Filed with the Securities and Exchange Commission on June 10, 1997
Registration No. 33-
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FRANKLIN CONSOLIDATED MINING CO., INC.
(Name of small business issuer)
Delaware 1070 13-2878202
- -------- ---- ----------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
76 Beaver Street
Suite 500
New York, New York 10005
212-344-2828
J. Terry Anderson
President
(Name, address, including zip code, and telephone number,
including area code, of agent for service of process)
Approximate date of proposed sale to the public: As soon as practicable after
the registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If the delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class Number of Shares Proposed Total Aggregate Amount of
of Securities to be to be Registered Offering Price Offering Price Registration
Registered Per Share Fee
====================================================================================================
<S> <C> <C> <C> <C>
Common Stock 15,951,885 $.140625 $ 2,243,234 $679.77
par value $.01
per share
</TABLE>
- ----------
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, based upon the average
high and low prices reported on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") as of May 31, 1997.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a) may determine.
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Cross Reference Sheet Showing location in the Prospectus of Information required
by Items in Part I of Form SB-2
<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Prospectus Caption
- --------------------------------- ------------------
<S> <C>
1. Front of the Registration Statement
and Outside Front Cover Page of Prospectus................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back
Prospectus................................................... Cover Page
3. Summary Information and Risk Factors......................... Prospectus Summary, High
Risk Factors
4. Use of Proceeds.............................................. Use of Proceeds
5. Determination of Offering Price.............................. Outside Front Cover Page,
High Risk Factors
6. Dilution..................................................... Not Applicable
7. Selling Security Holder...................................... Selling Security Holder
8. Plan of Distribution......................................... Plan of Distribution
9. Legal Proceedings............................................ Legal Proceedings
10. Directors, Executive Officers
Promoters and Control Persons........................... Management
11. Security Ownership of Certain Beneficial Security Ownership of certain
Owners and Management .................................. beneficial Owners and
Management
12. Description of the Securities Registered..................... Description of Securities
13. Interest of Named Experts and Counsel........................ Experts and Counsel
14. Statement as to Indemnification.............................. Disclosure of Commission
Position on Indemnification
for Securities Act liabilities.
15. Organization Within Last Five Years......................... Not Applicable
16. Description of Business...................................... Prospectus Summary,
Description of Business
17. Management's Discussion and Analysis or Management's Discussion
Plan of Operation......................................... And Analysis or Plan of
Operation
</TABLE>
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<TABLE>
<CAPTION>
Form SB-2 Item Number and Caption Prospectus Caption
- --------------------------------- ------------------
<S> <C>
18. Description of Property...................................... Description of Property
19. Certain Relationships and Related
Transactions............................................... Certain Transactions
20. Market for Common Equity and Related Market for Common Equity
Stockholder Matters Information......................... and Related Matters.
21. Executive Compensation....................................... Executive Compensation
22. Financial Statements......................................... Financial Statements
23. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure................. Changes in and Disagreements
with accountants on accounting
and financial disclosure
</TABLE>
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PROSPECTUS DATED JUNE 10, 1997
FRANKLIN CONSOLIDATED MINING CO., INC.
15,951,885 Shares
Common Stock
par value $.01 per share
This Prospectus relates to the offer and sale of up to an aggregate of
15,951,885 shares (the "Shares") of Common Stock, par value $.01 per share (the
"Common Stock") of Franklin Consolidated Mining Co., Inc., a Delaware
corporation (the "Company" or "Franklin") by Selling Security Holders (the
"Selling Security Holders") of Franklin. See "Selling Security Holders."
An investment in the Shares is subject to a high degree of risk. See
"Investment Considerations."
The Selling Security Holders acquired the Shares pursuant to private
transactions with the Company. See "Recent Sales of Unregistered Securities" in
Part II. Information not required in Prospectus in the Registration Statement.
The consideration for the sale of the Shares to the Selling Security
Holders was determined through negotiation with the Company after consideration
by the Company of certain factors such as market price for the Common Stock,
lack of immediate liquidity of the Shares and prevailing market conditions. The
Selling Security Holders will arbitrarily determine the selling price of the
Shares based upon certain factors such as the market price for the Common Stock
and prevailing general market conditions.
The Company will not receive any of the proceeds from the sale of any of
the Shares. The Company, however, has agreed to bear certain expenses in
connection with the registration of the Shares being offered and sold by Selling
Security Holders. See "Other Expenses of Issuance and Distribution" in Part II.
Information not required in Prospectus in the Registration Statement.
The Common Stock is quoted on the NASDAQ Stock Market under the symbol
"FKCM." On May 31, 1997, the last reported sale price of the Common Stock was
$.15625 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any state.
Investors should carefully review the risk factors set forth in the prospectus
before investing in the securities offered hereby.
The date of this Prospectus is June 10, 1997
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<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.
Washington, D.C. 20549. Documents filed by the Company can also be inspected at
the offices of the National Association of Securities Dealers, Inc., located at
1735 K Street N.W., Washington, D.C. 20006, on which exchange the Company's
Common Stock is listed.
Recently the Company has commenced filing its reports, proxy statements and
other information with the Commission electronically. The Commission maintains a
web site that contains such reports, proxies and information statements and
other information filed electronically by the Company which can be accessed at
http://www.sec.gov.
INFORMATION INCORPORATED BY REFERENCE
All reports and other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of the Shares shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of the filing of such
reports and documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference therein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed documents which also is
incorporated or deemed to be incorporated by reference superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
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The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such person,
a copy of any or all of the documents incorparated herein by reference (except
for exhibits unless such exhibts are specifically incorporated by reference
herein). Requests for such copies should be directed to the Company principal
executive offices located at 76 Beaver Street, Suite 500, New York, N.Y. 10005,
to the attention of Robert Waligunda, Secretary (telephone no. (212) 344-2828).
No underwriter, dealer, salesman or other person has been authorized to
give any information or to make any representation other than those contained in
this Prospectus, in connection with the offering described herein, and if given
or made, such information or representation must not be relied upon as having
been authorized by the Company. The delivery of this Prospectus at any time does
not imply that there has not been any change in the information set forth herein
or in the affairs of the Company since the date hereof. This Prospectus does not
constitute any offer to sell or a solicitation of an offer to buy any security
other than the securities offered hereby, or an offer to sell or a solicitation
of an offer to buy such securities in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom such offer or
solicitation would be unlawful.
7
<PAGE>
15,951,885
Shares of Common Stock
of
FRANKLIN CONSOLIDATED MINING CO., INC.
Table of Contents Page
- ----------------- ----
Additional Information 6
Documents Incorporated by Reference 6
Summary Information 9
Investment Considerations 11
Selling Security Holders 19
Plan of Distribution 20
Legal Proceedings 22
Directors, Executive Officers, Promoters 28
and Control Persons
Security Ownership of Certain Beneficial 30
Owners and Management
Description of Securities 31
Interest of Named Experts and Counsel 32
Disclosure of Commission Position on 32
Indemnification for Securities Act Liabilities
Description of the Business 32
Management's Discussion and Analysis 45
or Plan of Operation
Description of Property 51
Certain Relationships and Related 63
Transactions
Market for Common Equity and 63
Related Stockholder Matters
Executive Compensation 64
Financial Statements 65
Changes In and Disagreements With 66
Accountants and Financial Disclosure
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THE COMPANY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and condensed financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Franklin Consolidated Mining Co., Inc. ("Franklin" or, the "Company") is a
development stage Delaware corporation organized for the purpose of acquiring
and developing mineral resource properties. Among the Company's assets are (i)
the leasehold rights (the "Hayden/Kennec Leases") to explore and develop 28
patented mining claims comprising approximately 322 acres of property in Clear
Creek County, Colorado and leasehold and/or ownership interest in the adjacent
mining claims comprising approximately 23 additional acres (collectively, the
"Franklin Mines"), (ii) a crushing and flotation mill on the site of the
Franklin Mines having a capacity to process approximately 150 tons of ore 24
hour period (the "Franklin Mill"), (iii) a fully permitted modern milling
facility located in the Gold Hill mining region, and (iv) a 20% interest in a
limited liability company which has rights to certain mining properties in the
Spencer Mountain region of Colorado . The principal minerals found at the
Franklin Mines are gold, silver, lead, zinc and copper.
In February 1993, the Company and Island Investment Corp. ("Island") formed
Zeus No. 1 Investments (the "Joint Venture" or "Zeus Joint Venture"), a
California general partnership, to develop the Franklin Mines and the related
assets of the Company. Shortly thereafter, Island assigned its rights to the
Joint Venture to Gems & Minerals Corp., a subsidiary of Island ("Gems"). On July
15, 1996, Gems transferred 31.5% of its 82.5% interest in the Company and 29% of
its interest in Newmineco, LLC to Nuco Venture, Inc., ("NUCO") a Delaware
corporation in exchange for 100% of the outstanding shares of Nuco. Presently,
the Company maintains a 17.5% interest, Gems maintains a 51% interest and Nuco
maintains a 31.5% interest in the Joint Venture. Neither the Franklin Mines nor
the Franklin Mill has commenced production to date.
The Zeus Joint Venture was primarily formed to develop the Franklin Mines
and Franklin Mill pursuant to the Company's rights under the Hayden/Kennec
Leases, and the future success of its operations is dependent on its ability to
utilize those lease rights and/or to otherwise acquire the rights to the use of
such properties and the rights to extract the resources thereon. Pursuant to the
Hayden/Kennec Leases, the Company has the exclusive right to explore, develop,
mine and extract any minerals found in the mines, lodes, veins and dumps located
at the Franklin Mines.
On July 3, 1996, Franklin acquired the Gold Hill Mill, a permitted modern
milling facility located in Boulder County, Colorado (the "Gold Hill Mill") from
Colina Oro Molina, Inc. ("COM, Inc.") for a $2,500,000 note. COM, Inc. is a
wholly owned subsidiary of Gems. The Gold Hill Mill is located within close
proximity to the Franklin Mine and Franklin Mill as well as the Mogul Mines (as
defined below) and will afford the Company the opportunity to expand its
geographic reach into the Gold Hill Mining region. Although the Gold Hill Mill
has not been commercially operated in the past and is not currently operational,
management is hopeful that milling will occur at the Gold Hill Mill and Franklin
Mill at a combined initial rate of 200 tons per day in fiscal year 1997. The
Company anticipates that such capacity will be increased in the future
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<PAGE>
upon the installation of additional equipment at the facilities and receipt of
the appropriate regulatory approvals, if necessary.
On September 26, 1996, the Company acquired from Gems a 20% interest in a
start up entity, Newmineco, LLC, a Colorado limited liability company
("Newmineco" or "LLC") which leases the rights to the mining properties known as
the Mogul Mines, consisting of the Mogul Tunnel and the surrounding claims in
the Spencer Mountain region (the "Mogul Mines"). The Mogul Mines, located in
Eldora, Boulder County, Colorado, are well known in the region as a historic
gold resource and yielded in late 1996 during bulk testing an estimated 100 tons
of gold ore with an average grade of approximately 1 ounce per ton. Although the
Mogul Mines are not operating on a commercial basis, Newmineco has informed the
Company that, upon obtaining appropriate regulatory approvals, it is
anticipating a target production rate of approximately 100 tons per day during
fiscal year 1997 and has informed the Company of its intention to transport
mined materials to the Franklin milling facilities for crushing and processing.
