemical Company and
Mr. Carlo Sgrizzi, an unaffiliated individual and Mr. Anthony DiMatteo (the
"Anderson Loans") pursuant to which the Company borrowed an aggregate of
$504,000 at an interest rate of 3% above the prime rate of interest.
Additionally, $450,000 of such loans were entitled, under certain conditions, to
a 1% interest in profits (as defined in the Loan Agreement) of the Company, for
each $50,000 of principal amount held and, accordingly, the lenders held a total
profit participation interest of 9%. Such Loan Agreements were further amended
in July, 1993, whereby replacement notes were issued which permitted the
conversion of the Anderson Loans into shares of common stock of the Company at a
conversion ratio of $.10 per share and granted certain demand and piggyback
registration rights. The Anderson Loans were convertible into a total of
approximately 4,500,000 shares of common stock at each lender's option,
including, all profit interests which were convertible into 300,000 shares for
each 1% profit participation interest.
In August, 1995, Gems, as an assignee of Mr. DiMatteo, converted its 4% net
profits interest in the Company to which it has rights to receive under the
terms of a Loan Agreement, into 300,000 shares per percentage point or 1,200,000
shares of the Company. Such shares were issued to Gems on or about August 18,
1995. In September, 1995, certain of the holders of the Anderson Loans, other
than Gems, agreed to convert their notes and accrued interest thereon at a rate
of $.078 per share which represents 50% of the NASDAQ quoted price of the
Company's shares for the last 3 months, the total amount of principal and
interest to be converted to be determined at the time of conversion. Thereafter,
on or about December 27, 1995, Gems was invited to convert its notes on the same
terms and conditions as the other holders, thereby satisfying the Company's
obligations under the Anderson Loans.
In December 1995, the Company commenced an offering pursuant to Rule 505 of
Regulation D of $1,500,000 principal amount of its 15% Secured Notes (the
"Notes") Convertible into Shares of Common Stock of the Company. Such Notes had
a maturity date of eighteen months from the date of each Note so issued (the
"Maturity Date"). Interest on the Notes accrued at a rate of 15% per annum,
compounded annually on the outstanding unpaid principal of each Note, payable
quarterly. During the second quarter of 1996, all of the Notes issued in the
fourth quarter of 1995 and the first quarter of 1996 were converted and the
Company issued 4,294,770 common shares upon conversion based on the total
balance of the principal and accrued interest outstanding of $418,740 and a
conversion price of $.0975 per share.
In February 1996, the Company commenced an offering, directly and without
using any agents, pursuant to Rule 505 of Regulation D of its Common Stock to
accredited and unaccredited investors in an effort to raise the remaining amount
of funds which it anticipated it would be able to realize through the offering
of the Notes. Subscribers of the offering purchased the Common Stock at a
purchase price 15% below the market price of the stock as quoted on NASDAQ at
the close of business the date prior to such sale. The Company raised
approximately $202,600.
On July 3, 1996, the Company acquired the Gold Hill Mill facility for
$2,500,000 through a non-cash transaction whereby it issued a mortgage note to
the affiliate requiring the payment of the entire principal balance of July 3,
1999 and the payment of interest, at 8% per annum, on a quarterly basis. The
mortgage note is secured by the milling facility.
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Additionally, in July, 1996, the Company commenced an offering to
unaffiliated parties pursuant to Regulation D for the issuance of shares of
common stock at the approximate equivalent of $.15625 per share in exchange for
certain notes, mortgages and other obligations. Upon completion of the offering,
the Company purchased obligations of its affiliates having an aggregate
principal balance of approximately $1,400,000 through the issuance of
approximately 9,366,919 shares of Common Stock and then transferred the
obligations of its affiliates so acquired to the seller of the Gold Hill
property for an equivalent reduction in the principal balance of the mortgage
note.
Also in July 1996, the Company commenced an offering of its common stock,
to accredited investors only, pursuant to Rule 505 of Regulation D during which
Stires & Co. acted as Selling Agent on behalf of the Company to raise additional
funds needed for operating purposes. The offering was on a best efforts basis
and the Selling Agent was to receive a commission of 5% of the aggregate gross
proceeds of the sale of the common stock to investors. In addition, the Company
agreed to issue to the Selling Agent warrants to purchase 5% of the total shares
of common stock sold in the offering. Due to market conditions at the time of
the offering, the Selling Agent was only able to sell 800,000 shares of Common
Stock and raise $100,000 and thereafter the offering was terminated on September
15, 1996.
In September 1996, the Company acquired its 20% interest in Newmineco,
which was a newly-formed company that is expected to develop certain inactive
mining rights and properties, for $600,000 through a noncash transaction whereby
it issued an interest only note to Gems bearing interest at 9.5% per annum. The
principal balance is due on June 30, 1997; however, the Company has the right to
convert the principal balance and accrued interest into shares of its Common
Stock at the conversion rate of $.078 per share. Pursuant to the agreement with
the other investors in Newmineco, the Company will be entitled to the first
$500,000 of any profits (as defined) to be distributed by Newmineco and 20% of
any of its profits thereafter.
The Company's only liquid resource was a cash balance of $1,954 at
September 30, 1996. It had total current liabilities as of that date of
$1,237,028, including convertible debentures with a principal balance of
$145,000 and loans payable to its joint venture partner of $604,782. The
Company's operations have been generating losses and negative cash flows from
inception. In addition to the payment of its current liabilities, management
estimates that the Company will incur general and administrative and other costs
and expenditures at the rate of approximately $30,000 per month during the year
ending September 30, 1997. In addition, as part of its financing efforts, the
Company has agreed to file a registration statement to cover certain shares
which it had sold privately and has further agreed to allow certain other
shareholders to piggyback on such registration. Thus, such agreement will cause
the Company to incur additional expenses relative to such registration.
Although the Company is entitled to distributions of 17.5% of the net
profits of the Zeus Joint Venture and the first $500,000 of profits generated by
Newmineco plus 20% of any profits thereafter, the Company's investees are in the
development stage and have not generated significant revenues on a sustained
basis. The Zeus Joint Venture will be dependent on Gems for the additional
financing it will need to commence operations and become profitable and
Newmineco will be dependent on other subsidiaries of Island or entities related
to Island and Gems for the additional financing it will need to commence
operations and become profitable. Therefore, the management of the Company
cannot assure that the investees will generate any profits or positive cash
flows and make any cash distributions during the year ending December 31, 1997.
Management believes, but cannot assure, that financing will continue to be
provided by Gems. Therefore, until such time, if any, as the Company begins to
receive cash distributions from its investees, it will remain dependent on its
joint venture partner and its other affiliates as the primary sources of
financing for its operations.
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DESCRIPTION OF PROPERTY
Glossary of Terms
Assay
A chemical evaluation of metal content conducted after mining ore.
Backfill
Mine waste which is disposed of underground in a formerly mined area.
Chacopyrite
A mineral containing copper, iron and sulfur.
Cyanidation and Pulp Recovery
The process by which gold is extracted in the milling process through
the use of cyanide.
