SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended 12/31/97 Commission File No. 0-9416
FRANKLIN CONSOLIDATED MINING CO., INC.
(name of small business issuer in its charter)
Delaware 13-2878202
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
76 Beaver Street, New York, New York 10005
(Address of principal executive offices)
Issuers telephone number: 212-344-2828
Securities Registered under Section 12(b) of the Exchange Act: None
Securities Registered under Section 12(g) of the Exchange Act: Common
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes __X__ No _____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
State issuer's revenues for its most recent fiscal year. $3,888
State the aggregate market value of the voting and non-voting common equity
stock held by non- affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common equity
as of a specified date within the past 60 days
$5,669,860
State the number of shares outstanding of each of issuers class of common
equity, as of the latest practical date.
98,879,328 as of March 31, 1998
DOCUMENTS INCORPORATED BY REFERENCE IN PART III - SIX
Transitional Small Business Disclosure Format (check one) Yes_____ No __X__
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PART I TABLE OF CONTENTS PAGE
Item 1 Description of Business 3
Item 2 Properties 14
Item 3 Legal Proceedings 23
Item 4 Submission of Matters to a Vote of Security Holders 30
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 30
Item 6 Management's Discussion and Analysis or Plan
of Operation 34
Item 7 Financial Statements 38-F-1
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 39
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Person; Compliance with Section 16(a) of the
Exchange Act 40
Item 10 Executive Compensation 41
Item 11 Security Ownership of Certain Beneficial Owners
and Management 42
Item 12 Certain Relationships and Related Transactions 42
PART IV
Item 13 Exhibits, Reports on Form 8-K 43-49
Signatures 50
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PART I
Item 1. Description of Business
General
The Company, originally incorporated on December 1, 1976 under the laws of the
State of Delaware, is engaged in the exploration, development and mining of
precious and nonferrous metals, including gold, silver, lead, copper and zinc.
The Company owns or has an interest in a number of precious and nonferrous metal
properties. The Company's principal mining properties are ( i) the Franklin
Mines, located near Idaho Springs in Clear Creek County, Colorado, for which the
Company acquired the exclusive right to explore, develop, mine and extract all
minerals located in approximately 51 [owned and/or patented] mining claims (the
"Franklin Mines"), (ii) the Franklin mill, a crushing and flotation mill which
is located on the site of the Franklin Mines (the "Franklin Mill") and (iii) the
Gold Hill Mill, a fully permitted modern facility located in Boulder County,
Colorado (the "Gold Hill Mill"). While none of its properties were operational
in fiscal year 1997, the Company continued its rehabilitation of the Franklin
Mines and Franklin Mill in anticipation of the commencement of operations.
History and Development of the Company
The claims which comprise the Franklin Mines are located on a site upon which
placer gold was discovered above the ground at Idaho Springs, Colorado in 1859.
The Franklin Mines vein system was discovered in 1865. Thereafter, mining
commenced on the site in 1865 and continued on an almost uninterrupted basis
through 1915 until the outbreak of World War I caused curtailment of mining
operations in the area. The principal minerals extracted during this period were
gold, silver, lead, copper and zinc. The Franklin Mines have not operated on a
continuous or consistent commercial basis since 1915.
On December 26, 1976, the Company acquired Gold Developers and Producers
Incorporated, a Colorado corporation which, prior to the acquisition, leased 28
patented mining claims from Audrey and David Hayden and Dorothy Kennec pursuant
to a mining lease and option to purchase, dated November 12, 1976 (hereinafter
collectively referred to as the "Hayden/Kennec Leases"). In 1981, the Company
commenced a rehabilitation program to extend and rehabilitate the shafts and
tunnels in place at the Franklin Mines, install the Franklin Mill and search for
and delineate a commercial ore body. The Company completed the Franklin Mill,
which is capable of crushing, processing and concentrating approximately 150
tons of ore per 24 hour period, in 1983.
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The Zeus Joint Venture
In February, 1993, the Company entered into a joint venture arrangement with
Island Investment Corp., a Nevada corporation ("Island"), pursuant to which the
parties formed Zeus No. 1 Investments, a California general partnership
(hereinafter referred to as "Zeus", the "Joint Venture" or the "Zeus Joint
Venture"). The Zeus Joint Venture was formed to develop the Franklin Mines and
related assets of the Company. In May, 1993, Island assigned its interest in the
Zeus Joint Venture to Gems and Minerals Corp., a wholly owned subsidiary of
Island ("Gems"). The activities of the Zeus Joint Venture was overseen by a
management committee comprised of three members, one member appointed by Gems
and two members appointed by Franklin.
The Joint Venture was formed to provide the Company with the financial and
technical support necessary to develop the Franklin Mining properties. While the
Zeus Joint Venture was granted the exclusive right to use the Franklin Mining
properties, at no time did the Company transfer its leasehold interests or
ownership interest in its mining permits to the Joint Venture or to Gems. The
Company did, however, relinquish its interest in 82.5% of the profits from
operations at the Franklin Mine and Mill as Gems was to contribute necessary
capital and other technical support to bring the Franklin Mines into operation.
Each of Gems and the Company were free to pursue other business interests
outside the Joint Venture exclusive of the other.
Since the inception of the Joint Venture, Gems maintained the responsibility for
supplying technology, engineers and personnel, as well as additional equipment
and financing to bring the Franklin Mines and Mill into operation. The Company
retained responsibility for keeping its permits in full force and effect.
However, since the Company had limited financial resources, it was dependent on
Gems for its primary funding.
On June 5, 1996, the Company entered into a non-binding letter of intent (the
"June 5 Letter of Intent") with Gems to acquire certain assets of Gems in
exchange for 67% of the Company, which together with the 18% then held by Gems
would equal approximately 85% of the Company. For more information on issuance
of shares to Gems, See Item Market for Registrants Common Equity and Related
Stockholders Matters,- Sale of Restricted Securities. However, after conducting
preliminary due diligence, it was mutually determined by Gems and the Company
that it would not be in the best interest of either parties to pursue the
Transactions set forth in the June 5 Letter of Intent.
On July 15, 1996, Gems transferred 31.5% of its 82.5% interest in the Zeus Joint
Venture to Nuco Ventures, Inc., a Delaware company and wholly owned subsidiary
of Gems ("Nuco").
During 1997, it became apparent to the Company that Gems did not possess the
technical and financial resources required to bring the Franklin Mines into
operation as contemplated by the Joint Venture. Additionally, on September 25,
1997, the Company entered into a letter of intent, (the "Martucci Letter of
Intent"), with Mr. William C.
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Martucci ("Martucci") to acquire (the "Transaction") all of the outstanding
shares of POS Financial Corp., a New Jersey corporation ("POS") and certain
other entities owned by him including U.S. Mining, Inc., a New Jersey
corporation ("USM"), in exchange for newly issued shares of Common Stock of the
Company. It was contemplated, that Martucci would receive approximately 85% of
the outstanding shares of the Company, upon the closing of the Transaction. The
consummation of the Transaction was predicated upon the completion of customary
due diligence, the execution of definitive agreements and the approval of
Franklin stockholders. Additionally, Mr. Martucci agreed to cover expenses
incurred with respect the Transaction in the form of loans to the Company.
Management believed that the financial support to be supplied by Mr. Martucci
pursuant to the Letter of Intent would be sufficient to fund the Company prior
to the consummation of the Transaction.
On November 25, 1997 in a step transaction, USM acquired an aggregate of 82.5%
interest in the Zeus Joint Venture from Gems and Nuco in exchange for the
assumption of approximately $100,000 in liabilities of Gems (the "Gems
Liabilities"). USM thereafter simultaneously assigned the acquired interest to
the Company in exchange for the assumption of the Gem's liabilities. Upon the
acquisition of the 82.5% interest of the Zeus Joint Venture by the Company, the
Zeus Joint Venture relationship with Gems was terminated and the Joint Venture
was effectively dissolved. The result of the termination of the Zeus Joint
Venture is that the Company has reacquired the right to 100% of the profits
generated from the Franklin Mines and Mill once these properties come into
operation which will further enhance the Company's future profitability.
On April 6, 1998, Martucci terminated the Martucci Letter of Intent. During
1997, POS and/or affiliates advanced to Franklin approximately $955,756 of funds
including approximately $410,000 advanced to the Company by POS through advances
made to Gems for the Company (the "POS Advances") and on March 9, 1998, the
Company executed a Loan Agreement and Promissory Note (the "POS Note")
evidencing the terms upon which the Company would repay the POS Advances and
upon which POS would advance additional funds to the Company on an "as needed"
basis. The POS Note; in the principal amount of $955,756, bears interest at a
rate of 8% per annum and is due and payable on May 4, 1998 but can be extended
on a month to month basis. The POS Note is secured by a first priority lien on
substantially all of the assets of the Company. POS thereafter assigned the POS
Note to USM on March 9th, 1998.
Notwithstanding, the termination of the Martucci Letter of Intent, the Company
and Mr. Martucci have agreed to continue negotiations for a possible business
combination between the Company and the Martucci Companies on an informal basis.
However, there can be no assurance that any definitive agreement will be reached
between the parties regarding future acquisitions. Moreover, since Martucci and
the Martucci Companies have been the primary source of funding to the Company as
of late; there can be no assurance that the Company will have adequate funds
available to repay the POS Note. In the event that the Company should default on
its obligations to repay the POS advances, USM may foreclose on the assets
securing the POS Note. Such foreclosure actions by USM would have a material
adverse effect on the future
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operations of the Company and on the Company's ability to explore the Franklin
Mines.
Operations at the Company's Mining Properties
(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 Company's 112D Mining Permit (the "Franklin
Permit"). The DMG identified several areas in which it believed violations of
the terms of the Franklin Permit may have existed. The major issues cited by the
DMG in its January correspondence are outlined as follows:
The Franklin Mill. On September 2, 1993, the DMG approved, subject to certain
conditions, a revision to the Franklin Permit to change the processing method
then currently in place at the Franklin Mill to a Carbon In Leach process. The
conditions set forth by the DMG included submission of quarterly sampling and
analyses to be performed in connection with the milling process. These sampling
requirements were to remain in effect for the life of the Franklin Permit or
until a subsequent change was agreed to by the DMG. As of January 9, 1996, the
DMG stated that the Company had failed to submit such information to the DMG in
accordance with such conditions and, therefore, it believed a possible violation
existed regarding such matter.
Tailings Disposal Area. As approved on September 26, 1983, the original mining
plan of the Company called for tailings to be slurried to a Lined Tailings Ponds
located adjacent to the Franklin Mill (the "Lined Tailings Ponds"). 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 Ponds was no longer functional. The DMG further
claimed that acidic water had been observed during inspections to be seeping
from the Lined Tailings Ponds into nearby drainage during the spring run-off
period. Therefore, the DMG required that action be taken at the site to prevent
any further leakage into area drainage on or before January 10, 1996 to prevent
a citation for possible permit violations. Moreover, the DMG required that the
Company submit a revision to the Franklin Permit to include a plan for long term
correction of this problem on or before March 8, 1996.
Lower Tailings Pond. On or about August 13, 1988, the Company submitted
Amendment application AM-001 to the DMG to amend its original mining plan to
conduct custom milling and to dewater the tailings on the lower tailings pond
which is located below the Lined Tailings Ponds 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
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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 was further revised in technical revisions to the Franklin Permit approved
by the DMG on each of September 2, 1993 and March 14, 1994. The technical
revision approved on September 2, 1993 required the Company to submit
groundwater analyses to the DMG on a quarterly basis; however, the DMG stated
that it had not received the required analyses from that date and the Company
needed to verify whether its surface and groundwater monitoring programs were
active and functional on or before March 8, 1996. Until such time as this
information was submitted to the DMG, the Company was prohibited from disposing
further tailings on the property.
Reclaimation 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 reclaimation bond of the
Company was recalculated. To help reduce reclaimation costs, the Company
committed to filing an amendment prior to mine start-up and no later than July
1, 1995 which included a plan to leave the mine and mill structures after
reclaimation. 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 reclaimation 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.
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 Reclaimation Board, the agency
responsible for overseeing and reviewing permitting issues ("MLRB") and the DMG,
the Company received a temporary cease and desist order prohibiting it from
conducting mining
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and/or milling operations at the Franklin Mines until such time as all past
violations cited by the DMG were satisfied.
During fiscal year 1996 and 1997, the majority of the remedial work and the
technical revisions to the Franklin Permit consisted of work relating to
correcting violations existing with respect to the matters identified above.
Specifically, the Company (a) instituted a plan quarterly groundwater monitoring
which included surface water and groundwater sampling plans, (b) took steps to
correct the run-off problem associated with the Disposal Area, (c) reclaimed the
Lined Tailings Ponds, (d) commenced preliminary plans for the installation of a
paste backfill system for tailings disposal in the Lined Pond and (e) made
application to the DMG for expansion of the permitted area at the Franklin Mines
and Franklin Mill to allow for performance of certain of the remediation work
outlined above. Upon completion of paste backfill work, it is anticipated that
the Company will possess substantial tailings disposal capacity consistent with
its production plans. However, should additional disposal areas be required, the
Company may make application to the DMG to reopen the Lined Tailings Ponds which
it has recently reclaimed. Since the reclaimation work relating to the Lined
Tailings Ponds has been completed, the Company may also make application to the
DMG to reduce the $252,000 reclaimation bond currently posted with the DMG.
In addition to the work performed in connection with the Franklin Permits, the
Company submitted 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 includes 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
Environmental Protection Plan has been accepted by the DMG.
On January 31, 1997, the Company received approval from the DMG of its March 6,
1996 amendment application to the Franklin Permit. The notification of approval,
received by the Company on February 28, 1997, increased the total permitted
area, revised the mining plan to include the processing of ore from the Mogul
Mines, alters the milling process, propose tailings paste disposal, and modifies
the surface water control plan. 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 installation of the components of the Surface Water
Control Plan not later than April 15, 1997 and (iii) the completion of closure
plans for the Lined Tailings Pond by spring runoff and in any event no later
than April 15. Finally, the schedule for the completion of the closure plan for
Tailings Pond 5 will be determined by the DMG during fiscal year 1997 and will
be dependent on the Company's tailings disposal plan which is to be submitted to
the DMG in 1997.
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In the Spring of 1997, the region in which the Franklin mining properties are
located was subject to severe weather patterns which caused flood conditions in
the area. As a result, the Company was unable to complete its work at the
Franklin Mines within the prescribed time frame. Given the oral agreement with
the DMG to grant the Company latitude with respect to the completion of its
projects, the Company failed to make any formal application to the DMG for an
extension of time to complete the Surface Water Control Plan and closure plans
for the tailings ponds. As a result of this oversight, the Company received a
formal Notice of Violation and Cease and Desist Order from the DMG for failure
to fully complete these projects as prescribed by the DMG in its January 31,
1997 approval.
Thereafter, installation of the Surface Water Control Plan, and the closure and
reclamation of the tailings ponds were completed and the Cease and Desist was
automatically lifted without further action by the Company or administrative
proceedings by the DMG. As of the date hereof, the Company is in compliance with
all applicable regulations and no violations exist against the Company or its
properties.
(2) Newmineco and the Mogul Mine.
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, at
its option, could convert the principal and interest payments due under the
Newmineco Note into the Company's Common Stock on or after January 1, 1997 at a
conversion rate of .078 per share. The conversion shares had registration
rights. Additionally, the Company acquired the right to receive the first
$500,000 of profits distributed by Newmineco, but thereafter, will receive only
that portion of such profits which the Company would be entitled in respect of
the aforesaid 20% ownership interest. As of December 31, 1996, the Company had
failed to make its December 31, 1996 interest payment on the Newmineco Note.
The majority of the rights to the Mogul Mine were evidenced by a Lease dated
March 18, 1996, entered into between Island, as lessee, and the Ruggs (McCollum
being the lessor/optionor as to the Muscat Lode claim only) as lessor (the
"Rugg/Mogul Lease"). The Rugg/Mogul Lease was contributed to Newmineco prior to
the acquisition by the Company of 20% of the LLC.
During the early part of 1996 and again in the latter part of the year, mining
commenced at the Mogul Mine in accordance with a prospecting permit which had
been secured by Durango Metals, Inc. a former owner/operator of the Mogul Mine
(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
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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.
In the latter part of 1996, Newmineco informed the Company that disputes had
arisen among various parties to the Newmineco agreements which included the
Rugg/Mogul Lease and use of the underlying leasehold rights. On January 1, 1997,
Island, the former lessee under the Rugg/Mogul Lease, received a notice of
intent to terminate the Rugg/Mogul Leases from the Ruggs unless Island paid
approximately $85,000 allegedly due to the Ruggs pursuant to the terms of the
lease within 30 days of the date of the notice. The Company was advised by
Newmineco and Island that the parties were negotiating in good faith to resolve
their differences and that they were hopeful that a resolution would be reached
shortly.
During the later part of 1996, the Company entered into discussions with Gems
regarding the problems with the Mogul Mine which included certain title issues
with respect to the rights to mine the Mogul Mine and litigation commenced
against various parties, including the Company, in connection therewith. As a
result of these discussions, the Company, Gems, Com, Inc. and Newmineco agreed
that, effective December 31, 1996, the $600,000 purchase price paid by the
Company, for its 20% interest in Newmineco would be reduced to $150,000. The
parties further agreed that the $450,000 reduction in the Newmineco Note plus
accrued and unpaid interest thereon would be applied against the outstanding
balance of the Gold Hill Note (as hereafter defined), thereby further reducing
the principal balance of the Gold Hill Note to $586,419. Moreover, Gems and Com,
Inc. agreed to indemnify the Company for any damages incurred as a result of any
lawsuits arising out of the Company's interest in Newmineco and/or the Gold Hill
Mill. For further information regarding the Gold Hill Mill and Gold Hill Note
See Item 1. Description of Business (3) the Gold Hill Mill. For more information
regarding the title issues and litigation involving the Mogul Mine, see Item 2.
Property-Rugg/Mogul Lease; Item 3 Litigation-Durango Litigation. The Gold Hill
Note was further reduced by $150,000 in 1997 as a result of the reduction of the
purchase of the interest in the Newmineco Note evidenced by the Newmineco Note
to 0.
On February 7, 1997, Gems notified the Company that it had assigned its interest
in the Newmineco Note to certain third parties, including John Miner, a
consultant to the Zeus Joint Venture. Thereafter, on February 10, 1997, the
Company notified Mr. Miner, as special agent to the assignees that it had
elected to convert the principal due on the Newmineco Note into Common Stock of
the Company in accordance with the terms therein. An aggregate of 7,692,308
shares were issued to the assignees in full satisfaction of the Newmineco Note.
