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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-19798
AMERICAN RESOURCE CORPORATION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEVADA 88-0216081
(STATE OR OTHER JURISDICTION OF (I.R.S EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
100 DRAKE'S LANDING ROAD, SUITE 250
GREENBRAE, CALIFORNIA 94904-2496
(ADDRESS OF PRINCIPAL OFFICES) (ZIP CODE)
</TABLE>
TELEPHONE: (415) 461-6868
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports 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 ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
The aggregate market value of the 13,528,731 shares of voting stock held by
non-affiliates of the registrant as of March 25, 1996 was $69,334,746.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No ______
The number of shares of the registrant's Common Stock outstanding on March
25, 1996 was 13,529,922.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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AMERICAN RESOURCE CORPORATION, INC.
INDEX TO FORM 10-K
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PAGE NO.
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PART I
Item 1. Business....................................................................... 3
Item 2. Properties..................................................................... 3
Item 3. Legal Proceedings.............................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders............................ 21
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters... 22
Item 6. Selected Financial Data........................................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 23
Item 8. Financial Statements and Supplementary Data.................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ 57
PART III
Item 10. Directors and Officers of the Registrant....................................... 58
Item 11. Executive Compensation......................................................... 60
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 64
Item 13. Certain Relationships and Related Transactions................................. 65
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 66
</TABLE>
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
GENERAL
American Resource Corporation, Inc. ("ARC" or "the Company") is a Nevada
corporation formerly known as New Gold, Inc. New Gold, Inc. was formed in 1985
as the successor to Ora Tech, Inc., a Utah company organized in 1984. The
principal office of ARC is located at 100 Drake's Landing Road, Suite 250,
Greenbrae, California 94904, USA.
ARC's principal focus is gold exploration and mining in Uruguay where ARC
controls mineral properties in excess of 1,200 square miles (3,000km2), through
several prospection, exploration and exploitation grants under the Uruguayan
Mining Code. ARC is presently in the process of the development of the San
Gregorio Gold Project in northern Uruguay. In addition, ARC controls zeolite (an
industrial mineral) properties and prospects in Arizona, California, Nevada and
Oregon. ARC's Mahoma Mine, in southern Uruguay, ceased milling operations in
April 1996.
The aforementioned properties and rights to explore have all been acquired
since ARC emerged from bankruptcy proceedings in February 1992. ARC is
evaluating the development potential of these properties on an on-going basis,
and in the case of San Gregorio is committed to its development subject to the
receipt of final regulatory approvals and financing. ARC intends to continue its
search for mineral properties (principally precious metals) that it believes to
have economic development potential and secure its interest by purchase, lease,
joint venture or other arrangements.
In December 1995, ARC sold its 78 percent interest in American Pacific
Minerals Ltd. ("APML"), formerly known as Red Rock Mining Corporation, a British
Columbia corporation (See "Item 3. Legal Proceedings"). APML owns, through its
subsidiary company, APM USA, the Goldfield mining properties located near
Goldfield, Nevada. ARC will continue to manage the Goldfield properties under an
operator and service agreement. Additionally, ARC will continue to advance APM
USA funds for the costs related to the shutdown of the Goldfield Mine. These
advances, as well as APM USA's existing obligations to ARC, are secured by the
assets and stock of APM USA.
In June 1995, ARC sold its wholly-owned Argentinean subsidiary Recursos
Americanos Argentinos, S.A. ("RAA"), which controlled several mineral properties
in Argentina, to Northern Orion Explorations Limited, a British Columbia
corporation.
Information set forth below concerning the San Gregorio Gold Project and
the Uruguay Regional Exploration Program, particularly information concerning
reserves and mineralization, construction activities and schedules and mining
methods, projected schedules, operating and capital costs and mining results and
mine life, include forward looking statements and statements based on estimates.
Actual future results could differ from those anticipated in these forward
looking statements. See "Risk Factors".
For a description of mining terms, refer to the Glossary on page 25.
SAN GREGORIO GOLD PROJECT
Description and Location: The San Gregorio Gold Project is located in the
Rivera Province of northern Uruguay, near the town of Minas de Corrales
(population: 3000). The project is 90 kilometers south of the major population
center at the adjoining border cities of Rivera, Uruguay and Livramento, Brazil
(combined population: 200,000). Figure 1.