Development Stage Company
Companies engaged in the preparation of an established commercially
mineable deposit or reserve for its extract which are not in the
production stage.
Dip
An angle measured in degrees from the horizon.
Fault
A fracture in the earth through which mineralizing solutions may rise
and form a vein.
Fault System
A large regional fracture.
Footwall
That portion of the vein which is located below.
Galena
A mineral containing both lead and sulfur.
Gravity Concentration
Minerals concentrated by application of devices employing the force of
gravity.
Hanging wall
That portion of the vein which is overhead.
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J.L. Emerson Fault
A large fracture in the earth' s crust located in the Franklin Mine
area.
Laramide Period
A period in history dating back approximately 70 to 90 million years
ago.
Main Trunk
A highly mineralized portion of the J.L. Emerson fault located on the
properties constituting the Franklin Mines.
Massive Sulfides
High quality ore.
Microcline gneiss
A type of rock found at the Franklin Mine.
Mill
The plant facility where the metals constituting the ore are removed
from mined rock.
Mine Workings
The areas where ore is being mined.
Mineral Concentrate
A mill product where the rock particles have been removed from the
metallic minerals.
Mineralized Rock
The rock which contains the minerals to be mined.
Monzonite
Intrusive rock types containing large amounts of quartz and often the
progenitor of metallic, mineralizing solutions.
Ore
A metallic or non-metallic mineral that can be mined from the earth
and sold at a profit.
Ore Conduit
An opening through which mineralizing solutions can rise.
Ore Reserves
Minerals located in the ground whose existence is governed by varying
degrees of probability.
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Ore Shoot
A body of ore.
Orogeny
An event causing a major upheaval or reshapement of the earth's crust,
such as volcanism, mountain building or ore formation.
Pegatites
A type of rock found in the Franklin Mine.
Pillars
Unmined sections of ore in a stope.
Pre-Cambrian age
A time period in history dating back approximately 600 million years
ago.
Probable (Indicated) Reserves
Reserves for which quantity and grade and/or quality are computed from
information similar to that used for proven reserves, but the site for
inspection, sampling and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although
lower than that for proven reserves, is high enough to assume
continuity between point of observation.
Production Shaft
The device through which ore is hoisted from the mine and the area
through which materials are lowered into the mine and miners enter and
exit the mine.
Proven (Measured) Reserves
Reserves for which (a) quantity is computed from dimensions revealed
in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling and (b) the sites
for inspection, sampling and measurement are spaced so closely and the
geologic character is so well defined that size, shape, depth and
mineral content of reserves are well established.
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Pyrite
A mineral containing both zinc and sulfur.
Raise
A tunnel driven upward from a level.
Refractory
A difficulty in separating value metals or minerals from the host
rock.
Reserves
That part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.
Schist, granite gneiss
A type of rock found in the Franklin Mine.
Selective Flotation
Minerals concentrated in a selected mineral group in the mill.
Shaft
A vertical tube-like opening whereby miners enter the mine.
Slurry
A mixture of ground rock or minerals in water.
Slimes
Exceedingly fine particles mixed with water.
Sphalerite
A mineral containing both zinc and sulfur.
Strike
In a horizontal direction.
Stope
The area of the mine where miners extract mineral deposits from the
mine.
Tailings
Waste which is produced by the Mill.
Tailings Pond
The location where mill wastes are deposited.
Telluride
A mineral containing tellurium often found with quantities of gold
and/or silver and sulfur.
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Tennentite
A complex mineral containing copper, antimony or arsenic, often
containing large amounts of silver.
Tertiary Period
A time period in history dating back approximately 40 to 70 million
years ago.
Vein
A fracture in the earth's crust where minerals have been deposited.
Winze
A tunnel driven downward from a level.
Colorado Mining Properties
The property which constitutes the Franklin Mine consists of (i) 100%
mineral rights interest leased by the Company under the Hayden/Kennec Leases
covering 28 claims comprising approximately 322 acres and (ii) an additional 23
claims which have been either leased or purchased covering less than 100%
mineral rights interest comprising approximately 20 additional acres, for a
total of 51 claims over 340 acres. Such properties include all improvements
thereon, including milling facilities capable of supporting up to a 150 ton per
day operation. The Company does not intend to exploit any claims for which it
holds less than a 100% interest in such claims.
The Hayden/Kennec Leases provide for payment of certain charges relating to
the property and a minimum royalty payment of $2,000 per month or 5% of the
Company's net smelter royalties realized from production. The Hayden/Kennec
Leases expired in November 1996 at which time the Company could have purchased
the leased rights thereunder for a purchase price of $1,250,000 less any
royalties previously paid as of the expiration date. As of December 31, 1995,
the Company has paid approximately $456,000 in royalties. The Company has
extended the term of the lease; however in the event that the Hayden/Kennec
Leases shall expire, any improvements made on the property become the property
of the landowner without any further compensation to the Company; however, in
accordance with the Company's reclamation bond, it will be required to dismantle
the site and remove all of its equipment therefrom. Thus, the likelihood that
the Company would not recover fixtures and other equipment on the property is
minimal. As of the date hereof, the Company has not been notified of any
existing default under such agreements.
The Joint Venture was primarily formed to develop the mining properties
pursuant to the Company's rights existing primarily 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. To
further secure its ability and the ability of Gems, its Joint Venture partner,
to exploit the Idaho Springs mining properties, Gems entered into an agreement
on December 21, 1995 to purchase Audrey Hayden's interest under the
Hayden/Kennec Leases as well as all the mining claims subject thereto (the
"Hayden Interests") for a purchase price of $75,000 (the "Purchase Agreement").
The Purchase Agreement was further amended and restated in September, 1996.
Pursuant to the Purchase Agreement, the parties agreed to the $75,000 purchase
price and Gems 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 an
initial payment of $5,000 advanced by Gems under the original Purchase Agreement
for back payments on the Hayden/Kennec Leases. The management of Gems has
informed the Company that it believes that with the acquisition of the Hayden
Interests, together with the portion of the Hayden/Kennec Leases owned by
Dorothy Kennec permitting the exploration and development of such properties by
any method of mining, the Joint Venture will have adequate access to the
minerals during the remainder of the term of the Hayden/Kennec Leases and on a
continuing basis even if the Hayden/Kennec Leases should expire and not be
renewed by the Company.
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The Rugg/Mogul Lease, dated March 18, 1996, was entered into between
Island, as lessor, and Charles R. Rugg and Cindy McCollum (McCollum being the
lessor/optioner as to the Muscott Lode claim only). The lease was later
contributed to Newmineco prior to the acquisition by the Company of 20% of the
LLC.
The Rugg/Mogul Lease provided that, after the remittance of the $100,000
guaranteed payment, Newmineco will pay an additional $50,000 to Rugg, on either
the sixth month anniversary date or any monthly anniversary date thereafter when
the Mogul Mines become operational (but not later than eighteen months from the
date of the lease). In addition, the Rugg/Mogul Lease provides for a royalty
payment of $2,000 per month which increases to $5,000 once the Mogul Mines
becomes operational. The Rugg/Mogul Lease expires on May 17, 2006 at which time,
or at any time during the term of the Lease, Newmineco may purchase the mining
rights under the Rugg/Mogul Lease for a purchase price of $1,500,000 less
certain of the royalty payments made during the term of the lease.