(3) The Gold Hill Mill
In July, 1996, the Company acquired the Gold Hill Mill from COM, Inc. for
$2,500,000 note (the "Gold Hill Note") payable to COM, Inc. a wholly owned
subsidiary of Gems. The Gold Hill Note bears interest at a rate of 8% per annum
and interest payments are
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$50,000 payable quarterly and is secured by a mortgage on the property in favor
of COM, Inc. The principal amount of the Gold Hill Note is due June 3, 1999. The
first quarterly interest payment was due on October 3, 1996. In addition to the
Gold Hill Note and mortgage, the Company and COM, Inc. entered into a memorandum
of understanding in which the parties agreed that certain items needed to be
addressed as post closing items with respect to the sale of the Gold Hill Mill.
These issues included, but were not limited to (i) the disposition of certain
liens which were outstanding on the property as of July 3, 1996, including a
judgement lien in the amount of $6,815.50 and a Deed of Trust in the amount of
$300,000 which represented a debt owed by Gems, (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 assets consisting
of Promissory Notes and other debt instruments 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 in the indebtedness of the
Gold Hill Note. The Company further agreed to use its best efforts to file a
registration statement with respect to such shares within 45 to 60 days from the
date upon which the offering terminated. As a result of the Transaction, the
Company was able to reduce the Gold Hill Note by $1,463,581, leaving a balance
of $1,036,419. The Gold Hill Note was further reduced by a $600,000 credit in
accordance with the agreements reached with respect to the purchase price of the
Company's Newmineco interest. As of December 31, 1997, given effect to
adjustments relating to intercompany loans between Gems and the Company made in
connection with the settlement of affairs relating to the Zeus Joint Venture as
well as the $600,000 credit afforded to the Company in connection with the Mogul
Mine Note, the balance of the Gold Hill Note has been reduced to $0.
As further inducement to purchase the Gold Hill Mill, Gems represented to the
Company at the time of the purchase of the facility, that it had contracted to
acquire the rights 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 Company was advised by Gems that the Gold Hill Dumps were 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. In the fourth
quarter 1996, Gems advised the Company that due to the failure of the parties to
act, the agreement has been terminated.
The Gold Hill Mill is located within close proximity to the Franklin Mines and
Mill as well as the Mogul Mine and it was hoped that the acquisition of the
facility would afford the Company the opportunity to expand its geographic reach
into the Gold Hill Mining region. It was contemplated that the Company would
conduct milling operations at the Gold Hill Mill and Franklin Mill at a combined
initial rate of 200 tons per day and that such capacity would eventually be
increased.
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However, the present regulatory climate has made it economically unfeasible to
bring the Gold Hill Mill into operations. Recent changes in the laws governing
milling and mining in Boulder County restrict the use of milling facilities
located in Boulder County to processing ore recovered within the county only.
Therefore, the laws preclude the Company from using the Gold Hill Mill for
processing ore from the Franklin Mines. Management does not believe that any
mines located in Boulder County are operating at this time. Additionally, at the
time of the acquisition of the Gold Hill Mill by the Company, Gems had
represented to the Company that it had obtained the rights to mill the Gold Hill
Dumps. Since the agreements permitting such activities were terminated, the
Company cannot use the Gold Hill Mill for this purpose. Therefore, the Company
hopes to sell the real property and remove the milling equipment for relocation
to the Franklin Mine. Approximately 5 acres of property will be available for
sale.
Despite its decision not to operate the Gold Hill Mill, the Company has
continued to take the necessary action to preserve Permit #94-117 (the "Gold
Hill Permit"). Throughout 1996 and 1997, the Company has continued to work with
the DMG to correct possible violations of the Gold Hill Permit, including the
rehabilitation of the required spring evaporation system at the tailings ponds
located on the Gold Hill Mill property. As of the date hereof, no formal
violations are pending with respect to the Gold Hill Permits and the same
remains in full force and effect.
To reclaim the property, the Company will be required to remove all tailings and
ore from the site, test the condition of water located at the Hazel A adit
pursuant to Boulder County Water Control Board requirements and fill the
tailings pond with soil, contour and seed the same in accordance with state
regulations. In the event that the water quality is found to be in compliance
with existing standards, the adit will be plugged and capped. The Company
expects reclaimation costs to be approximately $15,000 to $20,000 and does not
expect reclaimation efforts in any event to exceed the $33,000 reclaimation bond
posted at the DMG to cover reclaimation costs.
The Company estimates that the sale of the real property comprising the Gold
Hill Mill will generate approximately $350,000 based upon estimates given to the
Company by local Realtors. Management believes that the equipment has a value of
approximately $925,000 and the water rights are valued at approximately $25,000.
As a result of the aforementioned estimated values, the value of the assets
comprising the Gold Hill Mill were written down by $1.2 million.
Other Matters
On or about June 12, 1997, the Company filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form SB-2 (the
"Registration Statement") on behalf of certain shareholders of the Company for
the purpose of registering an aggregate of 15,951,885 shares. The Company was
obligated to file the Registration Statement on behalf of these shareholders
pursuant to certain contractual agreements granting such persons demand and/or
piggyback registration rights.
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After receiving comments from the Commission on or about July 18, 1997, the
Company received requests from the majority of the Selling Shareholders to
withdraw their shares from the Registration Statement because, assuming all
other provisions of Rule 144 are complied with, the shares may be sold pursuant
to Rule 144 because the 1 year holding period has expired. Simultaneously, with
the filing of this Annual Report, the Company intends to file an application to
withdraw the Registration Statement. The Company expects that the Commission
will consent to the withdrawal of the Registration Statement based upon its
recent discussions with the Commission, provided the Company addresses the
Commission's comments in conjunction with the filing of this report.
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, 1997 from operations at the Franklin
Mine. Therefore, the Company remains in the development stage. Based on
information developed through the Analysis Program and previously available
geological data and reports as well as reports and other information supplied to
the Company by Gems, the Company is hopeful that economically viable commercial
mining operations at the Idaho Springs mining facilities can be conducted in the
future. Moreover, the Company continues to work closely with Colorado state
mining regulatory agencies in preparation and anticipation of full scale
operations at the Franklin Mines and Franklin Mill.
Water, Utilities and Refining Contracts
The Company has historically purchased power from Public Service Company of
Colorado at its published rates. Moreover, the Company's management believes
that sufficient water for present and future operations may be obtained from the
City of Idaho Springs at its normal rates or from other nearby sources at
reasonable rates. The Company's management does not anticipate any difficulty in
obtaining sufficient water and power sources for its future mining and milling
operations.
In the past, the Company has entered into refining agreements with Zinc
Corporation of America and ASARCO Incorporated for the sale and refining of
lead, zinc and copper concentrates produced from the Franklin Mine in Colorado.
The Company's management expects that at such time as it recommences active
mining and milling operations, the Company will not have difficulties in
renewing or renegotiating contracts with either ASARCO or Zinc Corporation of
America or entering into new contracts with their competitors.
Employees and Technical Consultants
As of December 31, 1997, the Company had no full-time employees. Three of the
Company's executive officers serve as needed on a part-time basis and one of the
Company's executive officers serves on a full time basis, each for no
compensation. With respect to operations at the Franklin Mines and Franklin
Mill, technical personnel and other qualified consultants and experts are
retained on a contract or consulting basis. Management anticipates that as the
Company's business develops, additional
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technical administrative staff may be hired as well as qualified geological and
technical consultants on an as needed basis.
Item 2. Properties
Glossary of Terms
- -----------------
Assay A chemical evaluation of metal content conducted
after mining ore.
Backfill Mine waste which is disposed of underground in a
formerly mined area.
Chacopyrite A mineral containing copper, iron and sulphur.
Cyanidation and Pulp Recovery The process by which gold is extracted in the
milling process through the use of cyanide.
Development Stage Company Companies engaged in the preparation of an
established commercially mineable deposit or
reserve for its extract which are not in the
production stage.
Dip An angle measured in degrees from the horizon.
Fault A fracture in the earth through which
mineralizing solutions may rise and form a vein.
Fault System A large regional fracture.
Footwall That portion of the vein which is located below.
Galena A mineral containing both lead and sulphur.
Gravity Concentration Minerals concentrated by application of devices
employing the force of gravity.
Hanging wall That portion of the vein which is overhead.
J.L. Emerson Fault A large fracture in the earth' s crust located
in the Franklin Mine area.
Laramide Period A period in history dating back approximately 70
to 90 million years ago.
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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 Rock which contains the minerals to be mined.
Monzonite Intrusive rock types containing large amounts of
quartz and often the progenitor of metallic,
mineralizing solutions.
Ore A metallic or non-metallic mineral that can be
mined from the earth and sold at a profit.
Ore Conduit An opening through which mineralizing solutions
can rise.
Ore Reserves Minerals located in the ground whose existence
is governed by varying degrees of probability.
Ore Shoot A body of ore.
Orogeny An event causing a major upheaval or reshapement
of the earth's crust, such as volcanism,
mountain building or ore formation.
Paste Backfill Procedure in which backfill is treated with
certain chemicals to solidify the same to
prevent seepage
Pegatites A type of rock found in the Franklin Mine.
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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 quality are
computed from the results of detailed sampling
and (b) the sites for inspection, sampling and
measurement are spaced so closely and the
geologic character is so well defined that size,
shape, depth and mineral content of reserves are
well established.
Pyrite A mineral containing both zinc and sulphur.
Raise A tunnel driven upward from a level.
Refractory A difficulty in separating value metals or
minerals from the host rock.
Reserves That part of a mineral deposit which could be
economically and legally extracted or produced
at the time of the reserve determination.
Schist, granite gneiss A type of rock found in the Franklin Mine.
Selective Flotation Minerals concentrated in a selected mineral
group in the mill.
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Shaft A vertical tube-like opening whereby miners
enter the mine.
Slurry A mixture of ground rock or minerals in water.
Slimes Exceedingly fine particles mixed with water.
Sphalerite A mineral containing both zinc and sulphur.
Strike In a horizontal direction.
Stope The area of the mine where miners extract
mineral deposits from the mine.
Tailings Waste which is produced by the Mill.
Tailings Pond The location where mill wastes are deposited.
Telluride A mineral containing tellurium often found with
quantities of gold and/or silver and sulphur.
Tennentite A complex mineral containing copper, antimony or
arsenic, often containing large amounts of
silver.
Tertiary Period A time period in history dating back
approximately 40 to 70 million years ago.
Vein A fracture in the earth's crust where minerals
have been deposited.
Winze A tunnel driven downward from a level.
Colorado Mining Properties
The property which constitutes the Franklin Mines consists of (i) 100% leasehold
interest in the mineral rights to 28 claims comprising approximately 322 acres
evidenced by the Hayden/Kennec Leases and (ii) an additional 23 claims leased
and/or purchased by the Company covering less than 100% of the mineral rights
comprising approximately 20 additional acres, for a total of 51 claims over 340
acres. Such properties include all improvements made by the Company thereon,
including the
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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 was greater to Mrs. Hayden and Mrs. Kennec. The original
Hayden/Kennec Leases expired in November, 1996 at which time the Company had the
option to purchase the leasehold rights for a purchase price of $1,250,000 less
any royalties previously paid as of the expiration date. As of November, 1996,
the Company paid approximately $480,000 in royalties.
On November 19, 1996, the Company entered into an amendment to the Hayden/Kennec
Leases with 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 on or about November 19, 1996
of $13,000. All of the payments made under the Kennec Amendment plus the value
of the shares issued thereunder are to be further applied against the buy-out
price of the property under the original Hayden/Kennec Leases. Additional
payments totaling approximately $60,000 was advanced by or on behalf of the
Company to each of Mrs. Hayden and Mrs. Kennec through December, 1997.
To further secure the ability of the Company and the Zeus Joint Venture, Gems
entered into an agreement on December 21, 1995 to purchase Hayden's interest
thereto (the "Hayden Interests") for a purchase price of $75,000 (as the same
has been subsequently amended from time to time, "Hayden-Gems Purchase
Agreement"). Gems made an initial payment of $5,000 to Hayden and the remainder
of the purchase price was to be paid on or prior to the expiration date of the
Hayden/Kennec Leases. Gems advised the Company that under Colorado law, if an
owner of 50% of mineral rights desired to exploit those rights, then the
remaining 50% owner could not object to the exploitation of the rights, provided
the non-participating owner received 50% of the net profits generated from such
exploitation. Therefore, Gems informed the Company that it believed that with
the acquisition of the Hayden interest, together with the portion of the
Hayden/Kennec Leases owned by Kennec, the Company and the Zeus Joint Venture
would have adequate access to the minerals during the remainder of the term of
the Hayden/Kennec Leases on a continuing basis even if Kennec should elect not
to renew the lease or sell her interests in the mining rights to the Company as
per the terms of the Hayden/Kennec Leases.
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On November 12, 1997, Gems had failed to comply with the terms of the
Hayden/Kennec-Gems Purchase Agreement. On November 13, 1997, Hayden entered into
an agreement to sell the Hayden interests to USM for a purchase price of $75,000
(the "Hayden-USM Purchase Agreement"). The purchase price is evidenced by note,
due on February 2, 1998. Upon the execution of the Hayden-USM Purchase
Agreement, USM agreed to extend the Hayden/Kennec Leases upon the same terms and
conditions currently in effect through March 13th, 1998 (the "Extended
Expiration Date"). As of the date hereof, USM has not consummated the
transaction contemplated by the Hayden-USM Purchase Agreement; however, it is
expected that the transactions will close upon delivery by Hayden of clear title
to the interests being conveyed to USM. Additionally, the Company is in
negotiations with the parties to further extend the terms of the Hayden/Kennec
Leases.
Location and Access
The Franklin Mines and Franklin Mill are located in Clear Creek County, Colorado
approximately 2.7 miles north of the town of Idaho Springs which is accessible
from Interstate 70 approximately 33 miles west of Denver. From Idaho Springs, a
county maintained gravel road connecting Idaho Springs with Central City in
Gilpin County passes within 1/4 of a mile of the Franklin Mine facilities and
offices. A minor roadway, also maintained by the County, allows access to the
Franklin Mine within 1/8 of a mile. The mine location is accessible year round,
except in the case of a major snow storm in winter months.
Ore Deposition in the Area
Most of the ore deposition in the area where the Franklin Mine is located has
been credited to the period of the Laramide Orogeny. Ore extracted from the
region 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 depths.
The ore deposits are of four types: (I) pyritic gold ores; (ii)
galena-sphalerite ores; (iii) composite (pyrite-galena-sphalerite) ores and (iv)
telluride ores. Pyritic gold ores are chiefly associated with pyrite,
chacopyrite and tennentite. The "composite ores" are believed to be the result
of two or more periods of mineralization, with pyritic minerals first and
galena-sphalerite second; mineral content varies widely with the relative
percentage of the different types of ore present. Telluride ores are present
mostly in the Northeast corner of the district, but some telluride ores have
been noted elsewhere.
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Geology of the Franklin Mines
The rocks most commonly seen in the Franklin Mines are Pre-Cambrian age granite
and microcline gneiss. Tertiary Period, monzonite, the most common of which is
quartz monzonite, can be seen on the ninth level and are reported from lower
levels in the Gem vein or Gem workings of the Franklin Mines. The general strike
of the system is N75 degrees W with dips varying from 45(degree) to 79(degree).
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.
Secondary to the J.L. Emerson Fault are a multitude of small fissure veins which
are parasitic to the main break. Some of these veins contribute to considerable
mineralization where they intersect the J.L. Emerson Fault structure. These
mineral bodies are observable in several locations in the Franklin 73 mine and
the Gem mine, one measuring 22 feet wide and 60 feet in length. It has been
reliably reported that some of the large stopes mined in the Gems workings
measured up to 105 feet in width.
Estimated Ore Reserves
The mineral lodes of the Franklin Mines consist of these associated with the
Gem, the Freighter and the Franklin mines and those minerals generally
associated with the "Main Trunk" of the J.L. Emerson Fault. No reference is
being made regarding the mineral potential of structures situated adjacent to,
or off the "Main Trunk".
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 strike of the veins. Blocks were sampled on three or four
sides and at times within by raise or winze. Those blocks which were extensively
mined were entered where possible through open stopes with both pillars and
"backfill" being sampled.
The Franklin mineral structure is generally a tabular structure in shape and
consisting of several parallel to sub-parallel veins, striking in a westerly
direction and dipping at 45(degree) - 79(degree) north. Its depth is unknown!
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 79 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
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interdict the J.L. Emerson Fault at several points, but do not cross. These
veins are of unknown economic potential.
The mineral structures in the Franklin Mines are often large, but poorly
defined. It was suggested that a core drilling program be conducted at promising
locations to determine potential mineral reserves therein. It was believed by
management and Gems, its joint venture partner, that much unexplored mineral
potential exists in the Franklin Mine.
A geological report prepared by Gifford A. Dieterle in December, 1993 indicated
that proven and probable reserves since 1987 to be as follows using a margin of
error of plus or minus 15% assuming a metallurgical recovery of 90%.
As filed with Securities & Exchange Commission; Summary of Reserves Report by
Gifford A. Dieterle, Geologist, dated December 7, 1993.
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 Grade of Gold: .315 ounces per ton
Average Grade of Silver: 6.740 ounces per ton
As of the date hereof, the Company has not received any information which would
require modification of the above table.
Operations.
The successful conclusion of the paste back fill testing program will provide
the Company with adequate tailings disposal and will bring the Company close to
the commencement of operations. The Company is hopeful that it will commence
rehabilitation before the end of the second quarter of 1998 by initially
bringing to the surface 8000 tons of ore existing at the 5th level tunnel via
the Freighters Friend Shaft. The Company has been approached by and is pursuing
ventures with two local mining operators to mill ore mined from other mining
properties located in the region at the Franklin Mill.
The Company has retained Walsh Environmental Scientists and Engineers, Inc., of
Boulder, Colorado to oversee all environmental, compliance and regulatory
matters relative to the Franklin Mines and Franklin Mill and has purchased the
necessary equipment to conduct paste back fill testing with regard to tailings
disposal on the property. It is anticipated that such tests will be completed to
the satisfaction of the DMG by the end of the second quarter of 1998.
