<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
For the transition period from ________ to _________
Commission file number: 0-14136
Casmyn Corp.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-0987840
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
28720 Canwood Street, Suite 207
Agoura Hills, California 91301
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(818) 879-6501
---------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1999, the Company had 243,578,142 shares of common stock
issued and outstanding.
Documents incorporated by reference: None.
1
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CASMYN CORP. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - June 30,
1999 and September 30, 1998
Consolidated Statements of Operations (Unaudited) -
Three Months and Nine Months Ended June 30, 1999 and
1998
Consolidated Statements of Comprehensive Income
(Unaudited) - Three Months and Nine Months Ended June
30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements (Unaudited) -
Nine Months Ended June 30, 1999 and 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
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Casmyn Corp. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
----------- -------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 3,016,079 $ 4,356,200
Marketable securities 1,011,003 1,588,536
Accounts receivable 227,555 301,456
Inventories (Note 1) 478,495 643,135
Prepaid expenses and other
current assets 20,721 20,830
----------- -----------
4,753,853 6,910,157
----------- -----------
PROPERTY AND EQUIPMENT 20,725,377 20,214,581
Less accumulated
depreciation, depletion
and amortization (3,034,085) (2,053,079)
----------- -----------
17,691,292 18,161,502
----------- -----------
Other assets 10,244 23,262
----------- -----------
$22,455,389 $25,094,921
----------- -----------
----------- -----------
</TABLE>
(continued)
3
<PAGE>
Casmyn Corp. and Subsidiaries
Consolidated Balance Sheets (Unaudited) (continued)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ -------------
<S> <C> <C>
LIABILITIES
CURRENT
Accounts payable $ 503,320 $ 518,823
Accrued liabilities 635,350 893,236
Preferred Stock penalty
(Note 2) 3,736,352 839,737
------------ -------------
4,875,022 2,251,796
------------ -------------
PREFERRED STOCK (Note 2) 21,041,599 44,440,451
------------ -------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
Preferred stock, $0.10 par value
Authorized - 20,000,000 shares
Issued and outstanding -
513,415 shares at June 30,
1999 and 1,084,347 shares at
September 30, 1998
(Liquidation preference -
$21,041,599 at June 30, 1999
and $44,440,451 at
September 30, 1998) (Note 2)
Common stock, $0.04 par value
Authorized - 300,000,000 shares
Issued and outstanding -
243,578,142 shares at June 30,
1999 and 217,751,710 shares
at September 30, 1998 (Note 2) 9,743,126 8,710,068
Additional paid-in capital 53,503,337 29,272,294
Accumulated deficit (62,974,218) (55,866,898)
Accumulated other comprehensive
income (Note 1) (3,733,477) (3,712,790)
------------ -------------
(3,461,232) (21,597,326)
------------ -------------
$ 22,455,389 $ 25,094,921
------------ -------------
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Casmyn Corp. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Gold sales $ 939,811 $ 1,240,077
---------- -----------
COSTS AND EXPENSES
Mineral production 747,378 1,084,258
General and administrative 489,674 529,839
Compensatory stock options
(Note 1) 4,331
Depreciation, depletion and
amortization 292,246 209,758
Mineral exploration 4,625 102,342
---------- -----------
1,538,254 1,926,197
---------- -----------
LOSS FROM OPERATIONS (598,443) (686,120)
---------- -----------
OTHER INCOME (EXPENSE)
Minority interest in net
loss of consolidated
subsidiary 41,162
Equity in net loss of
affiliate, including
write-down of investment (3,152,368)
Gain (loss) on foreign
currency translation (13,890) 208,101
Interest income, net 64,005 146,426
Gain on sale of investments 16,000
Loss on short-term
investments (19,151)
Other income (expense), net 8,411 (3,330)
---------- -----------
39,375 (2,744,009)
---------- -----------
NET LOSS $ (559,068) $(3,430,129)
---------- -----------
---------- -----------
</TABLE>
(continued)
5
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Casmyn Corp. and Subsidiaries
Consolidated Statements of Operations (Unaudited) (continued)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS
Net loss $ (559,068) $(3,430,129)
Less:
Dividends on Preferred
Stock (Note 2) (251,425) (529,925)
Amortization of discount
on Preferred Stock
(Note 2) (2,966,567)
Preferred Stock penalty
(Note 2) (1,146,723)
----------- -----------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $(1,957,216) $(6,926,621)
----------- -----------
----------- -----------
LOSS PER COMMON SHARE - BASIC
AND DILUTED (Note 1) $(0.01) $(0.04)
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 236,385,023 171,066,305
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Casmyn Corp. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
REVENUE
Gold sales $ 2,872,764 $ 3,441,483
----------- -----------
COSTS AND EXPENSES
Mineral production 2,135,377 2,509,168
General and administrative 1,106,027 1,880,632
Compensatory stock options
(Note 1) 12,993
Depreciation, depletion and
amortization 891,469 517,724
Mineral exploration 13,875 261,165
----------- -----------
4,159,741 5,168,689
----------- -----------
LOSS FROM OPERATIONS (1,286,977) (1,727,206)
----------- -----------
OTHER INCOME (EXPENSE)
Minority interest in net
loss of consolidated
subsidiary 122,705
Equity in net loss of
affiliate, including
write-off of investment (3,152,368)
Gain (loss) on foreign
currency translation (31,233) 266,305
Interest income, net 242,052 578,675
Gain on sale of investments 159,304
Loan guarantee loss (Note 5) (4,978,424)
Loss on short-term
investments (43,228)
Other income (expense), net 8,411 (22,258)
----------- -----------
176,002 (7,026,061)
----------- -----------
NET LOSS $(1,110,975) $(8,753,267)
----------- -----------
----------- -----------
</TABLE>
(continued)
7
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Casmyn Corp. and Subsidiaries
Consolidated Statements of Operations (Unaudited) (continued)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1999 1998
----------- ------------
<S> <C> <C>
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS
Net loss $(1,110,975) $ (8,753,267)
Less:
Dividends on Preferred
Stock (Note 2) (741,175) (1,755,500)
Amortization of discount
on Preferred Stock
(Note 2) (809,907) (7,031,820)
Preferred Stock penalty
(Note 2) (4,445,263)
----------- ------------
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $(7,107,320) $(17,540,587)
----------- ------------
----------- ------------
LOSS PER COMMON SHARE - BASIC
AND DILUTED (Note 1) $(0.03) $(0.24)
------ ------
------ ------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 225,473,013 72,170,982
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
8
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Casmyn Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET LOSS $ (559,068) $(3,430,129)
Other comprehensive income
(Note 1):
Foreign currency translation
adjustment (Note 1) 51,606 (69,579)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (507,462) $(3,499,708)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
Casmyn Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET LOSS $(1,110,975) $(8,753,267)
Other comprehensive income
(Note 1):
Foreign currency translation
adjustment (Note 1) (20,687) (140,372)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $(1,131,662) $(8,893,639)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
Casmyn Corp. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,110,975) $(8,753,267)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation, depletion
and amortization 891,469 517,724
Foreign exchange (gain)
loss 31,233 (266,305)
Equity in net loss of
affiliate, including
write-off of investment 3,152,368
Minority interest in net
loss of consolidated
subsidiary (122,706)
Compensatory stock options 12,993
Loss on short-term
investments 43,228
Loan guarantee loss 4,978,424
Changes in operating
assets and liabilities:
(Increase) decrease in:
Accounts receivable 73,901 (217,751)
Inventories 164,640 6,511
Prepaid expenses and
other current assets 109 173,248
Other assets 13,018 29,838
Increase (decrease) in:
Accounts payable (15,502) (293,537)
Accrued liabilities (257,886) (194,673)
----------- -----------
Net cash used in operating
activities (153,772) (990,126)
----------- -----------
</TABLE>
(continued)
11
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Casmyn Corp. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) (continued)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
INVESTING ACTIVITIES
Purchase of property and
equipment (421,259) (3,648,716)
Purchase of marketable
securities (2,053,343)
Proceeds from disposition
of marketable securities 534,305 336,361
----------- -----------
Net cash provided by (used
in) investing activities 113,046 (5,365,698)
----------- -----------
FINANCING ACTIVITIES
Decrease in restricted cash 5,074,659
Payment under loan guarantee (4,978,424)
Repayments of long-term debt (58,418)
Decrease in line of credit (4,966,160)
Exercise of stock options 2,796
Purchase and retirement of
common stock (2,037,157)
Purchase and retirement of
Preferred Stock (1,247,472)
----------- -----------
Net cash used in financing
activities (1,247,472) (6,962,704)
----------- -----------
Effect of exchange rate changes
on cash and cash equivalents (51,923) 125,933
----------- -----------
CASH AND CASH EQUIVALENTS:
Net decrease (1,340,121) (13,192,595)
At beginning of period 4,356,200 18,185,515
----------- -----------
At end of period $ 3,016,079 $ 4,992,920
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
Casmyn Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Nine Months Ended June 30, 1999 and 1998
1. Organization and Basis of Presentation
Basis of Presentation - The accompanying consolidated financial statements
include the operations of Casmyn Corp. and its wholly-owned and controlled
subsidiaries (the "Company"). All intercompany accounts and transactions
have been eliminated on consolidation. The consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles in the United States.
