SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended 12/31/96 Commission File No. 0-9416
FRANKLIN CONSOLIDATED MINING CO., INC.
(name of small business issuer in its charter)
Delaware 13-2878202
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
76 Beaver Street, New York, New York 10005
(Address of principal executive offices)
Issuers telephone number: 212-344-2828
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act: Common
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10
- -KSB or any amendment to this Form 10 -KSB. [ ]
State issuer's revenues for its most recent fiscal year. $2,351.00
State the aggregate market value of the voting stock held by non- affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days
$10,997,878
State the number of shares outstanding of each of issuers class of common
equity, as of the latest practical date. 91,583,020 as of March 29, 1997
DOCUMENTS INCORPORATED BY REFERENCE IN PART III - SIX
Prospectus, dated December 16, 1996, contained in the Registration Statement of
the Company on Form SB-2 declared effective by the Securities and Exchange
Commission on December 18, 1996. Transitional Small Business Disclosure Format
(check one) Yes____ No X
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PART I
Item 1. Description of 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 metal
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 (the "Franklin Mines"), (ii) the
Franklin mill, a crushing and flotation mill which is located on the site of the
Franklin Mines (the "Franklin Mill") and (iii) the Gold Hill Mill, a fully
permitted modern facility located in Boulder County, Colorado (the "Gold Hill
Mill"). The Company has also acquired an interest in the so-called Mogul Mine
(the "Mogul Mine"), which consists of the Mogul Tunnel and the surrounding
claims located in the Spencer Mountain region through its investment in
Newmineco, LLC, a Colorado limited liability company ("Newmineco"). While none
of its properties were operational in fiscal year 1996, the Company has made
significant strides in rehabilitating certain of its mining properties and
expanding its holdings through its relationship with its joint venture partner,
Gems and Minerals Corp. a Nevada corporation ("Gems").
History and Development of the Company
The claims which comprise the Franklin Mines are located on a site upon
which placer gold was discovered above the ground at Idaho Springs, Colorado in
1859. The Franklin Mines vein system was discovered in 1865. Thereafter, mining
commenced on the site in 1865 and continued on an almost uninterrupted basis
through 1915 until the outbreak of World War I caused curtailment of mining
operations in the area. The principal minerals extracted during this period were
gold, silver, lead, copper and zinc. The Franklin Mines have not operated on a
continuous or consistent commercial basis since 1915.
On December 26, 1976, the Company acquired Gold Developers and Producers
Incorporated, a Colorado corporation which, prior to the acquisition, leased 28
patented mining claims from Audrey and David Hayden and Dorothy Kennec pursuant
to a mining lease and option to purchase, dated November 12, 1976 (hereinafter
collectively referred to as the "Hayden/Kennec Leases"). In 1981, the Company
commenced a rehabilitation program to extend and rehabilitate the shafts and
tunnels in place at the Franklin Mines, install the Franklin Mill and search for
and delineate a commercial ore body. The Company completed the Franklin Mill,
which is capable of crushing, processing and concentrating approximately 150
tons of ore per 24 hour period, in 1983.
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In February, 1993, the Company entered into a joint venture arrangement
with Island Investment Corp., a Nevada corporation ("Island"), pursuant to which
the parties formed Zeus No. 1 Investments, a California general partnership
(hereinafter referred to as "Zeus", the "Joint Venture" or the "Zeus Joint
Venture"). The Zeus Joint Venture was formed to develop the Franklin Mines and
related assets of the Company. The specific terms of the partnership were set
forth in an agreement (the "Zeus Joint Venture Agreement") which, among other
things, ( 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 and leasehold interests related to
the Franklin Mines and Franklin Mill and (iii) provided that after the return of
any initial capital contributions and certain priority payments, Island and
Franklin would receive 50% of any partnership income until each party had
received $15,000,000; Island and the Company would receive 73% and 27%,
respectively, of any partnership income thereafter. On November 12, 1992, Island
formed Gems for the purpose of acquiring interests in and developing mineral
resource properties and remained inactive until Island assigned its interest in
the Zeus Joint Venture to Gems in May, 1993.
The Zeus Joint Venture Agreement
In July, 1993, the Company and Island entered into a letter of intent (the
"Letter of Intent") which anticipated the exchange of various assets of Island
for 81% of the issued and outstanding shares of the Company. The transaction was
subject to, among other things, the negotiation and consummation of a definitive
acquisition agreement between the parties. A definitive agreement was not
consummated and the Letter of Intent was terminated effective August 31, 1993.
On August 31, 1994, the Company and Island agreed to amend the Zeus Joint
Venture Agreement to provide for, among other things, the waiver of certain
priority payments due to Island under prior agreements of the parties and an
adjustment of the distribution arrangements of future income or loss of the
Joint Venture to each of the Company and Gems. The Zeus Joint Venture Agreement,
as amended, 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 leasehold interests and other assets related
to the Franklin Mines and Franklin Mill; (iii) the potential transfer of the
Company's assets to the Joint Venture under certain conditions; (iv) the
issuance to Gems of 6,000,000 shares of common stock of the Company, subject to
shareholders approval of a sufficient increase in the capitalization of the
Company and certain other conditions; and (v) the allocation of 70% and 30% of
the Joint Venture's income or loss to Gems and the Company, respectively.
On or about December 31, 1994, Island, Gems and the Company entered into a
Binding Exchange Letter Agreement (the "Exchange Agreement") pursuant to which
Island and Gems would transfer to the Company, in a tax free exchange, a
majority of their assets for approximately 270,000,000 newly issued shares of
the Company. The shares would have certain demand and piggyback registration
rights and anti-dilution rights. The Exchange Agreement further provided that if
a definitive agreement setting forth the specific terms of the asset exchange
was not consummated in a timely fashion, then the Company would be obligated to
issue 6,000,000 shares to Gems or, if the Company was unable to issue such
shares, pay Gems at least $1,500,000 as a priority payment (the "Upset Fee").
Any shares issued in accordance with these provisions would have demand and
piggyback registration rights attached thereto. If the transactions contemplated
by the Exchange Agreement were to have
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been consummated, it was anticipated that Gems would own approximately 85% of
the issued and outstanding shares of common stock of the Company.
In September 1995, the Company, Island and Gems entered into an agreement
(the "Settlement Agreement") whereby the parties acknowledged that the
transactions contemplated by the Exchange Agreement were not timely consummated.
Pursuant to the terms of the Settlement Agreement, the Company agreed to cause
6,000,000 shares of its common stock to be issued to Gems or, in the
alternative, to pay the Upset Fee. The Company further agreed to use its best
efforts to cause its shareholders to approve an increase in its authorized
capital from 50,000,000 to 100,000,000 its annual meeting of shareholders in
November 1995 in order to, among other things, permit the issuance of the shares
to Gems. In the event that the Company, after using its best efforts, was unable
to obtain the requisite approval of its shareholders, Gems agreed to reduce the
Upset Fee to $600,000. The parties further agreed to convert $249,600
intercompany advances into 3,200,000 additional shares of its common stock.
Finally, as further consideration for settlement of their disputes, Gems
interest in the joint venture was increased to 82.5% and the Company's interest
reduced to 17.5%. Gems was also given certain demand and piggyback registration
rights with respect to any shares issued under the Settlement Agreement. On
November 30, 1995, the shareholders of the Company approved an increase in the
Company's authorized capital stock and, in accordance with the Settlement
Agreement, the Company issued to Gems an aggregate of 9,200,000 shares.
In January, 1996, the Company and Gems executed an amendment to the Zeus
Joint Venture Agreement whereby the parties (i) restated and clarified various
amendments to the Zeus Joint Venture Agreement agreed to in prior agreements
between the parties, (ii) agreed to further clarify the composition of the Board
of Managers of Zeus, (iii) confirmed Gems as the Company's partner in the Joint
Venture and (iv) restated the general purposes of the Joint Venture.
On June 5, 1996 the Company entered into a non-binding letter of intent
(the "June 5 Letter of Intent) with Gems to acquire certain assets of Gems in
exchange for 67%, which of the Company together with the 18% then held by Gems
would equal approximately 85% of the outstanding shares of the Company. The
assets included Gems' 82.5% interest in the Zeus Joint Venture, the Hayden
interest in the Hayden/Kennec Leases for which Gems contracted to acquire in
December 1995, the Rugg/Mogul Lease relating to the Mogul Mine and the Gold Hill
Mill. The consummation of the transactions were predicated upon the completion
of customary due diligence, obtaining required consents, and/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 parties's respective boards of directors of the transactions on or
before September 3, 1996. After conducting preliminary due diligence, it was
mutually determined by 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.
On July 15, 1996, Gems transferred 31.5% of its interest in the Zeus Joint
Venture to Nuco Venture, Inc., a Delaware corporation and wholly owned
subsidiary of Gems ("Nuco") in exchange for 500,000 shares of Nuco which
constitutes 100% of the outstanding shares of Nuco. Gems and Nuco continue to
act as the Company's joint venture partners. The Company anticipates that it
will continue to rely upon its Joint Venture
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partners, specifically Gems, to provide the funding, technical data and
personnel necessary to continue its business plan at its properties in Idaho
Springs until such time as the Franklin Mines and/or Franklin Mill shall become
operational.
Operations at the Company's Mining Properties
Fiscal Year Ended 1994
In 1994, Gems advised the Company that all work necessary to preserve the
Company's 112D Mining Permit M83-083 (the "Franklin Permit") had been completed.
The technical revisions and remedial work performed in 1994 were in response to
the Colorado Division of Minerals and Geology ("DMG") requirements that Zeus
address erosion, sedimentation and run-off matters arising from the upper
pyritic tailings pond located at the Idaho Springs property. The tailings pond
is the location where waste products from the Franklin Mill are to be deposited
after the milling process is completed. During the latter part of 1994, Zeus
continued its efforts toward conducting a comprehensive core drilling and
analysis program (the "Analysis Program") to ascertain the scope and extent of
proven and probable ore reserves 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. As of December 31, 1994,
Island reported to the Company that it had incurred expenditures of
approximately $1,200,000, including approximately $781,000 in mine and mill
improvements.
Fiscal Year ended 1995
The Analysis Program commenced in January, 1995 and was completed in early
summer of that year. Based upon the reports generated from the Analysis Program
and available geological data and reports, Gems advised the Company that the
proven and probable reserves at the Franklin Mines previously reported by the
Company were accurate. Gems further confirmed that the application of its
proprietary technologies and processes should result in economically viable
operations. Specifically, the Company 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, it was further determined that the dump
sites at the Franklin Mines may provide an additional opportunity for
production. The Company has been advised by consultants retained by Gems and/or
Zeus that 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.
In addition to the Analysis Program, Zeus continued to perform the remedial
work and technical revisions commenced in 1994 addressing erosion,
sedimentation, run-off matters and other items which the DMG required in
connection with the Franklin Permit. As of December 31, 1995, Gems reported to
the Company that it had incurred expenses of approximately $1,250,000, including
approximately $781,000 attributable to mine and mill improvements through fiscal
year 1995.
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Fiscal Year ended 1996
(1) Compliance with DMG regulations at the Franklin Mines and Franklin
Mill.
On or about January 9, 1996, the Company received a letter from the DMG
outlining the status of the Franklin Permit to date. The DMG identified several
areas in which it believed violations of the terms of the Franklin Permit may
have existed. The major issues cited by the DMG in its January correspondence
are outlined as follows:
The Franklin Mill. On September 2, 1993, the DMG approved, subject to
certain conditions, a revision to the Franklin Permit to change the processing
method then currently in place at the Franklin Mill to a Carbon In Leach
process. The conditions set forth by the DMG included submission of quarterly
sampling and analyses to be performed in connection with the milling process.
These sampling requirements were to remain in effect for the life of the
Franklin Permit or until a subsequent change was agreed to by the DMG. As of
January 9, 1996, the DMG stated that the Company had failed to submit such
information to the DMG in accordance with such conditions and, therefore, it
believed a possible violation existed regarding such matter.
Tailings Disposal Area. As approved on September 26, 1983, the original
mining plan of the Company called for tailings to be slurried to a lined
tailings pond located adjacent to the Franklin Mill (the "Lined Tailings Pond").
The original mining plan also contemplated a system for draining residual
tailings water from the tailings pond disposal area (the "Disposal Area") to
minimize the infiltration of tailings water into groundwater in the area during
run-off periods. According to the DMG, inspections conducted over the prior
three years indicated that the condition of the Disposal Area at the Franklin
Mines would not effectively minimize infiltration of tailings water into
groundwater and that the system in place for draining residual tailings water
from the Disposal Area to the Lined Tailings Pond was no longer functional. The
DMG further claimed that acidic water had been observed during inspections to be
seeping from the Lined Tailings Pond into nearby drainage during the spring
run-off period. Therefore, the DMG required that action be taken at the site to
prevent any further leakage into area drainage on or before January 10, 1996 to
prevent a citation for possible permit violations. Moreover, the DMG required
that the Company submit a revision to the Franklin Permit to include a plan for
long term correction of this problem on or before March 8, 1996.
Lower Tailings Pond. On or about August 13, 1988, the Company submitted
Amendment application AM-001 to the DMG to amend its original mining plan to
conduct custom milling and to dewater the tailings on the lower tailings pond
which is located below the Lined Tailings Pond near the Franklin Mill (the
"Lower Pond"). The DMG, on April 4, 1989, agreed to approve this amendment
application provided that the Company comply with certain conditions on or
before April 11, 1989. The DMG stated that it had no record of the Company's
response to such compliance request and demanded that such conditions be agreed
to by the Company on or before January 31, 1996 or the amendment application
would be denied.
Additionally, on August 16, 1990, the DMG conducted an inspection of the
Franklin Mines property and reported that the Lower Pond was actively being used
for tailings disposal. The DMG considered this activity a
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possible violation of the Franklin Permit based on its review of its files. The
DMG further stated that no tailings disposal would be allowed in the Lower Pond
until the Company could demonstrate that an adequate groundwater monitoring
program was put in place and that the groundwater quality for existing and
potential future use would not be impacted by the use of the Lower Pond by the
Company. Further, the DMG stated that any raises or enlargements of the area
would require further revision of the Franklin Permit and approval by the DMG
before such work could be commenced.
Groundwater Monitoring Plan. In a technical revision to the Franklin Permit
approved by the DMG on February 1, 1985, the Company committed to monitor
upgradient and downgradient surface and groundwater at the Franklin Mines. Such
approval was given on the condition that analyses of the surface and groundwater
be submitted with each annual report of the Company. The groundwater monitoring
plan was further revised in technical revisions to the Franklin Permit approved
by the DMG on each of September 2, 1993 and March 14, 1994. The technical
revision approved on September 2, 1993 required the Company to submit
groundwater analyses to the DMG on a quarterly basis; however, the DMG stated
that it had not received the required analyses from that date and the Company
needed to verify whether its surface and groundwater monitoring programs were
active and functional on or before March 8, 1996. Until such time as this
information was submitted to the DMG, the Company was prohibited from disposing
further tailings on the property.
Reclamation Plan. On October 5, 1983, the Company committed to remove all
mine buildings in the event that the Company should reclaim the property
comprising the Franklin Mines and Franklin Mill. On March 14, 1994, the DMG
approved a technical revision to the Franklin Permit in which the reclamation
bond of the Company was recalculated. To help reduce reclamation costs, the
Company committed to filing an amendment prior to mine start-up and no later
than July 1, 1995 which included a plan to leave the mine and mill structures
after reclamation. The DMG stated that this plan was not submitted and
therefore, any costs associated with the demolition and disposal of such
structures will need to be included in the Company's reclamation bond. The DMG
required that the Company submit to it, no later than March 8, 1996,
specifications and other details regarding the structures to be demolished for
purposes of recalculating the bond. For further information regarding the
Company's reclamation bond, See Item 3. Litigation Environmental Matters.
Although the Company responded to the claims of the DMG in a letter, dated
January 19, 1996, the DMG cited the Company for possible violations of the
Franklin Permit with respect to the issues relating to, among other things, the
Disposal Area, the Lower Pond and the groundwater monitoring plan. On or about
March 28, 1996 at a hearing before the Mined Land Reclamation Board ("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 Mines until
such time as all past violations cited by the DMG were satisfied.
For the remainder of fiscal year 1996 and into the first quarter of 1997,
the majority of the remedial work and the technical revisions to the Franklin
Permit consisted of work relating to correcting violations existing with respect
to the matters identified above. Specifically, the Company instituted plans for
groundwater monitoring which included surface water and groundwater sampling
plans, took steps to correct the run-off problem associated with the Disposal
Area, submitted and implemented plans to reclaim tailings ponds 1, 4 and 5,
commenced preliminary plans for the installation of a paste backfill system for
tailings disposal in the
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remaining ponds on the site and made application to the DMG for expansion of the
permitted area at the Franklin Mines and Franklin Mill to allow for performance
of certain of the remediation work outlined above. Upon completion of paste
backfill work, it is anticipated that the Company will possess substantial
tailings disposal capacity consistent with its production plans. Moreover, the
reclamation work performed during fiscal year 1996 will permit it to make
application to the DMG to reduce its current reclamation bond.
In addition to the work performed in connection with the Franklin Permits,
the Company was required to develop and submit to the DMG an environmental
protection plan (the "Environmental Protection Plan") which complies with the
provisions of the Mineral Rules and Regulations of the MLRB of Hard Rock, Metal
and Designated Mining Operations. The Environmental Protection Plan must also
include an emergency response plan for designated chemicals used on site and
appropriate measures consistent with the recommendations by the Colorado
Division of Wildlife for the Protection of Wildlife to prevent damage to area
wildlife from designated chemicals, toxic or acid forming materials and acid
mine drainage. The Company submitted its proposed plan to the DMG on or about
September 12, 1996. On or about November 12, 1996, the DMG notified the Company
that certain information needed to bring addressed and revisions were needed to
bring the Company's Environmental Protection Plan into compliance with DMG
regulations. The DMG has extended the time period by which the Company must
submit its final Environmental Protection Plan and the Company is in the process
of completing its plan for submission.
On January 31, 1997, the Company received approval from the DMG of its
March 6, 1996 amendment application to the Franklin Permit. This approval brings
the Company in compliance with current environmental and regulatory standards
and will allow the Company to pursue its estimated annual production levels. The
notification of approval, received by the Company on February 28, 1997,
increased the total permitted area, revised the mining plan to include the
processing of ore from the Mogul Mines, alters the milling process, propose
tailings paste disposal, and modifies the surface water control plan.
Additionally, the reclamation plan of the Company was further revised to include
the closure plan for tailings pond, 1, 2 and 5. All of the terms of the
amendment approved by the DMG were incorporated into the Franklin Permit and
made a part thereof. However, the DMG set forth certain conditions to it
approval which required ( i ) the submission of a final design for tailings
disposal facilities in the form of a technical revision to the DMG for approval
prior to operation of the Franklin Mill, (ii) the components of the Surface
Water Control Plan approved during the amendment process must be installed no
later than April 15, 1997 and (iii) the closure plans for Ponds 1 and 2 must be
completed to the satisfaction of the DMG by spring runoff and no later than
April 15. Finally, the schedule for the completion of the closure plan for Pond
5 will be determined by the DMG during fiscal year 1997 and will be dependent on
the Company's tailings disposal plan which is to be submitted to the DMG in
1997.
The Company, through the Joint Venture or otherwise, has not conducted any
significant commercial mining operations and, as a result, had not generated any
significant revenues through December 31, 1996. During fiscal year 1996, the
Company has expended approximately $85,000 on mine and mill improvements and
$30,000 on maintenance expenses. This is in addition to the approximate
$12,000,000 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. Therefore, the Company remains in the development stage. Based
on information developed through the
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Analysis Program and previously available geological data and reports, the
management of Gems has informed the Company and the Company is hopeful that the
application of proprietary technologies and processes of Gems through the Joint
Venture should result in economically viable commercial mining operations at the
Idaho Springs mining facilities in the future. Moreover, the Company continues
to work closely with Colorado state mining regulatory agencies to further modify
and update the Franklin Permit in preparation and anticipation of full scale
operations at the Franklin Mines and Franklin Mill.
(2) Newmineco and Operations at the Mogul Mine.
On or about February 1, 1996, Island together with Wayne Tatman ("Tatman")
and Thomas Hartley ("Hartley") formed Newmineco, LLC, a Colorado limited
liability company (the "LLC") 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 Lincoln mine was controlled by Tatman and
Hartley and the Gold Hill mill was owned by an unaffiliated third party at the
time. Island originally maintained a 51% interest in the LLC. The managers of
the LLC were the same individuals who comprised the management committee of
Zeus. In addition, the LLC acquired an exclusive assignable contract to receive
and process, at cost, all of the ore produced from the Mogul Mine, the rights to
which were then leased by each of Hartley and Durango Metals, Inc. ("Durango"),
a company controlled by Hartley, and a 10% profit interest in net smelter
returns received from the ore mined from the Mogul Mine (the "Process/Profit
Interest Contract"). The leasehold rights which were to be assigned pursuant to
the Process/Profit Interest Contract were mining rights leased pursuant to (i) a
mining lease agreement, dated November 9, 1992, between Charles R. Rugg and
Cindy McCollum, as lessor (collectively, the "Ruggs") and Hartley as lessee (the
"Original Rugg/Hartley Lease"), (ii) the mining lease, dated January 31, 1995,
between David C. Sutton, et al., as lessor and Hartley, as lessee, and (iii) the
mining lease, dated October 24, 1995, between Jane A. Wood and Durango. No
operations were being 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 conduct the mining operations at 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 mining properties as
well as all mines owned and/or controlled by each of the LLC and/or the Joint
Venture.
Under the operational structure described above, it was anticipated that,
once the mining properties became operational, the Franklin Mill would process
the ore from each of the Mogul Mine, the Franklin Mines and the Lincoln Mine in
return for which the Joint Venture would 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 would retain its 17.5% interest in
profits under the Zeus Joint Venture thereby entitling it to receive its portion
of all monies realized by Zeus in connection with the Process/Profit Interest
Contract as well as any future contractual arrangements of Zeus.
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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 the Mogul Mine under a
prospecting permit issued to Durango (the "Durango Prospecting Permit"). The
Durango Prospecting Permit allowed limited operations at the Mogul Mine in
amounts not to exceed 250 tons per day and the mining of not more than a total
1800 tons of ore for prospecting and testing purposes. It was expected that the
Franklin Mill would begin crushing ore from the Mogul Mine on the limited basis
in accordance with the parameters of the Durango Prospecting Permit.
Gems thereafter advised the Company that, on or about April 10, 1996,
Island successfully completed the acquisition of 100% of the outstanding shares
of Colina Oro Molina, Inc. ("COM, Inc."), the company which owned the Gold Hill
Mill. In addition, the Company has been further advised that Island acquired
certain of the mining rights to the Mogul Mine covered by the original
Rugg/Hartley of the Mogul Mine Properties through the execution of a Novation
Agreement, dated March 18, 1996, among the Ruggs, Hartley, Durango and Island.
Pursuant to the Novation Agreement, the parties agreed that Hartley/Durango
would be exonerated and released from the original Rugg/Hartley lease and Island
would assume all of the obligations of Hartley/Durango thereunder. Subsequently,
each of the Ruggs and Island executed a new lease, dated March 18, 1996 (the
"Rugg/Mogul Lease"), which further clarified the terms and conditions of the
agreements between the Ruggs and Island. The acquisition by Island of the rights
evidenced by the Rugg/Mogul Lease permitted the Company, Island and Gems to
recommence negotiations with the remaining lessors lease in an effort to obtain
more favorable terms regarding profits to be generated by the Mogul Mine. The
Company was further advised by Island that the exclusive rights granted to the
Joint Venture pursuant to the Process/Profit Interest Contract were sufficient
to allow the LLC and other related parties to proceed with its operational plans
at the Mogul Mine.
In Spring, 1996, the Company was notified by Gems that Island intended to
recommence production at the Mogul Mine. The Mogul Mine is located in a region
known as a historic gold resource and produced during bulk testing an estimated
100 tons of gold ore with an average grade of approximately 1 ounce per ton.
Gems also informed the Company that a target production rate of approximately
100 tons per day was anticipated and such materials were to be transported to
the Franklin Mill for crushing and processing. Prior to that time, in March
1996, the Company received a cease and desist order from the DMG prohibiting it
from conducting mining and/or milling operations at the Franklin Mine; however,
crushing activities conducted at the Franklin Mill with respect to ore from the
Mogul Mine would be performed under the Durango Prospecting Permit and would be
excluded from such order.
In May, 1996, 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 Island terminated the joint venture arrangements with Durango,
Hartley and Tatman and Island thereafter assigned its interest in Newmineco to
Gems, which subsequently sold 20% of Newmineco to the Company and contributed
29% to Nuco, its wholly owned subsidiary. Due to the termination of the Joint
Venture arrangements with Durango, Tatman and Hartley, Newmineco was unable to
acquire the Lincoln Mine as previously contemplated in the original Joint
Venture Structure.
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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 (the "Newmineco Note"). 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. The shares into which the Newmineco Note converts will have certain
registration rights attached thereto. Additionally, the Company 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. As of
December 31, 1996, the Company had failed to make its December 31, 1996 interest
payment on the Mogul Note.
In late 1996, the Company entered into discussions with Gems regarding
certain title issues with respect to the rights to mine the Mogul Mine and
litigation which was commenced against various parties, including the Company,
in connection therewith. In an effort to resolve these disputes, the Company,
Gems, Com, Inc. and Newmineco agreed that, effective December 31, 1996, the
$600,000 purchase price paid by the Company, for its 20% interest in Newmineco
would be reduced to $150,000. The parties further agreed that the $450,000
reduction in the Newmineco Note plus accrued and unpaid interest thereon would
be applied against the outstanding balance of the Gold Hill Note (as hereafter
defined), thereby further reducing the Gold Hill Note to $586,419. Moreover,
Gems and Com, Inc. agreed to indemnify the Company for any damages incurred as a
result of any lawsuits arising out of the Company's interest in Newmineco and/or
the Gold Hill Mill. For further information regarding the Gold Hill Mill and
Gold Hill Note See Item 1. Description of Business (3) the Gold Hill Mill. For
more information regarding the title issues and litigation involving the Mogul
Mine, see Item 2. Property-Rugg/Mogul Lease; Item 3 Litigation-Durango
Litigation.
