U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File No. 0-9416
FRANKLIN CONSOLIDATED MINING CO., INC.
(Exact name of registrant as specified in its charter)
Delaware #13-2879202
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
76 Beaver Street, Suite 500, New York, New York 10005
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area code (212) 344-2828
The Number of Shares Outstanding of Common Stock
$.01 Par Value, at September 30, 1996 86,855,020
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports,) and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS
(Unaudited)
September December
ASSETS 30, 1996 31, 1995
----------- ---------
<S> <C> <C>
Current assets - cash .......................... $ 1,954 $ 118,176
Mining, milling and other property and
equipment, net of accumulated depre-
ciation and depletion of $1,806,799
and $1,715,194, respectively ............... 6,432,102 3,848,114
Mining reclamation bonds ....................... 125,000 45,000
Investment ..................................... 600,000
------------ ------------
Totals ............................... $ 7,159,056 $ 4,011,290
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Convertible debentures ..................... $ 145,000 $ 145,000
Accounts payable and accrued expenses ...... 467,246 298,016
Note and loans payable to
joint venture partner ....................... 604,782 313,688
Other Loan ..................................... 20,000
------------ ------------
Total current liabilities ............ $ 1,237,028 756,704
Note Payable ................................... 1,036,419
Convertible notes .............................. 200,000
Excess of equity in net losses of joint
venture over investment .................... 123,420 120,270
------------ ------------
Total liabilities .................... 2,396,867 1,076,974
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share;
100,000,000 shares authorized;
86,855,020 and 69,135,920 shares
issued and outstanding ................. 868,550 691,359
Additional paid-in capital ................. 14,731,232 12,471,502
Deficit accumulated in the development
stage .................................. (10,837,593) (10,228,545)
------------ ------------
Total stockholders' equity .......... 4,762,189 2,934,316
------------ ------------
Totals ............................... $ 7,159,056 $ 4,011,290
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
2
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Three Months Cumulative
Ended September 30, Ended September 30, from
1996 1995 1996 1995 Inception
---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales .................... $ 876,082
Interest income .......... $ 476 $ 764 $ -0- $ 300 539,012
Other income ............. 75,000
------------ ------------ ------------ ------------ ------------
Totals ............ 476 764 -0- 300 1,490,094
------------ ------------ ------------ ------------ ------------
Expenses:
Mine expenses ............ 3,360,793
Write-down of inventories 223,049
Depreciation, depletion
and amortization ..... 91,605 91,608 30,535 30,536 2,002,148
General and administrative
expenses ............. 434,570 214,574 157,030 118,724 4,732,301
Interest expense ......... 80,199 53,641 49,441 19,050 573,799
Amortization of debt is-
suance expense ....... 683,047
Equity in net loss of
joint venture ........ 3,150 1,050 123,420
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 ............ 609,524 359,823 238,056 168,310 12,327,687
------------ ------------ ------------ ------------ ------------
Net loss ..................... $ ( 609,048 ) $ (359,059) $ (238,056) $ (168,010) $(10,837,593)
============ ============ ============ ============ ============
Weighted average shares
outstanding ................ 74,993,609 48,956,125 85,463,020 48,956,125
============ ============ ============ ============
Net loss per common share .... $(.01) $(.01) $( - ) $( - )
============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Cumulative
Ended Sept. 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 Expense ......... 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>
4
<PAGE>
<TABLE>
<CAPTION>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Cumulative
Ended Sept. 30, from
1996 1995 Inception
----------- ----------- -----------
<S> <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
debentures 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.
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 and
three months ended September 30, 1996 and 1995. Information
included in the condensed balance sheet as of December 31, 1995
has been derived from the audited balance sheet in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995
(the "10-KSB") filed with the Securities and Exchange Commission.
Certain terms used herein are defined in the 10-KSB. Accordingly,
these unaudited condensed financial statements should be read in
conjunction with the financial statements, notes to financial
statements and the other information in the 10-KSB.
The results of operations for the nine months and three 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.
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.
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.