Business - Substantially all of the Company's assets and operations are
concentrated on mineral resource development. Subsequent to September 30,
1998, the Company has been focusing on its gold mining operations in
Zimbabwe.
Going Concern - Although the consolidated financial statements have been
prepared on the basis of accounting principles applicable to a going
concern, the rights of the holders of the First Convertible Preferred
Stock (the "Preferred Stock") to require the Company to redeem their
shares creates uncertainty with respect to the validity of this
assumption. If the going concern assumption was determined to not be
appropriate for these consolidated financial statements, then adjustments
may be necessary to the carrying values of assets and liabilities, the
reported net loss and the balance sheet classifications used, and these
adjustments may be material.
Foreign Currency Translation - Effective October 1, 1997, the United
States dollar was adopted as the functional currency for the Company's
operations in Zimbabwe. Non-monetary assets and liabilities are translated
into United States dollars at historical rates, which for the pre-existing
balances was the rate in effect at October 1, 1997 of approximately
US$1.00 = ZIM$13.00. Amortization and other charges related to
non-monetary items are translated into United States dollars using the
same exchange rate. Revenue and expense accounts continue to be translated
using the weighted average exchange rate prevailing during the reporting
period. The average exchange rate for the three months ended June 30, 1999
was approximately US$1.00 = ZIM$39.00 and for the nine months ended June
30, 1999 was approximately US$1.00 = ZIM$38.00. Translation adjustments
arising from the Zimbabwe operations are reflected in the statement of
operations.
The Company's operations outside the United States, other than in
Zimbabwe, are measured using the respective local currency as the
functional currency. Assets and liabilities of these operations are
translated into United States dollars at the weighted average rate of
exchange prevailing during each period. Translation adjustments arising
from differences in exchange rates from period to period are reflected in
the accumulated foreign currency translation adjustment account, which is
included as a component of other comprehensive income in stockholders'
equity (deficiency).
13
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Comments - The accompanying consolidated financial statements are
unaudited, but in the opinion of management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to
present fairly the financial position at June 30, 1999, results of
operations for the three months and nine months ended June 30, 1999 and
1998, comprehensive income for the three months and nine months ended June
30, 1999 and 1998, and cash flows for the nine months ended June 30, 1999
and 1998. The consolidated balance sheet as of September 30, 1998 is
derived from the Company's audited financial statements.
Certain information and footnote disclosures normally included in
financial statements that have been prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations of the Securities and Exchange Commission,
although management of the Company believes that the disclosures contained
in these financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1998, as filed with the Securities and Exchange Commission.
New management is investigating whether the Company's poor financial
performance and current financial condition may be related, in part, to
potentially improper transactions by former management and certain other
parties. Although new management believes that the information contained
in this Quarterly Report on Form 10-Q is accurate as of the date hereof,
such investigation may result in modification of the information contained
herein.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The most significant estimates used by management in preparing
the accompanying consolidated financial statements include estimates of
future gold prices, recoverable reserves and estimated capital costs,
which are utilized to assess the carrying value of the Company's mineral
properties, plant and equipment and to calculate depreciation and
depletion charges.
The results of operations for the three months and nine months ended June
30, 1999 are not necessarily indicative of the results of operations to be
expected for the full fiscal year ending September 30, 1999.
Inventories - Inventories consist of mining supplies.
Reclassification - Certain prior period amounts have been reclassified to
conform to the current year presentation.
Compensatory Stock Options - During the fiscal year ended September 30,
1995, the Company, under the direction of prior management,
14
<PAGE>
issued stock options under its 1995 Incentive Stock Option Plan to
certain employees at below fair market value, resulting in the
recognition of compensation expense over the vesting period through
September 30, 1999.
Other Comprehensive Income - The only component of other comprehensive
income is foreign currency translation adjustment.
Loss Per Share - Basic earnings per share are calculated by dividing net
income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution that would occur if securities or other contracts to issue shares
of common stock, including stock options, warrants and convertible
preferred stock, were exercised or converted into shares of common stock.
These potentially dilutive securities were anti-dilutive for all periods
presented, and accordingly, basic and diluted earnings per share are the
same for all periods presented.
2. Stockholders' Equity (Deficiency)
Preferred Stock - During the three months ended June 30, 1998 and 1999,
the Company issued 21,197 shares and 10,057 shares, respectively, of
Preferred Stock as the quarterly payment of the 8% annual dividend on the
Preferred Stock. The aggregate value of such shares of Preferred Stock of
$529,925 and $251,425 for the three months ended June 30, 1998 and 1999,
respectively, was recorded at the stated value of $25.00 per share.
During the nine months ended June 30, 1998 and 1999, the Company issued
70,220 shares and 29,647 shares, respectively, of Preferred Stock as the
aggregate quarterly payment of the 8% annual dividend on the Preferred
Stock. The aggregate value of such shares of Preferred Stock of $1,755,500
and $741,175 for the nine months ended June 30, 1998 and 1999,
respectively, was recorded at the stated value of $25.00 per share.