On February 7, 1997, Gems notified the Company that it had assigned its
interest in the Newmineco Note to certain third parties, including John Miner, a
consultant to the Zeus Joint Venture. Thereafter, on February 10, 1997, the
Company notified Mr. Miner, as special agent to the assignees that it had
elected to convert the principal due on the Newmineco Note into common stock of
the Company in accordance with the terms therein. Although such shares have not
been issued, the Company is committed to issue an aggregate of 7,692,308 shares
to such assignees in full satisfaction of the Newmineco Note.
The Mogul Mine is being operated pursuant to the Durango Prospecting Permit
originally issued to Durango, the original lessee under the terms of the
original Rugg/Hartley Lease. After the transfer of the leasehold to Island and
later to Newmineco, the Mogul Mine continued to operate under the Durango
Prospecting Permit. Moreover, Durango had made application to the DMG for
issuance of a 110 permit for the Mogul Mine (the "Mogul Permit"). The Company
had been advised by the management of Newmineco that Island and later Newmineco
provided funding and technical support to continue Durango's efforts to secure
the Mogul Permit.
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As a result of the disputes arising between the parties to the Newmineco
agreements, Durango and Hartley filed a series of liens on certain of the
properties of the Company and thereafter, on or about October 15, 1996, Durango,
Hartley and certain other related parties instituted suit against each of Gems,
Island and the Company to quiet title to certain claims comprising the Mogul
Mine. In connection with such litigation, Durango withdrew its application for
the Mogul Permit but specifically stated that any operations conducted at the
Mogul Mine would continue pursuant to the Durango Prospecting Permit then in
effect. Thus, the Company has been advised by the management of Newmineco that
it is permitted to continue prospecting operations at the Mogul Mine under the
Durango Prospecting Permit as a successor in interest thereto. Moreover, the
Company has been further advised by the management of Newmineco that it has
taken steps to apply for the Mogul Permit in the name of Newmineco and is
optimistic that it will be able to secure such permit to allow for expanded
operations at the Mogul Mine separate and apart from Durango. The Company as
been further advised by Newmineco that it is in discussion with the lessors of
the Mogul Mine and the DMG to resolve any pending claims and outstanding
requirements with regard to the Mogul Mine permitting process. Moreover, as part
of its efforts to secure the Mogul Permit, the Company arranged to post the
required bond in the amount of $33,000 in an effort to further the permitting
process. For more information regarding the disputes with Durango, See Item 3.
Litigation-Durango Litigation.
During the early part of 1996 and again in the latter part of the year,
mining commenced at the Mogul Mine in accordance with the Durango Prospecting
Permit. Approximately 285 tons of ore were mined in 1996, of which 85 tons were
shipped to a regional smelter for processing in March, 1996 and approximately
200 tons were crushed at the Franklin Mill from October through December. As a
result of such operations, the Company has been advised by the management of
Newmineco that approximately $30,000 of revenue was realized by the LLC, all of
which was applied against monies expenditures incurred by the LLC. Therefore,
the Company did not realize any revenues against its right to receive a $500,000
priority payment from revenues generated from the Mogul Mine.
(3) The Gold Hill Mill
As an alternative to the acquisition structure outlined in the June 5
Letter of Intent, the Company acquired the Gold Hill Mill from COM, Inc. is for
$2,500,000 interest only note (the "Gold Hill Note"). COM, Inc. a wholly owned
subsidiary of Gems. The Gold Hill Note bears interest at a rate of 8% per annum
and interest payments are $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. The first quarterly interest payment was due on October 3,
1996. In addition to the Gold Hill Note and mortgage, the Company and COM, Inc.
entered into a memorandum of understanding in which the parties agreed that
certain items needed to be addressed as post closing items with respect to the
sale of the Gold Hill Mill. These issues included, but were not limited to, (i)
the disposition of certain liens which were outstanding on the property as of
July 3, 1996, including a judgement lien in the amount of $6,815.50 and a Deed
of Trust in the amount of $300,000, (ii) COM, Inc.'s agreement to defend,
indemnify and hold the Company harmless for any current or subsequent notices of
liens served upon the Company relating to indebtedness or other claims of such
parties which occurred prior to the sale
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of the property to the Company and (iii) the receipt by the Company of title
insurance. As of the date hereof, none of the items set forth in the memorandum
of understanding have been satisfied.
In July, 1996, the Company commenced an offering to purchase certain assets
from third parties in exchange for Common Stock of the Company, Com, Inc. and
its affiliates thereafter agreed to purchase such assets from the Company in
exchange for a reduction in the indebtedness of the Gold Hill Note. The Company
further agreed to use its best efforts to file a registration statement with
respect to such shares within 45 to 60 days from the date upon which the
offering terminated. As a result of the transaction, the Company was able to
reduce the Gold Hill Note by $1,463,581, leaving a balance of $1,036,419. The
Gold Hill Note was further reduced by $450,000 plus accrued and unpaid interest
in accordance with the agreements reached with respect to reduction of the
purchase price of the Company's Newmineco interest. As of the date hereof, the
Company has defaulted on each of its October and January interest payments under
the Note.
The Gold Hill Mill is located within close proximity to the Franklin Mines
and Mill as well as the Mogul Mine and will afford the Company the opportunity
to expand its geographic reach into the Gold Hill Mining region. It is
contemplated that in the future 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. The Company has not conducted any milling
activities at the Gold Hill Mill to date.
On July 8, 1996, the Company had been advised by Gems that the Joint
Venture acquired the rights to certain agreements which would allow it to mill
mine dump material located on fourteen mine dumps in the immediate vicinity of
the Gold Hill Milling facility (the "Gold Hill Dumps"). The agreements afforded
the Zeus Joint Venture 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 this 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. The
dump material was to be screened on site, separating the coarse barren and low
grade fine material from that material to be milled. Gems had further informed
the Company that its consultants estimated 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. Gems further estimated that the operating costs at
the Gold Hill Mill would be approximately $196 per ounce of gold recovered. In
the fourth quarter 1996, Gems has advised the Company that due to the failure of
the parties to act on the terms of this agreement it has terminated. However,
Gems has informed the Company that it is presently engaged in discussions with
the lessee to develop an alternative business arrangement for the processing of
the Gold Hill Dumps. Additionally, as part of its future financing prospects,
the Company is exploring the possibility of obtaining financing using the Gold
Hill Mill as collateral for such financing.
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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
As of December 31, 1996, the Company had no full-time employees. 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 Mines and Franklin
Mill, it is the sole responsibility of Gems to supply the Joint Venture with
technical personnel and other qualified consultants and experts on a contract or
consulting basis pursuant to the terms of the Joint Venture Agreement.
Management anticipates that as the Company's business develops, additional
technical administrative staff may be hired and has been advised by Gems that it
believes it will be able to obtain the services of qualified geological and
technical consultants as needed.
Item 2. Properties
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
sulphur.
Cyanidation and Pulp Recovery The process by which gold is extracted
in the milling process through the use
of cyanide.
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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
sulphur.
Gravity Concentration Minerals concentrated by application of
devices employing the force of gravity.
Hanging wall That portion of the vein which is
overhead.
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.
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Mineralized Rock 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.
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.
Paste Backfill Procedure in which backfill is treated
with certain chemicals to solidify the
same to prevent seepage
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.
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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.
Pyrite A mineral containing both zinc and
sulphur.
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
sulphur.
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.
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Telluride A mineral containing tellurium often
found with quantities of gold and/or
silver and sulphur.
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 Mines consists of (i) 100%
leasehold interest in the mineral rights to 28 claims comprising approximately
322 acres evidenced by the Hayden/Kennec Leases and (ii) an additional 23 claims
leased and/or purchased by the Company covering less than 100% of the mineral
rights comprising approximately 20 additional acres, for a total of 51 claims
over 340 acres. Such properties include all improvements made by the Company
thereon, including the Franklin Mill capable of supporting up to a 150 ton per
day operation in its present state. The Company does not intend to exploit any
claims for which it holds less than a 100% interest. Management believes that it
currently maintains adequate insurance for all of its mining properties
Hayden/Kennec Leases
The original Hayden/Kennec Leases provided for payment by the Company of
certain liabilities relating to the leased property and a minimum royalty
payment of $2,000 per month or 5% of the Company's net smelter royalties
realized from production whichever is greater to Mrs. Hayden and Mrs. Kennec.
The original Hayden/Kennec Leases expired in November, 1996 at which time the
Company had the option to purchase the leasehold rights for a purchase price of
$1,250,000 less any royalties previously paid as of the expiration date. As of
November, 1996, the Company paid approximately $480,000 in royalties.
On November 19, 1996, the Company entered into an amendment to the
Hayden/Kennec Leases with respect to the portion of the leasehold attributable
to Dorothy Kennec (the "Kennec Amendment"). Pursuant to the terms of the Kennec
Amendment, Kennec agreed to extend the term as it relates to her portion of the
leasehold rights through November 12, 1997. In consideration for such extension,
the Company agreed to increase the royalty payment due to Kennec under the
original Hayden/Kennec Leases from $1,000 to $2,000 per month and to issue to
Kennec 104,000 shares of the common stock of the Company valued at $.125 per
share,
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having an aggregate market value at the time of issuance of $13,000. All of the
payments made under the Kennec Amendment plus the value of the shares issued
thereunder will be further applied against the buy-out price of the property
under the original Hayden/Kennec Leases. As of March 31, 1997, the Company is
current on its payments to Mrs. Kennec under the Kennec Amendment.
While the Company has extended the term of the Hayden/Kennec leases, as
amended through November 1997, in the event that it shall expire or otherwise
terminate, any improvements made on the property become the property of the
lessor without any further compensation to the Company and lessor would have to
reclaim the property in accordance with DMG requirements in effect at the time
of such expiration or termination, as the case may be. Thus, the likelihood that
the Company would recover fixtures and other equipment on the property may be
minimal.
The future success of the Joint Venture is dependent on its ability to
preserve and utilize the mineral rights leased under the Hayden/Kennec Leases as
amended by the Kennec Amendment and/or to otherwise acquire the rights to the
use of such properties and the extraction of the related resources. To further
secure the ability of the Joint Venture to exploit the Idaho Springs mining
properties, Gems entered into an agreement on December 21, 1995 to purchase
Audrey Hayden's interest in the Hayden/Kennec Leases and her ownership interest
in 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 which the parties reaffirmed
the $75,000 purchase price and Gems agreed to pay to Hayden $1,000 per month for
a period of 12 months. Hayden also agreed to extend the term of the
Hayden/Kennec Leases to December 1997 as the same relates to her portion of the
lease. 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. 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, 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 as amended by the Kennec amendment should
expire and not be renewed by Mrs. Kennec.
Rugg/Mogul Lease
The Rugg/Mogul Lease, dated March 18, 1996, entered into between Island, as
lessee, and the Ruggs (McCollum being the lessor/optionor as to the muscott Lode
claim only), as lessor, was 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 a $100,000 guaranteed payment, Newmineco would pay an additional
$50,000 to the Ruggs, on either the sixth month anniversary date of the lease or
any monthly anniversary date thereafter when the Mogul Mines become operational
(but not later than eighteen months from the date of the commencement 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 become
operational. The Rugg/Mogul Lease was to expire 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
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during the term of the lease.
In the latter part of 1996, Newmineco informed the Company that disputes
had arisen among various parties to the Newmineco agreements which included the
Rugg/Mogul Lease and use of the underlying leasehold rights. On January, 1,
1997, Island, the former lessee under the Rugg/Mogul Lease, received a notice of
intent to terminate the Rugg/Mogul Leases from the Ruggs unless Island paid
approximately $85,000 allegedly due to the Ruggs pursuant to the terms of the
lease within 30 days of the date of the notice. The notification further stated
that failure to pay such amounts within the time prescribed would result in a
termination of the agreement. However, it has been the position of Island and
Newmineco that the Ruggs are the party in default and certain of the payments
claimed to be owed to the Ruggs were not made due to such defaults. Moreover,
according to the terms of the Rugg/Mogul Lease, in the event that both lessor
and lessee had potentially breached the agreements set forth therein, the cure
period for such breach is extended to 90 days. Further, if lessee disputes such
claims of default, the lease may only be terminated if lessor shall obtain an
adverse judgment rendered by a court of competent jurisdiction and lessee fails
to, subject to such judgment, diligently and in good faith attempt to remedy the
default recognized by the court. No such judgement has been obtained.
Island and Newmineco advised the Company that lessor made false and
misleading representations and provided Newmineco and Island with fraudulent
and/or misleading information with respect to the Mogul Mine properties and the
leasehold rights. Additionally, lessor was to supply Island/Newmineco with a
title report and a title insurance policy. Notwithstanding their failure to
provide title insurance, Island/Newmineco, in good faith and in reliance upon
promises of cooperation by the Ruggs continued to finance improvements at the
Mogul Mine and complied with DMG requests in connection with the permitting
process. The Company has been advised by Newmineco and Island that the parties
are negotiating in good faith to resolve all of the disputes outlined above and
that they are hopeful that a resolution will be reached shortly. However, there
can be no assurance that the Rugg/Mogul Lease will be renegotiated, that
litigation will not ensue as a result of the current disputes between the
parties or that these disputes will not have a material adverse effect on
Newmineco's rights to exploit the Mogul Mine..
Location and Access
The Franklin Mines 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 mine location is
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 Mine is located
has been credited to the Laramide Period Orogeny. 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
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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.
Geology of the Franklin Mines
The rocks most commonly seen in the Franklin Mines are Pre-Cambrian age
granite and microcline gneiss. Tertiary Period, 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.
Estimated Ore Reserves
The Franklin Mines
The lodes at the Franklin Mines 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.
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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.
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.
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.
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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 Zeus 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. Average recovery of the combined precious metals is
estimated at approximately 90% of the total based upon preliminary test data
developed by Zeus.
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.
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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 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, in
the event such space should become unavailable in the future, the Company will
be able to lease these or other suitable facilities on a reasonable basis.
Item 3. 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 (the "Friedman Warrant") to Charles J. Friedman, P.C.
("Friedman"), a former corporate counsel of the Company, as payment of legal
fees. 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 sought payment of damages in the principal amount of the Friedman Note
plus interest, costs and attorney's fees and retained certain of the Company's
books, records and other material documentation subject to an attorney's lien.
The Company 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 denied the allegations in
the complaint and asserted counterclaims against Friedman for damages suffered
as a result of its failure to timely perform legal services and its refusal to
return the Company's books, records and material documentation. The Company also
demanded a full accounting of all Company materials in Friedman's possession and
the immediate return of such material.
On March 5, 1997, the Court entered a judgment against the Company for
$90,000 in favor of Friedman after the dismissal with prejudice on January 10,
1997 of all the Company's counterclaims (the "Friedman Judgment"). Pursuant to
the Friedman Judgment, the parties stipulated to a stay of execution of such
judgment for forty-five (45) days to provide the Company with time to pay
Friedman $45,000 in full and complete satisfaction of the Friedman Judgment.
Notwithstanding, the Company was further required, on or before March 21,
1997, (i) to issue to Friedman 1,000,000 shares of the Company's Common Stock
which have certain piggyback and demand registration rights (the "Friedman
Stock"), (ii) to execute a Financing Statement and Security Agreement on the
appropriate UCC forms (the "UCC Filings") with respect to the Company's assets,
(iii) to file with the SEC a Current Report on Form 8-K setting forth in full
and accurate detail the terms of the Friedman Judgment against the Company and
the terms of the stay of execution. The Friedman Stock, the UCC Filings, the
Friedman Note and the Friedman Warrant were deposited into the Registry of the
Court pending expiration of the stay of execution or payment of $45,000. The
Company also filed its current report on Form 8-K immediately after the
execution of the order by the District Court Judge.
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<PAGE>
Additionally, the Company was required, as soon as possible after the
completion of its audit for the fiscal year ended 1996 and the filing of this
Report, but no later than April 30, 1997, to file with the SEC a Registration
Statement on the appropriate form covering the Friedman Stock so that upon the
effective date thereof, such shares would be fully registered. In the event that
the Company made the $45,000 payment on or before April 21, 1997, all of the
documentation being held in the Registry of the Court would be returned to the
Company and Friedman would surrender all files and other documentation of the
Company on or before May 2, 1997. In the event that the Company failed to pay
the $45,000 within the time period of the stay of execution, the Friedman Stock
and the UCC Filings will be thereafter released from the Registry of the Court
to Friedman and Friedman would be free to enforce the Friedman Judgment. All
proceeds from the sale of the Friedman Stock after April 21, 1997 would be
applied to the outstanding amount of the Friedman Judgment.
On April 21, 1997, the Company delivered to its local counsel in Colorado
$45,000 to be paid in full satisfaction of the Friedman Judgment and such
payment was thereafter timely delivered to Friedman as per the terms of the
Judgement.. Upon execution of the necessary releases and stipulations and upon
delivery of the funds to Friedman, the certificate evidencing the Friedman
Stock, the UCC Financing Statement, the Friedman Note, the Friedman Warrant and
all of the Company's corporate papers and records subject to Friedman's attorney
lien will be returned to the Company.
Convertible Debentures
On June 1, 1994, the Company advised the Transfer Agent/Trustee that the
Company was not in compliance with certain of the terms of the indenture (the
"Indenture") relating to the Company's 12 1/4% Convertible Debentures (the
"Debentures") in that it had not maintained current filings with the Securities
and Exchange Commission (the "Commission") as required. Accordingly, the
Transfer Agent/Trustee was instructed not to convert any of the Debentures into
Common Stock of the Company until such time as the Company notified the Transfer
Agent/Trustee that the Company's SEC filings were current. Thereafter, the
Company became current on its SEC filings; however, the Company failed to make
required sinking fund payments in 1994 and was unable to pay the principal
balance of the Debentures due on December 31, 1994 resulting in a default under
the terms of the Indenture.
Although the Company is in default under the terms of the Indenture, it
agreed to continue to make quarterly interest payments to the Debenture Holders
during fiscal year 1995 until such time as the principal amount of the
Debentures could be paid in full. It was anticipated that the Company would have
the funds available to make such payments by December 31, 1995. The Company made
the first quarterly interest payment due on the Debentures in 1995 but has
failed to make any additional payments with respect to such interest as of the
date hereof.
In December 1995, the Company sent notices to the debenture holders
requesting their consent to extend the maturity date of the Debentures to
December 31, 1996. It was also contemplated that the conversion rights of such
holders would also be extended at its current rate of $.50 per share. The
Company also agreed that it would bring current all interest payments due and
owing to such holders through December 31, 1995, prepay
25
<PAGE>
interest which will become due and owing at the end of the first quarter of 1996
and set up a fund with the Transfer Agent/Trustee to secure the timely payment
of the principal amount of the Debentures on December 31, 1996. The Company set
February 15, 1996 as the date upon which all Debenture Holders had to submit
their consent forms to the Company indicating whether they agreed to extend the
maturity date as to their bonds or reject such proposal. Any holder which failed
to return a consent form within the prescribed time was to be treated as having
consented to the extension. As of the February 15, 1996, the Company received a
negative response from one holder owning $1,000 principal amount of Debentures.
While the Company intended to comply with the terms of its agreements with
the holders of the Debentures, a series of unforeseen circumstances relating to
the Company's permits and reclamation bond caused a cash flow shortage. As a
result the Company has been unable to make the payments described above.
Management is hopeful that the Company's limited cash flow will improve in the
near future and at such time intends to comply with the terms of its December
1995 agreements. As of December 31, 1996, the accrued and unpaid interest on the
Debentures is $31,084.
On January 17, 1997, the Company received a letter from counsel to James E.
Hopis, Revocable Trust, a holder of $5000.00 of Debentures of the Company
demanding payment of such bond immediately or legal action will be taken against
the Company to collect on such Debenture. Although the Company has not been
formally served with papers from the Hopis Trust or any other Debenture Holder,
its continued default and failure to comply with the 1994 and December 1995
agreements may result in Company being subject to formal legal proceedings by
the Transfer Agent/Trustee under the Indenture or from other holders seeking
immediate payment of the $145,000 plus related interest and penalties. While the
Company hopes to cure the default or, in the alternative, reach an acceptable
settlement arrangement with the holders, there can be no assurance that the
funds will be available in the future to meet all of the Company's obligations.
Management remains hopeful that payment or, in the alternative, commencement of
settlement negotiations, will delay the commencement of any legal action until
the Company can make the appropriate arrangements to repay the Debenture
holders.
Golder Litigation
On or about February 5, 1996, Bradley, Campbell, Carney & Madsen, P.C.,
Colorado counsel to the Company, Gems, Zeus and Newmineco ("BCCM") entered into
a contract with Golder Associates, Inc. ("Golder"), pursuant to which Golder
agreed to perform certain services at the Mogul Mine pertaining to environmental
issues, including, but not limited to, (a) reviewing surface and groundwater
quality and compliance standards, (b) reviewing 110 permitting requirements,
applications and responses, (c) reviewing certain environmental plans relating
to the Mogul Mine and (d) assessing water discharge requirements and dispensing
advice with respect to water discharge and surface spring outflow management and
mitigation of poor drainage quality (the "Mogul Tunnel Contract"). At the time
of the Mogul Tunnel Contract, BCCM allegedly entered into said contract as an
agent of Durango, the lessee of the Mogul Mine at that time.
On or about February 5, 1996, BCCM entered into a second contract with
Golder, pursuant to which Golder agreed to perform certain services at the
Franklin Mines and Franklin Mill pertaining to environmental issues, including,
but not limited to, (a) phase 1 site assessment, (b) preliminary regulatory and
permit review,
26
<PAGE>
(c) engineering site inspections, (d) designs for surface water management at
the ore handling facility, (e) technical memorandum on alternatives for the
extension of #5 tailings pond, (f) assistance in negotiation with the DMG and
(g) recommendations for bulk ore sampling and mineralogical testing at the
Franklin Mines (the "Franklin Mine Contract"). At the time of the Franklin Mines
Contract, BCCM allegedly entered into said contract as an agent of the Zeus
Joint Venture.
On or about August 23, 1996, Gems executed a note to Golder in the
aggregate principal amount of $268,683.75 and a note to BCCM in the aggregate
principal amount of $109,785.35 to secure legal and engineering fees outstanding
as of such date. Each note was due and payable on or before December 23, 1996
and bears interest at a rate of 6% per annum. In the event that the payments of
principal and interest under the notes were not paid when due, all principal and
interest will accrue additional interest at a rate of 10% per annum. The notes
were secured by a pledge of approximately 3,600,000 shares of common stock of
the Company owned by pursuant to a Security Agreement, dated August 23, 1996.
Any default under the notes constituted an event of default under the Security
Agreement. Gems failed to make the required payments as of December 23, 1996.
On or about January 28, 1997, Golder commenced an action against BCCM,
Zeus, the Company, Gems, Island, and Durango in the United States District Court
of the District of Colorado to recover sums due and owing from the Defendants
for breach of contract, breach of implied warranty, misrepresentation, negligent
misrepresentation, default under the Golder note and quantum merit arising out
of each of the Mogul Tunnel Contract and the Franklin Mine Contract. The Company
is a named defendant to this litigation by virtue of its general partnership
interest in Zeus, it being joint and severally liable with Gems and Nuco as
general partners in the Joint Venture.
The aggregate amount of the Golder claims are approximately $281,670.99
plus prejudgment and post judgment interest, costs and expenses (including
attorney's fees) and any additional relief granted by the court, $124,159.87,
exclusive of interest and other costs and expenses, of which is attributable to
the Mogul Tunnel Contract and $157,511.12, exclusive of interest and other costs
and expenses, of which is attributable to the Franklin Mines Contract.
On or about March 12, 1997, BCCM filed a motion to dismiss counts III, IV,
and V of the Complaint relating to the breach of warranty, misrepresentation and
negligent misrepresentation arguing the these claims were pled in the
alternative and only become viable in the event other defendants in the case
deny BCCM authority to enter into the subject contracts. Also on March 12, 1996,
Zeus, the Company, Island and Gems moved to dismiss or stay proceedings pending
arbitration arguing that arbitration clauses in the subject contract require the
captioned action to be submitted to arbitration. However, Durango filed a
separate answer to the Complaint denying that BCCM had any authority to enter
into any contract on behalf of Durango and denying that Durango ratified any
exercise of such authority. Therefore, on or about March 27, 1997, Golder moved
to file an amended complaint to clarify its position that the claims against
Durango are also asserted against the Franklin Defendants. The Company has not
received a copy of such complaint to date. Notwithstanding, the parties, on
April 4, 1997, executed a stipulation agreeing to arbitration on all issues
concerning the subject contracts but excluding issues relating to the note and
security agreement. The Company intends to vigorously
27
<PAGE>
defend the claims of Golder in the arbitration proceeding. The Company has been
advised by Zeus and Gems that Golder had not adequately performed the services
for which it had invoiced the Joint Venture. Based upon the representations of
Zeus and Gems, management is hopeful that this dispute will be resolved
favorably.
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.
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 its 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 Mines 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 verbal assurances from such agency that all of the violations
at the Franklin Mines with respect to the reclamation bonding 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.
28
<PAGE>
In January, 1997, the DMG requested a further increase in the Company's
reclamation bond by $11,500. Subsequent to this notification, a consultant
engaged by Zeus for the purpose of complying with all permitting issues had
discussions with representatives of the DMG regarding the Company's reclamation
bond. Due to the compliance work performed by the Company in fiscal year 1996
and the first quarter of 1997, the Company believes that it is entitled to a
reduction in its reclamation bond and is in the process of preparing such
application. In light of this application, the DMG orally agreed not to pursue
the increase request further until such time as the bond reduction application
is submitted and reviewed. The Company is hopeful that it will be able to submit
its application during the second quarter of 1997.
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 the Company will be
able to adequately comply with the conditions set forth in its permit approval
or that future violations will not arise and that such violations will not lead
to interruptions in operations at the Franklin Mines or Franklin Mill. For
further information regarding the Permits, see Item I, Business of the Company -
Operations at the Company's Mining Properties.