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Since the acquisition of Gem's 82 1/2% of the Joint Venture, the Company is now
entitled to receive 100% of the profits from mining operations and will assume
full responsibility for management of the Franklin Mining Properties. Management
believes that an initial capital requirement of approximately $750,000 will be
required to bring the Franklin Mine and Mill into operation. In addition, USM
and its affiliates have verbally pledged to continue to provide financing to the
Company on an as needed basis through December 31, 1998, this financing is in
addition to the POS Advances made in 1997. Other alternatives such as private
placements, loans or public offerings may be considered for future operating
capital.
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 23% of the weight of the ore. Approximately
35% of the gold content of the ore remains locked in the pyrite as refractory
gold and is not recoverable by ordinary means. In 1993, a new metallurgical
process was introduced to attempt 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 then joint venture
operator with recovery of 85% of gold. However, later testing indicated that
little or no gold could be recovered through this process.
Standard milling procedures are intended for newly mined ore with selective
flotation of; a) lead, silver, gold and b) zinc and c) gravity concentration of
gold bearing pyrite. Gold bearing pyrite concentrates will be taken off site to
a copper smelter where gold and silver will be extracted. Average recovery of
gold in lead concentrate is estimated at approximately 60%; pyrite concentrate
35%; slimes 5% (lost).
In the past, the Franklin Mill operated on a limited schedule while exploration
and development was taking place. While the Franklin Mill has not operated with
respect to ore milling, limited crushing activities took place in early 1996 for
the purpose of crushing bulk test ore samples prior to assay. Thus, prior
milling and the crushing recently done at the Franklin Mill can be characterized
as "exploratory" in nature.
Completed in 1992, the Gold Hill Mill is a fully permitted modern milling
facility completed in 1992. With the exception of test milling approximately
4,000 tons of ore by the previous owner, the Gold Hill Mill has not been
operated since its completion in any commercial operations.
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Offices of the Company
The Company maintains its executive offices, consisting of approximately 500
square feet, at 76 Beaver Street, Suite 500, New York, New York. During 1997,
the Company agreed to rent this space for a monthly rental of $600 pursuant to
an oral agreement with a non-affiliate. In 1998, the Company re-negotiated its
oral agreement and now pays a monthly rental of $3,500 for the office space,
secretarial and other services provided to the Company. The Company also
maintains an office on site at the Franklin mine in Idaho Springs.
The Company's management anticipates this space will service the Company's needs
for the foreseeable future and that, in the event such space should become
unavailable in the future, the Company will be able to lease these or other
suitable facilities on a reasonable basis.
Item 3. Legal Proceedings
Convertible Debentures
On June 1, 1994, the Company advised the Transfer Agent/Trustee that the Company
was not in compliance with certain of the terms of the indenture (the
"Indenture") relating to the Company's 12 1/4% Convertible Debentures (the
"Debentures") in that it had not maintained current filings with the Securities
and Exchange Commission (the "Commission") as required. Accordingly, the
Transfer Agent/Trustee was instructed not to convert any of the Debentures into
Common Stock of the Company until such time as the Company notified the Transfer
Agent. The Company failed to make required sinking fund payments in 1994 and was
unable to pay the principal balance of the Debentures due on December 31, 1994
resulting in a default under the terms of the Indenture.
Although the Company was in default, it agreed to continue to make quarterly
interest payments to the Debenture Holders during fiscal year 1995 until such
time as the principal amount of the Debentures could be paid in full. It was
anticipated that the Company would have the funds available to make such
payments by December 31, 1995. The Company made the first quarterly interest
payment due on the Debentures in 1995 but has failed to make any additional
payments with respect to such interest as of the date hereof.
In December 1995, the Company sent notices to the debenture holders requesting
their consent to extend the maturity date of the Debentures to December 31,
1996. It was also contemplated that the conversion rights of such holders would
also be extended at its current rate of $.50 per share. The Company also agreed
that it would bring current all interest payments due and owing to such holders
through December 31, 1995, prepay interest which will become due and owing at
the end of the first quarter of 1996 and set up a fund with the Transfer
Agent/Trustee to secure the timely payment of the principal amount of the
Debentures on December 31, 1996. The Company set February 15, 1996 as the date
upon which all Debenture Holders had to submit their consent forms to the
Company indicating whether they agreed to extend the maturity
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date as to their bonds or reject such proposal. Any holder which failed to
return a consent form within the prescribed time was to be treated as having
consented to the extension. As of the February 15, 1996, the Company received a
negative response from one holder owning $1,000 principal amount of Debentures.
While the Company intended to comply with the terms of its agreements with the
holders of the Debentures, a series of unforeseen circumstances relating to the
Company's permits and reclaimation bond caused a cash flow shortage. As a result
the Company has been unable to make the payments described above. Management is
hopeful that the Company's limited cash flow will improve in the near future and
at such time intends to comply with the terms of its December 1995 agreements.
As of December 31, 1997, the accrued and unpaid interest on the Debentures is
approximately $49,000.
On January 17, 1997, the Company received a letter from counsel to James E.
Hopis, Revocable Trust, a holder of $5000.00 of Debentures of the Company
demanding payment of such bond immediately or legal action will be taken against
the Company to collect on such Debenture. In September, 1997, certain of the
Company's 12 1/4% Convertible Debenture holders, including the Hopis Trust (the
"Plaintiff Debentureholders") instituted an action in the Supreme Court of the
State of New York against the Company for payment on approximately $42,500
principal amount of Debentures plus accrued and unpaid interest totaling
approximately $13,000 and other costs and expenses related thereto. The Company
has answered the aforesaid complaint.
Thereafter, the Plaintiff Debentureholders moved for summary judgment against
the Company. The Company chose not to oppose the motion and a default judgment
was entered against the Company in the amount of $42,500 plus interest, costs
and disbursements (the "Judgment"). Moreover, the issue of attorney's fees were
severed from the case and all to be set down for an inquest.
In February, 1998, USM entered into an agreement with the Plaintiff
Debentureholders agreeing to pay the Judgement plus certain additional costs in
the event that the Company fails to pay the Judgment and USM consummates the
Transaction with the Company. In the event that USM does not consummate the
Transaction by July 12, 1998, USM agreed to pay the Plaintiff Debentureholders
$5,100 for their agreement not to enter the Judgment against the Company or
pursue the inquest. Plaintiff Debentureholders have agreed not to enter the
Judgment against the Company until July 12, 1998 or until USM notifies them that
it will not pursue the Transaction.
As of the date hereof, the Company is not aware of any termination or
modification of the Agreement and believes it is in full force and effect.
However, there can be no assurance that USM will not terminate this Agreement or
that the Agreement will expire; the result of which will be the entering of the
Judgement against the Company and a possible inquest as to the Company's
liability regarding attorney's fees.
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The continued default and failure to comply with the 1994 and December 1995
agreements may result in Company being subject to additional legal proceedings
by the Transfer Agent/Trustee under the Indenture or from other holders seeking
immediate payment of the $102,500 plus related interest and penalties. While the
Company hopes to cure the default or, in the alternative, reach an acceptable
settlement arrangement with the holders, there can be no assurance that the
funds will be available in the future to meet all of the Company's obligations.
Management remains hopeful that payment or, in the alternative, commencement of
settlement negotiations, will delay the commencement of any legal action until
the Company can make the appropriate arrangements to repay the Debentureholders.
Golder Litigation
On or about February 5, 1996, Bradley, Campbell, Carney & Madsen, P.C., Colorado
counsel to the Company, Gems, Zeus and Newmineco ("BCCM") entered into a
contract with Golder Associates, Inc. ("Golder"), pursuant to which Golder
agreed to perform certain services at the Mogul Mine pertaining to environmental
issues, including, but not limited to, (a) reviewing surface and groundwater
quality and compliance standards, (b) reviewing 110 permitting requirements,
applications and responses, (c) reviewing certain environmental plans relating
to the Mogul Mine and (d) assessing water discharge requirements and dispensing
advice with respect to water discharge and surface spring outflow management and
mitigation of poor drainage quality (the "Mogul Tunnel Contract"). At the time
of the Mogul Tunnel Contract, BCCM allegedly entered into said contract as an
agent of Durango, the lessee of the Mogul Mine at that time.
On or about February 5, 1996, BCCM entered into a second contract with Golder,
pursuant to which Golder agreed to perform certain services at the Franklin
Mines and Franklin Mill pertaining to environmental issues, including, but not
limited to, (a) phase 1 site assessment, (b) preliminary regulatory and permit
review, (c) engineering site inspections, (d) designs for surface water
management at the ore handling facility, (e) technical memorandum on
alternatives for the extension of #5 tailings pond, (f) assistance in
negotiation with the DMG and (g) recommendations for bulk ore sampling and
mineralogical testing at the Franklin Mines (the "Franklin Mine Contract"). At
the time of the Franklin Mines Contract, BCCM allegedly entered into said
contract as an agent of the Zeus Joint Venture.
On or about August 23, 1996, Gems executed a note to Golder in the aggregate
principal amount of $268,683.75 and a note to BCCM in the aggregate principal
amount of $109,785.35 to secure legal and engineering fees outstanding as of
such date. Each note was due and payable on or before December 23, 1996 and
bears interest at a rate of 6% per annum. In the event that the payments of
principal and interest under the notes were not paid when due, all principal and
interest will accrue additional interest at a rate of 10% per annum. The notes
were secured by a pledge of approximately 3,600,000 shares of Common Stock of
the Company owned by Gems, pursuant to a Security Agreement, dated August 23,
1996. Any default under the notes
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constituted an event of default under the Security Agreement. Gems failed to
make the required payments as of December 23, 1996.
On or about January 28, 1997, Golder commenced an action against BCCM, Zeus, the
Company, Gems, Island, and Durango in the United States District Court of the
District of Colorado to recover sums due and owing from the Defendants for
breach of contract, breach of implied warranty, misrepresentation, negligent
misrepresentation, default under the Golder note and quantum merit arising out
of each of the Mogul Tunnel Contract and the Franklin Mine Contract. The Company
is a named defendant to this litigation by virtue of its general partnership
interest in Zeus, it being joint and severally liable with Gems and Nuco as
general partners in the Joint Venture.
The aggregate amount of the Golder claims are approximately $281,670.99 plus
prejudgment and post judgment interest, costs and expenses (including attorney's
fees) and any additional relief granted by the court, $124,159.87, exclusive of
interest and other costs and expenses, of which is attributable to the Mogul
Tunnel Contract and $157,511.12, exclusive of interest and other costs and
expenses, of which is attributable to the Franklin Mines Contract.
On or about March 12, 1997, BCCM filed a motion to dismiss counts III, IV, and V
of the Complaint relating to the breach of warranty, misrepresentation and
negligent misrepresentation arguing that these claims were pled in the
alternative and only become viable in the event other defendants in the case
deny BCCM authority to enter into the subject contracts. Also on March 12, 1996,
Zeus, the Company, Island and Gems moved to dismiss or stay proceedings pending
arbitration arguing that arbitration clauses in the subject contract require the
captioned action to be submitted to arbitration. However, Durango filed a
separate answer to the Complaint denying that BCCM had any authority to enter
into any contract on behalf of Durango and denying that Durango ratified any
exercise of such authority. Therefore, on or about March 27, 1997, Golder moved
to file an amended complaint to clarify its position that the claims against
Durango are also asserted against the Franklin Defendants. The Company has not
received a copy of such complaint to date. Notwithstanding, the parties, on
April 4, 1997, executed a stipulation agreeing to arbitration on all issues
concerning the subject contracts but excluding issues relating to the note and
security agreement.
The Company is currently engaged in settlement negotiations with the parties in
hopes of resolving this dispute and has an agreement in principal with all of
the parties. However, there can be no assurance that final settlement agreements
will be executed or that the Company will be successful should this matter
proceed to arbitration. The Company estimates that its portion of the liability
in this matter is approximately $35,000 in the event that the settlement should
be consummated.
Environmental Matters:
As of the date hereof, the Company has no violations against it with respect to
the Franklin Mines and Franklin Mill. While there are no outstanding violations
against the Company at this time, there can be no assurance that the Company
will be able to adequately comply with the conditions set forth in its permit
approval or that future
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violations will not arise and that such violations will not lead to
interruptions in operations at the Franklin Mines or Franklin Mill. For further
information regarding the Permits, see Item I, Business of the Company -
Operations at the Company's Mining Properties.
Durango Litigation
On or about February 1, 1996, Newmineco, Island, Gems and Zeus entered into a
series of Transactions with Durango, Thames Hartley, the president of Durango
("Hartley") and J. Wayne Tatman ("Tatman"), an agent of Durango and Hartley and
president of Consolidated Milling, Inc. ("Consolidated Milling") to develop
certain mining properties, including the Mogul Mines. For further information,
see Item 1, Business of the Company-Newmineco. On or about March 1996, Island
acquired the Rugg/Mogul Lease through a Novation Agreement. The Rugg/Mogul Lease
was then renegotiated and assigned to Newmineco. Thereafter, Island and Gems
notified the Company that Tatman, Hartley and Durango and certain other parties
to the Newmineco venture breached their agreements and as a result, Island
terminated certain venture agreements involving these persons. Island thereafter
assigned its interest in Newmineco to Gems. For more information on the status
of the Rugg/Mogul Leases, see Item 2. Properties Rugg/Mogul Leases; For more
information on the relationship of the parties, see Item 1. Business-Operations
at the Company's Mining Properties.
In June, 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, James A.
Wood and David C. Sutton, each the owner of claims located on the properties
comprising the Mogul Mines (the "Delaware Claims" and the "Bonanza Claims",
respectively) and Durango, as the proported lessee of such claims, commenced an
action in District Court, Boulder County, Colorado, against the Ruggs, Island,
Newmineco, the Company and any other unknown parties of interest to quiet title
to each of the Delaware Claim and Bonanza Claims (hereinafter the "Disputed
Claims"). The complaint further alleges that the defendants have removed ore
mined from the Disputed Claims and that, as a result of trespass and conversion
of certain equipment of Plaintiff Durango, plaintiffs have been further damaged
in the amount of approximately $800,000. In addition to the actions for quiet
title and for the adjudication of the ownership of the disputed Claims,
Plaintiffs requisite damages for conversion of Plaintiff Durango's equipment,
seeks a full accounting of the ore removed from the premises and request all
other damages, costs and expenses, including attorney's fees incurred with
respect to this dispute.
The Company, as well as its co-defendants, retained local Colorado counsel and
intend to rigorously defend this action while there are motions pending
regarding the sufficiency of the defendant's pleadings, no decision has been
made regarding such motions and no trial has yet been scheduled. In addition, on
or about October 30, 1996, each of Com, Inc., the previous owner of the Gold
Hill Mill, Gems, Island, the Company, Hayden and Kennec commenced an action
against each of Durango, Hartley, Consolidated Milling and Tatman in District
Court, Boulder Country, Colorado relating to the Company's properties in Boulder
County claiming, among other things,
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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,
an order was entered by the Court in 1997, 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.
NASDAQ Delisting
In 1996, the Commission approved certain amendments to the requirements for
continued listing on the NASDAQ Small-Cap Market. On February 27, 1998, the
Company received a notification letter from NASDAQ informing the Company that
the Company's Common Stock was not in compliance with the new minimum bid price
requirement of $1.00 which became effective on February 23, 1998. The review of
the Company's Common Stock price was based upon the price data covering the
previous 30 consecutive trade dates prior to notification. The Company has been
given 90 calendar days, expiring May 28, 1998, in order to regain compliance.
The Company would come into compliance in the event that its Common Stock trades
at or above the minimum requirement of $1.00 for at least 10 consecutive trade
days prior to May 28, 1998. In the event that the Company's Common Stock does
not regain compliance within the 90 day period, NASDAQ will issue to the Company
a formal delisting letter which will identify the review procedures available to
it should the Company wish to contest the delisting of its Common Stock.
Management believes that it is unlikely, given past trends, that the Company's
Common Stock will sustain trading at minimum bid price of $1.00 or more for 10
consecutive trade days between now and May 28, 1998. Thus, it is likely that the
Company will receive formal delisting notification and that the Company's Common
Stock will no longer be listed for trading on the NASDAQ Small Cap Market.
However, Management is hopeful that the Company's Common Stock will qualify for
trading on the Over-The-Counter/Bulletin Board ("OTC") market and the Company
will make every effort to include its Common Stock on the OTC in the likely
event of a delisting by NASDAQ.
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In the event that the Company's Common Stock is traded on the OTC, it may become
subject to the "penny stock" trading rules. The penny stock trading rules impose
additional duties and responsibilities upon broker-dealers recommends the
purchase of a penny stock (by a purchaser that is not an accredited investor as
defined by Rule 501(a) promulgated by the Commission under the Securities Act)
or the sale of a penny stock. Among such duties and responsibilities, with
respect to a purchaser who has not previously had an established account with
the broker-dealer, the broker-dealer is required to (i) obtain information
concerning the purchaser's financial situation, investment experience, and
investment objectives, (ii) make a reasonable determination that transactions in
the penny stock are suitable for the purchaser and the purchaser (or his
independent adviser in such transactions) has sufficient knowledge and
experience in financial matters and may be reasonably capable of evaluating the
risks of such transactions, followed by receipt of a manually signed written
statement which sets forth the basis for such determination and which informs
the purchaser that its unlawful to effectuate a transaction in the penny stock
without first obtaining a written agreement to the transaction. Furthermore,
until the purchaser becomes an established customer (i.e., having had an account
with the dealer for at least one year or, the dealer had effected three sales or
more of penny stocks on three or more different days involving three or more
different issuers), the broker-dealer must obtain from the purchaser a written
agreement to purchase the penny stock which sets forth the identity and number
of shares of units of the security to be purchased prior to confirmation of the
purchase. A dealer is obligated to provide certain information disclosures to
the purchaser of penny stock, including (i) a generic risk disclosure document
which is required to be delivered to the purchaser before the initial
transaction in a penny stock, (ii) a transaction-related disclosure prior to
effecting a transaction in the penny stock (i.e., confirmation of the
transaction) containing bid and asked information related to the penny stock and
the dealer's and salesperson's compensation (i.e., commissions, commission
equivalents, markups and markdowns) connection with the transaction, and (iii)
the purchaser-customer must be furnished account statements, generally on a
monthly basis, which include prescribed information relating to market and price
information concerning the penny stocks held in the customer's account. The
penny stock trading rules do not apply to those transactions in which the
broker-dealer or salesperson does not make any purchase or sale recommendation
to the purchaser or seller of the penny stock.