During the nine months ended June 30, 1999, under the direction of new
management, the Company paid $1,247,472 to repurchase and retire 598,655
shares of Preferred Stock at a significant discount in relation to the
penalty and liquidation preference claims of such Preferred Stock. The
Company also converted 1,924 shares of Preferred Stock into 25,826,432
shares of common stock during the nine months ended June 30, 1999. As a
result of these repurchases and conversions, and the attendant waivers by
the holders of the Preferred Stock of an accrued penalty obligation of
$1,548,648 and the redemption liquidation preference of $24,553,836, the
Company's stockholders' equity increased by $26,102,484.
The Preferred Stock Investment Agreement dated April 11, 1997 and the
Preferred Stock Investment Agreement dated September 2, 1997 (the
"Investment Agreements") specify that the Preferred Stock is convertible
into common stock at a discount to the common stock price ranging from
8.5% to 39%, depending on the date on which such shares were converted.
This discount is considered to be an additional Preferred Stock dividend
according to Securities and
15
<PAGE>
Exchange Commission accounting rules (the "Imputed Dividend"), and is
recorded as a charge to accumulated deficit and a corresponding
increase to additional paid-in capital. During the nine months ended
June 30, 1998 and 1999, the Company recorded an Imputed Dividend of
$7,031,820 and $809,907, respectively. During the three months ended
June 30, 1998, the Company recorded an Imputed Dividend of $2,966,567.
The Company did not record an Imputed Dividend during the three months
ended June 30, 1999, as the Company completed the recognition of this
Imputed Dividend during the three months ended December 31, 1998.
Pursuant to the Investment Agreements, a technical default occurred when
the Company's common stock was delisted from the NASDAQ SmallCap Market on
July 31, 1998. The Company may be obligated to pay the holders of the
Preferred Stock a cash penalty of 3% of the total purchase price of the
Preferred Stock during any period in excess of 30 days that the Company's
common stock is not listed and traded on NASDAQ or a national securities
exchange. The Investment Agreements provide the holders of the Preferred
Stock with the opportunity to have their shares redeemed by the Company at
the adjusted liquidation preference plus accrued but unpaid dividends if
the 3% penalty is not paid within 30 days of when due. The Company
believes that the exercise of such rights by the holders of the Preferred
Stock could be subject to legal challenge by the Company.
The Company is currently engaged in discussions with the holders of the
remaining shares of Preferred Stock regarding various matters, including a
waiver of the penalty and of their rights to require the Company to redeem
their shares of Preferred Stock. There can be no assurances that the
Company will be able to obtain a waiver or that the holders of the
Preferred Stock will not exercise their rights to require the Company to
redeem their shares. Should the holders of the Preferred Stock demand
payment of the cash penalty or exercise their rights to require the
Company to redeem their shares, and should the Company not prevail in its
challenge to any such asserted rights, the Company would likely have no
other choice than to file for bankruptcy protection.
On June 2, 1999, the holders of more than 10% of the outstanding shares of
common stock and the holders of more than 10% of the outstanding shares of
Preferred Stock sent a letter to the Company's Board of Directors
proposing amendments to the Company's Articles of Incorporation and
calling for a special meeting of the Company's stockholders to consider a
vote on such amendments. The proposed amendments call for a one for five
hundred reverse stock split of the common stock, a conversion of each
share of Preferred Stock into 8.5 shares of post-reverse split common
stock, and an increase in the Company's authorized shares of capital
stock. These amendments, if approved by the Company's stockholders, would
result in the current holders of Preferred Stock owning approximately 90%
of the issued and outstanding shares of common stock following the
completion of the above-described reverse stock split and conversion.
While the Company's Board of Directors has determined not to take a
position or make a recommendation regarding this proposal, management of
the Company has responded to this proposal and is continuing discussions
with such stockholders.
16
<PAGE>
Since the Company's common stock was delisted from NASDAQ on July 31,
1998, the Company has recorded a penalty of $1,146,723 and $4,445,263 for
the three months and nine months ended June 30, 1999, respectively, which
has not been paid. In connection with the repurchase or conversion of
600,579 shares of Preferred Stock during the nine months ended June 30,
1998, such holders have waived the right to claim their proportionate
share of the penalty, thus reducing the corresponding potential penalty
obligation by $1,548,648.
Since the right to require the Company to redeem the shares of Preferred
Stock outstanding at September 30, 1998 and June 30, 1999 is outside the
control of the Company, the carrying value of the Preferred Stock at such
dates has been recorded in the consolidated financial statements at their
redemption liquidation preference of $44,440,451 and $21,041,599,
respectively, and such shares have been reclassified out of the
stockholders' equity (deficiency) section of the consolidated balance
sheet. In connection with the repurchase of 598,655 shares of Preferred
Stock for $1,247,472 and the conversion of 1,924 shares of Preferred Stock
into 25,826,432 shares of common stock during the nine months ended June
30, 1999, such holders have waived the right to claim their proportionate
share of the liquidation preference, thus reducing the redemption
liquidation preference, and the corresponding potential redemption
obligation, by $24,553,836.
Common Stock - During the nine months ended June 30, 1998, under the
direction of prior management, the Company paid $2,037,157 to repurchase
and retire 402,500 shares of common stock that were acquired in open
market transactions.
During the three months ended June 30, 1999, the Company issued 20,401,640
shares of common stock upon conversion of 1,664 shares of Preferred Stock.
During the nine months ended June 30, 1999, the Company issued 25,826,432
shares of common stock upon conversion of 1,924 shares of Preferred Stock.
Stock Option - Effective January 18, 1999, the Board of Directors of the
Company granted the Company's President and Chief Executive Officer an
option to purchase 75,807 shares of Preferred Stock at an exercise price
of $2.00 per share, which the Board of Directors believes approximates
fair market value at the grant date. The stock option is exercisable
immediately through December 23, 1999, and is subject to annual renewal if
not terminated by the Board of Directors.
3. Commitments and Contingencies
During March 1999, the Company was advised of the results of an
examination report prepared by the Internal Revenue Service with respect
to certain transactions during 1994 between a predecessor entity of the
Company and a former officer of the Company. The findings, which indicate
a tax liability of approximately $2,000,000, including penalties and
interest, are preliminary in nature. The Company intends to contest this
matter, and is
17
<PAGE>
currently in the process of preparing its response. As this matter is
in an early stage, its ultimate resolution is not determinable at this
time.
On February 16, 1998, the Company, under the direction of prior
management, entered into an agreement with a financial advisor to render
certain financial advisory and investment banking services to the Company.
The services to be provided included advice on strategic alternatives and
implementation of the proposed restructuring of the Preferred Stock.
Efforts to restructure the Preferred Stock through the assistance of the
financial advisor were unsuccessful and were terminated during April 1998.
Nonetheless, should the Company complete a restructuring of the Preferred
Stock within two years from the termination date, the financial advisor
may assert that the structure or method of such restructuring entitles it
to a success fee of $1,000,000 plus potential additional amounts as stated
in the agreement. Although the Company would vigorously contest any claim
by the financial advisor for payment, there can be no assurances that the
Company would be successful in this regard.
On October 1, 1998, the Company entered into a services agreement with a
company controlled by a director and former President of the Company for
the services of that director. The agreement provides for annual payments
of $100,000, and is for a term of one year commencing October 1, 1998. The
agreement continues indefinitely thereafter, and can be terminated by
either party with not less than 30 days notice.
