SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 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.
(Exact Name of Registrant as Specified in its Charter)
Nevada 88-0180496
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
970 East Main Street, Suite 200, Grass Valley, California 95945
(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
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(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
<PAGE>
PART I
ITEM 1 - BUSINESS
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 $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.
<PAGE>
ITEM 1 - BUSINESS (Continued)
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 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
<PAGE>
ITEM 1 - BUSINESS (Continued)
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.
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."
<PAGE>
ITEM 1 - BUSINESS (Continued)
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 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.
<PAGE>
ITEM 1 - BUSINESS - (Continued)
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.
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.
<PAGE>
ITEM 1 - BUSINESS - (Continued)
Focus on Core Business (continued)
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 should be available within three weeks.
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 the Company's escrow agent until the end of the
valuation period.
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.
<PAGE>
ITEM 2 - PROPERTIES
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. 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.
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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
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.
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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
Gardner's Point and Pioneer Mines (continued)
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 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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
Ruby Mine - (continued)
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 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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
Ruby Mine - (continued)
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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
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.
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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
Carson Mine - (continued)
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 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.<PAGE>
ITEM 2 - PROPERTIES - (Continued)
Carson Mine - (continued)
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 porphyry-slate 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.
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
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 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.<PAGE>
ITEM 2 - PROPERTIES - (Continued)
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.
The Omega Mine was active during the 1920's and 1930's when a
labyrinth of 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
<PAGE>
ITEM 2 - PROPERTIES - (Continued)
Unpatented Property Interests - (continued)
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.
ITEM 3 - LEGAL PROCEEDINGS
During the fiscal year ended June 30, 1996, the Company entered 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 initial transactions, or lack thereof, which
caused the settled damages to 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-
compliant against CSGM.
With that result, all meaningful 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.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS (Continued)
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, 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 9, 1996, and 200,000 shares on or
about June 9, 1996. The remaining 200,000 shares were held in escrow for
delivery to Zuri Invest on 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.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS (Continued)
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.
<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 10 b-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.
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.
<PAGE>
ITEM 3 - LEGAL PROCEEDINGS - (Continued)
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 Anderson's 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.
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 12, 1996, the Company held an annual meeting of
shareholders to vote upon the election of directors and approve
appointment of Brown Armstrong Randall & Reyes as independent auditors for
the fiscal year ended June 30, 1996.
At the annual meeting James S. Chapin, Howard Kalodner, Albert Miller
and Kenneth S. Friedman were elected to serve as directors until the next
annual meeting. For each of the above directors 6,994,603 shares were
represented. The following are the results of the voting.
Howard Kalodner Albert Miller
For nominees 6,956,155 6,954,070
Withhold authority 5,656 7,741
Abstained 32,792 32,792
6,994,603 6,994,603
James S. Chapin Kenneth S. Friedman
For nominees 6,924,237 6,956,219
Withhold authority 13,166 5,592
Abstained 57,200 32,792
6,994,603 6,994,603
In addition, the shareholders voted 6,905,059 shares for approval of
Brown Armstrong Randall & Reyes as independent auditors, 17,321 shares
voted against, and 71,343 shares abstained.
<PAGE>
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded in the over-the counter
market and is quoted in the National Association of Securities Dealers
Automated Quotation System (NASDAQ) under the symbol BCMD.
There is no established public trading market for the Company's
Common Stock. The following table sets forth the range of the high and
low closing bid prices of the Company's Common Stock for the fiscal years
ended June 30, 1996 and 1995. The bid quotations set forth reflect inter-dealer
prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.
Range of Bid Prices
Low High
Fiscal Year 1996 First Quarter $ 2.37 $ 4.93
Second Quarter $ 0.25 $ 3.43
Third Quarter $ 0.72 $ 1.37
Fourth Quarter $ 0.81 $ 2.25
Fiscal Year 1995 First Quarter $ 2.13 $ 3.00
Second Quarter $ 1.88 $ 3.63
Third Quarter $ 2.75 $ 3.00
Fourth Quarter $ 1.81 $ 2.75
As of June 30, 1996, the Company's Common Stock was held of record
by 6,673 stockholders. The Company has never paid dividends on its Common
Stock.
<PAGE>
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
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.
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS (Continued)
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30,
1995
(Continued)
Liquidity and Capital Resources (continued)
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. 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.
