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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
[X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended June 30, 1996
[ ] Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from
____________ to _______________
Commission File No. 0-12761
BRUSH CREEK MINING AND DEVELOPMENT CO., INC.
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(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0180496
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
970 East Main Street, Suite 200, Grass Valley, California 95945
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(Address of Principal Executive Offices)
Registrant's Telephone Number Including Area Code: (916) 477-5961
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirement in the past 90 days. X Yes No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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. [X]
The issuer's total revenues for its most recent fiscal year were $42,160.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of September 23, 1996, was approximately $13,525,526.
Shares of common stock outstanding as of September 23, 1996: 16,913,681
Documents incorporated by reference: Portions of the registrant's proxy
statement for the annual meeting of shareholders to be held in 1997 are
incorporated by reference into Part III of this report.
Transitional Small Business Disclosure Format X Yes No
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The Registrant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report on Form 10-KSB for the fiscal
year ended June 30, 1996, as set forth herein:
PART I
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ITEM 1 - BUSINESS
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RISK FACTORS
Lack of Profitability; Continuing Losses; and Doubtful Ability to Continue
as a Going Concern.
The Company has incurred losses of $34,991,002 from inception to June
30, 1996 and had not realized economic production as of June 30, 1996. As a
result of the Company's cumulative losses from operations, and the fact that the
Company has not realized economic production from its mineral properties, the
Company's independent auditor's report, dated August 9, 1996, for the year ended
June 30, 1996, states that these conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management expects losses to
continue until mining operations are sufficient to process not less than 35
ounces of gold per day. When and if mining operations reach that level, the
ability of the Company to achieve net income is dependent on the grade of the
ore and on the price of gold. See "Risk Factors - Volatile Market Prices for
Gold." In response to the auditor's report, the Company is seeking to reopen
certain mining areas and increase production. However, there can be no assurance
that the Company's efforts will be successful.
Need for Additional Financing; Lack of Liquidity; No Material Revenues
The mining industry is capital intensive. On or about the beginning of
the 1995-1996 fiscal year, the Company estimated its mining development and
operating costs in the Lawry, Irene and Wolf sites at the Ruby mine to be
approximately $4 million for the fiscal year ended June 30, 1996. However, due
to increased costs associated with litigation the Company's operating costs were
higher than originally estimated at $4,010,966 for the fiscal year ended June
30, 1996. During the fiscal year ended June 30, 1996, the Company raised
$6,875,416 from the sale of securities pursuant to Regulation S under the
Securities Act of 1933 as amended ("Securities Act"). The shares of Common Stock
sold in such offerings were sold at a discount of between 35% and 50% at the
closing bid price of the Common Stock on the day before the sale. At June 30,
1996, the Company had a working capital deficit of $2,328,674 and had no
material revenues from mining operations. Additional financing will be required
in order for the Company to cover its mining and development costs in fiscal
1996-97 and to engage in full scale mining operation. At this time, the Company
has no definitive plans regarding additional financing, but believes that it
will likely be obtained through equity financing such as stock offerings or
joint ventures. No assurances can be given that the Company will be able to
raise cash from additional financing efforts and, even if such cash is raised,
that it will be sufficient to satisfy the Company's capital requirements. If the
Company is unable to obtain sufficient funds from future financings and/or
operations, the Company may not be able to achieve its business objectives and
may have to scale back its development plans. In addition, the Company may have
to sell its assets in order to meet its obligations and may lose some of its
properties for failure to make lease payments. In such event, the Company may be
required to seek protection under the bankruptcy laws which will have a material
adverse impact on the Company and the market value of the Common Stock.
Possible Delisting of Securities from Nasdaq System; Risks Relating to
Low-Priced Stocks
The Company's Common Stock is currently eligible for listing on Nasdaq. In
order to continue to be listed on Nasdaq, however, the Company must maintain
$2,000,000 in total assets, a $200,000 market value of the public float and
$1,000,000 in total capital and surplus. In addition, continued inclusion on
Nasdaq requires two market-makers and a minimum bid price of $1.00 per share.
Recently, the Company's Common Stock has fallen below such minimum bid price;
however, the Company will remain eligible for continued inclusion in Nasdaq if
the market value of the public float is at least $1,000,000 and the Company has
$2,000,000 in capital and surplus. As of June 30, 1996, the Company met the
foregoing public float and capital surplus requirements. The failure to meet
these maintenance criteria in the future may result in the delisting of the
Company's securities from Nasdaq, and trading if any, in the Company's
securities would thereafter be conducted in the non-Nasdaq over-the-counter
market. As
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ITEM 1 - BUSINESS - (Continued)
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a result of such delisting, an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Company's securities. In addition, if the Common Stock were to become delisted
from trading on Nasdaq and the trading price of the Common Stock were to remain
below $5.00 per share, trading in the Common Stock would also be subject to the
requirements of certain rules promulgated under the Securities Exchange Act of
1934, as amended, which require additional disclosure by broker-dealers in
connection with any trades involving a stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon-broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the Common Stock, which could severely limit the market liquidity of the Common
Stock.
Lack of Proven or Probable Ore Reserves of Commercial Quantity at the Mines
Although the Company has begun preliminary exploration activities on its
mining properties, the Company has not yet established proven or probable ore
reserves. Consequently, the Company has been unable to ascertain with certainty
whether adequate ore reserves sufficient for profitable operations exist.
Management believes, however, that an evaluation of the Company's mines
completed in May 1991 indicates the existence of sufficient mineralization to
warrant continued exploration. There can be no assurance that proven or probable
ore reserves will be established.
Government Regulation; Environmental Matters
The Company's mining facilities and operations are subject to
substantial government regulation, including federal, state and local laws
concerning mine safety, land use and environmental protection. The Company must
comply with local, state and federal requirements regarding exploration
operations, public safety, employee health and safety, use of explosives, air
quality, water pollution, noxious odor, noise and dust controls, reclamation,
solid waste, hazardous waste and wildlife as well as laws protecting the rights
of other property owners and the public. Although the Company believes that it
is in substantial compliance with such regulations, laws and requirements with
respect to the mines currently in operation, failure to comply could have a
material adverse effect on the Company, including substantial penalties, fees
and expenses, significant delays in the Company's operations and the potential
shutdown of the Company's operations.
The Company must also obtain and comply with local, state and federal
permits, including waste discharge requirements, other environmental permits,
use permits, plans of operation and other authorizations. Obtaining these
permits can be very costly and take significant amounts of time. Although the
Company foresees no material problems or delays, no assurances can be given that
the Company can obtain the necessary permits or commence mining operations, or
that, if permits are obtained, there will be no delay in the Company operations
or the Company can maintain economic production in compliance with the necessary
permits.
Competition
The Company operates in an industry that is characterized by intense
competition for resources, equipment and personnel. Some of the Company's
principal competitors are substantially larger, have substantially greater
resources, and expend considerably larger sums of capital than the Company for
exploration, rehabilitation and development.
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ITEM 1 - BUSINESS - (Continued)
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Risks in Mining Operations, Insurance Coverage and Uninsured Losses
The Company's activities are subject to all the risk and hazards
commonly associated with mining operations, including, but not limited to
unforeseen geological formations, cave-ins, environmental concerns and personal
injury. The Company has insurance covering personal injury, workers'
compensation and damage to property and equipment, although in view of recent
trends in damage awards in personal injury lawsuits, such insurance may be
insufficient to satisfy large losses or judgments against the Company.
Furthermore, certain types of insurance coverage (generally against losses
caused by natural disasters and Acts of God) are either unattainable or
prohibitively expensive. Substantial damage awards against the Company or
substantial damages not covered by insurance will affect the Company's ability
to continue as a going concern and may force the Company to seek protection
under the federal bankruptcy laws.
Volatile Market Prices for Gold
The price of gold has a material effect on the Company's financial
operations. Following deregulation, the market price for gold has been highly
speculative and volatile. Since the end of 1987 the price of gold has declined
from a high of approximately $500 per ounce to approximately $390 per ounce at
September 15, 1996. Instability in the price of gold may affect the
profitability of the Company's operations. No assurances can be given that the
Company's mines contain ore in commercial quantities or, if ore in commercial
quantities is discovered, that gold could be produced at a profit given the
recent market price range for gold.
Litigation; Administrative Proceedings
The Company is involved in various litigation matters and is the subject of
an informal inquiry being conducted by the staff of the Commission in connection
with the Company's financing activities pursuant to Regulation S under the
Securities Act. An adverse determination of one or more of such matters could
have a material adverse effect on the Company. See "Legal Proceedings."
Proposed Changes to Mining Laws
Both the United States House of Representatives and the Senate have
passed bills that seek to reform the General Mining Law of 1872, which governs
exploration and mining activities on federal lands. The pending legislation
contains strict new environmental protection standards and conditions,
additional reclamation requirements and extensive new procedures. Both bills
would also impose royalties on gold production from currently unpatented mines
rather than the current annual assessment work requirement ($100 per claim).
Although the Company expects its initial production to come from patented
(rather than unpatented) claims, any future production from the Company's
unpatented mining claims may be subject to an additional royalty payment or
other costs, if revisions to the 1872 Mining Law are implemented.
Brush Creek Mining and Development Co., Inc. (the Company) was
incorporated in 1982 and is engaged in the exploration and development of gold
mining properties. The Company currently owns the Brush Creek, Carson, High
Commission, Gardner's Point and Pioneer Mines. The Company also has leases with
options to purchase the Ruby, Rising Sun and Kate Hardy and Omega Mines. All of
these mines, except for the Gardner's Point and Pioneer Mines, are located in
the Allegheny-Forest-Downieville mining districts on the western slope of the
Sierra Nevada mountain range in northern California and comprise approximately
6,300 acres. Because of the proximity of the mines to each other, the Company
believes it can efficiently mine and operate these properties since it will be
able to take advantage of economies of scale by sharing personnel, mill
facilities and equipment. Because the Gardner's Point and Pioneer Mines are
located outside the Allegheny-Forest-Downieville mining districts, the Company
will most likely seek to enter into a joint venture to operate these mines.
Based on previous studies completed in December 1990, management believed
that the Company's mines had sufficient mineralization to warrant feasibility
studies and in January 1991 engaged Keewatin Engineering to conduct and
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ITEM 1 - BUSINESS - (Continued)
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document those studies. The Company received Phase I and Phase II reports
from Keewatin Engineering, the Phase II report being dated October 1992. The
Phase I and Phase II reports were exploration and development reports of the
Allegheny-Forest-Downieville mining district and mining properties of the
Company, including an evaluation of the underground hard-rock system and surface
geology studies to identify precious metal rock units, and additional structural
geology studies within the district. The Ruby Mine was the Company's original
focus because of its rich production history and because permits were in place
for placer production and hard rock exploration.
The Company filed its plan of operation for the Ruby and Carson Mines
with the United States Forestry Department, and has obtained all necessary
permits for continued production and milling at the Ruby Mine of up to 225 tons
of material per day. In order to continue the underground development of the
Carson vein system, a more extensive geologic evaluation using diamond drilling
on surface and subsurface should be completed. As this was a capital intensive
expense the Company decided to detain further development of the Carson Mine
until the Company decides to integrate this program into its future development
budget.
From February 1992 when the Company began limited production at the Ruby
Mine to December 1992 when the Company ceased production due to inclement
weather, the Company milled approximately 7,300 tons of mineralized placer
material and recovered approximately 200 ounces of gold, an amount which is
inconsistent with historical production at the Ruby Mine in the early 1940's.
However, the Company's management believes that these preliminary results are
too small to be a reliable representative sample of the expected placer grades.
More important, the Company has decided to focus on the lode deposits, which are
readily accessible and of considerably higher grade. The Company has not
completed sufficient drilling and sampling to establish proven or probable ore
reserves at the Ruby Mine. This is partly due to a lava cap of between 210 and
950 feet of overburden, which makes surface drilling inappropriate, and partly
due to a lack of sufficient capital to fund a systematic drilling program.
Focus on Core Business
Management believes that the future of the Company's mining lies in the
Downieville-Allegheny area of northern California where the Company controls
nine gold mines.
During fiscal 1996, the Company focused its mining and exploration
efforts in three areas. The Lawry side of the Ruby mine was reopened.
Exploratory mining and milling of small guts in the gravel proved uneven. One
day, 36 yards of material yielded more than twenty ounces of gold, including two
large nuggets, which were over two ounces each. Other days, the runs were nearly
blank. In an effort to intersect the main channels in the area, the Pilot and
Mt. Vernon, the Company began driving a drift toward the east. Seismic tests
indicate the potential for a depression in the bedrock approximately 260 feet
from the start of the drift.
The Wolf and Irene veins in the Ruby Mine were also explored. Due to the
presence of visible gold, the Company began sinking on the Irene vein from the
two-hundred foot level. After sinking approximately 15 feet, significant visible
gold was encountered on the left-hand rib of the vein. However, 40 feet down,
the vein split into several separate smaller veins. The decision was made to
focus hard-rock mining on the Wolf vein which appears to be the main structure
in the area.
The Wolf vein was mined from track level to a depth of first, 65 feet,
and then 200 feet in the late 1930's. The published grade of the ore was
approximately .37 ounces of gold per ton of ore. The advent of World War II, and
U.S. Government limiting orders, ultimately caused mining in the vein to stop.
The Company followed a previously begun winze from the 200 foot level of
the vein heading for the 275 foot level while simultaneously mining the left
over ore between the 200 foot level and 65 foot level. Because all the high
grade pockets and the best of the mill rock had been mined on that level in the
1930's, the Company did not expect to match the ore grade published in the
1930's. Seventy-four ounces of gold were extracted from 817 tons of ore.
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ITEM 1 - BUSINESS - (Continued)
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The Company began to sink on the Wolf vein in June 1996. As the winze got
deeper, the vein widened indicating a stronger structure. The 275 foot level and
virgin ore was reached in August 1996. The Company is working at that level and
hopes to duplicate the published grade of the 1930's. There can be no assurance
that the Company will be successful in its efforts. See "Risk Factors--Lack of
Proven or Probable Ore Reserves of Commercial Quality at the Mines."
Al Wasley, a seasoned mine superintendent with a long history of mining in
the Mother-Lode district, was hired as mine superintendent. His first task was
to replace a poorly designed hard-rock mill with one appropriate for Mother-Lode
ore. As a result of Mr. Wasley's efforts, the Company now has a hard-rock mill
circuit that includes: a jaw crusher, cone crusher, ball mill, jig, centrifugal
force bowls and tables. The Company also uses its own equipment to amalgamate
and pour the gold.
Subsequent Events
In July 1996, the Company successfully obtained an order on its motion to
pierce the corporate veil of Consolidated Sierra Gold Mines, Inc. in Case No.
52943 in the Superior Court of the State of California in and for the County of
Nevada. As a result, F. James and Simone Anderson are personally liable for the
judgment obtained by the Company in the case against Consolidated Sierra Gold
Mines, Inc. (see "Legal Proceedings"). A judgment on the order piercing the
corporate veil was entered on August 5, 1996.
The Company began crosscutting the 265 foot level of the wolf vein on
strike in late July 1996. Heading south, favorable mineralization was
encountered, including the presence of galena, pyrite and arsenopyrite. A sample
of the arsenopyrite was assayed and found to contain more than two ounces of
gold per ton. Heading north, visible gold was encountered. Seven six foot rounds
taken in that direction showed increases in the amount and coarseness of the
gold. The Company expects to begin running the hard-rock mill 12 hours per day
to process the ore.
On September 13, 1996, a raise was run from 255 feet in the Lawry placer
drift into the gravel overhead. Samples will be run through the placer mill and
the grade is expected to be available in November 1996.
In July 1996, the Company issued 695,652 shares of the Company's Common
Stock in connection with an offering in May 1996 pursuant to Regulation S in
which the Company entered into an investment agreement containing a purchase
price adjustment clause that required the Company to issue such shares if the
Company's low bid price fell below one dollar during the valuation period. The
Company was also required to place the 695,652 shares with an escrow agent
until the end of the valuation period. The valuation period expired on
September 27, 1996 and the Company has received notice that the purchaser claims
it is entitled to 661,569 shares of the 695,652 shares held in escrow. The
Company is evaluating the purchaser's claim to determine if the Company is
required to issue the claimed shares to the purchaser.
Also in July 1996, the Company was required to issue 57,523 shares of the
Company's Common Stock in connection with an offering in May 1996, pursuant to
Regulation S in which the Company entered into an agreement with a purchase
price adjustment clause.
In September 1996, the Company received $250,000 from the sale of 757,576
shares of the Company's Common Stock, pursuant to Regulation S. The shares were
sold at 50% of the closing bid price on the day before the sale.
Employees
The Company has 59 full-time employees, and operates in only one
industry segment.
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ITEM 2 - PROPERTIES
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The following is a discussion of the mining properties controlled by the
Company. The Company began geological and engineering studies on all of its
mining properties in January 1991. The Company received Phase I and Phase II
Reports, the most recent of which is dated October 1992, following these
studies. The Company has not completed sufficient geological activities and
drilling to establish proven or probable ore reserves for its mines. The Company
has no present intention of conducting further geological exploration and
drilling to establish ore reserves for its mining properties.
The Company began limited production at the Wolf vein and Lawry area placer
gravels at the Ruby Mine during the fiscal year ended June 30, 1996. Production
of approximately 100 tons of ore per day is expected in the fiscal year ending
June 30, 1997. Ore taken from the Wolf and Lawry will be milled on site.
However, there can be no assurance that production levels will reach 100 tons
per day in the 1997 fiscal year. Further work at these mines is subject to
the Company receiving additional financing. The Company expects that if the
required financing is obtained, it estimates it will cost approximately $4
million to perform the intended work and to continue operations at the Ruby
Mine. There can be no assurance that the Company will obtain the required
financing or any part thereof. In the event the Company is unable to raise the
required financing, the Company will scale back its operations. See "Risk
Factors--Need For Additional Financing; Lack of Liquidity; No Material
Revenues."