4. WaterPur International Inc.
Through September 30, 1997, under the direction of prior management, the
Company advanced approximately $9,000,000 to WaterPur International Inc.,
a Delaware corporation ("WaterPur"), an affiliated public company with
common officers and directors. In addition, during this same period of
time, the Company provided additional consideration to WaterPur of
approximately $3,000,000, including marketable securities with a value at
the time of transfer of approximately $2,500,000.
Effective September 30, 1997, subject to certain conditions, the Company,
under the direction of prior management, entered into an agreement to
restructure essentially its entire investment in WaterPur in exchange for
an aggregate of 7,900,004 shares of convertible preferred stock of
WaterPur. Also effective September 30, 1997, the Company's Board of
Directors approved the spin-off of the 7,900,004 shares of convertible
preferred stock to the common and preferred stockholders of the Company of
record on October 15, 1997, subject to compliance with regulatory
requirements and certain other conditions. The approximately $12,000,000
of consideration that the Company had transferred to WaterPur through
September 30, 1997 was reflected for accounting purposes as an investment
in WaterPur, and corresponding dividend payable, of $4,574,368 at
September 30, 1997.
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During the fiscal year ended September 30, 1998, due to a significant and
prolonged decrease in the market value of WaterPur's common stock,
WaterPur's inability to repay amounts borrowed from the Company, and
WaterPur's continuing need for additional loans, management of the Company
determined that there had been an impairment in the value of the
investment in WaterPur, and wrote off the entire investment in WaterPur.
Accordingly, at September 30, 1998, the Company's investment in WaterPur,
and the corresponding dividend payable, had been reduced to zero. In
December 1998, the Board of Directors determined not to effect the
spin-off of the Company's preferred stock investment in WaterPur for
several reasons, including WaterPur's inability to obtain regulatory
approval to date and in the foreseeable future, and its inability to
complete its annual audit and to make its securities filings on a timely
basis.
During September 1998, the Company began implementation of a plan to
separate the operations, personnel and executive management of the Company
and WaterPur, which had been substantially completed by December 31, 1998.
Pursuant to that certain Share Exchange Agreement dated as of May 7, 1999
between WaterPur and Gary T.C. Joice and Henriette Martinitz
(collectively, the "ProSafe Shareholders"), WaterPur acquired all of the
outstanding capital stock of ProSafe Fire Training Systems, Inc., an
Ontario, Canada corporation ("ProSafe"), in consideration for the issuance
to the ProSafe Shareholders of an aggregate of 218,833 shares of the
Series B Convertible Preferred Stock of WaterPur. Pursuant to that certain
Asset Purchase Agreement dated as of May 7, 1999 between WaterPur and Duck
Marine Systems, Inc. ("DMS"), WaterPur acquired from DMS substantially all
of the assets, properties and operating contracts of DMS, subject to
certain liabilities of DMS, in consideration of the issuance to DMS of an
aggregate of 218,833 shares of the Series B Convertible Preferred Stock of
WaterPur (the "DMS Acquisition"). The closings of the ProSafe acquisition
and the DMS acquisition occurred simultaneously on May 10, 1999 and were
conditioned on each other. Each share of Series B Convertible Preferred
Stock is convertible into 1,000 shares of common stock of WaterPur. As a
result of these acquisition transactions, the shareholders and management
of Pro Safe and DMS effectively assumed the management and control of
WaterPur. However, Mehdi Nimjee, a board member associated with prior
management, remained on the WaterPur board of directors subsequent to
these transactions.
As a result of WaterPur's inability to accomplish certain actions and
fulfill certain obligations to the Company, including the repayment of
various advances, as well as the May 1999 acquisition transactions
effected by WaterPur, the Company is reviewing potential claims that it
may have against WaterPur and its former and current officers and
directors, and certain other parties.
5. Loan Guarantee Loss
As of September 30, 1997, the Company, under the direction of prior
management, had deposited $5,074,659 of restricted cash (including
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accrued interest of $74,659) with two financial institutions to
guarantee two short-term loans. Under agreements with such parties, the
loans were secured by certain investment accounts containing shares of
common stock of the Company. During the three months ended March 31,
1998, the significant decline in the price of the Company's common
stock created an impairment in the value of the shares of common stock
in the accounts with such financial institutions. As a result, the
financial institutions proceeded to call the guarantees provided by the
Company, which resulted in the Company incurring a loss of $4,978,424
during the nine months ended June 30, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999
contains "forward-looking statements" within the meaning of the Federal
securities laws. These forward-looking statements include, but are not limited
to, statements concerning the Company's expectations regarding the price of
gold, estimated future production, estimated future production costs, currency,
political and economic risks, exploration plans, and other statements of
expectations, beliefs, future plans and strategies, anticipated events or
trends, and similar expressions concerning matters that are not historical
facts. The forward-looking statements in this Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1999 are subject to risks and uncertainties
that could cause actual results to differ materially from those results
expressed in or implied by the statements contained herein.
Recent Developments:
During August 1998, the Board of Directors was reconfigured, with two members
resigning and four new directors being appointed. On October 1, 1998, Amyn S.
Dahya resigned as President and Chief Executive Officer and was replaced by Mark
S. Zucker, one of the new directors. During October and November 1998, the
Company completely restructured its management team, which then began a
comprehensive review and evaluation of the Company's existing capital structure
and business operations, with the objective of maximizing value for all of the
Company's equity holders.
During the nine months ended June 30, 1999, the Company, under the direction of
new management, paid $1,247,472 to repurchase and retire 598,655 shares of
Preferred Stock at a significant discount in relation to the penalty and
liquidation preference claims of such Preferred Stock. The Company also
converted 1,924 shares of Preferred Stock into 25,826,432 shares of common stock
during the nine months ended June 30, 1999. As a result of these repurchases and
conversions, and the attendant waivers by the holders of the Preferred Stock of
an accrued penalty obligation of $1,548,648 and the redemption liquidation
preference of $24,553,836, the Company's stockholders' equity increased by
$26,102,484.
In October 1998, the Company began the implementation of a plan to streamline
its operations worldwide and divest all non-core business interests. In this
regard, the Company terminated its mineral exploration activities in South
Africa, its copper exploration activities in Zambia, and the activities of its
majority-owned subsidiary, Casmyn International Inc. The Company also wrote off
its investment in WaterPur, a public company associated with former management.
The Company's remaining business activities are primarily focused on its gold
mining operations in Zimbabwe. In this regard, the Company has implemented
programs to evaluate ways to improve production and achieve production
efficiencies, increase gold reserves, reduce capital expenditures and operating
costs, maximize operating profits
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and operating cash flows, and evaluate future opportunities. The Company has
reduced its executive management and corporate staff to minimum levels,
eliminating standard employee benefits and utilizing part-time personnel as
necessary. During this period, the Company closed its expensive corporate and
administrative offices in Vancouver, British Columbia, Canada, significantly
reducing occupancy costs, as well as travel and various other corporate
expenses.