As with the Gold Hill Mill, Newmineco has no operating history to date and
operations are predicated on obtaining all regulatory approvals and permits from
various regulatory authorities.
The Company is a Delaware corporation incorporated on December 1, 1976. The
executive offices of the Company are located at 76 Beaver Street, Suite 500, New
York, New York, New York 10005, telephone (212) 344-2828.
10
<PAGE>
INVESTMENT CONSIDERATIONS
In addition to the other information set forth in the Prospectus,
prospective investors should carefully consider the following factors prior to
making any investment in the Shares.
DEVELOPMENT STAGE COMPANY
The Company is in the development stage and has suffered operating losses
through March 31, 1997 due to its inability to effectively develop and operate
its mining properties. The Company's future success is highly dependent upon the
funding of its operations, including primarily, the successful funding and
operation of the Zeus Joint Venture and Newmineco in which the Company has
minority profit interests. It is anticipated that the Zeus Joint Venture will
have the technological and financial support necessary to bring certain of the
Company's mining properties into operation; however, there is no certainty that
adequate financing will be available and there can be no assurance that the
Franklin Mines or Mogul Mine will go into operation or that, if operations
commence, the operations will continue or be conducted profitably. Moreover, the
Gold Hill Mill and the Mogul Mines do not have any operating history; therefore,
the Company's projections have no historical basis . The likelihood of the
success of the Company must be considered in light of the problems, expenses,
difficulties, complications and delays frequently encountered in connection with
the development of any new business, particularly those associated with mining
businesses. No assurance may be given that the Company's proposed business plan
will succeed, that significant revenues will be achieved, or that the Company
will ever become profitable. Further, it is possible that the Company will
encounter obstacles, difficulties in obtaining financing, governmental
interference through regulations or otherwise, and other factors which could
cause significant delays to the Company. Such delays, if they occur, could have
a material adverse effect on the potential success of the Company and on the
ability of the Company to achieve profitable operations.
MANAGEMENT; DEPENDENCE ON JOINT VENTURE PARTNER
The Company's success is largely dependent upon the efforts and activities
of a very small management team with limited expertise in the operation of a
mining business. Moreover, the Company is highly dependent upon Gems, its joint
venture partner and outside consultants to develop, manage and, in the future,
operate the mining properties presently leased and/or owned by the Company.
While the Company anticipates that qualified personnel will be available to it,
there can be no assurance that the Company will be able to successfully retain
such personnel. Nonetheless, the loss of the Company's joint venture partners,
specifically Gems, would have a material adverse effect on the Company's ability
to implement its business plan and/or develop and operate its mining properties.
At this time, there is no current arrangement to hire additional management or
any negotiations with respect to entering into other joint venture arrangements.
Therefore, the Company will be dependent upon the general business acumen and
expertise of its current officers and directors and its joint venture partners.
If the Zeus Joint Venture should terminate, no assurance can be given that the
Company could find a suitable replacement therefor or that the Company's
business and operations would not be adversely affected if such relationship
were to be terminated for any reason. The Company has no current cash flow and
depends
11
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entirely upon the Joint Venture (which has no operating history to date) and its
joint venture partners, for repayment of the Company's obligations to investors
and to others as well as for financing necessary to bring the properties into
operation. Moreover, the Gold Hill Mill and the Mogul Mines do not have any
operating history. There can be no certainty that the Company will generate any
income or cash flow to pay its obligations from either its own properties or
from its investment in Newmineco.See Investment Considerations-Joint Venture
Arrangements.
COMPETITION
The Company, through its joint venture relationship, expects to be engaged
in a highly competitive industry. Nearly all of the Company's competitors will
have substantially greater capital, research and development, marketing and
human resources and experience than the Company. While none of the Company's
competitors have a large presence in the regions in which the Company maintains
its properties, competitive forces may establish businesses in Colorado mining
areas in the future and may represent significant long-term competition to the
Company. Accordingly, future competitive forces could have a material adverse
effect on the Company's viability and profitability.
ADDITIONAL FUNDING
The Company expended, and will continue to expend in the future, directly
or through the Joint Ventures, substantial funds to develop its mining
properties as currently contemplated. The Company will not receive any of the
proceeds from this offering and the Company has no current arrangement with
respect to additional financing. The Company currently has authorized
100,000,000 shares of Common Stock, of which 90,687,020(2) is outstanding as of
May 31, 1997. Thus, the Company's ability to use its Common Stock as a capital
resource will remain limited unless the Company's stockholders should approve an
increase in authorized capital or a reverse stock split. Additionally, the
Company remains highly dependent on its joint venture partner and the success of
each of the Zeus Joint Venture and Newmineco. No assurance can be given that
additional financing will be available to the Company on acceptable terms, if at
all, that additional Common Stock will become available as a capital resource,
or that its joint venture partner, the Zeus Joint Venture or Newmineco will
continue to provide the support necessary for the Company to develop its mining
properties. If additional funding becomes necessary and is not available to the
Company, it could cause the Company to further curtail its efforts with respect
to the development of its mining properties and preclude the Company from
fulfilling certain of its obligations, including its obligations with respect to
the Zeus Joint Venture and Newmineco.
- ----------
(2) Does not include 7,692,308 shares to be issued in connection with the
conversion of the Mogul Note and 500,000 shares to be issued to Redstone
Securities, Inc. in connection with its exercise of its option on May 27,
1997.
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DEPENDENCE ON SINGLE BUSINESS SEGMENT
The Company currently has only one business segment and has no present
plans or capital available to explore alternative business ventures.
Accordingly, the Company's success depends entirely on its ability to develop
its mining properties. There can be no assurance that the Company will be able
to successfully develop its mining properties into a commercially viable
business.
RECENT LOSSES
The Company is a development stage company. It has not had any significant
revenues from its mines and mills and/or, as a result, it has experienced losses
for each of the last five years. For the year ended December 31, 1996, the
Company reported a net loss of approximately $968,000 or $.01 per common share
compared to a net loss of $924,000 or $.02 per common share for 1995. The net
loss resulted primarily from the Company's inability to bring the Franklin Mines
and the Franklin Mill into operation. No assurance can be given that full scale
operations will commence at the Mogul Mines or that the Company will realize any
income from its investment in Newmineco in the near future.
LACK OF PRODUCTION
The Company's future production will be dependent upon the Company's
success in bringing the Franklin Mines and the Franklin Mill into production as
well as its development of new reserves, its ability to acquire new properties
containing adequate reserves and the successful operation of the Franklin Mill
and/or the Gold Hill Mill the success of Newmineco. There can be no assurance
that any of the Company's mining properties will ever come into operation or be
able to produce adequate amounts of concentrates to become commercially viable
ventures.
PROJECT DEVELOPMENT
Currently, the Company's projects in development are the Franklin Mines
project, the Mogul Mines project and the Gold Hill Mill project. The Company has
a 20% ownership interest in Newmineco and it is anticipated that the Mogul Mines
project will be placed into full production during 1997 or early 1998. The
Company owns a 17.5% interest in the Franklin Mines project through its
participation in the Zeus Joint Venture. The Company incurred capital
expenditures for the Franklin Mines project of approximately $60,000 in 1996 and
expects to expend approximately $250,000 in 1997. Capital expenditures for the
Gold Hill Mill were approximately $25,000 for the last two quarters of 1996 and
are expected to be approximately $100,000 in 1997.
With respect to such projects, the Company's estimated capital expenditures
for its mining projects are based upon available data and could increase or
decrease depending upon a number of factors beyond the Company's control. In
addition, the Company will not be able to commence production until virtually
all of the capital expenditures have been incurred. Thus, if capital
expenditures are higher than currently estimated, the Company may not be
13
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able to begin mining and/or milling operations until such time as additional
financing is arranged, and there an be no assurance that additional financing
will be available. Moreover, the Company maintains a minority interest in each
of the Zeus Joint Venture and Newmineco. Thus, there can be no assurance that
the Company would realize significant income from such projects should they ever
become operational.
Particularly in development projects, reserve estimates are, to a large
extent, based upon data from drill holes and different results may be
encountered when the ore bodies are exposed and mining begins. Although the
Company has engaged in feasibility and engineering activities at the Franklin
Mines, (including testing to determine recovery rates of metals from the ore),
since development projects usually have no prior operating history, it is
possible that the Company may experience different economic returns from such
projects than it currently forecasts. The Company has been advised that similar
difficulties exist at the Mogul Mines and that Newmineco has not, to date,
commenced any exploratory drilling to compile data with respect to the reserves
located at the Mogul Mines. Therefore, there can be no assurance that ore
reserves may ever be proven at the Mogul Mines or that reliable data regarding
estimated ore reserves will be available. It is not unusual in new mining
operations to experience unexpected problems during the development phase. As
described under "Investment Considerations-Mining Risks and Insurance," the
business of mining is subject to a number of risks and hazards, and there can be
no assurance that these risks and hazards can be avoided in development of the
Franklin Mines project or at the Mogul Mine project.
EXPLORATION
Mineral exploration, particularly for gold and silver, is highly
speculative in nature, involves many risks and frequently is nonproductive.
There can be no assurance that the Company's mineral exploration efforts will be
successful. Once mineralization is discovered, it may take a number of years
from the initial phases of drilling until production is possible, during which
time the economic feasibility of production may change. Substantial expenditures
are required to establish ore reserves through drilling to determine
metallurgical processes to extract the metals from the ore, and, in the case of
these uncertainties, no assurance can be given that the Company's exploration
programs will result in profitable operations at the Franklin Mines, the Mogul
Mines or other properties which the Company may acquire in the future.
METAL PRICE VOLATILITY
Because substantially all of the Company revenues will be derived from the
sale of gold, and to a lessor extent, silver, lead, copper and/or zinc, if the
market price for these metals falls below the Company's estimated production
costs and remains at such level for any sustained period, the Company may
experience losses and determine to discontinue development of the Franklin mine
project and similar decisions may be made with respect to the Mogul Mines or
other properties which may be acquired by the Company in the future. As
described above under "Investment Considerations-Recent Losses," the Company has
experienced losses from operations in each of the last five years due to the
Company's inability to commence operations at the Franklin Mines and the
Franklin Mill. While the Company hopes to be able to reduce its exposure to the
volatility of gold, silver, lead, copper
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and/or zinc prices once the Franklin Mines and Mogul Mines are operational,
there can be no assurance that it will be able to do so effectively.