Joint Venture Obligations
As of December 31, 1996, the Company has no outstanding obligations
regarding the Joint Venture; however, cumulative losses attributable to the
Company totaled $133,220 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 December 31, 1996, the Company owed Gems
approximately $957,700 which includes (i) $609,683 attributed to principal and
accrued but unpaid interest on the Gold Hill Note; (ii) $ 614,250 attributable
to principal and accrued but unpaid interest on the Mogul Note and (iii) less
$ 266,438 attributable to intercompany loans from the Company to Gems.
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 December 31, 1996, the real estate taxes presently due and
owing on the properties that comprise the Franklin Mines and Mill are
approximately $59,684 for the years ended 1993, 1994, 1995 and 1996. 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. On April 28, 1997 the Company paid
approximately $50,700 to Clear Creek County against the aforementioned tax
liabilities.
29
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Durango Litigation
On or about February 1, 1996, Newmineco, Island, Gems and Zeus entered into
a series of transactions with 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. For further information,
see Item 1, Business of the Company-Newmineco. On or about March 1996, Island
acquired the Rugg/Mogul Lease through a Novation Agreement. The Rugg/Mogul Lease
was then renegotiated and 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 certain venture agreements involving these persons. Island thereafter
assigned its interest in Newmineco to Gems. For more information on the status
of the Rugg/Mogul Leases, see Item 2. Properties Rugg/Mogul Leases; For more
information on the relationship of the parties, see Item 1. Business-Operations
at the Company's Mining Properties.
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 Gold Hill Mill. Thereafter, on or about October 15, 1996, James A.
Wood and David C. Sutton, each the owner of claims located on the properties
comprising the Mogul Mines (the "Delaware Claims" and the "Bonanza Claims",
respectively) and Durango, as the proported 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 requisite 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 while there are motions pending
regarding the sufficiency of the defendant's pleadings, no decision has been
made regarding such motions and no trial has yet been scheduled. In addition, on
or about October 30, 1996, each of Com, Inc., the previous owner of the Gold
Hill Mill, Gems, Island, the Company, Hayden and Kennec commenced an action
against each of Durango, Hartley, Consolidated Milling and Tatman in District
Court, Boulder Country, Colorado relating to the Company's properties in Boulder
County claiming, among other things, that (i) all liens be removed from the
public record, (ii) damages were incurred for the filing of excessive liens,
together with costs and expenses, including reasonable attorney's fees incurred
in connection therewith, (iii) breach of contract with respect to the Newmineco
venture agreement, (iv) damages incurred for loss of business opportunities and
interference with plaintiff's contractual relationships and (v) defendants
slandered plaintiffs title to property causing them damages. A similar complaint
was also filed in Clear Creek County with respect to liens filed against the
Company's properties in Clear Creek County. No counterclaims have been asserted
against any of the Plaintiffs. As a result of recent motions filed on behalf of
the Company in the Boulder County action, the parties have agreed and have
submitted a proposed order to discharge all liens
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<PAGE>
filed against the Company's properties. The Company has been advised that the
Court is expected to enter this order shortly and such order will thereafter be
recorded to remove the subject liens. The Clear Creek County Court has executed
an order removing the liens against the Company's Clear Creek County properties
and the Company has been advised by local counsel that such order is being filed
with the Clear Creek County to remove the liens from the record. Issues
concerning damages suffered and defendants liability with respect thereto in
each of the actions are to litigated. No trial dates have been set at this time.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant's 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").
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 1995 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, 1995 $.16 $.13
June 30, 1995 $.19 $.16
September 30, 1995 $.19 $.16
December 31, 1995 $.22 $.16
March 31, 1996 $.25 $.16
June 30, 1996 $.25 $.09
September 30, 1996 $.13 $.06
December 31, 1996 $.16 $.06
As of March 29, 1997, the approximate number of recordholders of the
Company's Common Stock is 3,100 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 issued and
outstanding is 91,583,020 as of March 29, 1996. 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.
Sales of Restricted Securities
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 of its outstanding debt at the time
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
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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 an piggyback registration rights. The Anderson Loans were
convertible into a total of approximately 4,500,000 shares of common stock at
each lenders 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. Such shares were issued by the Company in
reliance on an exception from registration under the Act.
In December 1995, the Company commenced an offering pursuant to Rule 505 of
Regulation D of the Act of $1,500,000 principal amount of its 15% Secured Notes
(the "Notes") Convertible into Shares of Common Stock of the Company. Such Notes
were offered by the officers and directors of the Company to accredited
investors only, and had a maturity date of eighteen months from the date of each
Note so issued (the "Maturity Date"). The conversion rights under the Note
become effective on or after April 1, 1996. The Company terminated this offering
on February 5, 1996 after selling an aggregate of $400,000 of the Notes. 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 shares of common stock to such investors upon such conversion based on
the total balance of the principal and accrued interest outstanding on the Notes
equal to an aggregate amount of $418,740 at a conversion price of $.0975 per
share.
In late February, 1996, the Company commenced an offering of its common
stock through its designated officers and directors pursuant to Rule 505 of
Regulation D under the Act. The offering was made to both accredited and
unaccredited investors. Subscribers of the offering purchased the common stock
at a purchase price equal to 15% below the market price as quoted on NASDAQ at
the close of business prior to the date of such sales. The Company raised
approximately $202,600 and issued 953,411 shares of its common stock in
connection with the offering.
On or about March 5, 1996, the Company issued to certain principals of
Wolinetz, Gottlieb & Lafazan, P.C., the former independent auditors of the
Company ("WGL"), approximately 56,000 shares of common stock of the Company in
satisfaction of outstanding accounting fees owed by the Company to WGL of
approximately
33
<PAGE>
$10,000. The shares were issued pursuant to an exemption from registration under
the Act. For more information concerning WGL, See Item8-Chantges In and
Disagreements with Accountants on Accounting and Financial Disclosure.
On or about April 18, 1996, the Company executed a promissory note payable
to a private lender in the principal amount of $60,000 and issued to lender
160,000 shares of common stock of the Company as further consideration for
advancing said loan. The shares were issued pursuant an exemption from
registration under the Act.
In July, 1996, the Company commenced an offering pursuant to Rule 505 of
Regulation D under the Act for the issuance of shares of common stock at a
purchase price of approximately $.15625 per share in exchange for certain notes,
mortgages and other obligations of its affiliates held by certain third party
unaffiliated parties of the Company and Gems. At the completion of the offering
in July, 1996, the Company purchased obligations of its affiliates having an
aggregated principal balance of approximately $1,400,000 through the issuance of
approximately 9,366,919 shares of common stock and thereafter transferred such
debt instruments and obligations to COM, Inc., in exchange for an equivalent
reduction in the principal amount of the Gold Hill Note and approximately
$191,875 through the issuance of 1,228,000 shares of common stock and thereafter
transferred such debt instruments and obligations to Gems in exchange for an
equivalent reduction in certain intercompany loans from Gems to the Company.
In Late July 1996, the Company commenced an offering of it common stock to
accredited investors only pursuant to Rule 505 of Regulation D under the Act
during which Stires & Co. acted as selling agent on behalf of the Company. The
offering was on a best efforts basis and the selling agent was to receive a
commission of 5% of the aggregate gross proceeds to 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 of the Company and
raised $100,000. The offering was terminated on September 15, 1996.
Also in July, 1996, the Company issued 1,000,000 shares of Common Stock to
a former officer and director of the Company in satisfaction of a finders fee
owed to Mr. Horing in connection with the formation of the Zeus Joint Venture.
The shares were issued in accordance with an exemption from registration under
the Act.
On August 28, 1996, the Company entered into an investment banking
agreement with Redstone Securities, Inc. ("Redstone") pursuant to which Redstone
agreed to perform certain investment banking services in exchange for a fee
payable by the granting of an option to Redstone to purchase up to 3,000,000
shares of Common Stock of the Company at an exercise price of $.01 per share. In
November, 1996, Redstone exercised its option to purchase 2,500,000 of the
3,000,000 shares of common stock and the Company issued such shares in
accordance with an exemption from registration under the Act.
34
<PAGE>
On or about August 29, 1996, the Company issued 1,088,000 shares of common
stock in consideration of the purchase price for certain real property purchased
by Gems. The shares were issued to seller in accordance with an exemption from
registration under the Act.
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. On February 10, 1997, the Company made its
election to convert the amounts owing on the Newmineco Note into common stock of
the Company at a conversion price of $.078 per share. Although such shares have
not yet been issued to the assignees of the Newmineco Note, the Company is
obligated to issue to such holders and aggregate of 7,692,308 shares of common
stock of the Company in full satisfaction of the Company's obligations under the
Newmineco Note. The Company intends to issue such shares in accordance with an
exemption from registration under the Act.
Item 6. Management's Discussion and Analysis or Plan of Operation
The Company is engaged in the business of investing 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 Mines
and the Franklin Mill. The Company acquired a 20% interest in Newmineco, LLC
from its Joint Venture partner 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 1996, remediation work was performed and substantially completed at
the Franklin Mines and the Franklin Mill in preparation for the commencement of
mining operations at both the Franklin Mines and the Mogul Mines. Approximately
200 tons of ore were mined at the Mogul Mines and shipped to the Franklin site
where the ore was crushed and milled. The management of the Company is very
satisfied with the mineral content of the assays taken.
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
respective relationships. 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.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations principally
through equity and debt financing, including such financing provided through its
relationships with its Joint Venture partner. The Company has derived no income
from its mining and milling investments which are comprised of the following:
(1) the investments in the assets and rights related to the Franklin Mines and
Franklin Mill, which are being
35
<PAGE>
developed and will be operated by Gems, the Company's principal Joint Venture
partner in the Zeus Joint Venture in which the Company holds at 17.5% interest;
(2) the investment in the assets of the Gold Hill Mill, the development and
operation of which are currently the responsibility of the Company; and (3) the
20% interest in Newmineco, LLC, which holds the assets and rights related to the
Mogul Mine whose development and operations will also be the responsibility of
Gems. At December 31, 1996, the Company's only liquid asset was cash, the
balance of which decreased from $118,176 at December 31, 1995 to $127 at
December 31, 1996.
During 1996, the Company used common stock as its principal capital
resource. It issued a total of 21,447,100 shares of common stock and certain
notes for cash, the acquisition of services and mining and milling properties
and the liquidation of debt, as further described below.
In December 1995, the Company commenced an offering pursuant to Rule 505 of
Regulation D of 15% Secured Notes (the "15% Notes") in the aggregate principal
amount of $1,500,000 that were convertible into shares of Common Stock at a
conversion price of $.0975 per share to raise funds for operations. The Company
terminated this offering on February 5, 1996 after selling 15% Notes in the
aggregate principal amount of $400,000. During the second quarter of 1996, the
Company issued 4,294,770 of Common Stock upon the conversion of all of the 15%
Notes based on the total balance of the principal and accrued interest
outstanding of $418,740 and the conversion price of $.0975 per share.
In February 1996, the Company commenced an offering pursuant to Rule 505 of
Regulation D of its Common Stock to accredited and unaccredited investors to
raise funds for operations. Subscribers of the offering purchased the Common
Stock at 15% below the market price as quoted on NASDAQ at the close of business
on a specified date prior to the termination of the offering. The Company raised
approximately $202,600 from the sale of 953,411 shares at $.2125 per share.
On July 3, 1996, the Company acquired the Gold Hill Mill facility for
$2,500,000 through a noncash transaction whereby it issued an 8% mortgage note
(the "8% Mortgage Note") to a subsidiary of Gems which requires the payment of
the entire principal balance no later than July 3, 1999. The 8% Mortgage Note is
secured by the Gold Hill Mill.
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 equivalent of $.15625 per share in exchange for certain
notes, mortgages and other obligations of Gems and its affiliates. Upon
completion of the offering, the Company issued 9,366,919 shares of Common Stock
to purchase obligations of Gems and its affiliates with an aggregate principal
balance of $1,463,581, and canceled the obligations in exchange for an
equivalent reduction in the principal balance of the 8% Mortgage Note.
In July 1996, the Company commenced an offering of its Common Stock to
accredited investors only pursuant to Rule 505 of Regulation D to raise
additional funds for operating purposes. The offering was on a best efforts
basis. 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 raised $95,000 before
the offering was terminated on September 15, 1996.
36
<PAGE>
In September 1996, the Company acquired its 20% interest in Newmineco by
issuing a 9.5% note (the "9.5 Note) payable to Gems with a principal balance of
$600,000. As a result of problems concerning permitting and various other issues
related to the Mogul Mines, the purchase price was reduced, effectively, to
$150,000 on December 31, 1996. The $450,000 reduction in the purchase price was
effectuated through an equivalent reduction in the principal balance of the 8%
Mortgage Note. The 9.5% Note was originally due on June 30,. 1997. However, on
February 7, 1997, Gems notified the Company that it had assigned its interest in
the 9.5% Note to certain third parties. On February 10, 1997, the Company
notified the assignees that it had elected to convert the principal balance of
the 9.5% Note into 7,692,308 shares of Common Stock based on 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 to
be distributed by Newmineco and 20% of any of its profits thereafter.
During 1996, the Company also issued 3,716,000 shares of Common Stock in
exchange for financial consulting and other services and for the payment of
accrued interest.
The Company had 100,000,000 shares of Common Stock authorized for issuance
as of December 31, 1996 of which 90,583,020 were outstanding. As a result of the
conversion of the 9.5% Note during February 1997, the Company's ability to use
its Common Stock as a capital resource will be limited unless its stockholders
authorize an increase in capital or approve a reverse stock split.
The Company had total current liabilities as of December 31, 1996 of
$1,378,883, including convertible debentures with a principal balance of
$145,000 and other notes payable with a principal balance of $80,000. Although
Gems will be responsible for providing the remaining capital resources that will
be needed for the commencement of operations at the Franklin Mines and the Mogul
Mine, the Company will be responsible for obtaining the remaining capital
resources that will be needed for the commencement of operations at the Gold
Hill Mill. In addition to the payment of its current liabilities, management
estimates that the Company will incur general, administrative and other costs
and expenditures, exclusive of any costs and expenditures related to any mining
and milling operations, at the rate of approximately $25,000 per month during
1997.
As explained above, the Company's only liquid resource was a cash balance
of $127 at December 31, 1996. Although the Company is entitled to distributions
of 17.5% of any net profits generated from the operations of the Franklin Mines
by the Zeus Joint Venture, any net profits generated by the Gold Hill Mill and
the first $500,000 of any profits generated through the operations of the Mogul
Mine by Newmineco plus 20% of any profits thereafter, all such operations are in
the development stage and have been generating losses and negative cash flows
and management cannot assure that those operations will generate any positive
cash flows during 1997.
In the absence of liquid resources, cash flows from operations and any
other commitments for debt or equity financing, management believes that the
ability of the Company to continue its operations will be dependent upon the
provision of financing by Gems, which Gems is required to provide pursuant to
the Joint Venture Agreement. Management believes, but cannot assure, that such
financing and the financing needed to
37
<PAGE>
commence operations at the Franklin Mines and the Mogul Mine will be provided by
Gems during 1997, and that the Company will remain dependent on its Joint
Venture partner as its primary source of financing for its operations until such
time, if any, as the Company begins to receive cash flows from its investments.
During the first four months of 1997, Gems repaid advances from the Company
and made advances to the Company totaling approximately $300,000. These advances
were used, among other things, to pay legal and accounting fees in connection
with the Company's public filings to satisfy obligations arising under a
settlement of certain litigation to pay delinquent real estate taxes and to
satisfy obligations for remedial work at the Franklin Mines and Franklin Mill.
The management of the Company believes that Gems will continue to fulfill its
commitment and make such advances until such time, if any, as the Company begins
to receive cash flows from its investments.
Management believes that all necessary environmental and regulatory
approvals have been obtained and it anticipates that mining and milling
operations will begin at the Franklin Mines and/or the Mogul Mines during the
third quarter of 1997. The management of the Company has been informed by the
management of Gems that Gems has or will provide the funds needed to complete
the rehabilitation and upgrading of the existing plant, equipment and mine
workings to facilitate the commencement of such operations.
Although the ultimate goal is to have both the Franklin Mines and the Mogul
Mine in operation simultaneously, no definitive plans have been made as to which
mine will be operated first. Based on limited operations at the Mogul Mines and
initial assay reports, management believes that the Mogul Mines may produce a
higher grade of ore than that produced by the Franklin Mines and, accordingly,
management anticipates that operations will commence initially at the Mogul
Mine. Any cash flow generated would then be used to assist in the commencement
of operations at the Franklin Mines.
With the addition of the Gold Hill Mill, the Company will own the only two
permitted mills in its mining district once the Franklin Mill and the Gold Hill
Mill become operational. To be able to commence milling operations, the Company
will have to obtain sufficient working capital and hire managerial and other
mill personnel. Other nearby mines are not operating currently due, in the
opinion of management, to the lack of available milling facilities. The Company
intends to solicit owners of those mines to use the Company's mills to process
their ore in order to augment expected revenues from mining operations. However,
there can be no assurance that any significant cash flows will be generated
through these operations.
In addition to funds committed by Gems, management is considering raising
capital by mortgaging the Gold Hill Mill property. The management of the Company
believes that, based on the fair value of the Gold Hill Mill property, it can
raise a minimum of $1,000,000 using conventional mortgage financing, with
guarantees from Gems and its principals. Such funds would be used to supply the
working capital initially needed to commence operations at the Gold Hill Mill
and as an alternative means of financing operations at the Franklin Mines,
Franklin Mill and the Mogul Mine.
38
<PAGE>
Management also believes that, at a minimum, the Company will be able to
obtain sufficient financing from Gems and/or mortgage loans on the Gold Hill
Mill property to enable it to meet its working capital requirements through at
least December 31, 1997.
Results of Operations
The Company and the Zeus Joint Venture had no active mining or milling
operations during 1996 and 1995.
The Company had a net loss of $967,524 for 1996 as compared to a net loss
of $924,344 during 1995. This increase of $43,180 was primarily attributable to
an increase in general and administrative expenses in 1996 of $505,414 offset by
the effects of a nonrecurring, noncash charge in 1995 of $468,000 for the
issuance of stock to Gems to settle claims arising from the failure of the
Company to meet its obligations under the Joint Venture Agreement. General and
administrative expenses were $732,710 for 1996 as compared with $227,287 during
1995 due primarily to increases in professional fees and costs of investment
banking services. Interest expense was $102,238 during 1996 as compared to
$92,434 during 1995 due to increased interest incurred in connection with the
issuance of notes in the Gold Hill Mill and Newmineco acquisitions.
Operations of the Joint Venture at the Franklin Mines and the Franklin Mill
during 1996 were restricted by the cease and desist order issued in March 1996
by the DMG for permit violations that were not vacated until June 7, 1996. As a
result, the Company's equity in the net loss of the Zeus Joint Venture was
$12,950 in 1996 compared to $15,540 in 1995.
39
<PAGE>
Item 7. Financial Statements and Supplementary Data
The index to Financial Statements appears on page F-1.
40
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
(Item 7)
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 F-3
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1996 F-4
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1996 F-5/11
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
PERIOD FROM DECEMBER 1, 1976 (INCEPTION) TO
DECEMBER 31, 1996 F-12/13
NOTES TO FINANCIAL STATEMENTS F-14/37
* * *
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Franklin Consolidated Mining, Co., Inc.
We have audited the accompanying balance sheets of FRANKLIN CONSOLIDATED MINING
CO., INC. (A Development Stage Enterprise) as of December 31, 1996 and 1995, and
the related statements of operations, stockholders' equity and cash flows for
the years then ended and for the period from December 1, 1976 (inception) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Consolidated Mining
Co., Inc. as of December 31, 1996 and 1995, and its results of operations and
cash flows for the years then ended and for the period from December 1, 1976
(inception) to December 31, 1996, in conformity with generally accepted
accounting principles.
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
inception and, as of December 31, 1996, has a substantial working capital
deficiency. As a result, it was in default with respect to payments on a secured
promissory note and on convertible debentures 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
April 3, 1997, except for
Note 11 as to which the
date is April 30, 1997
F-2
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
------ ------------ ------------
Current assets:
Cash $ 127 $ 118,176
Prepaid expenses 107,979
Advances from joint venture partner 266,438
------------ ------------
Total current assets 374,544 118,176
Mining, milling and other property and
equipment, net of accumulated depre-
ciation and depletion of $1,837,180
and $1,715,194 6,311,128 3,848,114
Investment in equity investee 150,000
Mining reclamation bonds 126,875 45,000
------------ ------------
Totals $ 6,962,547 $ 4,011,290
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
12.25% convertible debentures $ 145,000 $ 145,000
9.5% convertible note payable to joint
venture partner 600,000
Other notes payable 80,000
Accounts payable and accrued expenses 553,883 298,016
Advances to joint venture partner 313,688
------------ ------------
Total current liabilities 1,378,883 756,704
8% mortgage note payable to joint venture
partner 586,419
15% convertible notes 200,000
Excess of equity in net losses of joint ven-
ture over investment 133,220 120,270
------------ ------------
Total liabilities 2,098,522 1,076,974
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share;
100,000,000 shares authorized;
90,583,020 and 69,135,920 shares issued
and outstanding 905,830 691,359
Additional paid-in capital 15,154,264 12,471,502
Deficit accumulated in the development
stage (11,196,069) (10,228,545)
------------ ------------
Total stockholders' equity 4,864,025 2,934,316
------------ ------------
Totals $ 6,962,547 $ 4,011,290
============ ============
See Notes to Financial Statements.
F-3
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Cumulative
from
1996 1995 Inception
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 876,082
Interest income $ 2,351 $ 1,060 540,887
Other income 75,000
------------ ------------ ------------
Totals 2,351 1,060 1,491,969
------------ ------------ ------------
Expenses:
Mine expenses 3,360,793
Write-down of inventories 223,049
Depreciation and depletion 121,986 122,143 2,032,529
General and administrative
expenses 732,701 227,287 5,030,432
Interest expense 102,238 92,434 595,838
Amortization of debt issuance
expense 683,047
Equity in net loss of joint
venture 12,950 15,540 133,220
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 969,875 925,404 12,688,038
------------ ------------ ------------
Net loss $ (967,524) $ (924,344) $(11,196,069)
============ ============ ============
Weighted average shares outstanding 74,284,324 49,035,351
============ ============
Net loss per common share $(.01) $(.02)
===== =====
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional in the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
--------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock:
Cash 155,000 $ 1,550 $ 41,550 $ 43,100
Noncash:
Related par-
ties 925,000 9,250 9,250
In exchange
for shares
of Gold
Developers
and Pro-
ducers,
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-5
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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-6
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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-7
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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-8
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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-9
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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-10
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
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
loans from
related par-
ties and
accrued in-
terest 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
Issuance of common stock for:
Cash 1,753,411 17,534 280,066 297,600
Services and
interest 3,716,000 37,160 318,277 355,437
Conversion of con-
vertible notes 4,294,770 42,948 375,792 418,740
Repayments of loan
from joint ven-
ture partner 2,316,000 23,160 338,715 361,875
Repayments of long-
term loans from
related party 9,366,919 93,669 1,369,912 1,463,581
Net loss (967,524) (967,524)
------------ ------------ ------------ ------------ ---------- -----------
Balance, Decem-
ber 31, 1996 90,583,020 $ 905,830 $ 15,154,264 11,196,069) $ -- $ 4,864,025
============ ============ ============ ============ ========== ===========
</TABLE>
See Notes to Financial Statements
F-11
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Cumulative
from
1996 1995 Inception
------------ ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss $ (967,524) $ (924,344) $(11,196,069)
Adjustments to reconcile net
loss to net cash used in operat-
ing activities:
Depreciation and depletion 121,986 122,143 2,032,529
Amortization of debt issuance
expense 683,047
Value of common stock issued
for:
Services and interest 355,437 1,325,714
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 12,950 15,540 133,220
Other (7,123)
Changes in operating assets
and liabilities:
Prepaid expenses (107,979) (107,979)
Other current assets 71
Interest accrued on mining
reclamation bonds (1,875) (1,875)
Accounts payable and accrued
expenses 274,607 138,305 736,356
------------ ------------ ------------
Net cash used in operat-
ing activities (312,398) (180,285) (5,409,780)
------------ ------------ ------------
Investing activities:
Purchases and additions to mining,
milling and other property and
equipment (85,000) (5,120,354)
Purchases of mining reclamation
bonds, net (80,000) (125,000)
Deferred mine development costs
and other expenses (234,435) (255,319)
------------ ------------ ------------
Net cash used in invest-
ing activities (165,000) (234,435) (5,500,673)
------------ ------------ ------------
</TABLE>
F-12
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Cumulative
from
1996 1995 Inception
--------- --------- ------------
<S> <C> <C>
Financing activities:
Issuances of common stock $ 297,600 $ 8,758,257
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 $ 200,000 1,505,000
Proceeds of advances from joint
venture partner 331,980 526,288
Advances to joint venture
partner (218,251) (218,251)
Payments of debt issuance
expenses (164,233)
Proceeds of other notes and
loans payable 80,000 768,000
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 359,349 531,980 10,910,580
--------- --------- ------------
Increase (decrease) in cash (118,049) 117,260 127
Cash, beginning of period 118,176 916 --
--------- --------- ------------
Cash, end of period $ 127 $ 118,176 $ 127
========= ========= ============
Supplemental disclosure of cash flow data:
Interest paid $ -- $ 4,441 $ 298,868
========= ========= ============
</TABLE>
See Notes to Financial Statements.
F-13
<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 flotation mill which is located on
the site of the Franklin Mine (the "Franklin Mill").
During 1996, as further explained in Note 3, the Company acquired (i)
the Gold Hill Mill, a fully permitted milling facility located in
Boulder County, Colorado and (ii) a 20% interest in Newmineco, LLC
("Newmineco"), a Colorado limited liability company, which holds the
exclusive mining rights related to the Mogul Tunnel and the
surrounding claims located in the Spencer Mountains of Colorado known
as the "Mogul Mines."
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").
F-14
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation (continued):
Organization (concluded):
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 5).
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"). During 1996, such
operations consisted primarily of additional repair and remediation
work needed to comply with environmental regulatory requirements.
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 or milling operations at
that site through December 31, 1996. In addition, the Company had not
conducted any milling operations at the Gold Hill Mill, and Newmineco
had not conducted any significant commercial mining operations at the
Mogul Mine site, through December 31, 1996. Therefore, the Company,
the Joint Venture and Newmineco had not generated any significant
revenues through, and were still in the development stage, at December
31, 1996.