During June 1999, the Company entered into an Exploration Agreement with Right
to Acquire an Interest in Prospecting License with Cyprus Amax Zambia
Corporation ("Cyprus Amax"), which requires Cyprus Amax to expend $3,000,000 to
fund exploration, development and other work on land covered by the Company's
former prospecting license in or near the Copper Belt Province in the Republic
of Zambia (the "Luswishi Dome Project"). Upon the expenditure by Cyprus Amax of
$3,000,000 on or for the benefit of the Luswishi Dome Project, the Company will
have the right to acquire an undivided 15% interest in the Luswishi Dome Project
from Cyprus Amax for a nominal cost. At such time, Cyprus Amax and the Company
have agreed to enter into a contractual joint venture to carry out further
exploration and, if warranted, development and mining of the Luswishi Dome
Project. The Company's previous exploration of the Luswishi Dome Project had
yielded ore grade drill intercepts of copper together with uranium and cobalt,
but no economic mineralization. There can be no assurances that Cyprus Amax will
expend the $3,000,000, that the joint venture will ever be formed, or that if
the joint venture is formed it will ever reach profitability.
On June 2, 1999, the holders of more than 10% of the outstanding shares of
common stock and the holders of more than 10% of the outstanding shares of
Preferred Stock sent a letter to the Company's Board of Directors proposing
amendments to the Company's Articles of Incorporation and calling for a special
meeting of the Company's stockholders to consider a vote on such amendments. The
proposed amendments call for a one for five hundred reverse stock split of the
common stock, a conversion of each share of Preferred Stock into 8.5 shares of
post-reverse split common stock, and an increase in the Company's authorized
shares of capital stock. These amendments, if approved by the Company's
stockholders, would result in the current holders of Preferred Stock owning
approximately 90% of the issued and outstanding shares of common stock following
the completion of the above-described reverse stock split and conversion. While
the Company's Board of Directors has determined not to take a position or make a
recommendation regarding this proposal, management of the Company has responded
to this proposal and is continuing discussions with such stockholders.
Overview:
The Company's short-term plan has been to focus on producing gold from the
tailings dumps and the surface materials, and to develop, on a minimal basis,
underground production until gold prices increase to a level that can justify
the substantial capital expenditures necessary to fund an underground
development program. As a result of the recent decline in gold prices to a
range of approximately $255 to $260 per ounce, the Company intends to
continue this plan for the indefinite future.
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<PAGE>
The Company anticipates that revenues from gold sales from its Zimbabwe
mining operations will exceed mine operating expenditures, excluding
depreciation, depletion and amortization, during the fiscal year ending
September 30, 1999, based on current gold prices, currency exchange rates,
and the continued ability of the Company to deliver and process ore at its
mills. However, the Company expects that gold production for the fiscal year
ending September 30, 1999 will be approximately 12,500 ounces, as compared to
15,378 ounces produced during the fiscal year ended September 30, 1998. This
expected decrease in gold production of approximately 20% is a result of a
continuing decrease in the gold recovery rate from the tailings dumps that
the Company has been mining, as well as the Company's expectation that
certain mining operations would be reduced or shut down in mid to late 1999.
In this regard, during the three months ended June 30, 1999, the Company
permanently closed the Queen's 7 mine as a result of its mineable gold ore
being exhausted; temporarily suspended operations at the Dawn mine, which is
not commercially viable at current gold prices; and temporarily suspended
dump retreatment operations at the Lonely mine as a result of a temporary
lack of available water supplies. Processing of tailings dumps and surface
materials at the Dawn mine and the Lonely mine have represented approximately
one-third of the Company's recent gold production, but do not represent a
significant portion of the Company's proven and probable gold reserves.
In order to maintain the economies of scale necessary to profitably produce gold
at current gold prices, it will be necessary to replace the production from the
Dawn mine and the Lonely mine. The Company is evaluating several short-term
options to replace such production, including employing certain production
techniques and entering into contracts with other tailings dumps. The Company
has considered the feasibility of expanding gold production by accessing the
proven and probable gold reserves at the Turk mine. However, a major development
of the Turk mine is estimated to require capital expenditures of approximately
$3,000,000 to $5,000,000 over a period of three years, and any such plan would
require several months of planning and lead-time prior to its implementation. As
a result of the Company's current financial condition, the economic conditions
in Zimbabwe, and the current price of gold, among other factors, the Company has
no plans to implement such a major mine development program. Accordingly, there
can be no assurances that the Company will be able to replace the production
from the Dawn mine and the Lonely mine on a timely basis and at an acceptable
cost.
The Company is currently deferring implementation of long-term,
capital-intensive plans for the development of its mining properties until the
price of gold improves. Over the near term, the Company intends to focus on the
limited development of its existing properties, while minimizing capital
expenditures funded directly by the Company. Although the Company does not
currently expect to engage in any significant property acquisition or
exploration activities, it will consider acquisition or exploration
opportunities on an individual basis.
As an alternative to funding the development of its mining properties, the
Company also may consider a joint venture or sale of its mining assets in order
to preserve its capital and maximize shareholder value.
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<PAGE>
However, there can be no assurances that the Company would be successful in
forming such a joint venture or completing such a sale.
As a result of the decrease in the price of gold and a declining gold recovery
rate from the tailings dumps, combined with substantial government-mandated
increases in labor and electricity costs (a substantial portion of which, for
the first time, are now being pegged to the United States dollar), the Company's
operating margin is expected to decrease significantly subsequent to June 30,
1999. In response, the Company has implemented a program to reduce operating
costs throughout its Zimbabwe mining operations. However, there can be no
assurances that the Company will be able to achieve cost reductions sufficient
to compensate for increased operating costs and decreased gold recovery rates
and gold prices.
The Company expects that continued development of its existing mining properties
will result in periodic adjustments to the Company's gold reserves. In addition,
a sustained decrease in gold prices may result in a write down of the carrying
value of the Company's mineral properties and fixed assets related to gold
production, and could result in the Company curtailing or ceasing mining
activities.
Consolidated Results of Operations:
Three Months Ended June 30, 1999 and 1998:
Revenues for the three months ended June 30, 1999 were $939,811, reflecting the
sale of 3,453 ounces of gold. Revenues for the three months ended June 30, 1998
were $1,240,077, reflecting the sale of 4,190 ounces of gold. The average
selling price of gold for the three months ended June 30, 1999 was approximately
$272 per ounce, as compared to $296 for the three months ended June 30, 1998.
Mineral production expense for the three months ended June 30, 1999 was $747,378
or 79.5% of revenues, as compared to $1,084,258 or 87.4% of revenues for the
three months ended June 30, 1998. The average direct production cash cost per
ounce of gold was $216 in 1999 as compared to $259 in 1998.
General and administrative expenses were $489,674 for the three months ended
June 30, 1999, as compared to $529,839 for the three months ended June 30, 1998,
a decrease of $40,165 or 7.6%. General and administrative expenses included
significant professional services in 1998, reflecting prior management's
unsuccessful efforts to restructure the Company. General and administrative
expenses decreased in 1999 as compared to 1998 as a result of the effect of new
management's cost reduction efforts, which included, among other things, a
reduction in personnel and personnel related costs, professional fees, and
various other general and administrative expense categories.
Depreciation, depletion and amortization was $292,246 for the three months ended
June 30, 1999, as compared to $209,758 for the three months ended June 30, 1998,
an increase of $82,488 or 39.3%, reflecting additions to property, plant and
equipment during the fiscal year ended September 30, 1998.