COMPETITION FOR PROPERTIES
Because mines have limited lives based on proven and probable ore reserves,
the Company must continually seek to replace and expand its reserves. While the
Company is one of the few mining companies operating in its Colorado mining
region to date, the Company may encounter strong competition from other mining
companies in connection with the acquisition of properties procuring or capable
of producing gold, silver, lead, zinc and industrial minerals should competitors
wish to establish operations in Colorado. In the event that such competition
will develop, most of which will be with companies having greater financial
resources than the Company, the Company may be unable to acquire attractive
mining properties on terms it considered acceptable. In addition, there are a
number of uncertainties inherent in any program relating to the location of
economic ore reserves, the development of appropriate metallurgical processes,
the receipt of necessary governmental permits and the construction of mining and
processing facilities. Accordingly, there can be no assurance that the Company's
programs will yield new reserves to replace and expand current reserves. The
mining properties upon which the Zeus Joint Venture and Newmineco are based are
leased from third parties, and these leases must be renewed or the property must
be purchased in order to allow the Company and its joint venture partners to
continue to exploit such properties. There can be no assurance that the Company,
or its joint venture partners, will be able to retain its leasehold rights, or
acquire such rights in the future, or purchase such properties on acceptable
terms. Failure to maintain its interests will have a material adverse effect on
the business and finances of the Company.
RESERVES
The ore reserve figures for the ore bodies comprising the Franklin Mines
presented in this Prospectus are, in large part, estimates made on behalf of the
Company and no assurance can be given that the indicated level of recovery of
these metals will be realized. Reserves estimated for the Franklin Mines may
require revision based on actual production experience as these properties have
not yet commenced production. Market price fluctuations of the metals to be
mined as well as increased production costs or reduced recovery rates, may
render ore reserves containing relatively lower grades of mineralization
uneconomic and may ultimately result in a restatement of reserves. Moreover,
short-term operating factors relating to the ore reserves, such as the need for
sequential development of ore bodies and the processing of new or different ore
grades, may adversely affect the Company's profitability in any particular
accounting period.
With respect to the Mogul Mines, reports have been done in the past with
respect to the geology and deposits located thereat. However, such reports were
conducted several years ago and the Company has been advised by Newmineco that
it intends to conduct its own testing to generate information regarding basic
line data with respect to geology and possible reserves. Therefore, there can be
no assurance that the Company will have ore reserve figures available to it with
respect to the Mogul Mines or that such figures will indicate that commercial
production at the Mogul Mines will be economically feasible.
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JOINT VENTURE ARRANGEMENTS
The Franklin Mines project is being conducted through the Company's joint
venture arrangements with Gems. As a matter of partnership law, if a joint
venture partner fails to honor its obligations (including as a result of
insolvency), the Company could incur losses in excess of its pro rata share of
the Joint Venture.
The Company estimates of its development costs and capital expenditures
assume that its joint venture partners will not default on their obligations to
contribute their respective portions of such costs and expenditures as set forth
in the partnership agreement. If there is such a default, there can be no
assurance that the Company will have the resources available to contribute
additional capital to the Franklin Mines project. Accordingly, there can be no
assurance that the Company's cash flow from operations and its capital resources
will be sufficient to achieve planned levels of expenditures.
GOVERNMENT REGULATION AND LEGAL PROCEEDINGS
The Company's mining activities are subject to extensive federal, state and
local laws and regulations controlling not only the mining of and exploration
for mineral properties, but also the possible effects of such activities upon
the environment. Permits from a variety of regulatory authorities are required
for many aspects of mine and mill operation and reclamation. Further,
legislation and regulations could cause additional expense, capital
expenditures, restrictions and delays in the development of the Company's
properties, the extent of which cannot be predicted. In the context of
environmental permitting, including the approval of reclamation plans, the
Company must comply with known standards, existing laws and regulations which
may entail greater or lesser costs and delays depending on the nature of the
activity to be permitted and how stringently the regulations are implemented by
the permitting authority. It is possible that the costs and delays associated
with the compliance with such laws, regulations and permits could become such
that the Company would not proceed with the development or operation of a mine.
TITLE TO PROPERTIES
The validity of unpatented mining claims is often uncertain and may be
contested. Although the Company has attempted to acquire satisfactory title to
its undeveloped properties, the Company, in accordance with mining industry
practice, does not generally obtain title opinions until a decision is made to
develop a property, with the attendant risk that some title, particularly titles
to undeveloped properties, may be defective. However, with respect to the
Franklin Mines, the Company has procured title policies and, despite some minor
defects with respect to the Franklin Mines, believes that it will not have any
issues with respect to defective title.
MINING RISKS AND INSURANCE
The business of mining is generally subject to a number of risks and
hazards, including environmental hazards, industrial accidents, labor disputes,
encountering unusual or unexpected geologic formations, cave-ins, flooding and
periodic interruptions due to inclement
16
<PAGE>
or hazardous weather conditions. Such risks could result in damage to, or
destruction of , mineral properties or producing facilities, personal injury,
environmental damage, delays in mining, monetary losses and possible legal
liability. Although the Company believes that it maintains insurance within the
ranges of industry practice, no assurance can be given that such insurance will
be available at economically feasible premiums. Insurance against environmental
risks (including potential for pollution or other hazards as a result of
disposal waste products occurring form exploration and production) is not
generally available to the Company or to other companies within the industry. To
the extent that the Company is subject to environmental liabilities, the payment
of such liabilities would reduce the funds available to the Company. Should the
Company be unable to fund fully the cost of remedying an environmental problem,
the Company might be required to suspend operations or enter into interim
compliance measures pending completion of the required remedy.
17
<PAGE>
SMELTING CAPACITY
The Company intends to sell substantially all of its metallic concentrates
to smelters which are subject to extensive regulations including environmental
protection laws. The Company has no control over the smelters' operations or
their compliance with environmental laws and regulations. If smelting capacity
should be severely reduced, unavailable to the Company or otherwise, it is
possible that the Company's operations could be adversely affected.
18
<PAGE>
SELLING SECURITY HOLDERS
(a) The following table sets forth certain information with respect to
shares held by the Selling Security Holders. The shares may be offered from time
to time by the Selling Security Holders. See "Plan of Distribution".
<TABLE>
<CAPTION>
Security Holder Shs. Beneficially owned Shares Shares Beneficially Owned
Name Prior to the Offering Offered after the Offering
- ----------------------------------------------------------------------------------------------
Number(1) Percent Number Percent
<S> <C> <C> <C> <C> <C>
Gems & Minerals
Corp. (2) 3,627,577(3) 3.67 3,627,577 0 0
- ----------------------------------------------------------------------------------------------
Redstone Securities, 3,700,000 3.74 3,000,000 700,000 .71
Inc.(4)
- ----------------------------------------------------------------------------------------------
Carl Clinger 1,720,566 1.74 898,462 822,104 .83
- ----------------------------------------------------------------------------------------------
John Miner 4,909,361 4.97 4,896,461 12,900 .01
- ----------------------------------------------------------------------------------------------
Andrew Yu Liu 1,613,848 1.63 618,461 995,387 1.01
and Veronica
Kwai Liu
- ----------------------------------------------------------------------------------------------
Leif E. Anderson(5) 3,639,660 3.68 300,000 3,339,660 3.38
- ----------------------------------------------------------------------------------------------
Michael Gleason 1,060,145 1.07 359,231 700,914 .71
- ----------------------------------------------------------------------------------------------
Lawrence 1,265,063 1.28 898,462 366,601 .37
McReynolds MD
Pension Trust
- ----------------------------------------------------------------------------------------------
Dorothy Kennec(6) 104,000 .10 104,000 0 0
- ----------------------------------------------------------------------------------------------
Thomas Thiersch 1,794,060 1.81 449,231 1,344,829 1.36
- ----------------------------------------------------------------------------------------------
Warren L. Serenbetz 800,000 .81 800,000 0 0
- ----------------------------------------------------------------------------------------------
Totals 24,234,280 15,951,885 8,282,395
</TABLE>
19
<PAGE>
(1) As of May 31, 1997
(2) Gems has been an affiliate of and the joint venture partner of the Company
since 1993 and, together with its subsidiary, controls 82.5% of the Zeus
joint venture and 80% of Newmineco.
(3) All of the shares beneficially owned by Gems are currently pledged to
secure certain obligations of Gems to Bradley, Campbell, Carney & Madsen
local Colorado counsel to the Zeus joint venture, and Golder Associates, a
mining engineering consultant. For a more detailed description of the
transactions involving Gems, BCCH and Golder, see Legal Proceedings-Golder
Litigation.
(4) Redstone Securities, Inc. is currently acting as the Company's investment
banker and financial advisor in accordance with the terms of an investment
banking agreement entered into between the Company and Redstone in August
1996. As compensation thereunder, Redstone was given options to purchase
up to 3,000,000 shares of common stock of the Company and has exercised
all such options. See "Recent Sales of Unregistered Securities" in Part
II. Information not required in this Prospectus of the Registration
Statement of the Company on Form SB-2. Redstone is a registered broker
dealer and a member of the National Association of Securities Dealers.
Redstone is also a leading market maker in the common stock of the
Company.
(5) Mr. Anderson is the brother of J. Terry Anderson, an officer and director
of the Company. Mr. Anderson is also a principal and has ownership
interest in Anderson Chemical Company and Anderson Brothers Realty, LLC,
of which Mr. J. Terry Anderson also has ownership interest and is a
principal therein.
(6) Dorothy Kennec is a lessor under the Hayden/Kennec Leases pursuant to
which the Company has been granted the right to exploit the Franklin
Mining Properties. For a more detailed description of the relationship
between Mrs. Kennec and the Company see Description of
Property-Hayden/Kennec Leases.
PLAN OF DISTRIBUTION
The Shares offered hereby may be sold from time to time by the Selling
Security Holders acting as principals for their own account. The Company will
receive none of the proceeds from the offering of the Shares. Pursuant to
certain agreements between the Company and each of the Security Holders, the
Company and each of the Selling Security Holders agreed, at its expense, to file
this Registration Statement and to take certain other actions to permit the
Selling Security Holders to sell the Shares under the Securities Act of 1933, as
amended ("Act") and applicable state securities laws. The Selling Security
Holders will pay or assume brokerage commissions, discounts or other charges and
expenses incurred in the sale of the Shares.
20
<PAGE>
The distribution of the Shares by the Selling Security Holders are not
subject to any underwriting agreement. The Shares covered by this Prospectus may
be sold only by the Selling Security Holders. The Shares offered by the Selling
Security Holders may be sold from time to time at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices relating to
such prevailing market prices or at negotiated prices. In addition, the Selling
Security Holders may sell the Shares covered by this Prospectus through
broker-dealers acting as agents or brokers who may then resell the Shares, or a
private sale or otherwise, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
Selling Security Holders may effect such transactions by selling Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of underwriting discounts, concessions, commissions or fees from the
Selling Security Holders and/or purchasers of the Shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation to a particular broker-dealer might be in excess of
customary commissions). Any broker-dealers that participate with the Selling
Security Holders in the distribution of Shares may be deemed to be underwriters
and any commissions received by them and any profit on the resale of Shares
positioned by them might be deemed to be underwriting discounts and commissions
within the meaning of the Act of, in connection with such sales.