Access to the project site from Montevideo, the capital city of Uruguay, is
to the north on Route 5 via Tacuarembo and then eastward on Route 29 to the town
of Minas de Corrales, a total distance of approximately 280 miles (450km). San
Gregorio is located approximately four miles (6km) to the south via a well
maintained gravel road, passable by standard passenger vehicles. It is expected
that the majority of the mine and plant operations personnel will be sourced
from either Rivera, Tacuarembo or Minas de Corrales. Staff personnel will be
housed in either Rivera or Tacuarembo.
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ARC owns 100 percent of the project through its wholly-owned Uruguayan
subsidiary STEL S.A. The project will be developed as a 2,750 ton per day (2,500
tonnes per day) conventional open pit gold mine and milling operation. Over the
current estimated mine life of 5.6 years, gold production is estimated to be
387,000 ounces (12 tonnes) at an average annual rate of approximately 70,000
ounces (2.2 tonnes).
The San Gregorio property is comprised of contiguous mineral concessions
totalling 3,121 acres (8,000 Ha). The current ore reserves are contained within
two Mine Exploitation grants, issued in November 1989 and June 1994, which are
in effect for an initial term of 15 years. Also, ARC owns outright 2,189 acres
(900Ha) of the surface estate within the project area.
ARC controls exploration rights on 289,600 acres (736,000Ha) of prospective
mineral lands in proximity to the San Gregorio Project. An exploration and
reserve expansion program is on-going on ARC's mineral lands within the San
Gregorio Project area and on its exploration concessions in the region. In 1996,
ARC has planned an ambitious program of geologic, geochemical and geophysical
analyses followed by exploration and definition drilling on known mineral
targets.
Project History: Gold prospecting and mining activities in the San
Gregorio area were first recorded in the middle of the nineteenth century.
Initial gold production from organized mining in the region was reported in
1869. During the period 1878 to 1909, French companies organized the region's
mining activities and consolidated ore processing operations at a now historic
facility on the Cunapiru River. Intermittent production continued in the region
until 1916 with recorded gold production from the region totalling approximately
90,000 ounces (2.8 tonnes). The old underground mine at San Gregorio, with total
recorded production of 64,300 ounces (2.0 tonnes), was the largest producing
gold mine in Uruguay until operations ceased in 1914.
The San Gregorio Mine remained idle until 1983-1985 when Amax Gold, Inc. a
US company, conducted mineral exploration throughout the mining district. In
1988, the Brazilian companies Companhia de Mineracao e Participacoes ("CMP") and
Companhia de Mineracao de Amapa ("CMA") acquired the mining property and
conducted additional exploration at San Gregorio. Between March 1993 and January
1994, ARC conducted an evaluation of the properties and acquired 100 percent of
the project through the purchase of all outstanding stock of the CMP/CMA
operating company STEL S.A.
In 1994, ARC retained Mineral Resources Development, Inc. ("MRDI") of San
Mateo, California, USA to conduct a Final Feasibility Study at San Gregorio. The
Final Feasibility Study was completed in September 1994, and a reserve and
resource update followed in December 1994.
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FIGURE #1: LOCATION MAP
SOUTH AMERICA
[MAP]
and
INSERT OF
URUGUAY
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Throughout 1994 and 1995 ARC employed various international consultants in
the fields of geotechnics, geohydrology, metallurgical testwork, environmental
engineering and engineering design. In August 1995, an environmental impact
study was completed and submitted, with ARC's application for project
environmental permits, to the Uruguayan regulatory agencies. The environmental
permits were received by ARC March 26, 1996.
Geologic Setting: The Minas de Corrales gold district and the San Gregorio
Mine occur in the western portion of a 70 mile-long (112km), east-west geologic
feature known as the Rivera Mineral Belt or Rivera Crystalline Island ("RCI").
The RCI geologic domain is characterized by an intensely sheared complex of
Precambrian crystalline intrusives and greenstone assemblages. Gold
mineralization occurs in various geologic settings indicating that local
structural and lithologic features were significant controls to deposition of
the mineralization. Known gold deposits in the region are predominantly
associated with dilatent zones within major east-west trending shear complexes.
The San Gregorio mineral deposit is a linear complex of disseminations,
stockworks and veins which developed within an elongate dioritic intrusive unit.