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<PAGE>
Mineral exploration expense was $4,625 for the three months ended June 30, 1999,
as compared to $102,342 for the three months ended June 30, 1998, a decrease of
$97,717 or 95.5%, primarily as a result of management's decision to reduce
exploration efforts and concentrate on developmental mining activities.
Loss from operations was $598,443 for the three months ended June 30, 1999, as
compared to a loss from operations of $686,120 for the three months ended June
30, 1998.
During the three months ended June 30, 1998, due to a significant and prolonged
decrease in the market value of WaterPur's common stock, management of the
Company determined that there had been an impairment in the value of the
investment in WaterPur. Accordingly, the Company wrote down its investment in
WaterPur by $3,152,368 to its estimated market value of $1,422,000. The
corresponding dividend payable was also reduced by $3,152,368, to $1,422,000 at
June 30, 1998 to reflect the decrease in the value of this investment.
Interest income, net was $64,005 for the three months ended June 30, 1999, as
compared to $146,426 for the three months ended June 30, 1998, as a result of
lower cash balances in 1999 as compared to 1998.
Net loss was $559,068 for the three months ended June 30, 1999, as compared to a
net loss of $3,430,129 for the three months ended June 30, 1998.
The Company recorded Preferred Stock dividends of $251,425 for the three months
ended June 30, 1999, as compared to $529,925 for the three months ended June 30,
1998, reflecting the reduction in the outstanding shares of Preferred Stock in
1999 as compared to 1998. The Company recorded an Imputed Dividend on Preferred
Stock, which is reflected as a return to the preferred stockholders and as an
increase in the loss to common stockholders, of $2,966,567 for the three months
ended June 30, 1998. The Company did not record an Imputed Dividend for the
three months ended June 30, 1999, as the Company completed the recognition of
this Imputed Dividend during the three months ended December 31, 1998. During
the three months ended June 30, 1999, the Company recorded a Preferred Stock
penalty of $1,146,723 relating to the delisting of the Company's common stock
from NASDAQ on July 31, 1998.
Net loss applicable to common stockholders was $1,957,216 for the three months
ended June 30, 1999, as compared to a net loss applicable to common stockholders
of $6,926,621 for the three months ended June 30, 1998.
Nine Months Ended June 30, 1999 and 1998:
Revenues for the nine months ended June 30, 1999 were $2,872,764, reflecting the
sale of 10,162 ounces of gold. Revenues for the nine months ended June 30, 1998
were $3,441,483, reflecting the sale of 11,585 ounces of gold. The average
selling price of gold for the nine months ended June 30, 1999 was approximately
$283 per ounce, as compared to $297 for the nine months ended June 30, 1998.
Mineral production expense for the nine months ended June 30, 1999 was
$2,135,377 or 74.3% of revenues, as compared to $2,509,168 or 72.9% of
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<PAGE>
revenues for the nine months ended June 30, 1998. The average direct
production cash cost per ounce of gold was $210 in 1999 as compared to $217
in 1998.
General and administrative expenses were $1,106,027 for the nine months ended
June 30, 1999, as compared to $1,880,632 for the nine months ended June 30,
1998, a decrease of $774,605 or 41.2%. General and administrative expenses in
1998 included significant expenses for professional services, reflecting prior
management's unsuccessful efforts to restructure the Company. General and
administrative expenses decreased in 1999 as compared to 1998 as a result of the
effect of new management's cost reduction efforts, which included, among other
things, a reduction in personnel and personnel related costs, professional fees,
and various other general and administrative expense categories.
Depreciation, depletion and amortization was $891,469 for the nine months ended
June 30, 1999, as compared to $517,724 for the nine months ended June 30, 1998,
an increase of $373,745 or 72.2%, reflecting additions to property, plant and
equipment during the fiscal year ended September 30, 1998.
Mineral exploration expense was $13,875 for the nine months ended June 30, 1999,
as compared to $261,165 for the nine months ended June 30, 1998, a decrease of
$247,290 or 94.7%, primarily as a result of management's decision to reduce the
Company's exploration efforts and concentrate on developmental mining
activities.
Loss from operations was $1,286,977 for the nine months ended June 30, 1999, as
compared to a loss from operations of $1,727,206 for the nine months ended June
30, 1998.
During the nine months ended June 30, 1998, due to a significant and prolonged
decrease in the market value of WaterPur's common stock, management of the
Company determined that there had been an impairment in the value of the
investment in WaterPur. Accordingly, the Company wrote down its investment in
WaterPur by $3,152,368 to its estimated market value of $1,422,000. The
corresponding dividend payable was also reduced by $3,152,368, to $1,422,000 at
June 30, 1998 to reflect the decrease in the value of this investment.
As of September 30, 1997, the Company, under the direction of prior management,
had deposited $5,074,659 of restricted cash (including accrued interest of
$74,659) with two financial institutions to guarantee two short-term loans.
Under agreements with such parties, the loans were secured by certain investment
accounts containing shares of common stock of the Company. During the three
months ended March 31, 1998, the significant decline in the price of the
Company's common stock created an impairment in the value of the shares of
common stock in the accounts with such financial institutions. As a result, the
financial institutions proceeded to call the guarantees provided by the Company,
resulting in the Company incurring a loss of $4,978,424 during the nine months
ended June 30, 1998.
Interest income, net was $242,052 for the nine months ended June 30, 1999, as
compared to $578,675 for the nine months ended June 30, 1998, as a result of
lower cash balances in 1999 as compared to 1998.
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<PAGE>
Net loss was $1,110,975 for the nine months ended June 30, 1999, as compared to
a net loss of $8,753,267 for the nine months ended June 30, 1998.
The Company recorded Preferred Stock dividends of $741,175 for the nine months
ended June 30, 1999, as compared to $1,755,500 for the nine months ended June
30, 1998, reflecting the reduction in the outstanding shares of Preferred Stock
in 1999 as compared to 1998. The Company recorded an Imputed Dividend on
Preferred Stock, which is reflected as a return to the preferred stockholders
and as an increase in the loss to common stockholders, of $809,907 for the nine
months ended June 30, 1999, as compared to $7,031,820 for the nine months ended
June 30, 1998. The Imputed Dividend decreased in 1999 as compared to 1998 as a
result of the Company completing the recognition of this Imputed Dividend during
October 1998. During the nine months ended June 30, 1999, the Company recorded a
Preferred Stock penalty of $4,445,263 relating to the delisting of the Company's
common stock from NASDAQ on July 31, 1998.
Net loss applicable to common stockholders was $7,107,320 for the nine months
ended June 30, 1999, as compared to a net loss applicable to common stockholders
of $17,540,587 for the nine months ended June 30, 1998.
Consolidated Financial Condition - June 30, 1999:
Liquidity and Capital Resources:
The Company's cash and cash equivalents were $3,016,079 at June 30, 1999, as
compared to $4,356,200 at September 30, 1998, a decrease of $1,340,121,
primarily as a result of the $1,247,472 of cash utilized to repurchase and
retire 598,655 shares of Preferred Stock. Primarily as a result of the Preferred
Stock repurchases, and the attendant waivers by the holders of the Preferred
Stock of an accrued penalty obligation of $1,548,648 and the redemption
liquidation preference of $24,553,836, the Company's stockholders' equity
increased by $26,102,484.