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS (Continued)
Fiscal Year Ended June 30, 1995 Compared with Fiscal Year Ended June 30,
1994
(Continued)
Liquidity and Capital Resources (continued)
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 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.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item 7 is set forth in Item 13 to this Form
10-KSB at pages 34 through 62.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information called for in Item 9 is incorporated by reference to
the definitive proxy material of the Company to be filed with the
Securities and Exchange Commission within 120 days from the year end in
connection with the Company's 1997 annual meeting of stockholders.
ITEM 10 - EXECUTIVE COMPENSATION
The information called for in Item 10 is incorporated by reference
to the definitive proxy material of the Company to be filed with the
Securities and Exchange Commission within 120 days from year end in
connection with the Company's 1997 annual meeting of stockholders.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information called for in Item 11 is incorporated by reference
to the definitive proxy material of the Company to be filed with the
Securities and Exchange Commission within 120 days from the year end in
connection with the Company's 1997 annual meeting of stockholders.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in Item 12 is incorporated by reference
to the definitive proxy material of the Company to be filed with the
Securities and Exchange Commission within 120 days from the year end in
connection with the Company's 1997 annual meeting of stockholders.
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.<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
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.*
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.*
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
2. EXHIBITS - (Continued)
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.++
10.23 Stock Option Agreement with Simone Anderson.++
10.24 Stock Option Agreement with G. Michael Pickering.++
10.25 Stock Option Agreement with Edward Lawson.++
10.26 Stock Option Agreement with Susan Miller.++
10.27 Stock Option Agreement with Michael Skopos.++
10.28 Stock Option Agreement with Dave Trueman.++
10.29 Stock Option Agreement with Peter LeCoutier.++
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
2. EXHIBITS - (Continued)
10.30 Lease on the Kate Hardy - Omega Mines.++
10.31 Letter of Agreement with Morrison Knudsen.+++
10.32 Joint Venture Agreement with MK Gold Company.++++
10.33 Modification of Lease Purchase Agreement for Rising Sun
Mine dated November 1, 1994.
10.34 Letter agreements regarding option to lease Dreadnought
Mine.
11.1 Computation of per share earnings.
16.1 Letter regarding change in certifying accountant.
21.1 List of Subsidiaries of the Company.
* 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.
++ 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.
+++ Previously filed on Form 8-K on September 10, 1992.
++++ Previously filed on Form 8-K on June 15, 1994.
Previously filed on Form 8-K on July 12, 1994.
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.
<PAGE>
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K - (Continued)
3. 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.
<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: /s/ James S. Chapin
James S. Chapin
Chief Executive Officer,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: /s/ James S. Chapin
James S. Chapin
Chief Executive Officer,
Chief Financial Officer, and
Director
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
Chairman of the Board
Date: /s/ Howard I. Kalodner
Howard I. Kalodner
Director
Date: /s/ Albert Miller
Albert Miller
Director
Date: /s/ Ken Friedman
Ken Friedman
Director
<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.
<PAGE>
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
<PAGE>
BRUSH CREEK MINING AND DEVELOPMENT COMPANY, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
ASSETS
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
<PAGE>
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
Development Stage
Period from
July 1, 1989
Through
1996 1995 June 30, 1996
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
Net Loss $ (9,270,102) $(4,671,396) $ (23,875,250)
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
<PAGE>
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
Accumulated
Common Stock Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
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)
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)
<PAGE>
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)
Accumulated
Common Stock Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
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)
<PAGE>
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)
Accumulated
Common Stock Deficit
During the
Number of Accumulated Development
Shares Amount Deficit Stage Total
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
<PAGE>
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
Development Stage
Period from
July 1, 1989
Through
1996 1995 June 30, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(9,270,102) $(4,671,396) $(23,875,250)
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 10,169,573
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)
<PAGE>
Development Stage
Period from
July 1, 1989
Through
1996 1995 June 30, 1996
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)
<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.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 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.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
Asset Impairment (continued)
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.
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.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
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 and Exchange 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
expects to issue an additional 753,000 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 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.<PAGE>
NOTE 5 - OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment consists of the following at June 30, 1996:
Office furniture and equipment $ 114,744
Vehicles 165,050
279,794
Less accumulated depreciation (163,957)
$ 115,837
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT
The Company's net investment in mineral properties and mining equipment as of
June 30, 1996 is as follows:
Land and Development Mining
Land Options Costs Equipment Total
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
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:
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT (Continued)
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.
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.