Required compliance with the penny stock trading rules affect or will affect the
ability to resell the Common Stock by a holder principally because of the
additional duties and responsibilities imposed upon the broker-dealers and
salespersons recommending and effecting sale and purchase transactions in such
securities. In addition, many broker-dealers will not effect transactions in
penny stocks, except on an unsolicited basis, in order to avoid compliance with
the penny stock trading rules. The penny stock trading rules consequently may
materially limit or restrict the liquidity typically associated with other
publicly traded equity securities. In this connection, the holder of Common
Stock may be unable to obtain on resale the quoted bid price because a dealer or
group of dealers may control the market in such securities and may set prices
that are not based on competitive forces. Furthermore, at times there may be a
lack of bid quotes which may mean that the market among dealers is not active,
in which case a holder of
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Common Stock may be unable to sell such securities. Because market quotations in
the over-the-counter market are often subjected to negotiation among dealers and
often differ from the price at which transactions in securities are effected,
the bid and asked quotations of the Common Stock may not be reliable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The principal U.S. market on which shares of the Company Common Stock (all of
which are of one class, $.01 per share) are traded is the over the counter
market on the National Association of Securities Dealers, Inc. Automated
Quotation System (Symbol "FKCM"). For Information regarding possible delisting
of the Company's Common Stock. See Item 3. Litigation NASDAQ Delisting.
The following table sets forth the range of high and low bid quotes of the
Company's Common Stock per quarter since the beginning of fiscal year 1995 as
reported by the National Quotation Bureau (which reflects inter-dealer prices
without retail mark-up, mark-down or commission and may not necessarily
represent actual Transactions).
High Low
Quarter Ended Bid Price Bid Price
March 31, 1995 $.16 $.13
June 30, 1995 $.19 $.16
September 30, 1995 $.19 $.16
December 31, 1995 $.22 $.16
March 31, 1996 $.25 $.16
June 30, 1996 $.25 $.09
September 30, 1996 $.13 $.06
December 31, 1996 $.16 $.06
March 31, 1997 $.22 $.16
June 30, 1997 $.19 $.16
September 30, 1997 $.22 $.16
December 31, 1997 $.09375 $.0625
As of December 31, 1997, the approximate number of recordholders of the
Company's Common Stock is approximately 2,999 inclusive of those brokerage firms
and/or clearing houses holding the Company's Common Shares in street name for
their clientele (with each such brokerage house and/or clearing house being
considered as one holder). The aggregate number of shares of Common Stock issued
and
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outstanding is 98,879,328 as of December 31, 1997. No dividends on Common Shares
have ever been paid by the Company due to the lack of excess capital and the
Company does not anticipate that dividends will be paid in the foreseeable
future.
Sales of Restricted Securities
Upon the approval of the increase in the capitalization of the Company by its
shareholders on November 30, 1995, the Company was able to eliminate certain of
its liabilities by converting certain of its outstanding debt at the time into
Common Stock. In May, 1992, the Company entered into a Loan Agreement with Mr.
Anderson, an officer and director of the Company, Mr. Anderson's brothers,
Anderson Chemical Company and Mr. Carlo Sgrizzi, an unaffiliated individual and
Mr. Anthony DiMatteo (the "Anderson Loans") pursuant to which the Company
borrowed an aggregate of $504,000 at an interest rate of 3% above the prime rate
of interest. Additionally, $450,000 of such loans were entitled, under certain
conditions, to a 1% interest in profits (as defined in the Loan Agreement) of
the Company, for each $50,000 of principal amount held and, accordingly, the
lenders held a total profit participation interest of 9%. Such Loan Agreements
were further amended in July, 1993, whereby replacement notes were issued which
permitted the conversion of the Anderson Loans into shares of Common Stock of
the Company at a conversion ratio of $.10 per share and granted certain demand
an piggyback registration rights. The Anderson Loans were convertible into a
total of approximately 4,500,000 shares of Common Stock at each lenders option,
including, all profit interests which were convertible into 300,000 shares for
each 1% profit participation interest.
In August, 1995, Gems, as an assignee of Mr. DiMatteo, converted its 4% net
profits interest in the Company to which it has rights to receive under the
terms of a Loan Agreement, into 300,000 shares per percentage point or 1,200,000
shares of the Company. Such shares were issued to Gems on or about August 18,
1995. In September, 1995, certain of the holders of the Anderson Loans, other
than Gems, agreed to convert their notes and accrued interest thereon at a rate
of $.078 per share which represents 50% of the NASDAQ quoted price of the
Company's shares for the last 3 months, the total amount of principal and
interest to be converted to be determined at the time of conversion. Thereafter,
on or about December 27, 1995, Gems was invited to convert its notes on the same
terms and conditions as the other holders, thereby satisfying the Company's
obligations under the Anderson Loans. Such shares were issued by the Company in
reliance on an exception from registration afforded by Section 4(2) under the
Act.
In December, 1994, Island, Gems and the Company entered into a Binding Exchange
Letter Agreement (the "Exchange Agreement"), pursuant to which Island and Gems
would transfer to the Company, in a tax free exchange, assets having a value
equal to 270,000,000 shares of newly issued Common Stock or approximately 85% of
the Company. In the event that the Company was unable to perform its obligations
under the Exchange Agreement in a timely fashion, then the Company was obligated
to issue to Gems 6,000,000 shares of Common Stock, or in the alternative, pay a
fee of approximately $1,500,000 to Gems (the "Upset Fee").
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In September, 1995, the Company, Island and Gems entered into a settlement
agreement (the "Settlement Agreement") which acknowledged that the Transactions
contemplated by the Exchange Agreement were not timely consummated and in which
the Company agreed to either issue 6,000,000 shares of its Common Stock to Gems
or pay the Upset Fee. The issuance of the Common Stock was predicated upon the
approval of the Company's stockholders of an increase in the authorized capital
of the Company from 50,000,000 to 100,000,000. In addition, the parties further
agreed to convert $249,600 advances made by Gems to the Company into 3,200,000
shares of Common Stock and to increase Gems interest in the Joint Venture to
82.5%. On November 30, 1995, the shareholders of the Company approved an
increase in the Company's authorized capital stock and in accordance with the
Settlement Agreement, the Company issued to Gems and aggregate of 9,200,000
shares of Common Stock in reliance on an exemption afforded by Section 4(2)
under the Act.
In December 1995, the Company commenced an offering pursuant to Rule 505 of
Regulation D of the Act of $1,500,000 principal amount of its 15% Secured Notes
(the "Notes") Convertible into Shares of Common Stock of the Company. Such Notes
were offered by the officers and directors of the Company to accredited
investors only, and had a maturity date of eighteen months from the date of each
Note so issued (the "Maturity Date"). The conversion rights under the Note
become effective on or after April 1, 1996. The Company terminated this offering
on February 5, 1996 after selling an aggregate of $400,000 of the Notes. During
the second quarter of 1996, all of the Notes issued in the fourth quarter of
1995 and the first quarter of 1996 were converted and the Company issued
4,294,770 shares of Common Stock to such investors upon such conversion based on
the total balance of the principal and accrued interest outstanding on the Notes
equal to an aggregate amount of $418,740 at a conversion price of $.0975 per
share.
In late February, 1996, the Company commenced an offering of its Common Stock
through its designated officers and directors pursuant to Rule 505 of Regulation
D under the Act. The offering was made to both accredited and unaccredited
investors. Subscribers of the offering purchased the Common Stock at a purchase
price equal to 15% below the market price as quoted on NASDAQ at the close of
business prior to the date of such sales. The Company raised approximately
$202,600 and issued 953,411 shares of its Common Stock in connection with the
offering.
On or about March 5, 1996, the Company issued to certain principals of Wolinetz,
Gottlieb & Lafazan, P.C., the former independent auditors of the Company
("WGL"), approximately 56,000 shares of Common Stock of the Company in
satisfaction of outstanding accounting fees owed by the Company to WGL of
approximately $10,000. The shares were issued pursuant to an exemption from
registration afforded by Section 4(2) under the Act. For more information
concerning WGL, See Item8-Chantges In and Disagreements with Accountants on
Accounting and Financial Disclosure.
On or about April 18, 1996, the Company executed a promissory note payable to a
private lender in the principal amount of $60,000 and issued to lender 160,000
shares of Common Stock of the Company as further consideration for advancing
said loan.
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<PAGE>
The shares were issued pursuant an exemption from registration afforded by
Section 4(2) under the Act.
In July, 1996, the Company commenced an offering pursuant to Rule 505 of
Regulation D under the Act for the issuance of shares of Common Stock at a
purchase price of approximately $.15625 per share in exchange for certain notes,
mortgages and other obligations of its affiliates held by certain third party
unaffiliated parties of the Company and Gems. At the completion of the offering
in July, 1996, the Company purchased obligations of its affiliates having an
aggregated principal balance of approximately $1,400,000 through the issuance of
approximately 9,366,919 shares of Common Stock and thereafter transferred such
debt instruments and obligations to COM, Inc., in exchange for an equivalent
reduction in the principal amount of the Gold Hill Note and approximately
$191,875 through the issuance of 1,228,000 shares of Common Stock and thereafter
transferred such debt instruments and obligations to Gems in exchange for an
equivalent reduction in certain intercompany loans from Gems to the Company.
In Late July 1996, the Company commenced an offering of it Common Stock to
accredited investors only pursuant to Rule 505 of Regulation D under the Act
during which Stires & Co. acted as selling agent on behalf of the Company. The
offering was on a best efforts basis and the selling agent was to receive a
commission of 5% of the aggregate gross proceeds to the sale of the Common Stock
to investors. In addition, the Company agreed to issue to the selling agent
warrants to purchase 5% of the total shares of Common Stock sold in the
offering. Due to market conditions at the time of the offering, the selling
agent was only able to sell 800,000 shares of Common Stock of the Company and
raised $100,000. The offering was terminated on September 15, 1996.
Also in July, 1996, the Company issued 1,000,000 shares of Common Stock to a
former officer and director of the Company in satisfaction of a finders fee owed
to Mr. Horing in connection with the formation of the Zeus Joint Venture. The
shares were issued in accordance with an exemption from registration afforded by
Section 4(2) under the Act.
On August 28, 1996, the Company entered into an investment banking agreement
with Redstone Securities, Inc. ("Redstone") pursuant to which Redstone agreed to
perform certain investment banking services in exchange for a fee payable by the
granting of an option to Redstone to purchase up to 3,000,000 shares of Common
Stock of the Company at an exercise price of $.001 per share. In November, 1996,
Redstone exercised its option to purchase 2,500,000 shares of Common Stock and
in January, 1997 exercised its option to purchase the remaining 500,000 shares
of Common Stock. The Company issued such shares in accordance with an exemption
from registration afforded by Section 4(2) 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
Gems. The shares were issued to seller in accordance with an exemption from
registration afforded by Section 4(2) under the Act.
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<PAGE>
In consideration of the extension of the Kennec portion of the Hayden Kennec
Leases, the Company issued to Dorothy Kennec, 104,000 shares of the Company
Common Stock in {April 1997]. The stock was valued at $.125 per share having an
aggregate value at the time of the extension agreement of $13,000. The shares
were issued in accordance with an exemption from registration afforded by
Section 4(2) 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. The Company issued 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 shares
were issued in accordance with an exemption from registration afforded by
Section 4(2) under the Act.
Item 6. Management's Discussion and Analysis or Plan of Operation
The Company is engaged in the business of investing and participating in the
development of commercial mining and milling operations primarily at leased
properties in or near Idaho Springs, Colorado.
During 1996 and 1997, remediation work was performed and completed at the
Franklin Mines and the Franklin Mill in preparation for the commencement of
mining operations at the Franklin Mines and the Mogul Mines. In 1996,
approximately 200 tons of ore were mined at the Mogul Mines and shipped to the
Franklin site where the ore was crushed and milled. Management was encouraged by
the performance of the Mill during these operations.
The Company remains in the development stage and has not generated significant
revenues on a sustained basis since its inception. The Company did not realize
any revenues based on sales made by the Zeus Joint Venture or Newmineco in 1996
and 1997. Since the termination of the Zeus Joint Venture, and the abandonment
of its participation in Newmineco, the Company will no longer recognize income
or losses based on its proportionate equity interest in these entities.
Accordingly, the Company will be entitled to receive 100% of the income
generated from the Franklin Mines, if any, once production is commenced.
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 in 1996 and early 1997 and through
its relationship with Martucci and the Martucci companies the remainder of 1997.
The Company has derived no income from its mining and milling investments which
during 1997 were comprised of investments in the assets and rights related to
the Franklin Mines and Mill, the Gold Hill Mill and Newmineco. At December 31,
1997, the Company's only liquid asset was
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cash, the balance of which increased from $127 at December 31, 1996 to $1,078 at
December 31, 1997.
During 1997, the Company relied on its Joint Venture partner Gems, and later POS
and its affiliates as its principal capital resource. As of December, 1997, the
Company borrowed approximately $547,000 from POS and affiliates and assumed an
additional $410,000 in liabilities for funds advanced to Gems by POS and
affiliates.
The Company had total current liabilities as of December 31, 1997 of $1,666,870,
including $955,756 constituting the principal balance of the POS Note,
convertible debentures with a principal amount of $145,000 and other notes
payable with a principal balance of $167,000. In addition to the payment of its
current liabilities, the Company incurred general, administrative and other
costs and expenditures related to any mining and milling operations, at the rate
of approximately $60,000 per month in 1997 and expects to incur additional
administrative expenses of approximately $20,000 per month plus interest in
1998.
During 1997, POS and its affiliates advanced approximately $410,000 to the
Company through Gems. These monies were used to, among other things, pay for
legal and accounting fees in connection with public filings and necessary
general and administrative expenses. In November 1997, USM purchased Gems
interest in the Zeus Joint Venture and assigned the rights to the Company in
exchange for the assumption of certain liabilities. This transfer gave the
Company 100% of net profits generated by operations at the Franklin Mines. Also,
in November 1997, USM entered into a contract to purchase 50% of all of the
mineral rights from Audrey Hayden, a co-lessor to the Company. In addition, as
of December 31, 1997, USM/POS and/or its affiliates, had advanced approximately
$955,756 including the $410,000 previously advanced to the Company, by POS and
affiliates through Gems.
USM and its affiliates have pledged to provide financing to the Company on an as
needed basis until on or about January 1, 1999. It is anticipated that the funds
received from USM and its affiliates will cover the general, administrative and
other costs which Management estimates will be approximately $20,000 per month.
Management further anticipates, but cannot insure, that USM will provide
$750,000 of funding which Management estimates will be needed to ready the
Franklin Mine and Milling properties for the commencement of extraction and
milling. Additional funding, however, will be needed to support operations once
mining and milling commence to finance operations as well as upgrade the
processing facilities to allow for an increase in ore processing capacity.
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 USM and its affiliate. Management believes, but cannot assure,
that such financing and the financing needed to commence operations at the
Franklin Mines will be provided by USM and its affiliates during 1998, and that
the Company will remain dependent on USM and its affiliates as its primary
source of financing for its operations
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until such time, if any, as the Company begins to receive cash flows from the
Franklin Mine and Mill.
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 during 1998. To be able to commence milling
operations, the Company will have to obtain sufficient working capital of
approximately $750,000 and hire managerial and other mill personnel. Other
nearby mines are not operating currently due, in the opinion of management, to
the lack of available milling facilities. The Company intends to solicit owners
of those mines to use the Company's mills to process their ore in order to
augment expected revenues from mining operations. However, there can be no
assurance that any significant cash flows will be generated through these
operations during 1998.
Plan of Operations
For the remainder of fiscal 1998, the Company plans to (i) commence the
extraction of minerals from the Franklin Mine and full scale operations at the
Franklin Mill, (ii) hire personnel to adequately staff the mine and mill and
(iii) conclude negotiations of milling contracts with neighboring mines.
Management estimates that approximately $750,000 of capital will be needed to
achieve (i) and (ii).
In the event that the Company should acquire additional working capital, then
the Company will initiate a reconfiguration program at the Franklin Mill to
expend mill capacity to processing 300 tons of ore per day by the end of fiscal
year 1999 and initiate core drilling programs to substantiate additional proven
ore reserves.
Results of Operations 1997 vs 1996
The Company had a net loss of $1,908,475 for 1997 as compared to a net loss of
$967,524 during 1996. This increase of $940,951 or 97% was primarily
attributable to a $1,200,000 write-down of mining, milling and other property
and equipment associated with the Gold Hill Mine, no such costs were reflected
in 1996 by the Company. In addition, during 1997, mine expenses and
environmental remediation costs of $162,945 were incurred by the Company. During
1996, these costs were reflected on the books of the Joint Venture and/or Gems
and its affiliates.
Other than the write-down and the mine and environmental remediation expenses,
the loss from other sources was $545,530 for 1997 compared to $967,524 for 1996
expenses.
General and administrative expenses declined from approximately $733,000 in 1996
to approximately $368,000 in 1997. This reduction of approximately $365,000 or
50% is attributable primarily to the following:
* Reduction in professional fees from approximately $395,000 in 1996 to
approximately $179,000 in 1997, this $216,000 decrease represents a
55% reduction. Professional fees consist of legal, accounting and
engineering
36
<PAGE>
fees. Professional fees were greater in 1996 as compared to 1997
because of expenses incurred in connection with the various
litigation, environmental and financing matters described in items 1
and 3.
* Investment banking fees decreased by $105,000 in 1997 from $213,000 to
$108,000, a 49% decrease. All investment banking fees were incurred in
connection with the Company's agreement with Redstone Securities. This
agreement expired during 1997.
Other general and administrative expenses during 1996 and 1997 included: costs
associated with the Company's public filings, rent, office and other fees.
Interest expenses for 1997 were approximately $33,000 as compared to $102,000
for 1996. This $69,000 decrease, or 68% is attributable to the decrease in
obligations payable to Gems and its affiliates. Interest associated with
obligations incurred and assumed with respect to the $955,756 note payable to
POS and affiliates were substantially recorded during November and December of
1997.
During 1997, the Company recognized $9,249 in income related to the Joint
Venture. During 1996, the Company recorded a loss from Joint Venture of $12,950.
Other expenses reflected in 1997 of $35,000 were incurred in connection with the
Golder litigation (See Item 3).
Results of Operations 1996 vs. 1995
The Company and the Zeus Joint Venture had no active mining or milling
operations during 1996 and 1995.
The Company had a net loss of $967,524 for 1996 as compared to a net loss of
$924,344 during 1995. This increase of $43,180 was primarily attributable to an
increase in general and administrative expense in 1996 of $505,414 offset by the
effects of a non-recurring, 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 expense were $732,710 for 1996 as compared with $227,287 during
1995 due primarily to increases in professional fees and costs of investment
banking services. Interest expense was $102,238 during 1996 as compared to
$92,434 during 1995 due to increased interest incurred in connection with the
issuance of notes in the Gold Hill Mill and Newmineco acquisitions.