The host diorite was intruded into granitic rocks along a regional-scale shear
complex referred to as the San Gregorio Shear Zone ("SGSZ"). At the San Gregorio
Mine, gold occurs in elemental form and with silver as electrum within an
alteration/mineralization assemblage containing quartz, carbonates, K-feldspar,
sericite and chlorite. Minor pyrite, chalcopyrite, galena and sphalerite
accompany the gold mineralization; however, overall sulfide content of the ore
is only two to four percent by volume.
Mineralization and Reserves: In 1993 and again in 1994, MRDI conducted
in-situ mineralization and reserve studies of the San Gregorio deposit. The
original study conducted in 1993 relied generally on the data base generated by
STEL S.A. and others prior to ARC's active participation in the project. During
1994, ARC completed a major drilling program designed to check and verify the
initial resource model and increase the data base on which resource estimation
was based. An update of mineralization and reserves was prepared in December
1994 as an addendum to the Final Feasibility Study. The 1994 drilling endorsed
in large part the initial mineralization modelling and increased ARC's
confidence in the mineralization estimations.
Proven and Probable Reserves for the San Gregorio deposit, as reported by
MRDI in their December 1994 report, Update of Resources and Reserves -- Addendum
to the Final Feasibility Study, are as follows:
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CONTAINED GOLD
GOLD GRADE ------------------
PROVEN AND PROBABLE RESERVES MT (1) G/T KG TROY OZ
- --------------------------------------------------------- ------ ---------- ------ -------
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In Situ Reserves (2)(4).................................. 4.214 3.052 12,861 413,537
Mineable Reserves (Diluted) (2)(3)(4).................... 5.057 2.588 13,091 420,933
</TABLE>
Notes:
(1) Mt = metric tons X 1,000,000
(2) Above 1.02 g/t cutoff (by Zone)
(3) 20% dilution, diluted grade = [grade in-situ + (0.2)(0.27)]
1.2
(4) Gold price: US$375/oz
Operations: Open pit mining methods utilizing loaders and trucks will be
used to mine the reserve contained within the Main and East Extension Pits.
Mining will take place six days per week, three shifts per day, at a nominal ore
production rate of 3,300 tons per day (3,000 tonnes per day), providing mill
feed at a rate of 2,750 tons per day (2,500 tonnes per day) seven days per week.
Total ore and waste material mined per day will range between 17,000 and 20,000
tons per day (16,000 and 18,000 tonnes per day).
Major mining equipment will include two 610hp (455kw) front end loaders,
three 30 ton (27 tonne) and four 58 ton (52.6 tonne) haul trucks (the latter
being preferentially used for waste stripping), three drills and ancillary
equipment. Ore will be dumped by truck directly into the ore hopper at the
primary crusher. A run-of-mine stockpile will also be developed to insure a
continuous ore supply to the mill when not directly available from the mine.
Waste material will be hauled to the main waste dump located south of the Main
Pit.
The waste dump will be constructed to allow concurrent reclamation as
mining progresses. Backfilling the pits with waste will also be considered as an
option. Additional exploration drilling is required to close off the reserves
for this option to be evaluated.
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Preproduction stripping will take place over a period of approximately six
months. This activity will provide waste for use as construction fill for the
tailings impoundment and crusher retaining wall as well as to facilitate
operator training.
Process Plant and Ancillary Support Facilities: The San Gregorio process
plant will be a conventional gold mill with a capacity of 990,000 tons per annum
(900,000 tonnes per annum) or 2,750 tons per day (2,500 tonnes per day). The
major unit operations will include primary jaw crushing, crushed ore
stockpiling, SAG and ball mill grinding, carbon-in-leach, carbon acid washing,
pressure stripping followed by electrowinning to recover gold and silver values.
Electrowon cathodes will be smelted to produce dore bars for shipment. The
process plant will also include carbon regeneration, reagent systems and
tailings cyanide destruction. The following simplified flowsheet (Figure 2)
illustrates the San Gregorio process. Metallurgical recovery is estimated to be
92 percent.
Ancillary facilities will consist of a sample preparation and assay
laboratory, mill workshop, mill warehouse, mine warehouse, truckshop and a
change room / lunchroom. Most of the service buildings such as the mill work
shop and the warehouses will be constructed using relocated facilities from the
Mahoma Mine supplemented by surplus shipping containers for storage. Fencing
will be installed around the plant site.