Location and Access
The Franklin Mine and Franklin Mill are located in Clear Creek County,
Colorado approximately 2.7 miles north of the town of Idaho Springs which is
accessible from Interstate 70 approximately 33 miles west of Denver. From Idaho
Springs, a county maintained gravel road connecting Idaho Springs with Central
City in Gilpin County passes within 1/4 of a mile of the Franklin Mine
facilities and offices. A minor roadway, also maintained by the County, allows
access to the Franklin Mine within 1/8 of a mile. The portal of the Mogul Mines
is located immediately south of the town of Eldora, 25 miles west of Boulder by
paved roads maintained by Boulder County. The mine locations are accessible year
round, except in the case of a major snow storm in winter months.
Ore Deposition in the Area
Most of the ore deposition in the area where the Franklin Mines are located
has been credited to the Laramide period progeny. Ores exploited from this
region have included gold, silver, copper, lead, zinc and uranium. By far the
largest single metal values were in gold, with silver being a distant second.
Though many of the smaller veins located in the area pinched out at moderate
depth, some have shown strong mineralization at greater depth.
The ore deposits are of four types: (i) pyritic gold ores; (ii)
galena-Sphalerite ores; (iii) composite (pyrite-galena-Sphalerite) ores and (iv)
telluride ores. Pyritic gold ores are chiefly associated with pyrite,
Chacopyrite and Tennentite. The "composite ores" are believed to be the result
of two or more periods of mineralization, with pyritic minerals first and
galena-Sphalerite second; mineral content varies widely with the relative
percentage of the different types of ore present. Telluride ores are present
mostly in the Northeast corner of the district, but some telluride ores have
been noted elsewhere.
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Geology of the Franklin Mines
The rocks most commonly seen in the Franklin Mines are Pre-Cambrian age
granite and Microcline gneiss. Tertiary Monzonite, the most common of which is
quartz Monzonite, can be seen on the ninth level and are reported from lower
levels in the Gem vein or Gem workings of the Franklin Mines. The general strike
of the system is N75 degrees W and dips vary, being steeper in higher levels and
flattening at depth. On the ninth level general dip is about 50 degrees to the
north.
The structure of the mines is controlled by the J.L. Emerson Fault system
which runs in a west north west direction across the whole property and beyond.
Subsidiary to the J.L. Emerson Fault are a multitude of veins crossing at low
angles and meandering in and out of the main break. Most of these subsidiary
faults are ore conduits; when more than one of these happen to meet at the same
location, the result is a large body of ore. These large ore bodies are, within
the observed area served at present by the Franklin 73 shaft, as much as 22.5
feet wide and at least 60 feet long. It has been reliably reported that some of
the large ore body stopes within the Gems workings adjoining to the west (and
part of the property) were as wide as 105 feet. Some of the individual veins
carry names of the claims, such as Franklin, Gem, Washington and Freighter's
Friend.
Geology and History of the Mogul Mines
Based upon newspaper accounts and inspector reports published from 1898
through 1904, it is believed that the claims on Spencer Mountain were discovered
during the last decade of the 19th century. The accounts of the day indicate
that the veins produced gold and initially were developed by shafts, which was
common practice during this era. The deepest shaft was believed to be that of
the Enterprise at 400 feet. In 1907, the Mogul Tunnel was created as a drainage
and transportation tunnel. Claim owners were permitted to use the tunnel for a
royalty fee which was calculated based upon the distance traveled in the tunnel
and varied from 10 to 20 percent. While the Colorado and Northwestern Railroad
was completed to the town of Eldora in 1905, the boom period of gold mining in
the area had ended and by 1919, the railroad, which never operated profitably,
was washed out and never rebuilt. Thus, there are very limited records of
production form the properties on Spencer Mountain due to its limited period of
operation.
Spencer Mountain is on the east flank of the Eldora stock, a quartz
monzonite porphyry of Eocene-Paleocene Age. The rocks which make up the Spencer
Mountain are believed to be older Precambrian geniuses and locally schist.
Within the area of the Mogul Tunnel, the wall rocks are geniuses which contain
biotite, sometimes hornblende, and usually quartz and plagioclase. In some cases
the wall rocks are quartz-plagioclases gneiss.
It is believed that the most productive gold-bearing structures on the
Spencer Mountain are the easterly trending Enterprise fault and the
northeasterly trending fractures which cut the peak of the mountain. There are
other faults and fractures which trend north, northwesterly, and possibly any
direction of the compass, any one of which could contain ore and would have
offset an ore deposit by faulting.
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The enterprise and Village Bell Mine are located on the Enterprise fault.
It was noted in an inspector report of 1899 that in the Enterprise and Village
Belle, the fault dipped south for the first 50 feet or 80 feet, respectively, of
depth and then northerly. It is from this zone where the dips changed that most
of the ore was mined. The remainder of the production has come from
northeasterly trending veins. Some ore was also produced from veins trending
east-northeast such as the Gold Coin, especially near their intersection with
the Enterprise fault.
It is believed that the gold occurs as a telluride, probably sylvanite and
there also exists some pyrite and a small amount of molydenite. The gange
minerals are barite, quartz, roscoelite and calcedly. Within the Mogul tunnel,
it appears that the gold occurs principally in thin stringers of quartz which
are often in gouge zones. It is approximated that the exposures within the Mogul
Tunnel, are a good grade of mineralization and ore shoots in the area are noted
for being small and often very rich. Values in the press at the turn of the
century indicated approximately 1.5 ounces of gold per ton.
Estimated Ore Reserves
The Franklin Mines
The Franklin Mine lodes consist of the minerals associated with the Gem,
the Freighter and the Franklin mine veins and specifically, those minerals
associated with the "Main Trunk" element of the J.L. Emerson Fault. No
representations have been made regarding the potential of mineral structures
situated adjacent to, or off the "Main Trunk", as these are considered to be of
marginal importance at this time.
Sampling by the channel sample method was conducted during the period of
1975 through 1993 with assaying provided by the Franklin and other accredited
assay laboratories. Assays were also obtained from the old Gem Mining Co. mine
assay map, dated 1921 (the "Gems Assay Map"). The sampling process was carried
out at right angles to the structure of the veins. Blocks were sampled on three
or four sides and at times within by raise or winze. Those blocks which were
already heavily mined were entered through open stopes, both pillars and
"backfill" being sampled.
The Franklin ore body is generally a tabular structure in shape, consisting
of several parallel to sub-parallel veins. The evaluation process, by
concentrating on primarily one vein, obviously by-passed additional mineral
potential.