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 in the 10-KSB, 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 $308,906 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 in the 10-KSB, 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.
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
$1,463,581 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 for an
equivalent reduction in the principal balance of the mortgage
note.
10
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
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, Colorado,
from Colina Oro Molina, 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.
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 consist 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.
11
<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 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. Management of the
Company anticipates that upon the completion of the offering the
Company shall have (i) purchased obligations of its affiliates
with an aggregate principal balance of approximately $1,400,000
through the issuance of approximately 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 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. Management of the Company anticipates that the
proceeds of the offering will be used (i) to pay all accrued
interest on the Company's outstanding convertible debentures,
(ii) to satisfy delinquent real property taxes, (iii) to pay
accrued professional fees (iv) to pay for $250,000 of costs of
assisting in the development and design of technologies for use
in the Company's milling facilities and (v) for general working
capital purposes. As of the date this report was filed, the
Company had 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.
12
<PAGE>
Management's Discussion and Analysis
Liquidity and Capital Resources
The Company had no active mining or milling operations during the nine
months ended September 30, 1996 as a result, in part, of a cease and desist
order issued in March 1996 by the Colorado Division of Minerals and Geology for
permit violations that were not vacated until June 7, 1996.
During 1995 and 1994, the Company financed its operations primarily through
loans from Gems & Minerals Corp., its joint venture partner. During the nine
months ended September 30, 1996, the Company raised $200,000 from the private
placement of convertible notes in addition to another $200,000 raised in the
fourth quarter of 1995. The Company also sold 953,411 shares of unregistered
common stock for $202,600 and raised an additional $100,000 in July 1996 through
another Regulation D offering. The Company used the cash obtained through the
sale of the notes and the stock primarily to ( I ) partially finance its
operating losses; (11) increase the net amount of mining reclamation bonds on
deposit by $80,000 in order to get the cease and desist order vacated; and (111)
reduce the net balance payable to Gems arising from previous operating loans by
approximately $309,000 (the Company repaid $312,000 in the first quarter,
borrowed $60,000 from Gems in the second quarter, and repaid %57,000 in the
third quarter).
During the second quarter of 1996, all of the notes issued in the fourth
quarter of 1995 and the first quarter of 1996 as described in the preceding
paragraph were converted, 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.
On July 3, 1996, the Company acquired the Gold Hill Mill, a permitted modem
milling facility located in Boulder County, Colorado from an affiliate of Gems
for $2,500,000 through another noncash transaction, whereby it issued a mortgage
note to the affiliate requiring the payment of the entire principal balance on
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.
13
<PAGE>
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 approximate equivalent of $.15625 per share in exchange for certain notes,
mortgages and other obligations of Gems and/or other subsidiaries of Island.
Management of the Company anticipates that upon completion of the offering the
Company shall have 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 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.
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 (of a
$10,000,000 share offering) at $.125 raising $1 00,000. The offering was on a
best efforts basis and was terminated on September 15, 1996.
In September 1996, the Company acquired a 20% intrest in Newmineco from
Gems for a purchase price of $60,000. Interest at 9.5% is payable quartly and
the pricipal is due in full on June 30, 1997. Additionally, the Company has
aquired the right to receive the first $500,000 of profits distributed by
Newmineco, but thereafter, will receive only that portion of such profits which
the Company would be entiled in respect of the aforesaid 20% ownership interest.
The Company's current administrative costs are estimated to be
approximately $30,000 per month. In addition to loans and advances from Gems,
the Company expects positive cash flow from the Franklin's mine, Gold Hill and
Newmineco operations in the first and second quarters of 1997.
14
<PAGE>
Management's Discussion and Analysis
Results of Operations
The Company had a net loss of $238,056 for the three months ended September
30, 1996 as compared to a net loss of $168,010 during the same period in 1995.
This increase was primarily attributable to an increase in interest expense of
approximately $30,000 and an increase in general and administrative expenses
approximating $38,000.
General and administrative expenses were $157,030 for the quarter ended
September 30, 1996 as compared with $118,724 during the same period 'in 1995.