If and when any Shares covered by this Prospectus qualify for sale pursuant
to Rule 144 under the Securities Act of 1933, they may be sold under Rule 144
rather than pursuant to this Prospectus and the Company will be under no further
obligation to maintain the registration of such Shares at that time.
The Selling Security Holders are not restricted as to the price or prices
at which they may sell Shares. Sales of such Shares at less than the market
prices may depress the market price of the Company securities. Moreover, the
Selling Security Holders are not restricted as to the number of Shares which may
be sold at any one time, and it is possible that a significant number of Shares
could be sold at the same time which may also have a depressive effect on the
market price on the Company's securities. It is anticipated that the sale of the
Shares will be made over a one year period commencing with the date of this
Prospectus.
The Selling Security Holders will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including, without
limitation, Rules 10b-2, 10b-5, 10b-6 and 10b-7, which provisions may limit the
timing of purchases and sales of the Shares by the Selling Security Holders.
The Company is permitted to suspend the use of this Prospectus in
connection with sale of the Shares by Selling Security Holders during certain
periods of time under certain circumstances relating to pending corporate
developments and public filings with the Commission and similar events.
21
<PAGE>
LEGAL PROCEEDINGS
12 1/4% Convertible Debentures
- ------------------------------
As of the date hereof, the Company remains in default with respect to its
12 1/4% Convertible Debentures (the "Debentures") which matured on December 31,
1994. In 1994 and again in 1995, the Company asked the holders to approve
alternative payment arrangements in an effort to cure the defaults and
ultimately pay, in full, $145,000 principal amount of the Debentures, together
with all accrued and unpaid interest thereon. However, a series of unforeseen
circumstances caused cash flow shortages which prevented the Company from
bringing such holders current. As of March 31, 1997, the Company owed
approximately $35,526 in accrued and unpaid interest to such holders.
As a result of its default and its continued failure to comply with the
1994 and December 1995 agreements, the Company may be subject to legal
proceedings by the Transfer Agent/Trustee under the Indenture or from holders
seeking immediate payment of the $145,000 outstanding, plus related interest and
other costs and expenses associated therewith as well as penalties and other
legal remedies available to such holders under the law. On or about January 17,
1997, the Company received a letter from counsel to James E. Hopis, Revocable
Trust, a holder of $5,000 of Debentures of the Company demanding payment of such
bond immediately or legal action will be taken against the Company to collect
thereon. As of the date hereof, however, no litigation has been commenced
against the Company with respect to the Debentures. While the Company is
currently attempting to cure the default, there can be no assurance that the
funds will be available in the future to meet all of the Company's obligations.
The Company is hopeful that it will generate sufficient funds prior to
December 31, 1997 to pay the accrued and unpaid interest, together with the
outstanding principal balance of the Debentures. There can be no assurance,
however, that the Company will have adequate funds available to make the
payments or that the commencement of legal proceedings will not have a material
adverse effect on the Company.
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 Mines 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 Mines 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
22
<PAGE>
lessee of the Mogul Mines 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, (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 3,627,577 shares of common stock of
the Company owned by Gems 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 under the notes on
or before 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 certain claims
of Golder 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
23
<PAGE>
the subject contracts. Also on March 12, 1997, 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 amended 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 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 112D Mining Permit, M83-083 (the "Franklin
Permit"). Such technical revision plan was required to address erosion,
sedimentation and run-off matters arising from the upper pyritic tailings pond
located at the property. The DMG set the matter down for a hearing to determine
if a violation existed in connection with the Franklin 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 Mines relating to water run-off from the
upper pyritic tailings pond 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 Joint Venture reported that it 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 Mines 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.
24
<PAGE>
In March, 1996, the Company was notified that it would be required, to
further increase its land reclamation bond. In an effort to comply with such
requests, the Company posted an additional $48,000 increasing it land
reclamation bond from $45,000 to $93,000. On or about March 28, 1996 at a
hearing before the MLRB and the DMG, the Company received a temporary cease and
desist order prohibiting it from conducting mining and/or milling operations at
the Franklin Mine until such time as all of the violations cited by the DMG were
satisfied. Additionally, the MLRB determined that the Company's reclamation bond
should be increased to approximately $252,000 on or before April 5, 1996.
The Company was able to post the required bond with the DMG in May of 1996
and has received verbal assurances from such agency that all of the violations
at the Franklin Mines 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.
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 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 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
Franklin Permit, See Description of the Business-Operation at the Franklin
Mines.
Joint Venture Obligations
- -------------------------
As of March 31, 1997, the Company has no outstanding obligations to the
Joint Venture; however, cumulative losses attributable to the Company totaled
$136,108 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 $957,000 which includes (i) $609,683 attributable to principal and
accrued but unpaid interest on the Gold Hill Note; and (ii) $614,250
attributable to principal and accrued but unpaid interest on the Note evidencing
the purchase price of the Company's 20% interest in Newmineco (the "Newmineco
Note") less $266,438 attributable to inter-company loans from the Company to
Gems.
25
<PAGE>
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. At December 31, 1996, the real estate taxes which were due and owing
on the properties that comprise the Franklin Mines and Mill were 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. As of May 31,1997, the Company paid approximately $57,500
against the aforementioned tax liabilities.
Durango Litigation.
- -------------------
On or about February 1, 1996, Newmineco, Island, Gems and Zeus entered into
a series of transactions with Durango Metals, Inc., a Colorado Corporation
("Durango") Thames Hartley, the president of Durango (Hartley") and J. Wayne
Tatman ("Tatman"), an agent of Durango and Hartley and president of Consolidated
Milling, Inc. ("Consolidated Milling") to develop certain mining properties,
including the Mogul Mines. See Description of the Business-Newmineco. In March
1996, Island acquired a lease known as the Rugg/Mogul Lease from Charles R. Rugg
and his daughter, Cindy McCollum (collectively the "Ruggs") through a Novation
Agreement by which the predecessor lessee, Durango, Hartley and/or its
representative Tatman, agreed to release their leasehold interest in the Rugg
properties in exchange for the agreements of each of Island and the Ruggs to
allow Island to become the lessee of the properties and to take over all of the
rights and obligations of the parties under the original lease which included
the payment by Island of certain financial obligations owed by Durango, Hartley
and/or Tatman to the Ruggs under the original lease. The Rugg/Mogul Lease was
then renegotiated and renewed with the Ruggs and Island, solely, as lessee for a
ten year period which lease is currently in effect and which was later assigned
to Newmineco. Thereafter, Island and Gems notified the Company that Tatman,
Hartley and Durango and certain other parties to the Newmineco venture breached
their agreements and as a result, Island terminated all such venture agreements
involving these persons and Newmineco. Island thereafter assigned its interest
in Newmineco to Gems.
In June 1996, 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, Jane A.
Wood and David C. Sutton, each the owner of claims located on the properties
comprising the Mogul Mines (the "Delaware Claim" and the "Bonanza Claims",
respectively) and Durango, the purported lessee of such claims, commenced an
action in District Court, Boulder County, Colorado, against the Ruggs, Island,
Newmineco, the Company and any other unknown parties of interest to quiet title
to each of the Delaware Claim and Bonanza Claims (hereinafter the "Disputed
Claims"). The complaint further alleges that the defendants have removed ore
mined from the Disputed Claims and that, as a result of trespass and conversion
of certain equipment of Plaintiff Durango, plaintiffs have been further damaged
in the amount of approximately $800,000. In addition to the
26
<PAGE>
actions for quiet title and for the adjudication of the ownership of the
Disputed Claims, Plaintiffs requested damages for conversion of Plaintiff
Durango's equipment, seeks a full accounting of the ore removed from the
premises and request all other damages, costs and expenses, including attorney's
fees incurred with respect to this dispute.
The Company, as well as its co-defendants, retained local Colorado counsel
and intend to rigorously defend this action 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 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.
27
<PAGE>
MANAGEMENT
Name Age Position
- ---- --- --------
J. Terry Anderson 49 Chairman, President,
Treasurer, Director
Robert L. 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 manufacture and marketing of sanitation and water treatment chemicals. Mr.
Anderson has also served as a member of the advisory local board of Norwest
Bank, Minnesota Central, N.A., Litchfield, Minnesota. Mr. Anderson received a
Bachelor of Arts degree in theology from Ambassador College in Big Sandy, Texas
in 1972. Prior to that time, Mr. Anderson pursued a degree in Business
Administration from the University of Minnesota from 1965 to 1968.
Robert L. Waligunda. Mr. Waligunda has served as a director of the Company since
1985 and as Secretary of the Company since August, 1995. From 1965 to the
present, Mr. Waligunda has served as founder, President and principal
stockholder of Sky Promotions, Inc., a Pittstown, New Jersey marketing and
management company involved in sales, advertising and marketing of hot air
balloons and inflatable products. He is a founder and director of the
International Professional Balloon Pilots Racing Association, a member of the
advisory board of Aerostar International, Inc., the world's oldest and largest
balloon manufacturing company, and a member of the National Aeronautic
Association, the Experimental Aircraft Association, and the Airplane Owner and
Pilots Association. Mr. Waligunda received a Masters of Science degree in
guidance and psychological services from Springfield College in 1968.
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.
28
<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, 1996; 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 conversion of the Anderson note.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Certain Beneficial Owners of Common Stock
NONE
(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) 4.2%
Robert L. Waligunda 192,000(2) --(3)
Directors and Executive
Officers as a Group 4,381,660 4.4%
- -----------------------------
(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.
(3) Less than 1%.
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DESCRIPTION OF SECURITIES
The following statements with respect to the Company's Common Stock
describe the material terms but are subject to the detailed provisions of the
Company's Certificate of Incorporation, and by-laws, as amended. These
statements do not purport to be complete and are qualified in their entirety by
reference to the terms of the Certificate of Incorporation and by-laws, which
are incorporated by reference in this Prospectus.
The Company is authorized to issue 100 million shares of Common stock,
$0.01 par value per share, of which 90,687,020(3) shares of Common Stock were
issued as of May 31, 1997.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding shares of Common Stock
can elect all of the directors then standing for election. Holders of Common
stock are entitled to such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefore.
Holders of Common Stock have no conversion, redemption or preemptive rights
to subscribe to any securities of the Company. All outstanding shares of Common
Stock are fully paid and nonassessable. In the event of any liquidation,
dissolution or winding up of the affairs of the Company, holders of the Common
stock will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors.
The Certificate of Incorporation of the Company provides that directors of
the Company shall not be personally liable to the company or its stockholders
for monetary damages for breach of fiduciary duties as a director except to the
extent otherwise required by Delaware law. The By-laws of the Company provide
for indemnification of the officers and directors of the Company to the full
extent permitted by Delaware law.
The transfer agent and registrar for the Common stock is American Stock
Transfer and Trust Company, located at 40 Wall Street - 46 Floor, New York, New
York 10005.