The project's current approved environmental permit is based on storing
untreated tailings in a lined impoundment with hydrogen peroxide detoxification
of any residual cyanide in the decant water. At the time of mine closure,
erosion protection will be placed where required, and the surface of the
tailings dam will be covered with previously stockpiled topsoil and
re-vegetated.
Power Supply: Power supply to the site will be via a new 150 kV 16
mile-long (22km) power line extending from the existing national grid that
parallels Highway 5. A new 150 Kv/4.16 Kv substation will be constructed
adjacent to the process plant.
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FIGURE #2: SAN GREGORIO PROJECT SIMPLIFIED PROCESS FLOWSHEET
[DIAGRAM]
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STEL S.A. has negotiated an agreement with the Uruguayan governmental power
agency (UTE) to provide power to the project, including terms and tariffs
(3.7c/kWh), right of ways and approval from the Environmental Agency.
Environmental and Permitting: On January 19, 1994, the Uruguayan
Government enacted Law 16.466, (regulatory decree passed September 21, 1994)
which established the requirement for mining companies to be issued with an
Environmental Impact Authorization ("EIA") prior to the commencement of
construction and mining activities. In August 1995, STEL S.A. submitted an
environmental impact study to the Environmental Agency. The EIA received
technical approval on February 16, 1996, and final authorization from the
Uruguayan government was received by ARC on March 26, 1996.
Community Interface: Environmental quality preservation is a major
priority for ARC and the environmental management program for San Gregorio
incorporates a community relationship strategy as well systematic environmental
auditing. The Summary Environmental Report, prepared for and addressed to the
community, details the systematic and periodic actions and control measures to
be implemented by ARC's, as well as any improvements that could be achieved by
incorporating new proven technologies.
ARC/community relationship is of paramount importance since through this
relationship the community will better understand ARC's objectives and actively
participate in the attainment of a responsible, clean and safe mining operation.
Capital Cost Estimate, Financing and Construction Schedule: The cost for
plant, facilities, equipment, financing and working capital is estimated to be
US$41.9 million. ARC intends to fund this cost through a combination of debt and
equity. STEL S.A. entered into a loan agreement with a financial institution for
a US$25 million project gold loan. Loan drawdown is expected by early June 1996.
The loan agreement contains representations and covenants of both STEL S.A. and
ARC, including limitations on indebtedness. The loan will be secured against the
assets of San Gregorio and STEL S.A.'s obligations under the loan agreement,
including its obligation to complete construction of the project as well as to
pay principal and interest, will be guaranteed by ARC pursuant to a guaranty and
security agreement until the project passes an economic completion test;
thereafter the lender will look only to STEL S.A. for repayment. ARC will secure
its guaranty with, among other things, a pledge of the stock of STEL S.A. and
its parent company and an escrow deposit of $5.0 million. In addition, ARC
separately agrees that it will only dispose of any NNO Shares for cash
consideration at fair market value, and that it will deposit the proceeds of any
such disposition up to a maximum of $5.0 million in its bank account and
thereafter it will maintain a cash balance of $5.0 million until released from
its guaranty of the loan.
ARC also expects to receive a Declaration of National Interest for the
project by June 1996 which will give ARC certain preferential treatment relating
to taxes and import duties. A project schedule of eleven months is forecast from
the commencement of detail design through to economic completion. Dore
production is forecast to begin in month ten and full production should be
achieved by March 1997. ARC's early purchase of the grinding mills and
transformer are making possible an exceptionally short construction schedule.
ARC has awarded a $16.5 million contract to an independent contractor for
the engineering and construction of the plant and related infrastructure. The
contractor is proceeding with a construction schedule which allows for the
commencement of mining operations in early 1997. Commitments to other San
Gregorio Project vendors and contractors for products and services totalled
approximately $2.6 million at May 24, 1996.
Operating Cost Projection: Based on the September 1994 MRDI Feasibility
Study updated by ARC to reflect the costs of major consumables as of the first
quarter 1996, the average life-of-mine direct production cost is estimated to be
US$180 per equivalent ounce of gold sold. This cost estimate is subject to the
impact (positive and negative) of changes in labour, materials and consumables
costs, and hence there is no assurance that this cost estimate will be realized
in the future nor that future production can be maintained at economic levels.