The J.L. Emerson Fault is a large regional structure, striking east to west
and having an irregular plain that dips to the north at 45 to 78 degrees. The
J.L. Emerson Fault is associated throughout with a series of parallel to
sub-parallel sigmoidal shaped fractures that may focus east or west on the
principal fault plain. These fracture patterns are found on nearly all levels
and represent important centers of mineral concentration. The J.L. Emerson Fault
consists of two main parallel to sub-parallel mineralized fault fractures, the
so called "footwall" and "hanging wall" veins. Each of the principal veins has
historically contributed to ore production in the Gem vein. A second set of true
fissure veins of a later date and striking northeast and southwest interdict the
J.L. Emerson Fault at several points, but do not cross. These veins are of
unknown economic potential.
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The ore structures in the Franklin Mines are often large, but poorly
defined. It was suggested that a core drilling be conducted in these locations
in order to determine economic potential and establish mineral reserves therein.
It was believed by management and Gems, its joint venture partner, that much
unexplored mineral potential exists in the Franklin Mine.
A geological report prepared by Gifford A. Dieterle in December, 1993
indicated that proven and probable reserves since 1987 to be as follows using a
margin of error of plus or minus 15%:
In place 173,486.60 Tons
Broken ore (in stopes
or on surface) 4,700.00 Tons
Ore Mined or Milled
since 1987 8,100.00 Tons
--------
186,286.60 Tons
Average Value of Gold: .315 ounces per ton
Average Value of Silver: 6.740 ounces per ton
The Gems Assay Map indicated possible reserves of 167,500 tons. No assay
values are indicated on these reserves.
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The Mogul Mines
With respect to the Mogul Mines, there is very little published geological
information and no company reports covering the Mogul Tunnel area. Most of the
information available about the ore bodies in the Mogul Mines can be derived
from local newspaper reports between 1898 and 1904 and from mine inspector
reports for the years 1897, 1898 and 1901. The newspaper and inspection reports
are useful to indicate the approximate size and grade of deposits, veins, or
production but are not considered by the Company to be hard fact.
Although there are no known ore reserves in the Mogul Mines, proven or
probable, there are considerable good exploration targets. The Company has been
informed by Newmineco that it is hopeful that it will be successful in locating
richer shoots which could yield a profitable amount of ore. Thus, Newmineco has
informed the Company that it has begun a comprehensive program to substantiate
ore reserves at the Mogul Mines and target areas for future production.
Mill/Metallurgy
The Franklin Mill, when constructed in 1982, was designed to recover and
concentrate metallic minerals by two historic methods; selective flotation and
gravity by table and jig. Both systems were operated in a continuous circuit.
The Franklin Mill has a daily processing capacity (operating for a 24 hour
period) of approximately 150 tons of ore. In the past, the Franklin Mill
operated on an eight hour schedule and processed approximately 30 tons of ore
during that time interval.
The Franklin ore is refractory and therefore difficult to separate. Pyrite
(iron sulfide) constitutes approximately 18% of the weight of the ore.
Approximately 30% of the gold content of the ore remains locked in the pyrite as
refractory gold and is not recoverable by ordinary means. In 1993, a new
metallurgical process was introduced to extract gold from the pyrite
concentrates. This process attempted to break down the pyrite minerals by
oxidation and thereby free the contained refractory gold. The procedure involved
the use of standard banks of flotation cells (48"), pyrite slurry (30%), air and
agitation. At a later stage pre-processing of the pyrite by further milling
occurred. Processed pyrite was subjected to Cyanidation and carbon-pulp recovery
of gold. The process was initially reported to be successful by the joint
venture operator with recovery of 85% of gold. However, additional testing is
required and is expected to be undertaken. About 5% of the gold was contained in
refractory slimes and were lost in the tails during the milling process.
Conventional milling procedures by the Zeus Joint Venture are to be
followed with selective flotation of lead, silver, gold and zinc and gravity
concentration of gold bearing pyrite. Concentration of tailings slimes by slime
cone and recovery of fine gold and silver from slimes are to be achieved by
Cyanidation and carbon pulp in closed circuit. Moreover, additional technologies
are being tested by Gems to assure maximum recovery of mined ore. Average
recovery of the combined precious metals is estimated at approximately 90% of
the total based upon preliminary test data developed by Zeus Joint Venture.
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In the past, the Franklin Mill operated on a limited schedule while
exploration and development was taking place. While the Franklin Mill has not
been operational with respect to milling of ore, crushing activities have begun
at the Franklin Mill for the limited purpose of prospecting and testing in the
early part of 1996. Thus, any prior milling activity and the crushing currently
being done at the Franklin Mill can be characterized as "development" in nature.
The Gold Hill Mill is a fully permitted modern milling facility. With the
exception of test milling approximately 4,000 tons of ore by the previous owner,
the Gold Hill Mill has not been operational with respect to the milling of ore.
New York Office
The Company maintains its executive offices, consisting of approximately
500 square feet, at 76 Beaver Street, Suite 500, New York, New York. The Company
has agreed to rent this space until September 30, 1996 for a monthly rental of
$670.50 pursuant to an oral agreement with a non-affiliate. The Company's
management anticipates this space will service the Company's needs for the
foreseeable future and that the Company will be able to lease these or other
suitable facilities on a reasonable basis.
CERTAIN TRANSACTIONS
The information required by this item as it relates to Messrs. Anderson and
Waligunda is set forth in the Company's definitive proxy statement relating to
the Company's 1995 Annual meeting of Stockholders under the caption "Certain
Relationships and Related Transactions" under the heading "Executive
Compensation." Such information is incorporated herein by reference therefrom.
For further information regarding transactions between the Company and Messrs.
Anderson, Waligunda and DiMatteo, See "Management's Discussion and Analysis or
Plan of Operation-Liquidity and Capital Resources."
In connection with the Company's annual meeting of stockholders held in
November, 1995, the Company engaged Four Color Lithograph ("Lithograph") to
perform printing services relating to the proxy materials distributed to the
Company's shareholders. Mr. DiMatteo, a former officer and director of the
Company and an acting officer and director of Gems, is the sales manager for
Lithograph. During 1994 and 1995, Lithograph performed services for the Company
totaling approximately $24,000 which was advanced by Gems on behalf of the
Company. The Company intends to continue to use the services of Lithograph in
the future and believes its charges are comparable to other companies providing
such services.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal U.S. market on which shares of the Company Common Stock (all of
which are of one class, $.01 per share) are traded is the over the counter
market on the National Association of Securities Dealers, Inc. Automated
Quotation System (Symbol "FKCM").
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The following table sets forth the range of high and low bid quotes of the
Company's Common Stock per quarter since the beginning of fiscal year 1994 as
reported by the National Quotation Bureau (which reflects inter-dealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions).