- ----------
(3) Does not include 7,692,308 shares to be issued in connection with the
conversion of the Mogul Note and 500,000 shares to be issued to Redstone
Securities, Inc. in connection with its exercise of its option on May
27,1997.
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Legal Matters
Certain legal matters with respect to the validity of the shares being
registered will be passed upon for the Company by Falcone, Houdek, Bailey & Curd
LLP.
Experts
The financial statements of the Company included in this prospectus as of
and for the years ended December 31, 1996 and December 31, 1995 and the period
from December 1, 1976 (inception) to December 31, 1996 been included herein in
reliance on the report of J.H. Cohn LLP, independent public accountants,
appearing elsewhere herein (which expresses an unqualified opinion and includes
explanatory paragraphs referring to uncertainties about the ability of the
Company to continue as a going concern) and upon the authority of that firm as
experts in accounting and auditing.
Interest in Named Experts and Counsel
- -------------------------------------
No expert or counsel to the Company, hired on a contingent basis, will
receive a direct or indirect interest in the Company or is acting as a promoter,
underwriter, voting trustee, director, officer, or employee, of the Company.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
DESCRIPTION OF THE BUSINESS
General
- -------
The Company, originally incorporated on December 1, 1976 under the laws of
the State of Delaware, is engaged in the exploration, development and mining of
precious and nonferrous metals, including gold, silver, lead, copper and zinc.
The Company owns or has an interest in a number of precious and nonferrous
metals properties. The Company's principal mining properties are (i) the
Franklin Mines, located near Idaho Springs in Clear Creek County, Colorado, for
which the Company acquired the exclusive right to explore, develop, mine and
extract all minerals located in 28 patented mining claims comprising
approximately 322 acres
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and 23 additional owned or leased mining claims, (ii) the Franklin Mill, a
crushing and flotation mill which is located on the site of the Franklin Mines
and (iii) the Gold Hill Mill, a fully permitted modern facility located in
Boulder County, Colorado. The Company has also acquired a 20% interest in the
Mogul Mines, which consists of the Mogul Tunnel and the surrounding claims
located in the Spencer Mountain region through its investment in Newmineco and a
17.5% interest in the Gold Hill Dumps, which consists of mine dump materials
located on fourteen dump sites in close proximity to the Gold Hill Mill through
its participation in the Zeus Joint Venture. While none of its properties were
operational in fiscal year 1996, the Company has made significant strides in
rehabilitating certain of its mining properties and expanding its operations
through its relationship with its joint venture partner, Gems.
The Zeus Joint Venture
- ----------------------
In February 1993, the Company and Island Investment Corp. ("Island") formed
Zeus No. 1 Investments (the "Joint Venture" or "Zeus Joint Venture"), a
California general partnership, to develop the Franklin Mines and the related
assets of the Company. Shortly thereafter, Island assigned its rights to the
Joint Venture to Gems & Minerals Corp., a subsidiary of Island ("Gems"). On July
15, 1996, Gems transferred 31.5% of its 82.5% interest in the Joint Venture to
Nuco Venture, Inc., a Delaware corporation ("Nuco"), in exchange for 100% of the
outstanding shares of Nuco. Presently, the Company maintains a 17.5% interest,
Gems maintains an 51% interest and Nuco maintains a 31.5% interest in the Joint
Venture.
The Company anticipates that it will continue to rely upon its joint
venture 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 Franklin Mine
- -------------------------------
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.
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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 during fiscal
year 1995.
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.
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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
seeping from the Lined Tailings Pond into nearby drainage areas 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 to
the DMG Amendment application AM-001 to the Franklin Permit 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 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
35
<PAGE>
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 subsequently received the required analyses 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 but 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 Legal Proceeding- 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 performed to correct 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 certain of its tailings ponds
commenced preliminary plans for the installation of a paste backfill system for
tailings disposal in the 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
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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 until July 15, 1997 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
brought the Company into compliance with current environmental and regulatory
standards and allows the Company to pursue its operating plan without alteration
of 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, altered the milling process, proposed tailings paste disposal, and
modified the surface water control plan. Additionally, the reclamation plan of
the Company was further revised to include the closure plan for certain of the
Company's tailings ponds. 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 its 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 be installed no later than April 15, 1997 and (iii) the
closure plans for certain of the Company's tailings ponds 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 an additional tailings
pond 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 is currently completing the installation of the equipment
necessary to implement its Surface Water Control Plan and the closure of certain
of the tailings ponds. The Company has been advised by its consultant that so
long as there exists no environmental violations and no further permit
violations during the Spring run off period as a result of the Company's
inability to complete these projects as of April 15, 1997, the DMG will permit
the Company certain latitude with respect to the completion of such projects.
Management is confident that these items will be addressed to the satisfaction
of the DMG in a timely manner and no further permit violations will result in
connection with these projects.
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
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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 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.
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 had been conducted at the Mogul Mine at the time of these
agreements. In exchange for the Process/Profit Interest Contract, the LLC agreed
to finance future mining operations at the Mogul Mine, satisfy certain
obligations owed by Durango to a third party and obtain the exclusive right to
hire Durango to conduct 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
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process all ore produced from Durango mining 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 become operational, the Franklin Mill would process
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 was to retain its 17.5% interest in
profits under the Zeus Joint Venture thereby entitling it to receive its portion
of all monies realized by the Joint Venture in connection with the
Process/Profit Interest Contract as well as any future contractual arrangements
of Zeus.
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 Lease 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 of the Mogul Mine in an effort to obtain
more favorable terms regarding profits to be generated by future operations. 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.
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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 an 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, Island terminated the joint venture arrangements with Durango,
Hartley and Tatman and Island thereafter assigned its 100% 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.
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
were to be made quarterly, the first payment being due on December 31, 1996. The
principal amount of the Newmineco Note was due on June 30, 1997. The Company was
also given the option to convert the principal and interest payments due under
the Newmineco Note into Common Stock on or after January 1, 1997 at a conversion
rate of .078 per share. The shares into which the Newmineco Note converted would
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, would 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
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Gold Hill Note (as hereafter defined), thereby further reducing the principal
amount owed by the Company to Com, Inc. under 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 Description of the Business-the Gold Hill Mill.
For more information regarding the title issues and litigation involving the
Mogul Mines, See Legal Proceedings-Durango Litigation and Description of
Property - Rugg/Mogul Lease.
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 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 thereof. The Company is committed to issue an
aggregate of 7,692,308 shares to such assignees in full satisfaction of the
Newmineco Note, as of February 11, 1997.
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.
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 to Durango. 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 Permit. As part of its efforts to secure
the Mogul
41
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Permit, the Company posted a bond in the amount of $33,000 as required by the
DMG in an effort to further the permitting process. For more information
regarding the disputes with Durango, See Legal Proceedings - 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 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., a
wholly owned subsidiary of Gems, for $2,500,000 which purchase price as
evidenced by an interest only note (the "Gold Hill Note"). 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. 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 post
closing items needed to be addressed 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 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.
thereafter agreed to purchase such assets from the Company in exchange for a
reduction of the principal amount of the Gold Hill Note. 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
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defaulted on each of its October, January and April interest payments under the
Note but the Company has not received any formal notification of such default.
However, as of the date hereof, the outstanding principal amount of the Gold
Hill Note has been reduced from $2,500,000 to $586,113.
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 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
lessor 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.
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
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mining and milling operations.
In the past, the Company has entered into refining agreements with Zinc
Corporation of America and ASARCO Incorporated for the sale and refining of
lead, zinc and copper concentrates produced from the Franklin Mine in Colorado.
The Company's management expects that at such time as it recommences active
mining and milling operations, the Company will not have difficulties in
renewing or renegotiating contracts with either ASARCO or Zinc Corporation of
America or entering into new contracts with their competitors.
Employees and Technical Consultants
- -----------------------------------
The Company presently has no full-time employees. 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 Joint Venture Agreement. Management anticipates that as the
Company's business develops, additional technical and administrative staff may
be hired and has been informed by Gems that it believes it will be able to
obtain the services of qualified geological and technical consultants as needed.
44
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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, 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 was
satisfied with the assay reports setting forth the mineral content of the ore
samples.
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 developed and will be operated by Zeus, under the
direction of Gems, 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 Mines
whose development and operations will also be the responsibility of Newmineco,
under the direction of Gems. At March 31, 1997, the Company's only liquid asset
was cash, the balance of which increased from $127
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at December 31, 1996 to $4,543 at March 31, 1997.
The Company had no active mining or milling operations during the first
quarter of 1997, however, remediation work was substantially completed at the
Franklin Mine and Mill in preparation for the anticipated commencement of mining
operations sometime during the third Quarter 1997.
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 shares 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
$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.
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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.
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. This relieved the Company of its obligation to pay this note
on June 30, 1997.The issuance of the shares and the increase in total
stockholders equity of the Company by $600,000 was recorded in the second
quarter of 1997. 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 shares of capital stock or approve a reverse stock
split.
The Company had total current liabilities as of March 31, 1997 of
$1,379,254, 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
Mines, 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
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$25,000 per month during 1997.
As explained above, the Company's only liquid resource was a cash balance
of $4,543 at March 31, 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 the twelve month period ending March 31, 1998.
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 commence operations at the Franklin Mines
and the Mogul Mines will be provided by Gems during the twelve month period
ending March 31, 1998 , 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
Mines 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
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of ore than that produced by the Franklin Mines and, accordingly, management
anticipates that operations will commence initially at the Mogul Mines. 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 owns the only two
permitted mills in its mining district. 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 currently
operating 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, in accordance with the Joint
Venture Agreement, 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
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
Mill property to enable it to meet its working capital requirements through at
least March 31, 1998.
Results of Operations
- ---------------------
The Company and the Zeus Joint Venture had no active mining or milling
operations during 1995, 1996 or the first quarter of 1997.
(I) Year Ended 1996 as compared to year ended 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
49
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$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.
(2) First Quarter 1997 as compared with First Quarter 1996.
The Company had a net lost of $155,907 for the three months ended March 31,
1997 as compared to a net loss of $284,421 during the same period in 1996. The
loss in 1996 was higher due to legal and engineering fees incurred in connection
with permit violations and bond reclamation requirements imposed by Colorado
regulatory authorities.
General and administrative expenses were $86,018 for the first quarter 1997
compared with $233,985 during the same period in 1996. This decrease, as
mentioned above, was due to a substantial decrease in legal and engineering
fees.
Interest income was $952 for the three months ended March 31, 1997 compared
with $590 during the same period in 1996. Interest expense was $37,953 during
the 1997 quarter as compared to $19,441 in the 1996 quarter. This increase was
due to interest incurred on notes in connection with the Gold Hill Mill and
Newmineco acquisitions.
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DESCRIPTION OF PROPERTY
Glossary of Terms
Assay A chemical evaluation of metal
content conducted after mining ore.
Backfill Mine waste which is disposed of
underground in a formerly mined
area.
Chacopyrite A mineral containing copper, iron
and sulfur.