Interest expense was $49,441 during the 1996 third quarter as compared to
$19,050 in the same 1995 quarter. The increase in interest was due to interest
incurred in connection with the acquisition of the Gold Hill property in July
1996.
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, wich was mostly comprised of professional fees.
General and administrative expenses were $434,570 for the mine months ended
September 30, 1996 compared with $214,574 during the same period in 1995 due
primarily to a substantial increase in professional fees in 1996. Interest
expense was $80,199 during the nine months ended September 30, 1996 as compared
to $53,641 during the same period in 1995.
The Company's ability to continue operations through September 30, 1997 is
predicated primarily on the terms of the joint venture agreement with Gems
pursuant to which Gems has agreed to provide technical and financial support for
the resumption of mining and milling operations at the Company's original
Franklin mining and milling property and the Gold Hill and Newmineco
acquisitions. Once the properties begin commercial operations, the Company will
realize 17.5% of all net profits the Franklin Mine and the Gold Hill Mill
generate pursuant to the joint venture agreement. Additionally, the Company will
receive 17.5% of all income the joint venture will derive from certain contracts
in which the Zeus Joint Venture has profit interests and the first $500,000 and
20% thereafter of all Newmineco income. Management is hopeful that profits and
cash flow derived from these operations will be sufficient to fund its future
operation; however, there can be no assurance that the Company will realize
sufficient cash flows from the commercial operations of its properties during
the 12 months ending September 30, 1997.
15
<PAGE>
Part II
Item 1. Legal Proceedings
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 Colorado1 with respect to certain
monies advanced by Leadville on behalf of the Company in connection with
expenses allegedly attributable to the Company incurred by the Company as a
result of the use of common office space in New York and certain consulting fees
which Mr. Dieterle claims are owed by the Company to him for services rendered
in connection with the Franklin Mining properties as a geologist. The aggregate
amount of the claims were 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 of Leadville for $18,000 and the claims of Mr. Dieterle
for $4,000. In consideration of such payments, Leadville and Mr. Dieterle agreed
as soon as possible, to (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 September
30, 1996, the Company has paid Mr. Dieterle $4,000 as payment in full for his
personal claims and Leadville $9,000 of the $18,000 owed under the Settlement
Agreement. The Company has been informed that the legal proceedings have been
withdrawn and, as of September 30, 1996, the Company has not received any notice
of lien being filed by either Mr. Dieterle or Leadville with respect to the
Company's assets.
On February 1, 1996, Island Investment Corp. ("Island"), parent company of
Gems & Minerals Corp., the Company's joint venture partner ("Gems"), entered
into a series of transactions with Thames Hartley ("Hartley"), the president of
Durango Metals, Inc. ("Durango"), and Wayne Tatman, an employee, owner and/or
agent or representative of Durango and Hartley and a representative of
Consolidated Milling, Inc.("CMI"), pursuant to which Hartley and Tatman, on
behalf of Durango, granted to Newmineco, LLC. ("LLC") the exclusive right to all
ore mined from three leases for the mining rights to the mining properties known
as the Mogul Mines (the "Mogul Mines") under which Durango was the lessee. The
Mogul Mines consist of the Mogul Tunnel and the surrounding claims located in
the Spencer Mountain region, a region which is well known as an historic gold
resource.
Specifically, LLC acquired an exclusive assignable contract right to
receive and process, at cost, all of the ore produced from the Mogul Mine and a
10% profit interest in net smelter returns received from the ore mined from the
Mogul Mine (the "Process/Profit Interest Contract"). In exchange for the
Process/Profit Interest Contract, the LLC agreed to finance 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 Mine, a mining
property controlled by Hartley (the "Lincoln Mine") 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 Zeus 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.
16
<PAGE>
On or about March 1996 and as previously agreed, Island acquired the lease
known as the Rugg Lease at the Mogul Mine 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 and for 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 Ruggs
and Island, solely, as lessee for a ten year period which lease is currently in
effect and which was later assigned to Newmineco. In the spring of 1996, Island
and Gems notified the Company that Hartley, Tatman and Durango had defaulted on
their agreements with Island. As a result, Island terminated the agreements and
its business relationship with Durango, Tatman and Hartley. Island thereafter
assigned its interest in Newmineco to Gems.