F-15
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation (continued):
Basis of presentation:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, as explained
above, the Company is a development stage enterprise whose operations
have generated recurring losses and cash flow deficiencies from its
inception. As of December 31, 1996, the Company had a cash balance of
$127, an accumulated deficit of approximately $11,196,000, current
liabilities of $1,379,000 and a working capital deficiency of
$1,004,000, and, as explained in Notes 6 and 7, the Company was in
default with respect to the payment of the principal balance and the
accrued interest on its outstanding secured promissory note and 12.25%
convertible debentures. Certain accounts payable were also past due.
In addition to the payment of its current liabilities, management
estimates that the Company will incur general, administrative and
other costs and expenditures, exclusive of any costs and expenditures
related to any mining and milling operations, at the rate of
approximately $25,000 per month during 1997. Although the Company is
entitled to distributions of 17.5% of any net profits generated from
the operations of the Franklin Mines by the Zeus Joint Venture, any
net profits generated by the Gold Hill Mill and the first $500,000 of
any profits generated through the operations of the Mogul Mines by
Newmineco plus 20% of any profits thereafter, all such operations are
in the development stage and have been generating losses and negative
cash flows and management cannot assure that those operations will
generate any positive cash flows during 1997. Such matters raise
substantial doubt about the Company's ability to continue as a going
concern.
Gems, the Company's Joint Venture partner, will be responsible for
providing the remaining capital resources that will be needed for the
commencement of operations at the Franklin Mine and the Mogul Mines,
and the Company will be responsible for obtaining the remaining
capital resources that will be needed for the commencement of
operations at the Gold Hill Mill. In the absence of liquid resources,
cash flows from operations and any other commitments for debt or
equity financing, management believes that the ability of the Company
to continue its operations as a going concern will be dependent upon
the provision of financing by Gems, which Gems is required to provide
pursuant to the Joint Venture Agreement, the continued forbearance of
the holders of its secured promissory note and convertible debentures
and, ultimately, the ability of the Joint Venture, the Gold Hill Mill
and Newmineco to conduct profitable mining and milling operations on a
sustained basis.
F-16
<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):
Management believes, but cannot assure, that such financing and the
financing needed to commence operations at the Franklin Mines and the
Mogul Mines will be provided by Gems during 1997, and that the Company
will remain dependent on its Joint Venture partner as its primary
source of financing for its operations until such time, if any, as the
Company begins to receive cash flows from its investments. During the
first four months of 1997, Gems repaid advances from the Company and
made advances to the Company totaling approximately $300,000. The
management of the Company believes that Gems will continue to fulfill
its commitment and make such advances until such time, if any, as the
Company begins to receive cash flows from its investments.
In addition to funds committed by Gems, management is considering
raising capital by mortgaging the Gold Hill property. The management
of the Company believes that, based on the fair value of the Gold Hill
property, it can raise a minimum of $1,000,000 using conventional
mortgage financing, with guarantees from Gems and its principals. Such
funds would be used to supply the working capital initially needed to
commence operations at the Gold Hill Mill and as an alternative means
of financing operations at the Franklin Mines and Mill and the Mogul
Mines.
Management also believes that, at a minimum, the Company will be able
to obtain sufficient financing from Gems and/or mortgage loans on the
Gold Hill property to enable the Company to meet its working capital
requirements through at least December 31, 1997.
F-17
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
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 1996 and
1995 since the Company's 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.
Impairment of long-lived assets:
Effective as of January 1, 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121"). Under SFAS 121, impairment losses on
long-lived assets are recognized when events or changes in
circumstances indicate that the undiscounted cash flows estimated to
be generated by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the fair
value of assets to their carrying amounts. The adoption of SFAS 121
had no material effect on the Company's 1996 financial statements.
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.
F-18
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (concluded):
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.
Income taxes:
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
which utilizes an asset and liability approach to financial accounting
and reporting for income taxes. Under this approach, deferred income
tax assets and liabilities are computed annually for temporary
differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. The income
tax provision or credit is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax
assets and liabilities.
F-19
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 3 - Acquisitions of mining and milling properties:
On July 3, 1996, the Company acquired the Gold Hill Mill from a
wholly-owned subsidiary of Gems, the Company's Joint Venture partner,
in exchange for an 8% mortgage note with an initial principal balance
of $2,500,000 (see Notes 7 and 10). The Gold Hill Mill is a fully
permitted milling facility located in Boulder County, Colorado. The
Company will be responsible for the development and operation of the
Gold Hill Mill.
On September 26, 1996, the Company acquired its 20% interest in
Newmineco by issuing a 9.5% note payable to Gems with a principal
balance of $600,000. Newmineco was a newly-formed, inactive company at
the time the Company acquired its 20% interest. Newmineco holds the
exclusive mining rights related to the Mogul Mines located in the
Spencer Mountains of Colorado. Gems will be responsible for the
development and operation of the Mogul Mines. As a result of problems
concerning permitting and various other issues related to the Mogul
Mines, the purchase price for the Company's 20% interest was reduced
to $150,000 on, effectively, December 31, 1996 (see Notes 7 and 10).
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.
F-20
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 4 - Mining, milling and other property and equipment:
Mining, milling and other property and equipment, at the Franklin
Mines and the Franklin Mill and the Gold Hill Mill consisted of the
following at December 31, 1996 and 1995:
1996 1995
---------- ----------
Land $ 345,000
Machinery and equipment 2,217,220 $1,219,220
Mine and mill improvements 5,490,278 4,248,278
Furniture and fixtures 11,714 11,714
Automotive equipment 84,096 84,096
---------- ----------
8,148,308 5,563,308
Less accumulated depreciation
and depletion 1,837,180 1,715,194
---------- ----------
Total $6,311,128 $3,848,114
========== ==========
F-21
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 5 - 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.
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, 1994, 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 8).
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.
F-22
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 5 - Status of the Zeus Joint Venture Agreement (continued)
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 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.
F-23
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 5 - Status of the Zeus Joint Venture Agreement (concluded):
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.
The Company's investment in the Joint Venture as of December 31, 1996
and 1995, and the Joint Venture's results of operations for the years
then ended, in relation to those of the Company, were not material.
From time to time, the Company receives advances from and makes
advances to Gems. Pursuant to the Joint Venture agreement, these
advances are noninterest bearing and without a specific due date. As a
result of such advances, the Company had a receivable of $266,438 from
Gems at December 31, 1996 and a payable of $313,688 to Gems at
December 31, 1995.
During 1996, the Company issued 2,316,000 shares of common stock to
Gems and reduced the balance of its advances payable by $361,875 based
on the estimated fair value of the shares issued.
F-24
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 6 - Other notes payable:
Other notes payable was comprised as follows at December 31, 1996:
12% unsecured demand note $20,000
Secured promissory note (a) 60,000
-------
Total $80,000
=======
(a) The outstanding principal balance of the note became payable on
July 18, 1996 and is overdue (see Note 8). The note is guaranteed
by the Company's Joint Venture partner and certain individuals
and is collateralized through a security interest in the
Company's mining reclamation bond. Interest on the note is
payable based on the rate of interest applicable to the mining
reclamation bond.
F-25
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 7 - Convertible and mortgage debt:
The Company's convertible debt at December 31, 1996 and 1995 consisted
of the following:
1996 1995
-------- --------
12.25% convertible debentures (a) $145,000 $145,000
9.5% convertible secured promissory
note payable to Joint Venture
partner (b) 600,000
15% convertible notes (c) 200,000
-------- --------
Totals $745,000 $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 accrued interest payable for the quarters
subsequent to March 31, 1995. The Company sent notices to its
debentureholders in December 1995 asking for their consent by
February 15, 1996 to the further extension of the maturity date
to December 31, 1996. It was also contemplated that conversion
rights would also be extended at the previous rate of $.50 per
share. The Company also agreed that it would make all interest
payments due to such holders through December 31, 1995, prepay
interest which will become due at the end of the first quarter of
1996 and set up a fund with the Trustee to secure the timely
payment of the principal balance of the debentures on December
31, 1996. Only one holder of a $1,000 debenture rejected the
Company's request.
While it was the intention of management and the Company to
comply with the terms of the agreements with the
debentureholders, the Company has been unable to comply as a
result of the liquidity and cash flow problems described in Note
1. As a result of its default and its continued failure to comply
with the December 1995 agreements, the Company may be subject to
legal proceedings by the Transfer Agent/Trustee under the
Indenture Agreement or from debentureholders seeking immediate
repayment of principal plus interest and penalties. Management
cannot assure that there will be funds available for the required
payments or what the effects of any actions brought by or on
behalf of the debentureholders will be.
F-26
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 7 - Convertible and mortgage debt (continued):
(b) In September 1996, the Company acquired its 20% interest in
Newmineco by issuing a 9.5% note payable to Gems with a principal
balance of $600,000. As a result of problems concerning
permitting and various other issues related to the Mogul Mines,
the purchase price was reduced to $150,000 on, effectively,
December 31, 1996. The $450,000 reduction in the purchase price
was effectuated through an equivalent reduction in the principal
balance of the 8% mortgage note that is also payable to Gems by
the Company. The 9.5% note was originally due on June 30, 1997.
However, on February 7, 1997, Gems notified the Company that it
had assigned its interest in the 9.5% note to certain third
parties. On February 10, 1997, the Company notified the assignees
that it had elected to convert the principal balance of the 9.5%
note into 7,692,308 shares of common stock based on the
conversion rate of $.078 per share.
(c) In December 1995, the Company commenced an offering exempt from
registration pursuant to Rule 505 of Regulation D of the 15%
secured convertible promissory notes in the aggregate principal
amount of $1,500,000. The Company terminated the offering on
February 5, 1996 after selling convertible notes in the aggregate
principal amount of $400,000, of which $200,000 was outstanding
at December 31, 1995 as shown above. Each convertible note was
scheduled to mature 18 months from the date of its issuance. The
notes were 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. During the second
quarter of 1996, the Company issued 4,294,770 shares of common
stock upon the conversion of all of the notes based on the total
balance of the principal and accrued interest outstanding of
$418,740 and the conversion price of $.0975 per share.
F-27
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 7 - Convertible and mortgage debt (concluded):
The $586,419 principal balance of the 8% mortgage note payable to the
Joint Venture partner at December 31, 1996 represents the remainder of
the $2,500,000 principal balance of the note issued by the Company to
a subsidiary of Gems on July 3, 1996 as the consideration for the
acquisition of the Gold Hill Mill facility. In July 1996, the Company
commenced an offering for the issuance of shares of common stock at
the equivalent of $.15625 per share in exchange for certain notes,
mortgages and other obligations of Gems and its affiliates (see Note
10). Upon completion of the offering, the Company issued 9,366,919
shares of common stock to purchase obligations of Gems and its
affiliates with an aggregate principal balance of $1,463,581, and
canceled the obligations in exchange for an equivalent reduction in
the principal balance of the 8% mortgage note. Effective December 31,
1996, the principal balance was reduced by $450,000 as a result of the
adjustment to the purchase price of its 20% interest in Newmineco as
explained above.
Accounts payable and accrued expenses at December 31, 1996 includes
accrued interest on the 8% mortgage, a portion of which was due as of
September 30, 1996. The entire remaining principal balance of the 8%
mortgage note, which is due no later than July 3, 1999, is secured by
the property and equipment related to the Gold Hill Mill.
F-28
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - 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 costs. Rentals amounted to $24,000 in
1996 and 1995 and were paid by the Joint Venture.
On November 19, 1996, the Company entered into an amendment to the
Hayden/Kennec Leases with respect to the portion of the leasehold
attributable to Dorothy Kennec (the "Kennec Amendment"). Pursuant to
the terms of the Kennec Amendment, Kennec agreed to extend the terms
of the Hayden/Kennec Leases as they related to her portion of the
leasehold rights for one year. The extension will expire on November
12, 1997. In consideration for such extension, the Company agreed to
increase the rental payment to Kennec under the original Hayden/Kennec
Leases from $1,000 to $2,000 per month. Kennec will also receive
104,000 shares of the common stock of the Company. All of the payments
made under the Kennec Amendment, plus the value of the shares issued
thereunder, will be further applied against the buy-out price of the
property under the original Hayden/Kennec Leases.
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.
F-29
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (continued):
Lease commitments(concluded):
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.
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 (which was amended and restated in
September 1996) 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.
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.
F-30
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (continued):
Environmental matters (continued):
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 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.
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 remediation 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.
On January 31, 1997, the Company received approval from the DMG of its
March 6, 1996 amended application to its permit. As a result,
management believes that substantially all of the necessary
environmental and regulatory approvals have been obtained that are
needed to enable the Company to commence mining and milling operations
at the Franklin Mine and/or the Mogul Mines during 1997.
F-31
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (concluded):
Environmental matters (concluded):
The amended permit, among other things, increases the permitted area
of the Franklin Mine to 42.5 acres and allows for the processing of
ore on an unlimited basis. The amended permit further contemplates the
submission of a final design for tailings disposal facilities, the
installation of a Surface Water Control Plan previously approved by
the DMG, the filing of an Environmental Protection Plan, and the
completion of certain closure plans.
Litigation:
The Company is involved in various litigation as explained below:
a) The Company, the Joint Venture, Gems, Island and others are
defendants in an action related to a dispute over fees for
engineering consulting services supplied in the amount of
approximately $268,000. The Court has remanded the case to
arbitration. The defendants plan to vigorously defend their
position asserting that the work was never completed.
b) The Company, Island, Newmineco and others are defendants in
litigation involving title to the mining claims at the Mogul
Mines. This action was instituted by the former owners of such
claims. The Company intends to vigorously contest the action. In
the opinion of legal counsel, the defendants have valid defenses
to all claims.
c) In April 1997, the Company was notified by the Superior Court of
New Jersey that it had received a copy of a complaint by the
holder of the $60,000 secured note, which was due and payable in
July 1996 (see Note 6). The complaint demanded, among other
things, payment of all principal and interest due. As of April
14, 1997, the Company had not received service of such complaint.
Management believes that, to the extent that any of the claims are
finally determined to have merit, the Company has made adequate
provision for any amounts that may be due. However, management also
believes that it is too early in the process to evaluate the possible
outcome of these claims or estimate the amount or range of any
additional loss or the likelihood of such loss occurring. An
unfavorable resolution of these matters could result in material
liabilities and/or charges which have not been reflected in the
accompanying financial statements.
F-32
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 9 - Income taxes:
As of December 31, 1996, the Company had net operating loss
carryforwards of approximately $9,844,000 available to reduce future
Federal taxable income which, if not used, will expire at various
dates through December 31, 2011. 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 $3,347,000
attributable to the potential benefits from such net operating loss
carryforwards as of December 31, 1996 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 1996 and 1995 and the statutory Federal
income tax rate, is reconciled to the actual tax benefit reflected in
the accompanying financial statements as follows:
1996 1995
--------- ---------
Expected tax benefit at statutory
rates $ 329,000 $ 314,000
Decrease resulting from valuation
allowance for benefits from net
operating loss carryforwards (329,000) (314,000)
--------- ---------
Totals $ -- $ --
========= =========
F-33
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 10- Stockholders' equity:
Issuances of common stock:
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.
F-34
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 10- Stockholders' equity (continued):
Issuances of common stock (continued):
In February 1996, the Company commenced an offering pursuant to Rule
505 of Regulation D of its common stock to accredited and unaccredited
investors to raise funds for operations. Subscribers of the offering
purchased the common stock at 15% below the market price as quoted on
NASDAQ at the close of business on a specified date prior to the
termination of the offering. The Company raised approximately $202,600
from the sale of 953,411 shares at $.2125 per share.
During the second quarter of 1996, the Company issued 4,294,770 shares
of common stock upon the conversion of all of the 15% secured
convertible promissory notes then outstanding based on the total
balance of the principal and accrued interest outstanding of $418,740
and the conversion price of $.0975 per share.
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 of Gems and its affiliates.
Upon completion of the offering, the Company issued 9,366,919 shares
of common stock to purchase obligations of Gems and its affiliates
with an aggregate principal balance of $1,463,581, and canceled the
obligations in exchange for an equivalent reduction in the principal
balance of the 8% mortgage note payable to Gems (see Note 7).
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 offering was on a best efforts
basis. The Company sold 800,000 shares of common stock and raised
$95,000 before the offering was terminated on September 15, 1996.
F-35
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 10- Stockholders' equity (concluded):
Issuances of common stock (concluded):
During 1996, the Company issued 2,316,000 shares of common stock to
Gems, with an estimated fair value of $361,875, to reduce the balance
of advances payable and 3,716,000 shares of common stock, with an
estimated fair value of $355,437, in exchange for financial consulting
and other services and for the payment of accrued liabilities.
Warrants issued for services:
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. These warrants were returned to the Company in April 1997.
Common stock reserved for issuance:
At December 31, 1996, there were 290,000 shares of common stock
reserved for issuance upon the exercise of the 12.25% convertible
debentures and 7,692,608 shares reserved for issuance upon the
exercise of the 9.5% note payable that was exercised on February 10,
1997 (see Note 7).
F-36
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 11- Subsequent events:
Real estate taxes:
As of December 31, 1996, the Company was delinquent in paying
approximately $50,700 of the required taxes due (including interest)
on the Franklin Mine. Clear Creek County had filed liens on those
taxes in arrears. Certain of the liens were sold under auction in
October 1994.
On April 30, 1997, the Company paid all of the delinquent taxes which
will cause the liens to be removed.
Litigation:
In April 1997, the Company paid $45,000 in full settlement of a case
involving a fee dispute with a former legal counsel to the Company. As
part of the settlement, the plaintiff, among other things, returned
warrants to purchase 500,000 shares of the Company's common stock
which had been issued to him in prior years.
F-37
<PAGE>
Item 8. 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 auditors and
of its intention to retain J.H. Cohn & Company ("J.H. Cohn") as its independent
accountants for year ended December 1995. 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; however, WGL had modified
its reports on the financial statements of the Company 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. The Company thereafter retained J.H.
Cohn & Company to act as their independent auditors in February, 1996.
41
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person; Compliance
with Section 16(a) of the Exchange Act
Name Age Position
- ---- --- --------
J. Terry Anderson 49 Chairman, President
Treasurer, Director
Robert Waligunda 50 Secretary, Director
Robert J. Levin 50 Vice President-Finance
Richard Brannon 47 Vice President-West Coast
Operations
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 manufacturer and marketing of sanitation and water treatment chemicals. Mr.
Anderson has also served as a member of the local advisory 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 the founder and director of
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.
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.
42
<PAGE>
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.
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) and with respect to Mr. Anderson who has not filed an annual
report on Form 5 for fiscal year ended 1995 indicating the acquisition by him of
restricted securities in connection with the Anderson Note.
Item 10. 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 1996.
Item 11. 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)(2) 10,827,577 11.8%
- -----------------------------------
(1) Gems has the sole right to direct the voting or disposition of the
10,827,577 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 Gem's 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) The amount of shares owned by Gems is as of December 31, 1996. As of March
28, 1997, Gems had disposed of 7,200,000 additional shares, leaving 3,627,577 or
4% of the issued outstanding shares of common stock of the Company.
43
<PAGE>
(b) Security Ownership of Management of Common Stock
Name and Amount and Percentage
Address of Nature of of Class
Beneficial Beneficial
Owner Owner
J. Terry Anderson 4,189,660(1) 4.6%
Robert L. Waligunda 192,500(2) .2%
Directors and Executive
Officers as a Group 4,381,660 4.8%
- -----------------------------
1. 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.
2. Includes 30,000 shares pledged as collateral to a non - affiliate individual.
Item 12. Certain Relationships and Related Transactions
In July 1996, Anderson Chemical Company advanced a loan to the Company for
working capital in the amount of $20,000. Such loan was evidenced by a
promissory note bearing interest at 12%. The principal amount and all accrued
and unpaid interest is currently outstanding.
44
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Exhibits
The following documents are filed as exhibits herewith, unless otherwise
specified by an asterisk, and are incorporated herein by this reference:
Exhibit Sequentially
Number Description of Exhibit Numbered Pages
3.1 Amended and First Restated Certificate of
Incorporation filed with the Delaware
Secretary of State on December 4, 1995.
(Incorporated by reference, Annual Report on
Form 10KSB for year ended December 31, 1995)
3.2 Amended and Restated By-Laws of the Company
(Incorporated by reference, Annual Report on
Form 10-K for Year Ended December 31, 1994,
Exhibit 3.2.)
4.1 Form of Indenture dated January 2, 1990
(Incorporated by reference, Registration
Statement on Form S-1, File No. 33-31418,
Exhibit 4.1.)
10.1 Mining Lease and Option to Purchase, dated
November 12, 1976, among Davis I. And Audrey
I. Hayden, husband and wife, and Dorothy L.
Kennec, a single woman and trustee for her
children, and Gold Developers and Producers
Incorporated (Incorporated by reference,
Registration Statement on Form S-1, File No.
33-31418, Exhibit 10.1.)
10.2 Indenture, dated August 2, 1982, by and
between the Company and David I. and Dorothy
I. Hayden. (Incorporated by reference,
Registration Statement on Form S-1, File No.
33-31418, Exhibit 10.2.)
45
<PAGE>
10.3 Agreement, dated August 2, 1982, by and
between the Company and David I. and Audrey
I. Hayden. (Incorporated by reference,
Registration Statement on Form S-1, File. No.
33-31418, Exhibit 10.3)
10.4 Loan Agreement, dated May 18, 1992, by and
between the Company and various Lenders.
(Incorporated by reference, current Report on
Form 8-K dated July 19, 1993, File No.
0-9416, Exhibit (d).)
10.5 Zeus Joint Venture Agreement, dated February
26, 1993 between the company and Island
Investment Co. (Incorporated by reference,
Current Report on Form 8-K dated July 19,
1993, File No. 0-9416, Exhibit (a) filed as
exhibit to Schedule 13D filed by Gems &
Minerals Corp.)
10.6 Amended Loan Agreement, dated as of July 15,
1993, by and between the Company and various
Lenders. (Incorporated by reference, Current
Report on Form 8-K dated July 19, 1993, File
No. 0-9416, Exhibit (c).)
10.7 Scheduled 13D filed with the Commission on
July 23, 1993 by Gems & Minerals Corp.
(Incorporated by reference, Current Report on
Form 8-K dated July 19, 1993, File No.
0-9416, Exhibit (a), filed with exhibits (I)
February 26, 1993 Zeus Joint Venture
Agreement and (ii) various Exchange
Agreements between Gems & Minerals Corp. and
Anthony DiMatteo, Cheryl Peterson, John
DiMatteo and Joseph DiMatteo).
10.8 Amendment to Zeus Joint Venture Agreement,
dated as of August 31, 1993, by and between
the Company and Island Investment Co. and
Gems & Minerals Corp. (Incorporated by
reference, Current Report on Form 8-K, dated
August 31, 1993, File No. 0-9416, Exhibit
(a).)
10.9 Exchange Letter Agreement, dated June 27,
1994, by and between the Company and Island
Investment Corp. and Gems and Minerals Corp.
(Incorporated by reference, Current Report on
Form 8-K, dated June 27, 1994, File No.
0-9416, Exhibit B.)
46
<PAGE>
10.10 Purchase Agreement, dated November 22, 1994,
by and between Gems & Minerals Corp. and
Audrey I. Hayden regarding certain portions
of the Hayden/Kennec Leases (Incorporated by
reference, Annual Report on Form 10-K for
Year Ended December 31, 1994, Exhibit 10.10.)
10.11 Binding Exchange Letter Agreement, dated as
of December 14, 1994, by and between the
Company and Island Investment Corp. and Gems
& Minerals Corp (Incorporated by reference,
Annual Report on Form 10-K for Year Ended
December 31, 1994, Exhibit 10.11.)
10.12 Standard Drilling Contract, dated December
15, 1994, by and between the Company and
American Mine Services Inc. (Incorporated by
reference, Annual Report on Form 10-K for
Year Ended December 31, 1994, Exhibit 10.12.)
10.13 Schedule 13D filed with the Commission on
March 20, 1995 by Gems & Minerals Corp.
(Incorporated by reference, Current Report on
Form 8-K dated March 20, 1995, File No.
0-9416, Exhibit (b).)
10.14 Amendment, dated August 24, 1995, to the
Binding Share Agreement, dated December 14,
1994. (Incorporated by reference, Current
Report on Form 8-K dated August 24, 1995,
File No. 0-9416, Exhibit B.)
10.15 Settlement Agreement, dated September 27,
1996, by and among the Company, Gems &
Minerals Corp and Island Investment Corp.
(Incorporated by reference, Current Report on
Form 8-K dated September 27, 1995, File No.
0-9416, Exhibit A.)
10.16 Agreement, dated September 26, 1995, among
the Company, Bruce R. Anderson, J Terry
Anderson, Leif E. Anderson, Lindsay A.
Anderson and Carlo Sgrizzi regarding
conversion of Anderson Loans ( Incorporated
by reference, Current Report on Form 8-K
dated September 27, 1995, File No. 0-9416,
Exhibit B.)
10.17 Schedule 13D filed with the Commission on
December 28, 1995 by Gems & Minerals Corp.,
Island Investment Corp. and Whitey Bear
Trust, as a group. (Incorporated by
reference, Current Report on Form 8-K dated
December 26, 1995, File No. 0-9416, Exhibit
B)
47
<PAGE>
*10.18 Assignment of the contract dated February 1,
1996, by and between Newmineco, LLC and
Durango Metals, Inc., by Newmineco, LLC to
the Zeus Joint Venture.
*10.19 Novation Agreement, dated March 18, 1996,
between Charles R. Rugg (and Cindy McCullum,
McCullum being the Lessor/Optioner as to the
Mascott Lode Claim only), original party and
Durango Metals, Inc., discharged partly, and
Island Investment Corporation, substantial
party.
*10.20 Mining Lease, dated March 18, 1996 between
Island Investment Corp. and Charles R. Rugg
and Cindy McCullum (McCullum being the
Lessor/Optioner as to the Mascott Lode claim
only.
*10.21 Letter of Intent, date June 5, 1996, by and
between the Company and Gems & Minerals Corp.
10.22 Deed of Trust, dated July 3, 1996, between
the Company and Colina Oro Molina, Inc.