<PAGE>
NOTE 6 - MINERAL PROPERTIES AND MINING EQUIPMENT (Continued)
Merger with Sierra Gold Properties, Inc. - Kate-Hardy Mine (continued)
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
Accounts payable and accrued liabilities consist of the following at June 30,
1996:
Accounts payable $ 947,745
Performance deposit (Note 13) 176,223
Accrued payroll and other 316,300
$ 1,440,268
NOTE 8 - LONG-TERM DEBT
Long-term debt consists of the following at June 30, 1996:
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
<PAGE>
NOTE 8 - LONG-TERM DEBT (Continued)
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
$ -
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 pre-change 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.
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY
During Fiscal 1996, the following major equity transactions occurred:
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.
The Company issued 1,100,000 shares as partial settlement of the Zuri Invest
litigation.
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:
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.
During fiscal 1994, the following major equity transactions occurred:
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.(*)
The Company issued shares of the Company's Common Stock pursuant to a service
agreement with James Anderson totaling $421,875.
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:
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.(*)
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.(*)
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.(*)
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.(*)
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.(*)
The Company sold 10,664 shares of stock at $7.50 per share, totaling
$80,000.
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY - (Continued)
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:
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.(*)
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.(*)
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.(*)
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.(*)
The Company issued 24,439 shares of Common Stock in satisfaction of
outstanding debt obligations amounting to $336,617.(*)
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.(*)
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.(*)
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.(*)
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.
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.
<PAGE>
NOTE 10 - SHAREHOLDERS' EQUITY - (Continued)
During fiscal 1991, the following major equity transactions occurred:
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.
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.
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.(*)
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.(*)
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.(*)
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)
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.
In March 1990, Ms. Anderson sold 66,667 shares of her Common Stock to Sungold
Mining Corp. (Sungold) for $10,000 as an inducement for an affiliate of
Sungold to lend the Company $140,000.(*)
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.
The following is a summary of Common Stock options and warrants outstanding as
of June 30, 1996:
Shares Shares
Under Under Price Expiration
Warrants Options Per Share Date
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
<PAGE>
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
Shares Shares
Under Under Price Expiration
Warrants Options Per Share Date
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
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 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 initial transactions, or lack thereof, which caused the settled damages to
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-compliant
against CSGM.
With that result, all meaningful 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.
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
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, 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 the
plaintiffs, 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 5,
1996 and 200,000 shares on or about June 9, 1996. The remaining 200,000 shares
were held in escrow for delivery to Zuri Invest.
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.
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
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.
<PAGE>
NOTE 13 - 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 10 b-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.
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. 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.
<PAGE>
NOTE 13 - LEGAL PROCEEDINGS (Continued)
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.
<PAGE>
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 Kyrghzstan. 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 Concern
Kyrghyzaltyn acting on behalf of the government of the Kyrghyzian Republic
entered into a general agreement to explore, develop, operate, and mine the
Jerooy Gold Project located in the Kyrghyzian 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 Kyrghyzian
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.
<PAGE>
NOTE 15 - SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND
FINANCING ACTIVITIES
Noncash investing and financing activities as of June 30, 1996 and 1995 are as
follows:
1996 1995
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
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.
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 Reg S investment agreement from the fiscal year 1996,
containing a purchase price adjustment clause (see Note 5) 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 Reg 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 Reg 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 11.1
COMPUTATION OF EARNINGS PER SHARE
<PAGE>
Year Ended
June 30, 1996 June 30, 1995
Net Loss $ (9,270,102) $ (4,671,396)
Weighted Average Common
Shares Outstanding divided by 9,634,616 divided by 4,799,311
Net Loss per Common Share $ (.96) $ (.97)
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<PAGE>
1. B. Creek Acquisition Corporation
2. Alpha Hardware
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,275,413
<SECURITIES> 0
<RECEIVABLES> 40,462
<ALLOWANCES> 0
<INVENTORY> 24,290
<CURRENT-ASSETS> 1,391,455
<PP&E> 11,399,493
<DEPRECIATION> (798,666)
<TOTAL-ASSETS> 12,485,266
<CURRENT-LIABILITIES> 3,720,129
<BONDS> 0
0
0
<COMMON> 43,752,439
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,485,266
<SALES> 0
<TOTAL-REVENUES> 42,160
<CGS> 0
<TOTAL-COSTS> 9,245,028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,234
<INCOME-PRETAX> (9,270,102)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,270,102)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,270,102)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