Operations of the Joint Venture at the Franklin Mine 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.
37
<PAGE>
Item 7. Financial Statements and Supplementary Data
The index to Financial Statements appears on page F-1.
38
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
- INDEX -
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Auditors F - 2
Report of Predecessor Independent Auditors F - 3
Financial Statements:
Balance Sheet, December 31, 1997 F - 4
Statements of Operations, Years Ended December 31, 1997 and 1996 and
Period From December 1, 1976 (Inception) to December 31, 1997 F - 5
Statements of Stockholders' Equity, Years Ended December 31, 1997 and 1996 and
Period From December 1, 1976 (Inception) to December 31, 1997 F - 6
Statements of Cash Flows, Years Ended December 31, 1997 and 1996 and
Period From December 1, 1976 (Inception) to December 31, 1997 F - 11
Notes to Financial Statements F - 13
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Franklin Consolidated Mining Co., Inc.
We have audited the balance sheet of Franklin Consolidated Mining Co., Inc. as
of December 31, 1997, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Consolidated Mining
Co., Inc. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended 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 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, 1997, has a substantial working capital
deficiency. As a result, it was in default with respect to payments on several
notes and on convertible debentures and substantially dependent on outside
funding 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.
LAZAR LEVINE & FELIX LLP
New York, New York
April 20, 1998
F - 2
<PAGE>
PREDECESSOR INDEPENDENT AUDITORS' REPORT
F - 3
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
BALANCE SHEET
DECEMBER 31, 1997
- ASSETS -
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,078
------------
TOTAL CURRENT ASSETS 1,078
Mining, milling and other property and equipment, net of accumulated
depreciation and depletion of $1,959,160 5,424,935
Land - held for resale 345,000
Mining reclamation bonds 130,681
------------
$ 5,901,694
============
- LIABILITIES AND STOCKHOLDERS' EQUITY -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 367,933
Payroll and other taxes payable 31,181
Convertible debentures 145,000
Notes payable - related party and others 167,000
Note payable - related party 955,756
------------
TOTAL CURRENT LIABILITIES 1,666,870
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share; 100,000,000 shares authorized;
98,879,328 shares issued and outstanding 988,793
Additional paid-in capital 16,350,575
Deficit accumulated during the development stage (13,104,544)
------------
4,234,824
------------
$ 5,901,694
============
</TABLE>
See auditors' report and notes to financial statements.
F - 4
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENTS OF OPERATIONS
------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Cumulative
from
1997 1996 Inception
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales $ -- $ -- $ 876,082
Interest income 3,888 2,351 544,775
Other income -- -- 75,000
------------ ------------ ------------
3,888 2,351 1,495,857
------------ ------------ ------------
EXPENSES:
Mine expenses and environmental remediation costs 162,945 -- 3,523,738
Write-down of mining and milling and other property and equipment 1,200,000 -- 1,200,000
Depreciation and depletion 121,980 121,986 2,154,509
General and administrative expenses 368,353 732,701 5,398,785
Interest expense 33,334 102,238 629,172
Amortization of debt issuance expense -- -- 683,047
Equity in net (income) loss and settlement of claims of Joint Venture (9,249) 12,950 591,971
Other 35,000 -- 419,179
------------ ------------ ------------
1,912,363 969,875 14,600,401
------------ ------------ ------------
NET LOSS $ (1,908,475) $ (967,524) $(13,104,544)
============ ============ ============
BASIC LOSS PER COMMON SHARE $ (.02) $ (.01)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 98,500,000 74,284,324
============ ============
</TABLE>
See auditors' report and notes to financial statements.
F - 5
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 1 of 5
----------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During 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
Non-cash:
Related parties 925,000 9,250 -- -- -- 9,250
In exchange for shares of Gold
Developers and Producers, Inc. 1,095,000 10,950 6,484 -- -- 17,434
Net loss -- -- -- (45,584) -- (45,584)
------------ ----------- ----------- ----------- --------- -----------
Balance, December 31, 1977 2,175,000 21,750 48,034 (45,584) -- 24,200
Issuance of common stock:
Pursuant to public offering , net of
underwriting expenses of $11,026 588,200 5,882 278,113 -- -- 283,995
Cash 225,000 2,250 240,627 -- -- 242,877
Non-cash 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
Non-cash - related parties 40,000 400 59,600 -- -- 60,000
Non-cash - other 6,675 67 13,283 -- -- 13,350
Net loss -- -- -- (128,242) -- (128,242)
------------ ----------- ----------- ----------- --------- -----------
Balance, December 31, 1979 3,271,725 32,717 1,083,539 (240,321) -- 875,935
Issuance of common stock:
Cash 289,750 2,898 837,102 -- -- 840,000
Non-cash 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
Issuance of common stock:
Cash 65,625 656 261,844 -- -- 262,500
------------ ----------- ----------- ----------- --------- -----------
Balance, pre-stock split 3,686,600 36,866 2,300,890 (459,342) -- 1,878,414
Issuance of common stock:
Pursuant to a four-for-one stock split 11,059,800 110,598 (110,598) -- -- --
Cash 578,000 5,780 552,220 -- -- 558,000
Non-cash 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
</TABLE>
See auditors' report and notes to financial statements.
F - 6
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 2 of 5
----------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
----------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <S>
Issuance of common stock:
Cash 861,006 $ 8,610 $ 755,516 $ -- $ -- $ 764,126
Non-cash 162,000 1,620 160,380 -- -- 162,000
Commission on sale of common stock -- -- (56,075) -- -- (56,075)
Net loss -- -- -- (287,291) -- (287,291)
----------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1982 16,451,406 164,514 3,647,993 (1,034,738) -- 2,777,769
Issuance of common stock:
Cash 1,273,134 12,732 1,176,818 -- -- 1,189,550
Non-cash 70,834 708 70,126 -- -- 70,834
Exercise of stock options by:
Related parties 267,500 2,675 264,825 -- -- 267,500
Others 4,000 40 3,960 -- -- 4,000
Commission on sale of common stock -- -- (124,830) -- -- (124,830)
Net loss -- -- -- (749,166) -- (749,166)
----------- ----------- ----------- ----------- --------- -----------
Balance, December 31, 1983 18,066,874 180,669 5,038,892 (1,783,904) -- 3,435,657
Issuance of common stock:
Cash 1,201,700 12,017 1,139,683 -- -- 1,151,700
Non-cash 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 common stock:
Cash 421,308 4,213 295,866 -- -- 300,079
Non-cash 10,000 100 7,400 -- -- 7,500
Exercise of stock options by:
Related parties 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
</TABLE>
See auditors' report and notes to financial statements.
F - 7
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 3 of 5
----------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock:
Cash 569,000 $ 5,690 $ 294,810 $ -- $ -- $ 300,500
Non-cash - related parties 160,000 1,600 78,400 -- -- 80,000
Non-cash - 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
Issuance of common stock:
Cash 2,604,368 26,044 1,261,257 -- -- 1,287,301
Non-cash - related parties 202,000 2,020 68,880 -- -- 70,900
Non-cash - 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 - non-cash
- related parties 200,000 2,000 48,000 -- -- 50,000
Net loss -- -- -- (386,704) -- (386,704)
Purchase of 50,000 shares of
treasury stock - at cost -- -- -- -- $ (12,500) (12,500)
----------- ----------- ----------- ----------- ----------- -----------
Balance, at 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
Non-cash - others 283,666 2,836 31,030 -- -- 33,866
Non-cash -related parties 210,000 2,100 29,400 -- -- 31,500
Private placement:
Cash 2,275,000 22,750 -- -- -- 22,750
Debt issuance expense -- -- 455,000 -- -- 455,000
Conversion of debentures 1,050,000 10,500 94,500 -- -- 105,000
Exercise of stock options 300,000 3,000 42,000 -- -- 45,000
Commission on sale of common stock -- -- (1,500) -- -- (1,500)
Compensation resulting 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
</TABLE>
See auditors' report and notes to financial statements.
F - 8
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 4 of 5
----------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sale of underwriter's stock warrants -- $ -- $ 100 $ -- $ -- $ 100
Issuance of common stock:
Cash 335,000 3,350 41,875 -- -- 45,225
Non-cash - 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
Non-cash - 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
Non-cash - others 1,729,609 17,296 348,762 -- -- 366,058
Non-cash - related parties 12,120 121 485 -- -- 606
Non-cash - exercise of options by
related parties 2,050,000 20,500 82,000 -- -- 102,500
Conversion of debentures 540,000 5,400 156,600 -- -- 162,000
Commission on sale of common stock
- related parties -- -- (7,123) -- -- (7,123)
Net loss -- -- -- (1,343,959) -- (1,343,959)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1992 45,365,723 453,657 10,945,415 (8,124,986) (12,500) 3,261,586
Issuance of common stock:
Cash - others 873,400 8,734 125,230 -- -- 133,964
Cash - related parties 777,000 7,770 69,930 -- -- 77,700
Non-cash - others 150,000 1,500 13,500 -- -- 15,000
Non-cash - settlement of litigation 1,000,000 10,000 90,000 -- -- 100,000
Non-cash - exercise of options by
related parties 200,000 2,000 8,000 -- -- 10,000
Conversion of debentures 140,000 1,400 33,600 -- -- 35,000
Conversion of loan 100,000 1,000 9,000 -- -- 10,000
Net loss -- -- -- (797,619) -- (797,619)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 48,606,123 486,061 11,294,675 (8,922,605) (12,500) 2,845,631
</TABLE>
See auditors' report and notes to financial statements.
F - 9
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY Page 5 of 5
----------------------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Paid-in Development Treasury
Shares Stock Capital Stage Stock Total
------------ --------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
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 parties and accrued interest 8,679,797 86,798 590,227 -- -- 677,025
Exchange of shares for profit partici-
pation interests 2,700,000 27,000 (27,000) -- -- --
Net loss -- -- -- (924,344) -- (924,344)
------------ --------- ----------- ------------ --------- ------------
Balance, December 31, 1995 69,135,920 691,359 12,471,502 (10,228,545) -- 2,934,316
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 convertible notes 4,294,770 42,948 375,792 -- -- 418,740
Repayments of loan from joint
venture 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, December 31, 1996 90,583,020 905,830 15,154,264 (11,196,069) -- 4,864,025
Issuance of common stock for:
Extension of lease rights 104,000 1,040 11,960 -- -- 13,000
Conversion of note payable 7,692,308 76,923 523,077 -- -- 600,000
Conversion of debt 500,000 5,000 45,500 -- -- 50,500
Acquisition of joint venture -- -- 615,774 -- -- 615,774
Net loss -- -- -- (1,908,475) -- (1,908,475)
------------ --------- ----------- ------------ --------- ------------
BALANCE, DECEMBER 31, 1997 98,879,328 $ 988,793 $16,350,575 $(13,104,544) $ -- $ 4,234,824
============ ========= =========== ============ ========= ============
</TABLE>
See auditors' report and notes to financial statements.
F - 10
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENT OF CASH FLOWS
-----------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996 Page 1 of 2
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Cumulative
from
1997 1996 Inception
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,908,475) $ (967,524) $(13,104,544)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and depletion 121,980 121,986 2,154,509
Write-down of mining and milling and other property and equipment 1,200,000 -- 1,200,000
Amortization of debt issuance expense -- -- 683,047
Value of common stock issued for:
Services and interest 13,000 355,437 1,338,714
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 (income) loss of joint venture (9,249) 12,950 123,971
Other -- -- (7,123)
Changes in operating assets and liabilities:
Prepaid expenses 107,979 (107,979) --
Interest accrued on mining reclamation bonds (3,806) (1,875) (5,681)
Accounts payable and accrued expenses (104,986) 274,607 631,370
------------ ------------ ------------
Net cash used in operating activities (583,557) (312,398) (5,993,337)
------------ ------------ ------------
CASH FLOWS FROM 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 -- -- (255,319)
------------ ------------ ------------
Net cash used in investing activities -- (165,000) (5,500,673)
------------ ------------ ------------
CASH FLOWS FROM 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 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
Advances to joint venture partner 37,234 (218,251) (181,017)
Payments of debt issuance expenses -- -- (164,233)
Proceeds of other notes and loans payable 547,274 80,000 1,315,274
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 584,508 359,349 11,495,088
------------ ------------ ------------
</TABLE>
See auditors' report and notes to financial statements.
F - 11
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
STATEMENT OF OPERATIONS Page 2 of 2
-----------------------
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND PERIOD FROM DECEMBER 1, 1976 (INCEPTION)
TO DECEMBER 31, 1997
Cumulative
from
1997 1996 Inception
--------- --------- ---------
INCREASE (DECREASE) IN CASH $ 951 $(118,049) $ 1,078
Cash, beginning of period 127 118,176 --
--------- --------- ---------
CASH, END OF PERIOD $ 1,078 $ 127 $ 1,078
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ -- $ -- $ 299,868
========= ========= =========
NON-CASH ITEMS:
During 1997: (1) the Company converted a
$600,000 note payable to a former joint
venture partner to 7,692,308 shares of
Company stock (2) the Company also issued
500,000 shares of common stock as
consideration for a liability of
approximately $50,000 due to an
unaffiliated third party (3) in connection
with the elimination of the Zeus Joint
Venture, the Company acquired net assets of
$615,774 and recorded additional paid-in
capital of the same amount and (4) the
Company wrote down the remaining $150,000
investment associated with the 20% purchase
of Newmineco and simultaneously reduced a
note payable to a party related to
Newmineco.
See auditors' report and notes to financial statements.
F - 12
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Franklin Consolidated Mining Co., Inc. (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 non-ferrous metals, including gold, silver, lead, copper
and zinc. The Company owns or has an interest in a number of precious
and non-ferrous metal properties. The Company's principal mining
properties are (i) the Franklin Mines, located near Idaho Springs in
Clear Creek County, Colorado, for which the Company acquired the
exclusive right to explore, develop, mine, and extract all minerals
located in approximately 51 mining claims (the "Franklin Mines"), (ii)
the Franklin Mill, a crushing and flotation mill which is located on
the site of the Franklin Mines (the "Franklin Mill"), and (iii) the
Gold Hill Mill (see Note 2d), a fully permitted modern facility
located in Boulder County, Colorado (the "Gold Hill Mill"). The
Company is a development stage enterprise because it did not generate
any significant revenues through December 31, 1997.
In February 1993, the Company entered into a joint venture arrangement
with Island Investment Corp., a Nevada corporation ("Island"),
pursuant to which the parties formed Zeus No. 1 Investments, a
California general partnership (the "Joint Venture"). The Company had
a 17.5% interest in the Joint Venture, and Island had the remaining
82.5% interest. The Joint Venture was formed to develop the Franklin
Mines and related assets of the Company. In May 1993, Island assigned
its interest in the Joint Ventures to Gems and Minerals Corp.,
("Gems") a wholly-owned subsidiary of Island. On July 15, 1996, Gems
transferred 31.5% of its 82.5% interest in the Joint Venture to Nuco
Ventures, Inc., a Delaware company and wholly-owned subsidiary of Gems
("Nuco").
During 1997, in a step transaction, Gem's and Nuco's 82.5% interest in
the Joint Venture was acquired by U.S. Mining, Inc., a New Jersey
corporation ("USM"). USM assigned the acquired interest to the Company
in exchange for the assumption by the Company of certain liabilities.
Upon the acquisition of the 82.5% interest of the Joint Venture by the
Company, the relationship with Gems was terminated and the Joint
Venture was effectively dissolved.
In conjunction with these transactions, the Company:
o Acquired mine and mill improvements having a net
book value of (see Note 4) $780,787
o Eliminated the Joint Venture deficit of $123,971,
after giving effect to equity in net income of
Joint Venture of $9,249 for 1997 123,971
o Eliminated a $458,567 liability which represented
the remainder of a note and related accrued
interest payable to a subsidiary of Gems in
conjunction with the acquisition of the Gold Hill
Mill 458,567
F - 13
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued):
o Eliminated a $229,204 receivable from Gems $(229,204)
o Assumed notes payable - other of $87,000 and
related accrued interest on these notes of $16,858
(see Note 5) (103,858)
o Assumed a liability of $408,482 payable to POS
Financial, Inc. (see Note 7) (408,482)
o Assumed a liability of $20,255 associated with the
Joint Venture less other items of $14,248 (6,007)
---------
The net amount of $615,774 was credited to
additional paid-in capital. $ 615,774
=========
Basis of Presentation:
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. However, the Company has had
recurring losses and cash flow deficiencies since inception. As at
December 31, 1997, the Company has a cash balance of $1,078, an
accumulated deficit of $13,104,544, current liabilities of $1,666,870,
and a working capital deficiency of $1,665,792, and its 1997
operations used $ 583,557 of cash. Also, the Company was in default on
the payment of the principal balance and accrued interest on certain
notes and debentures (see Notes 5 and 6). Certain accounts payable
also were past due, and the Company has possible permit and other
violations. 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 $20,000 per month plus interest during
1998. Such matters raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not
include any adjustments that may result from the outcome of the above
uncertainty.
U.S. Mining Co. and its affiliates have pledged to provide financing
to the Company on an as needed basis until on or about January 1,
1999. The funds received from USM and its affiliates will cover the
general, administrative and other costs approximated at $20,000 per
month plus interest. Additional monies raised from USM will help
finance $750,000 of funds the Company estimates will be needed to
ready the Franklin Mine and Milling properties for the commencement of
extraction and milling. Additional funds will be needed to support the
extraction and milling processes once underway as well as to upgrade
the processing facilities to allow for an increase in ore processing
capacity.
F - 14
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION (Continued):
There can be no assurance that the Company will have adequate funds
available to repay the funds advanced by USM and its affiliates. In
the event that the Company defaults on its obligations, USM may
foreclose on the assets secured by the POS note. Such foreclosure
actions by USM would have a material adverse effect on the future
operations of the Company and the Company's ability to explore the
Franklin Mines.
Substantially all of the $5,424,935 of mineral properties and
equipment included in the accompanying balance sheet as of December
31, 1997, is related to exploration properties. The ultimate
realization of the Company's investment in exploration properties and
equipment is dependent upon the success of future property sales, the
existence of economically recoverable reserves, the ability of the
Company to obtain financing or make other arrangements for
development, and upon future profitable production.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's accounting policies are in accordance with generally
accepted accounting principles. Outlined below are those policies that
are considered particularly significant.