Brush Creek Mine
The Brush Creek Mine is an underground lode gold mine located in Sierra
County, California, approximately eight miles west of the town of Downieville,
California. It consists of eight patented mining claims comprising approximately
245 acres and 45 unpatented mining claims comprising approximately 960 acres.
The Company's investment in this property is $2,062,629 at June 30, 1996,
consisting of $408,496 of land and land options, $1,460,669 of development
costs, and $193,464 of mining equipment.
All of the unpatented claims in the property package are in good standing
with assessment work documents for 1996 filed with both the Bureau of Land
Management (BLM) in Sacramento and Sierra County in Downieville. The patented
claims of the Brush Creek Mine are not fully permitted for underground
exploration, development and production. A waste discharge permit is required
and a plan of operation must be filed with the U.S. Department of Forestry and
Sierra County before full scale mining may begin. The Company has no current
plans to obtain such a permit or file a plan.
The Brush Creek Mine was opened in 1868 when the old Brush Creek Shaft was
sunk to a depth of approximately 600 feet. Reports indicate that between 1868
and 1870 it produced approximately 19,632 ounces of gold. Between 1870 and 1944,
operations at the Brush Creek Mine were limited. In 1870, it was closed due to
poor ground conditions, flooding of the shaft and a fatal accident. In 1922, the
Ante Up Mining Company drove a 2,200 foot drift which eventually connected with
the old Brush Creek tunnel. In 1927, shafts were driven into the Brush Creek
Mine by the Kate Hardy Mining Company. Between 1870 and 1994, production records
are sparse. Reports during this period indicate that 223 ounces of gold were
produced in April of 1929. Between 1944 and 1950, A.L. Merritt made additional
improvements to the Brush Creek Mine including the sinking of the Golden Gate
Shaft to a depth of approximately 647 feet. Mining activity occurred between
1978 and 1979 when new equipment was installed and a new level was started. This
activity ended when the Brush Creek Mine was flooded due to a power failure in
1979.
In April of 1982, the Company leased the Brush Creek Mine and, in February
of 1984, it purchased all patented and unpatented claims of the Brush Creek
Mine. The Company continued limited development and production until the end of
1985 when the Brush Creek Mine was closed. Until the Brush Creek Mine was closed
in 1985, work was carried out on an extension of the old Brush Creek Shaft and
ore pockets were exploited between the 410 and 465 foot level. A new 60
tons-per-day mill was assembled near the portal of the Brush Creek tunnel and 14
holes totaling 4,950 feet were cored from various underground locations.
Subsequent mining produced approximately 700 to 1,000 ounces of gold.
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ITEM 2 - PROPERTIES - (Continued)
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Both upper and lower adits are reinforced with concrete and have steel
security doors. The Brush Creek Mine has 30-pound rail, and electrical and air
lines on both levels. The rail is in good condition. There is also a steel
corrugated equipment building and a small changing room for miners located on
the property.
Water normally accumulates from underground sources in the Brush Creek
Mine. This water can be pumped in sufficient quantity and quality for mining
operations and the Company anticipates that it will be sufficient to meet its
mining and milling needs. In addition to underground water, two streams flow all
year on the property.
The Brush Creek Mine is accessible by a graveled road maintained by Sierra
County. Snow removal is performed during the winter by the Company. Electrical
power is supplied by Pacific Gas and Electric Company, a public utility.
Gardner's Point and Pioneer Mines
The Gardner's Point and Pioneer Mines include two placer mines located on
the same parcel of land comprising approximately 700 acres. These mines are
approximately 10 air miles northwest of Downieville and three air miles east of
La Porte in Sierra County, California in the Port Wine Gold Mining Region. The
Gardner's Point and Pioneer Mines are approximately 12.5 air miles from the
Company's other mines. These mines consist of three patented claims, the
Pioneer, the Comet, and the Challenge, and two unpatented claims. The Company's
investment in this property is $1,084,325 at June 30, 1996, consisting of
$185,477 of land and land options, $770,327 of development costs, and $128,521
of mining equipment.
All of the unpatented claims in the property package are in good standing
with assessment work documents for 1996 filed with both the BLM in Sacramento
and Sierra County in Downieville. A new operating permit and a waste discharge
permit are required before full scale mining may begin at the Pioneer Mine. The
Company has no current plans to obtain such a permit.
Gold was first discovered in the area of the Gardner's Point and Pioneer
Mines on Rabbit Creek in 1850 at the approximate location of the present town of
La Porte. After 1885, drift mining continued along portions of the Port Wine
Tertiary Channel, but progressively diminished after the turn of the century. In
1934, renewed activity occurred as a result of an increase in the price of gold
mandated by the federal government. Following the outbreak of World War II,
however, the federal government brought a halt to gold mining activities.
In 1980, the higher price of gold led to the search for and leasing of the
Gardner's Point and pioneer Mines by Mr. L.F. Goodson and the Gardner's Point
Mine, a California Limited Partnership. Appealing characteristics of the
Gardner's Point and Pioneer Mines were the unusually large amount of flat
working space and areas of low overburden.
In 1985, the Brush Creek Joint Venture, consisting of the Company and two
other companies, purchased all patented and unpatented claims of the Gardner's
Point and Pioneer Mines, and it produced approximately 2,800 ounces of gold from
its operations before deciding in August of 1988 to suspend operations at the
Gardner's Point and Pioneer Mines and reduce operations to a care and
maintenance level. The Gardner's Point and Pioneer Mines were subsequently
purchased by the Company in connection with the change of control of the Company
in 1989.
The Gardner's Point and Pioneer Mines have a Yuba-Lowe trommel which
contains new interior screens and a water hutch. Additionally, the property has
a two-story gold recovery building which houses a large Deister table and
associated equipment for gold recovery. The Company spent approximately $100,000
to upgrade and improve water quality measures on these mines.
The Gardner's Point and Pioneer Mines are accessible year round by roads
maintained by Sierra County. However, the Company is responsible for snow
removal in the winter. Existing access to the Gardner's Point and Pioneer Mines
is from La Porte, California through the site of Queen City. It is also possible
to reach these mines
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ITEM 2 - PROPERTIES - (Continued)
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from Challenge, California through Union Hill. Access to the Gardner's
Point and Pioneer Mines for heavy equipment is by United States Forest Service
Roads from Strawberry Valley, California. Power is generated on the site of the
Gardner's Point and Pioneer Mines.
The Brush Creek Joint Venture submitted applications to Sierra County and
the U.S. Forest Service in March of 1987 to initiate production activity at the
Pioneer Mine. However, the authorities determined that an Environmental Impact
Report (EIR) was necessary before exploration permits could be granted. Sierra
County, acting as the lead agency, contracted with an engineering firm to
complete the study. The draft EIR has been completed, distributed to the public
and interested agencies, and comments have been returned and addressed by the
Company. A final EIR must be submitted to and approved by Sierra County before
production at the Pioneer Mine may begin. The Company has not submitted the
request to continue the EIR process, and does not intend to do so at this time.
Currently, the property is in a care and maintenance status.
Ruby Mine
In December of 1989, the Company issued 100,000 shares of its Common Stock
which it used to purchase an option to lease the Ruby Mine and to purchase
equipment located on the site. In March of 1990, the Company paid $50,000 to
extend the option period to April 30, 1990. In April of 1990, the Company issued
an additional 125,000 shares of its common stock in order to extend the option
period to June 30, 1990. The Company exercised the option on June 30, 1990 by
paying the owner $150,000 cash, which represents lease consideration of $50,000
and a $100,000 down payment on the purchase of the equipment. To complete the
equipment purchase, the Company agreed to pay an additional $100,000 in cash in
three equal semi-annual installments, which have been paid. The Company's
investment in this property is $4,554,575 at June 30, 1996, consisting of
$327,336 of land and land options, $2,251,714 of development costs, and
$1,975,525 of mining equipment.
Pursuant to the terms of the lease, which was most recently modified on
November 1, 1994, the Company must pay a 7-1/2% net smelter royalty on all
minerals produced from lode deposits and 10% on minerals produced from placer
deposits with a minimum lease payment of $10,000 per month through June 30,
2000, subject to an adjustment based on the Consumer Price Index. The lease may
be extended for two additional five-year periods or the property may be
purchased for $4,000,000 subject to adjustment based on the Consumer Price Index
payable by June 30, 2000. All payments made subsequent to July 1, 1995, to
acquire the lease/option and all payments made under the lease subsequent to
July 1, 1995, will be credited against the option purchase price. Performance
under the lease purchase agreement is secured by the Company's equipment used in
the mining operations on the leased premises.
The Ruby Mine is an underground placer and lode mine located between
Downieville and Forest City, California in Sierra County. The Ruby Mine consists
of two patented claims comprising approximately 435 acres and 37 unpatented
claims comprising approximately 1,150 acres. The mine encompasses four distinct
underground river channels and three known lode gold veins.
All of the unpatented claims in the property package are in good standing
with assessment work documents for 1996 filed with both the BLM in Sacramento
and Sierra County in Downieville. The patented claims of the Ruby Mine are fully
permitted for underground exploration, small scale development and small scale
production. However, a waste discharge permit is required and a plan of
operation must be filed with the U.S. Department of Forestry before operations
can be expanded beyond the current 225 tons-per-day.
Production began at the Ruby Mine in the late 1870's when approximately
50,000 ounces of gold were extracted from what became known as the Old Ruby
Channel. In the 1930's, the Ruby Mine was purchased by Clarence L. Best, who
produced gold from the mine until it was closed in 1942 by War Production Board
Order L- 208. High labor rates and a gold price freeze kept the Ruby Mine from
re-opening. In the 1950's, the Ruby Mine was sold and was subsequently mined by
small operators until the mid-1970's. In 1979, the mine was leased to
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<PAGE>
ITEM 2 - PROPERTIES - (Continued)
----------
Alhambra Mines, Inc. After limited rehabilitation, Alhambra Mines, Inc.
failed to make lease payments and the Ruby Mine reverted to its owner.
The majority of the historical production at the Ruby Mine has come from
underground placers. Since 1942 virtually no new ground has been opened and most
of the attention has been directed at the Wolf lode vein and the Big Bend area
of the Black Channel, a famous underground placer. Due to extensive overburden
of up to 700 feet on the property, the only way new reserves will be established
is from underground, utilizing mapping, sampling, and drilling techniques and by
opening new ground.
The Ruby Mine hosts a gold recovery washing plant with all associated
equipment, a mill building, and a separate compressor building in good
condition. The Ruby Tunnel has been rehabilitated, retimbered and refitted. The
underground workings include 30-pound mine rail and electrical and ventilation
equipment. The Ruby Mine has compressors, generators and an electric train with
sufficient haulage capacity to feed a 200 ton per-day-mill. There are 21 mine
ore cars and a Mancha locomotive in good condition on the property.
The Ruby Mine is accessible via State Highway 49 to Pliocene Road to the
Henness Pass paved road then via five miles of paved and gravel road. Power is
generated on the site.
The Company filed its plan of operation for the Ruby and Carson Mines with
the United States Forestry Department, and has obtained all necessary permits
for production and milling at the Ruby Mine of up to 225 tons of material per
day. The mine, if operated, however, has been operating at less than 225 tons of
material per day. From February 1992 when the Company began limited production
at the Ruby Mine to December 1992 when the Company ceased production due to
inclement weather, the Company milled approximately 7,300 tons of mineralized
material and recovered approximately 200 ounces of gold, an amount which is
inconsistent with historical production at the Ruby Mine in the early 1900's,
and is insufficient in total quantity to be a reliable representative sample of
the expected grade of the mineralized gravel. Consequently, no assurances can be
given that future production will result in grades of similar or historical
amount. Furthermore, the Company has not completed sufficient geological
activities and drilling to establish proven or probable ore reserves at the Ruby
Mine. The Company has no present intention of conducting further geological
exploration and drilling to establish ore reserves at the Ruby Mine at this
time.
From December 1992 when the Company ceased production at the Ruby Mine
until July 2, 1993, when the Company recommenced production, the Company
rehabilitated and re-timbered approximately one and one-quarter miles of
horizontal haulage tunnel supports and a 210 foot vertical shaft for mine
safety, built underground roads for use by diesel loaders recently purchased by
the Company, constructed a new sixty-foot steel head frame and installed a hoist
over the Lawry Shaft at the Ruby Mine, installed a complete underground
ventilation system and electrical system at the Lawry Shaft, constructed a new
waste water treatment system for use at the mill site, modified and enlarged the
structures and ore bins at the mill site, and removed two main mill and
warehouse structures at the Carson Mine.
The Company commenced production in the Lawry Shaft, a new area of the Ruby
Mine, on July 2, 1993, and in August 1993 recommenced production in the Black
Channel of the Ruby Mine where most of the production occurred between February
1992 and December 1992. The Company has completed the sixty foot steel head
frame at the Lawry Shaft and set-up electrical lines and constructed a hoist
house, with associated hoist equipment.
The Company recommenced production in the Lawry Shaft on June 26, 1994.
Underground programs consisted of driving exploration drifts towards potential
primary channels. Sampling programs were undertaken to allow the mining of
approximately 5,000 tons of material. The Company drove a total of approximately
430 feet downstream and 520 feet upstream in the Lawry Channels. The Lawry shaft
is currently under care and maintenance as the Company concentrates on its hard
rock targets.
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<PAGE>
ITEM 2 - PROPERTIES - (Continued)
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Rising Sun Mine
In December of 1989, the Company issued 10,000 shares of its common stock
for an option to lease the Rising Sun Mine. On June 30, 1990, the Company
exercised the option upon payment of $20,000 cash and entered into a five year
lease with an option to purchase. Pursuant to the terms of the lease, which was
most recently modified on November 11, 1994, the Company must pay a net smelter
royalty of 8% on all minerals produced with a minimum royalty of $4,590 per
month, through June 30, 2000, subject to an adjustment based on the Consumer
price index. The property may be purchased for $1,000,000 payable on or before
June 30, 2000, subject to adjustment based on the Consumer Price Index. All
payments made to acquire the lease/option and all payments made under the lease
will be credited against the option purchase price. The Company's investment in
this property is $139,091 at June 30, 1996, consisting of $9,111 of land and
land options and $129,980 of development costs.
The Rising Sun Mine is an underground lode gold mine located approximately
three miles southeast of Allegheny, California. It consists of four patented
claims comprising approximately 52 acres, three unpatented claims comprising
approximately 60 acres, and one placer claim comprising 10 acres.
All of the unpatented claims in the property package are in good standing
with assessment work documents for 1996 filed with both the BLM in Sacramento
and Sierra County in Downieville. There are currently no existing permits to
mine either the patented or unpatented claims.
The Rising Sun Mine produced gold as early as 1882. By 1883 two tunnels had
been driven and production is estimated to have exceeded 3,000 ounces of gold.
The Rising Sun Mine closed after an attempt to design and construct a mill
failed in the 1890's. During the early 1960's the Mine re-opened and
considerable drilling and raising was conducted in an effort to intersect the
Rising Sun Vein and Cedar Vein. Mining ceased as custom milling became
prohibitively expensive. In 1960, the Rising Sun Mine was acquired by the Rising
Sun Development Company. In 1973, G.R. Beechel completed a mapping program and
compiled a list of recommendations for further work.
There is a generator, compressor, rock drills, and a mucking machine on the
property. The overall ground condition of the mine is good. Since the early
1960's, the Rising Sun Mine has operated on a care and maintenance level only.
Currently, however, the Company is driving around a caved in area in an attempt
to get to the face of the drift where high-grade assays have been reported. The
Company also is attempting to find the potentially high grade intersection of
the Belmont and Rising Sun veins.
The Rising Sun Mine is accessible via Kanaka Creek Road, a graveled road.
The property will require on-site generators to supply power.
Carson Mine
The Carson Mine is located in Sierra County, California, on the western
slope of the Sierra Nevada Mountain Range. Access to the Carson Mine is by a two
mile dirt road, which connects the Henness Pass Road, an all weather paved road.
The nearest large population center is Grass Valley, about 40 miles south of the
site. Downieville is located two miles north of the Carson Mine. Allegheny,
California is approximately four miles south of the Carson Mine. The Carson
Mine, also known as the City of Six Mine, is an underground mine and consists of
21 unpatented lode claims and two unpatented placer claims comprising
approximately 550 acres. The Company's investment in this property is $3,294,424
at June 30, 1996, consisting of $2,199,858 of land and land options, $1,051,731
of development costs, and $42,835 of mining equipment.
The City of Six gravel deposit was discovered at the site of the Carson
Mine in the 1850's. The property was operated as a hydraulic pit until 1886,
when hydraulic mining was stopped in California by judicial mandate. From 1860
to 1879, the gravel was worked underground by drift mining. Reports from 1879
indicate that a channel had been tunneled from the City of Six pit to Rock
Creek, a distance of about one mile.
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<PAGE>
ITEM 2 - PROPERTIES - (Continued)
----------
Work began on the Carson Mine in the mid 1920's. By 1930, two adits had
been driven on the Carson Mine vein; the upper adit 925 feet and the lower adit
about 2,600 feet. The two adits are separated vertically by 460 feet and on the
dip by 500 feet. From 1932 to 1942, a 500 foot raise was constructed from the
lower level to the upper level. The raise was used as an ore pass, allowing ore
mined on the upper level to be transported from the lower level.
A 30 foot winze is operable in the same areas as the raise. The winze
accesses the vein about 25 feet downdip from the upper level. The vein has been
drifted on for 60 feet to the south from the winze. A 14-foot cross cut connects
the main raise with the winze sub level. The main rise is open from the winze
sub level downward, for about 350 feet on the vein. The bottom 125 feet of the
raise above the lower level is plugged with ore and muck as is that above the
upper level. The underground portion of the property has 20-pound mine rail in
good condition.