Cyanidation and Pulp Recovery The process by which gold is
extracted in the milling process
through the use of cyanide.
Development Stage Company Companies engaged in the
preparation of an established
commercially mineable deposit or
reserve for its extract which are
not in the production stage.
Dip An angle measured in degrees from
the horizon.
Fault A fracture in the earth through
which mineralizing solutions may
rise and form a vein.
Fault System A large regional fracture.
Footwall That portion of the vein which is
located below.
Galena A mineral containing both lead and
sulfur.
Gravity Concentration Minerals concentrated by
application of devices employing
the force of gravity.
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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.
Mineralized Rock The rock which contains the
minerals to be mined.
Monzonite Intrusive rock types containing
large amounts of quartz and often
the progenitor of metallic,
mineralizing solutions.
Ore A metallic or non-metallic mineral
that can be mined from the earth
and sold at a profit.
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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.
Pegatites A type of rock found in the
Franklin Mine.
Pillars Unmined sections of ore in a stope.
Pre-Cambrian age A time period in history dating
back approximately 600 million
years ago.
Probable (Indicated) Reserves Reserves for which quantity and
grade and/or quality are computed
from information similar to that
used for proven reserves, but the
site for inspection, sampling and
measurement are farther apart or
are otherwise less adequately
spaced. The degree of assurance,
although lower than that for proven
reserves, is high enough to assume
continuity between point of
observation.
Production Shaft The device through which ore is
hoisted from the mine and the area
through which materials are lowered
into the mine and miners enter and
exit the mine.
Proven (Measured) Reserves Reserves for which (a) quantity is
computed from dimensions revealed
in outcrops, trenches, workings or
drill holes; grade and/or quality
are computed from the results of
detailed sampling and (b) the sites
for inspection, sampling and
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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
sulfur.
Raise A tunnel driven upward from a
level.
Refractory A difficulty in separating value
metals or minerals from the host
rock.
Reserves That part of a mineral deposit
which could be economically and
legally extracted or produced at
the time of the reserve
determination.
Schist, granite gneiss A type of rock found in the
Franklin Mine.
Selective Flotation Minerals concentrated in a selected
mineral group in the mill.
Shaft A vertical tube-like opening
whereby miners enter the mine.
Slurry A mixture of ground rock or
minerals in water.
Slimes Exceedingly fine particles mixed
with water.
Sphalerite A mineral containing both zinc and
sulfur.
Strike In a horizontal direction.
Stope The area of the mine where miners
extract mineral deposits from the
mine.
Tailings Waste which is produced by the
Mill.
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Tailings Pond The location where mill wastes are
deposited.
Telluride A mineral containing tellurium
often found with quantities of gold
and/or silver and sulfur.
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 342 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
55
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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, 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 May 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
56
<PAGE>
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/optioner 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 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
parties to 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
57
<PAGE>
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 Mine and Franklin Mill are located in Clear Creek County,
Colorado approximately 2.7 miles north of the town of Idaho Springs which is
accessible from Interstate 70 approximately 33 miles west of Denver. From Idaho
Springs, a county maintained gravel road connecting Idaho Springs with Central
City in Gilpin County passes within 1/4 of a mile of the Franklin Mine
facilities and offices. A minor roadway, also maintained by the County, allows
access to the Franklin Mine within 1/8 of a mile. The portal of the Mogul Mines
is located immediately south of the town of Eldora, 25 miles west of Boulder by
paved roads maintained by Boulder County. The mine locations are accessible year
round, except in the case of a major snow storm in winter months.
Ore Deposition in the Area
- --------------------------
Most of the ore deposition in the area where the Franklin Mines are located
has been credited to the Laramide period progeny. Ores exploited from this
region have included gold, silver, copper, lead, zinc and uranium. By far the
largest single metal values were in gold, with silver being a distant second.
Though many of the smaller veins located in the area pinched out at moderate
depth, some have shown strong mineralization at greater depth.
The ore deposits are of four types: (i) pyritic gold ores; (ii)
galena-Sphalerite ores; (iii) composite (pyrite-galena-Sphalerite) ores and (iv)
telluride ores. Pyritic gold ores are chiefly associated with pyrite,
Chacopyrite and Tennentite. The "composite ores" are believed to be the result
of two or more periods of mineralization, with pyritic minerals first and
galena-Sphalerite second; mineral content varies widely with the relative
percentage of the different types of ore present. Telluride ores are present
mostly in the Northeast corner of the district, but some telluride ores have
been noted elsewhere.
Geology of the Franklin Mines
- -----------------------------
The rocks most commonly seen in the Franklin Mines are Pre-Cambrian age
granite and Microcline gneiss. Tertiary Monzonite, the most common of which is
quartz Monzonite, can be seen on the ninth level and are reported from lower
levels in the Gem vein or Gem
58
<PAGE>
workings of the Franklin Mines. The general strike of the system is N75 degrees
W and dips vary, being steeper in higher levels and flattening at depth. On the
ninth level general dip is about 50 degrees to the north.
The structure of the mines is controlled by the J.L. Emerson Fault system
which runs in a west north west direction across the whole property and beyond.
Subsidiary to the J.L. Emerson Fault are a multitude of veins crossing at low
angles and meandering in and out of the main break. Most of these subsidiary
faults are ore conduits; when more than one of these happen to meet at the same
location, the result is a large body of ore. These large ore bodies are, within
the observed area served at present by the Franklin 73 shaft, as much as 22.5
feet wide and at least 60 feet long. It has been reliably reported that some of
the large ore body stopes within the Gems workings adjoining to the west (and
part of the property) were as wide as 105 feet. Some of the individual veins
carry names of the claims, such as Franklin, Gem, Washington and Freighter's
Friend.
Geology and History of the Mogul Mines
- --------------------------------------
Based upon newspaper accounts and inspector reports published from 1898
through 1904, it is believed that the claims on Spencer Mountain were discovered
during the last decade of the 19th century. The accounts of the day indicate
that the veins produced gold and initially were developed by shafts, which was
common practice during this era. The deepest shaft was believed to be that of
the Enterprise at 400 feet. In 1907, the Mogul Tunnel was created as a drainage
and transportation tunnel. Claim owners were permitted to use the tunnel for a
royalty fee which was calculated based upon the distance traveled in the tunnel
and varied from 10 to 20 percent. While the Colorado and Northwestern Railroad
was completed to the town of Eldora in 1905, the boom period of gold mining in
the area had ended and by 1919, the railroad, which never operated profitably,
was washed out and never rebuilt. Thus, there are very limited records of
production from the properties on Spencer Mountain due to its limited period of
operation.
Spencer Mountain is on the east flank of the Eldora stock, a quartz
monzonite porphyry of Eocene-Paleocene Age. The rocks which make up the Spencer
Mountain are believed to be older Precambrian geniuses and locally schist.
Within the area of the Mogul Tunnel, the wall rocks are geniuses which contain
biotite, sometimes hornblende, and usually quartz and plagioclase. In some cases
the wall rocks are quartz-plagioclases gneiss.
It is believed that the most productive gold-bearing structures on the
Spencer Mountain are the easterly trending Enterprise fault and the
northeasterly trending fractures which cut the peak of the mountain. There are
other faults and fractures which trend north, northwesterly, and possibly any
direction of the compass, any one of which could contain ore and would have
offset an ore deposit by faulting.
The Enterprise and Village Bell Mine are located on the Enterprise fault.
It was noted in an inspector report of 1899 that in the Enterprise and Village
Belle, the fault dipped south for the first 50 feet or 80 feet, respectively, of
depth and then northerly. It is from this zone where
59
<PAGE>
the dips changed that most of the ore was mined. The remainder of the production
has come from northeasterly trending veins. Some ore was also produced from
veins trending east-northeast such as the Gold Coin, especially near their
intersection with the Enterprise fault.
It is believed that the gold occurs as a telluride, probably sylvanite and
there also exists some pyrite and a small amount of molydenite. The gange
minerals are barite, quartz, roscoelite and calcedly. Within the Mogul tunnel,
it appears that the gold occurs principally in thin stringers of quartz which
are often in gouge zones. It is approximated that the exposures within the Mogul
Tunnel, are a good grade of mineralization and ore shoots in the area are noted
for being small and often very rich. Values in the press at the turn of the
century indicated approximately 1.5 ounces of gold per ton.
Estimated Ore Reserves
- ----------------------
The Franklin Mines
------------------
The Franklin Mine lodes consist of the minerals associated with the Gem,
the Freighter and the Franklin mine veins and specifically, those minerals
associated with the "Main Trunk" element of the J.L. Emerson Fault. No
representations have been made regarding the potential of mineral structures
situated adjacent to, or off the "Main Trunk", as these are considered to be of
marginal importance at this time.
Sampling by the channel sample method was conducted during the period of
1975 through 1993 with assaying provided by the Franklin and other accredited
assay laboratories. Assays were also obtained from the old Gem Mining Co. mine
assay map, dated 1921 (the "Gems Assay Map"). The sampling process was carried
out at right angles to the structure of the veins. Blocks were sampled on three
or four sides and at times within by raise or winze. Those blocks which were
already heavily mined were entered through open stopes, both pillars and
"backfill" being sampled.
The Franklin ore body is generally a tabular structure in shape, consisting
of several parallel to sub-parallel veins. The evaluation process, by
concentrating on primarily one vein, obviously by-passed additional mineral
potential.
The J.L. Emerson Fault is a large regional structure, striking east to west
and having an irregular plain that dips to the north at 45 to 78 degrees. The
J.L. Emerson Fault is associated throughout with a series of parallel to
sub-parallel sigmoidal shaped fractures that may focus east or west on the
principal fault plain. These fracture patterns are found on nearly all levels
and represent important centers of mineral concentration. The J.L. Emerson Fault
consists of two main parallel to sub-parallel mineralized fault fractures, the
so called "footwall" and "hanging wall" veins. Each of the principal veins has
historically contributed to ore production in the Gem vein. A second set of true
fissure veins of a later date and striking northeast and southwest interdict the
J.L. Emerson Fault at several points, but do not cross. These veins are of
unknown economic potential.
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
60
<PAGE>
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 Mines.
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 reports covering the Mogul Tunnel area. Most of the
information available about the ore bodies in the Mogul Mines can be derived
from local newspaper reports between 1898 and 1904 and from mine inspector
reports for the years 1897, 1898 and 1901. The newspaper and inspection reports
are useful to indicate the approximate size and grade of deposits, veins, or
production but are not considered by the Company to be hard fact.
Although there are no known ore reserves in the Mogul Mines, proven or
probable, there are considerable good exploration targets. The Company has been
informed by Newmineco that it is hopeful that it will be successful in locating
richer shoots which could yield a profitable amount of ore. Thus, Newmineco has
informed the Company that it has begun a comprehensive program to substantiate
ore reserves at the Mogul Mines and target areas for future production.
Mill/Metallurgy
- ---------------
The Franklin Mill, when constructed in 1982, was designed to recover and
concentrate metallic minerals by two historic methods; selective flotation and
gravity by table and jig. Both systems were operated in a continuous circuit.