High Low
Quarter Ended Bid Price Bid Price
March 31, 1994 $.19 $.13
June 30, 1994 $.13 $.09
September 30, 1994 $.03 $.03
December 31, 1994 $.09 $.06
March 31, 1995 $.16 $.13
June 30, 1995 $.16 $.16
September 30, 1995 $.16 $.16
December 31, 1995 $.22 $.16
March 31,1996 $.25 $.16
June 30, 1996 $.25 $.09
September 30, 1996 $.13 $.06
As of September 30, 1996, the approximate number of recordholders of the
Company's Common Stock is 3,153 inclusive of those brokerage firms and/or
clearing houses holding the Company's common shares in street name for their
clientele (with each such brokerage house and/or clearing house being considered
as one holder). The aggregate number of shares of Common Stock outstanding is
86,855,020 as of September 30, 1996 which does not include certain shares issued
in connection with the Company's private offering of its Common Stock. No
dividends on Common Shares have ever been paid by the Company, nor does the
Company anticipate that dividends will be paid in the foreseeable future.
EXECUTIVE COMPENSATION
No compensation has been awarded to, earned by or paid to any of the named
executives or directors of the Company during the fiscal year ended 1995 or for
the first, second and third quarters of 1996. The Company does not anticipate
that such persons will receive any compensation through fiscal year ended 1996.
50
<PAGE>
FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1
51
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
PAGE
UNAUDITED CONDENSED FINANCIAL STATEMENTS:
BALANCE SHEET
SEPTEMBER 30, 1996 F-2
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND PERIOD FROM
DECEMBER 1, 1976 (INCEPTION) TO SEPTEMBER 30, 1996 F-3
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND PERIOD FROM
DECEMBER 1, 1976 (INCEPTION) TO SEPTEMBER 30, 1996 F-4/5
NOTES TO CONDENSED FINANCIAL STATEMENTS F-6/11
AUDITED FINANCIAL STATEMENTS:
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-12/14
BALANCE SHEET
DECEMBER 31, 1995 F-15
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1995 F-16
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1995 F-17/23
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1995 F-24/25
NOTES TO FINANCIAL STATEMENTS F-26/39
F-1
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(Unaudited)
ASSETS
<S> <C>
Current assets - cash ......................................... $ 1,954
Mining, milling and other property and equipment,
net of accumulated depreciation and depletion of
$1,806,799 6,432,102
Mining reclamation bonds ...................................... 125,000
Investment .................................................... 600,000
------------
Totals .............................................. $ 7,159,056
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible debentures .................................... $ 145,000
Accounts payable and accrued expenses ..................... 467,246
Notes and Loans payable to joint venture partner .......... 604,782
Other loan ................................................ 20,000
------------
Total current liabilities ........................... 1,237,028
Notes Payable ................................................. 1,036,419
Excess of equity in net losses of joint venture
over investment ........................................... 123,420
------------
Total liabilities ................................... 2,396,867
------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 100,000,000
shares authorized; 86,855,020 shares issued and
outstanding ........................................... 868,550
Additional paid-in capital ................................ 14,731,232
Deficit accumulated in the development stage .............. (10,837,593)
------------
Total stockholders' equity ......................... 4,762,189
------------
Totals .............................................. $ 7,159,056
============
</TABLE>
See Notes to Condensed Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Cumulative
Ended September 30, from
1996 1995 Inception
---- ---- ---------
<S> <C> <C> <C>
Revenues:
Sales ...................... $ 876,082
Interest income ............ $ 476 $ 764 539,012
Other income ............... 75,000
------------ ------------ ------------
Totals .............. 476 764 1,490,094
------------ ------------ ------------
Expenses:
Mine expenses .............. 3,360,793
Write-down of inventories .. 223,049
Depreciation, depletion
and amortization ....... 91,605 91,608 2,002,148
General and administrative
expenses ............... 434,570 214,574 4,732,301
Interest expense ........... 80,199 53,641 573,799
Amortization of debt is-
suance expense ......... 683,047
Equity in net loss of
joint venture .......... 3,150 123,420
Loss on settlement of
claims by joint
venture partner ........ 468,000
Loss on settlement of
litigation ............... 100,000
Loss on investment in
oil and gas wells ...... 61,130
------------ ------------ ------------
Totals ............... 609,524 359,823 12,327,687
------------ ------------ ------------
Net loss ....................... $ (609,048) $ (359,059) $(10,837,593)
============ ============ ============
Weighted average shares
outstanding .................. 74,993,609 48,956,125
============ ============
Net loss per common share ...... $(.01) $(.01)
====== ======
</TABLE>
See Notes to Condensed Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Cumulative
Ended September 30, from
1996 1995 Inception
---- ---- ---------
<S> <C> <C> <C>
Operating activities:
Net loss ............................. $ (609,048) $ (359,059) $(10,837,593)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and depletion ....... 91,605 91,608 2,002,148
Amortization of debt issuance
expense ....................... 683,047
Value of common stock issued
for:
Debt Issuance expence.......... 93,600
Services ...................... 75,000 1,045,277
Settlement of litigation ...... 100,000
Settlement of claims by joint
venture partner ........... 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 ....................... 3,150 123,420
Other ............................ (7,123)
Changes in operating assets
and liabilities:
Other current assets .......... 71
Accounts payable and accrued
expenses .................. 194,970 (37,134) 656,719
------------ ------------ ------------
Net cash used in operat-
ing activities ....... (244,323) (210,914) (5,341,705)
------------ ------------ ------------
Investing activities:
Purchases and additions to mining,
milling and other property and
equipment ........................ (175,593) (5,210,947)
Purchases of mining reclamation
bonds, net ....................... (80,000) (125,000)
Deferred mine development costs
and other expenses ............... (255,319)
------------ ------------
Net cash used in invest-
ing activities ....... (255,593) (5,591,266)
------------ ------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Cumulative
Ended September 30, from
1996 1995 Inception
---- ---- ---------
<S> <C> <C> <C>
Financing activities:
Issuances of common stock ............ $ 302,600 $ 8,763,257
Issuance of Underwriter's stock
warrants ......................... 100
Commissions on sales of common
stock ............................ (381,860)
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 1,505,000
Proceeds of loans from joint
venture partner .................. 258,100 $ 130,441 784,388
Repayments of loans from joint
venture partner .................. (397,006) (397,006)
Payments of debt issuance
expenses ......................... (164,233)
Proceeds of other notes and
loans payable..................... 20,000 80,000 708,000
Repayments of other notes and
loans payable .................... (120,000)
Proceeds of loans from affiliate ..... 55,954
Repayments of loans from affili-
ate .............................. (48,661)
------------ ------------ ------------
Net cash provided by financ-
ing activities ............ 383,694 210,441 10,934,925
------------ ------------ ------------
Increase (decrease) in cash .............. (116,222) (473) 1,954
Cash, beginning of period ................ 118,176 916 --
------------ ------------ ------------
Cash, end of period ...................... $ 1,954 $ 443 $ 1,954
============ ============ ============
Supplemental disclosure of cash flow data:
Interest paid ........................ $ -- $ 4,441 $ 298,868
============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
F-5
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited
condensed financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to
present fairly the financial position of Franklin
Consolidated Mining Co., Inc. (the "Company") as of
September 30, 1996, and its results of operations and cash
flows for the nine months ended September 30, 1996 and 1995.