(a) Use of Estimates:
To prepare financial statements in accordance with generally
accepted accounting principles, management makes certain
estimates and assumptions, where applicable, that affect the
reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. While actual results
could differ from those estimates, management does not expect
such variances, if any, to have a material effect on the
financial statements.
(b) Cash Equivalents:
The Company defines cash equivalents as all short-term, highly
liquid investments with original maturity dates less than 90
days.
F - 15
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Mining, Milling and Other Property and Equipment:
Mining, milling and other property and equipment are recorded at
cost. Costs incurred to acquire, explore, improve and develop
mining and milling properties are capitalized and amortized in
relation to the production of estimated reserves. Mine
development expenditures incurred substantially in advance of
production are deferred on an individual property basis until the
viability of a property is determined. When a property is placed
in commercial production, such deferred costs are depleted using
the units-of-production method. General exploration costs and
costs to maintain the mineral rights and leases are expensed as
incurred. Management of the Company periodically reviews the
recoverability of the capitalized mineral properties and mining
equipment. Management takes into consideration various
information including, but not limited to, historical production
records taken from previous mine operations, results of
exploration activities conducted to date, estimated future prices
and reports and opinions of outside geologists, mine engineers,
and consultants. When it is determined that a project or property
will be abandoned or its carrying value has been impaired, a
provision is made for any expected loss on the project or
property.
Post-closure reclamation and site restoration costs are estimated
based upon environmental and regulatory requirements and accrued
over the life of the mine using the units-of-production method.
Current expenditures relating to ongoing environmental and
reclamation programs are expensed as incurred.
Depletion of mining and milling improvements and mine development
expenditures is computed using the units of production method
based on probable reserves (there was no charge for depletion in
1997 and 1996 because the Company's mining and milling operations
were not in operation during these years). Depreciation of
equipment is computed using the straight-line method over the
estimated useful lives of the related assets.
(d) Impairment of Long-Lived Assets:
As of January 1, 1996, the Company adopted the provisions of FASB
Statement of Financial Accounting Standards No. 121, "Accounting
of 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 then are measured by comparing
the fair value of assets to their carrying amounts. It is the
Company's determination that due to certain restrictions
associated with milling operations in Boulder County, Colorado,
the Gold Hill Mill properties will not be placed into operation.
The Company plans to sell the land and structural building and
move and utilize the equipment to the Franklin properties. As a
result, at December 31, 1997 the Company reduced by $1,200,000
the carrying value of certain assets relating to its Gold Hill
milling operations to $1,340,000, which approximates management's
estimate of fair value.
F - 16
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(e) Joint Venture:
The Company accounts for its investment in the Joint Venture
under the equity method. As a general partner in the Joint
Venture (until the Joint Venture's dissolution in November 1997
see Note 1), the Company would be liable to creditors and certain
other parties for any obligations the Joint Venture might
ultimately be unable to satisfy. Accordingly, through November
25, 1997, the Company recorded its equity in the net losses of
the Joint Venture even though they exceeded the Company's total
investment.
(f) Revenue Recognition:
Revenues, if any, from the possible sales of mineral concentrates
will be recognized by the Company only upon receipt of final
settlement funds from the smelter.
(g) Environmental Remediation Costs:
Environmental remediation costs are accrued based on estimates of
known environmental remediation exposures, and, generally, are
charged to expense when incurred.
(h) Income Taxes:
Deferred income taxes are provided on transactions which are
reported in the financial statements in different periods than
for income tax purposes. The Company utilizes Financial
Accounting Board Statement No. 109, "Accounting for Income
Taxes," ("SFAS 109"). SFAS 109 requires recognition of deferred
tax liabilities and assets for expected future tax consequences
of events that have been included in the financial statements or
tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the
financial statements and tax basis of assets and liabilities
using enacted tax rates in effect for the year in which the
difference is expected to reverse. Under SFAS 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized
(see Note 9).
F - 17
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(i) Loss Per Common Share:
The Company had adopted SFAS 128 "Earnings Per Share" ("SFAS
128"), which has changed the method of calculating earnings per
share. SFAS 128 requires the presentation of "basic" and
"diluted" earnings per share on the face of the income statement.
Prior period earnings per share data has been restated in
accordance with Statment 128. Loss per common share is computed
by dividing the net loss by the weighted average number of common
shares outstanding during each period. Common stock equivalents
have been excluded from the computations since the results would
be anti-dilutive.
(j) Reclassifications:
Prior years financial statements have been reclassified to
conform with the current year presentation.
(k) Fair Value of Financial Investments:
The carrying amount of the Company's borrowings approximate fair
value.
NOTE 3 - ACQUISITIONS OF MINING AND MILLING PROPERTIES:
On December 26, 1976, the Company acquired Gold Developers and
Producers Incorporated, a Colorado corporation which, prior to the
acquisition, leased 28 patented mining claims from Audrey and David
Hayden and Dorothy Kennec pursuant to a mining lease and option to
purchase, dated November 12, 1976 (hereinafter collectively referred
to as the "Hayden/Kennec Leases"). In 1981, the Company commenced a
rehabilitation program to extend and rehabilitate the shafts and
tunnels in place at the Franklin Mines, install the Franklin Mill, and
search for and delineate a commercial ore body. In 1983, the Company
completed the Franklin Mill.
On July 3, 1996, the Company acquired the Gold Hill Mill from a
wholly-owned subsidiary of Gems (see Note 1), in exchange for a 8%
mortgage note with an initial principal balance of $2,500,000. The
Gold Hill Mill is a fully permitted milling facility located in
Boulder, Colorado. The Company is responsible for developing and
operating the Gold Hill Mill.
At December 31, 1997, the Company reduced by $1,200,000 the carrying
value of certain of the Gold Hill Mill assets to $1,340,000 which
approximates management's estimate of fair value . Land aggregating
$345,000 of the remaining $1,340,000 in assets is classified on the
balance sheet as land-held for resale with the balance classified as
mining, milling and other property and equipment.
F - 18
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - ACQUISITIONS OF MINING AND MILLING PROPERTIES (Continued):
On September 26, 1996, the Company acquired a 20% interest in
Newmineco, an inactive company by issuing a 9.5% note payable to Gems
with a principal balance of $600,000. Newmineco represented that it
held the exclusive mining rights related to the Mogul Mines in the
Spencer Mountains of Colorado. Because of certain permitting and other
problems in the Mogul Mines, the purchase price to the Company was
reduced to $150,000 in 1996, and the investment was written down to
zero as at December 31, 1997 (see Note 6).
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 consist of the
following at December 31, 1997:
Machinery and equipment $2,217,220
Mine and mill improvements (a) 5,071,065
Furniture and fixtures 11,714
Automotive equipment 84,096
----------
7,384,095
Less: accumulated depreciation and depletion 1,959,160
----------
$5,424,935
==========
(a) Includes mine and mill improvements of $780,787 in connection
with the termination of the Joint Venture (see Note 1).
During the years ended December 31, 1997 and 1996, the Company
expended $162,945 and $- 0-, respectively on mine expenses and
environmental remediation costs.
F - 19
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - NOTES PAYABLE RELATED PARTY AND OTHERS:
Notes payable related party and others consist of the following at
December 31:
12% unsecured demand note due to the Company's President $ 20,000
Secured promissory note (a) 60,000
Unsecured promissory notes (b) 87,000
--------
$167,000
========
(a) The outstanding principal balance of the note became payable on
July 18, 1996 and the Company is in default. The note is
guaranteed by certain officers of Gems and is collateralized
through a subordinated 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.
(b) This principal amount represents four unsecured promissory notes
comprised of one $36,000 note and three $17,000 notes payable.
These obligations were assumed by the Company on November 25,
1997, as part of the acquisition from USM of the remaining
interest in the Joint Venture (see Note 1). These notes were in
default when assumed by the Company, and remain in default as of
December 31, 1997. Interest is being accrued at rates between 8%
and 17% per annum.
Accrued interest on the above notes at December 31, 1997 aggregated
approximately $21,000, including $3,750 payable to the Company's
President.
NOTE 6 - CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT:
The Company's convertible debt at December 31, 1997 consist of:
12.25% convertible debenture originally due 12/31/94 $145,000
As of December 31, 1997, the Company was in default with respect to
the payment of the $145,000 principal balance of the debenture and
accrued interest of approximately $49,000. As a result of its default,
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 other
costs. Management cannot assure that there will be funds available for
the required payments or what the effects will be of any actions
brought by or on behalf of the debentureholders (see Note 8c).
F - 20
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 6 - CONVERTIBLE DEBENTURES AND OTHER CONVERTIBLE DEBT (Continued):
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. This note could be converted to common stock at the
Company's option on or after January 1, 1997. 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 December 31, 1996
and to $-0- on December 31, 1997 (see Note 3). The $450,000 (1996) and
$150,000 (1997) reductions in the purchase price were effectuated
through an equivalent reduction in the principal balance of the 8%
mortgage note that was payable to an affiliate of 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.
NOTE 7 - NOTE PAYABLE - RELATED PARTY:
The Company had outstanding a 8% promissory note balance of $955,756,
at December 31, 1997, which represents monies advanced to the Company
by POS Financial, Inc. ("POS"), a New Jersey corporation and
obligations assumed in connection with the contributions of Joint
Venture interests (see Note 1). The note is payable on May 4, 1998,
and is secured by all the Company's mining claims and mining
properties, as well as its interests in the Hayden/Kennec Leases. The
note is subject to successive 30 day extensions throughout 1998 upon
the mutual agreement of the maker and lender for no additional
consideration. On March 5, 1998, POS assigned this note to USM. Both
POS and USM are considered related parties because they can exert
significant influence over the Company. Accrued interest at December
31, 1997 was approximately $7,500.
NOTE 8 - COMMITMENTS AND CONTINGENCIES:
(a) Lease Agreements:
The original Hayden/Kennec Leases provided for payment by the
Company of certain liabilities relating to the leased property
and a minimum royalty payment of $2,000 per month or 5% of the
Company's net smelter royalties realized from production,
whichever is greater to Mrs. Hayden and Mrs. Kennec. The original
Hayden/Kennec Leases expired in November 1996, at which time the
Company had the option to purchase the leasehold rights for a
purchase price of $1,250,000 less any royalties previously paid
as of the expiration date. As of November 1996, the Company had
paid approximately $480,000 in royalties.
F - 21
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(a) Lease Agreements(continued):
On November 19, 1996, the Company entered into an amendment to
the Hayden/Kennec Leases with 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 value of $13,000. All of the payments
made under the Kennec Amendment plus the value of the shares
issued thereunder are to be further applied against the buy-out
price of the property under the original Hayden/Kennec Leases.
The 104,000 shares of common stock were issued on April 9, 1997
(see Note 10).
To further secure the Company and the Joint Venture, Gems entered
into an agreement on December 21, 1995 to purchase Hayden's
interest thereto (the "Hayden Interests") for a purchase price of
$75,000. Gems made an initial payment of $5,000 to Hayden and the
remainder of the purchase price was to be paid on or prior to the
expiration date of the Hayden/Kennec Leases. Gems advised the
Company that under Colorado law, if an owner of 50% of mineral
rights desired to exploit those rights, then the remaining 50%
owner could not object to the exploitation of the rights,
provided the non-participating owner received 50% of the net
profits generated from such exploitation. Therefore, Gems
informed the Company that it believed that with the acquisition
of the Hayden interest, together with the portion of the
Hayden/Kennec Leases owned by Kennec, the Company and the Joint
Venture would have adequate access to the minerals during the
remainder of the term of the Hayden/Kennec Leases on a continuing
basis.
On November 12, 1997, Gems had failed to comply with the terms of
the Hayden/Kennec-Gems Purchase Agreement. On November 13, 1997,
Hayden entered into an agreement to sell the Hayden interests to
USM for a purchase price of $75,000 (the "Hayden-USM Purchase
Agreement"). The purchase price is evidenced by a note, due on
February 2, 1998. Payment on the note has been extended until USM
receives a report of clear title. Upon the execution of the
Hayden-USM Purchase Agreement, USM agreed to extend the
Hayden/Kennec Leases upon the same terms and conditions currently
in effect through March 13, 1998 (the "Extended Expiration
Date"). The Company is currently in negotiations to extend these
interests.
F - 22
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(a) Lease Agreements (continued):
While the Company has extended the term of the Hayden/Kennec
Leases, as amended through March 13, 1998, 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 the lessor would have to reclaim
the property in accordance with the State of Colorado Division of
Minerals and Geology (the "DMG") requirements in effect at the
time of such expiration or termination. Thus, the likelihood that
the Company would recover fixtures and other equipment on the
property may be minimal.
(b) Environmental Matters:
On January 31, 1997, the Company received approval from the DMG
of its March 6, 1996 amended application to its permit by
obtaining the $252,000 bond required by the DMG from an
independent bonding company in exchange for (i) the deposit by
the Company of $125,000 in a trust account maintained for the
benefit of the bonding company, (ii) guarantees from the Joint
Venture partner and certain of its principals and (iii) 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, management believes that
substantially all of the necessary environmental and regulatory
approvals have been obtained from DMG.
The amended permit required among other things 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.
As of December 31, 1997, the Company has no formal violations
against it with respect to the Franklin Mines and Franklin Mill.
However, there can be no assurance that the Company will be able
to adequately comply with the conditions set forth in its permit
approval or that future violations will not arise and that such
violations will not lead to interruptions in operations at the
Franklin Mines or Franklin Mill.
(c) Litigation:
The Company is involved in various litigation as explained below:
(i) The Company 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. An accrued liability of $35,000 which the
Company estimates to be its portion of the total claim has
been recorded in the accompanying financial statements and
is included in other expenses.
F - 23
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 8 - COMMITMENTS AND CONTINGENCIES (Continued):
(c) Litigation (continued):
(ii) In September 1997, certain of the Company's 12.25%
Convertible Debenture holders instituted an action against
the Company for payment of approximately $42,500 principal
amount of its 12.25% Convertible Debentures plus accrued and
unpaid interest totaling approximately $13,000 and other
costs and expenses related thereto. The Company has answered
the aforesaid complaint.
An unfavorable resolution of these matters could result in
material liabilities or charges that have not been reflected in
the accompanying financial statements.
(c) NASDAQ Notification:
In 1996, the Securities and Exchange Commission approved certain
amendments to the listing requirements for continued listing on
the NASDAQ Small-Cap Market. On February 27, 1998, subsequent to
the balance sheet date, the Company received a notification
letter from NASDAQ informing the Company that as of that date,
the Company's common stock is not in compliance with the new
minimum bid price requirement of $1.00 which became effective on
February 23, 1998. The review of the Company's common stock price
was based upon the price data covering the previous 30
consecutive trade dates. The Company has been given 90 calendar
days, expiring May 28, 1998, in order to regain compliance. The
Company would be able to regain compliance if its common stock
trades at or above the minimum requirement of $1.00 for at least
10 consecutive trade days. In the event that the Company's common
stock does not regain compliance within the 90 day period, NASDAQ
has advised the Company that it will issue a delisting letter
which will identify the review procedures available to the
Company.
Management believes that it is unlikely, given past trends, that
the Company's common stock will sustain a minimum bid price of
$1.00 or more for 10 consecutive trade days between now and May
28, 1998. Thus, it is likely that the Company will receive formal
delisting notification and that the Company's common stock will
no longer be listed for trading on the NASDAQ Small Cap Market.
However, management believes that the Company's common stock will
qualify for trading on the Over-The-Counter/Bulletin Board
("OTC") market and the Company will make every effort to include
its common stock on the OTC in the likely event of a delisting by
NASDAQ.
The Company is unable to determine the effect, if any, a
delisting by NASDAQ would have on the Company's ability to obtain
additional equity or debt financing.
F - 24
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 9 - INCOME TAXES:
As of December 31, 1997, the Company had Federal net operating loss
carryforwards of approximately $10,500,000 available to reduce future
Federal taxable income which, if not used, will expire at various
dates through December 31, 2012. Changes in the ownership of the
Company may subject these loss carryforwards to substantial
limitations.
The Company also reduced the carrying value of its milling properties
by $1,200,000 during 1997, resulting in a related deferred tax asset
of approximately $408,000.
The Company has offset the deferred tax asset attributable to the
potential benefits from such net operating loss carryforwards and the
reduction in carrying value by an equivalent valuation allowance due
to the uncertainties related to the extent and timing of its future
taxable income. There are no other material temporary differences.
<TABLE>
<CAPTION>
Deferred Tax Valuation
Asset Allowance
---------- ----------
<S> <C> <C>
Balance at January 1, 1997, attributable to federal
net operating loss carryforward $3,347,000 $3,347,000
Increase in federal net operating loss, year ended
December 31, 1997 231,000 231,000
Write-down of mining, mineral and other property
and equipment 408,000 408,000
---------- ----------
Balance at December 31, 1997 $3,986,000 $3,986,000
========== ==========
</TABLE>
NOTE 10 - STOCKHOLDERS' EQUITY:
Issuances of Common Stock:
In February 1996, the Company commenced an offering pursuant to Rule
505 of Regulation D of its common stock to accredited and unaccredited
investors 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.
F - 25
<PAGE>
FRANKLIN CONSOLIDATED MINING CO., INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 - STOCKHOLDERS' EQUITY (Continued):
Issuances of Common Stock (continued):
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 this 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 6).
In July 1996, the Company commenced another offering to unaffiliated
parties pursuant to Regulation D of up to 100,000,000 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.
The following three 1997 common stock issuances reflect security
values that were established at the time the parties entered into
arm's-length agreements in 1996, and represent the respective value of
the security at those dates. The securities were issued pursuant to an
exemption provided by Section 4(2) of the Securities Act of 1933, and
are restricted securities.
On February 10, 1997, the Company issued 7,692,308 common shares upon
conversion of the $600,000 9.5% note at a conversion price of $.078
per share (see Note 6).
On April 9, 1997, the Company issued 104,000 common shares to Dorothy
Kennec in exchange for extension of lease terms (see Note 8a) at an
aggregate value of $13,000 or $.125 per share.
On June 19, 1997, the Company issued 500,000 common shares to Redstone
Securities as payment for approximately $50,000 in debt obligations.
Common Stock Reserved for Issuance:
At December 31, 1997 and 1996, there were 290,000 shares of common
stock reserved for issuance upon the exercise of the 12.25% $145,000
convertible debentures (see Note 6).