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 which the Company would be entitled in respect of
the aforesaid 20% ownership interest.
Prior to the acquisition by the Company of its 20% profit interest, 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 propertied 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 and 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.
17
<PAGE>
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., the previous owner of the Gold Hill Mill, Gems,
Island, the Company, Audrey I. Hayden and Dorothy Kennec (the owners of the
properties covered by the Hayden/Kennec Leases) commenced an action against each
of Durango, Hartley, CMI and Tatman in District Court, Boulder County Colorado
claiming, among 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. As of
the dates hereof, Defendants have not answered such complaint.
Item 3. Defaults Upon Senior Securities
As of September 30, 1996, the Company continues to be in default with
respect to the payment of $145,000 principal amount of its 12 1/4% Convertible
Debentures (the "Debentures") and accrued and unpaid interest as of September
30, 1996 in the amount of approximately $26,643. In December 1995, the Company
notified its debenture holders that it would be unable to pay the outstanding
principal and interest on December 31, 1995 as previously agreed and requested
that such holders extend the maturity date of the Debentures to December 31,
1996. In exchange for such consents, the Company agreed to (i) bring all
interest payments current through December 31, 1995 and prepay the interest
payment due at the end of the first quarter of 1996, (ii) extend the conversion
rights of such holders at the previous rate of $.50 per share through December
31, 1996 and (iii) establish a fund with the Trustee to secure the timely
payment of the principal balance of the Debentures on December 31, 1996 (the
"December 1995 Agreements"). Only one holder of $1,000 principal amount of
debentures rejected the Company's proposal.
18
<PAGE>
While it remains the intention of management and the Company to comply with
these agreements, the Company has been unable to meet its obligations to such
holders as a result of unforeseen liquidity and cash flow shortages. As a result
of its continued default and failure to comply with the December 1995
Agreements, the Company may be subject to legal proceedings by or on behalf of
debenture holders seeking payment of principal and all interest as well as any
penalties and other legal remedies the holders may claim they are entitled to
receive under the law. There can be no assurance that the Company will have
adequate funds available to make the payment s required under the December 1995
Agreements or that the commencement of legal proceedings will not have a
material adverse effect on the Company.
Item 5. Other Information
As partial payment for services rendered, the Company issued an aggregate
of 56,000 shares to partners of the Company's former independent auditors which
issuance has reduced the Company's outstanding liability to such firm from
$17,000 to $10,000. The remainder of such fees are to be paid in cash and have
not been paid as of the date this report was filed.
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
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 was 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. As of September 30, 1996. the Company has not
paid any of the aforesaid taxes and, therefore, may be subject to enforcement
proceedings for the collection of such taxes.
On July 3, 1996, the Company acquired the Gold Hill Mill, a permitted
modern milling facility located in Boulder County, Colorado, from Com, Inc., and
affiliate of Gems & Minerals, Corp. for $2,500,000. The $2,500,000 consideration
for the acquisition of the Gold Hill Mill was paid by the issuance of an
interest only note of the Company payable to Com, Inc.( the "Gold Hill Note")
bearing interest at a rate of 8% per annum. Interest payments on the Gold Hill
Note are $50,000 payable on a quarterly basis and the Gold Hill Note is secured
by a mortgage on the Gold Hill Mill property in favor of Com, Inc. The principal
amount of the Note is due on July 3, 1999.