The Franklin Mill has a daily processing capacity (operating for a 24 hour
period) of approximately 150 tons of ore. In the past, the Franklin Mill
operated on an eight hour schedule and processed approximately 30 tons of ore
during that time interval.
The Franklin ore is refractory and therefore difficult to separate. Pyrite
(iron sulfide) constitutes approximately 18% of the weight of the ore.
Approximately 30% of the gold
61
<PAGE>
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.
Milling Facilities
- ------------------
Conventional milling procedures by the Zeus Joint Venture are to be
followed with selective flotation of lead, silver, gold and zinc and gravity
concentration of gold bearing pyrite. Concentration of tailings slimes by slime
cone and recovery of fine gold and silver from slimes are to be achieved by
Cyanidation and carbon pulp in closed circuit. Moreover, additional technologies
are being tested by Gems to assure maximum recovery of mined ore. Average
recovery of the combined precious metals is estimated at approximately 90% of
the total based upon preliminary test data developed by Zeus Joint Venture.
In the past, the Franklin Mill operated on a limited schedule while
exploration and development was taking place. While the Franklin Mill has not
been operational with respect to milling of ore, crushing activities have begun
at the Franklin Mill for the limited purpose of prospecting and testing in the
early part of 1996. Thus, any prior milling activity and the crushing currently
being done at the Franklin Mill can be characterized as "development" in nature.
The Gold Hill Mill is a fully permitted modern milling facility. With the
exception of test milling approximately 4,000 tons of ore by the previous owner,
the Gold Hill Mill has not been operational with respect to the milling of ore.
New York Office
- ---------------
The Company maintains its executive offices, consisting of approximately
500 square feet, at 76 Beaver Street, Suite 500, New York, New York. The Company
has agreed to rent this space for a monthly rental of $670.50 pursuant to an
oral agreement with a non-affiliate. The Company's management anticipates this
space will service the Company's needs for the foreseeable future and that the
Company will be able to lease these or other suitable facilities on a reasonable
basis.
62
<PAGE>
CERTAIN TRANSACTIONS
In July, 1996 Anderson Chemical Company, of which Mr. Anderson serves as a
director and officer, 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 of the Note and all accrued and unpaid interest is
currently outstanding.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal U.S. market on which shares of the Company Common Stock (all
of which are of one class, $.01 per share) are traded is the over the counter
market on the National Association of Securities Dealers, Inc. Automated
Quotation System (Symbol "FKCM").
The following table sets forth the range of high and low bid quotes of the
Company's Common Stock per quarter since the beginning of fiscal year 1994 as
reported by the National Quotation Bureau (which reflects inter-dealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions).
High Low
Quarter Ended Bid Price Bid Price
- ------------- --------- ---------
March 31, 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 $.13 $.06
March 31, 1997 $.22 $.06
As of May 31, 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 outstanding is
90,687,020 as of May 31, 1997(4). 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.
- ----------
(4) Does not include 7,692,308 shares to be issued in connection with the
conversion of the Mogul Note and 500,000 shares to be issued to Redstone
Securities, Inc. in connection with its exercise of its option on May 27,
1997.
63
<PAGE>
EXECUTIVE COMPENSATION
No compensation has been awarded to, earned by or paid to any of the named
executives or directors of the Company during the fiscal year ended 1995 or
1996.
64
<PAGE>
FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1
65
<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-14/32
* * *
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.
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.
F-17
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (continued):
Mining, milling and other property and equipment (continued):
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.
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.
F-18
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 2 - Summary of significant accounting policies (concluded):
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.
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-19
<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
========== ==========
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.
F-20
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 5 - Status of the Zeus Joint Venture Agreement (continued)
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.
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.
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 (concluded):
On November 30, 1995, the stockholders of the Company approved the
proposed increase in the authorized capital stock of the Company and,
as required by the Settlement Agreement, in December 1995, the Company
issued to Gems 3,200,000 shares of its common stock to reduce
outstanding advances by $249,600 and 6,000,000 shares of its common
stock as additional consideration for the settlement of claims by
Gems. Based on an estimated fair market value of $.078 per share, the
Company recognized a loss on settlement of claims by its Joint Venture
partner of $468,000 for the issuance of the 6,000,000 shares to Gems.
Based on information developed through the Analysis Program and
previously available geological data and reports, the management of
the Joint Venture believes that the application of the Company's
proprietary technologies and processes should result in economically
viable commercial mining operations at the Franklin Mine.
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.
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-22
<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-23
<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-24
<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.
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.
F-25
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (continued):
Lease commitments (continued):
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.
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
com-
F-26
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (continued):
Lease commitments (concluded):
mencing 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.
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 opera-
F-27
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (continued):
Environmental matters (concluded):
tions 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.
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.
F-28
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies (concluded):
Litigation (concluded):
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.
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.
F-29
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 9 - Income taxes (concluded):
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 $ -- $ --
========= =========
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-30
<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.
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.
F-31
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
Note 10- Stockholders' equity (concluded):
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).
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-32
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS
(Unaudited)
-----------
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1997 1996
------ ------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 4,543 $ 127
Prepaid expenses 80,984 107,979
Advances to joint venture partner 165,417 266,438
------------ ------------
Total current assets 250,944 374,544
Mining, milling and other property and
equipment, net of accumulated depreciation
and depletion of $1,867,180 and $1,837,180 6,281,128 6,311,128
Investment in equity investee 150,000 150,000
Mining reclamation bonds 127,827 126,875
------------ ------------
Totals $ 6,809,899 $ 6,962,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
12.25% convertible debentures $ 145,000 $ 145,000
9.5% convertible note payable to joint venture partner 600,000 600,000
Other notes payable 80,000 80,000
Accounts payable and accrued expenses 554,254 553,883
------------ ------------
Total current liabilities $ 1,379,254 $ 1,378,883
8% mortgage note payable to joint venture partner 586,419 586,419
Excess of equity in net losses of joint venture over investment 136,108 133,220
------------ ------------
Total liabilities $ 2,101,781 $ 2,098,522
------------ ------------
Comments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share;
100,000,000 shares authorized;
90,583,020 shares issued and outstanding 905,830 905,830
Additional paid-in capital 15,154,264 15,154,264
Deficit accumulated in the development stage (11,351,976) (11,196,069)
------------ ------------
Total Stockholders' equity 4,708,118 4,864,025
------------ ------------
Totals $ 6,809,899 $ 6,962,547
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
F-33
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months
Ended March 31, Cumulative
----------------------------- from
1997 1996 Inception
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales $ 876,082
Interest income $ 952 $ 590 541,839
Other income 75,000
------------ ------------ ------------
Totals 952 590 1,492,921
------------ ------------ ------------
Expenses:
Mine expenses 3,360,793
Write-down of inventories 223,049
Depreciation and depletion 30,000 30,535 2,062,529
General and administrative expense 86,018 233,985 5,116,450
Interest expense 37,953 19,441 633,791
Amortization of debt issuance expense 683,047
Equity in net loss of joint venture 2,888 1,050 136,108
Loss on settlement of claims by joint venture partner 468,000
Loss on settlement of litigation 100,000
Loss on investment in oil and gas wells 61,130
------------ ------------ ------------
Totals 156,859 285,011 12,844,897
------------ ------------ ------------
Net loss $ 155,907) $ (284,421) $(11,351,976)
============ ============ ============
Weighted average shares outstanding 90,583,020 69,249,729
============ ============
Net loss per common share $( -- ) $( -- )
============ ============
</TABLE>
See Notes to Condensed Financial Statements
F-34
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months
Ended March 31, Cumulative
------------------------------- from
1997 1996 Inception
------------------------------- ---------
<S> <C> <C> <C>
Operating activities:
Net loss $ (155,907) $ (284,421) $(11,351,976)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and depletion 30,000 30,535 2,062,529
Amortization of debt issuance expense 683,047
Value of common stock issued for:
Services and Interest 1,325,714
Settlement of litigation 100,000
Settlement of claims by joint venture partner 468,000
Compensation resulting from stock options granted 311,900
Value of stock options granted for services 112,500
Equity in net loss of joint venture 2,888 1,050 136,108
Other (7,123)
Changes in operating assets and liabilities:
Interest accrued on Mining Reclamation Bonds (952) (2,827)
Prepaid Expenses 26,995 (80,984)
Accounts payable and accrued expenses 371 92,202 736,727
----------- ----------- ------------
Net cash used in operating activities (96,605) (160,634) (5,506,385)
----------- ----------- ------------
Investing activities:
Purchases and additions to mining, milling and
other property and equipment (5,120,354)
Purchases of mining reclamation bonds, net (48,194) (125,000)
Deferred mine development costs and other expenses (255,319)
----------- ----------- ------------
Net cash used in investing activities - 0 - (48,194) (5,500,673)
----------- ----------- ------------
</TABLE>
F-35
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
-----------
<TABLE>
<CAPTION>
Three Months
Ended March 31, Cumulative
--------------------------- from
1997 1996 Inception
--------------------------- ------------
<S> <C> <C> <C>
Financing activities:
Issuances of common stock $ 202,600 $ 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 underwriting costs (63,814)
Proceeds from exercise of stock options 306,300
Issuance of convertible debentures and notes 200,000 1,505,000
Proceeds of advances from joint venture partner 526,288
Repayments by (advances to) joint venture partner $101,021 (311,824) (117,230)
Payments of debt issuance expenses (164,233)
Proceeds of other notes and loans payable 768,000
Repayments of other notes and loans payable (120,000)
Proceeds of loans from affiliate 55,954
Repayments of loans from affiliate (48,661)
-------- ---------- ------------
Net cash provided by financing activities $101,021 90,776 11,011,601
-------- ---------- ------------
Increase (decrease) in cash 4,416 (118,052) 4,543
Cash, beginning of period 127 118,176 -0-
-------- ---------- ------------
Cash, end of period $ 4,543 $ 124 $ 4,543
======== ========== ============
Supplemental disclosure of cash flow data:
Interest paid $ -- $ -- $ 298,868
======== ========== ============
</TABLE>
See notes to Condensed Financial Statements
F-36
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 1 - Unaudited interim financial statements:
In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position
of Franklin Consolidated Mining Co., Inc. (the "Company") as of March
31, 1997, and its results of operations and cash flows for the three
months ended March 31, 1997 and 1996. Information included in the
condensed balance sheet as of December 31, 1996 has been derived from
the balance sheet in the Company's audited financial statements
included elsewhere herein. Certain terms used herein are defined in
the notes to the audited financial statements. Accordingly, these
unaudited condensed financial statements should be read in conjunction
with the financial statements, notes to financial statements and the
other information in the 10-KSB.
The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results of operations for the
full year ending December 31, 1997.