(Incorporated by reference, Quarterly Report
on Form 10-QSB for Quarter Ended June 30,
1996, Exhibit B).
10.23 Memorandum of Understanding, dated July 3,
1996, between the Company and Colina Oro
Molina, Inc. (Incorporated by reference,
Quarterly Report on Form 10-QSB for Quarter
Ended June 30, 1996, Exhibit B)
10.25 Deed, dated July 3, 1996, between Colina Oro
Molina, Inc. and the Company. (Incorporated
by reference, Quarterly Report on Form
10-QSB, for the Quarter Ended June 30, 1996,
Exhibit B)
10.24 Promissory Note, dated July 3, 1996, by the
Company in favor of Colina Oro Molina, Inc.
in the amount of $2,500,000 (Incorporated by
reference, Quarterly Report on Form 10-QSB
for Quarter Ended June 30, 1996, Exhibit B)
*10.26 Promissory Note, dated July 6, 1996 by the
Company in favor of Anderson Chemical Co. in
the aggregate principal amount of $20,000.
48
<PAGE>
*10.27 Amendment No. 1 to Schedule 13D, dated July
10, 1996, filed with the Commission by Gems &
Minerals Corp., Island Investment Corp. and
Whitey Bear Trust, as a Group.
*10.28 First Amendment to the Joint Venture
Agreement of Zeus No. 1 Investments, a
California general partnership, dated August
15, 1996.
*10.29 Letter Agreement, dated September 5, 1996, by
and between Mrs. Audrey I. Hayden and Gems &
Minerals Corp.; Letter Agreement dated
September 12, 1996, by and between Mrs.
Audrey I. Hayden and the Company.
10.30 Assignment, dated September 26, 1996, by Gems
& Minerals Corp. in favor of the Company
(incorporated by reference, Quarterly Report
on Form 10-QSB for Quarter Ended September
30, 1996, Exhibit A)
10.31 Secured Promissory Note, dated September 26,
1996, by the Company in favor of Gems &
Minerals Corp. in the principal amount of
$600,000 (Incorporated by reference,
Quarterly Report on Form 10-QSB, for the
Quarter Ended September 30, 1996, Exhibit B)
*10.32 Amendment dated November 19, 1996, mining
lease and Option to Purchase, dated November
12, 1996, between the Company and Mrs.
Dorothy Kennec.
*10.33 Amendment No. 2 to Schedule 13D, dated
December 26, 1996, filed with the Commission
by Gems & Minerals Corp., Island Investment
Corp and Whitey Bear Trust as a group.
13 Proxy Statement to Stockholders of the
Company for the fiscal year ended December
31, 1994 . Except for those portions of such
Proxy Statement to Stockholders, expressly
incorporated by reference into this Report,
such Annual Report to Stockholders is solely
for the information of the Securities and
Exchange Commission and Shall not be deemed a
"filed" document. (Incorporated by reference,
Annual Report on Form 10-KSB for Year Ended
December 31, 1995)
49
<PAGE>
24.1 Consent of Gifford A. Dieterle, dated June 3,
1994, as an Expert with respect to the
geological reports dated December 7, 1993,
and May 16, 1994 filed as supplemental
information with the Company's Annual Report
on Form 10-K for the year ended December 31,
1994. (Incorporated by reference, Annual
Report on Form 10-K for Year Ended December
31, 1993, File No. 0-9416, Exhibit 23.)
28.1 Maps and Geological Reports prepared by
consultant Gifford A. Dieterle dated December
7, 1993 and May 16, 1994. (Incorporated by
reference, Annual Report on Form 10-K for
Year Ended December 31 1993, File No. 0-9416,
Exhibit 23.)
28.3 Letter from Messrs., Bruce, Terry, Leif and
Lindsay Anderson dated June 2, 1994 waiving
defaults under certain promissory notes.
(Incorporated by reference, Annual Report on
Form 10-K for Year Ended December 31, 1993,
File No. 0-9416, Exhibit 23.)
28.4 Letter from Gems & Minerals Corp. dated June
4, 1994 amending Zeus Joint Venture Agreement
regarding waiver of joint venture defaults.
(Incorporated by reference, Annual Report on
Form 10-K for Year Ended December 31, 1993,
File No. 0-9416, Exhibit 23.)
28.5 Letter from Gems & Minerals Corp. dated March
27, 1995 amending Zeus Joint Venture
Agreement regarding waiver of joint venture
defaults and extending the upset date and
promissory note due date.(Incorporated by
reference, Annual Report on Form 10-K for
Year Ended December 31, 1994, File No.
0-9416, Exhibit 28.5.)
28.6 Letter from Messrs., Bruce, Terry, Leif and
Lindsay Anderson dated March 27, 1995 waiving
defaults under certain promissory notes and
extending due dates on such notes to
September 30, 1995 (Incorporated by
reference, Annual Report on Form 10-K for
Year Ended December 31, 1994, File No.
0-9416, Exhibit 28.6.)
28.7 Letter from Anderson Chemical Company dated
March 27, 1995 waiving defaults under certain
promissory notes and extending due date on
such notes to September 30, 1995.
(Incorporated by reference, Annual Report on
Form 10-K for Year Ended December 31, 1994,
File No. 0-9416, Exhibit 28.6.)
50
<PAGE>
- -------------
* Filed herewith
Reports on Form 8-K
Current Report on Form 8K, dated February 5, 1996.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
FRANKLIN CONSOLIDATED MINING CO. , INC.
May 1, 1997 By:/s/ J. Terry Anderson
----------------------
J. Terry Anderson, Chairman, President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ J. Terry Anderson Director/Chairman, President May 1, 1997
- ----------------------- and Treasurer
J. Terry Anderson
/s/ Robert Waligunda Director/Secretary May 1, 1997
- -----------------------
Robert Waligunda
/s/ Robert Levin Vice President-Finance May 1, 1997
- -----------------------
Robert Levin
/s/ Richard Brannon Vice President-West Coast May 1, 1997
- ----------------------- Operations
Richard Brannon
52
ASSIGNMENT
Newmineco LLC, ("Assignor"), a Colorado limited liability company, for
good and valuable consideration, hereby assigns and transfers to Zeus No.1
Investments, a California general partnership, ("Assignee") all of Assignor's
right, title and interests in and unto the Contract dated February 1, 1996, by
and between Assignor and Durango Metals, Inc. a copy of which is attached
hereto.
NEWMINECO LLC
By/s/ Paul Moran
------------------------------
Paul Moran, Manager
02-01-96
-------------------------------
Date
<PAGE>
CONTRACT
This Agreement between Durango Metals, Inc. ("Durango") and Newmineco LLC
("LLC") is made this 1st day of February, 1996.
WHEREAS, Durango is a Nevada corporation, duly authorized to conduct
business in Colorado, as shown by the copy of the Articles of Incorporation
thereof, attached as Exhibit 1 hereto; and
WHEREAS, Durango is Lessee under three leases with three different Lessors
relating to the so-called "Mogul Mine," those leases being the "Wood" lease,
dated October 24, 1995, between Jane A. Wood and Thames Edwin Hartley; the
so-called "Rugg" lease, dated November 9, 1992, between Charles R. Rugg and
Thames Edwin Hartley; and the so-called "Sutton" lease, dated January 31, 1995,
between David C. Sutton, et al., and Thames Edwin Hartley, and the properties
leased to Durango under said leases are hereinafter collectively referred to as
the "Mogul Mine;" and
WHEREAS, the Wood lease runs for a term of ten years from October 24, 1995;
the Rugg lease runs for a term of ten years from November 9, 1992; and the
Sutton lease runs for a term of twenty years from January 31, 1995; and
NOW, THEREFORE, in consideration of the covenants of the parties herein
contained and for other good and valuable consideration, the receipt and
adequacy whereof are hereby expressly acknowledged, the parties agree as
follows:
1. Exclusive Rights to Ores. Durango hereby grants to LLC the exclusive,
assignable right, but not the obligation, to receive all ores mined for the
terms of the said Wood, Rugg and Sutton leases, and for any renewal term of each
and every of the said three leases.
2. Mining Contract. LLC has the assignable right to employ Durango as the
miner for any one or all of each of the said three leases of the Mogul Mine, in
exchange for the fee/cost agreement for payment of actual mining costs plus 10
percent, calculated as set forth in the formula attached as Exhibit A hereto.
3. Ore Transport. At the request of LLC, Durango shall arrange for the
transport of any and all ores from the Mogul Mine to the milling facility for
such ore as directed by LLC, and the costs of such ore transport shall be
considered a cost of mining as set forth in paragraph 2 immediately above.
4. Durango Permits for Mining. Durango, through its president, Thames Edwin
Hartley, represents and warrants that:
a) He is the duly authorized representative of Durango with full and
complete authority to enter into this Agreement on behalf of Durango;
<PAGE>
b) Durango has a prospector permit to mine the said ores of the Mogul Mine,
authorizing mining of certain tonnage from the said Mogul Mine as set forth in
attached Exhibit B;
c) It has filed an application for mining permit with the Division of Mines
and Geology of the State of Colorado, which is pending as of the date of this
Agreement, and that as of the date of this Agreement Hartley is not aware of any
grounds upon which the said Division would deny the said application for mining
permit, and further, that said application will be completed and granted to
Durango on or before May 1, 1996;
d) It is in compliance with any and all applicable state and county
requirements including zoning requirements, with respect to the said Mogul Mine
and with respect to the transfer of any ores from the said Mogul Mine to any
milling facility to be designated by LLC or its successors and/or assigns.
5. Profit Interest. Durango hereby grants LLC, during the terms of said
leases, a 10 percent profit interest in net smelter returns received from the
smelting of ores from the Mogul Mine.
6. Financing. LLC agrees, during the terms of said lesases, to finance
Durango in the mining of said ore from the Mogul Mine, and further, agrees to
pay off indebtedness to Durango in the approximate amount of $370,000.00.
7. Complete Agreement. This Agreement is the full and complete Agreement of
the parties with respect to the subject matter hereof, and supersedes any and
all prior agreements or understandings, whether written or otherwise, between
the parties hereto with respect to the subject matter hereof.
8. Venue and Choice of Law. This Agreement is enforceable in the District
Courts of the State of Colorado and shall be governed by Colorado law.
2
<PAGE>
AGREED TO THE DATE FIRST ABOVE WRITTEN:
NEWMINECO LLC
By /s/ Paul Moran
----------------------------
Paul Moran, Manager
STATE OF COLORADO )
)SS:
COUNTY OF JEFFERSON )
Subscribed and sworn to before me this 1st day of February, 1996, by
Paul Moran.
/s/Lori H. Hilton
------------------------
Notary Public
My commission expires: 7/27/97
DURANGO METALS, INC.
By /s/ Thames Edwin Hartley
----------------------------------
Thames Edwin Hartley, President
STATE OF COLORADO )
)SS:
COUNTY OF Jefferson )
Subscribed and sworn to before me this 1st day of February, 1996, by
Thames Edwin Hartley
/s/Lori H. Hilton
------------------------
Notary Public
My commission expires: 7/27/99
3
NOVATION AGREEMENT
Agreement made March 18, 1996, between Charles R. Rugg (and Cindy McCollum,
McCollum being the Lessor/Optionor as to the Mascott Lode claim only)
(collectively "Rugg"), original party, and Durango Metals, Inc. ("Durango"),
discharged party, and Island Investment Corporation ("Island"), substituted
party.
The parties stipulate and recite that:
Rugg and Durango entered into a contract referred to as
the "original mining lease" on November 9, 1992, that
provided that Rugg would be Lessor and that Durango
would be Lessee under the mining lease with certain
obligations to Rugg under the terms of the said
original mining lease.
Durango desires to be discharged from the performance
of the obligations enumerated in the original mining
lease.
Rugg desires to release Durango from obligations as
described in the original mining lease provided that
Island agrees to perform the obligations and to be
bound by the terms of the said original mining lease.
For the reasons recited above, and in consideration of the mutual covenants
contained herein, the parties agree as follows:
1. Island shall perform the obligations of Durango that
are enumerated under the original mining lease, and
Island agrees to be bound by all the terms of the
original mining lease in every way as if an original
party thereto.
2. Rugg hereby releases Durango from all claims for any
liability that has arisen or may have arisen in respect
to the original mining lease. Rugg accepts the
liability of Island in lieu of the liability of
Durango. Rugg shall be bound by the terms of the
original mining lease in every way as if Island was
named in the original mining lease in place of Durango
as a party thereto.
3. This Agreement supersedes the original mining lease
entered into by Rugg and Durango, and all the rights
and obligations under the original mining lease are
completely extinguished. A copy of the original mining
lease is attached and incorporated by reference to
define the extent of the liability of Island under this
Agreement.
4. This Agreement has been executed in triplicate, and all
parties to this Agreement have received a signed copy
of it.
5. Rugg, Durango, and Island consent to all the provisions
of this Agreement.
<PAGE>
6. Rugg and Island agree that upon execution of this
Novation Agreement they will then promptly execute a
lease to discharge and supersede the original mining
lease referred to as the New Mining Lease for a new
ten-year term plus options, which New Lease is attached
and incorporated by reference to define the entire new
lease relationship between them.
IN WITNESS WHEREOF, the parties have executed this Agreement in Golden,
Colorado, the day and year first above written.
CHARLES R. RUGG DURANGO METALS, INC
Lessor Discharged Party/Original Lessee
By /s/ Charles R. Rugg By /s/ Thames E. Hartley
- -------------------------------- -------------------------------
Charles R. Rugg Thames E. Hartley President
555 Huron Avenue 4571 Ashfield Drive
Eldora Colorado 80466 Boulder, Colorado 80301
CINDY McCOLLUM ISLAND INVESTMENT CORPORATION
By /s/ Cindy McCollum By /S/Curtis Berhardt
- --------------------------------------- -------------------------------
Cindy McCollum Curtis Bernhardt, President
P.O. Box 790 1717 Washington Avenue
Nederland, Co. 80466 Golden, Colorado 80401
VERIFICATION
On this 18th day of March, 1996, before me appeared Charles R. Rugg known
to me to be Charles R. Rugg, who executed the above and foregoing Novation
Agreement of his voluntary and free act.
Subscribed and sworn to before me this 18th day of March, 1996, by Charles
R. Rugg.
/s/Doris F. Drager
--------------------------------
Notary Public
My commission expires: August 30, 1999
2
My commission expires: August 30, 1999
3
<PAGE>
VERIFICATION
On this 18th day of March, 1996, before me appeared Thames E. Hartley,
President of Durango Metals Inc., known to me to be Thames E. Hartley, President
of the said firm, who executed the above and foregoing Novation Agreement on
behalf of Durango Metals, Inc. as his voluntary and free act.
Subscribed and sworn to before me this 18th day of March,
1996, by Thames E. Hartley.
/s/Doris F. Drager
------------------------
Notary Public
My commission expires August 30, 1999.
VERIFICATION
On this 18th day of March, 1996, before me appeared Cindy McCollum, known
to me to be Cindy McCollum, who executed the above and foregoing Novation
Agreement of his voluntary and free act.
Subscribed and sworn to before me this 18th day of March, 1996, by Cindy
McCullum.
/s/Doris F. Drager
-------------------------
Notary Public
My commission expires August 30, 1999.
VERIFICATION
On this 18th day of March, 1996, before me appeared Curtis Bernhardt,
President of Island Investment Corporation, known to me to Curtis Bernhardt,
President of the said firm, who executed the above and foregoing Novation
Agreement of his voluntary and free act.
Subscribed and sworn to before me this 18th day of March, 1996, by Curtis
Bernhardt.
/s/Doris F. Drager
-------------------------
Notary Public
My commission expires August 30, 1999.
Mining Lease
THIS MINING LEASE (hereinafter referred to as the "Agreement") is made
effective this 18th day of March, 1996 (hereinafter referred to as the
"Effective Date") between Island Investment Corp., a Nevada corporation
qualified to conduct business in the State of Colorado, or its nominee, whose
address is 1717 [Illegible] (Island or its nominee hereinafter referred to as
"lsland") and Charles R. Rugg and Cindy McCollum (McCollum being the
Lessor/optionor as to the Mascott Lode claim only), whose address is P.O. Box
790, Nederland, Colorado 80466 (hereinafter referred to as "Rugg").
Recitals
Rugg owns certain patented lode mining claims and other interests in
property situated in Boulder County, Colorado, (the "Property") which claims and
interest are more fully described in Exhibit A to this Agreement. Island desires
to lease the Property from Rugg, and Rugg is willing to lease the Property to
Island, on the terms and conditions herein specified.
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sufficiency of which are hereby acknowledged, the parties agree
as follows:
<PAGE>
"Anniversary Date" shall mean March 18th occurring in each year
subsequent to the effective date of this Agreement, so long as this Agreement
shall continue in force and effect. "Monthly Anniversary Date" shall mean the
18th day of each Lease Month.
"Lease Year" shall mean the twelve (12) month period of time commencing
upon the effective date of the Agreement or annually thereafter on the
Anniversary Date thereof, as the case may be, and continuing through the last
day prior to the next occurring Anniversary Date.
"Minerals" shall mean any and all minerals, or materials of every kind and
character whatsoever, except oil, gas and associated liquid or gaseous
hydrocarbons, whether surface or sub-surface in, upon, under or which may be
produced from the Property.
"In Operation" shall mean that exploration, development, mining, milling
or processing operations are occurring on the leased property or properties
accessed by or through that structure known as the Mogul Tunnel, being all
workings accessed through the Mogul Tunnel Portal, or other structures located
or to be located on the leased ground. The word "occurring" as used in this
section shall mean any month in which ore or waste materials are taken from the
leased properties or through the Mogul Tunnel.
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1. Grant of Lease. Subject to the reservations, exceptions,
exclusions, limitations, conditions, and other provisions contained in this
Agreement, Rugg hereby grants and leases exclusively to Island, its successors
and assigns, all rights (including but not limited to the rights set forth
below in this Section 1), titles, interests, and estates now owned or hereafter
acquired by Rugg in and to the Property for the purpose of exploring,
developing, working, mining, milling, beneficiating, concentrating, extracting,
leaching, treating, smelting, refining, storing, removing, transporting, and
selling or otherwise disposing of any and all minerals situated on, in, or under
the Property or other lands, to have and to hold for the term set forth in
Section 27 below.
The grant made in this Section 1 includes, but is not limited to, the
rights to:
a. explore for, develop, work, mine, mill, beneficiate,
concentrate, extract, leach, treat, smelt, refine, store, remove, transport, and
sell or otherwise dispose of all minerals collectively referred to as "work"
situated on, in, or under the Property, and including minerals contained in
existing dumps or stockpiles on or in the Property, performing such work in any
manner deemed necessary or convenient by Lessee;
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b. mine the Property by such methods and in such manner as
Island shall elect, including but not limited to stripping, open-cut, open-pit,
pit, shaft, underground, block caving, solution, or other methods heretofore
known or hereafter developed, including the right to store or to dispose of
minerals, water, waste, or other materials, whether produced from the Property
or other lands, on or in the Property, in accord with laws and regulations
governing such activities;
c. place and use excavations, openings, shafts, ditches,
flumes and drains on or below the surface of the Property, and to construct,
erect, install, maintain, repair, use, replace, or remove roads, haulageways,
buildings, structures, machinery, equipment, and facilities of any nature
whatsoever, both on or below the surface of the Property as necessary or
desirable to effectuate the purposes hereof, including, but not limited to
roads, haulageways, trackage, conveyors, pipelines, crushers, mills,
concentrators, leach pads, treatment facilities, smelters, refineries, and other
processing facilities, water, fuel, power, and communications facilities,
storage facilities, stockpiles, waste piles, tailings ponds, settling ponds,
dams, sump pits, flumes and sluices, loading and shipment facilities, offices
for the conduct of operations hereunder, residences for persons employed in the
accomplishment of the purposes hereof, and other ancillary and support
facilities as may be
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allowed by law and regulation, and use of all water and water rights owned by
Lessor and appurtenant to the Property if the same exist;
d. occupy and use the Property as described in this Section 1
in connection with or in support of operations conducted by Island on lands
other than the Property, including other patented and unpatented lands whether
or not adjacent or contiguous;
e. reclaim the Property in conformance with the provisions of
this Agreement;
f. take any and all other actions which are deemed by Island
to be necessary or desirable in connection with or in support of operations
under this Agreement; and
g. to utilize any and all rights of Rugg in and to the Mogul
Tunnel and Mogul Tunnel portal area and/or the Swarthmore Tunnel and Swarthmore
Tunnel portal area as may have been acquired by Rugg by deed, quiet title action
or adverse usage and occupancy, and as listed in Exhibit A, the "Property."
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2. Surface Uses Reserved. Rugg reserves the right to enter the
surface of the granted property for the purpose of hiking and horseback riding,
including specifically the right of Cindy McCollum or her assigns to lead
commercial or personal trail rides on Spencer Mountain outside of the area of
actual mining operations which might present a mining safety hazard to man or
horse. Such reserved rights shall be in addition to the right of inspection
reserved herein, and such reserved rights shall terminate upon exercise and
closing of the purchase option granted herein.
3. Mining Rights and Access. During the term this Agreement is in
effect, Island shall have free and unrestricted access to the Property and shall
have the exclusive right (subject only to Rugg's rights as reserved herein) to
enter upon and occupy the Property for all purposes reasonably incident to
exploring for, developing, mining (by underground mining, surface mining or any
other method, including any method hereafter developed), extracting, milling,
stockpiling, storing, processing, removing and marketing therefrom all ores,
minerals and materials of every nature or sort (which ores, minerals and
materials are herein designated as Mineral Substances"), including the right of
placing, constructing, maintaining, using and, thereafter, removing such
structures, facilities, equipment, roadways, haulageways and other improvements
as may be necessary, useful or convenient for the full enjoyment
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of all of the rights granted to Island herein. Island shall also have such
rights with regard to the cross-mining rights granted in Section 4 below.
4. Cross Mining. Island is further granted the exclusive right of
producing, depositing, treating, stockpiling or transporting Minerals in and
upon the Property and of mining ores, minerals, materials, waste and overburden
from the Property or from other lands and the right of mining and removing of
such Minerals from the Property or from other lands through or by means of
shafts, openings or pits which may be made in or upon adjoining or nearby
property. Island's operations hereunder, and its mining of adjoining or nearby
lands, may be conducted upon the Property and upon such other lands as a single
mining operation to the same extent as if the Property and all such other
properties constituted a single tract of land. The cross mining rights granted
herein shall specifically include the right to utilize the Mogul Tunnel and the
Mogul Tunnel portal area, together with any and all Interest of Rugg in and to
the Swarthmore Tunnel or portal area, and all workings now or in the future
accessible through the Mogul Tunnel, subject to termination or continuation as
hereinafter provided.
5. Commingling. Commingling of ores from the Mogul Tunnel with ores
extracted by means of exercise of the cross mining rights, or other
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ores of Island or any other entity, shall not be allowed absent a signed written
agreement between the parties establishing an agreed method for measuring,
sampling and weighing the ores prior to commingling.
5. Representations and Warranties. Rugg makes the following
representations and warranties effective the date hereof:
a. With respect to any portion of the Property listed in
Exhibit A comprised of fee land or patented mining claims, Rugg represents and
warrants that Rugg is the sole owner and has the exclusive possession thereof,
and has good and merchantable title to such property, including the surface and
mineral estates, free and clear of all claims, liens, title defects or
encumbrances, subject only to those matters specifically set forth in Exhibit A,
if any, or as specifically limited below. "Free and clear of all claims, liens,
and title defects" as used in this sub-section, and as the same governs Rugg's
obligation to defend title, shall be limited to such claims or title defects
which are material in nature, meaning those having the ability to substantially
impair Rugg's ability to deliver title to Island or to impair Island's ability
to conduct mining operations hereunder free of the claims of others which would
impair the ability to mine or to take possession of minerals mined. Rugg makes
no warranty or representation as to any liens or encurnbrances created by or
through Thames
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Hartley or Durango Metals, Inc., whether choate or inchoate: Rugg makes no
warranty with regard to any claims by others of extralateral rights in the
Property which might in the future be asserted, and makes no warranty with
regard to the Mascott lode claim, this to which was acquired in 1995.
Rugg represents that he has the lawful right to lease the
property and will defend at his own expense (except as may be limited or
otherwise agreed herein) such title and peaceable enjoyment by Island of the
estate granted herein, against all claims which might be asserted which would or
could substantially impair the ability of Island to explore, develop or mine the
Property, or to take possession of minerals mined from the Property.
b. Within ten (10) days after the execution hereof, Rugg shall
deliver to island all title information in Rugg's possession. Within one hundred
and twenty (120) days after the execution hereof, Rugg shall deliver to Island
a lessee's title insurance policy in the name of Island in the amount of $1.5
million, if such coverage is available through Commonwealth Land Title Insurance
Company or other regular commercial sources within Boulder County, Colorado. If
such coverage is unavailable the parties shall obtain such a title insurance
policy from some other agreed source. Prior to paying the policy
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premium thereon, Rugg shall deliver a copy of the title commitment to Island for
examination ("title commitment delivery").
If Island finds that there are material or substantial defects
which would impair its ability to explore, develop and mine the Property, its
remedies in addition to any other legal or equitable rights it may have to cure
title defects in its own steed and/or its own name shall be as follows:
a. To request Rugg cure those defects of title which might be
curable without legal action; and/or
b. To request Rugg to file a quiet title suit to eliminate
material and substantial defects to the title to which a claim to cure may
exist, the costs and expenses of such quiet title suit (including attorney fees)
to be advanced by Island, with all of such costs advanced subject to offset
against the Purchase Price in the event of the exercise of the Purchase Option
granted herein: and/or
c. To propose to Rugg an equitable adjustment of any and all
terms in this Agreement, and if the parties fail to agree to such equitable
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adjustment, than Island shall have the option to elect to terminate this
Agreement subject only to any accrued obligations hereunder, including any
obligation to make Guaranteed Payments, the monthly payments, and its other
accrued obligations, specifically including the reclamation obligation.