1996 Development/Reserve-expansion Drilling: ARC initiated a core drilling
program in November 1995 designed to provide additional information required for
detailed mine design and ore release scheduling. The current drilling program
will also test possible reserve expansion opportunities within and adjacent to
the planned San Gregorio Mine. The program is in-progress and will consist of
over 14,000 feet (4,300 meters) of core drilling in the Main Pit and East
Extension mineralized zones. In December 1995, ARC announced the discovery of
ore grade mineralization in a new zone situated in the footwall of the San
Gregorio Main zone of mineralization. This new
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footwall mineralized zone is outside the limits of the current ore envelope
(reserve model) and may provide additional reserves in the Main Pit with only
modest modifications to the current mine design.
An additional 4,000 feet (1,200 meters) of core drilling is planned to
further define the limits of mineralization at the Santa Teresa West ("STW")
target located some 1.2 miles (2.0km) to the west of the San Gregorio Main Pit.
An 18-hole drilling program was completed during the latter part of 1995 with
encouraging results. Each hole penetrated shear-hosted gold mineralization of
similar thickness and grade to that identified at San Gregorio. The STW resource
has been drill confirmed for over 820 feet (250 meters) along strike to a depth
of 164 feet (50 meters). Although it is premature to quantify the
mineralization, it appears likely that STW will add to ARC's ore reserve
position. In addition, four other identified targets along the SGSZ will be
drill tested during 1996 with 3,000 feet (900 meters) of core drilling.
URUGUAY REGIONAL EXPLORATION PROGRAM
ARC through its wholly-owned Uruguayan subsidiaries controls a total of
1,200 square miles (3,000km2) of mineral properties under several prospection
and exploration licenses. These properties are basically situated within two
principal mineral provinces; the Northern Mineral Belt, referred to as the
Rivera Crystalline Island, and the Florida Greenstone Belt located in southern
Uruguay.
ARC has also entered into a joint venture exploration agreement with Gold
Standard covering mineral properties in the San Juan Hills area in the
south-west of Uruguay.
ARC's mineral lands cover geologic formations analogous to other great gold
producing areas in the Americas, Australia and Africa. This region is
under-explored and represents exceptional discovery potential for ARC.
Northern Mineral Belt: The Northern Mineral Belt is located in the
northern portion of Uruguay near the Brazilian Border. It hosts the San Gregorio
gold deposit and numerous other gold occurrences typically associated with shear
zones in Archean and Proterozoic granites and gneisses. ARC controls over
306,000 (770,000Ha) acres of mineral lands in this region. These mineral rights
are owned by ARC's wholly owned subsidiary STEL S.A.
During 1996 ARC plans to conduct a program of reconnaissance geologic
mapping, regional-scale geochemical and geophysical studies for target
definition. This program will advance ARC's understanding and development of
individual prospection grants. Major program components include geochemical
analyses of all drainage basins in the region to delineate the most prospective
areas for more detailed evaluation including remote sensing, geologic,
geophysical and geochemical analyses and limited definition drilling.
Florida Greenstone Belt: This region, located in the southern portion of
Uruguay, is a 9 to 13 mile-wide (14 to 21km) sequence of Lower Proterozoic to
Archean age rocks that extends for approximately 195 miles (312km) east to west.
ARC's holdings in this region are comprised of three properties and a joint
venture interest. Montevideo, Uruguay's capital city, is located approximately
80 miles (128km) south from the center of the Florida Greenstone Belt. The area
has several two-lane concrete and asphalt highways as well as other arterial
highways to provide adequate access to ARC's properties.
ARC's proposed 1996 regional program for this area will commence with a
comprehensive review of ARC's technical data base and previous program results.
Prospects will be prioritized on their stand-alone merits in the absence of the
Mahoma mill complex which will cease operations in April, 1996. Approximately
3,000 feet (900m) of definition drilling is envisaged.
CMSJ Properties: Through its wholly owned subsidiary, CMSJ S.A., ARC owns
100 percent of the mineral rights to an area of approximately 250,000 acres
(101,000Ha) in this area. ARC's ownership of CMSJ S.A. which also owns the
Mahoma Mine, is derived through Tarot Financial Investments, Inc.
("Tarot"), a Panamanian holding company. As of the date of this
Prospectus/Joint Proxy Statement, ARC's agreement to purchase Tarot has not
been completed. (See Note 3 and Note 16 to Consolidated Financial
Statements). CMSJ S.A. has no interest in the San Gregorio Gold Project.