Certain terms used herein are defined in the audited
financial statements of the Company as of December 31, 1995
and for the years ended December 31, 1995 and 1994 (the
"Audited Financial Statements") also included in the
Prospectus of this Registration Statement. Accordingly,
these unaudited condensed financial statements should be
read in conjunction with the Audited Financial Statements
and the other information included herein.
The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the
results of operations for the full year ending December 31,
1996.
Note 2 - 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 September 30, 1996,
it had an accumulated deficit of approximately $10,800,000
and a working capital deficiency of $1,235,000. As explained
in Note 3, 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 $172,000 as
of September 30, 1996. The Company was delinquent with
respect to the payment of $44,000 of real estate taxes as of
September 30, 1996. The Company is substantially dependent
on Gems, 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 September 30, 1996. Such matters raise
substantial doubt about the Company's ability to continue as
a going concern.
F-6
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 2 - 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. 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 the remainder of 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 September
30, 1997. 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 3 - Convertible debt:
As of September 30, 1996, the Company was in default with
respect to the payment of the $145,000 principal balance of
its outstanding 12.25% convertible debentures and $26,643 of
accrued interest thereon 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 for 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.
F-7
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 3 - Convertible debt (concluded):
While it is the intention of management and the Company to
comply with the terms of the agreements with the debenture-
holders, 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. In December 1995, the Company commenced an offering
exempt from registration pursuant to Rule 505 of Regulation
D under the Securities Act of 1933, as amended (the "Act"),
of 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 $400,000, of which
$200,000 was sold in December 1995 and $200,000 was sold in
the three months ended March 31, 1996. Each convertible note
was scheduled to mature 18 months from the date of its
issuance. The convertible notes were guaranteed by Gems and
secured by Gems' profit interest in the Joint Venture. The
notes became 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. All
of the notes were converted prior to September 30, 1996, and
the Company issued 4,294,770 common shares upon conversion
based on the total balance of principal and accrued interest
outstanding of $418,740 and a conversion price of $.0975 per
share.
F-8
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 4 - Loans payable to Joint Venture partner:
As explained in Note 4 to the Audited Financial Statements,
the balance of the loans payable by the Company to its Joint
Venture partner pursuant to the terms of the Zeus Joint
Venture Agreement totaled $313,688 at December 31, 1995.
During the nine months ended September 30, 1996, the Company
made net cash repayments of $138,906 thereby reducing the
balance of the loans payable to $4,782. 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 3).
Note 5 - Environmental matters:
As explained in Note 6 to the Audited Financial Statements,
the Company was notified by the State of Colorado Division
of Minerals and Geology (the "DMG") in March 1996 that it
would be required to increase its land reclamation bond by
an amount that would be determined subsequently; however,
the Company was required to increase such bond to $93,000
until such time as the total amount of the reclamation bond
was determined. 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 were corrected. In addition, the Mined Land
Reclamation Bureau of Colorado (the "MLRB") determined that
the Company's reclamation bond should be further increased
to approximately $252,000 by April 5, 1996. The Company was
unable to meet that deadline. However, the prospecting and
testing activities that were in process at the Franklin Mill
were not materially affected by the cease and desist order
since they were being conducted pursuant to a permit that
was specifically excluded from such order.
On April 24, 1996, the Company was able to obtain the
$252,000 bond required by the MLRB from an independent
bonding company in exchange for the deposit by the Company's
Joint Venture partner of $125,000 in a trust account
maintained for the benefit of the bonding company,
guarantees from the Joint Venture partner and certain of its
principals and the posting of a performance bond from an
independent bonding company by one of the Joint Venture's
contractors with respect to the completion of the technical
and remedia- tion work required by the regulatory
authorities. As a result, the cease and desist order was
vacated on June 7, 1996 and the Company received refunds of
approximately $93,000 during the second quarter of 1996 from
the mining reclamation bonds it had posted.
F-9
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 6 - Stockholders' equity: Issuances of common stock:
In February 1996, the Company commenced an offering pursuant
to Rule 505 of Regulation D of its common stock to
accredited and unaccredited investors at a purchase price
15% below the market price of the common stock as quoted on
NASDAQ at the close of business on the prior day in an
effort to raise up to approximately $1,000,000. During the
nine months ended September 30, 1996, the Company sold
953,411 shares of common stock for total cash proceeds of
$202,600, or $.2125 per share, prior to the termination of
the offering.
During the nine months ended September 30, 1996, the Company
also issued 4,294,770 shares of unregistered common stock
upon the conversion of notes (see Note 3) and 56,000 shares
of unregistered common stock in lieu of a cash payment for
previously accrued liabilities of $7,000, which was
equivalent to $.125 per share or approximately 50% of the
fair market value of the shares at the time of issuance.
These were noncash transactions and, accordingly, they were
not reflected in the accompanying statement of cash flows
for the nine months ended September 30, 1996.
The holders of the 4,294,770 common shares issued upon the
conversion of the notes have unlimited piggyback
registration rights and, commencing one year after issuance
and subject to certain conditions, will have the right to
demand one registration with respect to the shares.
During the third quarter ended September 30, 1996, the
Company issued 1,160,000 shares of unregistered common stock
in consideration for services rendered in the amount of
$75,000. Additionally, in July 1996, the Company commenced
an offering of its common stock pursuant to Rule 505 of
Regulation D during which the selling agent, due to adverse
market conditions, was only able to sell 800,000 shares at
$.125 raising $100,000. The offering was on a best efforts
basis and was terminated on September 15, 1996.
Also, in July 1996, the Company commenced an offering to
unaffiliated parties pursuant to Regulation D for the
issuance of shares of common stock at the equivalent of
$.15625 per share in exchange for certain notes, mortgages,
and other obligations. Upon completion of the offering, the
Company purchased obligations of its affiliates having an
aggregate principal balance of $1,463,583 through the
issuance of 9,366,919 shares of common stock and then
transferred the obligations of its affiliates so acquired to
the seller of the Gold Hill property and equivalent
reduction in the principal balance of the mortgage note.
Common stock reserved for issuance:
At September 30, 1996, shares of common stock were reserved
for issuance upon exercise of outstanding debentures and
warrants as follows:
Convertible debentures 290,000
Warrants 500,000
-------
Total 790,000
=======
Note 7 - Acquisitions:
On July 3, 1996, the Company acquired the Gold Hill Mill, a
permitted milling facility located in Boulder County,
Colora- do, from Colino Oro Molino, Inc. ("COM Inc."), a
wholly-owned subsidiary of Island which is the parent of
Gems, the Compa- ny's Joint Venture partner. The cost of the
acquisition totaled $2,500,000 which was paid through the
issuance of a mortgage note requiring the payment of the
entire principal balance on July 3, 1999 and the payment of
interest, computed at an annual rate of 8%, on a quarterly
basis. The mortgage note is secured by the milling facility
which was inactive prior to the acquisition.