The parties specifically state and agree that Rugg and his
family predecessors have controlled the Property (except the Mascott Lode claim)
for such an extensive period of time, and paid property taxes for such an
extensive period of time, that in all likelihood material and substantial
defects, if any, would be curable by quiet title action. If Island is continues
to be dissatisfied with the Rugg title after the conclusion of any quiet title
action, it may elect to terminate this Agreement pursuant to option C above.
d. There are no pending or threatened actions, suits, claims
or proceedings with respect to the Property, other than that certain lawsuit
entitled Durango v. Rugg (Case No. 94 CV 1470, Boulder District Court) which
lawsuit the parties have this day stipulated to dismiss with prejudice.
Said litigation concerned, inter alia, a certain predecessor
lease from Rugg to Durango Metals, Inc. of 31 of the patented
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<PAGE>
claims included in the Property, which lease has been terminated pursuant to a
certain "Novation Agreement" attached hereto as Exhibit B.
7. Title Defects. In the event of adverse claim or claims or defects
of title affecting all or a portion of the Property, Island may, all at its own
expense, take immediate steps to defend against such claim or claims until such
adverse claim or claims is or are judicially or otherwise fully settled and
determined or such defects are otherwise cured, in which effort Rugg shall
cooperate fully, Island may, without affecting Rugg's obligations under the
preceding sentence, at Island's sole election, take steps to cure such defects.
Island will advise and consult with Rugg with regard to steps it may propose to
take to cure any title defect, including, but not limited to, bringing a quiet
title suit, if necessary, in the name of Rugg and/or Island.
8. Lesser Interest. It Rugg owns a lesser interest in the Property,
or any part thereof, than the entire and undivided fee simple estate, then the
Guaranteed Payments, payments of Production Royalty and other consideration
herein provided for shall be paid Rugg only in the manner in which it is
equitably adjusted, which may include payment only in the proportion which its
interest bears to the whole and undivided fee simple estate in the Property.
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There shall be no reduction in the amount of production
royalty paid unless Rugg has a lesser interest in the particular claim from
which ores or Minerals were produced. The parties agree that the Purchase Price
stated in the Option to Purchase shall not be proportionately reduced in
consideration of the one hundred and twenty (120) day title examination period
provided for, and the fact that the Purchase Price has not been made the subject
of a inflation adjustment during the Lease Term.
9. Use of Water. Island shall have the right to use, in operations
hereunder, any and all wells, ditches, drains, and reservoirs on or presently
serving the Property, and may use the water and water rights on and appurtenant
to the Property to the same extent as Rugg might do, or has the legal, equitable
or other right or opportunity, to do. Island may construct and maintain water
lines and water systems useful in its operations anywhere upon the Property.
Rugg makes no representation that water rights exist which are appurtenant to
the Property.
10. Operations
a. During the term of this Agreement. Island shall have free
and unrestricted access to the Property, for purposes granted in this Agreement
or specified in Section 1.
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<PAGE>
b. Island shall conduct all operations on the Property in a
good and minerlike manner and in accordance with generally accepted industry
practices as understood by Island. All decisions with respect to exploration,
development, and mining of the Property and the selling of ores, minerals,
concentrates, or other products from the ores, minerals, concentrates, or other
products from the Property, including all decisions regarding the commencement,
suspension, resumption, or termination of any operations, shall be made by
Island in its sole discretion. Island may sell ores, minerals, concentrates, or
other products, and may stockpile ores, minerals, concentrates or other products
for any length of time before selling the same. There are no covenants or
agreements regarding these matters other than those expressly set forth herein,
subject only to the obligation to continue making monthly payments and or
Guaranteed Payments as provided for herein.
c. Island shall substantially comply with all applicable laws
and regulations governing its operations on the Property, and in effect as of
the execution date of this Lease Agreement, specifically including the Colorado
workmen's compensation law, if applicable, and reclamation and water quality
laws. If this Agreement is inconsistent with or contrary to any such law or
regulation, the law or regulation shall control and this Agreement shall be
deemed to be modified accordingly. Island shall keep Rugg advised on
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<PAGE>
a regular basis of its efforts to obtain permits for the Property, and to
address compliance issues, if any, as they arise, or with respect to any new or
revised or reissued law or regulation or binding interpretation of any existing
law or regulation in a manner which changes or modifies the same, and its
efforts to address such new law or regulation, and to continue lease operations.
d. As a special operational covenant, the panics agree that
Thames Hartley and J. Wayne Tatman shall not be entrusted with or perform
operational responsibilities or tasks at or within the Mogul Mine. Island
further agrees that it shell not attempt to circumvent this special covenant by
contract, agreement, the creation of new business entities or any form of
subterfuge. Rugg agrees that Thames Hartley may function at the Mine in an
advisory role for the first ninety (90) days after the execution hereof, which
period shall be known as the "transition period," but not thereafter. After the
transition period, Hartley and/or Tatman shall have no operational
responsibilities at the Mogul Mine site.
11. Governmental Approvals.
Island shall be solely responsible for obtaining any and all
licenses, permits, and other approvals required by any federal, state, or local
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governmental entity which are applicable to operations under this Agreement;
provided, however, that (a) Rugg in good faith shall give such consents to
Island's proposed operations as may be required before a governmental entity
will issue a license, permit, or other approval to Island and (b) Rugg, when
reasonably requested to do so by island, shall support the proposed operations
of Island and otherwise assist Island in its efforts to obtain approval of its
proposed operations, specifically including approvals required by Boulder
County, or any other unit of any local government. If and when Rugg, at the
request of island, supports the proposed operations of Island or otherwise
assists Island in its efforts to obtain approval of its proposed operations,
Island shall have no obligation to reimburse Rugg for all out-of-pocket costs
incurred by Rugg in so supporting the proposed operations of Island or otherwise
assisting Island in its efforts to obtain approval of its proposed operations,
provided island is in operation under the terms of this Lease or its exercised
option to purchase the Property.
12. No Implied Covenants. The parties expressly agree that no
implied covenant or condition whatsoever shall be read into this Agreement
relating to the exploration, development, mining of the Property or processing
Mineral Substances from the Property or the time therefor, or to any operations
of Island hereunder or to the measure of diligence thereof.
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13. Payment of Taxes and Encumbrances. Island shall pay when due and
before delinquent all taxes required by this Agreement to be paid by Island,
specifically including property taxes for the year 1996 payable in 1997, and
all personal property taxes for equipment or fixtures installed by Island or its
predecessor Lessee upon the Property. Island shall furnish Rugg with receipts or
other evidence of such payments. If at any time during the term of this
Agreement it appears that any one or more third parties may have a claim against
the Property by reason of any tax, mortgage, or other lien (other than back
taxes, mortgages or liens created by the predecessor Lessee, Durango Metals,
Inc. or Thames Hartley, for which Island agrees to be responsible) Island may
pay any past due payments and shall be subrogated to all rights of the holder
against Rugg.
If Island makes any payments to one or more third parties as a
result of any tax, mortgage, or lien, either by way of contract, settlement,
compromise, pursuant to final judgment of any court of record, which item was
created by or otherwise the direct responsibility of Rugg, Island shall recover
from Rugg or from any payments thereafter to become due to Rugg hereunder the
amount of any payment and all costs, expenses (including reasonable attorney
fees), and interest at the prime rate then applicable incurred by Island
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in connection with the tax, mortgage or lien created by or the direct
responsibility of Rugg.
14. Voluntary Termination by Island. Island shall have the
continuing right to terminate this Agreement with respect to all of the Property
at any time without further obligation, except for those obligations which have
accrued as of the date of termination (specifically including the Guaranteed
Payments, the monthly payments, and reclamation and other obligations), and to
relinquish and surrender all of the Property to Rugg, by giving Rugg written
notice thereof. If this Agreement has been terminated with respect to all or a
portion of the Property, Island shall release or quitclaim to Rugg all of its
rights with respect to such terminated interests, as provided in the Section
entitled "Evidence of Release."
The parties specifically agree that upon termination, the
cross-mining rights granted herein, and Mogul Tunnel and portal usage rights,
shall terminate. The development of adjacent or other property pursuant to
exercise of the cross-mining rights hereunder shall not be deemed to create
claims or rights to access that theretofore did not exist, or which came into
existence only pursuant to the exercise of rights under this Agreement, subject
to the following exception to termination:
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In the event that this Agreement remains in effect for a
minimum period of five (5) years, with all payments due thereunder made on a
regular basis, and should this Agreement thereafter be terminated, Island shall
retain a non-exclusive right to pass across or through the leased Property and
to utilize the Mogul Tunnel, Swarthmore Tunnel, and associated workings for
haulage purposes upon a monthly payment to Rugg of a haulage fee of Two Thousand
Dollars ($2,000.00) per month, which haulage fee shall escalate on an annual
basis by One Hundred Twenty-Five Dollars ($125.00) per month, said new monthly
rate to take effect on an annual basis in the month following the annual
anniversary of termination, said charge to be paid to Rugg on a monthly basis
within fifteen (15) days after the monthly anniversary of termination.
"Non-exclusive" as used herein shall mean a right to pass through the Mogul
Tunnel, Swarthmore Tunnel, and associated workings together with Rugg or his
lessees or optionees, if any, including, at the election of Rugg or his
successors, to share the use and maintenance costs of the rail haulage line on a
pro-rata basis tied to usage. This section shall survive termination of this
Agreement if this Agreement remains in effect for a minimum five (5) year
period, and shall terminate upon the failure to make two consecutive monthly
payments of the haulage charge thereafter, or upon the cessation or abandonment
of the use of the Mogul Tunnel.
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15. Termination by Lessor. Failure by Island to perform or comply
with the express terms and provisions of this Lease, including provisions
concerning timeliness of payments, shall not automatically terminate this Lease
or any sublease hereunder, nor render the Lease null an void; but in the case of
such default, Rugg may notify Island in writing specifying the nature and
particulars of such default, and Island shall have a period of ninety (90) days
after receipt of such notice or, if contested by Island, after entry of a final
judgment adverse to Island by a court of competent jurisdiction, in which to
commence efforts to cure such default which shall be diligently pursued in good
faith and, except as otherwise provided herein, if such default shall not have
been cured within such time, Lessor may terminate this Lease, except that with
regard to Island's failure to make a Monthly Payment or Guaranteed Payment when
due, the period for cure after receipt of written notice by Rugg shall be thirty
(30) days.
It shall be deemed that Minerals are being mined and that
Island is in operation and not in default under the terms of this Lease if
mining operations or other required activities are suspended or are prevented or
prohibited by law, ordinance or other governmental regulation, restraint or
court order, by inability to obtain permits or licenses, by scarcity or
inability to obtain equipment, material, power, fuel or favorable market for the
Minerals, by strike.
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lockout or industrial disturbance, by failure of carriers to transport or
furnish facilities for transportation, by operation of force majeure (including,
without limitation, lightening, earthquake, fire, storm, flood, washout), by
breakage or accident to machinery or facilities, or by any cause beyond Island's
control; provided, however, that Island shall exercise reasonable diligence to
resume mining operations. This Section shall not suspend Island's obligation to
make monthly payments or any Guaranteed Payment during periods when Operations
are suspended.
Upon final termination of the Lease, Island shall surrender
possession of the Property to Rugg and shall execute and deliver to Rugg a
recordable written release of all of Island's right, title end interest in this
Lease.
16. Island's Liability Following Termination. Upon termination of
this Agreement, Island shall be under no further liability to Rugg as a result
of Island's activities on the Property or as a result of the terms of this
Agreement from and after the date of such termination, except for liabilities
and obligations to Rugg accrued prior to the date of such termination and
Island's obligations hereunder arising upon termination as a result of
operations upon the Property by Island, but only by reason thereof.
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17. Worker's Compensation and Other Laws. Island shall observe and
comply with all applicable federal and state laws and mine safety regulations
and shall insure and keep insured all persons employed by Island under the
provisions of the Workmen's Compensation Law or equivaIent law of the State in
which the Property is situated.
18. Compliance with Insurance. Island shall procure such insurance,
including comprehensive general liability insurance, on the Property, or on any
portions of the surface and sub-surface which Island is using, as in its sole
judgment is adequate, but in no case less than combined total coverage limits of
$500,000 per person, $1,000,000 per incident for bodily injury, and $1,000,000
for property damage for each incident or accident, to which policy or policies
Rugg shall be a named co-insured, and provided on a regular basis with copies of
a certificate of insurance so stating, beginning no later than twenty (20) days
after the execution hereof.
19. Inspection. Rugg or its authorized agents shall have the right,
on a semi-annual basis during the term of this Agreement (being no more often
than twice during any Lease Year), and after forty-eight (48) hours written
notice, to enter upon and inspect the Property and all underground workings
thereof and structures thereon, and to make any survey Rugg may deem
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necessary, either for the purpose of checking the amount of ore mined or for an
examination of the physical condition of the Property and workings and the
manner and conduct of the mining operations, and for the purpose of taking
samples or specimens of any ore or material produced therefrom. For the purpose
of such semi-annual inspection and sampling, all hoists, ladderways and other
means of ingress and egress shall be open to Rugg or its authorized agents
during all ordinary working hours. Rugg shall also be authorized to enter and to
inspect any areas developed as a result of exercise of the cross-mining rights
granted herein. Rugg and his agents may enter the mine at their own risk, and
Island shall offer its reasonable cooperation in conducting such inspection.
Any additional rights of entry and inspection shall be
dependent upon the existence of a dispute between the parties regarding the
payment of royalty or the operation of the mine pursuant to the terms of this
Agreement. In the event of such dispute, Rugg shall request entry in writing,
and Island shall arrange inspection at such reasonable time(s) as may be
required, and at such places as may be necessary, for the resolution of such
dispute, including, if necessary to such resolution, measuring, surveying or
sampling as Rugg may conduct at its own expense.
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20. Taxes. Rugg shall pay when due all general and ad valorem taxes
levied and assessed against, upon or measured by Advance Royalty or Production
Royalty payments to Rugg. Island shall pay when due all taxes lawfully assessed
and levied against improvements and equipment placed upon the Property by
Island, upon production from the Property except such portions thereof as are
payable for Production Royalty paid to Rugg and upon other rights, property and
operations of Island; provided, however, that nothing contained herein shall
impose upon either party any obligation to pay any taxes levied or assessed
against the other party in the nature of an income tax.
21. Liens. Island shall promptly pay all wages due its workmen and
employees and pay for all materials and supplies furnished for its mining
operations hereunder and shall defend and protect Rugg from and against all
claims, liens and liabilities which may arise as a result of Island's failure
so to do. In the event that any mechanic's, materialmen's or laborer's liens may
arise and are filed against the Property as a result of Island's operations
hereunder, Island shall take reasonable steps to promptly and diligently obtain
the discharge thereof.
22. Indemnity. Island shall indemnify and save harmless Rugg from
and against any and all claims, demands, suits or causes of action in law
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or equity for damages and injuries occurring on or about the Property and
arising solely and directly out of Island's negligence.
23. Guaranteed Payments and Monthly Payments.
a. Guaranteed Payments. Concurrently with the execution of
this Agreement, Island shall pay Rugg the sum of Twenty Five Thousand Dollars
($25,000.00). An additional Twenty Five Thousand Dollars ($25,000) shall be held
in escrow by Island's law firm, and released to Rugg upon the delivery to it by
Rugg of the title commitment. On the third (3rd) monthly anniversary of the
effective date of this Agreement, Island shall pay Rugg the sum of Fifty
Thousand Dollars ($50,000.00), which three initial payments of a total of One
Hundred Thousand Dollars ($100,000) are guaranteed, and which shall not be
terminated or waived by the termination of this Agreement.
If this Agreement is in effect as of the sixth (6th) monthly
anniversary date, or any monthly anniversary date thereafter when the Mogul Mine
is in operation (but no later than the eighteenth monthly anniversary date),
Island shall make an additional payment of Fifty Thousand Dollars ($50,000.00)
to Rugg. Island shall be under no obligation (and Island does not guarantee) to
make this third (3rd) payment of Fifth Thousand Dollars
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($50,OOO.OO) if this Agreement is terminated prior to eighteenth (18th) monthly
anniversary date, having not resumed Operations within the Mogul Mine since
prior to the sixth (6th) monthly anniversary date. Nothing herein shall suspend
the obligation to make Monthly Payments as herein provided while this Agreement
remains in effect.
The parties agree that Rugg shall, from the proceeds of the
first Twenty Five Thousand Dollars ($25,000.00) payment identified above, pay
the chaining charges and search fees associated with preparing the title
commitment provided for in Section 6 above, and shall pay the policy premium of
the Lessee title insurance policy also provided for in such section. In the
event that Island determines that there exist material and substantial defects
in Rugg's title which do or could impair its ability to mine, and which defects
Rugg cannot cure without benefit of a quiet title suit as provided for in
Section 6, Island shall, if Rugg so requests, advance all of the costs and
expenses of such quiet title litigation, with the amount of such advances to be
offset as a credit against the Purchase Price in the event of the exercise of
the Purchase Option.
b. Monthly Payments. Beginning on the effective date hereof, and on
every monthly anniversary date thereafter during the term of this Agreement,
Island shall pay to Rugg the minimum monthly amount ("the
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Minimum Monthly Payment") of Two Thousand Dollars ($2000.00), provided that
during each and every lease month when the Property is in Operation, including
operations on other properties pursued in the exercise of Cross-Mining rights
granted herein, the required payment ("Operating Monthly Payment" in the nature
of Advance Royalty) shall be Five Thousand Dollars ($5000.00). If upon the
monthly anniversary date only the Minimum Monthly Payment was made, and
Operations subsequently commence during Lease month, the remainder (being Three
Thousand Dollars ($3,000.00) of the Operating Monthly Payment shall be remitted
to Rugg within ten (10) business days after such commencement.
The Operating Monthly Payment shall be paid to Rugg in months
when Operations are conducted on other properties pursuant to the Cross Mining
rights herein granted. The applicability of the Operating Monthly Payment to
operations conducted on other or adjacent properties through the Mogul Tunnel
facilities shall be in lieu of any haulage payment or royalty for such
operations under the cross mining rights granted herein. Nothing hereunder shall
be deemed to require the payment of production royalty for production from other
or adjacent properties under that certain Section of this Agreement labelled
"Production Royalty".
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The parties agree that the Minimum Monthly Payment shall be a
minimum holding cost, and shall not be credited as advance royalty to be offset
against future amounts of production royalty which might thereafter become due.
During any lease month when the Operating Monthly Payment of (Five Thousand
Dollars) $5,000.00 is paid (including a late commencement payment as provided
for above), said amount shall be credited as advance royalty, and available for
offset against future production royalties which may become due.
In the event that the purchase option herein is exercised, all
amounts paid to Rugg as Operating Monthly Payments or as Production Royalty
under the section governing Production Royalty, shall be cumulated, and
available for offset against the Purchase Price at Closing, and may cumulate to
the extent of the full Purchase Price, as the case may be.
24. Records. Island shall keep books and accounts showing the amount
of ores extracted from the Property, the amount of ores shipped, sold or
treated, and the amount of money received from the sale of the ore. Island shall
keep similar records for properties mined utilizing cross mining rights granted
herein.
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<PAGE>
Island shall keep accurate maps of all drifts, crosscuts,
raises, slopes and other workings created by Island during its operations for
the Property under this Agreement, and shall mark on such maps any geological
findings which may be significant with regard to future mining or development of
the Property or the calculation of production royalty.
Island shall keep records and maps of its core drilling,
longhole drilling, sampling, channel sampling and other test or assay results
obtained in or from within the Property. Island shall also maintain records of
its milling of ores from the Property, including head, tail and concentrate
assays from any milling facility used or controlled by it. Island shall also
maintain and make available for inspection or review by Rugg smelter settlement
sheets, shipping records, umpire assay results or like records related to ores
or concentrates from the Property which are shipped to either a commercial or
captive smelter or other buyer of any type for the purpose of verifying
Production Royalty payments due.
Island shall also make available to Rugg at Rugg's expense
legible full size copies of any underground or surface surveys performed in
whole or part upon the Property.
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<PAGE>
26. Inspection of Records. Island shall maintain true and correct
records of all Minerals mined and sold from the Property, and Island shall
permit Rugg to inspect, at Rugg's expense, the books and records of Island which
are pertinent to the determination of the Production Royalty, at any reasonable
time during normal business hours, provided such inspection is conducted by Rugg
or by an accounting firm of recognized standing, at least one of whose members
is a member of the American Institute of Certified Public Accountants, and
provided such inspection does not interfere unreasonably with Island's
operations or procedures.
28. Confidentiality. Rugg agrees that all information developed or
acquired as a result of activities by Island under this Agreement, including but
not limited to information relating to mineral discoveries, ore reserves, mining
methods, plans and production schedules and other information, including assays,
cost and production cost, and all income and receipts, data, and information,
and including the terms of this Agreement, shall be kept strictly confidential
and shall not be released or made public (with the exception of Rugg's counsel
and professional tax advisors) without Island's express prior written consent
during such period that this Agreement is in effect; provided, however, that
nothing herein shall be construed to interfere with any responsibility of Rugg
to make reasonable disclosures required under applicable
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<PAGE>
securities or other laws. In the event Rugg deems it necessary to make such
disclosures for the reasons stated, Rugg agrees to provide advance written
notice and reasonable opportunity to confer with Island no less than ten (10)
days prior to making such disclosures, which request shall not be unreasonably
refused.
27. Term. Subject to Section 15 regarding termination and default,
this Agreement shall continue in full force and effect for a period of ten (10)
years from the Effective Date hereof. At any time during the initial ten year
term hereof, Island, at its sole option, may elect in writing to extend this
Agreement for a second ten (10) year term. Such election may be made at any time
this Agreement is in good standing.
28. Zoning and Land Use Reputation. If the Property should be or
become zoned or otherwise regulated so as to prevent or restrict the operations
contemplated by Island hereunder, or if any covenant so preventing or
restricting such operations is found to apply to the Property, Island shall have
the right to seek change thereof, in which event Rugg will cooperate with Island
in obtaining such change. Rugg will not attempt to change the zoning or land use
regulations presently applicable to the Property, if the change could prevent,
restrict or adversely impact operations contemplated by Island. Rugg
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agrees to cooperate with and support Island in creating and maintaining good
relations and support for mining the Property with all federal, state, and local
governmental entities.
29. Surrender of Possession on Termination. Upon termination of this
Agreement for any reason, Island will surrender peaceable possession of the
Property, and Rugg shill thereupon have the right to take full and complete
possession thereof, subject to the rights of Island to go upon the Property for
a period not to exceed six months for the purpose of removing and disposing of
the machinery, equipment and supplies situated thereon and therein. Within a
reasonable time after termination, Island agrees to provide Rugg with copies of
all factual data generated by Island's activities on the Property prior to
termination except as previously provided to Rugg; however, Island shall not be
liable to Rugg for the completeness or accuracy thereof.
Upon such termination, Island shall not be obligated to leave
any mine workings or openings in the Property, including ventilation openings,
in any particular condition or state of repair, except with regard to the Mogul
Tunnel as it existed on the date of execution, which shall remain open and
unobstructed, or as otherwise required by law. Permission is specifically not
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<PAGE>
granted here to cave or close the Mogul Tunnel as part of any reclamation plan
absent exercise and Closing of the Purchase Option granted herein.
30. Evidence of Release. In the event of termination of the
Property, Island shall surrender peaceably to Rugg possession of such Property
and shall, at the request of Rugg, record in the county where the Property is
situated such documents as are necessary to release the Property from this
Agreement. Island shall deliver to Rugg a copy of such instrument us recorded
within fifteen (15) days after recording.
31. Reclamation. Island shall reclaim the Property in accordance
with local, state, and federal laws relating to reclamation of mined land. Prior
to obtaining any necessary governmental approval of a reclamation plan for the
Property, Island will submit such reclamation plan for review by Rugg, approval
of which shall not be unreasonably withheld. The obligations set forth in this
Section shall survive termination of this Agreement.
32. Assignment. The rights of Island hereunder may not be assigned
or transferred, in whole or in part, to Thames Hartley, Durango Metals, J. Wayne
Tatmen, or to any entity under their direct control. Island Covenants not to use
a subterfuge or device to evade the proscription of this non-transfer
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<PAGE>
provision. Island shall have the right at any time, without consent, to assign
or transfer its rights and interest; under this Agreement to a subsidiary or
parent company or to a subsidiary of its parent company or to any affiliated
company provided that such company execute and provide to Rugg written
evidence of its acceptance of the terms hereof. No such assignment or transfer
shall operate to enlarge the obligations or to diminish the rights of either
party. No such change in ownership or interest shall be binding upon Rugg until
the expiration of ten (10) days after Rugg shall have received satisfactory
written evidence, in recordable form, thereof. The rights of Island hereunder
and/or this Lease may otherwise be assigned with the Consent of Rugg, which
consent will not be unreasonably withheld, which shall become effective upon
written notice to Rugg, and shall thereafter bind the heirs, executors,
administrators, successors, and assigns of the parties, provided and subject to
such assignee's executing and providing to Rugg written evidence of its
acceptance of the terms hereof.
33. Encumbrances Non-Sale Transfers, and Sales.
a. Non-Sale Transfers. Any transfer or assignment of any
interest in or subject to this Agreement shall be made expressly subject to this
Agreement and shall require the transferee to assume and agree in writing to
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<PAGE>
perform all of the obligations of the transferor under this Agreement as relate
to the interest assigned. In case of transfer by mortgage or deed of trust,
however, such assumption of obligations shall not be required, but should such
mortgage or deed of trust be foreclosed, the purchaser on foreclosure shall take
subject to this Agreement. No transfer shall be effective as between the parties
until the first day of the next month following the delivery of the non-
transferring party or satisfactory evidence of such transfer.
b. Sales. Rugg may convey or sell part or all of the Property to a
financially responsible buying party who agrees to be bound by the terms and
conditions of this Agreement; provided, however, prior to sale Rugg shall first
give sixty (60) days' prior written notice to Island of Rugg's desire to sell
its interest. The notice shell specify the name of the buying party and the
terms and conditions of the proposed sale. Within the sixty (60) day period,
Island shall have the first right to purchase the interest being sold on the
terms and conditions specified in the notice. If Island does not exercise such
right within the sixty (60) day period, then Rugg may sell its interest on the
terms and conditions specified in the notice within thirty (30) days after the
expiration of the sixty (60) day period.