Bolir Properties: Bolir S.A., a wholly owned subsidiary of ARC, was
acquired by ARC on February 28, 1992. (See Note 3 to Consolidated Financial
Statements). Bolir S.A. controls the mineral rights in properties totalling
6,600 acres (2,700Ha) within the Florida Greenstone Belt. These properties
held under prospection grants, are located near the town of Colonia in the
western portion of the Florida Greenstone Belt adjacent to the San Juan
Hills property and near the town of Cerro Colorado approximately 170 miles
(270km) north of Montevideo adjacent to the Brimol property referred to
below.
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Limited mineral exploration has been completed to date, consisting mainly
of geologic mapping, stream sediment and rock sampling. The areas held
cover stream sampling anomalies and zones with evidence of surface gold
mineralization.
Brimol Properties: Brimol S.A., a wholly-owned subsidiary of Bolir S.A.,
holds 100 percent of the mineral rights under prospection grants to mineral
properties of approximately 98,000 acres (250,000Ha) located on the eastern
section of the Florida Greenstone Belt approximately 100 miles (160km)
northeast of Montevideo.
Exploration work, consisting of a regional stream sediment geochemical
survey, had been previously conducted by Compania Minera Aguilar S.A.
Mapping, prospecting and sampling were successful in locating a number of
gold bearing quartz vein structures. Aguilar completed a limited drilling
program on several of the veins. There has been no historic mining in the
area.
San Juan Hills Joint Venture: The San Juan Hills property covers the west
extension of the Florida Greenstone Belt near the town of Colonia. The area
is reached by sealed and gravel roads which provide access to all parts of
the property. Montevideo is approximately 100 miles (160km) to the
southeast. The property is operated under a joint venture, in which CMSJ
S.A. is the operator and has a sixty percent interest. Its joint venture
partner, Gold Standard, owns 100 percent of the mineral rights over an area
of approximately 120,000 acres (49,000Ha) subject to the Joint Venture
Agreement.
Prior to Gold Standard's acquisition, exploration activities comprising
stream sediment sampling, soil geochemistry, geologic mapping and airborne
geophysical surveys, were carried out by St. Joe Minerals, Bond
International Gold, and LAC Minerals Ltd. ARC's drilling program at the
Cerro San Carlos target during 1994 and 1995 resulted in the delineation of
a small resource that could possibly be treated in the Mahoma mill some 75
miles (120km) to the southeast. During 1995, 33,895 tons (30,814 tonnes) of
material grading 0.395 opt (12.29 g/t) were shipped to Mahoma for treatment
on a trial basis. Following management's decision to close the Mahoma
complex, ARC's exploration focus for this region has changed; focusing now
on the mineral potential for standalone projects, rather than small, high
grade targets as suitable feed for Mahoma.
Major portions of the venture property either expire or require a 50
percent reduction in acreage during 1996. Possible down plunge projections
of the Cerro San Carlos mineral system will be targeted and drill-tested
for high grade lode potentials. Major shear complexes and greenstone
terrain will be investigated by application of a variety of ore deposit
models.
MAHOMA GOLD PROJECT
Description and Location: The Mahoma gold mining operation is located near
the town of San Jose, Uruguay within the Florida Greenstone Belt. Access is
available year round to the project site from the capital city of Montevideo,
approximately 85 miles (136km) southeast by mainly sealed and minor all-weather
gravel roads.
ARC acquired the Mahoma project and exploration rights in 1992. (See Note 3
and Note 16 to Consolidated Financial Statements). The Mahoma Project, covering
approximately 1,000 acres (400Ha) commenced operations in the first quarter in
1993 with an estimated annual throughput of 110,000 tons (100,000 tonnes) of
material.
Royalty payments based on a modified net profits interest (net smelter
return less direct operating costs excluding administration costs) are two (2)
percent payable to the Uruguayan government and three (3) percent to the surface
landowner; after five years increasing to three (3) and five (5) percent to the
government and surface landowner, respectively. The former owner of CMSJ S.A.,
LAC Minerals Ltd., an Ontario corporation, now Barrick Gold Corporation, has a
five percent (5%) royalty on the net sale price of all gold produced from the
CMSJ S.A. property in excess of 40,000 ounces (1.2 tonnes) up to $10,000,000.