In the early 1980's, the Carson Mine was sold to Golden Lion Mining
Corporation. Golden Lion's work consisted of rehabilitation of the upper adit,
construction of a 30 foot winze in the upper adit, and limited stopping both
above and below track level in the upper workings. In 1986 and 1987, a 50
tons-per-day gravity circuit mill was constructed on the property. In 1988,
Golden Lion Mining Corporation leased the Carson Mine to the Ireland Mining
Corporation, which operated the Carson Mine to July of 1990 when it was acquired
by the Company.
On July 31, 1990, the Company acquired the Carson Mine, together with the
improvements, inventory and equipment located on the property, from Golden Lion
Mining for a total consideration of approximately $2,299,000. The consideration
paid to Golden Lion Mining consisted of $50,000 cash, an $89,000 promissory note
due August 15, 1990, 502,070 shares of common stock, and an agreement to deliver
61.3 ounces of gold bullion by August 1, 1992. In addition, Golden Lion Mining
had forward sold 2,000 ounces of gold to four individuals. As further
consideration, the Company assumed Golden Lion Mining's forward sell obligation
by issuing a total of 781,072 shares of its common stock. Finally, the Company
issued 976,000 shares of common stock to Ireland Mining Corporation in
consideration for Ireland Mining Corporation terminating its lease and option to
purchase the property with Golden Lion Mining.
All of the unpatented claims in the property package are in good standing
with assessment work documents for 1996 filed with both the BLM in Sacramento
and Sierra County in Downieville. However, a waste discharge permit is required
and a plan of operation must be filed with the U.S. Department of Forestry
before full scale mining may begin.
The Carson Mine previously had a 50 tons-per-day gravity flow mill and mill
housing which was in need of engineering and structural work to meet current
building codes. A large seven-bedroom cabin, a smaller cabin that has been
improved and a mobile home are currently located on the Carson Mine property.
Although not currently planned for production in the next fiscal year, when the
Company does begin production at the Carson Mine it intends to mill the ore at
the Ruby mill site. Power at the Carson Mine is supplied by Pacific Gas and
Electric Company, a public utility.
The upper level of the Carson Mine is fully supplied and operational for
small scale operations. Air and water lines are installed throughout and
adequate natural ventilation is assisted by a 12 foot fan. This level is
serviced by a 925 foot traced adit, the entire length of which is open. A raise,
which was once open to the surface (125 ft.), is present about 600 feet in by
the portal. A north-south subdrift is present off the raise for 150 feet.
On July 24, 1990, the Company obtained from an independent mining
laboratory 64 channel samples of ore from the Carson Mine. Each sample weighed
approximately 25 pounds and had an average width of over 4.6 feet. Samples taken
yielded an overall uncut weighted average of 5.45 ounces of gold per ton. These
substantial-grade ore shoots were tested in two levels with a distance of 400
feet vertical separation. All of the assays occurred within a strike length of
125 feet. On August 29, 1990, the Company received confirmation of these
substantial grades from a separate independent mining laboratory. The
confirmation report consisted of nine channel sample checks of ore
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<PAGE>
ITEM 2 - PROPERTIES - (Continued)
----------
taken from the Carson Mine. Although no assurances can be given that these
substantial grades will continue through the length of the entire vein, the
strike length potential of this vein is believed to be 4,100 feet and is thought
to extend into additional ground currently controlled by the Company. In order
to determine the magnitude of its discovery and to evaluate its findings further
the Company has completely mapped and sludge drilled the vein system in the
exposed portions of the Carson vein. Because the Company decided to begin
production at the Ruby Mine, the Company postponed further development at the
Carson Mine.
The Company also has 16 lode claims named the BC Claims which are located
on the northern border of the Carson Mines.
High Commission Mine
In September of 1990, the Company entered into an agreement to purchase the
High Commission Mine for 50,000 shares of the Company's common stock and $30,000
in cash. The Company's investment in this property is $107,993 at June 30, 1996,
consisting of $101,875 of land and land options, and $6,118 of development
costs.
The High Commission Mine is located in the Allegheny-Forest-Downieville
mining districts in Sierra County, California, approximately one-half to two
miles northeast of Downieville. The High Commission Mine is an underground mine
and consists of 22 unpatented lode claims comprising 440 acres and five
unpatented placer claims comprising 500 acres. The unpatented claims in the
property package are in good standing with assessment work documents filed with
both the BLM in Sacramento and Sierra County in Downieville. Its current
configuration is a consolidation of four past producing gold mines. The High
Commission, the Big Ledge, the Mexican, and the Golden Star.
The High Commission Mine was discovered in 1888 and produced approximately
1,234 ounces in a bunch of arsenopyrite from the sinking of an 18-foot shaft. In
addition, approximately 177 ounces were produced about 1914.
Three veins were developed on the property, the High Commission, Big Ledge,
and Mexican. The High Commission has a 280-foot tunnel with a quartz vein
averaging 4.5 feet and carries free gold and arsenopyrite. The strike was over
three miles on the surface. The Big Ledge vein is 11 feet wide, carries free
gold and no sulphide, and parallels the High Commission vein. The subsequently
developed Mexican vein parallels and is 300 feet in length. Both tunnels were in
pay shoots, with open cuts occurring over 900 feet. Quartz fissure veins occur
along a slate foot wall and porphyry hanging wall contact which carry free gold,
arsenopyrite and pyrite mineralization. The veins vary from two to fifteen feet
in width and the parallel vein 40 feet west averages four to five feet in width.
The strike is north, dips 70 to 80 degrees east, and has a length on surface of
3,000 feet.
The geology of the property consists mainly of the Calaverous Formation,
Carboniferous Period, comprised of slate, quartzite and porphyry. The quartz
veins carrying the free gold mineralization occur along the porphyryslate
contact within a 300 to 400-foot shear zone associated with the Melonese Fault
Zone. The High Commission, Big Ledge and Mexican veins all occur within this
wide contact rock formation. The veins vary from a few inches up to 20 feet in
width, striking mainly a north-south direction and dipping 70 to 80 degrees
east. Another vein formation strikes northeast and dips 60 degrees northwest.
The zone appears to be altered and mineralized.
The High Commission Mine is accessible by State Highway 49. The property
will require on-site generators for power. Because of the Company' focus on the
Ruby Mine, the Company has put the High Commission on a care and maintenance
program.
Kate Hardy Mine
The Kate Hardy Mine was discovered in 1860 and is an underground lode gold
mine located in Sierra County, California, and is approximately three miles
south of the Brush Creek Mine. The Kate Hardy Mine consists
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<PAGE>
ITEM 2 - PROPERTIES - (Continued)
----------
of two patented claims comprising approximately 42 acres and 15 unpatented
claims comprising approximately 320 acres. The Company's investment in this
property is $156,456 at June 30, 1996, consisting of $58,667 of land and land
options, and $97,789 of development costs.
All of the unpatented claims in the property package are in good standing
with assessment work documents for 1996 filed with both the BLM in Sacramento
and Sierra County in Downieville. The Kate Hardy Mine has no permits for mining
operations.
In 1957, Richmond Flatland, Sr. acquired the Kate Hardy Mine. In the mid to
late 1970's, various attempts were made to rehabilitate the Kate Hardy Mine. On
June 30, 1992, the Company entered into a lease effective March 23, 1992, in the
form of a mining option agreement for a term of five years expiring March 22,
1997. The Company paid a $50,000 payment (initial option payment) upon the
execution of the agreement; and during the term of the lease, must pay $5,500
per month for each month during the first year; $6,500 per month during the
second year; $7,500 per month during the third year; $8,500 per month during the
fourth year; and $9,500 per month during the fifth year. In addition, the
Company must pay a 6% net smelter royalty on all minerals produced. The option
purchase price for the mine is $1,500,000 less 75% of all option payments paid
up to a maximum of $750,000.
The Kate Hardy Mine contains a quartz vein on a reverse fault. The vein is
traceable along the surface for approximately 1,500 feet and disappears under
tertiary lava both to the north and the south. The vein varies in width from a
few inches to over 55 feet. Dykes of gabbro and serpentine cut the vein
irregularly. Considerable slate has been replaced by carbonate close to, and
within, the vein. Mariposite is erratic in distribution and is not necessarily
confined to the exposed serpentine zones. Historically, the best gold production
has come from the foot wall and hanging wall portions of the vein. The vein core
is largely barren bull quartz. Sulphide minerals associated with gold in the
vein include arsenopyrite, pyrite, galena and trace sphalerite.
Development has been carried out over 2,700 feet of strike length on the
Principal No. 1 North and South Drifts. The vein has been developed on five
levels, two of which are accessed by an internal shaft. Stopping has been
carried out with three principal blocks over a vertical range of 600 feet.
The Kate Hardy mine has been in a care and maintenance level since 1975.
The site has a 100 tons-per-day gravity flow mill which requires some upgrading
and repair. The underground workings in the south adit are in fair condition
with appropriate 20-pound mine rail and all electrical and ventilation utilities
installed. The north adit is caved-in for approximately 75 feet and will have to
be rehabilitated with new timbering before access to the north section of the
property is permitted. There is a corrugated mill building in fair condition and
an equipment building in fair condition on the property.
The Company has been permitted to dewater the mine. This will allow the
Company access to approximately 16,000 tons of ore and will enable the Company
to explore the O'Donnell winze and the five existing ore shafts.
The Kate Hardy Mine is accessible by Mountain House Road, a graveled road.
Power is supplied by Pacific Gas and Electric Company, a public utility.
Omega Mine
The Omega Mine is an underground drift placer mine in Sierra County,
California, and is contiguous with the Kate Hardy Mine and is covered by the
Kate Hardy lease referred to above. The Omega mine consists of seven unpatented
claims comprising approximately 440 acres.
All claims in the property package are in good standing with assessment
work documents for 1996 filed with both the BLM in Sacramento and Sierra County
in Downieville. However, a waste discharge permit is required and a plan of
operation must be filed with the U.S. Department of Forestry before full scale
mining operation may begin. The Company has no current plans to obtain such a
permit or file such a plan.
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<PAGE>
ITEM 2 - PROPERTIES - (Continued)
----------
The Omega Mine was active during the 1920's and 1930's when a labyrinth 9of
tunnels exceeding 2,000 feet was driven in the underlying serpentine mainly in
pursuit of high grade pay streaks. Raises were driven to access stopping areas
in the gravel. In 1957, Richmond Flatland, Sr. acquired the Omega mine. There
was no activity on the claims until 1980, at which time the underground workings
were completely remapped. Most of the gravel was found to be of igneous origin
containing a small percentage of white quartz cobbles. Cobbles vary from a few
inches to twelve inches in diameter and are tightly cemented by sand and silt.
Before any production may begin at the Omega Mine, the underground workings
will have to be retimbered. There is no equipment at the mine site at the
present time.
The Omega Mine is accessible by Mountain House Road, a graveled road. Power
is supplied by Pacific Gas and Electric Company, a public utility.
Unpatented Property Interests
The Company has acquired rights to explore for and produce minerals on
federally owned lands and paid all required fees to maintain the unpatented
claims. The Company acquired these rights through the acquisition of previously
located mining claims from the claimant or through the location of unpatented
mining claims upon unappropriated federal land pursuant to procedures
established by the General Mining Law of 1872, the Federal Land Policy and
Management Act of 1976, and various state laws. These referenced laws generally
provide that a citizen of the United States, including a corporation, may
acquire a possessory right to explore for and to develop and produce valuable
mineral deposits discovered upon unappropriated federal lands, provided that
such lands have not been withdrawn from mineral location. Withdrawn lands would
include, for example, lands included in national parks and military reservations
and lands designated as part of the National Wilderness Preservation System
(NWPS).
The location of a valid mining claim on federal lands requires the
discovery of a valuable mineral deposit, the erection of appropriate monuments,
the posting of a location notice at the point of discovery, the marking of the
boundaries of the claim in accordance with federal law and the laws of the state
in which it is located, and the filing of a notice or certificate of location
and a map with the BLM and the real property recording official of the county in
which the claim is located. Failure to follow the required procedures may render
the mining claim void. If the statutes and regulations for the location of a
mining claim are complied with, the locator obtains a valid possessory right to
explore for, develop and produce minerals from the claim. This property right
can be freely transferred and is protected against appropriation by the
government without just compensation. Also, the claim locator acquires the right
to obtain a patent (or deed) conveying fee title to his claim from the federal
government upon payment of fees and compliance with certain additional
procedures.
Unpatented mining claim interests possess certain unique vulnerabilities
not associated with other types of property interests. For example, in order to
maintain each unpatented mining claim, the claimant must annually perform not
less than $100 worth of work or improvements on or for the benefit of the claim
and must file with state and federal authorities an affidavit attesting to the
performance of such work. Although currently not a requirement, the Company
feels it should continue to file proofs of labor to prevent adverse claimants
from occupation of the claim and to have a proper chain of title should the
Company decide to apply for patents. In addition, the Bureau of Land Management
currently assesses a $100 per claim rental fee which, if not paid annually
before August 31 of each year, invalidates the unpatented claims. In the fiscal
year ended June 30, 1996, the Company paid approximately $16,000 of rental fees
to the Bureau of Land Management to validate said claims. Failure to perform
such work will render the claim subject to relocation by third parties and
constitutes abandonment of the claim. Further, because mining claims are often
located with less then sophisticated surveying techniques, great difficulty may
arise in determining the validity and ownership of specific mining claims.
Moreover, under applicable regulations and court decisions, in order for
unpatented mining claims to be valid against a governmental challenge, the
claimant must be able to prove that the mineral deposit on which the claim is
based can be mined at a profit. Thus, it is conceivable that, during times of
declining metal prices, claims that were valid when located could be invalidated
by the federal government.
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<PAGE>
ITEM 3 - LEGAL PROCEEDINGS
-----------------
During the fiscal year ended June 30, 1996, the Company entered into two
significant settlement agreements. The settlement agreements resolve claims
against the Company made by Zuri Invest A.G., et. al., and the Royal Bank of
Scotland, et. al. The Company has filed complaints against the Andersons and
parties and entities related to the Andersons which were allegedly involved in
the transactions related to the settlements with Zuri Invest A.G. and Royal Bank
of Scotland.
Additionally the Company went to trial against Consolidated Sierra Gold
Mines, Inc. ("CSGM"), and won a $30,000 jury verdict in its cross-complaint
against CSGM.
With that result, all material litigation against the Company was resolved.
The Company has been requested pursuant to a non-public informal inquiry by
the staff of the Securities and Exchange Commission, to provide information to
the staff of the Commission regarding the Company's financing activities in
reliance upon Regulation S under the Securities Act. The Commission has advised
the Company that the inquiry should not be construed as an indication by the
Commission or its staff that any violations of law have occurred, nor should it
be considered a reflection upon any person.
The following is a detailed historical perspective of significant actions
involving the Company, including those summarized above.
On August 9, 1991, Zuri Invest A.G., Andre Michaels and Peter Woodfield
(the "Plaintiffs") filed a complaint against the Company, Euro Canadian
Securities Limited, Georges Benarroch, Simone Anderson, James Anderson and
Capitol Bank Sacramento and were seeking 1,500,000 shares of the Company's
Common Stock previously owned by Simone Anderson and subsequently sold to Euro
Canadian, which were allegedly promised to Plaintiffs in connection with the
Company's equity financing in 1990. In a stipulated settlement, Euro Canadian
and Georges Benarroch agreed to defend and indemnify the Company in any lawsuit
filed by the Plaintiffs claiming title to such shares. Accordingly, the Company
tendered its defense in this lawsuit to Euro Canadian and Georges Benarroch who
agreed to provide the Company with such defense. Mr. Benarroch defaulted in the
proceeding and although the Company had the commitment from Mr. Benarroch, the
Company engaged its own counsel and vigorously defended itself in this
litigation.
Simone Anderson also filed a counterclaim in the Zuri Invest action against
the Royal Bank of Scotland, seeking rescission of 3,250,000 shares (pre-split)
of Common Stock transferred to the Royal Bank of Scotland by Simone Anderson in
connection with certain financing on behalf of the Company. After the Royal Bank
of Scotland was served with the complaint, an order of default was entered
against it. Based on the order of default, representations made by Simone
Anderson, Ms. Anderson's agreement with the Company to indemnify it from any
adverse claims, and the deposit of $200,000 with the Company to secure
performance under the indemnity agreement, the Company transferred the 3,250,000
(pre-split) shares into the name of Simone Anderson and reserved an additional
3,250,000 shares of Common Stock as a contingency for future adverse claims.
Thereafter, the Company, its transfer agent, and Simone Anderson received notice
from the Royal Bank of Scotland, as nominee, demanding return of the 3,250,000
shares and further threatening legal action if the shares were not returned.
On December 14, 1995, the Company entered into an agreement (the "Zuri
Agreement") with Zuri Invest A.G., Andre Michaels and Peter Woodfield in
connection with the Zuri Invest action to partially satisfy the joint and
several judgment entered in the Zuri Invest action against the Company and
Simone Anderson and James Anderson (collectively, the "Andersons") on October
31, 1995 (the "Judgment"). The Zuri Plaintiffs agreed, subject to the receipt of
the consideration described below, not to seek any further recovery directly
from the Company on the Judgment, and to release the Company from any further
liability thereunder. The Zuri Plaintiffs also agreed not to pursue recovery
against the Andersons on the Judgment if it is judicially determined that the
Andersons have indemnification rights against the Company with respect to the
Judgment. The Company issued and delivered to each of Woodfield and Michaels
250,000 shares of the Company's Common Stock. The Company issued 600,000 shares
of the Company's Common Stock to Zuri Invest and delivered 200,000 of such
shares to Zuri Invest on or about
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<PAGE>
ITEM 3 - LEGAL PROCEEDINGS - (Continued)
-----------------
April 10, 1996, and 200,000 shares on or about June 11, 1996. The remaining
200,000 shares were held in escrow for delivery to Zuri Invest on or about
September 9, 1996.