F - 26
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
On February 23, 1998, the Company notified J.H. Cohn, LLP ("J.H. Cohn, LLP") of
its decision to dismiss the firm as its independent auditors. The decision to
dismiss J.H. Cohn, LLP was approved by the Board of Directors of the Company.
During the two most recent fiscal years of the Company, none of the reports of
J.H. Cohn, LLP on the financial statements of the Company contained an adverse
opinion or a disclaimer of opinion or was qualified or modified as to audit
scope, or accounting principles; however, J.H. Cohn, LLP has qualified or
modified its reports on the financial statements of the Company as a going
concern. During the two most recent fiscal years and any subsequent interim
period preceding the dismissal of J.H. Cohn, LLP, there were no disagreements
between the Company and J.H. Cohn, LLP concerning accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
would have caused J.H. Cohn, LLP to make a reference to the subject matter
thereof in its report had such disagreement not been resolved to the
satisfaction of J.H. Cohn, LLP.
The Company to retained Lazar Levine & Felix LLP as its independent auditors for
fiscal year 1997.
39
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Person;
Compliance with Section 16(a) of the Exchange Act
Name Age Position
- ---- --- --------
J. Terry Anderson 50 Chairman, President Treasurer,
Director
Robert Waligunda 51 Secretary, Director
Robert J. Levin 51 Former Vice-President-Finance
Richard Brannon 48 Vice-President-
West Coast Operations
Steven R. Schurman 46 Director
George E. Otten 71 Director
J. Terry Anderson. Mr. Anderson has served as a director of the Company since
August, 1991, as the Company's Chairman of the Board since June, 1993, as the
Company's President since June, 1994, and as the Company's Treasurer since
August, 1995. From 1977 to the present, Mr. Anderson has served as Chairman,
President, a director and a principal stockholder of Anderson Chemical Company,
a privately-held company located in Litchfield, Minnesota which is engaged in
the manufacturer and marketing of sanitation and water treatment chemicals. Mr.
Anderson has also served as a member of the local advisory board of Norwest
Bank, Minnesota Central, N.A., Litchfield Minnesota. Mr. Anderson received a
Bachelor of Arts degree in theology from Ambassador College in Big Sandy, Texas
in 1972. Prior to that time, Mr. Anderson pursued a degree in Business
Administration from the University of Minnesota from 1965 to 1968.
Robert L. Waligunda. Mr. Waligunda has served as a director of the Company since
1985 and as Secretary of the Company since August 1995. From 1965 to the
present, Mr. Waligunda has served as founder, President and principal
stockholder of Sky Promotions, Inc., a Pittstown, New Jersey marketing and
management company involved in sales, advertising and marketing of hot air
balloons and inflatable products. He is the founder and director of
International Professional Balloon Pilots Racing Association, a member of the
advisory board of Aerostar International, Inc., the world's oldest and largest
balloon manufacturing company, and a member of the National Aeronautic
Association, the Experimental Aircraft Association, and the Airplane Owner
40
<PAGE>
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 served as the Vice President-Finance of the Company
from December, 1995 through February, 1998. 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. Mr. Levin resigned his
position as Vice President on February 20, 1998.
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.
Steven R. Schurman Mr. Schurman has served as a director of the Company since
February, 1998. From 1985 to present, Mr. Schurman has served as president of
MinSearch, Inc., a Denver based company, specializing in mineral project
evaluation, exploration, project permitting, mapping and drill testing of mines.
Mr. Schurman is a senior exploration geologist and is a member of the American
Institute of Professional Geologists, American Institute of Mining Engineers and
Denver Region Exploration Geologists. Mr. Schurman has a BS in Geology from the
Colorado State University.
George E. Otten Mr. Otten has served as director of the Company since February,
1998. Mr. Otten was the first president of the Company from 1976 through 1985
and is the owner and operator of the Bates Hunter Mine under the name "Central
City Consolidated Mining Company" since 1985. Since 1997, Mr. Otten is the
president, director and General Operating officer of all operations of Hunter
Gold Mining, Inc. Central City Colorado. Mr. Otten holds a degree in Business
Administration from Adams State College, Alamosa, Colorado.
To the Company's knowledge and based solely on a review of such materials as are
required by the Securities and Exchange Commission, no officer, director or
beneficial holder of more than ten percent of the Company's issued and
outstanding shares of Common Stock ("Beneficial Owner") has filed any forms and
reports required to be filed pursuant to Section 16(a) of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), during the fiscal year
ended December 31, 1995; and no officer, director or Beneficial Holder has not
submitted any representation letter to the Company stating that they are not
subject to the filing requirements under Section 16 of the Exchange Act for
fiscal year 1997.
Item 10. Executive Compensation
No compensation has been awarded to, earned by or paid to any of the named
executives or directors of the Company during the fiscal year ended 1996.
41
<PAGE>
Item 11. 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) 4.6%
Robert L. Waligunda 192,500(2) .2%
George E. Otten -0- 0
Steven R. Schurman -0- 0
Richard Brannan -0- 0
Directors and Executive
Officers as a Group 4,381,660 4.8%
(5 persons)
- ----------
1. Includes 1,688,140 shares owned by Mr. Anderson, 10,000 shares owned by Bruce
E. Anderson Trust under which Mr. Anderson acts as Trustee and 2,491, 520 owned
by Anderson Chemical Company for which Mr. Anderson serves as a director and
president and owns approximately 21% of the outstanding shares. Mr. Anderson
disclaims any beneficial ownership with respect to shares of the Company owned
by his brothers.
2. Includes 30,000 shares pledged as collateral to a non - affiliate individual.
Item 12. Certain Relationships and Related Transactions
In July 1996, Anderson Chemical Company advanced a loan to the Company for
working capital in the amount of $20,000. Such loan was evidenced by a
Promissory Note bearing interest at 12%. The principal amount and all accrued
and unpaid interest is currently outstanding.
As of March 31, 1998, J. Terry Anderson has loaned the Company an additional
$40,000 for working capital.
42
<PAGE>
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Exhibits
The following documents are filed as exhibits herewith, unless otherwise
specified by an asterisk, and are incorporated herein by this reference:
Exhibit Sequentially
Number Description of Exhibit Numbered Pages
3.1 Amended and First Restated Certificate of
Incorporation filed with the Delaware Secretary of
State on December 4, 1995. (Incorporated by
reference, Annual Report on Form 10KSB for year ended
December 31, 1995)
3.2 Amended and Restated By-Laws of the Company
(Incorporated by reference, Annual Report on Form
10-K for Year Ended December 31, 1994, Exhibit 3.2.)
4.1 Form of Indenture dated January 2, 1990 (Incorporated
by reference, Registration Statement on Form S-1,
File No. 33-31418, Exhibit 4.1.)
10.1 Mining Lease and Option to Purchase, dated November
12, 1976, among Davis I. And Audrey I. Hayden,
husband and wife, and Dorothy L. Kennec, a single
woman and trustee for her children, and Gold
Developers and Producers Incorporated (Incorporated
by reference, Registration Statement on Form S-1,
File No. 33-31418, Exhibit 10.1.)
10.2 Indenture, dated August 2, 1982, by and between the
Company and David I. and Dorothy I. Hayden.
(Incorporated by reference, Registration Statement on
Form S-1, File No. 33-31418, Exhibit 10.2.)
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)
43
<PAGE>
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.)
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.)
44
<PAGE>
10.11 Binding Exchange Letter Agreement, dated as of
December 14, 1994, by and between the Company and
Island Investment Corp. and Gems & Minerals Corp
(Incorporated by reference, Annual Report on Form
10-K for Year Ended December 31, 1994, Exhibit
10.11.)
10.12 Standard Drilling Contract, dated December 15, 1994,
by and between the Company and American Mine Services
Inc. (Incorporated by reference, Annual Report on
Form 10-K for Year Ended December 31, 1994, Exhibit
10.12.)
10.13 Schedule 13D filed with the Commission on March 20,
1995 by Gems & Minerals Corp. (Incorporated by
reference, Current Report on Form 8-K dated March 20,
1995, File No. 0-9416, Exhibit (b).)
10.14 Amendment, dated August 24, 1995, to the Binding
Share Agreement, dated December 14, 1994.
(Incorporated by reference, Current Report on Form
8-K dated August 24, 1995, File No. 0-9416, Exhibit
B.)
10.15 Settlement Agreement, dated September 27, 1996, by
and among the Company, Gems & Minerals Corp and
Island Investment Corp. (Incorporated by reference,
Current Report on Form 8-K dated September 27, 1995,
File No. 0-9416, Exhibit A.)
10.16 Agreement, dated September 26, 1995, among the
Company, Bruce R. Anderson, J. Terry Anderson, Leif
E. Anderson, Lindsay A. Anderson and Carlo Sgrizzi
regarding conversion of Anderson Loans (Incorporated
by reference, Current Report on Form 8-K dated
September 27, 1995, File No. 0-9416, Exhibit B.)
10.17 Schedule 13D filed with the Commission on December
28, 1995 by Gems & Minerals Corp., Island Investment
Corp. and Whitey Bear Trust, as a group.
(Incorporated by reference, Current Report on Form
8-K dated December 26, 1995, File No. 0-9416, Exhibit
B)
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 10.18)
45
<PAGE>
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 10.19)
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 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, File No. 0-9416, 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, File No.
0-9416, Exhibit B)
10.25 Deed, dated July 3, 1996, between Colina Oro Molina,
Inc. and the Company. (Incorporated by reference,
Quarterly Report on Form 10-QSB, for the Quarter
Ended June 30, 1996, File No. 0-9416, 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, File No. 0-9416, Exhibit B)
10.26 Promissory Note, dated July 6, 1996 by the Company in
favor of Anderson Chemical Co. in the aggregate
principal amount of $20,000. (Incorporated by
reference, Annual Report on Form 10-KSB for year
ended December 31, 1996, File No. 0-9416, Exhibit
10.26).
46
<PAGE>
10.27 Amendment No. 1 to Schedule 13D, dated July 10, 1996,
filed with the Commission by Gems & Minerals Corp.,
Island Investment Corp. and Whitey Bear Trust, as a
Group. (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, File No. 0-9416,
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, File No. 0-9416,
Exhibit B)
10.32 Amendment dated November 19, 1996, mining lease and
Option to Purchase, dated November 12, 1996, between
the Company and Mrs. Dorothy Kennec. (Incorporated by
reference, Annual Report on Form 10-KSB for year
ended December 31, 1996, File No. 0-9416, Exhibit
10.31).
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
*10.34 Lease Extension Agreement dated November 21, 1997
between Dorothy L. Kennec, individually and Dorothy
L. Kennec, Trustee and the Company.
47
<PAGE>
*10.35 Assumption of Debt dated December 1, 1997 between the
Company and Gems & Minerals Corp.
*10.36 Promissory Note dated March 5, 1998 between the
Company and POS Financial, Inc.
*10.37 Termination Letter dated March 6, 1998 between
William Martucci, POS Financial, Inc. and US Mining,
Inc. and the Company.
10.38 Letter of Intent, dated September 25, 1997, by and
between the Company and William C. Martucci
(Incorporated by reference on Form 8-K dated October
20, 1997, File No. 0-9416, Exhibit A).
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)
24.1 Consent of Gifford A. Dieterle, dated June 3, 1994,
as an Expert with respect to the geological reports
dated December 7, 1993, and May 16, 1994 filed as
supplemental information with the Company's Annual
Report on Form 10-K for the year ended December 31,
1994. (Incorporated by reference, Annual Report on
Form 10-K for Year Ended December 31, 1993, File No.
0-9416, Exhibit 23.)
28.1 Maps and Geological Reports prepared by consultant
Gifford A. Dieterle dated December 7, 1993 and May
16, 1994. (Incorporated by reference, Annual Report
on Form 10-K for Year Ended December 31, 1993, File
No. 0-9416, Exhibit 23.)
28.3 Letter from Messrs., Bruce, Terry, Leif and Lindsay
Anderson dated June 2, 1994 waiving defaults under
certain promissory notes. (Incorporated by reference,
Annual Report on Form 10-K for Year Ended December
31, 1993, File No. 0-9416, Exhibit 23.)
28.4 Letter from Gems & Minerals Corp. dated June 4, 1994
amending Zeus Joint Venture Agreement regarding
waiver of joint venture defaults. (Incorporated by
reference, Annual Report on Form 10-K for Year Ended
December 31, 1993, File No. 0-9416, Exhibit 23.)
48
<PAGE>
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
Reports on Form 8-K
Current Report on Form 8K, dated March 5, 1997.
Current Report on Form 8K, dated October 20, 1997
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized
FRANKLIN CONSOLIDATED MINING CO. , INC.
April 28, 1998 By: /s/ J. Terry Anderson
----------------------------------
J. Terry Anderson, Chairman,
President and Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ J. Terry Anderson Director/Chairman, President April 28, 1998
- ----------------------- and Treasurer
J. Terry Anderson
/s/ Robert Waligunda Director/Secretary April 28, 1998
- -----------------------
Robert Waligunda
/s/ Robert Levin Vice President-Finance April 28, 1998
- -----------------------
Robert Levin
/s/ Richard Brannon Vice President-West Coast April 28, 1998
- ----------------------- Operations
Richard Brannon
50
LEASE EXTENSION AGREEMENT
THIS AGREEMENT is made the day, month and year hereinafter set forth by and
between Dorothy L. Kennec, individually and Dorothy L. Kennec, Trustee
(hereinafter collectively referred to as "Lessor") having her primary address in
Baltimore, Maryland and Franklin Consolidated Mining Company, Inc., a Delaware
corporation with its principal place of business located in New York, New York
(hereinafter referred to as the "Lessee").
RECITALS
WHEREAS, Lessor owns a fifty (50%) percent undivided interest in certain
mineral rights and real property rights located in Clear Creek County, Colorado
attendant with what is commonly referred to as the Franklin Mine and Mill. Said
mineral and real property rights are more specifically described in Exhibit "A",
a copy of which is attached hereto and incorporated herein by reference.
WHEREAS, Lessor, in conjunction with her fifty (50%) percent undivided
interest in Exhibit "A", on November 12, 1976 entered into a "Mining Lease and
Option to Purchase" agreement which had a term of twenty (20) years.
WHEREAS, Lessor on November 25, 1996 extended the "Mining Lease and Option
to Purchase" for one year.
WHEREAS, Lessor and Lessee are desirous of extending the "Mining Lease and
Option to Purchase" for four (4) months until March 12, 1998.
NOW, THEREFORE, in consideration of the mutual covenants and agreements of
each party to the other hereinafter set forth, the parties hereto do hereby
mutually covenant and agree as follows:
I. TERM OF EXTENSION
The "Mining Lease and Option to Purchase" shall be extended for four (4)
months until March 12, 1998.
1
<PAGE>
II. CONSIDERATION
Over and above the compensation set forth in paragraph 11 of the "Mining
Lease and Option to Purchase"; Lessee, as and for consideration for the
extension made the subject of the instant agreement, agrees to pay an additional
One Thousand ($1,000) Dollars per month during the term of the extension and a
one time fee of Five Thousand ($5,000) Dollars payable upon the execution of
this agreement.
The initial payment called for under this agreement shall be made upon the
execution of this agreement by Lessor. All subsequent payments shall be made by
the 10th of each subsequent month during the term hereof.
III. APPLICATION OF PAYMENTS
Should Lessor elect to exercise its purchase option during the term of the
extension period made the subject of this agreement or any other extension
thereof; all payments made in accordance with this agreement (including but not
limited to the $5,000 extension fee) and all payments made pursuant to the
"Mining Lease and Option to Purchase" shall be credited to the purchase price.
IV. LATE PAYMENT CHARGES
A late payment charge of $100 will be paid to Lessor in the event that the
monthly payment is not received within 5 days after its due date.
2
<PAGE>
V. EFFECT OF MINING LEASE AND OPTION TO PURCHASE
Except for the contents of this agreement; the "Mining Lease and Option to
Purchase" agreement shall be unmodified and in full force and effect.
Date: 11-21-97 /s/ Dorothy Kennec
---------------------------------------
Dorothy Kennec
Date: 11-21-97 /s/ Dorothy Kennec, Trustee
---------------------------------------
Dorothy Kennec, Trustee
Date: Franklin Consolidated Mining Co., Inc
A Delaware Corporation
/s/ Richard Brannon, V.P.
---------------------------------------
By Richard Brannon, Vice President
3
ASSUMPTION OF DEBT
THIS AGREEMENT is made and entered into on December 1,1997 by and between
Franklin Consolidated Mining Company, Inc., a Delaware corporation (hereinafter
referred to as "Franklin) and Gems & Minerals Corporation, a Nevada corporation
(hereinafter referred to as "Gems").
RECITALS
WHEREAS, Gems is obligated to U.S. Mining, Inc., a New Jersey corporation
in the sum of Four Hundred and Eight Thousand, Four Hundred and Eighty Two
($408,482) Dollars (the "obligation").
WHEREAS, Franklin is willing and desirous of assuming the obligation of
Gems to US. Mining, Inc.
NOW THEREFORE, in consideration of their mutual promises, covenants, and
agreements, the parties hereto do hereby agree to be legally bound as follows:
1. For good and valuable consideration, receipt of which is acknowledged,
Franklin assumes, without recourse, the monetary obligation of Gems to U.S.
Mining, Inc., in the sum of Four Hundred and Eight Thousand, Few Hundred and
Eighty Two ($408,482) Dollars.
2. The failure of either party to enforce, at any time, or for any period of
time, the provisions of this agreement, shall not be construed as a waiver of
said rights by the waiving party.
3. This agreement and its contents shall be interpreted and construed under the
laws of the State of Delaware.
4. The invalidity of any portion of this agreement shall not affect the validity
of any other portion. In the event that any portion of this agreement is held to
be invalid, the parties agree that the remaining provisions shall remain in full
force and effect.
5. This agreement contains the complete agreement between the parties and shall
supersede all other agreements, either oral or written, on the subject of this
agreement, between the parties.
6. Should a controversy arise between the parties concerning this agreement, the
prevailing party shall be entitled to reasonable attorney's fees and costs.
1
<PAGE>
7. Any modification, amendment or change of this agreement will be effective
only if it is in writing signed by both parties.
8. This agreement may be executed in one or more counterparts, each of which
shall be considered to be an original, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day,
month and year as earlier set forth.