Property History: Systematic exploration and delineation of the Mahoma
deposits commenced in 1986 after discovery of mineralized surface outcrops the
previous year. Initial work centered on delineation of gold bearing quartz
veins. The delineation program took almost three years and was conducted by LAC
Minerals Ltd. The program was completed in 1990. Exploration activities
comprising stream sediment sampling, soil geochemistry, mapping and airborne
geophysical surveys were carried out by LAC Minerals Ltd. and other former
owners.
Description of Operations: Mahoma commenced open pit mining operations
within a one mile radius of ARC's crushing and carbon in pulp ("CIP") processing
plant in the first quarter of 1993. The plant has a nominal design mill
throughput capacity of 500 tons (454 tonnes) per day. Operations were suspended
late 1993 to reconstruct the tailings dam and to bring it into compliance with
Uruguayan regulations. Operations resumed in
11
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December 1994, and have essentially continued uninterrupted since then, except
for a four week period in September/October, 1995, when milling operations were
stopped because the water level in the tailings dam had reached the limit
stipulated in the mine's operating permit. In June 1995, mineralized material on
the Mahoma property, that could be economically mined and processed was
exhausted, and ARC's exploration drilling along strike extension to the known
mineralized zones also failed to define further economic mineralization.
The Veta Crucera Property (Brimol) and Cerro San Carlos (San Juan Hills
Joint Venture) had been for some time considered potential alternative sources
for Mahoma mill feed, albeit located some 150 miles (240km) and 75 miles (120km)
respectively from the plant site. Exploration drilling was primarily directed at
Cerro San Carlos where a small, high grade resource had been identified. Title
for Cerro San Carlos is held under exploration status. This limits the quantity
of material that can be extracted prior to the completion and approval of an
Environmental Impact Authorization and subsequent conversion of the property to
exploitation status under the Uruguayan Mining Code. The identified mineable
reserve was estimated to be sufficient to sustain Mahoma plant operations
through the end of 1995. However, based on the results of exploration
activities, it was considered unlikely that sufficient additional economic
mineralization would be found that could justify the capital expenditures
required to bring the property to exploitation status and expand the capacity of
the Mahoma tailings dam. In June 1995 the decision was made to exploit this
resource on a trial basis.
In the third quarter 1995, based on its own independent evaluation, ARC's
new management decided to cease operations by the end of 1995, and commence
reclamation activities. Since then additional economic mineralization has been
found which enabled mining to continue through early February 1996 when
operations ceased. Milling ceased in April 1996. The mining equipment will be
transferred to San Gregorio as well as certain of the buildings and processing
equipment. The remaining plant components will be temporarily mothballed and/or
offered for sale and reclamation activities, re-contouring, mulching and
seeding, are expected to be substantially completed during 1997.
The following table summarizes certain gold production and other operating
information relating to Mahoma and Cerro San Carlos.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
------- ------- ---------
<S> <C> <C> <C>
MAHOMA
Ore mined -- tons................................................ 21,277 3,924 49,624
Gold grade -- ounces per ton..................................... 0.214 0.172 0.207
Waste mined -- tons.............................................. 154,305 195,892 415,089
Stripping ratio.................................................. 7.3 49.9 8.4
Ore milled -- tons............................................... 27,670 2,877 49,624
Mill feed grade -- ounces per ton................................ 0.203 0.130 0.207
Gold produced -- ounces.......................................... 4,998 352 9,544
CERRO SAN CARLOS
Ore mined -- tons................................................ 33,985 -- --
Gold grade -- ounces per ton..................................... 0.395 -- --
Waste mined -- tons.............................................. 476,126 -- --
Stripping ratio.................................................. 14.0 -- --
Ore milled -- tons............................................... 25,411 -- --
Mill feed grade -- ounces per ton................................ 0.389 -- --
Gold produced -- ounces.......................................... 8,931 -- --
TOTAL
Ore mined -- tons................................................ 55,262 3,924 49,624
Gold grade -- ounces per ton..................................... 0.325 0.172 0.207
Waste mined -- tons.............................................. 630,431 195,892 415,089
Stripping ratio.................................................. 11.4 49.9 8.4
Ore milled -- tons............................................... 53,081 2,877 49,624
Mill feed grade -- ounces per ton................................ 0.292 0.13 0.207
Gold produced -- ounces.......................................... 13,929 352 9,544
</TABLE>
12
<PAGE> 13
GOLDFIELD, NEVADA
Present Status: In July 1995, mining operations at Goldfield were
discontinued and a sequential closure plan was initiated. In December 1995, ARC
sold its interest in APML. ARC will continue to manage the Goldfield properties
under an operator and service agreement. Additionally, ARC will continue to
advance APMUSA funds for the costs related to the shutdown of the Goldfield
Mine. These advances, as well as APMUSA's existing obligations to ARC, are
secured by the assets and stock of APMUSA.