As security for the Company's obligations to issue and deliver the above
described shares of Common Stock, the Company issued a promissory note in the
amount of $1.2 million payable to the Zuri Plaintiffs. The note is secured by a
deed of trust on all real property and patented and unpatented mining claims
owned by the Company. Pursuant to the Zuri Agreement, the principal amount of
the note shall be reduced as the shares issued to the Zuri Plaintiffs are sold,
dollar for dollar by the gross proceeds generated from such sales.
Pursuant to the Zuri Agreement, the Company also assigned to the Zuri
Plaintiffs an interest (33% of the Company's 60% interest) in claims asserted
against the Andersons and their controlled corporations in the action entitled
Brush Creek Mining and Development v. F. James Anderson, et al., currently
pending in the United States District Court, Northern District of California.
On December 13, 1995, the Company entered into an agreement (the "Royal
Bank Agreement") to settle the action by the Royal Bank of Scotland by
delivering to the plaintiffs in such suit (the "Royal Bank Plaintiffs") 216,667
shares of the Company's Common Stock and cash in the amount of $241,000. The
Company also assigned to the Royal Bank Plaintiffs a portion of its interest in
any total recovery from claims against the law firm formerly known as Bartel,
Eng, Miller & Torngren, the Company's formal legal counsel ("Bartel, Eng"). On
December 13, 1996, the Company is further required to deliver to each of the
Royal Bank Plaintiffs, at his or her option, additional shares of the Company's
common stock or additional cash. The number of shares of Common Stock or the
amount of cash each Royal Bank Plaintiff is entitled to receive is based on the
amount of his or her pro rata interest in amounts paid by the Company pursuant
to the Royal Bank Agreement. If all Royal Bank Plaintiffs elect to receive
Common Stock the Company will be required to issue and deliver a maximum of
300,000 shares in the aggregate and if all Royal Bank Plaintiffs elect to
receive cash, the Company will be required to deliver cash in the maximum
aggregate amount of $600,000.
The Company's obligations under the Royal Bank Agreement are secured by (1)
a deed of trust on all real property and patented and unpatented mineral claims
owned by the Company; (2) a first priority security interest in all of the
Company's right, title and interest in and to any and all goods, products,
yield, receivables, inventory (including any gold from any mines), any and all
exploration and drilling information, data, maps, reports or surveys, and any
and all income and proceeds derived from the Company's mining operations on
property which the Company presently or subsequently owns or leases; (3) a
first-priority security interest in the Company's right, title and interest in
and to any total recovery by the Company on the claims against Bartel, Eng; and
(4) a stipulated judgment in the amount of $3,250,000. The priority and other
matters related to the enforcement of the respective deeds of trust executed by
the Company pursuant to the Zuri Agreement and the Royal Bank Agreement are
determined by an intercreditor agreement between the Zuri Plaintiffs and the
Royal Bank Plaintiffs.
The Royal Bank Agreement provides that an uncured default under the Zuri
Agreement constitutes a default under the Royal Bank Agreement and that an
uncured default under the Royal Bank Agreement constitutes a default under the
Zuri Agreement.
The Company has registered the 1,616,667 shares of Common Stock issued and
delivered pursuant to the Zuri Agreement and the Royal Bank Agreement, which
represents approximately 10 percent of the total outstanding shares of the
Company's Common Stock as of June 30, 1996. This number includes the 300,000
additional shares that may be issued pursuant to the Royal Bank Agreement.
On June 18, 1996, Hinton & Alfert was substituted in as counsel for the
Company in the case Royal Bank of Scotland et. al. v. Brush Creek Mining &
Development, et. al. in the United States District Court for the Eastern
District, Case Number CV-S-94-0962 GEB GGH. Hinton & Alfert represent the
Company in its cross-complaint against attorneys Bartel, Miller, Eng & Torngren
for professional negligence and against Simone Anderson for contractual
indemnity.
-17-
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS - (Continued)
-----------------
On October 24, 1994, the Company filed an amended complaint against F.
James Anderson, Simone Anderson, Edward M. Lawson, Consolidated Sierra Gold
Mines, Inc. ("CSGM"), Independent Sierra Gold Mines, Inc. ("ISGM"), Bartel, Eng,
Miller & Torngren, attorneys, Robert Sibthorpe, Coopers & Lybrand and Yorkton
Securities as defendants in an action to recover damages. The suit was filed in
the United States District Court for the Northern District of California as Case
No. C94-3487 (the "Federal Action"). On April 28, 1995, the Company filed a
third amended complaint which seeks to recover damages against James and Simone
Anderson for breach of fiduciary duty, for violations of Rule 10b-5 and 16(b),
and for violations of California Corporations Code Section 25400(d) and Section
25401. The lawsuit seeks to recover damages against Edward M. Lawson, Robert
Sibthorpe and Yorkton Securities, Inc. for breach of fiduciary duty. The lawsuit
seeks to recover damages against James and Simone Anderson, ISGM, CSGM, Robert
Sibthorpe, and Yorkton Securities, Inc. for intentional and negligent
misrepresentation. The lawsuit seeks to recover damages against the firm of
Bartel, Eng, Miller & Torngren based upon breach of fiduciary duty and
negligence claims. The law firm of Bartel, Eng, Linn & Schroder has (as
successor in interest to Bartel, Eng, Miller & Torngren) filed a counterclaim in
this litigation seeking recovery from the Company of legal fees totaling
approximately $95,000. The accounting firm of Coopers & Lybrand has been
dismissed as a defendant from the litigation without prejudice.
As to the progress of the case to date, an initial round of discovery has
been completed. On August 12, 1996, defendants Yorkton Securities and Robert
Sibthorpe filed a joint Motion for Summary Judgment. The hearing on that motion
is set for October 11, 1996. There has been no trial date set.
On November 3, 1994, the Company was served a complaint filed in Superior
Court of the State of California in and for the County of Nevada, Case No.
52943, by CSGM for amounts claimed to be due and owing by the Company. The
complaint seeks to recover $335,000 pursuant to an alleged open book account and
$950,000 pursuant to fees and expenses which CSGM allegedly incurred on behalf
of the Company for general financial advice and advice concerning mergers and
acquisitions.
On April 4, 1996, a jury returned a verdict in favor of the Company in the
action by CSGM. In addition, the jury returned a verdict against CSGM in favor
of the Company in the amount of $30,000 on the Company's cross-action. Following
the verdict, the Company filed a motion to pierce the corporate veil of CSGM,
which motion was heard on June 7, 1996. The Company's motion was granted and
judgment on the verdict was entered. As a result, F. James and Simone Anderson
are personally liable for the judgment obtained by the Company against
Consolidated Sierra Gold Mines, Inc.
On November 7, 1994, the Company was served with a complaint filed in the
Superior Court of the State of California in and for the County of Sacramento,
Case No. 543926, by James Anderson and Simone Anderson for amounts claimed to be
due and owing by the Company. The complaint sought to recover $58,821 and
unspecified further sums they have incurred or will incur in legal fees and
costs in providing a defense in the Zuri Invest litigation. The Company has
entered into a settlement in this matter whereby the Company has paid the past
legal fees incurred by Mr. and Mrs. Anderson and has agreed to pay the legal
fees they continue to incur in defending themselves in the Zuri Invest
litigation. On February 16, 1996, this agreement became a stipulated judgment
which concluded the action.
On February 8, 1996, the Company filed a complaint against F. James
Anderson and Simone Anderson in Superior Court of the State of California, in
and for the County of Sacramento, Case No. 96AS 00513 (the "Sacramento Action").
The complaint seeks (a) judicial determination and declarations that the Company
(1) has no further obligations to advance defense fees and costs incurred by the
Andersons in connection with the Zuri litigation, including on the Andersons'
appeal of that judgment; (2) is entitled to recoup defense fees and costs
allocable to the Andersons' defense of claims in the Zuri Invest litigation for
which they were found liable; (3) is not required to indemnify the Andersons for
their liability in the Zuri Invest litigation; (4) has no duty or obligation to
the Andersons to account for, replenish, and/or return monies to or pay interest
on the $200,000 provided by the Andersons as partial indemnification to the
Company in connection with the Royal Bank litigation; and (5) is entitled to
have all amounts returned to the Company from the $200,000 which were disbursed
for the purposes other than to indemnify
-18-
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS - (Continued)
-----------------
the Company such that the Company receives the full net benefit of the
$200,000, and (b) equitable indemnification to collect from the Andersons their
proportionate share of the judgment in the Zuri Invest litigation.
On April 4, 1996, the Company was served with the Andersons' answer to the
Sacramento Action and their cross-complaint against the Company. The answer
generally denied the allegations of the Company's complaint and asserted various
affirmative defenses. The cross-complaint seeks judicial determination and
declarations that the Company (1) is obligated to advance the Andersons' defense
costs (including costs of appeal) in the Zuri litigation and defense costs in
the Federal Action and (2) is obligated to indemnify them from the judgment in
the Zuri Invest litigation and any judgment that might be rendered against them
in the Federal Action.
Also, on April 4, 1996, the Company was served with a motion by the
Andersons for summary adjudication of two of their cross claims which would have
forced the Company to advance the Andersons' defense cost in the Zuri litigation
and the Federal Action. On May 3, 1996, the Andersons' motion was heard by the
superior court and denied.
The Company answered the Andersons' cross complaint on May 6, 1996
generally denying the allegations and asserting various defenses. The Company
also anticipates amending its original complaint to assert an additional claim
to hold the Andersons liable for the entire amount of the Royal Bank of Scotland
settlement.
The Company has been requested pursuant to a non-public informal inquiry by
the staff of the Securities and Exchange Commission (the "Commission") to
provide information to the staff of the Commission regarding the Company's
financing activities in reliance upon Regulation S under the Securities Act. The
Commission has advised the Company that the inquiry should not be construed as
an indication by the Commission or its staff that any violations of law have
occurred, nor should it be considered a reflection upon any person.
The Company is a party to other various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the business or financial position of the Company.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30, 1995
Liquidity and Capital Resources
At June 30, 1996, the Company had working capital deficit of $2,328,674, a
decrease in working capital of $2,181,751 as compared to a working capital of
$146,923 at June 30, 1995. The decrease in working capital was due to the
expenses associated with opening several new areas of the Ruby Mine for
hard-rock mining, litigation fees and expenses, and a litigation settlement of
$2,389,668.
The mining industry is capital intensive. On or about the beginning of the
1995-1996 fiscal year, the Company estimated its mining development and
operating costs in the Lawry, Irene and Wolf sites at the Ruby mine to be
approximately $4 million for the fiscal year ended June 30, 1996. However, due
to increased costs associated with litigation the Company's operating costs were
higher than originally estimated $4,010,966 for the fiscal year ended June 30,
1996. During the fiscal year ended June 30, 1996, the Company raised $6,875,416
from the sale of securities pursuant to Regulation S under the Securities Act of
1933 as amended ("Securities Act"). The shares of Common Stock sold in such
offerings were sold at a discount of between 35% and 50% of the closing bid
price of Common Stock on the day before the sale. At June 30, 1996, the Company
had a working capital deficit of $2,328,674 and had no material revenues from
mining operations. Additional financing will be required in order for the
Company to cover its mining and development costs in fiscal 1996-97 and to
engage in full scale mining operation. At this time, the Company has no
definitive plans regarding additional financing, but believes that it will
-19-
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS - (Continued)
---------------------
likely be obtained through equity financing such as stock offerings or
joint ventures. No assurances can be given that the Company will be able to
raise cash from additional financing efforts and, even if such cash is raised,
that it will be sufficient to satisfy the Company's capital requirements. If the
Company is unable to obtain sufficient funds from future financings and/or
operations, the Company may not be able to achieve its business objectives and
may have to scale back its development plans. In addition, the Company may have
to sell its assets in order to meet its obligations and may lose some of its
properties for failure to make lease payments. In such event, the Company may be
required to seek protection under the bankruptcy laws which will have a material
adverse impact on the Company and the market value of the Common Stock.
During the fiscal year ended June 30, 1996; the Board of Directors approved
options to purchase 747,000 shares of the Company's Common Stock, ratified the
settlement for the Zuri-Invest and the Royal Bank of Scotland matters, and
raised $6,875,446 from the sale of 6,788,800 shares pursuant to Regulations S.
Such shares were sold at a discount of between 35% and 50% of the closing bid
price of the Common Stock on the day before the sale.
The Company estimates its mining development and operating costs to be
approximately $4 million for the fiscal year ending June 30, 1997. The majority
of the funds will be used for operations in the Ruby Mine, and at the Lawry,
Irene and Wolf sites. Additional financing will be required to perform the
intended work at the Ruby Mine. There can be no assurance that the Company will
be able to obtain such financing or that financing will be obtained on terms
favorable to the Company. In the event the Company is unable to obtain
additional financing, the Company may scale back its operations or sell assets
which could adversely affect production and the Company's business objectives.
Results of Operations
The Company had a $9,270,102 net loss for the fiscal year ended June 30,
1996, compared to a net loss of $4,671,396 for the fiscal year ended June 30,
1995. This loss was due to an increase in mining expenses, legal fees and
expenses and a litigation settlement of $2,389,668.
Fiscal Year Ended June 30, 1995 Compared with Fiscal Year Ended June 30, 1994
Liquidity and Capital Resources
At June 30, 1995, the Company had working capital of $146,923, a decrease
in working capital of $1,125,341 as compared to working capital of $1,272,264 at
June 30, 1994. The decrease in working capital was due to the expenses
associated with opening several new areas of the Ruby Mine for hard-rock mining
in several of the Company's existing mines.
The Company estimated its mining development and operating costs to be
approximately $3 to $3.5 million for the fiscal year ended June 30, 1995. Actual
development and operating costs were $4,010,966. The Company raised $6,875,416
from the sale of securities pursuant to Regulation S under the Securities Act.
The majority of the funds were used for the operations of the Ruby, Peavine,
Rising Sun and Kate Hardy mines, with emphasis on operations of the Ruby Mine.
The Company expected revenues from current operations to increase. Revenues from
operations were not sufficient. Additional funding was needed to perform the
intended work at the Ruby Mine. The Company was able to fund continued
operations from sales of Common Stock, so it met its long-term liquidity
requirements and kept its mining properties in production.
During the fiscal year ended June 30, 1995; (1) the Board of Directors
approved options to purchase 29,000 shares of Common Stock for key employees;
(2) G. Michael Pickering resigned as President as disclosed in the Company's
Form 8-K filed September 26, 1994; (3) Senator Edward Lawson resigned as a board
member, as disclosed in the Company's Form 8-K dated November 22, 1994; (4)
Michael Henrick, P.Geo., was appointed as President as disclosed
-20-
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS - (Continued)
---------------------
in the Company's Form 8-K filed October 19, 1994 and resigned as President
as disclosed in the Company's Form 8-K dated June 16, 1995; (5) two stockholders
and two directors loaned funds to the Company in an aggregate amount of
$143,821, which were repaid in full; and (6) the Company raised $3,696,457
through the sale of Common Stock pursuant to Regulation S under the Securities
Act of 1933.
Results of Operations
The Company had a $4,671,396 net loss for the year ended June 30, 1995,
compared to net income of $136,625 in the fiscal year ended June 30, 1994. This
loss was due to an increase in mining expenses and also the fact that a
$4,232,000 legal settlement was received in the prior year.
General and administrative expenses decreased by $856,109 due primarily to
the issuance in 1994 of 100,000 shares of the Company's Common Stock from the
prior fiscal year pursuant to a service agreement with James Anderson which was
treated as an expense. General mining and exploration costs increased $1,070,398
due primarily to increased pre-production at the Ruby Mine.
-21-
<PAGE>
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
James S. Chapin has been a director of Brush Creek since April 1994. Since
April 1994, Mr. Chapin also served as the Chief Executive Officer and Chief
Financial Officer of Brush Creek. Prior to working with Brush Creek, Mr. Chapin
was a registered representative with the Hartford, Connecticut offices of Tucker
Anthony, a securities broker-dealer from 1988 to April 1994. He previously
served in executive positions from 1977 to 1983 with IBM and from 1983 to 1988
with the securities firm of Smith Barney.
Howard I. Kalodner has been a director of Brush Creek since March 1994. Mr.
Kalodner is a professor of law and, from 1977 to 1994, served as the dean of
Western New England College School of Law in Springfield, Massachusetts. Mr.
Kalodner is a member of the American Law Institute.
Albert Miller has been a director of Brush Creek since March 1994. From
1976 to 1991, Mr. Miller was chairman and chief executive officer of Royalpar
Industries, a publicly owned human resources company. He retired from Royalpar
in July 1991 when it was acquired by another company.
Kenneth Friedman has been a director of Brush Creek since January 1995. Mr.
Friedman has served as president of Nonlinear Resource Corp. from 1993 to the
present and, from 1991 to 1993, served as director of research for Dickinson &
Co. He served as the natural resources analyst for Kemper Securities, a
brokerage firm, from 1990 to 1991 and the metal and mining analyst for
Boettcher Co., a brokerage firm, from 1989 to 1990.