Gems & Minerals Corporation
A Nevada corporation
By /s/ Curtis Bernhardt
------------------------------------
Curtis Bernhardt, President
Franklin Consolidated Mining Company, Inc
A Delaware corporation
By /s/ J. Terry Anderson
------------------------------------
J. Terry Anderson, President
2
PROMISSORY NOTE
$955,756.22 Springfield, New Jersey
March 5, 1998
FOR VALUE RECEIVED, the undersigned, FRANKLIN CONSOLIDATED MINING COMPANY,
INC., a Delaware corporation (hereinafter referred to as the "Maker") promises
to pay to POS FINANCIAL, INC., a New Jersey corporation (hereinafter referred to
as the "Lender"), or order, the principal sum Nine Hundred and Fifty Five
Thousand, Seven Hundred and Fifty Six Dollars and Twenty Two Cents ($955,756.22)
from December 31, 1997 until the note is paid in full pursuant to the following
terms and conditions.
1. Interest Rate.
The unpaid amount of this Promissory Note shall bear interest at the rate
of Eight (8%) percent, per annum.
2. Computation of Interest.
Interest chargeable hereunder shall be calculated from December 31,1997 on
all amounts outstanding until the date when the Note is paid in full. Interest
not paid when due shall be added to the unpaid principal balance and shall
thereafter bear interest at the same rate as principal. All payments hereunder
are to be applied first to the payment of accrued interest and the balance
remaining to the payment of principal.
3. Payment.
All principal and accrued interest shall be due and payable on May 4, 1998.
4. Extension.
If Maker informs Lender, in writing, at least ten (10) days prior to the
due date under the terms of this note of its inability to make the required
payment of principal and interest; Lender may, in its sole discretion, extend
the note until June 4, 1998.
5. Prepayment.
This note may be prepaid, in whole or in part, without prepayment penalty.
1
<PAGE>
6. Security Agreement.
The obligations evidenced by this Promissory Note are secured by certain
collateral as set forth in that certain Security Agreement of even date herewith
(the "Security Agreement"). A copy of the Security Agreement is attached hereto
and marked Exhibit "A".
7. Waivers.
Except as may be set forth herein or in the Security Agreement, Maker, for
itself and for its legal representatives, successors, and assigns, expressly
waives presentment, protest, demand, notice of dishonor, notice of nonpayment,
notice of maturity, notice of protest, notice of intent to accelerate, notice of
acceleration, presentment for the purpose of accelerating maturity, and
diligence in collection.
8. Default - Security Interests.
It is expressly agreed that, upon the occurrence of an event of default
under the promissory note and/or security agreement, the unpaid principal
balance of this Promissory Note, together with interest accrued thereon, shall
be immediately due and payable as provided in the promissory note and Security
Agreement, without presentment, demand, protest, or notice of protest, of any
kind, all of which are hereby expressly waived. It is further understood that
this note is secured by, among other things, any of the security interests
granted to Lender under the Security Agreement and under any other agreement
between Lender and Maker which is executed in connection with the Promissory
Note and Security Agreement, in connection herewith, or in connection with the
transaction contemplated hereunder ("Collateral Documents"). All of the
covenants, conditions, warranties, representations and agreements contained in
such collateral documents, are hereby incorporated herein and made a part
hereof.
9. Events of Default.
If any one or more of the following events (each an "Event of Default")
shall occur, such occurrence shall be deemed an "Event of Default" under this
Note:
(i) Failure of the Maker to make any payment of principal or interest
under this note as and when the same shall become due and payable, whether
at maturity or by acceleration.
2
<PAGE>
(ii) The Maker shall make a general assignment for the benefit of
creditors, file a petition in bankruptcy, be adjudicated insolvent or
bankrupt, suffer an order for relief under any federal bankruptcy law,
petition or apply to any tribunal for the appointment of a custodian,
receiver or any trustee for the Maker or a substantial part of the assets
of the Maker or a third party shall file for involuntary relief against the
Maker
(iii) The maker shall breach any provision of this Promissory Note,
the Security Agreement or any collateral documents to this transaction.
10. Attorney's Fees and Costs
In the event it should become necessary to employ counsel to collect under
the terms of this Promissory Note, Maker agrees to pay all reasonable attorney's
fees and costs of the Lender irrespective of whether suit is brought.
11. Amendments
This Promissory Note may not be changed, modified or amended without a
written document containing such changes, modifications or amendments executed
by the Lender and Maker.
12. Choice of Law.
This Promissory Note and all transactions hereunder and/or evidenced hereby
shall be governed by, construed under, and enforced in accordance with the laws
of the State of New Jersey.
13. Trial By Jury.
Maker hereby waives any right to trial by jury in any action or proceeding
relating to this Promissory Note.
Franklin Consolidated Mining Company, Inc.
A Delaware Corporation
By /s/ J. Terry Anderson
--------------------------------
J. Terry Anderson, President
3
<PAGE>
ASSIGNMENT OF INTEREST AND ASSUMPTION OF LIABILITIES
For value received, U.S. Mining, Inc., the Assignor, hereby assigns to
Franklin Consolidated Mining Company, Inc., the Assignee, all of its right,
title and interest in a certain California General Partnership, dated February
26, 1993 (as amended from time to time), known as the Zeus Joint Venture,
together with all liabilities associated therewith, as set forth in Exhibit "A",
a copy of which is attached hereto and incorporated herein by reference.
For value received, Franklin Consolidated Mining Company, Inc., hereby
accepts the assignment of U.S. Mining, Inc's right, title and interest in a
certain California General Partnership, dated February 26, 1993 (as amended from
time to time), known as the Zeus Joint Venture, and assumes all liabilities
associated therewith, as set forth in Exhibit "A", a copy of which is attached
hereto and incorporated herein by reference.
Date: December 1, 1997 Assignor
U.S. Mining, Inc.
A New Jersey Corporation
By /s/ William C. Martucci
------------------------------------------
William C. Martucci, President
Date: December 1, 1997 Assignee
Franklin Consolidated Mining Company, Inc.
A Delaware Corporation
By /s/ J. Terry Anderson
------------------------------------------
J. Terry Anderson, President
<PAGE>
EXHIBIT "A"
ASSIGNMENT
For good and valuable consideration, receipt of which is acknowledged,
POS, Financial, Inc., a New Jersey corporation (hereinafter referred to as
"Assignor") hereby assigns to US Mining, Inc., a New Jersey corporation
(hereinafter referred to as the "Assignee") all of its right, title and interest
in that certain Promissory Note, dated March 5, 1998, in the principal amount of
Nine Hundred and Fifty Five Thousand, Seven Hundred and Fifty Six Dollars and
Twenty Two Cents ($955,756.22) wherein Franklin Consolidated Mining Company,
Inc., a Delaware corporation is the maker and Assignor is the Payee. A copy of
said Promissory Note is attached hereto, marked Exhibit "A" and incorporated
herein by reference.
Date: March 5, 1998 POS, FINANCIAL, INC.
A New Jersey corporation
By /s/ William C. Martucci
------------------------------------------
William C. Martucci
President
<PAGE>
EXHIBIT "D"
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") is entered into on May 5, 1998 by
and between, U.S. MINING, INC., a New Jersey corporation (hereinafter referred
to as the "Lender") and FRANKLIN CONSOLIDATED MINING COMPANY, INC., a Delaware
corporation
RECITALS
WHEREAS, Borrower has, by way of a separate document entitled, "Loan
Agreement" dated as of the date of this Agreement, acknowledged the existance of
a monetary obligation between Borrower and Lender. The monetary obligation is
evidenced by two promissory notes, one of which is referred to (in the Loan
Agreement) as the "Existing Indebtedness" and one of which is referred to (in
the Loan Agreement) as the "Additional Advances".
WHEREAS, the Loan Agreement further acknowledges the possibility that
Lender may advance additional funds, in the future, to Borrower.
WHEREAS, Borrower is a corporation in good standing in the State of
Delaware and is authorized to enter into the type of arrangement envisioned by
this Agreement, the Promissory Notes and any necessary collateral documentation.
WHEREAS, Lender and Borrower are desirous of securing what has been termed,
in the Loan Agreement, the "Existing Indebtedness" and the "Additional Advances"
and any future advances that Lender may make to Borrower.
NOW THEREFORE, in consideration of the mutual covenants, conditions,
representations, and warranties hereinafter set forth and for other good and
valuable consideration, the parties hereto mutually agree as follows:
I.
Definitions and Construction
1.01. The following terms, as used in this Agreement, have the following
meanings:
(a) Code means the Colorado Uniform Commercial Code, as amended and
supplemented from time to time, and any successor statute.
1
<PAGE>
(b) Collateral means that property, both personal property and real
property, and tangible and intangible property set forth in Exhibit "A", a
copy of which is attached hereto and incorporated herein by reference.
(c) Ob1igations means all obligations of Borrower under this Agreement
and the Promissory Notes (as defined herein), any other collateral
documentation and all costs and expenses attendant with this transaction.
1.02. Unless the context of this Agreement clearly requires otherwise,
references to the plural include the singular, references to the singular
include the plural, and the term "including" is not limiting. The words
"hereof," "herein," "hereby," "hereunder" and other similar terms refer to this
Agreement as a whole and not to any particular provision of this Agreement. Any
references herein to any promissory notes includes any replacement,
substitutions, alterations, amendments, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable. Neither the Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against any party
hereto, whether under any rule of construction or otherwise. On the contrary,
the Agreement has been reviewed by each party and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of the parties hereto.
II.
Pledge and Further Assurances
2.01. Borrower agrees that it will cooperate with Lender and shall execute and
deliver or cause to be executed and delivered, to Lender a UCC-1 Financing
Statement in the form of Exhibit "B", a copy of which is attached hereto, a Deed
of Trust in the form of Exhibit "C", a copy of which is attached hereto
instruments and other documents, and shall take all further action, at the
expense of Borrower, from time to time reasonably requested by Lender, in order
to maintain a continuing, first-priority perfected security interest in the
Collateral in favor of Lender, and to enable Lender to exercise and enforce
Lender's rights and remedies hereunder with respect to the Collateral. All
certificates or instruments representing or evidencing the Collateral shall be
delivered promptly to Lender or Lender's designated Attorney-in-Fact for the
benefit of Lender pursuant hereto and shall be in suitable form for transfer or
assignment in blank, all in form and substance satisfactory to the Lender or
Lender's designated representative.
2
<PAGE>
III.
Representations, Warranties and Covenants
Borrower warrants, represents and covenants that:
3.01. There are no restrictions upon the transfer of any of the Collateral, and
Borrower is the sole and beneficial owner of the Collateral and has the right to
pledge and grant a security interest in or otherwise transfer such Collateral
free of any encumbrances or rights of third parties.
3.02. All of the Collateral is and shall remain free from all liens, claims,
encumbrances and purchase-money or other security interests.
3.03. The execution and delivery of this Agreement creates a valid, perfected,
and first-priority interest in the Collateral in favor of Lender.
3.04. All books, records and documents relating to the Collateral are and will
be genuine and in all respects what they purport to be.
3.05. All covenants, representations and warranties contained in this Agreement
shall be true and correct at the time of the execution of this Agreement and
shall be deemed to be continuing.
IV.
Events of Default
The occurrence of any of the following events shall constitute an Event of
Default hereunder:
4.01. The failure of Borrower to pay any amount required to be paid pursuant to
the Promissory Notes, whether at maturity or by acceleration.
4.02. Borrower shall make a general assignment for the benefit of creditors,
file a petition in bankruptcy, be adjudicated insolvent or bankrupt, suffer an
order for relief under any federal bankruptcy law, petition or apply to any
tribunal for the appointment of a custodian, receiver or any trustee for the
Borrower or a substantial part of the assets of Borrower or a third party shall
file for involuntary relief against the Borrower.
4.03. Borrower shall breach any provision of the Promissory Notes, this Security
Agreement or any collateral documents to this transaction.
3
<PAGE>
V.
Remedies Upon Default
5.01. Upon the occurrence of an Event of Default, Lenders shall have, in
addition to any other rights given by law or in this agreement, or in any other
documents related to an Obligation, all of the rights and remedies with respect
to the personal property Collateral of a secured party under the Code.
VI.
General Provisions
6.01. This Agreement shall be binding and deemed effective when executed by
Borrower and accepted and executed by Lender.
6.02. The enumeration herein of Lender's rights and remedies is not intended to
be exclusive, and such rights and remedies are in addition to and not by way of
limitation of any other rights or remedies that the Lender may have under the
Code or other applicable law. Lender shall have the right, in Lender's sole
discretion, to determine which rights and remedies are to be exercised and in
which order. The exercise of one right or remedy shall not preclude the exercise
of any others, all of which shall be cumulative.
6.03. No act, failure to act, or delay by Lender shall constitute a waiver of
any of Lender's rights and remedies. No single or partial waiver by Lender of
any provision of this Agreement or any other Loan Document, or of a breach or
default hereunder or thereunder, or of any right or remedy which the Lender may
have, shall operate as a waiver of any other provision, breach, default, right,
or remedy or of the same provision, breach, default, right, or remedy on a
future occasion. No waiver by Lender shall affect Lender's right to require
strict performance of this Agreement.
6.04. If any provision of this Agreement shall be prohibited or invalid, under
applicable law, it shall be effective only to such extent without invalidating
the remainder of the Agreement.
6.05. This Agreement shall be deemed to have been made in the State of Colorado
and shall be governed by and interpreted in accordance with the laws of such
state.
6.06. All of Borrower's representations and warranties contained in this
Agreement shall survive the execution, delivery, and acceptance thereof by the
parties.
6.07. In the event it shall be necessary to enforce any provision hereof; Lender
shall be entitled to reimbursement of all of Lenders' reasonable costs and
4
<PAGE>
expenses, including without limitation: (a) attorney's and paralegals fees and
disbursements of counsel to Lenders, (b) costs and expenses of lien searches,
(c) charges attendant with actions to perfect, protect, and continue the
security interest created herein, (d) fees and costs incurred by Lenders to
defend any claims made or threatened against the Lenders arising out of the
transaction contemplated hereby. The parties agree that attorney's fees and
costs incurred in enforcing any judgment are recoverable as a separate item in
addition to fees and costs incurred in obtaining the judgment, and are not to be
deemed merged into any judgment. In the event of a dispute between the parties
arising out of this Agreement or otherwise, the prevailing party, as determined
by a court of competent jurisdiction, shall be entitled to recovery of
reasonable attorney's fees and costs incurred in connection with litigation or
other resolution of the dispute whether or not litigation is initiated.
6.08. Except as otherwise provided herein, all notices, demands and requests
that either party is required or elects to give to the other shall be in
writing, shall be delivered personally against receipt, or sent by recognized
overnight courier service, or mailed by registered or certified mail, return
receipt requested, postage prepaid and shall be addressed as follows:
Borrower:
J. Terry Anderson
President
Franklin Consolidated Mining Company, Inc.
76 Beaver Street
Suite 500
New York, New York 10005
Lender:
William Martucci
President
U.S. Mining, Inc.
3 Dundar Road
Springfield, New Jersey 07081
6.09. The provisions of this Agreement shall be binding upon and inure to the
benefit of the respective representatives, successors and assigns of the parties
hereto.
6.10. This Agreement is intended by Borrower and Lender to be the final,
complete, and exclusive expression of the agreement between them. This Agreement
supersedes any and all prior oral or written agreements relating to the subject
matter hereof. No modifications, recission, waiver, release or amendment of any
provision of this Agreement shall be made, except by written agreement executed
by the parties hereto.
5
<PAGE>
6.11. This Agreement may be executed in any number of counterparts and by Lender
and Borrower in separate counterparts, each of which shall be an original, but
all of which shall together constitute one and the same agreement.
6.12. The captions contained in this agreement are for convenience only, are
without substantive meaning and should not be construed to modify, enlarge, or
restrict any provision.
Lender
U.S. Mining, Inc.
A New Jersey corporation
By /s/ William C. Martucci
----------------------------------
WILLIAM C. MARTUCCI
President
Borrower
Franklin Consolidated Mining Co. Inc.
A Delaware corporation
By /s/ J. Terry Anderson
--------------------------------------
J. TERRY ANDERSON
President
6
<PAGE>
EXHIBIT "A"
COLLATERAL
All mining claims and mining properties as well as all of Borrower's right,
title and interest of whatsoever nature, in and to that certain Mineral Lease,
including any extensions thereto, dated November 12, 1976 between David I.
Hayden and Audrey I. Hayden, husband and wife, Dorothy L. Kennec, individually
and Dorothy L. Kennec trustee and Gold Developers and Producers, Incorporated,
and all of Borrower's right, title and interest in and to all mines, minerals,
lodes, veins dips and spurs, dumps, plants, fixtures, equipment, improvements,
water rights and/or any and all other rights, casements, and/or appurtenances
whatsoever relating thereto, including, without limitation, all of the exclusive
right, title and interest of Borrower to mine, extract, explore, develop, mill,
store, remove, and market all of the minerals, metals, ore materials of
whatsoever nature or sort to be found either on, in, under, upon and/or
belonging to or associated with or used or usable in connection with the
property rights and interest or related in any way to the subsurface of that
certain property known as the Franklin Mine and Mill site located in the County
of Clear Creek, in the State of Colorado.
U.S. MINING, INC.
P.O. BOX 343
MILLBURN, NEW JERSEY 07041
March 6, 1998
J. Terry Andersen
President
Franklin Consolidated Mining Company, Inc.
76 Beaver Street, Room 500
New York, New York 10005
Re: Franklin Consolidated Mining Company, Inc. (the "Company")
----------------------------------------------------------
CERTIFIED MAIL RETURN RECEIPT REQUESTED
Dear Terry:
The letter between the Company and myself, dated September 25, 1997
provides, in pertinent part: "....WM may, upon written notice to Franklin,
terminate its obligations hereunder at any time prior to the execution of
definitive agreements." In compliance with the pertinent language contained in
said letter of the September 25, 1997; this writing, on behalf of myself, in an
individual capacity, POS, Financial, Inc., and U.S. Mining, Inc. is designed
(with the exception of any rights, under any promissory notes, loans, liens,
pledges, claims or security Interests held by POS, Financial, Inc., or U.S.
Mining, Inc., with respect to the Company existing as of the date hereof and/or
hereafter created) to terminate any obligations of whatsoever nature that might
have been created as a result of said letter.
/s/ William C. Martucci
- -----------------------------------------------
William C. Martucci, in his individual capacity
POS, Financial, Inc.
A New Jersey Corporation
/s/ William C. Martucci
- -----------------------------------------------
William C. Martucci,
U.S. Mining, Inc.
A New Jersey Corporation
/s/ William C. Martucci
- -----------------------------------------------
William C. Martucci, President
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<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1997
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0
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