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<PAGE>
34. Production Royalty. Island shall pay to Rugg a Production Royalty of
five percent (6%) of the net smelter returns from all ores including crude ores
concentrates, minerals, or other products shipped or removed from the Property
and sold. As used herein, "net smelter returns" means the net proceeds of such
ores, concentrates, minerals, or other products as shown by the liquidation
sheets, settlement sheets, purchase sheets, or other evidences of receipt of
payment furnished by the mill, smelter, ore buyer, or purchaser treating,
purchasing, and paying for such ores and products, after allowing deductions for
costs of sampling and assaying, including, umpire charges, freight costs to the
smelter or other purchaser, smelting, refining, and other treatment costs,
specifically excluding milling costs.
35. Production Rovalty Definitions. As used in this Agreement, the words
and phrases set forth below shall have the following meanings:
a. "Concentrates" means the product derived from the Crude Ore after
waste materials have been removed through leaching, milling or other
beneficiation.
b. "Crude Ore" means minerals mined and removed from the Property by
Island that have not, except for sizing or crushing, been subject
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<PAGE>
to further processing or concentration prior to "direct shipping" to a smelter
or other purchaser.
c. "Transportation Costs" means the expenses and charges actually
incurred by Island in transporting the Crude Ore or Concentrates from the mine
to the smelter, refinery or other place of processing and/or sale. Such expenses
shall include, but not be limited to, freight, shipment insurance, handling,
port, delay, demurrage, lighterage, tug, forwarding costs and transportation
taxes, but specifically not including transportation costs from the mine to a
mill.
36. Sales to Affiliate Smelters. Any smelter owned or controlled by Island
or an Affiliate of Island shall be deemed to be a custom smelter for purposes of
this Agreement, and the Net Smelter Returns from such ores, concentrates, and
derivatives shall be computed and determined in accordance with usual custom
smelting practices the same as if sold to such smelter by a third party, but Net
Smelter Returns shall not be less than would have been realized by Island if
such ores, concentrates, or derivatives had been sold to any smelter not owned
or controlled by Island or an Affiliate.
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<PAGE>
37. Payment of Production Royalty. All payments of Production Royalty
shall be made on or before the twentieth (2Oth) day of the month following the
calendar month in which payment is received for such ores, minerals, or other
products. All royalty payments shall be accompanied by a statement indicating
the amount of ores, minerals, concentrates or other products sold or processed
and the computation of the royalty being paid. Upon request made by Rugg within
three (3) months following payment of a monthly Production Royalty, Island will
allow Rugg access to its production records for such quarter for Rugg's review
and informal audit of such records. The time and place of such review and audit
shall be determined by mutual agreement of the parties.
38. Manner of Payment. All payments of Advance Royalty or Production
Royalty due or payable to Rugg hereunder may be made by check or draft mailed or
delivered on or before the due date to Rugg in the name of the person designated
and at the address provided in the Section entitled "Notices."
39. Royalty on Stockpiled Ore. If Island stockpiles any ores, minerals or
other products on or off the Property for a period longer than three (3)
consecutive months, Island shall pay Rugg a provisional royalty of three and one
half percent (3.5%) of the amount which Island estimates in good faith
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<PAGE>
would be due to Rugg as Production Royalty if such ores, minerals or other
products wore sold in an arm's length transaction. When such ores, minerals, or
other products are sold or processed by Island, Island shall pay to or recover
from Rugg the difference between the provisional royalty paid to Rugg pursuant
to this Section and the amount of Production Royalty determined as provided in
Section 39.
40. No Liability for Metal Losses. Island may, but is not obligated to,
beneficiate, mill, sort, concentrate, refine, smelt, or otherwise process or
upgrade the ores and concentrates produced from ores mined from the Property
prior to sale, transfer, or conveyance to a purchaser, user, or consumer other
than Island. Island shall not be liable for Production Royalties on such losses
or for mineral values lost in such processing except for losses resulting from
the bad faith or gross negligence of Island. Island shall be affirmatively
obligated to attempt to maintain recovery ratios for precious metals which
accord with generally accepted industry standards for milling and concentrating.
41. Grant of Option. Rugg hereby grants to Island the sole, exclusive, and
irrevocable option to purchase, at any time during the term of this Agreement,
all right, title, and interest now owned or hereafter acquired by Rugg in and to
the Property on the terms and conditions hereinafter provided,
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<PAGE>
for a Purchase Price ("the Purchase Price") of One Million Five Hundred Thousand
Dollars ($1,500,000.00). At Closing, Island may offset against the Purchase
Price any accumulated payments of Production Royalty or Operation Monthly
Payments as a credit against the Purchase Price
42. Exercise of Option. Written notice of election to exercise the Option,
accompanied by a certified check for One Hundred Thousand Dollars ($100,000.00),
shall be sent to Rugg prior to the termination of this Agreement, in the manner
provided in this Agreement for the giving of notice. The balance of the Purchase
Price shall be paid at Closing, Closing to occur within thirty (30) days after
the mailing of notice of exercise at the offices of Commonwealth Land Title
Insurance Company, Boulder, Colorado 80302, or such alternate closing agent as
may be designated by Rugg within Boulder or environs. Attached to the Notice
shall be an accounting for Accumulated Advance Royalty and Operating Monthly
Payments which Island proposes to offset against the Purchase Price.
43. Conveyance of Title. Upon receiving the first payment and notice that
Island intends to exercise the Option, Rugg shall promptly deposit in escrow
with Commonwealth Title a special warranty deed sufficient in all respects to be
entitled to recordation, conveying to Island the Property, with
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<PAGE>
instructions to Commonwealth Title to deliver the deed to Island upon receipt at
Closing of the remaining Purchase Price in the form of a certified check in
accordance with the terms hereof for the account of Rugg. Rugg shall also
promptly have prepared and delivered to island a title insurance commitment
update covering the Property, bringing the Commitment current to date of
closing, certified by a licensed title insurer, and shall deliver to Island
after closing a paid policy of title insurance in the amount of the Purchase
Price. The parties agree to cooperate in attempting to reduce the charges for
converting the Lessee policy previously issued to an Owner's policy at Closing.
Island shall not be heard to object to the title of Rugg except to the extent
that Rugg be found to have conveyed, encumbered or caused defects in the title
after the period provided for herein for the initial title examination by
Island.
44. Amendment. This Agreement shell not be altered, amended or otherwise
modified except pursuant to an instrument in writing signed by both of the
parties hereto.
45 Attorney's Fees. In any litigation between the parties or persons
claiming under them resulting from, arising out of, or in connection with this
Agreement or the construction or enforcement thereof, the substantially
prevailing party shall be entitled to recover all reasonable Costs,
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<PAGE>
expenses and attorneys' fees incurred by it in connection with such litigation,
including such costs, expenses and fees incurred prior to the commencement of
the litigation or in connection with any appeals.
46. Construction. The Section Titles used herein are for convenience of
reference only and shall not be taken or construed to define or limit any of the
terms or provisions hereof. Unless otherwise provided, or unless the context
shall otherwise require, words importing the singular number shall include the
plural number, words importing the masculine gender shall include the feminine
gender, and vice versa.
47. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
48. Entire Agreement. This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements, understandings and representations of the parties with respect
thereto.
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<PAGE>
49. Further Assurances. Each of the parties agrees to take from time to
time such actions and execute such additional instruments as may be reasonably
necessary or convenient to implement and carry out the intent and purpose of
this Agreement.
50. Governing Law. The interpretation, construction, performance and venue
in regard to any matter arising out of this Agreement shall be governed by the
laws of the State of Colorado. Jurisdiction and venue shall be in the First or
Twentieth Judicial District in the State of Colorado to resolve any dispute
involving the formation, existence, meaning, interpretation, application, or
enforcement of this Agreement or any term or provision of this Agreement.
51. No Waiver. The failure of either of the parties to insist on the
strict performance of any provision of this Agreement or to exercise any right,
power or remedy upon a breach hereof shall not constitute a waiver of any
provision of this Agreement or limit either party's right thereafter to enforce
any provision or exercise any right hereunder. A waiver of any provision of this
Agreement shall not be effective unless in writing and signed by the party
against whom it is to be enforced.
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<PAGE>
52. Notices. All notices and other required communications ("Notices") to
the parties to this Agreement shall be in writing, and shall be addressed
respectively as follows:
Island: Bradley Campbell Carney & Madsen
C/O Earl K. Madsen or Timothy Campbell
1717 Washington Avenue
Golden, Colorado 80401 - 1994
Rugg: Charles A. Rugg
P.O. Box 790
Nederland, CO 80466
with a copy to: Vranesh and Ralsch, LLC
C/O John R. Henderson
P.O. Box 871
Boulder, Colorado 80306
Notices shall be given (a) by personal delivery to the other party, or (b) by
electronic communication, with a confirmation sent by registered or certified
mail, return receipt requested, or (c) by registered or certified mail, return
receipt requested. All Notices shall be effective and shall be deemed delivered
(a) if by personal delivery on the date of delivery if delivered during normal
business hours, and, if not delivered during normal business hours, on the next
business day following delivery, (b) if by electronic communication on the next
business day following receipt of the electronic communication, and (c) if
solely
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<PAGE>
by mail three (3) business days after mailing. A party may change its address by
Notice to the other party.
53. Recording of Agreement Permitted. This Agreement may be recorded in
the real property records of the county in which the Property is located by
either of the parties.
54. Rule Against Perpetuities. As to any provision in this Agreement, the
parties hereto do not intend that there shall be any violation of the rule
against perpetuities or any related rule. If any such violation should
inadvertently occur, it is the intent of the parties hereto that the appropriate
court shall reform the provision in such a way as to approximate most closely to
the intent of the parties hereto within the limits permissible under such rule
or related rules.
55. Severance of Provisions. If any clause or provision of this Agreement
or application hereof shall be determined to be invalid or unenforceable, for
any reason, the remainder of this Agreement and any other application of such
provision shall not be affected thereby.
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<PAGE>
64. Short Form of Agreement. At the request of island, a form of this
Agreement omitting the financial terms hereof may be recorded in lieu of
recordation of the full agreement. Such election shall be made within five (5)
days after execution.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
/s/Charles R. Rugg
---------------------------------------
Charles R. Rugg
/s/Cindy mcCollum
---------------------------------------
Cindy McCollum
ISLAND INVESTMENT CORP.
By: /s/ Earl K. Madsen
--------------
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<PAGE>
STATE OF COLORADO
ss.
COUNTY OF BOULDER
The foregoing instrument was acknowledged before me this 18th day of
March, 1996, by Charles A. Rugg and Cindy McCollum.
WITNESS my hand and official seal.
/s/ Doris F. Drager
-------------------
Notary Public
NOTARY
SEAL My Commission Expires: August 30, 1999
STATE OF COLORADO
ss.
COUNTY OF BOULDER
The foregoing instrument was acknowledged before me this 18th day of
March, 1996, by Earl K. Madson, on behalf of Island Investment Corp.
WITNESS my hand and official seal.
/s/ Doris F. Drager
------------------
Notary Public
NOTARY
SEAL My Commission Expires August 30, 1999
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<PAGE>
MOGUL CLAIMS
Claim MINERAL SURVEY NO.
- ----- ------------------
Gold Fleece #1. only that portion
which is south of Middle Boulder Creek 13305 Amended
Gold Fleece #2 (less part sold) 13305 Amended
Gold Fleece #3 (less part sold) 13305 Amended
Protection #1 12791
Protection #2 12791
Protection #3 12791
Swarthmore #1 (part) 18349
Swarthmore #2 18349
Red Bird Lode 11568
Gold Dust Lode 12355
Little Stranger Lode 13119
Bobtail Lode 12557
Grover Cleveland Lode 12161
Clara Lode 12791
Enterprise Lode 12557
Enterprise Extension Lode 12545
Arapahoe Jim Lode 18628
Memphis Lode 12941
Mogul claims
March 18, 1996 PAGE 1 OF 3
EXHIBIT A
<PAGE>
Southern Boy Lode 12545
Uncle Sam Lode 11568
Sommerset Lode 12160
Village Bell Lode 12381
Bird's Neat Lode 12060
Virginia Lode 12686
Satilla Lode 13096
Mendota Lode 15679
Mary Jane Lode 12636
Gold Coin Lode 12689
Mary EE Protection #1 12113
1/2 Mogul Lode 14175
Lady Alice a/k/a Lady Allis (less part sold,
and less 50' x 150' Tract) 12786
MCCOLLUM CLAIM
Mascott Lode (.9 ac/more or less) M.S. 11959
UNPATENTED CLAIM
"Merle C" Lode Mining Claim Film 2052 R.N. #01518100
Mogul claims
March 18, 1996 PAGE 2 OF 3
EXHIBIT A
<PAGE>
EASEMENT FOR DUMP PURPOSES OVER TOWN LOTS
ENCUMBERED BY DUMPS
Any and all parts of Blocks 12, 18, and 19, town of Eldora, as may now or
hereafter be owned by Rugg, and now covered or encroached upon by Mogul Tunnel
Mine dumps, including an additional area extending twenty-five (25) feet north
from the toe of such dumps as they now exist (but such additional area not
including the bed of Boulder Creek or any road presently existing). The area of
this easement may be surveyed by Island at its cost, and Rugg agrees to amend
this description to conform to such a true survey. Upon exercise end Closing of
the Purchase Option, the area described shall be made the subject of a
permanent easement grant for mining, milling, mine dump, haulage, storage, and
related purposes.
All subject to exceptions or reservations contained in the respective U.S.
mineral patents end easements of record together with any and all veins, lodes
and mineral deposits now owned or hereafter acquired by Rugg extending from or
into, or contained in, the above mining claims and properties, all ores and
minerals therein, whether now owned or hereafter acquired by Rugg, all rights,
title and interest of Rugg, now owned or hereafter acquired, in and to the
surface and sub-surface hereof, all water, water rights, easements, and
rights-of-way now or hereafter owned or held by Rugg if any, in, upon or under,
the above mining claims and properties, or in any way pertaining thereto, and
all tenements, hereditaments and appurtenances thereof, all of the above
described mining claims and all other property, rights and interests of Rugg set
forth hereinafter collectively are called the "Claims," together with any and
all rights of Rugg in and to and to use the Mogul Tunnel and/or the Swarthmore
Tunnel, whether through deed, gift, devise, adverse or open and notorious use
legal action, quiet title action or otherwise, together with the hoist,
headframes and buildings on the Birds Nest mine, which shall be subject to this
agreement.
Mogul claims
March 18, 1996 PAGE 3 OF 3
EXHIBIT A
FRANKLIN CONSOLIDATED MINING CO., INC.
June 5,1996
Gems & Minerals Corp.
76 Beaver Street
Suite 500
New York, New York 10005
Dear Sirs:
This will confirm our understanding concerning the proposed
acquisition (the "Transaction") of certain assets of Gems & Minerals Corp., a
Nevada corporation ("Gems") in exchange for common stock, par value $.01 per
share ("Franklin Common Stock") of Franklin Consolidated Mining Co., Inc., a
Delaware corporation ("Franklin"). This letter does not contain all matters upon
which agreement must be reached in order for the Transaction to be consummated,
but is intended solely as an outline of material provisions. The terms of our
understanding are as follows:
1. Gems shall transfer to Franklin certain of its assets
which shall include (i) its 82.5% general partnership interest in
the Zeus No. 1 Investments, a California general partnership
("Zeus") of which Franklin currently owns the remaining 17.5%
interest; (ii) all of its interest in and to the so-called "Hayden
Lease" agreements; (iii) all of its interest in the so-called
"Rugg/Mogul Mine Leases"; and (iv) all of its interest in the
so-called "Gold Hill Mill", including all permits and other
agreements relating thereto (collectively the "Assets").
2. Franklin shall cause to be issued to Gems, in
consideration for the transfer of the Assets, such number of shares
of the Franklin Common Stock so that upon the closing of the
Transaction Gems shall own approximately 85% (including
approximately 18% currently owned by Gems) of the issued and
outstanding shares of Franklin Common Stock (on a fully diluted
basis).
3. The Transaction shall be conditioned upon (i) the
completion of customary due diligence by each of the parties;(ii)
the negotiation and approval of definitive documentation by the
board of directors of each of the parties hereto within 10 business
days from the
<PAGE>
date of this letter of intent; (iii) the approval of the
shareholders of Franklin of an increase in the capitalization of
Franklin, and approval by the parties' respective shareholders and
boards of directors of any other matters required by applicable law,
or their respective certificates of incorporation and/or by-laws in
order to consummate the Transaction as contemplated hereby; and (iv)
the obtaining or making of any other consents, filings, instruments
or regulatory approvals necessary to consummate the Transaction
contemplated hereby.
4. Notwithstanding anything herein to the contrary the
closing of the Transaction and the consummation thereof must be
completed no later than 90 days from the date of this Letter of
Intent.
The parties agree on the date hereof that Franklin shall issue a
press release in substantially the form of Exhibit A hereto.
Following your signature, the parties will cause their respective
officers, employees, attorneys, agents, investment bankers, accountants, and
other representatives working on the Transaction to cooperate with each other
with respect to the Transaction until the Transaction is consummated or
negotiations with respect thereto are terminated.
Following your signature, the parties agree that until the
Transaction is consummated or negotiations with respect thereto are terminated,
to conduct their respective business and operations in all respects only in the
ordinary course unless otherwise consented to in writing by the other party.
Following your signature, until the Transaction is consummated or
negotiations with respect thereto are terminated, each party will afford to the
officers, employees, attorneys, agents, investment bankers, accountants, and
other representatives of the other party working on the Transaction free and
full access to its properties, books, and records, will permit them to make
extracts from and copies of such books and records, and will from time to time
furnish them with such additional financial and operating data and other
information as to its financial condition, results of operations, business,
properties, assets, liabilities, or future prospects as they from time to time
may request. Each party will cause its independent certified public accountants
to make available to the other party and its independent certified public
accountant, the work papers relating to any audit of its financial statements in
the last five years.
Each party shall insure that all confidential information which such
party or any of its respective officers, directors, employees, attorneys,
agents, investment bankers, or accountants may hereafter obtain relating to the
financial condition, results of operations, business, properties, assets,
liabilities, or future prospects of the other
-2-
<PAGE>
party, any affiliate of the other party, or any customer or supplier of such
other party or any such affiliate shall not be published, disclosed, or made
accessible by any of them to any other person or entity at any time or used by
any of them, in each case without the prior written consent of the other party,
provided, however, that the restrictions of this sentence shall not apply (a) as
may otherwise be required by law, (b) as may be necessary or appropriate in
connection with the enforcement of this Agreement, (c) to the extent such
information shall have otherwise become publicly available, or (d) as to
disclosure by the parties or on their behalf to existing or prospective lenders,
investors or to others whose consent may be required or desirable in connection
with obtaining the financing or consents which are required or desirable to
consummate the Transaction. Each party shall, and shall cause all of such other
persons and entities who received confidential data from it to, deliver to the
other party all tangible evidence of such confidential information to which the
restrictions of the foregoing sentence apply at such time as negotiations with
respect to the Transaction are terminated before the parties enter into any
formal agreement as contemplated by this letter of intent.
It is understood that this is a letter of intent only and while the
parties hereto agree in principle to the contents hereof and agree to proceed in
good faith to work out the details of the Transaction, neither of them shall
have any legal obligation to the other as a result of this letter (other than
those obligations contained in this paragraph or the preceding paragraph of this
letter, and the obligations contained in the preceding paragraph and the last
sentence of this paragraph shall continue to apply after negotiations with
respect to the Transaction are terminated). Accordingly, except as set forth in
the preceding sentence, this letter does not constitute a binding agreement nor
does it constitute an agreement to enter an agreement and the terms hereof are
subject to the execution and delivery of formal agreements. This letter may not
be assigned by either of the parties hereto. Neither party shall be responsible
for any of the other's expenses in connection with the negotiations, documents,
or transactions contemplated hereby, except that all of the terms and conditions
of the Zeus Joint Venture Agreement regarding the continued financing of
Franklin's operations shall remain in full force and effect until such time as
the parties shall otherwise modify the same in accordance with the terms and
conditions thereunder.
If this letter accurately reflects our understanding, please so
indicate by signing the original and duplicate of this letter and returning a
fully executed copy to
-3-
<PAGE>
me, so that we can promptly commence work on the formal documents relating to
the Transaction.
Very truly yours,
FRANKLIN CONSOLIDATED
MINING CO., INC.
By
--------------------------------------
President
Accepted and agreed to
this ___ day of June, 1996
GEMS & MINERALS CORP.
By /s/ [illegible]
-------------------
President
-4-
<PAGE>
me, so that we can promptly commence work on the formal documents relating to
the Transaction.
Very truly yours,
FRANKLIN CONSOLIDATED
MINING CO., INC.
By /s/ [illegible]
-------------------------------------
President
Accepted and agreed to
this 5th day of June, 1996
GEMS AND MINERALS CORP.
By
----------------------------------
President
Non-Binding Letter of Intent
Exchange Agreement w/Gems & Minerals
June 5, 1996
-4-
<PAGE>
me, so that we can promptly commence work on the formal documents relating to
the Transaction.
Very truly yours,
FRANKLIN CONSOLIDATED
MINING CO., INC.
By /s/ [illegible]
-------------------------------------
President
Accepted and agreed to
this 5th day of June, 1996
GEMS AND MINERALS CORP.
By
----------------------------------
President
Non-Binding Letter of Intent
Exchange Agreement w/Gems & Minerals
June 5, 1996
-4-
[LOGO ANDERSON
CHEMICAL COMPANY]
PROMISSORY NOTE
U.S. $20,000 Litchfleld, Minnesota
July 9, 1996
1. FOR VALUE RECEIVED, The undersigned(Borrower) promises to pay Anderson
Chemical Company, a Minnesota Corporation(Note Holder) the principal sum of
Twenty Thousand U.S. Dollars ($20,000) with interest on the unpaid principal
balance at a rate of one percent (1%) per month. The 1% interest will be the
minimum payable for each fraction of a month. Principal and interest shall be
payable at Box 1041, Litchfield, Minnesota, 55355.
2. This is a demand note and borrower shall pay Anderson Chemical Company
the principal and interest as outlined above(1.) out of any proceeds which
Franklin Consolidated Mining Company receives from private stock offerings upon
demand. This note shall have a priority payment status and shall be paid before
any other liabilities of Franklin Consolidated Mining Co. are satisfied.
FRANKLIN CONSOLIDATED MINING CO.
By: /s/ J. Terry Anderson
---------------------------------------------
J. Terry Anderson, Chairman and President
ANDERSON CHEMICAL COMPANY
By: /s/ Leif E. Anderson
----------------------------------------------
Leif E. Anderson, Vice President and Treasurer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
SCHEDULE 13D
(Rule 13d-101)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)*
Franklin Consolidated Mining Co., Inc.
- --------------------------------------------------------------------------------
(Name of Issuer)
Common Stock, $.01 Par Value
- --------------------------------------------------------------------------------
(Title of Class of Securities)
35355910
- --------------------------------------------------------------------------------
(CUSIP Number)
Andrew Cosentino, Esq., Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel
153 East 53rd Street, New York, New York 10022 (212) 801-9200
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
July 10, 1996
- --------------------------------------------------------------------------------
(Date of Event which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box |_|.
Note: Six copies of this statement, including all exhibits, should be filed with
the Commission. See Rule 13d-1(a) for other parties to whom copies are to be
sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934
(Act) or otherwise subject to the liabilities of that section of the Act but
shall be subject to all other provisions of the Act (however, see the Notes).
<PAGE>
Item 2. Identity and Background
On January 11, 1996 Christopher W. Johnson submitted his resignation
as trustee of Whitey Bear Trust. On July 10, 1996 Anthony DiMatteo accepted
appointment as new trustee of Whitey Bear Trust.
Item 4. Purpose of Transaction.
On or about July 10, 1996, Gems & Minerals Corp. ("Gems") expressed
to Franklin Consolidated Mining Co., Inc. ("Franklin") Gems' desire and
intention to explore structures to lead to the combination of certain of their
respective businesses. This expression followed transactions among Gems, certain
of its affiliates, and Franklin in recent days. On July 3, 1996 Gems and
Franklin entered into an agreement for Franklin to acquire the Gold Hill Mill, a
permitted modern milling facility located in Boulder County, Colorado from
Colino Oro Molino, Inc. ("COM"), an affiliate of Gems, for $2,500,000 of
consideration. On July 8, 1996, various parties entered into an agreement for
Zeus No. 1 Investments ("Zeus"), a joint venture formed by Gems and Franklin, to
acquire the rights to certain agreements which would allow Zeus to mill mine
dump material located on fourteen mine dumps in the immediate vicinity of the
Gold Hill Milling facility. The properties subject to the July 3, 1996 and July
8, 1996 agreements were part of the properties originally the subject of a
non-binding letter of intent between Gems and Franklin dated June 5, 1996 which
the parties mutually agreed not to consummate shortly after executing the same.
That non-binding letter of intent has expired by its terms.
Item 7. Material to be Filed as Exhibits.
Exhibit Description
------- -----------
A Agreement by Gems, Island and the Trust to file this
Amendment on behalf of all of the same.
B Non-binding Letter of Intent dated June 5, 1996 between
Gems and Franklin.
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: July l2, 1996
ISLAND INVESTMENT CORPORATION
GEMS & MINERALS CORP.
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Secretary and Treasurer
of Island Investment Corporation and
Gems & Minerals Corp.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: July 12, 1996
WHITEY BEAR TRUST
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Trustee
<PAGE>
EXHIBIT A
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct and hereby agree that this statement is being filed on behalf of Gems,
Island and the Trust.
Date: July l2, 1996
ISLAND INVESTMENT CORPORATION
GEMS & MINERALS CORP.
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Secretary and Treasurer
of Island Investment Corporation and
Gems & Minerals Corp.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct and hereby agree that this statement is being filed on behalf of Gems,
Island and the Trust.
Date: July 12, 1996
WHITEY BEAR TRUST
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Trustee
FIRST AMENDMENT
TO THE JOINT VENTURE AGREEMENT
OF ZEUS NO. 1 INVESTMENTS,
A CALIFORNIA GENERAL PARTNERSHIP
THIS FIRST AMENDMENT (this "Amendment") to the Joint Venture
Agreement (the "Agreement") of the Zeus No. 1 Investments, a California General
Partnership (the "Partnership"), is made by and between Gems & Minerals Corp., a
Nevada corporation ("Gems") and assignee of Island Investment Corporation, a
Nevada corporation ("Island"), and Franklin Consolidated Mining Co., Inc., a
Delaware corporation ("Franklin").