ITEM 10 - EXECUTIVE COMPENSATION
----------------------
The table below sets forth certain information with respect to compensation
for services in all capacities paid by Brush Creek for the past three years, to
or on behalf of the Chairman of the Board and the Chief Executive Officer at
June 30, 1996. No other employee of Brush Creek made more than $60,000 in the
fiscal year 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------- ------------------------
Awards Payouts
------------------------ ---------
Restricted Securities Long-Term
Name and Principal Bonus Other Annual Stock Underlying Incentive All Other
Position Year Salary($) ($) Compensation($) Awards($) Options(#) Payouts($) Compensation($)
- ------------------ --------- ----------- ----- --------------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James S. Chapin, 1996(1) $ 110,000 none none none 250,000 none none
Chief Executive 1995(1) $ 110,000 none none none 25,000 none $23,512(2)
Officer and Chi 1994 $ 17,769 none none none 100,000 none none
- ----------
(1) Represents compensation for the period July 1, 1994, through June 30,
1996, the time during which Mr. Chapin was employed by Brush Creek as
Chief Executive Officer and Chief Financial Officer. Pursuant to Mr.
Chapin's employment agreement, Brush Creek is to pay him $100,000 as
severance compensation if he is terminated other than "for cause." Upon
completion of five (5) consecutive years of employment with the Company
this obligation terminates. He was also awarded options to acquire
100,000 shares of Brush Creek's common stock at $1.88 per share (the
closing price for the stock on April 5, 1994, the date of the grant).
(2) Represents payments made by the Company for living expenses.
</TABLE>
Incentive Stock Option Plan
The Company has a nonqualified stock option plan, under which options to
purchase a total of 279,000 shares at prices ranging from $2.00 to $2.63 were
outstanding and exercisable at June 30, 1996.
-22-
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION - (Continued)
----------------------
The following tables set forth certain information with respect to stock
options granted to the persons named in the Summary Compensation Table during
the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------------------------------------------
Number of Percent of Total
Securities Options Granted to
Underlying Options Employees in Exercise or Base Expiration
Name Granted(#) Fiscal Year Price($/Sh) Date
- --------------- ------------------ ------------------ ---------------- ----------
<S> <C> <C> <C> <C>
James S. Chapin 250,000 99.0% $1.13 to $2.98 07/15/2000
12/14/2000
</TABLE>
<TABLE>
The following table sets forth certain information as to each exercise of
stock options during the year ended June 30, 1996, by the persons named in the
Summary Compensation Table and the fiscal year-end value of unexercised options:
<CAPTION>
Aggregated Option Exercises in 1996 and Year-End Option Value
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Shares Options at June 30, 1996(1) at June 30, 1996(2)
Acquired Value ---------------------------------- ----------------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ------------- ------------ ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James S. Chapin - - 375,000 - (3) -
- ----------
(1) Share figures have been calculated to reflect the number of shares which
may be acquired, following the October 1993 15-to-1 reverse stock split.
(2) Realizable values are reported net of the option exercise price but
before any income taxes that the executives may have to pay. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the common stock as well as the option holder's continued
employment through the vesting period. The amounts reflected in this
table may never be obtained.
(3) Mr. Chapin's stock options are not in-the-money as 100,000 shares have
an exercise price of $1.88 per share, 25,000 shares have an exercise
price of $2.00 per share, 125,000 shares have an exercise price of $2.98
and 125,000 shares have an exercise price of $1.13.
</TABLE>
Other Options
Senator Edward Lawson, who resigned as a Director of Brush Creek effective
November 22, 1994, currently has options to purchase up to 23,333 shares at an
exercise price of $7.50 per share, following the October 1993 15-to-1 reverse
stock split.
Long-Term Incentive Plans
Other than the stock option plans described above, Brush Creek does not
have any plan providing compensation to its executive officers for performance
to occur over a period longer than one (1) fiscal year.
Pension Plans
Brush Creek does not have any pension plan available to its executive
officers.
-23-
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION - (Continued)
----------------------
Directors' Compensation
The Independent Directors of Brush Creek are compensated $1,500 per month
for their services. Certain expenses incurred in connection with such services,
including travel to meetings, may be reimbursed. In addition, the Board has
awarded options to acquire common stock of Brush Creek to directors in
recognition of services. During the fiscal year ended June 30, 1996, an
aggregate amount of $48,500 in fees was paid to Directors.
Employment Agreements and Termination of Employment Arrangements
Brush Creek has an employment agreement with Mr. James S. Chapin, which
provides that Mr. Chapin's employment will commence April 4, 1994, and continue
through April 3, 1996, following which his employment is to continue for an
indefinite term, subject to certain severance and notice provisions. Brush Creek
is to pay Mr. Chapin $100,000 as severance compensation if he is terminated
other than "for cause." The $100,000 is held in trust and is secured by an
irrevocable letter of credit. Upon completion of five (5) consecutive years of
employment with the Company, this obligation terminates. The employment
agreement with Mr. Chapin also provides him with options to purchase 100,000
shares of Brush Creek's common stock at $1.88 per share (the closing bid price
for the stock on April 5, 1994). The options were fully vested in April 1996 and
may be exercised on or before April 4, 2001. The options are not transferable
(other than by will or the laws of descent or distribution) and must be
exercised in their entirety.
Repricing of Options
During the last fiscal year, Brush Creek did not adjust or amend the
exercise price of options previously awarded to any of the named executive
officers.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
<TABLE>
The following table sets forth certain information regarding beneficial
ownership of Brush Creek's common stock as of September 30, 1996 by (i) each
person who is known by Brush Creek to own beneficially more than five percent
(5%) of Brush Creek's common stock, (ii) each person set forth in the Summary
Compensation Table, (iii) each of Brush Creek's directors and (iv) all directors
and executive officers as a group.
<CAPTION>
Shares Beneficially
Beneficial Owner Owned (Number)(1) Percentage
- ---------------------------------------- ------------------- ----------
<S> <C> <C>
James S. Chapin 392,877 (1,2) 2.3%
Chief Executive Officer, Chief Financial
Officer and Director
970 E. Main Street, Suite 200
Grass Valley, CA 95945
Howard I. Kalodner 227,005 (1,2) 1.3%
Director
55 Riverview Terrace
Springfield, MA 01108-1603
Albert Miller 209,834 (1,2) 1.2%
Director
250 Westmont
West Hartford, CT 06117
</TABLE>
-24-
<PAGE>
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Beneficially
Beneficial Owner Owned (Number)(1) Percentage
- ---------------------------------------- ------------------- ----------
<S> <C> <C>
Kenneth Friedman 185,200 (1) 1.1%
Director
26 Willow Lane
Blackhawk, CO 80422
All Officers and Directors as a
group (four persons) 1,014,916 5.9%
- ----------
(1) Includes shares which may be acquired within 60 days pursuant to the
exercise of options, as follows: Mr. Chapin, 375,000 shares; Mr.
Kalodner, 200,000 shares; Mr. Miller, 200,000 shares; Mr. Friedman,
185,000 shares; and all officers and directors as a group, 1,014,916
shares.
(2) Figure includes shares owned by a spouse.
</TABLE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
1. FINANCIAL STATEMENTS
--------------------
Brush Creek Mining and Development Company, Inc.
------------------------------------------------
Independent Auditor's Report - Brown, Armstrong, Randall and Reyes
Accountancy Corporation.
Consolidated Balance Sheet as of June 30, 1996.
Consolidated Statements of Operations for the Years Ended June 30, 1996
and 1995 and for the period from July 1, 1989 (date of resumption of
development stage enterprise activities) through June 30, 1996.
Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 1996 and 1995 and for the period from July 1, 1989 (date of
resumption of development stage enterprise activities) through June 30,
1996.
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996
and 1995 and for the period from July 1, 1989 (date of resumption of
development stage enterprise activities) through June 30, 1996.
Notes to Consolidated Financial Statements.
2. EXHIBITS
3.1 Articles of Incorporation of the Company with Amendments
thereto.*
3.2 Amended and Restated Bylaws of the Company.*
4.1 Specimen Certificate for the Company's common stock.*
-25-
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
--------------------------------
4.2 Form of Warrant Agreements.*
10.1 Voting Agreement between the Company, Simone M. Anderson and Euro
Canadian Securities Limited.*
10.2 Agency Agreement between the Company and Euro Canadian Securities
Limited.*
10.3 Stock Purchase Agreement between the Company, Simone M. Anderson
and Euro Canadian Securities Limited.*
10.4 Merger Agreement and Plan of Reorganization between the Company,
Sierra Gold Properties, Inc. and California Properties, Ltd., and
Addendum thereto.*
10.5 Lease Purchase Agreement for the Ruby Mine, and Modifications
thereto.*
10.6 Modification of Lease Purchase Agreement for the Ruby Mine dated
November 1, 1994.++
10.7 Agreement to Lease with Option for the Rising Sun Mine, and
Modifications thereto.*
10.8 Agreements to Purchase Carson Mine.*
10.9 Agreement to Purchase High Commission Mine.*
10.11 Promissory Note between the Company and Consolidated Sierra Gold
Mines, Inc.*
10.12 Promissory Note between the Company and Independent Sierra Gold
Mines, Inc.*
10.13 Consulting Agreement between the Company and Consolidated Sierra
gold Mines, Inc.**
10.14 Revolving Credit Facility between the Company and Consolidated
Sierra Gold Mines, Inc.*
10.15 Stock Option Agreements for G. Michael Pickering.*
10.17 Credit Facility Agreement between the Company and Epsom
Investment Services N.V.*
10.18 Settlement Agreement between the Company, Simone Anderson, Euro
Canadian Securities Limited, and Georges Benarroch.*
10.19 Agency Agreement between Epsom Investment Services N.V. and the
Company.*
10.20 Letter Agreement with Grande Portage.*
10.21 Letter Agreement with the All-Union Research Institute of Geology
of Foreign Countries (VZG).*
10.22 Contract for Services between the Company and F. James
Anderson.(1)
10.23 Stock Option Agreement with Simone Anderson.(1)
10.24 Stock Option Agreement with G. Michael Pickering.(1)
10.25 Stock Option Agreement with Edward Lawson.(1)
10.26 Stock Option Agreement with Susan Miller.(1)
10.27 Stock Option Agreement with Michael Skopos.(1)
-26-
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
--------------------------------
10.28 Stock Option Agreement with Dave Trueman.(1)
10.29 Stock Option Agreement with Peter LeCoutier.(1)
10.30 Lease on the Kate Hardy - Omega Mines.(1)
10.31 Letter of Agreement with Morrison Knudsen.(2)
10.32 Joint Venture Agreement with MK Gold Company.(3)
10.33 Modification of Lease Purchase Agreement for Rising Sun Mine
dated November 1, 1994.++
10.34 Letter agreements regarding option to lease Dreadnaught Mine.++
10.35 Settlement Agreement between the Company, Zuri Invest, A.G.,
Andre Michaels and Peter Woodfield.+++
10.36 Settlement Agreement between the Company, Werner Aeberhard, Chris
Lambrianos, Mikis Theodosiou, Andreas Samuel, as Executor of the
Estate of Dinos N. Samuel, Tania Bruntsfield, Jacques Philippou
and the Royal Bank of Scotland, A.G.+++
11.1 Computation of per share earnings.++++
16.1 Letter regarding change in certifying accountant.+
21.1 List of Subsidiaries of the Company.++++
23.1 Consent of Brown Armstrong Randall & Reyes, A.C.
* Incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-39867, and pre-effective amendments thereto which
was previously filed with the Commission on April 8, 1991.
** Incorporated by reference to the Company's Registration Statement on
Form S-8, File No. 33-38646, which was previously field with the
Commission on January 23, 1991.
(1) Previously filed in connection with the Registration Statement on Form
S-3, File No. 33-45174, and combined Registration Statement on Form S-3,
File No. 33-63374.
(2) Previously filed on Form 8-K on September 10, 1992.
(3) Previously filed on Form 8-K on June 15, 1994.
+ Previously filed on Form 8-K on July 12, 1994.
++ Previously filed on Form 10-KSB on September 28, 1995.
+++ Previously filed in connection with the Registration Statement on Form
S-3, File No. 333-286.
++++ Previously filed on Form 10-KSB on September 30, 1996.
3. REPORTS ON FORM 8-K
-------------------
8-K filed July 12, 1994, change in Certifying Accountant.
8-K filed September 26, 1994, James S. Chapin was appointed Chairman of
the Board, replacing Edward M. Lawson. G. Michael Pickering resigned as
President on September 22, 1994.
8-K filed October 19, 1994, Michael Henrick, P.Geo., was appointed
President of Brush Creek.
8-K filed November 22, 1994, Edward M. Lawson resigned as a director.
-27-
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
--------------------------------
8-K filed January 25, 1995, Kenneth S. Friedman appointed a member of
the Board of Directors.
8-K filed, June 16, 1995, Michael Henrick, P.Geo., resigned as President
of Brush Creek.
8-K filed October 31, 1995, Zuri Invest verdict rendered against Brush
Creek in the amount of $2,799,000.
8-K filed December 8, 1995, Brush Creek loses appeal of jury verdict.
8-K filed December 19, 1995, Brush Creek announces settlement of Zuri
Invest judgment of $2.8 million, plus interest. Brush Creek also
disclosed that it had come to an agreement in principle with the
plaintiff's representation to settle the Royal Bank of Scotland
litigation which is pending.
8-K filed February 14, 1996, final settlement of both the Zuri Invest
litigation and the Royal Bank of Scotland litigation reached.
8-K filed April 8, 1996, favorable jury verdict in the consolidated
Sierra Gold Mines $1 .4 million suit against Brush Creek.
8-K filed April 15, 1996, Hard Rock Mill at the Ruby Mine site commenced
operation.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Brush Creek Mining and Development
Company, Inc.
Date: October 25, 1996 /s/ James S. Chapin
----------------------------- --------------------------------------
James S. Chapin
Chief Executive Officer,
Chairman of the Board
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Brush Creek Mining and Development Company, Inc.
Grass Valley, California
We have audited the accompanying consolidated balance sheet of Brush Creek
Mining and Development Company, Inc. and Subsidiary (a development stage
enterprise) as of June 30, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the two years in
the period ended June 30, 1996, and for the period from the date of resumption
of development stage activities (July 1, 1989) through June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Brush Creek Mining
and Development Company, Inc. and Subsidiary (a development stage enterprise) as
of June 30, 1996, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 1996, and the period from the date
of resumption of development stage activities (July 1, 1989) through June 30,
1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, there
are conditions which raise substantial doubt about the Company's ability to
continue as a going concern, including the Company's ability to raise additional
capital to fund its operations and development programs and to establish ore
reserves. Management's plans in regard to these matters are described in Note 1.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of reported asset amounts and
classification of liabilities that might result from the outcome of these
uncertainties.