In September 1996, the Company acquired from Gems a 20%
interest in Newmineco LLC, which was a newly formed Colorado
Limited Liability Company. Newmineco owns the rights to the
mining properties known as the Mogul Mines which consists of
the Mogul Tunnel and the surrounding claims in the Spencer
Mountain region. The purchase price was $600,000 evidenced
by an interest only note bearing interest at 9.5% per annum.
Payments of interest are payable quarterly and the principal
is due June 30, 1997. The Company may, at its option,
convert the principal and interest payments due under the
note into the Company's common stock on or after January 1,
1997 at a conversion rate of $.078 per share. Additionally,
the Company has acquired the right to receive the first
$500,000 of profits distributed by Newmineco, but
thereafter, will receive only that portion of such profits
to which the Company would be entitled in respect of the
aforesaid 20% ownership interest.
F-10
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 8 - Financing:
In July 1996, the Company commenced an offering to
unaffiliated parties pursuant to Regulation D for the
issuance of shares of common stock at the approximate
equivalent of $.15625 per share in exchange for certain
notes, mortgages and other obligations of Gems and/or other
subsidiaries of Island. Upon the completion of the offering,
the Company (i) purchased obligations of its affiliates with
an aggregate principal balance of approximately $1,400,000
through the issuance of 9,366,919 shares of common stock and
(ii) transferred the obligations of its affiliates so
acquired to COM Inc. for an equivalent reduction in the
principal balance of the mortgage note.
In July 1996, the Company commenced another offering to
unaffiliated parties pursuant to Regulation D of up to
10,000,000 shares of its common stock at $.125 per share.
The Company received gross proceeds of $100,000 from the
sale of 800,000 shares of common stock pursuant to this
offering. The investment banking company acting as the
placement and selling agent will receive a commission equal
to 5% of the gross proceeds of the offering and a warrant
for the purchase of 5% of the total number of shares sold in
the offering. The warrant will be exercisable during the
three year period from the date of the closing of the
offering at $.125 per share, subject to anti-dilution
adjustments. As of September 30, 1996, the Company received
gross proceeds of only $100,000 from the sale of 800,000
shares of common stock. Due to market conditions the
offering was terminated on September 15, 1996.
The Company has agreed to use its best efforts with respect
to the completion of initial and effective filings of
registration statements pursuant to the Act within specified
periods for any common shares sold through the offerings
described above.
F-11
<PAGE>
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 Frank- lin 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-12
<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.
J. H. COHN LLP
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-13
<PAGE>
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 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 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.
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
March 8, 1995
F-14
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 1995
ASSETS
<S> <C>
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 $.01 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
============
</TABLE>
See Notes to Financial Statements.
F-15
<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 outstand-
ing ............................ 49,035,351 48,556,123
============ ============
Net loss per common share .......... $(.02) $(.01)
====== ======
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE>
<TABLE>
<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 - re-
lated parties 925,000 9,250 9,250
in exchange
for shares of
Gold Devel-
opers 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 com-
mon stock:
Pursuant to
public offer-
ing, 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
Net 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 - re-
lated 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 com-
mon stock:
Cash ............ 289,750 2,898 837,102 840,000
Noncash ......... 59,500 595 118,405 119,000
Net loss ............ (219,021) (219,021)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December
31, 1980 ........ 3,620,975 36,210 2,039,046 (459,342) 1,615,914
</TABLE>
F-17
<PAGE>
<TABLE>
<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 com-
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 com-
mon stock:
Cash ........... 1,273,134 12,732 1,176,818 1,189,550
Noncash ........ 70,834 708 70,126 70,834
Exercise of
stock op-
tions by:
Related par-
ties .... 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
</TABLE>
F-18
<PAGE>
<TABLE>
<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)
Net 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 com-
mon 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 - re-
lated 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
</TABLE>
F-19
<PAGE>
<TABLE>
<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 - re-
lated 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 par-
ties ............ 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 - re-
lated parties 210,000 2,100 29,400 31,500
Private place-
ment:
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)
</TABLE>
F-20
<PAGE>
<TABLE>
<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 - re-
lated parties 12,120 121 485 606
</TABLE>
F-21
<PAGE>
<TABLE>
<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 - exer-
cise of op-
tions by re-
lated 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 com-
mon stock -
related par-
ties ........ (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 - set-
tlement of
litigation .. 1,000,000 10,000 90,000 100,000
Noncash - exer-
cise of op-
tions by re-
lated 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
Net loss ............ (381,596) (381,596)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December
31, 1994 ........ 48,556,123 485,561 11,282,675 (9,304,201) 2,464,035
</TABLE>
F-22
<PAGE>
<TABLE>
<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:
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 - re-
lated parties 8,679,797 86,798 590,227 677,025
Exchange of
shares for
profit parti-
cipation in-
terests ...... 2,700,000 27,000 (27,000)
Net loss ......... $ (924,344) (924,344)
------------ ------------ ------------ ------------ ----- ------------
Balance, Decem-
ber 31, 1995 . 69,135,920 $ 691,359 $ 12,471,502 $(10,228,545) $-- $ 2,934,316
============ ============ ============ ============ ===== ============
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
<TABLE>
<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 operat-
ing 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 .................. 138,305 72,164 461,749
------------ ------------ ------------
Net cash used in operat-
ing activities ....... (180,285) (144,984) (5,097,382)
------------ ------------ ------------
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 invest-
ing activities ....... (234,435) (12,333) (5,335,673)
------------ ------------ ------------
</TABLE>
F-24
<PAGE>
<TABLE>
<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 ............................ (381,860)
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
============ ============ ============
</TABLE>
See Notes to Financial Statements.
F-25
<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 Mill").
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-26
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 - 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 remedia- tion 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-27
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 - 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 Decem- ber 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-28
<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 liable
to creditors 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-29
<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 is-
sued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," 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 cer-
tain 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-30
<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 pay $1,500,000
F-31
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Status of the Zeus Joint Venture Agreement (continued):
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 of 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 to the Company's Joint
Venture partner totaled $313,688 at December 31, 1995. Such
balance is nonin-
F-32
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Status of the Zeus Joint Venture Agreement (concluded):
terest 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.
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 inter-
est 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 previ-
ous 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 de-
bentures 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 deben- tureholders will be.
F-33
<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 Regu-
lation 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 prin-
cipal amount of $400,000, of which $200,000 was out-
standing 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 condi-
tions, will have demand registration rights with re-
spect 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-34
<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-35
<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-36
<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 Com- pany'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
carryforwards 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 carryforwards 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-37
<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
$.01 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
Compa- ny's common stock as of December 31,
1995 (see Note 5).
F-38
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 9 - Fair value of financial instruments:
The Company's material financial instruments at December 31,
1995 for which disclosures of estimated fair values are
required by certain accounting standards consisted of cash,
convertible debentures, convertible notes and loans payable
to the Joint Venture partner. The fair value of cash is
equal to its carrying value because of the liquidity and
short-term maturity of such a financial instrument. The fair
value of the fixed rate convertible notes is equal to the
carrying value because such obligations were issued just
prior to December 31, 1995 at a market interest rate.