19
<PAGE>
In an effort to reduce its outstanding obligation to Com, Inc. incurred in
connection with the acquisition of the Gold Hill Mill, the Company commenced an
offering pursuant to Regulation D under the Securities Act of 1933, as amended (
the "Act"), to purchase certain assets form third parties in exchange for common
stock of the Company. The assets consist of certain notes, mortgages and other
obligations of Gems and/or its affiliates to such third parties. As a result of
the offering, the Company was able to reduce the principal amount of the Gold
Hill Note by approximately $1,400,000 through the issuance of approximately
9,366,919 shares of common stock. As part of the terms of the offering, the
Company has agreed to use its best efforts to file within 45 to 60 days from the
date upon which this offering has been terminated, a registration statement with
the Securities and Exchange Commission (the "Commission") with respect to such
shares issued in the offering on such form as shall be available to the Company
and shall use its best efforts to cause such registration statement to become
effective not more than 90 days from the date of such initial filing. On July 8,
1996, the Joint Venture acquired the rights to certain agreements which would
allow it to mill and mine dump material located on fourteen mine dumps in the
immediate vicinity of the Gold Hill Milling facility (the "Gold Hill Dumps").
The agreements provide Zeus Joint Venture the right to mill or process the 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 of dump material. As of the date hereof, no milling has begun at either the
Franklin Mill and/or Gold Hill Mill.
As part of the agreements to mill and mine these dump materials, the lessor
of the property which comprises 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 time table set
forth in the Agreement, 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 to work
together under the terms of the Agreement with respect to the Gold Hill Dumps.
In July, 1996, the Company commenced an offering of up to $1,250,000 of its
common stock at a purchase price of $.125 per share. The offering was to be
placed by Stires & Company, a New York brokerage firm, acting as placement agent
for the Company (the "Placement Agent"). The Company agreed to pay a commission
to the Placement Agent equal to 5% of the gross proceeds of the offering and to
issue a selling agent warrant which will, when exercised convert into 5% of the
total amount of shares sold in the offering. Moreover, the Company agreed to use
its best efforts to file within 45 to 60 days from the date upon which this
offering has been terminated, a registration statement with the Commission with
respect to such shares issued in the offering on such form as shall be available
to the Company and shall use its best efforts to cause such registration
statement to become effective not more than 90 days from the date of such
initial filing. 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.
20
<PAGE>
On September 20, 1996, the Company acquired a 20% interest in Newmineco.
For a more detailed description of the terms of such acquisition, see Item 3.
Litigation.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
A. Newmineco Assignment of 20% Interest to the Company.
B. Newmineco $600,000 Note.
C. Press Release of the Company, dated September 30, 1996.
b. Reports of Form 8-K
None.
21
<PAGE>
212-344-2828
FRANKLIN CONSOLIDATED MINING
COMPANY, INC.
ROOM 500
76 BEAVER STREET
NEW YORK, NEW YORK 10005-3402
For Immediate Release
New York, New York/Idaho Springs, Colorado - September 30, 1996 -On
September 26, 1996 Franklin Consolidated Mining Co., Inc. (FKCM-NASDAQ) acquired
from Gems & Minerals Corp., the Company's Joint venture partner, a 20% interest
in Newmineco, LLC, a Colorado limited liability company for $600,000. In
addition, Franklin has been given the right to receive the first $500,000 of net
income from Newmineco operations by the participants in Newmineco, which are
Gems and Newco, Inc., an affiliate of Gems.
Newmineco owns the leases to the mining rights to the so called "Mogul
Mine" which is comprised of the Mogul Tunnel and the surrounding claims located
in the Spencer Mountain region, a historically rich gold mining area which is in
the exploratory stage.
Franklin has been advised by the management of Newmineco that it previously
delivered gold ore extracted as part of its recent bulk testing program to
ASARCO, which resulted in an average of approximately I ounce ore per ton out of
an estimated 1.00 tons tested. The Company has been further advised that
Newmineco is continuing its exploratory program in an effort to gather
additional bulk data with respect to the Mogul Mine ore bodies with a view
toward production. The Company will release such additional information as the
same becomes available.
The purchase price is payable by a Note bearing interest at 9% per annum
and maturing on June 30, 1997.
22
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities and Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FRANKLIN CONSOLIDATED MINING CO, INC.
Date: November 21, 1996 /s/ Robert J. Levin
-------------------
Robert J. Levin
Vice President-Finance
Principal Financial Officer
23
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