BROWN ARMSTRONG RANDALL & REYES
ACCOUNTANCY CORPORATION
Bakersfield, California
August 9, 1996
-30-
<PAGE>
<TABLE>
<CAPTION>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
ASSETS
<S> <C>
Current Assets
Cash $ 1,275,413
Prepaid expenses 51,290
Inventory 24,290
Accounts receivable, employees 40,462
------------------
Total Current Assets 1,391,455
Office Furniture and Equipment, Net 115,837
Mineral Properties and Mining Equipment, Net 10,600,827
Deposits 377,147
------------------
Total Assets $ 12,485,266
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 1,440,268
Current portion of long-term debt 2,279,861
------------------
Total Current Liabilities 3,720,129
Other Liabilities 3,700
Total Liabilities 3,723,829
Shareholders' Equity
Common stock, no par value; authorized 100,000,000
shares; issued and outstanding, 14,963,369 shares 43,752,439
Accumulated Deficit (11,260,214)
Accumulated Deficit during the Development Stage (23,730,788)
-----------------
Total Shareholders' Equity 8,761,437
Total Liabilities and Shareholders' Equity $ 12,485,266
==================
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR
THE PERIOD FROM JULY 1, 1989 (Date of Resumption of
Development Stage Enterprise Activities) THROUGH
JUNE 30, 1996
<CAPTION>
Development Stage
--------------------------------------------------------------------
Period from
July 1, 1989
Through
1996 1995 June 30, 1996
----------------- -------------------- ----------------------
<S> <C> <C> <C>
Revenues
Sale of Joint Venture $ - $ - $ 4,232,000
Other Income - - 156,444
Interest 42,160 25,720 165,513
----------------- -------------------- ----------------------
Total Revenues 42,160 25,720 4,553,957
----------------- -------------------- ----------------------
Expenses
General and Administrative
Expenses 2,471,067 1,494,076 13,899,765
General Mining and Exploration 4,010,966 2,832,819 8,914,025
Loss on Lease Abandonments - - 392,317
Depreciation and Amortization 373,443 311,625 1,063,260
(Gain) Loss on Sale of
Mining Equipment (116) 20,875 86,910
Interest Expense 67,234 7,721 375,668
Litigation Settlement 2,389,668 30,000 3,697,262
----------------- -------------------- ----------------------
Total Expenses 9,312,262 4,697,116 28,429,207
----------------- -------------------- ----------------------
Income (Loss) Before
Extraordinary Item (9,270,102) (4,671,396) (23,875,250)
Extraordinary Item, Net Gain
(Loss) from Debt Extinguishment,
Net of Tax 144,462
----------------- -------------------- ----------------------
Net Loss $ (9,270,102) $ (4,671,396) $ (23,730,788)
================= ==================== ======================
Loss per Common Share
Before Extraordinary Item $ (.96) $ (.97)
================= ====================
Net Loss per Common Share $ (.96) $ (.97)
================= ====================
Weighted Average Common
Shares Outstanding 9,634,616 4,799,311
================= =====================
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE PERIOD
FROM JULY 1, 1989 (Date of Resumption of Development Stage Enterprise
Activities) THROUGH JUNE 30, 1996
<CAPTION>
Accumulated
Common Stock Deficit
---------------- During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance,
June 30, 1989 1,233,041 $ 12,318,877 $ (11,260,214) $ - $ 1,058,663
Issuance of stock
for options
on mining
properties 15,667 117,500 - - 117,500
Sale of stock in
private placement,
net of offering
costs 150,000 434,000 - - 434,000
Issuance of stock
for services 23,500 72,500 - - 72,500
Sale of stock in
private placement,
net of offering
costs 131,727 828,110 - - 828,110
Issuance of units
for debt to
affiliates 73,766 553,242 - - 553,242
Net loss - - - (768,436) (768,436)
----------- ------------- --------------- ------------- --------------
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE PERIOD
FROM JULY 1, 1989 (Date of Resumption of Development Stage Enterprise
Activities) THROUGH JUNE 30, 1996 - (Continued)
<CAPTION>
Accumulated
Common Stock Deficit
--------------------------- During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
--------- ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Balance,
June 30, 1990 1,627,701 14,324,229 (11,260,214) (768,436) 2,295,579
Issuance of stock
for options on
mining properties 154,737 2,283,020 - - 2,283,020
Sale of stock in
private placement,
net of offering costs 141,606 910,840 - - 910,840
Exercise of
warrants 3,333 35,000 - - 35,000
Issuance of stock
for services 64,122 1,097,258 - - 1,097,258
Issuance of stock
for debt 5,150 114,560 - - 114,560
Cancellation of
units from CSGM (73,766) - - - -
Issuance of shares
to CSGM 120,000 - - - -
Issuance of stock
for litigation
settlement, net 33,334 875,000 - - 875,000
Net loss - - - (2,558,381) (2,558,381)
------------- ------------- --------------- --------------- -------------
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE PERIOD
FROM JULY 1, 1989 (Date of Resumption of Development Stage Enterprise
Activities) THROUGH JUNE 30, 1996 - (Continued)
<CAPTION>
Accumulated
Common Stock Deficit
------------------- During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
----------------- ---------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance,
June 30, 1991 2,076,217 19,639,907 (11,260,214) (3,326,817) 5,052,876
Issuance of stock
for options on
mining properties 195,780 564,899 - - 564,899
Sale of stock in
private placement,
net of offering costs 142,100 2,298,451 - - 2,298,451
Exercise of warrants
and options 124,834 1,250,750 - - 1,250,750
Issuance of stock
for services 184,579 1,818,102 - - 1,818,102
Issuance of stock for debt 24,440 336,617 - - 336,617
Issuance of shares to CSGM 88,000 748,750 - - 748,750
Capital contributions - 312,805 - - 312,805
Net loss - - - (3,178,878) (3,178,878)
----------------- ---------------- ------------------ ------------------ --------------
Balance,
June 30, 1992 2,835,950 26,970,281 (11,260,214) (6,505,695) 9,204,372
Issuance of stock
for mining properties
and equipment 37,290 255,238 - - 255,238
Sale of stock 10,664 80,000 - - 80,000
Exercise of warrants
and options 95,404 707,105 - - 707,105
Exchange of options
for debt, CSGM 33,334 250,000 - - 250,000
Issuance of stock
for services 183,190 1,616,659 - - 1,616,659
Issuance of stock
for debt 105,140 713,494 - - 713,494
Issuance of shares
for CSGM 100,256 500,285 - - 500,285
Issuance of stock
for the acquisition
of Trans-Russian 539,402 (84,176) - - (84,176)
Net loss - - - (3,420,220) (3,420,220)
----------------- ---------------- ------------------ ------------------ ---------------
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR THE PERIOD
FROM JULY 1, 1989 (Date of Resumption of Development Stage Enterprise
Activities) THROUGH JUNE 30, 1996 - (Continued)
<CAPTION>
Accumulated
Common Stock Deficit
-------------- During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
---------------- ----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
Balance,
June 30, 1993 3,940,630 31,008,886 (11,260,214) (9,925,915) 9,822,757
Sale of stock 82,485 241,139 - - 241,139
Exercise of warrants
and options 58,319 608,925 - - 608,925
Issuance of stock
for services 215,099 938,159 - - 938,159
Net income - - - 136,625 136,625
---------------- ----------------- ------------------ ------------------ -----------------
Balance,
June 30, 1994 4,296,533 32,797,109 (11,260,214) (9,789,290) 11,747,605
Sale of stock 2,566,666 3,696,457 - - 3,696,457
Net loss - - - (4,671,396) (4,671,396)
---------------- ----------------- ------------------ ------------------ -----------------
Balance,
June 30, 1995 6,863,199 36,493,566 (11,260,214) (14,460,686) 10,772,666
Sale of stock 6,783,503 6,875,416 - - 6,875,416
Issuance of stock
for partial settlement
of Royal Bank agreement 216,667 223,436 - - 223,436
Compensation recognized on
stock options granted - 160,021 - - 160,021
Issuance of stock for partial
settlement of Zuri Invest
litigation 1,100,000 - - - -
Net loss - - - (9,270,102) (9,270,102)
---------------- ---------------- ------------------ ------------------ -----------------
Balance,
June 30, 1996 14,963,369 $ 43,752,439 $ (11,260,214) $ (23,730,788) $ 8,761,437
================ ================ ================== ================== =================
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995 AND FOR
THE PERIOD FROM JULY 1, 1989 (Date of Resumption of Development
Stage Enterprise Activities) THROUGH JUNE 30, 1996
<CAPTION>
Development Stage
--------------------
Period from
July 1, 1989
Through
1996 1995 June 30, 1996
----------------- ------------------ --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (9,270,102) $ (4,671,396) $ (23,730,788)
----------------- ------------------ --------------------
Gain on debt restructuring - - (144,462)
Depreciation and amortization 373,443 311,625 1,063,260
Loss on lease abandonments - - 444,359
Loss on litigation settlement 2,389,668 - 3,667,262
Gain on sale of mining equipment (116) (20,875) (35,100)
Other - - 43,576
Shareholder payment of services - - 105,055
Stock and debt for services - - 703,068
Change in stock purchase price
adjustment receivable 284,749 (284,749) -
Change in note receivable 7,000 - 7,000
Change in inventory 41,282 (41,118) (22,000)
Change in prepaid expenses (4,530) 34 450,446
Change in deposits and other
current assets (2,490) (19,852) (115,961)
Change in deposits (115,500) (5,050) (134,117)
Change in accounts payable and
accrued liabilities 495,065 315,681 3,992,725
----------------- ------------------ --------------------
Total adjustment 3,468,571 255,696 10,025,111
----------------- ------------------ --------------------
NET CASH USED IN OPERATING ACTIVITIES (5,801,531) (4,415,700) (13,705,677)
----------------- ------------------ --------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of mineral properties,
equipment and deferred
developments (652,735) (400,160) (5,010,059)
Acquisition of office equipment (69,460) (39,442) (260,101)
Proceeds from sale of equipment - 3,500 294,356
Proceeds from the acquisition of
Trans-Russian - - 20,060
----------------- ------------------ --------------------
NET CASH USED IN INVESTING ACTIVITIES (722,195) (436,102) (4,955,744)
----------------- ------------------ --------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Development Stage
--------------------
Period from
July 1, 1989
Through
1996 1995 June 30, 1996
----------------- ------------------ --------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Advances from affiliates - - 2,009,127
Payments made to affiliates - - (343,798)
Proceeds from issuance of stock 7,035,435 3,696,457 18,126,212
Proceeds from warrant extensions - - 207,750
Proceeds from issuance of notes payable - 143,821 870,043
Payments on long-term debt (220,449) (145,777) (1,236,348)
Proceeds from convertible debenture 300,000 - 300,000
----------------- ------------------ --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,114,986 3,694,501 19,932,986
----------------- ------------------ --------------------
Net Increase (Decrease) in Cash 591,260 (1,157,301) 1,271,565
Cash at Beginning of Period 684,153 1,841,454 3,848
----------------- ------------------ --------------------
Cash at End of Period $ 1,275,413 $ 684,153 $ 1,275,413
================= ================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest
(net of amounts capitalized) $ 67,234 $ 7,721 $ 220,976
================= ================== ====================
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
(See Note 15)
The accompanying notes are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND BASIS OF PRESENTATION
------------------------------------
Brush Creek Mining and Development Company, Inc. (the Company) was incorporated
in 1982 and operated as a mining and mineral development company until April 17,
1989, at which time its mining operations, all of which had been conducted
through the Brush Creek Joint Venture (BCJV) (40% owned) were terminated.
Shortly thereafter, the Company became actively engaged in acquiring additional
mineral properties, raising capital, and preparing properties for resumed
production. The Company did not have any significant operations or activities
from April 17, 1989 through June 30, 1989 and suspended all mining operations
and reduced its activities to a care and maintenance level. Accordingly, the
Company is deemed to have reentered the development stage effective July 1,
1989.
In February 1992, the Company began limited production at the Ruby Mine under a
permit that limited mill capacity to 225 tons per day. Production was terminated
due to adverse weather conditions in December 1992. The Company resumed limited
production in July 1993 and has continued to gradually increase production at
the Ruby Mine. However, the Company has not commenced economic production and is
therefore still considered to be in the development stage.
The Company's consolidated financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of the mineral
properties and other assets and the satisfaction of liabilities in the normal
course of business. The Company has incurred losses of $34,991,002 from
inception to June 30, 1996. The Company has not realized economic production
from its mineral properties as of June 30, 1996. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management
continues to actively seek additional sources of capital to fund current and
future operations. There is no assurance that the Company will be successful in
continuing to raise additional capital, establishing probable or proven ore
reserves, or determining if the mineral properties can be mined economically.
These consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, B. Creek Acquisition Corporation and Alpha
Hardware. All material intercompany accounts and transactions have been
eliminated.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, and
disclosure of contingent liabilities at the date of the financial statements,
and the reported amount of revenues and expenses during the reporting period.
Mineral Properties and Mining Equipment
- ---------------------------------------
Mineral properties and mining equipment include land, mining claims, development
costs and mining equipment carried at cost. Mining equipment including mill
facilities is depreciated using the straight-line method over estimated useful
lives of 5 to 15 years, or the units-of-production method based on estimated
tons of ore reserves
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
------------------------------------------
if the equipment is located at a producing property with a shorter economic
life. Mining equipment not in service is not depreciated.
The Company defers direct costs related to the acquisition, exploration and
development of mineral properties pending determination of their economic
viability which normally entails performing an in-depth geological and
geophysical study. If no minable ore body is discovered, previously capitalized
costs are expensed in the period the property is abandoned. Any revenue
generated from pre-production activities is offset against the related deferred
development and pre-production costs. When a property is placed in commercial
production, such deferred costs are depleted using the units-of-production
method.
Asset Impairment
- ----------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" (SFAS 121), management of the Company reviews the net carrying
value of each mine and development property on a regular basis. Estimated future
net cash flows from each mine are calculated using estimated future prices,
operating capital, and reclamation costs on an undiscounted basis. Reductions in
the carrying value of each mine are recorded to the extent the net book value of
the investment exceeds the estimate of future discounted net cash flows. Upon
adoption of SFAS 121 in fiscal year 1995-96, there was no impact to the
financial statements.
The recoverability of the carrying value of development projects is evaluated
based upon estimated future net cash flows from each property, determined as
described above, using estimates of contained mineralization expected to be
classified as proven and probable reserves upon completion of a feasibility
study. Reductions in the carrying value of each property are recorded to the
extent that the Company's carrying value in each property exceeds its estimate
of future discounted net cash flows.
Management's estimates of gold prices, recoverable proven and probable reserves,
operating capital, and reclamation costs are subject to certain risks and
uncertainties which may affect the recoverability of the Company's investment in
property, plant, and equipment. Although management has made its best estimate
of these factors based on current conditions, it is reasonably possible that
changes could occur in the near term which could adversely affect management's
estimate of the net cash flow expected to be generated from its operations.
Office Furniture and Equipment
- ------------------------------
Office furniture and equipment are recorded at cost. Depreciation is computed by
the straight-line method based upon the estimated useful lives of the respective
assets, generally three to five years.
Income (Loss) per Common Stock
- ------------------------------
Income (loss) per share of common stock is computed based on the weighted
average number of shares outstanding. Warrants, options and convertible
debentures have not been included in the calculation as their effect would be
anti-dilutive. All common shares included in the financial statements reflect a
reverse stock split of 15:1, which the Board of Directors approved November 29,
1993.
Reclamation and Environmental Costs
- -----------------------------------
Reclamation costs and related accruals are based on the Company's interpretation
of environmental and regulatory requirements. Minimum standards for mine
reclamation have been established by various governmental agencies. Reclamation,
site restoration, and closure costs for each producing mine are accrued over the
life of the mine using the units-of-production method. Ongoing reclamation
activities are expensed in the period incurred.
<PAGE>
Income Taxes
- ------------
The Company accounts for income taxes using the liability method which requires
recognition of deferred tax liabilities and assets for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred tax assets and liabilities 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
differences are expected to reverse.
Inventory
- ---------
Inventory is stated at net realizable value.
Stock Based Compensation
- ------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123), which is effective for periods beginning after
December 15, 1995. SFAS 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value or provide proforma disclosure of the effect on
net income and earnings per share in the Notes to the Financial Statements. The
Company intends to continue to account for its stock-based compensation under
Accounting Principles Board No. 25; however, the Company will adopt the
disclosure provisions of SFAS 123 during the fiscal year ending June 30, 1997.
Fair Value of Financial Instruments
- -----------------------------------
Disclosure of the estimated fair value of financial instruments is required
under SFAS No. 107, "Disclosure About Fair Value of Financial Instruments." The
fair value estimates are made at discrete points in time based on relevant
market information and information about the financial instruments. These
estimates may be subjective in nature and involve uncertainties and significant
judgment and therefore cannot be determined with precision.
Cash, cash equivalents, and short-term investments are valued at cost plus
accrued interest, which approximates market value. The fair value of long-term
debt is estimated based on quoted market prices for the same or similar issues
with similar maturities. The amount recorded in the financial statements
approximates fair value for long-term debt at June 30, 1996.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include highly
liquid debt instruments purchased with a maturity of five months or less. Of the
$1,275,413 cash balance at June 30, 1996, $1,099,773 was not covered by Federal
Depository Insurance.
NOTE 3 - AFFILIATES AND RELATED PARTIES
------------------------------
Significant relationships with (1) companies affiliated through common ownership
and/or management, and (2) other related parties are as follows:
In prior years the Company entered into a number of relationships with
California Properties, Independent Sierra Gold Mines (ISGM) and Consolidated
Sierra Gold Mines (CSGM) at times when Ms. Simone Anderson was (i) an officer,
director and substantial shareholder of the Company, (ii) an officer and
director of California Properties and its wholly owned subsidiary Sierra Gold
Properties, Inc., and (iii) the sole shareholder of ISGM and CSGM. The Company
has terminated its relationships with these entities, and the Company
understands that Ms. Anderson and her affiliates no longer hold 5% or more of
the Company's securities.
<PAGE>
NOTE 3 - AFFILIATES AND RELATED PARTIES - (Continued)
------------------------------
The former chief executive officer and director of the Company, Mr. James
Anderson, who is the spouse of the individual discussed in the previous
paragraph, is a director of California Properties and director and president of
ISGM and CSGM. Mr. James Anderson is also the chief executive officer of the
Moscow Country Club.
On October 18, 1993, the Company entered into a severance agreement with James
Anderson, the former chief executive officer and director of the Company. In
total satisfaction of all amounts owing Anderson, the Company issued 1,500,000
shares of its common stock to Anderson, 800,000 shares of which have already
been issued to Anderson. The remaining 700,000 shares are being held in an
escrow account until certain conditions are met. Included in these conditions is
the payment of approximately $80,000 owed to the Company by entities under the
direct or indirect control by Anderson. These amounts were not repaid. The
700,000 shares remain in escrow.
Mr. Georges Benarroch, who previously served as a director of the Company from
August 1990 to May 1991 and was an officer of the Company during a portion of
that period, has a controlling interest in Euro Canadian, a Canadian corporation
(see Note 13).
During the year ended June 30, 1995, the Company borrowed a total of $143,821
from two stockholders and two Directors. The loans were used to provide the
Company with working capital. The loans were secured by gold inventory and
equipment. The loans were repaid in full, including interest at 8.5% per annum.
NOTE 4 - STOCK PURCHASE PRICE ADJUSTMENTS
--------------------------------
During the year ended June 30, 1996, the Company entered into investment
agreements in connection with offerings of its Common Stock in reliance on
Regulations S under the Securities Act of 1933, as amended. Several of these
agreements contained purchase price adjustment clauses which require that the
initial purchase price be adjusted up or down depending on the average share
price of the Company's Common Stock during a stated period, typically 45 days,
subsequent to the stock purchase closing date. As a result, the Company could be
required to issue up to an additional 753,175 shares of Common Stock based on
the closing bid price at June 30, 1996. The valuation period ends on September
27, 1996 at which time the actual adjustment, if any, will be determined.
In addition to purchase price adjustments, shares of Common Stock were issued at
various times during the year pursuant to Regulation S of the Securities and
Exchange Act of 1933 at discounts of up to 50% from the closing bid price on the
day prior to the sales.