Because of the relationship of the Company and its Joint
Venture partner, there is no practical method that can be
used to determine the fair value of the loans payable by the
Company. Because of the Company's defaults with respect to
the payment of the convertible debentures and the
uncertainties related to the ability of the Company to
obtain the funds for their repayment, there is no practical
method that can be used to determine the fair value of the
loans payable by the Company to the holders of the
debentures.
F-39
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 26, 1995, the Company notified Wolinetz, Gottlieb &
Lafazan, P.C. ("WGL") of its decision to dismiss the firm as its independent
accountants. The decision to dismiss WGL was approved by the Board of Directors
of the Company.
During the two most recent fiscal years of the Company prior to the
dismissal, none of the reports of WGL on the financial statements of the Company
contained an adverse opinion or a disclaimer of opinion or was qualified or
modified as to audit scope, or accounting principles, except that WGL had
modified its reports on the financial statements of the Company to include an
explanatory paragraph referring to uncertainties about the ability of the
Company to continue as a going concern. During the two most recent fiscal years
and the subsequent interim period preceding the dismissal of WGL, there were no
disagreements with the Company and WGL concerning accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
would have caused WGL to make a reference to the subject matter thereof in its
report had such disagreement not been resolved to the satisfaction of WGL.
In February 1996, the Company retained J.H. Cohn LLP to act as its
independent accountants for the year ended December 31, 1995.
52
<PAGE>
PART II-INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware provides for
broad indemnification of officers and directors and allows the corporation to
advance funds to such indemnified party to defend such action prior to the
adjudication thereof. The Certificate of Incorporation of the Company does not
grant any indemnification rights other than those specifically set forth in
Section 145, nor does the Company maintain any director and officer liability
insurance at this time.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate (except with respect to SEC
Registration fees) of all fees and expenses in connection with the issuance and
distribution of the securities being registered, all of which will be paid by
the Company:
SEC Registration Fee $ 383.33
Printing and Filing Expenses $ 7,500.00
Legal Fees and Expenses $ 40,000.00
Accounting Fees and Expenses $ 15,000.00
Blue Sky Fees and Expenses $ 8,000.00
Transfer Agent Fees $ 3,000.00
Miscellaneous $ 2,000.00
Total $ 75,883.33
RECENT SALES OF UNREGISTERED SECURITIES
On or about July, 1996, the Company issued to Saul Horing 1,000,000 shares
of Common Stock as payment for a finders fee owed to Mr. Horing in connection
with the Zeus Joint Venture. The shares were issued to Mr. Horing pursuant to
Section 4 (2) of the Act.
In connection with its investment banking arrangements with Redstone
Securities, Inc., the Company granted Redstone an option to purchase 2,500,000
share of Common Stock of the Company at an option price of $.01 per share. On or
about November, 1996, Redstone exercised its option and the Company thereafter
issued such shares to Redstone pursuant to the exemption set forth in Section 4
(2) of the Act.
For a detailed discussion of additional offerings by the Company of
unregistered securities, see "Managements Discussion and Analysis on Plan of
Operation-Liquidity and Capital Resources." See also, quarterly reports on Form
10-QSB for the quarters ended March 31, 1996, June 30, 1996 and September 30,
1996.
EXHIBITS
3.1 Articles of Incorporataion*
3.2 By Laws*
5.1 Opinion of Falcone, Houdek, Bailey & Curd LLP**
16.1 Letter on Change in Certifying Accountants*
23.1 Consent of JH Cohn, LLP, Independent Public Accountants***
23.2 Consent of Wolinetz, Gottleib & Lafazan, PC, Independent Certified
Accountants***
* Filed in public documents incorporated by reference herein
** Filed herewith
*** Filed with Form SB-2 filed with the Commission on November 18, 1996.
<PAGE>
UNDERTAKINGS
As the Company is registering securities under Rule 415 of the
Securities Act, the Company will:
(a) file, during any period which it offers or sells
securities, a past effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of
the Securities Act
(ii) reflect in the prospectus any facts or events which
individually or together, represent a fundamental
change in the information in the registration
statement; notwithstanding the foregoing; any increase
and decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from one low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
42(b) of the Securities Act if, in the aggregate, the
changes in the volume and price represent no more than
20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii)include any additional or changed material information
on the plan of distribution.
(b) For determining liability under the Securities Act, treat each post
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bonafide
offering.
(c ) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
54
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment No. 1
to such registration statement to be signed on its behalf by the undersigned in
the City of New York, State of New York on December 16, 1996.
FRANKLIN CONSOLIDATED MINING CO., INC.
/s/ J. Terry Anderson
----------------------------------
J. Terry Anderson, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated
December 16, 1996 /s/ J. Terry Anderson
---------------------
J. Terry Anderson
President and Director
December 16, 1996 /s/ Robert Waligunda
---------------------
Robert Waligunda
Secretary and Director
December 16, 1996 /s/ Robert J. Levin
---------------------
Robert J. Levin
Vice President-Finance and
Chief Financial Officer
December 16, 1996 /s/ Richard Brannon
---------------------
Richard Brannon
Vice President- West Coast
Operations
55
EXHIBIT 5.1
December 16, 1996
Franklin Consolidated Mining Co., Inc.
76 Beaver Street
Suite 500
New York, New York 10005
Re: Registration Statement on Form SB-2 of
relating to 9,200,000 shares of Common Stock
Dear Sir or Madam:
This opinion relates to an aggregate of 9,200,000 shares of Common Stock,
par value $.01 per share (the "Common Stock") of Franklin Consolidated Mining
Co., Inc. (the "Company") which is the subject matter of a Registration
Statement initially filed with the Securities and Exchange Commission on
November 18, 1996 (the "Registration Statement"). The 9,200,000 shares of Common
Stock covered by the Registration Statement are being sold by a selling security
holder of the Company (the "Selling Security Holder").
Based on such investigations as we have deemed necessary, we are of the
opinion that the sares of Common Stock being sold by Selling Security Holder
have been validly issued, fully paid and are non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference of our firm in the Prospectus under
the caption "Named Experts and Counsel".
Very truly yours,
/S/ FALCONE, HOUDEK, BAILEY & CURD LLP
--------------------------------------
FALCONE, HOUDEK, BAILEY & CURD LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus of this Registration
Statement on Form SB-2 of our report dated March 23, 1996 (except as noted
therein) on the financial statements of Franklin Consolidated Mining, Co, Inc.
as of December 31, 1995, and for the year and period then ended. We also consent
to the reference to our firm under the caption "Experts" in the Prospectus of
the Registration Statement.
J. H. COHN LLP
Roseland, New Jersey
November 13, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus of this Registration
Statement on Form SB-2 of our report dated March 8, 1995 (except as noted
therein) on the financial statements of Franklin Consolidated Mining, Co, Inc.
for the year ended December 31, 1994. We also consent to the reference to our
firm under the caption "Experts" in the Prospectus of the Registration
Statement.
/S/ WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
--------------------------------------
WOLINETZ, GOTTLIEB & LAFAZAN, P.C.
Rockville Centre, New York
November 13, 1996