WHEREAS, Franklin and Island entered into the Agreement on February
26, 1993 pursuant to which the Partnership was formed; and
WHEREAS, on or about May, 1993, Island assigned all of its right,
title and interest in and to the Partnership to Gems; and
WHEREAS, the Agreement has been subsequently amended from time to
time in connection with various other agreements and arrangements between the
parties, including, without limitation, the amendments set forth in the
agreements set forth on Schedule A hereto; and
WHEREAS, in an effort to further clarify such previous amendments,
the purposes and management of the Partnership and the interests of the parties
therein, each of Franklin and Gems desires to further amend the agreement as
hereinafter set forth.
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Definitions. Unless otherwise defined herein, all capitalized
terms used in this Amendment shall have the meanings ascribed to such terms in
the Agreement.
2. Amendment to Section 1.19 of the Agreement. Section 1.19 of the
Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"1.19 "Management Committee" means the committee comprised of one
person named by Gems and two persons named by Franklin. The
Management Committee shall control the Partnership and its
decision making processes."
1
<PAGE>
3. Amendment to Section 1.26 of the Agreement. Section 1.26 of
the Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"1.27 "Partners" means collectively Gems and Franklin,
and reference to a "Partner" shall be to any one of them."
4. Amendment to Section 2.4 of the Agreement. Section 2.4 of the
Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"2.4 Partnership Purpose. The general nature and purpose of the
business to be conducted by the Partnership is the operation of
mining and milling properties owned, leased or otherwise controlled
by the Partners and/or the Partnership, as the case may be and all
things necessary, related or incidental to such purposes, as may be
determined from time to time by the Partners. The Partnership shall
not engage in any other business unless the Partners unanimously
agree to do so in writing."
5. Amendment to Section 6.8 of the Agreement. Section 6.8 of the
Agreement is hereby amended by deleting such Section in its entirety.
6. Amendment to Section 8.1.1 of the Agreement. Section 8.1.1 of the
Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"8.1.1 Income and Losses shall be allocated as follows:
(a) First, to the Partners prorata until the cumulative Income
allocated to each Partner pursuant to this Section 8.1.1(a) is equal
to the Cumulative Losses allocated to the Partners pursuant to
Section 8.1.2 for all prior periods.
(b) Thereafter, 82.5% to Gems and 17.5% to Franklin."
7. Amendment to Section 8.1.2 of the Agreement. Section 8.1.2 of the
Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"8.1.2 Losses shall be allocated prorata to the allocations
of the Cumulative Income as provided above and otherwise
2
<PAGE>
in the Agreement."
8. Amendment to Section 8.2.1 of the Agreement. Section 8.2.1 of the
Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"8.2.1 Cash Available For Distribution shall be distributed as
follows:
(a) Advances made on behalf of Franklin which have not been
previously paid to Gems, and any Remediation Expenses and other
Acquired Facilities expenditures incurred by Gems or any other
amounts specified in any agreement as constituting a priority
payment (all collectively referred to as and deemed to be "Priority
Payments").
(b) Thereafter, 85.2% to Gems and 17.5% to Franklin."
9. Amendment to Section 9.2 of the Agreement. Section 9.2 of the
Agreement is hereby amended by deleting such provision in its entirety and
amending the same to read as follows:
"9.2 Capital Contribution of Franklin. Franklin hereby assigns to
the Partnership the right to use, on an exclusive basis, all mining
and milling properties owned, leased or controlled by Franklin,
including, without limitation, all mining properties, mining claims,
all water rights, buildings, milling facilities, machinery and
equipment (collectively "Rights") all as necessary and appropriate
to profitable extract and mill all ores and minerals located on such
properties."
(a) Franklin shall take all steps as necessary and appropriate
to allow the Partnership to effectively utilize the Rights as
contemplated herein; provided however, that in the event that Gems
shall exercise its rights as set forth in this Section 9.2 regarding
the transfer of the Rights, Franklin shall not be required to
effectuate such transfer or otherwise take any action which would
violate any rules or regulations to which its mining and milling
properties are subject, including, without limitation, any and all
rules and regulations pertaining to any and all permits issued to
3
<PAGE>
Franklin with respect to its mining and milling properties.
(b) In the event that a termination of non-profitability is made as set
forth in Section 11.3.7, then, subject to the restrictions set forth in Section
9.2(a),:
(i) any and all assets contributed to or acquired by the Partnership
by or with funds provided by Gems shall revert to Gems in the manner provided
for herein;
(ii) title to all new or replacement equipment or facilities
acquired by Gems (collectively the "Acquired Facilities") shall be vested in the
Partnership, whether or not such Acquired Facilities shall have been installed,
affixed or in any other manner incorporated into existing equipment or
facilities otherwise owned or leased by Franklin of the Partnership, until such
time as a final winding up of the affairs of the Partnership shall have occurred
at which time title to such Acquired Facilities shall revert to Gems;
(iii) any and all assets of the Partnership not covered by (i) and
(ii) above shall otherwise be distributed to the Partners prorata to their
respective interest herein at the time of such distribution;
(iv) in the event the distribution in kind contemplated by Section
9.2(a) shall not be possible, then the parties shall reach agreement with
respect to the value of such assets or make other appropriate adjustments in the
distributions such that the prorata distribution may be accomplished. In the
event of dispute with respect to such valuations, the parties shall thereupon
submit the matter to mediation through a mediator mutually acceptable to the
parties. In the event that the parties are unable to reach agreement as a result
of the mediation, the mediator shall have the authority to specify the means by
which the matter shall be submitted to binding arbitration, if the parties have
not been able to reach an agreement with respect to such arbitration
proceedings.
(v) in the event that Gems shall demand that
4
<PAGE>
Franklin transfer to the Partnership its ownership interests with
respect to the Rights as specified in Section 9.2(a) and such Rights
shall thereafter have been transferred to the Partnership, then any
Acquired Facilities shall be irrevocably transferred to the
Partnership and the provisions of Section 9.2(a) shall thereupon be
amended to provide that the return or distribution of any such
Rights or the Acquired Facilities shall be prorata to the respective
Capital Accounts of the Partners as provided in Section 1.6. Such
distributions shall be made without regard to reasons for or basis
upon which the Partnership shall have been terminated. It is
understood by the Partners that a material consideration to Gems
with respect to the transfer of the Rights is determination whether
such transfer would result in increased liability to either the
Partnership or Gems with respect to CERCLA liabilities or any other
liabilities arising out of any applicable law or regulation
pertaining to environmental matters (collectively "CERCLA"). Thus,
Gems shall e under no obligation at any time to make such demand for
the transfer of the Rights, however, in the event that a demand
shall be made by Gems, Franklin shall thereupon use this best
efforts to expeditiously take all steps as necessary and appropriate
to effectuate such transfer provided that such transfer shall be
consummated on the terms and subject to the conditions of this
Section 9.2."
10. Effectiveness of Prior Amendments. The provisions of this
Amendment hereby supersede all of the amendments to the Agreement set forth in
the agreements listed on Schedule A hereto.
11. Provisions Incorporation by Reference. The provision of Article
XIV GENERAL PROVISIONS are incorporated herein by reference and made a part
hereof.
5
<PAGE>
FIRST AMENDMENT TO THE ZEUS JOINT VENTURE AGREEMENT DATED FEBRUARY 26, 1993
IN WITNESS WHEREOF, the undersigned have executed this Agreement this 15th
day of August, 1996.
FRANKLIN CONSOLIDATED MINING CO., INC.
/s/ J. Terry Anderson
--------------------------------
Name: J. TERRY ANDERSON
Title: Chairman and President
GEMS & MINERALS CORP.
/s/ [Illegible]
--------------------------------
Name:
Title: President
<PAGE>
Schedule A
1. Asset Exchange Agreements, dated as of May 14, 1993, by and between
Island, Gems and Anthony DiMatteo, et. al.
2. Agreement, dated as of August 31, 1993, by and among Franklin, Island
and Gems.
3. Exchange Agreement Letter Agreement, dated as of June 24, 1994, by and
among Island, Gems, Franklin and the Partnership.
4. Binding Exchange Letter Agreement, dated as of December 14, 1994, by
and among Franklin, Island and Gems.
5. Agreement, dated as of September 27, 1995, by and among, Franklin,
Island, Gems and the Partnership.
7
[LETTERHEAD FOR GEMS & MINERALS CORP.]
September 5, 1996
Mrs. Audrey I. Hayden
240 Hemlock Street
Broomfield, Co. 80020
RE: Purchase of Mineral Rights for Property in Clear Creek County, Colorado
Dear Mrs. Hayden:
On behalf of Gems & Minerals Corporation ("Gems"), this letter Purchase
Agreement provides for the transfer of equitable title and ownership of the
mineral rights and property rights described below to Gems. It is expressly
understood that Gems will acquire title and ownership of these mineral rights
and property rights subject to confirmation of your legal title to the Property
(see below) pursuant to a title insurance commitment from the Clear Creek-Gilpin
Abstract & Title Corporation, Georgetown, Colorado. In the event that a title
opinion or title commitment questions your legal title to any of the Property to
be conveyed and transferred pursuant to this Purchase Agreement, you agree to an
equitable adjustment in the terms and compensation to be paid in consideration
of the transfer of ownership of the mineral and property rights to Gems &
Minerals Corporation. The terms of our purchase agreement are as follows:
1. Property. Subject to the terms and conditions of that certain Mineral
Lease and Option to Purchase dated November 12, 1975, between Audrey I. Hayden
(`Seller"), as Lessor, and Gold Developers and Producers, Incorporated, as
Lessee, as the same way have been amended and modified (the "Mineral Lease"),
the property herein purchased transferred and conveyed consists of all the
right, title and interest of Seller in and to all mining claims and mining
properties, as well as all of the Seller's right and interest of Lessor under
the Mineral Lease, and all of Seller's right, title and interest in and to all
mines, minerals, lodes and veins, dips and spurs, dump, plants, fixtures,
improvements, water rights and/or any and all other rights, casements, and/or
appurtenances whatsoever relating thereto, including, without limitation, all of
the exclusive right, title and interest of Seller to mine, extract, explore,
develop, mill, beneficiate, store, remove and market all of the minerals,
metals, ores, materials of whatsoever nature or sort found either on, in under,
upon and/or belonging to or associated with or used or useable in connection
with the property, rights and interest or relating in any way to the subsurface
of that certain property located in the County of Clear Creek, in the State of
Colorado, more fully described in attached Exhibit A (the "Property").
2. Purchase Price: Extension of Mineral Lease.
(a) Purchaser agrees to pay and Seller agrees to accept as sufficient
good and valuable consideration, the sum of seventy-five thousand ($75,000)
dollars as the purchase price for the Property (the "Purchase Price"). Seller
hereby further acknowledges receipt of Five Thousand ($5,000) dollars on or
about December 21, 1995 as an initial payment made toward the Purchase Price
(the "Initial Payment").
<PAGE>
Gems & Minerals Corp.
Purchase of Mineral Rights for Property
(b) Seller hereby acknowledged that, as of the date hereof, all
payments under the Mineral Lease are current and Seller forever waives and
releases Purchasers and any other parties, including any parties under the
Mineral Lease, from any claims for back lease payments. Purchaser further agrees
to guarantee to Seller, the payments in the sum of One Thousand ($1,000) dollars
per month (the "Monthly Payments") due and owing to Sell under the terms and
conditions of the Mineral Lease.
(c.) On the date upon which the final payment of the Monthly payment
is made, Purchaser will pay Seller the Purchase Price less the Initial Payment
(the "Final Payment"). Purchaser may, at its option, prepay in whole or in part,
the Final Payment at any time without penalty.
3. Closing: The execution of this Purchase Agreement and the Payment of all
monies owed to Seller as set forth in paragraph 2 above shall constitute the
closing and consummation of the sale and purchase of the Property, which shall
be for all purposes effective to convey equitable title to the Property as of
the date of this Purchase Agreement. Full legal title will be conveyed by
appropriate deeds and conveyance instructions to Purchaser within ten (10) days
from Purchaser's acceptance of evidence of title (see paragraph 4(a) infra).
Seller and Purchaser expressly agree that equitable title to all property to be
conveyed by this Purchase Agreement will provide Purchaser with all right, title
and interest to mine, mill, beneficiate, operate, mortgage, convey, or otherwise
deal with the Property with respect to any and all third parties and state or
federal governmental entity or representative as the owner of such Property.
Seller further agrees that Seller will not in any manner or in any action or
omission interfere with these rights of equitable ownership of Purchaser as
stated herein, and will cooperate in any manner deemed necessary or appropriate
and as may be requested by Purchaser.
4. Conditions of Closing: The obligations of Purchaser incident to this
closing are subject to the following conditions:
a. Within a reasonable time, not to exceed one hundred twenty (120) days
from the date of this Purchase Agreement, Seller shall provide Purchaser with
evidence acceptable to Purchaser in the form of a title commitment from the
Clear Creek-Gilpin Abstract and Title Corporation, Georgetown, Colorado,
confirming that Seller is fully vested with all right, title and interest in and
to the Property free and clear of any and all liens and encumbrances other than
the Mineral Lease and such other exceptions to title as are acceptable to
Purchaser.
b. Within a reasonable time, not to exceed one hundred twenty (120) days
from the date of this Purchase Agreement, Purchaser shall have satisfied itself
that the property to be conveyed hereunder includes all of the rights to utilize
water rights, under, but not limited to, the Silver Age Loan Mining Claim, U.S.
Survey No. 4648 for mining, milling, manufacturing, mechanical, power and other
beneficial uses as required by Purchaser and such uses must be acceptable to
Purchaser and must not have been abandoned. If prior to the date set forth
above, Purchaser, in its sole and absolute discretion, determines that any of
the foregoing conditions shall not have been fulfilled, then Purchaser may
demand an equitable adjustment in the purchase price and/or other terms and
conditions of this Agreement, and failing to reach agreement with Seller or such
equitable adjustment, then may declare this Purchase Agreement to be null and
void and of not further effect, and convey by quit claim deed all right, title
and interest in and to the Property to Seller, and to execute any necessary or
appropriate instruments to fully effect such return to Seller.
5. Remedies: In the event that following the Closing Purchaser shall fail
to perform any of its obligations in respect to the payment of any sums due to
Seller following the Closing, Seller's sole remedy on account thereof shall be
as against the Property (i.e.) the definitive agreement shall be non-recourse to
Purchaser) and seller shall be entitled to retain all amounts therefore paid to
Seller by Purchaser.
2
<PAGE>
Gems & Minerals Corp.
Purchase of Mineral Rights for Property
6. Confidentiality: Neither the Seller nor the Purchaser shall disclose to
any party the existence or terms of this Purchase Agreement. This obligation
shall survive the Closing.
7. Binding Effect: The foregoing embodies all the terms and conditions of
the Purchase Agreement by which title to the Property is and has been
transferred this day from Seller to Purchaser.
8. Counterpart Originals. This Purchase Agreement may be executed in
counterpart originals, each of which shall be deemed an original, with the same
effect as if the signatures thereto were on the same instrument.
9. Prior Agreement Void: This Purchase Agreement supersedes any and all
agreements(s), in writing or otherwise, between the parties prior to the date of
this Purchase Agreement, and all such prior agreements shall be and are null and
void and of no force or effect.
If the foregoing is acceptable to you, kindly indicate by signing and
forwarding to the undersigned the enclosed copy of this Purchase Agreement.
Very truly yours,
GEMS & MINERALS CORP.
/s/ Anthony DiMatteo
------------------------------------
Anthony DiMatteo
Secretary Treasurer of Corporation
ACCEPTED AND AGREED TO THIS
16th DAY OF Sept, 1996
/s/ Audry I. Hayden
- ----------------------------
AUDREY I. HAYDEN
3
<PAGE>
[LETTERHEAD FOR FRANKLIN CONSOLIDATED MINING
COMPANY, INC.]
September 12, 1996
Mrs. Audrey I. Hayden
240 Hemlock Street
Broomfield, Co. 80020
RE: Extension of the Mineral Lease and Option to Purchase, dated
November 12, 1975, as the same has been amended from time to time
(the "Mineral Lease")
Dear Mrs. Hayden:
Reference is made to that certain Mineral Lease hereinabove referenced,
between you and Franklin Consolidated Mining Co., Inc. (the "Company") as a
successor in interest to Gold Developers and Producers, Incorporated. Reference
is further made to that certain Purchase Agreement, dated September 5, 1996 by
an between you and Gems & Minerals Corp. ("Gems") pursuant to which you have
agreed to sell your interest in and to the Mineral Lease (the "Hayden Interest")
to Gems for an aggregate purchase price of $75,000 (the "Purchase Agreement").
We submit this letter agreement to you to further qualify the relationships of
the parties as they relate to the Mineral Lease and the Purchase Agreement.
The Company hereby acknowledges and consents to the sale of the Hayden
Interest to Gems upon the terms and conditions of the Purchase Agreement. In
consideration of such consent and for other good and valuable consideration the
receipt and sufficiency of which is hereby acknowledged, you hereby agree to
extend the term of the Mineral Lease for one year such extended term to expire
in December, 1997 (the "Extended Termination Date") Further, the Company agrees
to continue to make the required royalty payment of $1,000 to you as per the
terms and conditions of the Mineral Lease on or before the 15th day of each
month until the Extended Termination Date. In the event that the Company shall
default on such payment and Gems shall not have made such payment on behalf of
the Company as per its agreements in the Purchase Agreement, then the default
provision and cure periods set forth in the Mineral Lease shall apply.
<PAGE>
FKCM
Extension of Mineral Lease & Option To Purchase
Page 2
If the foregoing accurately reflects our understanding, please so indicate
by executing this letter agreement in the space so provided.
Very truly yours,
/s/ Robert J. Levin
-------------------------------
Robert J. Levin,
Vice President
RJL: js
Agreed and Accepted this 16th day
of September, 1996
/s/ Audrey I. Hayden
- ----------------------------------
Audrey Hayden
[LETTERHEAD FOR FRANKLIN CONSOLIDATED MINING]
MINING LEASE AND OPTION TO PURCHASE AMENDMENT
RE:
Amendment to the Mining Lease and Option to Purchase, dated November 12,
1976 ("the Mining Rights Agreement" Recorded December 9, 1976, Reception No.
78069, Book 364, Page 352 at the Clear Creek County Court House, State of
Colorado.
Reference is made to the Mining Rights Agreement between Dorothy L.
Kennec, Audrey I. Hayden, and Franklin Consolidated Mining Co., Inc. (the
"Company"), a copy or which is attached hereto and incorporated by reference
herein. The Mining Rights Agreement is hereby amended (the "Amendment") is as
follows:
1. TERMS OF THE LEASE
You hereby agree to extend the term of the Mining Rights Agreement for one
additional year November 12, 1996 until November 12, 1997, upon the same terms
and conditions as are set forth in the Mining Rights Agreement.
2 CONSIDERATION
In Consideration of such extension, the company hereby agrees that it will
pay you $13,000 to be issued in Franklin Consolidated Mining Company, Inc.'s
common stock, in the amount of 104,000 shares valued at $.125 per share. This
stock will be issued in January 1997. The company further agrees that it will
pay an additional $12,000 to be paid in the amount of $1,000 per month along
with the royalty payments in an amount equal t0 $1,000 per month as per the
terms of the Mining Rights Agreement. All payments made in accordance with this
Agreement shall further reduce the purchase price for the property set forth in
paragraph 13 of the Mining Rights Agreement.
<PAGE>
Franklin Consolidated Mining Co., Inc.
Mining Lease & Option to Purchase Amendment
3 LATE PAYMENT CHARGES
A late payment charge of $100 will be paid the lessor in the event that the
monnthy payment is not received in accordance of this agreement. The Lessee
shall be responsible for all shall pay any and all costs of such delinquent
sums, including reasonable attorney's fees, necessitated by the Lessees failure
to remit in accordance with this Agreement, on time, and in full.
In Witness whereof this agreement has been executed by the parties hereto on
the date below.
/s/ Robert J. Levin
----------------------------------
Robert J. Levin, V.P.
Franklin Consolidated Mining Company, Inc.
Agreed and Accepted This is to attest that on this 25th Day
this 25 day of November, 1996 of November 1996 Dorothy L. Kennec
appeared before me.
/s/ Dorothy L. Kennec
- ----------------------------- /s/ Michele R. Wedemeyer
Dorothy L. Kennec --------------------------------
Notary
MICHELE R. WEDEMEYER
NOTARY PUBLIC
BALTIMORE COUNTY, MARYLAND
MY COMMISSION EXPIRES MARCH 18, 2000
This is to attest that on this 19 Day of Nov. 1996 the above named
Person Appeared Before Me.
/s/ Josephine L. Cincotta
- ----------------------------
Notary Public
My commision Expires 4-30-97
JOSEPHINE L. CINCOTTA
Notary Public State of New York
No. 24-4698108
Qualified in Kings County
Commission Expires April 30, 1997
2
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
SCHEDULE 13D
(Rule 13d-101)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)*
Franklin Consolidated Mining Co., Inc.
- --------------------------------------------------------------------------------
(Name of Issuer)
Common Stock, $.01 Par Value
- --------------------------------------------------------------------------------
(Title of Class of Securities)
35355910
- --------------------------------------------------------------------------------
(CUSIP Number)
Andrew Cosentino, Esq., Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
December 26, 1996
- --------------------------------------------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box |_|.
Note: Six copies of this statement, including all exhibits, should be filed with
the Commission. See Rule 13d-1(a) for other parties to whom copies are to be
sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934
("Act") or otherwise subject to the liabilities of that section of the Act but
shall be subject to all other provisions of the Act (however, see the Notes).
<PAGE>
SCHEDULE 13D
CUSIP No. 35355910
- --------------------------------------------------------------------------------
1 Name of Reporting Person
S.S. or I.R.S. Identification No. of Above Person
Gems & Minerals Corp.
Island Investment Corporation
Whitey Bear Trust
- --------------------------------------------------------------------------------
2 Check the Appropriate Box If a Member of a Group* a. |_|
b. |_|
- --------------------------------------------------------------------------------
3 SEC Use Only
- --------------------------------------------------------------------------------
4 Source of Funds*
00
- --------------------------------------------------------------------------------
5 Check Box If Disclosure of Legal Proceedings Is Required Pursuant to Item
2(d) or 2(e) |_|
- --------------------------------------------------------------------------------
6 Citizenship or Place of Organization
Gems & Minerals Corp. - Nevada; Island Investment Corporation - Nevada;
Whitey Bear Trust - California
- --------------------------------------------------------------------------------
7 Sole Voting Power
by each of Gems & Minerals Corp., Island Investment
Number of Corporation and Whitey Bear Trust - See Response to
Shares Item 5 of this Schedule
Beneficially --------------------------------------------------------
Owned By 8 Shared Voting Power
Each
Reporting 0
Person --------------------------------------------------------
With 9 Sole Dispositive Power
by each of Gems & Minerals Corp., Island Investment
Corporation and Whitey Bear Trust - See Response to
Item 5 of this Schedule
--------------------------------------------------------
10 Shared Dispositive Power
0
- --------------------------------------------------------------------------------
11 Aggregate Amount Beneficially Owned by Each Reporting Person
by each of Gems & Minerals Corp., Island Investment Corporation and
Whitey Bear Trust - See Response to Item 5 of this Schedule
- --------------------------------------------------------------------------------
12 Check Box If the Aggregate Amount in Row (11) Excludes Certain Shares* |_|
- --------------------------------------------------------------------------------
13 Percent of Class Represented By Amount in Row (11)
- --------------------------------------------------------------------------------
14 Type of Reporting Person*
Gems & Minerals Corp. - CO; Island Investment Corporation - CO; Whitey
Bear Trust - OO
- --------------------------------------------------------------------------------
*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7
(INCLUDING EXHBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
<PAGE>
Item 4. Purpose of Transaction.
Gems & Minerals Corp. ("Gems") recently sold shares of Franklin
Consolidated Mining Co., Inc. ("Franklin"). stock in several transactions. On
December 26, 1996, two million (2,000,000) shares were sold to Concord
International Ltd. in settlement of certain debt obligations. Also on December
26, 1996, five hundred thousand (500,000) shares were sold to Growth
International Ltd. for consideration of $60,000. On January 2, 1997, one million
(1,000,000) shares were sold to Redstone Securities for cash of $78,061.28.
Item 5. Interest in Securities of the Issuer.
The reporting person in this Schedule beneficially owns __________
shares of the Common Stock, representing approximately ___% of an estimated
___________ issued and outstanding shares of the Common stock (based upon
_______ shares of the Common Stock issued and outstanding as of December 31,
1996). Gems has the sole right to direct the voting or disposition of _______
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.
Anthony DiMatteo, an officer and director of Gems, owns ________
shares of Common Stock in his own name.
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: January_____, 1997
ISLAND INVESTMENT CORPORATION
GEMS & MINERALS CORP.
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Secretary and Treasurer
of Island Investment Corporation and
Gems & Minerals Corp.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: January_____, 1997
WHITEY BEAR TRUST
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Trustee
<PAGE>
EXHIBIT A
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct and hereby agree that this statement is being filed on behalf of Gems,
Island and the Trust.
Date: January_____, 1997
ISLAND INVESTMENT CORPORATION
GEMS & MINERALS CORP.
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Secretary and Treasurer
of Island Investment Corporation and
Gems & Minerals Corp.
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct and hereby agree that this statement is being filed on behalf of Gems,
Island and the Trust.
Date: January_____, 1997
WHITEY BEAR TRUST
By /s/ Anthony DiMatteo
----------------------------------
Anthony DiMatteo
Trustee
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 127
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 374,544
<PP&E> 8,148,308
<DEPRECIATION> (1,837,180)
<TOTAL-ASSETS> 6,962,547
<CURRENT-LIABILITIES> 1,378,883
<BONDS> 0
0
0
<COMMON> 905,830
<OTHER-SE> 3,958,195
<TOTAL-LIABILITY-AND-EQUITY> 6,962,547
<SALES> 0
<TOTAL-REVENUES> 2,351
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 867,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,238
<INCOME-PRETAX> (967,524)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (967,524)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