Note 2 - Basis of presentation:
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. However, the Company is
a development stage enterprise whose operations have generated
recurring losses and cash flow deficiencies from its inception. As of
March 31, 1997, the Company had a cash balance of $4,543, an
accumulated deficit of approximately $11,352,000, current liabilities
of $1,379,000 and a working capital deficiency of $1,128,000, and, as
explained in Notes 3 and 4, the Company was in default with respect to
the payment of the principal balance and accrued interest on its
outstanding secured promissory note and 12.25%
F-37
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 2 - Basis of presentation (continued):
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 the twelve month period ending
March 31, 1998. 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
F-38
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 2 - Basis of Presentation (concluded):
and Newmineco to conduct profitable mining and milling operations on a
sustained basis.
Management believes, but cannot assure, that such financing and the
financing needed to commence operations at the Franklin Mine and the
Mogul Mines will be provided by Gems during the twelve month period
ending March 31, 1998, 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 Mine 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 March 31, 1998.
F-39
<PAGE>
FRANKLIN CONSOLIDATED MINING CO, INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 3 - Other notes payable:
Other notes payable was comprised as follows at March 31, 1997:
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. 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.
Note 4 - Convertible debt:
The Company's convertible debt at March 31, 1997 consisted of the
following:
12.25% convertible debentures (a) $145,000
9.5% convertible secured promissory
note payable to Joint Venture partner(b) 600,000
--------
Total $745,000
(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
(b) The 9.5% note wae originally due on June 30, 1997 (see Note 7 of
the notes to the audited financial statements). 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 (see Note 6 herein)
F-40
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 4 - Convertible debt (concluded):
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 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 2. 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.
Note 5 - Commitments and contingencies:
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
F-41
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 5 - Commitments and contingencies (continued):
Environmental matters (continued)
connection with continuation of the Company's state mining
permit. As a result, the Company had to take certain remedial
actions, increase its reclamation bond from $29,000 to $45,000
and pay a $5,000 fine during 1994.
In August 1994, the Company received an informal notice from the
DMG of an additional violation at the Franklin Mine related to
water run-off matters. The Company attempted to rectify the
violations cited by the DMG but was unable to do so in a timely
manner because such corrections required performance of work
outside the boundaries of its then current permit. The Company
agreed that it would refrain from any mining or milling
operations at the Franklin Mine until the DMG (i) amended the
Company's permit to enable it to perform the required technical
and remediation work and (ii) determined that all required work
was completed.
In February 1996, the DMG permitted the Company to commence
crushing activity at the Franklin Mine pursuant to another
prospecting permit. In March 1996, the Company was notified that
it would be required to increase its land reclamation bond by an
amount that would be determined subsequently. In an effort to
comply, the Company increased its reclamation bond from $45,000
to $93,000. On or about March 28, 1996, the Company received a
temporary cease and desist order prohibiting it from conducting
mining 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.
F-42
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 5 - Commitments and contingencies (continued):
Environmental matters (concluded):
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.
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.
F-43
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 5 - Commitments and contingencies (continued):
Environmental matters (continued):
Litigation:
The Company is involved in various litigation as explained below
and in Note 7 therein:
a) The Company, the Joint Venture, Gems, Island and others are
defendants in the 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 3). 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.
F-44
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 5 - Commitments and contingencies (continued):
Litigation (concluded)
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.
Note 6 - Stockholders' equity:
Common stock reserved for issuance:
At March 31, 1997, there were 290,000 shares of common stock
reserved upon the exercise of the 12.25% convertible debentures
and 7,692,308 shares reserved for issuance for issuance in
connection with the conversion of the 9.5% note payable on
February 10, 1997 (See Note 4 Herein). The increase in the number
of shares outstanding and the $600,000 increase in total
stockholders' equity was recorded by the Company upon the
issuance of the shares in the second quarter of 1997.
Note 7 - Subsequent events:
Real estate taxes:
At March 31, 1997, 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.
Subsequent to March 31, 1997, the Company paid all of the
delinquent taxes which will cause the liens to be removed.
F-45
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note 7 - Subsequent events (continued):
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-46
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 26, 1995, the Company notified Wolinetz, Gottlieb & Lafazan,
P.C. ("WGL") of its decision to dismiss the firm as its independent accountants.
The decision to dismiss WGL was approved by the Board of Directors of the
Company.
During the two most recent fiscal years of the Company prior to the
dismissal, none of the reports of WGL on the financial statements of the Company
contained an adverse opinion or a disclaimer of opinion or was qualified or
modified as to audit scope, or accounting principles, except that WGL had
modified its reports on the financial statements of the Company to include an
explanatory paragraph referring to uncertainties about the ability of the
Company to continue as a going concern. During the two most recent fiscal years
and the subsequent interim period preceding the dismissal of WGL, there were no
disagreements with the Company and WGL concerning accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
would have caused WGL to make a reference to the subject matter thereof in its
report had such disagreement not been resolved to the satisfaction of WGL.
66
<PAGE>
PART II-INFORMATION NOT REQUIRED IN PROSPECTUS
- ----------------------------------------------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware provides for broad
indemnification of officers and directors and allows the Company to advance
funds to such indemnified party to defend such action prior to the adjudication
thereof. The Certificate of Incorporation of the Company does not grant any
indemnification rights other than those specifically set forth in Section 145,
nor does the Company maintain any director and officer liability insurance at
this time.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate (except with respect to SEC
Registration fees) of all fees and expenses in connection with the issuance and
distribution of the securities being registered, all of which will be paid by
the Company:
SEC Registration Fee $
Printing and Filing Expenses $
Legal Fees and Expenses $
Accounting Fees and Expenses $
Blue Sky Fees and Expenses $
` Transfer Agent Fees $
Miscellaneous $
Total $
RECENT SALES OF UNREGISTERED 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 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
67
<PAGE>
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 lender's option, including, all profit interests which were convertible
into 300,000 shares for each 1% profit participation interest.
In August, 1995, Gems, as an assignee of Mr. DiMatteo, converted its 4% net
profits interest in the Company to which it has rights to receive under the
terms of a Loan Agreement, into 300,000 shares per percentage point or 1,200,000
shares of the Company. Such shares were issued to Gems on or about August 18,
1995. In September, 1995, certain of the holders of the Anderson Loans, other
than Gems, agreed to convert their notes and accrued interest thereon at a rate
of $.078 per share which represents 50% of the NASDAQ quoted price of the
Company's shares for the last 3 months, the total amount of principal and
interest to be converted to be determined at the time of conversion. Thereafter,
on or about December 27, 1995, Gems was invited to convert its notes on the same
terms and conditions as the other holders, thereby satisfying the Company's
obligations under the Anderson Loans. 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
became 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
$202,600 and issued 953,411 shares of its
68
<PAGE>
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"), 56,000 shares of common stock of the Company in satisfaction of
outstanding accounting fees owed by the Company to WGL of approximately $7,000.
The shares were issued pursuant to an exemption from registration under the Act.
For more information concerning WGL, See Item 8-Changes 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
Saul Horing, 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.
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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 $.001 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.
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 the Company. 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.
On or about November 19, 1996, the Company agreed to issue to Dorothy
Kennec, 104,000 shares of Common Stock as partial consideration for the
extension by Mrs. Kennec of the Hayden/Kennec Leases through November, 1997. The
Company issued such shares in April 1997 pursuant to an exemption from
Registration under the Act.
On or about May 27, 1997, Redstone exercised the remaining option to purchase
500,000 shares of Common Stock of the Company. The Company issued such shares
pursuant to an exemption from registration under the Act.
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EXHIBITS
The following documents are filed as exhibits herewith, unless otherwise
specified by an asterisk, and are incorporated herein by this reference:
Exhibit
Number Description of Exhibit
------ ----------------------
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 10-KSB for year ended December
31, 1995 File No. 0-9416, Exhibit 3.1)
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,
File No. 0-9416, 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.)
5.1 Opinion of Falcone, Houdek, Bailey & Curd, LLP
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.)
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<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.)
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<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 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.)
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<PAGE>
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)
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.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416 - Exhibit No. 10.18)
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.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416 - Exhibit 10.4)
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.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416 - Exhibit 10.20)
10.21 Letter of Intent, date June 5, 1996, by and between
the Company and Gems & Minerals Corp.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416 - Exhibit 10-21)
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)
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<PAGE>
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)
Promissory Note, dated July 6, 1996 by the Company in
favor of Anderson Chemical Co. in the aggregate
principal amount of $20,000.
Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416, Exhibit 10-26)
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.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416 - Exhibit 10.27)
10.28 First Amendment to the Joint Venture Agreement of
Zeus No. 1 Investments, a California general
partnership, dated August 15, 1996.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416 - Exhibit 10.28)
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.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year Ended December 31, 1996, File No.
0-9416, Exhibit 10-29)
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)
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<PAGE>
10.32 Amendment dated November 19, 1996, mining lease and
Option to Purchase, dated November 12, 1996, between
the Company and Mrs. Dorothy Kennec.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year ended December 31, 1996, File No.
0-9416, Exhibit 10.32)
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.
(Incorporated by Reference, Annual Report on Form
10-KSB for Year ended December 31, 1996, File No.
0-9416, Exhibit 10.33)
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)
16.1 Letter of Wolinetz, Gottleb & Lafazan, P.C. regarding
change in certifying accountants.
(Incorporated by Reference, Current Report on Form
8-K, dated December 26, 1995, File No. 0-9416,
Exhibit A)
*23.1 Consent of J.H. Cohn, LLP, Independent Public
Accountants.
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.)
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<PAGE>
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.)
- -------------
* Filed herewith
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UNDERTAKINGS
As the Company is registering securities under Rule 415 of the Securities
Act, the Company will:
(a) file, during any period which it offers or sells securities, a
post effective amendment to this registration statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act
(ii) reflect in the prospectus any facts or events which
individually or together, represent a fundamental change in
the information in the registration statement;
notwithstanding the foregoing; any increase and decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from one low or high end of
the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to
Rule 42(b) of the Securities Act if, in the aggregate, the
changes in the volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) include any additional or changed material information on
the plan of distribution.
(b) For determining liability under the Securities Act, treat each
post effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bonafide offering.
(c ) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
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<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing to Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of New York,
State of New York on June 10, 1997.
FRANKLIN CONSOLIDATED MINING CO., INC.
----------------------------------
J. Terry Anderson, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated
June 10, 1997
------------------------------
J. Terry Anderson
President and Director
June 10, 1997
------------------------------
Robert Waligunda
Secretary and Director
June 10, 1997
------------------------------
Robert J. Levin
Vice President-Finance and
Chief Financial Officer
June 10, 1997
------------------------------
Richard Brannon
Vice President- West Coast Operations
79
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus of this Registration
Statement on Form SB-2 or our report dated April 3, 1997 (except as noted
therein) on the financial statements of Franklin Consolidated Mining Co, Inc. as
of and for the years ended December 31, 1996 and 1995 and the period from
December 1, 1976 (inception) to December 31, 1996. We also consent to the
reference to our firm under the caption "Experts" in the Prospectus of the
Registration Statement.
/s/ J.H. COHN LLP
J.H. COHN LLP
Roseland, New Jersey
June 12, 1997