NOTE 5 - OFFICE FURNITURE AND EQUIPMENT
------------------------------
Office furniture and equipment consists of the following at June 30, 1996:
<TABLE>
<S> <C>
Office furniture and equipment $ 114,744
Vehicles 165,050
---------------
279,794
Less accumulated depreciation (163,957)
---------------
$ 115,837
===============
</TABLE>
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT
---------------------------------------
<TABLE>
The Company's net investment in mineral properties and mining equipment as of
June 30, 1996 is as follows:
<CAPTION>
Land and Development Mining
Land Options Costs Equipment Total
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Carson Mine $ 2,199,858 $ 1,051,731 $ 42,835 $ 3,294,424
Brush Creek Mine 408,496 1,460,669 193,464 2,062,629
Gardners' Point and
Pioneer Mines 185,477 770,327 128,521 1,084,325
Ruby Mine 327,336 2,251,714 1,975,525 4,554,575
High Commission Mine 101,875 6,118 - 107,993
Kate-Hardy Mine 58,667 97,789 - 156,456
Rising Sun Mine 9,111 129,980 - 139,091
---------------- ----------------- ----------------- -----------------
3,290,820 5,768,328 2,340,345 11,399,493
Accumulated
depreciation - - (798,666) (798,666)
----------------- ----------------- ----------------- -----------------
$ 3,290,820 $ 5,768,328 $ 1,541,679 $ 10,600,827
================= ================= ================= =================
</TABLE>
All of the Company's mineral properties contain mines which were in production
previously. All such mines, except for the Gardners's Point and Pioneer Mines,
are located in the Allegheny-Forest-Downieville mining districts on the western
slope of the Sierra Nevada mountain range in Northern California and aggregate
approximately 6,300 acres. Because of the close proximity of the mines to each
other, the Company plans to centralize milling operations. The Gardner's Point
and Pioneer Mines are located outside this district and management has been
evaluating alternatives to placing them into current production. Current
developments and commitments related to certain properties follow:
Ruby Mine
- ---------
During 1992, the Company entered into an option agreement to lease this property
in exchange for a total of 225,000 shares of the Company's common stock with a
value of $112,500. In 1990, the Company entered into a lease purchase agreement,
for this property. This lease was modified on November 1, 1994. Pursuant to the
terms of this lease, the Company must pay a 7-1/2% net smelter royalty on all
minerals produced from lode deposits and 10% on minerals produced from placer
deposits with a minimum lease payment of $10,000 per month through June 30,
2000, subject to an adjustment based on the Consumer Price Index. The lease may
be extended for two additional five-year periods or the property may be
purchased for $4,000,000 subject to adjustment based on the Consumer Price Index
payable by June 30, 2000. All payments made subsequent to July 1, 1995, to
acquire the lease/option and all payments made under the lease subsequent to
July 1, 1995, will be credited against the option purchase price. Performance
under the lease purchase agreement is secured by the Company's equipment used in
the mining operations on the leased premises.
The Rising Sun Mine
- -------------------
In December of 1989, the Company issued 10,000 shares of its common stock for an
option to lease the Rising Sun Mine. On June 30, 1990, the Company exercised the
option upon payment of $20,000 cash and entered into a five year lease with an
option to purchase. Pursuant to the terms of the lease, which was most recently
modified on November 11, 1994, the Company must pay a net smelter royalty of 8%
on all minerals produced with a minimum royalty of $4,590 per month, through
June 30, 2000, subject to an adjustment based on the Consumer price index. The
property may be purchased for $1,000,000 payable on or before June 30, 2000,
subject to adjustment based on the Consumer Price Index. All payments made to
acquire the lease/option and all payments made under the lease will be credited
against the option purchase price.
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT - (Continued)
---------------------------------------
Merger with Sierra Gold Properties, Inc. - Kate-Hardy Mine
- ----------------------------------------------------------
In January 1992, the shareholders of California Properties approved a merger
between its wholly owned subsidiary, Sierra Gold and B. Creek Acquisition
Corporation, a wholly owned subsidiary of the Company. The merger was recorded
effective March 31, 1992. The Company issued 2,330,020 shares of common stock
with a value of $74,807 and gave up certain assets and assumed certain
liabilities totaling $175,193 in exchange for all of the common stock of Sierra
Gold. Management determined the value of Sierra Gold's assets to be
approximately $250,000 at the time the letter of intent was entered into and
announced in April 1989. Pro forma results of operations for the interim periods
presented are not shown as Sierra Gold conducted no significant activities
during these periods.
The primary asset of Sierra Gold, a lease with an option to acquire the
Kate-Hardy Mine, expired on April 24, 1992, and as a result, during the
nine-months ended March 31, 1992, the Company recognized a loss on the
expiration of the lease of $250,000. On June 30, 1992, the Company entered into
a new lease, effective March 23, 1992, in the form of a mining option agreement
for a term of five years expiring March 22, 1997. During the term of the option,
the Company must pay a $50,000 payment (initial option payment) upon the
execution of the agreement; $5,500 per month for each month during the first
year; $6,500 per month during the second year; $7,500 per month during the third
year; $8,500 per month during the fourth year; and $9,500 per month during the
fifth year. In addition, the Company must pay a 6% net smelter royalty on all
minerals produced. The option purchase price for the mine is $1,500,000 less 75%
of all option payments paid up to a maximum of $750,000.
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
----------------------------------------
<TABLE>
Accounts payable and accrued liabilities consist of the following at June 30,
1996:
<S> <C>
Accounts payable $ 947,745
Performance deposit (Note 13) 176,223
Accrued payroll and other 316,300
---------------
$ 1,440,268
===============
</TABLE>
NOTE 8 - LONG-TERM DEBT
--------------
<TABLE>
Long-term debt consists of the following at June 30, 1996:
<S> <C>
Financed insurance premium, bearing interest at
10%, payable in monthly installments of $6,079. $ 48,631
Convertible debenture payable, 7% interest
due April 3, 1998, convertible 45 days after
closing on April 3, 1996 (see Note 17). 300,000
Note payable to Zuri Invest, interest at
9.75%, Secured by mining properties.
Principal balance reduced as shares of
Company stock issued to Zuri Invest are sold
to satisfy principal outstanding. 1,100,000
shares placed in escrow to satisfy
obligation (see Note 13). 1,200,000
</TABLE>
<PAGE>
NOTE 8 - LONG-TERM DEBT - (Continued)
--------------
<TABLE>
<S> <C>
Zuri Invest litigation settlement totaled
$1,306,250. Note payable entered for $1,200,000.
Remaining balance payable at June 30, 1996
(see Note 13). 106,250
Royal Bank of Scotland litigation settlement
dated December 13, 1995. Settlement calls
for a combination of cash and stock (see Note 13). 624,980
---------------
2,279,861
Less current portion 2,279,861
---------------
$ -
===============
</TABLE>
NOTE 9 - INCOME TAXES
------------
At June 30, 1996, the Company had available net operating loss carryforwards for
financial statement and federal income tax purposes of approximately
$14,000,000. These loss carryforwards expire between 1998 and 2009.
The Company has reported income tax losses of approximately $25,000,000 in prior
years. In general, income tax losses are carried forward to future years to
reduce future income taxes.
In the case of a loss corporation which changes more than 50% of its ownership,
Internal Revenue Code Section 382 limits the amount carried forward to a small
percentage of the fair market value of the corporation's stock immediately
before the ownership change. The Company's 1989 ownership change reduced the
amount of the prechange loss carryforward from approximately $6,000,000 to
approximately $70,000.
A valuation allowance of approximately $4,760,000 has been provided to offset
the benefit of approximately $4,760,000 from the remaining $14,000,000 loss
carryforwards. This valuation allowance is necessary because at June 30, 1996,
the available benefits are more likely than not to expire before they can be
used. There was not a material change in the tax benefit or the valuation
allowance from 1995 to 1996.
NOTE 10 - SHAREHOLDERS' EQUITY
--------------------
During Fiscal 1996, the following major equity transactions occurred:
o The Company sold 6,783,503 shares of Common Stock for $6,875,416. These
shares were sold pursuant to Regulation S of the Securities Act of 1933.
o The Company issued 1,100,000 shares as partial settlement of the Zuri
Invest litigation.
o The Company issued 216,667 shares as partial settlement of the Royal Bank
of Scotland litigation.
During fiscal 1995, the following major equity transactions occurred:
o The Company sold 2,566,666 shares of Common Stock for $3,696,457. These
shares were sold pursuant to Regulation S of the Securities Act of 1933.
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY - (Continued)
--------------------
During fiscal 1994, the following major equity transactions occurred:
o The Company issued 215,099 shares of Common Stock in exchange for certain
legal, engineering, consulting, and employment services rendered to the
Company totaling $938,159.(*)
o The Company issued shares of the Company's Common Stock pursuant to a
service agreement with James Anderson totaling $421,875.
o The Board of Directors of the Company approved a 15-for-1 reserve stock
split effective November 29, 1993.
During fiscal 1993, the following major equity transactions occurred:
o The Company issued 539,402 shares of Common Stock in connection with its
acquisition of Trans-Russian. Total reduction in equity in relation to the
acquisition was $84,176.(*)
o In connection with its mining properties, the Company issued 37,290 shares
of Common Stock for accrued lease payments of $107,710, prepayment of
certain lease expenses of $113,153, and acquisition of mining equipment of
$34,375.(*)
o The Company issued 105,140 shares of Common Stock with a value of $713,494
in satisfaction of outstanding debt obligations amounting to $558,592.(*)
o The Company issued 100,256 shares of Common Stock with a value of $500,285
in satisfaction of the Company's obligation to CSGM of $574,750.(*)
o The Company issued 183,190 shares of Common Stock in exchange for certain
legal, engineering, consulting, and employment services rendered to the
Company totaling $1,616,659.(*)
o The Company sold 10,664 shares of stock at $7.50 per share, totaling
$80,000.
o The Company issued 33,334 shares of Common Stock pursuant to the exercise
of options in settlement of debt to CSGM of $250,000.(*)
During fiscal 1992, the following major equity transactions occurred:
o The Company issued 155,335 shares of Common Stock in connection with its
acquisition of Sierra Gold and the related options on mineral properties
for $74,807.(*)
o The Company issued 10,311 shares of Common Stock in connection with its
acquisition of the Kate-hardy Mine for $88,667 and prepayment of certain
lease expenses of $66,000.(*)
o In connection with its lease on the Ruby Mine, the Company issued 24,800
shares of Common Stock for: accrued lease payments of $72,502, prepayment
of lease obligation of $63,287, and modification and extension to lease
term of $154,836.(*)
o In connection with its lease on the Rising Sun Mine, the Company issued
5,333 shares of Common Stock for accrued lease payments of $22,002,
prepayment of lease obligation of $18,687, and modification and extension
to lease term of $4,111.(*)
o The Company issued 24,439 shares of Common Stock in satisfaction of
outstanding debt obligations amounting to $336,617.(*)
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY - (Continued)
--------------------
o The Company issued 88,000 shares of Common Stock with a value of $748,750
to CSGM in satisfaction of the Company's obligation to CSGM of
$900,000.(*)
o The Company issued 117,912 shares of Common Stock in exchange for certain
legal, engineering, and employment services rendered to the Company
totaling $1,286,852.(*)
o In May 1992, the Company entered into a three-year consulting contract
with Mr. Anderson in exchange for issuing 66,667 shares of Common Stock
with a value of $531,250.(*)
o Ms. Anderson paid expenses on behalf of the Company amounting to $105,055.
This amount and the proceeds received from the extension of warrants of
$207,750 totaling $312,805 is accounted for as a contribution of capital.
o The Company made several private placements of a total of 142,100 shares
of its Common Stock at prices ranging from $.90 to $1.50 per share
totaling $2,298,451, net of offering costs of $177,974.
During fiscal 1991, the following major equity transactions occurred:
o On June 29, 1990, the Company sold 131,727 units for $987,955. Each unit
consisted of one share of Common Stock and a warrant to purchase one share
of Common Stock. The Company's previous chairman, Mr. Benarroch, is the
president of the underwriter, Euro Canadian, in this transaction, which
received a commission of $98,796. The underwriter also received warrants
to purchase 33,333 shares of the Company's Common Stock at $.50 through
July 1992. In July 1990, the Company sold an additional 141,606 units. The
Company received $910,840 after offering expenses. Warrants covering
253,333 shares are exercisable at $.70 through June 1992, and warrants
covering 20,000 shares are exercisable at $.90 through June 1992.
o On June 26, 1990, the Company's Board of Directors approved the issuance
of 73,766 units to ISGM and CSGM in satisfaction of the Company's debt of
$553,242 to these entities. Each unit consists of one share of the
Company's Common Stock and one warrant to purchase one share of stock at
$.50 per share, exercisable through July 1992. As of December 31, 1990,
these units had not been delivered due to administrative delays. As an
inducement to the approval of the consulting agreement described below,
CSGM and ISGM agreed to cancel the units approved by the Board of
Directors on June 26, 1990.
o On January 23, 1991, the Company entered into an agreement with CSGM and
ISGM whereby CSGM and ISGM are obligated to render consulting services to
the Company to assist the Company in the acquisition of mining properties,
identification of and negotiation with the Company's creditors, and other
day-to-day business and administrative tasks. In exchange for rendering
consulting services, the Company agreed to issue 120,000 shares of its
Common Stock to CSGM. As the market value of the shares issued was
approximately equal to that of the units canceled, the issuance of the
shares has been treated as a replacement of the units for accounting
purposes.(*)
o In January 1991, an additional 49,272 shares of Common Stock were issued
to third parties. These shares, valued at fair market value of $630,568,
were issued for legal and consulting services rendered and the repayment
of a note payable issued for services of $114,560.(*)
o The Company agreed to issue 20,000 shares of Common Stock valued at fair
market value of $581,250 to an engineering firm for past and future
services.(*)
o The Company entered into a litigation settlement with Mr. Benarroch,
whereby 66,667 shares of the Company's outstanding Common Stock were
returned to the Company and, simultaneously, the Company issued back to
Mr. Benarroch 100,000 shares, valued at fair market value of $1.75 per
share. The settlement resulted in a net issuance of 33,333 shares of
Common Stock valued at $875,000.(*)
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY - (Continued)
--------------------
o During fiscal 1990, the Company initiated a private placement of its
Common Stock. In April 1990, the Company sold 150,000 shares for $450,000.
o In March 1990, Ms. Anderson sold 66,667 shares of Common Stock to Sungold
Mining Corp. (Sungold) for $10,000 as an inducement for an affiliate of
Sungold to lend the Company $140,000.(*)
o In March and May 1990, the Company issued 235,000 shares of Common Stock
in exchange for legal services valued at $72,500.(*)
(*) For each issuance involving noncash consideration, the Company recorded
the fair market value of the shares issued as the consideration received.
NOTE 11 - STOCK OPTIONS AND WARRANTS
--------------------------
The Company has an incentive stock option plan under which five and ten-year
options may be granted to key employees to purchase up to 33,333 shares of the
Company's Common Stock at the market price on the date of grant. At June 30,
1996, no options had been granted under this plan. A total of 33,333 shares of
the Company's unissued Common Stock has been reserved for this plan.
The Company has a nonqualified stock option plan, under which options to
purchase a total of 1,051,000 shares from $.85 to $4.13 were outstanding and
exercisable at June 30, 1996.
<TABLE>
The following is a summary of Common Stock options and warrants outstanding as
of June 30, 1996:
<CAPTION>
Shares Shares
Under Under Price Expiration
Warrants Options Per Share Date
-------------- -------------- ------------------- -----------
<S> <C> <C> <C> <C>
Outstanding at
June 30, 1994 584,752 243,334 $1.94 - 16.80
Expired (584,752) - 7.50 - 15.00
Granted - 29,000 2.63 July 29, 1999
Cancelled - (4,000) 2.63 July 29, 1999
Granted - 90,000 2.00 February 10, 2000
Expired - (79,334) 1.94 - 16.80 Various
-------------- -------------- -------------------
Outstanding at
June 30, 1995 - 279,000 2.00 - 2.63
Granted - 387,500 3.03 July 15, 2000
Cancelled - (17,500) 3.03 July 15, 2000
Granted - 2,000 4.13 August 4, 2000
Granted - 25,000 2.59 October 11, 2000
Granted - 350,000 1.13 December 14, 2000
Granted - 25,000 .85 January 1, 2001
-------------- -------------- -------------------
Outstanding at
June 30, 1996 - 1,051,000 .85 - 4.13
============== ============== -------------------
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
-----------------------------
Lease expense consists principally of an operating lease for the Company's
office building which calls for monthly payments of $2,500 from June 1989
through May 1994. The rent is subject to annual adjustment based upon the
Consumer Price Index. Rent expense for the years ended June 30, 1996 and 1995
was approximately $30,000 and $31,000, respectively.
See Note 6 regarding mineral property commitments.
NOTE 13 - LEGAL PROCEEDINGS
-----------------
During the fiscal year ended June 30, 1996, the Company entered into two
significant settlement agreements. The settlement agreements resolve claims
against the Company made by Zuri Invest A.G., et. al., and the Royal Bank of
Scotland, et. al. The Company has filed complaints against the Andersons and
parties and entities related to the Andersons which were allegedly involved in
the transactions related to the settlements with Zuri Invest A.G. and Royal Bank
of Scotland.
Additionally the Company went to trial against Consolidated Sierra Gold
Mines, Inc. ("CSGM"), and won a $30,000 jury verdict in its cross-complaint
against CSGM.
With that result, all material litigation against the Company was resolved.
The Company has been requested pursuant to a non-public informal inquiry by
the staff of the Securities and Exchange Commission, to provide information to
the staff of the Commission regarding the Company's financing activities in
reliance upon Regulation S under the Securities Act. The Commission has advised
the Company that the inquiry should not be construed as an indication by the
Commission or its staff that any violations of law have occurred, nor should it
be considered a reflection upon any person.
The following is a detailed historical perspective of significant actions
involving the Company, including those summarized above.
On August 9, 1991, Zuri Invest A.G., Andre Michaels and Peter Woodfield
(the "Plaintiffs") filed a complaint against the Company, Euro Canadian
Securities Limited, Georges Benarroch, Simone Anderson, James Anderson and
Capitol Bank Sacramento and were seeking 1,500,000 shares of the Company's
Common Stock previously owned by Simone Anderson and subsequently sold to Euro
Canadian, which were allegedly promised to Plaintiffs in connection with the
Company's equity financing in 1990. In a stipulated settlement, Euro Canadian
and Georges Benarroch agreed to defend and indemnify the Company in any lawsuit
filed by the Plaintiffs claiming title to such shares. Accordingly, the Company
tendered its defense in this lawsuit to Euro Canadian and Georges Benarroch who
agreed to provide the Company with such defense. Mr. Benarroch had defaulted in
the proceeding and although the Company had the commitment from Mr. Benarroch,
the Company engaged its own counsel and vigorously defended itself in this
litigation.