As of June 30, 1999, the Company had a working capital deficit of $121,169, as
compared to working capital of $4,658,361 at September 30, 1998, a decrease of
$4,779,530, respectively, primarily as a result of the repurchase of shares of
Preferred Stock and the accrual of the Preferred Stock penalty. As a result, the
Company's current ratio was .98:1 at June 30, 1999, as compared to 3.07:1 at
September 30, 1998.
Operating. The Company's operations utilized cash resources of $153,772 during
the nine months ended June 30, 1999, as compared to $990,126 for the nine months
ended June 30, 1998, a decrease of $836,354 or 84.5%, reflecting a reduction in
cash resources utilized to support mining operations and related administrative
costs in Zimbabwe, and reduced general and administrative expenses.
The Company's working capital resources consist primarily of cash and cash
equivalents, marketable securities, and the net cash generated from the
production and sale of gold. The Company anticipates that its working capital
resources are adequate to fund operating expenditures during the remainder of
the fiscal year ending September 30, 1999,
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<PAGE>
excluding any major capital expenditures, the payment of a cash penalty to
the holders of the Preferred Stock, or the redemption of the Preferred Stock
at the redemption liquidation preference resulting from the technical default
that occurred on July 31, 1998.
Investing. During the nine months ended June 30, 1999, the Company generated
net cash from investing activities of $113,046, which consisted of the
proceeds from the disposition of marketable securities of $534,305, offset in
part by cash utilized to purchase property and equipment of $421,259. During
the nine months ended June 30, 1998, the Company, under the direction of
prior management, utilized net cash in investing activities of $5,365,698,
which consisted of the purchase of marketable securities of $2,053,343 and
the purchase of property and equipment of $3,648,718, offset in part by the
proceeds from the disposition of marketable securities of $336,361. As of
June 30, 1999, the Company did not have any significant outstanding
commitments for capital expenditures.
Financing. During the nine months ended June 30, 1999, the Company, under
the direction of new management, utilized net cash in financing activities of
$1,247,472 to repurchase and retire shares of Preferred Stock. During the
nine months ended June 30, 1998, the Company, under the direction of prior
management, utilized net cash in financing activities of $6,962,704,
primarily to repay a bank line of credit of $4,966,160 and to repurchase
common shares in open market transactions at an aggregate cost of $2,037,157.
The loan guarantee loss of $4,978,424, incurred under the direction of prior
management, was recognized during the nine months ended June 30, 1998 and was
funded by a reduction in restricted cash of $5,074,659.
Inflation and Currency Matters:
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative
value of currencies occur periodically and may, in certain instances,
materially affect the Company's results of operations.
The Company is required to sell its gold production from its mining
operations in Zimbabwe to the Reserve Bank of Zimbabwe at the spot 2:00 p.m.
London price on the day of delivery. Settlement of gold sales are in Zimbabwe
dollars at the equivalent of the United States gold trading rate on the date
of sale. The spot gold price on July 30, 1999 was $256.90 per ounce.
Labor and electricity, which are the two major operating costs of the
Company's mines, historically have been denominated in Zimbabwe dollars and
have accounted for approximately 30% and 25% of mine operating costs,
respectively. These costs are periodically subject to significant increases
mandated by the Zimbabwe government. In addition, commencing August 1999,
approximately two-thirds of electrical costs will be pegged to the United
States dollar. Approximately 80% of the remaining mine operating costs are
sensitive to changes in the United States dollar.
Operating costs are affected in part by inflation rates in Zimbabwe. Inflation
in Zimbabwe was approximately 40% in 1998, during which time
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<PAGE>
the Zimbabwe dollar lost approximately 60% of its value as compared to the
United States dollar. Inflation in Zimbabwe through mid-1999 on an annualized
basis was in excess of 50%.
In response to this situation, the government of Zimbabwe has considered several
actions, including reintroducing exchange controls, pegging the exchange rate at
below free market rates, and banning remittance of profits from Zimbabwe. On an
unofficial basis, the government of Zimbabwe has also recently implemented
policies designed to restrict the ability of companies to convert Zimbabwe
dollars into foreign currencies and transfer such amounts out of Zimbabwe.
Subject to the terms of intercompany loan agreements approved by the Reserve
Bank of Zimbabwe, the Company is currently able to convert Zimbabwe dollars into
United States dollars and transfer such amounts to the United States, although
there can be no assurances that the Company will be able to continue to do so in
the future. In addition, the International Monetary Fund (the "IMF") recently
announced that it had decided to resume lending to Zimbabwe to support
Zimbabwe's economic recovery program. Through additional IMF credits and a
further tightening of Zimbabwe's fiscal policies, the economic recovery
program's objectives are to stabilize the exchange rate, bring inflation under
control and remove price controls and trade and exchange restrictions. However,
the Company cannot determine at this time whether this program will achieve its
objectives, or what effect, if any, this program may have on the general
business environment in Zimbabwe or on the Company's operations.
Year 2000 Issue:
The Year 2000 Issue results from the fact that certain computer programs have
been written using two digits rather than four digits to designate the
applicable year. Computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Based on a recent internal assessment, the Company does not believe that the
cost to modify its existing software and/or convert to new software will be
significant.
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances in a full set of
general purpose financial statements. SFAS No. 130 defines comprehensive income
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is presented with the same prominence as other
financial statements. The Company adopted SFAS No.
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130 for its fiscal year beginning October 1, 1998. Adoption of SFAS No. 130
did not have a material effect on the Company's financial statement
presentation and disclosures. Under SFAS No. 130, the Company reports the
foreign currency translation adjustment as a component of comprehensive
income.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), which supersedes SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise", and which is effective for financial statements issued for
fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. SFAS No. 131 also establishes standards for disclosures by public
companies regarding information about their major customers, operating segments,
products and services, and the geographic areas in which they operate. SFAS No.
131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No. 131 requires comparative information for earlier
years to be restated. The Company adopted SFAS No. 131 for its fiscal year
beginning October 1, 1998. Application of SFAS No. 131 to interim periods in the
initial year of adoption is not required. The Company does not anticipate that
adoption of SFAS No. 131 will have a material effect on its financial statement
presentation and disclosures.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" ("SFAS No. 132"), which is effective for financial statements
issued for fiscal years beginning after December 15, 1997. SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 requires comparative information for earlier years to be
restated. The Company adopted SFAS No. 132 for its fiscal year beginning
October 1, 1998. The Company does not expect that adoption of SFAS No. 132
will have a material effect on its financial statement presentation and
disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), which is effective for financial statements for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an
entity recognize those items as assets or liabilities in the statement of
financial position and measure them at fair value. SFAS No. 133 also
addresses the accounting for hedging activities. The Company will adopt SFAS
No. 133 for its fiscal year beginning October 1, 2000, and does not
anticipate that its adoption will have a material effect on the Company's
financial statement presentation and disclosures.
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 1998 and June 30, 1999, the Company had an investment in
marketable securities which consisted of United States government-backed
mortgage securities of $1,588,536 and $1,011,003, respectively, bearing interest
at 8% per annum, with an effective yield of approximately 7.7% per annum. Such
investment is stated at market value, which approximates cost. This investment
is the only investment of the Company whose market value is sensitive to changes
in interest rates. The Company expects that the investment will be fully
liquidated by December 2001. Although changes in short-term interest rates could
affect the interim market value of this investment, the Company does not expect
to incur any loss, since the investment is backed by the United States
government and the Company currently intends to hold this investment to
maturity.
As a result of the Company's assets and operations being concentrated in
Zimbabwe, the Company is subject to substantial foreign currency exchange risk.
The significant devaluation of the Zimbabwe dollar against the United States
dollar during the past few years has had, and continues to have, a material
adverse effect on the Company's consolidated financial position, results of
operations and cash flows. The Company made its investment in its Zimbabwe
assets and operations when the conversion rate of the United States dollar to
the Zimbabwe dollars was approximately 1:13. At June 30, 1999, as a result of
several factors, including significant inflation in Zimbabwe in 1997 and 1998,
the conversion rate of the United States dollar to the Zimbabwe dollar was
approximately 1:39. Accordingly, the Company's operations in Zimbabwe at current
levels are profitable when measured in Zimbabwe dollars, but are not profitable
when measured in United States dollars, as a result of the calculation of
depreciation, depletion and amortization at historical conversion rates and the
calculation of revenues and expenses at current conversion rates.
Due to the unique nature of the Company's Preferred Stock repurchase obligation
and Preferred Stock penalty, the Company is unable to determine a market value
for such obligations or their sensitivity to any external parameters.
The Company is required to sell its gold production from its mining operations
in Zimbabwe to the Reserve Bank of Zimbabwe at the spot 2:00 p.m. London price
on the day of delivery. Accordingly, the Company's revenues from the sale of its
gold production are directly linked to the price of gold in world commodity
trading markets. Furthermore, should the price of gold drop significantly, it
may not be commercially feasible for the Company to continue to operate certain
of its properties in the short-term. Under such circumstances, the Company may
also be required to recognize a charge to operations to reflect a write down of
the carrying value of its mineral properties and fixed assets related to gold
production, and may curtail or cease mining operations.
31
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Equity Securities
During the three months ended June 30, 1999, the Company issued
20,401,640 shares of common stock upon conversion of 1,664 shares of
Preferred Stock. The shares of common stock were issued without
registration in reliance upon the exemption afforded by Section 4(2) of
the Securities Act of 1933, as amended, and Regulation D promulgated by
the Securities and Exchange Commission thereunder, based on certain
representations made to the Company by the converting stockholder. The
stockholders are investors that had originally purchased the shares of
Preferred Stock in the Company's 1997 private placement.
During the three months ended June 30, 1999, the Company issued 10,057
shares of Preferred Stock as the quarterly payment of the 8% annual
dividend on the Preferred Stock. The aggregate value of such shares of
Preferred Stock of $251,425 was recorded at the stated value of $25.00
per share. The shares of Preferred Stock were issued without
registration in reliance upon the exemption afforded by Section 4(2) of
the Securities Act of 1933, as amended, and Regulation D promulgated by
the Securities and Exchange Commission thereunder, based on certain
representations made to the Company by the stockholders. The
stockholders were investors that had originally purchased the shares of
Preferred Stock in the Company's 1997 private placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(b) Material Delinquency with Respect to Preferred Stock
Pursuant to the Investment Agreements, a technical default occurred
when the Company's common stock was delisted from the NASDAQ SmallCap
Market on July 31, 1998. The Company may be obligated to pay the
holders of the Preferred Stock a cash penalty of 3% of the total
purchase price of the Preferred Stock during any period in excess of 30
days that the Company's common stock is not listed and traded on NASDAQ
or a national securities exchange. The Investment Agreements provide
the holders of the Preferred Stock with the opportunity to have their
shares redeemed by the Company at the adjusted liquidation preference
plus accrued but unpaid dividends if the 3% penalty is not paid within
30 days of when due. The Company believes that the exercise of such
rights by the holders of the Preferred Stock could be subject to legal
challenge by the Company.
The Company is currently engaged in discussions with the holders of the
remaining shares of Preferred Stock regarding various matters,
including a waiver of the penalty and of their rights to require the
Company to redeem their shares of Preferred Stock. There can be no
assurances that the Company will be able to obtain a waiver or that the
holders of the Preferred Stock will
32
<PAGE>
not exercise their rights to require the Company to redeem their
shares. Should the holders of the Preferred Stock demand payment of the
cash penalty or exercise their rights to require the Company to redeem
their shares, and should the Company not prevail in its challenge to
any such asserted rights, the Company may be forced to file for
bankruptcy protection.
Since the Company's common stock was delisted from NASDAQ on July 31,
1998, the Company has recorded a penalty of $1,146,723 and $4,445,263
for the three months and nine months ended June 30, 1999, respectively,
which has not been paid. In connection with the repurchase or
conversion of 600,579 shares of Preferred Stock during the nine months
ended June 30, 1999, such holders have waived the right to claim their
proportionate share of the penalty, thus reducing the corresponding
potential penalty obligation by $1,548,648.
Since the right to require the Company to redeem these shares of
Preferred Stock outstanding at September 30, 1998 and June 30, 1999 is
outside the control of the Company, the carrying value of the Preferred
Stock at such dates has been recorded in the consolidated financial
statements at their maximum liquidation preference of $44,440,451 and
$21,041,599, respectively, and such shares have been reclassified out
of the stockholders' equity (deficiency) section of the consolidated
balance sheet. In connection with the repurchase or conversion of
600,579 shares of Preferred Stock during the nine months ended June 30,
1999, such holders have waived the right to claim their proportionate
share of the liquidation preference, thus reducing the maximum
liquidation preference, and the corresponding potential redemption
obligation, by $24,553,836.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K:
Three Months Ended June 30, 1999 - None
33
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
CASMYN CORP.
------------------------
(Registrant)
/s/ MARK S. ZUCKER
DATE: August 12, 1999 By: ------------------------
Mark S. Zucker
President and Chief
Executive Officer
/s/ ROBERT N. WEINGARTEN
DATE: August 12, 1999 By: ------------------------
Robert N. Weingarten
Chief Financial Officer
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S QUARTERLY REPORT ON
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3016079
<SECURITIES> 1011003
<RECEIVABLES> 227555
<ALLOWANCES> 0
<INVENTORY> 478495
<CURRENT-ASSETS> 4753853
<PP&E> 20725377
<DEPRECIATION> 3034085
<TOTAL-ASSETS> 22455389
<CURRENT-LIABILITIES> 4875022
<BONDS> 0
0
21041599
<COMMON> 9743126
<OTHER-SE> (13204358)
<TOTAL-LIABILITY-AND-EQUITY> 22455389
<SALES> 2872764
<TOTAL-REVENUES> 2872764
<CGS> 2135377
<TOTAL-COSTS> 2135377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1110975)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1110975)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1110975)<F1>
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
<FN>
<F1>FOR THE NINE MONTHS ENDED JUNE 30, 1999, NET LOSS OF $1,110,975, LESS
DIVIDENDS ON THE PREFERRED STOCK OF $741,175, LESS AMORTIZATION OF DISCOUNT ON
THE PREFERRED STOCK OF $809,907, LESS THE PREFERRED STOCK PENALTY OF $4,445,263,
RESULTS IN A NET LOSS APPLICABLE TO COMMON STOCKHOLDERS OF $7,107,320.
</FN>
</TABLE>