Simone Anderson also filed a counter-claim in the Zuri Invest action
against the Royal Bank of Scotland, seeking rescission of 3,250,000 shares
(pre-split) of Common Stock transferred to the Royal Bank of Scotland by Simone
Anderson in connection with certain financing on behalf of the Company. After
the Royal Bank of Scotland was served with the complaint, an order of default
was entered against it. Based on the order of default, representations made by
Simone Anderson, Ms. Anderson's agreement with the Company to indemnify it from
any adverse claims, and the deposit of $200,000 with the Company to secure
performance under the indemnity agreement, the Company transferred the 3,250,000
(pre-split) shares into the name of Simone Anderson and reserved an additional
3,250,000 shares of Common Stock as a contingency for future adverse claims.
Thereafter, the Company,
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS - (Continued)
-----------------
its transfer agent, and Simone Anderson received notice from the Royal Bank
of Scotland, as nominee, demanding return of the 3,250,000 shares and further
threatening legal action if the shares were not returned.
On December 14, 1995, the Company entered into an agreement ("the Zuri
Agreement") with Zuri Invest A.G., Andre Michaels and Peter Woodfield in
connection with the Zuri Invest action to partially satisfy the joint and
several judgment entered in the Zuri Invest action against the Company and
Simone Anderson and James Anderson (collectively, the "Andersons") on October
31, 1995 (the "Judgment"). The Zuri Plaintiffs agreed, subject to the receipt of
the consideration described below, not to seek any further recovery directly
from the Company on the Judgment, and to release the Company from any further
liability thereunder. The Zuri Plaintiffs also agreed not to pursue recovery
against the Andersons on the Judgment if it is judicially determined that the
Andersons have indemnification rights against the Company with respect to the
Judgment. The Company issued and delivered to each of Woodfield and Michaels
250,000 shares of the Company's Common Stock. The Company issued 600,000 shares
of the Company's Common Stock to Zuri Invest and delivered 200,000 of such
shares to Zuri Invest on or about April 10, 1996 and 200,000 shares on or about
June 11, 1996. The remaining 200,000 shares were held in escrow for delivery to
Zuri Invest on or about September 9, 1996.
As security for the Company's obligations to issue and deliver the above
described shares of Common Stock, the Company issued a promissory note in the
amount of $1.2 million payable to the Zuri Plaintiffs. The note is secured by a
deed of trust on all real property and patented and unpatented mining claims
owned by the Company. Pursuant to the Zuri Agreement, the principal amount of
the note shall be reduced as the shares issued to the Zuri Plaintiffs are sold,
dollar for dollar by the gross proceeds generated from such sales.
Pursuant to the Zuri Agreement, the Company also assigned to the Zuri
Plaintiffs an interest (33% of the Company's 60% interest) in claims asserted
against the Andersons and their controlled corporations in the action entitled
Brush Creek Mining and Development v. F. James Anderson, et al., currently
pending in the United States District Court, Northern District of California.
On December 13, 1995, the Company entered into an agreement (the "Royal
Bank Agreement") to settle the action by the Royal Bank of Scotland by
delivering to the plaintiffs in such suit (the "Royal Bank Plaintiffs") 216,667
shares of the Company's Common Stock and cash in the amount of $241,000. The
Company also assigned to the Royal Bank Plaintiffs a portion of its interest in
any total recovery from claims against the law firm formerly known as Bartel,
Eng, Miller & Torngren, the Company's formal legal counsel ("Bartel, Eng"). On
December 13, 1996, the Company is further required to deliver to each of the
Royal Bank Plaintiffs, at his or her option, additional shares of the Company's
Common Stock or additional cash. The number of shares of Common Stock or the
amount of cash each Royal Bank Plaintiff is entitled to receive is based on the
amount of his or her pro rata interest in amounts paid by the Company pursuant
to the Royal Bank Agreement. If all Royal Bank Plaintiffs elect to receive
Common Stock the Company will be required to issue and deliver a maximum of
300,000 shares in the aggregate and if all Royal Bank Plaintiffs elect to
receive cash, the Company will be required to deliver cash in the maximum
aggregate amount of $600,000.
The Company's obligations under the Royal Bank Agreement are secured by (1)
a deed of trust on all real property and patented and unpatented mineral claims
owned by the Company; (2) a first priority security interest in all of the
Company's right, title and interest in and to any and all goods, products,
yield, receivables, inventory (including any gold from any mines), any and all
exploration and drilling information, data, maps, reports or surveys, and any
and all income and proceeds derived from the Company's mining operations on
property which the Company presently or subsequently owns or leases; (3) a
first-priority security interest in the Company's right, title and interest in
and to any total recovery by the Company on the claims against Bartel, Eng; and
(4) a stipulated judgment in the amount of $3,250,000. The priority and other
matters related to the enforcement of the respective deeds of trust executed by
the Company pursuant to the Zuri Agreement and the Royal Bank Agreement are
determined by an intercreditor agreement between the Zuri Plaintiffs and the
Royal Bank Plaintiffs.
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS - (Continued)
-----------------
The Royal Bank Agreement provides that an uncured default under the Zuri
Agreement constitutes a default under the Royal Bank Agreement and that an
uncured default under the Royal Bank Agreement constitutes a default under the
Zuri Agreement.
The Company has registered the 1,616,667 shares of Common Stock issued and
delivered pursuant to the Zuri Agreement and the Royal Bank Agreement, which
represents approximately 10 percent of the total outstanding shares of the
Company's Common Stock as of June 30, 1996. This number includes the 300,000
additional shares that may be issued pursuant to the Royal Bank Agreement.
On June 18, 1996, Hinton & Alfert was substituted in as counsel for the
Company in the case Royal Bank of Scotland et. al. v. Brush Creek Mining &
Development, et. al. in the United States District Court for the Eastern
District, Case Number CV-S-94-0962 GEB GGH. Hinton & Alfert represent the
Company in its cross-complaint against attorneys Bartel, Miller, Eng & Torngren
for professional negligence and against Simone Anderson for contractual
indemnity.
On October 24, 1994, the Company filed an amended complaint against F.
James Anderson, Simone Anderson, Edward M. Lawson, Consolidated Sierra Gold
Mines, Inc. ("CSGM"), Independent Sierra Gold Mines, Inc. ("ISGM"), Bartel, Eng,
Miller & Torngren, attorneys, Robert Sibthorpe, Coopers & Lybrand and Yorkton
Securities as defendants in an action to recover damages. The suit was filed in
the United States District Court for the Northern District of California as Case
No. C94-3487 (the "Federal Action"). On April 28, 1995, the Company filed a
third amended complaint which seeks to recover damages against James and Simone
Anderson for breach of fiduciary duty, for violations of Rule 10b-5 and 16(b),
for violations of the California Corporations Code S25400(d) and S25401. The
lawsuit seeks to recover damages against Edward M. Lawson, Robert Sibthorpe and
Yorkton Securities, Inc. for breach of fiduciary duty. The lawsuit seeks to
recover damages against James and Simone Anderson, ISGM, CSGM, Robert Sibthorpe,
and Yorkton Securities, Inc. for intentional and negligent misrepresentation.
The lawsuit seeks to recover damages against the firm of Bartel, Eng, Miller &
Torngren based upon breach of fiduciary duty and negligence claims. The law firm
of Bartel, Eng, Linn & Schroder has (as successor in interest to Bartel, Eng,
Miller & Torngren) filed a counterclaim in this litigation seeking recovery from
the Company of legal fees totaling approximately $95,000. The accounting firm of
Coopers & Lybrand has been dismissed as a defendant from the litigation without
prejudice.
As to the progress of the case to date, an initial round of discovery has
been completed. On August 12, 1996, defendants Yorkton Securities and Robert
Sibthorpe filed a joint Motion for Summary Judgment. The hearing on that motion
is set for October 11, 1996. There has been no trial date set.
On November 3, 1994, the Company was served a complaint filed in Superior
Court of the State of California in and for the County of Nevada, Case No.
52943, by CSGM for amounts claimed to be due and owing to the Company. The
complaint seeks to recover $335,000 pursuant to an alleged open book account and
$950,000 pursuant to fees and expenses which CSGM allegedly incurred on behalf
of the Company for general financial advice and advice concerning mergers and
acquisitions.
On April 4, 1996, a jury returned a verdict in favor of the Company in the
action by CSGM. In addition, the jury returned a verdict against CSGM in the
amount of $30,000 on the Company's cross-action. Following the verdict, the
Company filed a motion to pierce the corporate veil of CSGM which motion was
heard on June 7, 1996. The Company's motion was granted and judgment on the
verdict was entered. As a result, F. James and Simone Anderson are personally
liable for the judgment obtained by the Company against Consolidated Sierra Gold
Mines, Inc.
On November 7, 1994, the Company was served with a complaint filed in the
Superior Court of the State of California in and for the County of Sacramento,
Case No. 543926, by James Anderson and Simone Anderson for amounts claimed to be
due and owing by the Company. The complaint seeks to recover $58,821 and
unspecified further sums they have incurred or will incur in legal fees and
costs in providing a defense in the Zuri Invest action.
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS - (Continued)
-----------------
The Company has entered into a settlement in this matter whereby the
Company has paid the past legal fees incurred by Mr. and Mrs. Anderson and has
agreed to pay the legal fees they continue to incur in defending themselves in
the Zuri Invest litigation. On February 16, 1996, this agreement became a
stipulated judgment which concluded the action.
On February 8, 1996, the Company filed a complaint against F. James
Anderson and Simone Anderson in Superior Court of the State of California, in
and for the County of Sacramento, Case No. 96AS 00513 (the "Sacramento Action").
The complaint seeks (a) judicial determination and declarations that the Company
(1) has no further obligations to advance defense fees and costs incurred by the
Andersons in connection with the Zuri litigation, including on the Andersons'
appeal of that judgment; (2) is entitled to recoup defense fees and costs
allocable to the Andersons' defense of claims in the Zuri Invest litigation for
which they were found liable; (3) is not required to indemnify the Andersons for
their liability in the Zuri Invest litigation; (4) has no duty or obligation to
the Andersons to account for, replenish, and/or return monies to or pay interest
on the $200,000 provided by the Andersons as partial indemnification to the
Company in connection with the Royal Bank litigation; and (5) is entitled to
have all amounts returned to the Company from the $200,000 which were disbursed
for the purposes other than to indemnify the Company such that the Company
receives the full net benefit of the $200,000, and (b) equitable indemnification
to collect from the Andersons their proportionate share of the judgment in the
Zuri Invest litigation.
On April 4, 1996, the Company was served with the Andersons answer to the
Sacramento Action and their cross-complaint against the Company. The answer
generally denied the allegations of the Company's complaint and asserted various
affirmative defenses. The cross-complaint seeks judicial determination and
declarations that the Company (1) is obligated to advance the Andersons' defense
costs (including costs of appeal) in the Zuri Invest litigation and defense
costs in the Federal Action and (2) is obligated to indemnify them from the
judgment in the Zuri litigation and any judgment that might be rendered against
them in the Federal Action.
Also, on April 4, 1996, the Company was served with a motion by the
Andersons for summary adjudication of two of their cross claims which would have
forced the Company to advance the Andersons' defense cost in the Zuri litigation
and the Federal Action. On May 3, 1996, the Andersons' motion was heard by the
superior court and denied.
The Company answered the Andersons' cross complaint on May 6, 1996
generally denying the allegations and asserting various defenses. The Company
also anticipates amending its original complaint to assert an additional claims
to hold the Andersons liable for the entire amount of the Royal Bank of Scotland
settlement.
The Company has been requested pursuant to a non-public informal inquiry by
the staff of the Securities and Exchange Commission ("the Commission") to
provide information to the staff of the Commission regarding the Company's
financing activities in reliance upon Regulation S under the Securities Act. The
Commission has advised the Company that the inquiry should not be construed as
an indication by the Commission or its staff that any violations of law have
occurred, nor should it be considered a reflection upon any person.
The Company is a party to other various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the business or financial position of the Company.
NOTE 14 - AGREEMENT WITH MK GOLD COMPANY
------------------------------
During 1993, the Company and MK Gold Company, a wholly owned subsidiary of
Morrison Knudsen Corporation, entered into a nonbinding letter of intent to
jointly explore and develop mineral properties in, among other places, the
Republic of Kyrghyzstan. The Company and MK Gold Company also entered into a
Joint Development Agreement to form a new corporation called MKZ Gold Company
(MKZ Gold) to explore, develop, and mine precious and base metals in the
Republic of Kyrghyzstan. On May 10, 1993, MK Gold Company and the
<PAGE>
NOTE 14 - AGREEMENT WITH MK GOLD COMPANY - (Continued)
------------------------------
Concern Kyrghyzstan acting on behalf of the government of the Kyrghyzstan
Republic entered into a general agreement to explore, develop, operate, and mine
the Jerooy Gold Project located in the Kyrghyzstan Republic. The general
agreement was a binding agreement and called for the preparation of a mining
Joint Venture Foundation Document (the Venture Agreement) with the Kyrghyzstan
Republic.
Under the terms of the Joint Development Agreement, MK Gold Company would
own 60% and the Company, through a wholly owned subsidiary, would own 40% of MKZ
Gold. Further, the board of directors of MKZ Gold would consist of five members,
three nominated by MK Gold Company and two nominated by the Company. MK Gold
Company and the Company intended to capitalize MKZ Gold with $400,000 based on
their percentage of ownership in MKZ Gold. MK Gold Company was to provide mining
operations and the Company was to provide geological services to MKZ Gold.
On September 3, 1993, the Company served MK Gold Company with a complaint,
seeking declaratory relief with regard to the Joint Development Agreement. The
Company was seeking a declaration of its rights under the Joint Development
Agreement, including a declaration that the joint venture with MK Gold Company
exists under Idaho law, that the Company and MK Gold Company have equal rights
in the management of the joint venture, and that MK Gold Company owes the
Company $150,000. After serving the complaint, the Company and MK Gold Company
had discussions about resolving the dispute. MK Gold Company paid the Company
the $150,000 owed under the Joint Development Agreement.
On November 10, 1993, the Company amended its complaint seeking dissolution
of the joint venture between the Company and MK Gold Company and alleging fraud
and deceit, breach of fiduciary duty and breach of implied covenant of good
faith and fair dealing by MK Gold Company.
In December 1993, the Company settled the lawsuit with MK Gold Company
receiving: (1) $4,232,000 cash; (2) a 4% net smelter return on any interest
which MK Gold Company obtains in the Kumtor project; and (3) the assumption of
all the Company's obligations to the International Foundation for Privatization.
The $4,232,000 is shown as sale of joint venture in the June 30, 1994
consolidated statement of operations.
NOTE 15 - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
--------------------------------------------------------------------
<TABLE>
Noncash investing and financing activities as of June 30, 1996 and 1995 are
as follows:
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Company stock issued for
Partial settlement of litigation $ 223,436 $ -
Compensation recognized on stock
options granted 160,021 -
Company stock issued for professional
services - 938,159
</TABLE>
NOTE 16 - SEGMENT INFORMATION
-------------------
The Company's activities have been devoted to the acquisition, development,
and production of mineral properties. Accordingly, the Company is considered to
be in a single line of business. To date, substantially all of the Company's
identifiable assets and operating expenditures are in the United States.
<PAGE>
NOTE 17 - CONVERTIBLE DEBENTURE PAYABLE
-----------------------------
On April 3, 1996, the Company received net proceeds of $400,000 on gross
proceeds of $450,000 from an offshore; two year, $450,000, 7% convertible
debenture. The subscriber has the option of converting all or part of the
principle to the Company's Common Stock forty-five days after the closing date
of the transaction. The note is convertible to shares at 70% of the average
share price for the five days preceding conversion. On June 17, 1996, $150,000
of the note was converted to 161,360 shares.
On July 8, 1996, the remaining $300,000 of the note was converted into
439,560 shares of the Company's Common Stock. The convertible debentures
outstanding at June 30, 1996 has been classified as current portion of long-term
debt.
NOTE 18 - SUBSEQUENT EVENTS
-----------------
In July 1996, the Company issued 695,652 additional shares of the Company's
Common Stock per a Regulation S investment agreement from the fiscal year 1996,
containing a purchase price adjustment clause (see Note 4) that required the
Company to issue such shares if the Company's low bid price fell below one
dollar during the valuation period. The Company was also required to place such
shares with the Company's escrow agent until the end of the valuation period.
Also in July 1996, the Company was required to issue 57,523 additional
shares of the Company's Common Stock per a Regulation S agreement with a
purchase price adjustment clause (see Note 4).
In September 1996, the Company received $250,000 from the sale of 757,576
shares of the Company's Common Stock per a Regulation S stock purchase
agreement. The shares were sold at 50% of the Company's closing bid prices on
the day before the sale.
<PAGE>
EXHIBIT 23.1
[BROWN ARMSTRONG LOGO]
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Amendment to the Brush Creek Mining and Development Co., Inc. Form 10-KSB for
the fiscal year ended June 30, 1996, and to the incorporation by reference
therein of our report dated August 9, 1996, with respect to the consolidated
financial statements of Brush Creek Mining and Development Co., Inc. included in
its Annual Report on Form 10-KSB, filed with the Securities and Exchange
Commission.
BROWN ARMSTRONG RANDALL & REYES
ACCOUNTANCY CORPORATION
/s/ Brown Armstrong Randall & Reyes, A.C.
Bakersfield, California
October 25, 1996