Description and Location: The Goldfield Project is located approximately
190 miles (300km) northwest of Las Vegas and approximately 250 miles (400km)
southeast of Reno in the State of Nevada. The project is located adjacent to the
historic gold mining town of Goldfield. Access to the operation is provided year
around by paved and graveled roads. ARC assembled many previously fragmented and
complex claim blocks into a single project covering a major volcanic-hosted gold
and copper mineralized district.
The Goldfield operation properties consist of 183 patented claims and 192
unpatented claims covering approximately 7,300 acres (3,000Ha), both owned and
leased located in Esmeralda and Nye Counties, Nevada. Leases have terms from 5
to 99 years. Most of these leases contain renewal options and are terminable on
30 days' notice. To maintain these properties in good standing, minimum
quarterly royalty and/or lease payments, aggregating approximately $50,000, must
be made. Annual maintenance costs include annual claim-holding fees to the
United States Bureau of Land Management and property taxes. All payments are
current. Production royalties are paid to various claim holders under the terms
and conditions of various mining agreements in effect. The amount of each
royalty depends on the origin of the mined ore.
Property History and Description of Operations: ARC's Goldfield operations
were centered in an APML controlled block of approximately 542 acres (220Ha)
situated within the Main District. The Main District, has accounted for more
than ninety-five percent (95%) of the historic gold production of 4.1 million
ounces from the old Goldfield Mining District. Development of ARC's Goldfield
Project commenced during 1992, with some limited start-up sequencing activities
occurring by December 31, 1992. Facility testing and start-up activities were
conducted on an intermittent basis at substantially less than design capacity
levels through July 1993.
From August 1993 to August 1994, ARC suspended operations to develop and
implement a new mining plan. Due to mechanical and design problems in the
crushing circuit, mining activities were further suspended until repairs were
completed in October 1994. In early 1995, it was discovered that the
metallurgical characteristics of the ore then being mined and processed produced
lower recoveries than forecast which resulted in a significant write down of the
mineable reserves. During the first half of 1995, gold production never reached
economic levels and ARC's new management recommended to the APML Board of
Directors that the operation be closed in an orderly manner and reclamation
activities commenced. This was approved and on July 25, 1995, mining operations
ceased. Crushing and stacking of ore on the leach pad continued until September
13, 1995 with ore sourced from that already exposed within the open pits and
from existing stockpiles. Leaching of ore on the leach pad will continue into
the second or third quarter of 1996, at which time rinsing of the pad is
expected to commence.
Reclamation of the mining areas has commenced. Re-contouring is complete
and mulching and seeding operations will commence on receipt of State of Nevada
approval of ARC's reclamation plan. ARC has deposited a bond, in the form of a
certificate of deposit for $973,000, redeemable as phases of the reclamation
work are completed and approved by State of Nevada authorities.
During April 1994, ARC entered into a mining venture agreement with
Kennecott Exploration Company ("Kennecott") to explore, and if feasible, develop
and mine certain Goldfield properties. Pursuant to that agreement, Kennecott was
to receive a 60 percent interest in a joint venture with ARC upon spending $3.5
million to explore mineral claims adjacent to the Goldfield Mine. In February
1996, Kennecott informed ARC that it had decided to no longer explore the
mineral claims or participate in the mining venture.
13
<PAGE> 14
The following table summarizes certain gold production and other operating
information relating to the Goldfield operation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Ore mined -- tons............................................. 263,219 260,887 209,220
Gold grade -- ounces per ton.................................. 0.051 0.037 0.055
Waste mined -- tons........................................... 1,396,996 3,115,152 1,383,630
Stripping ratio............................................... 5.3 11.9 6.6
Ore milled -- tons............................................ 284,880 230,906 209,220
Mill feed grade -- ounces per ton............................. 0.053 0.034 0.055
Gold produced -- ounces....................................... 9,519 3,245 2,870
</TABLE>
BUTCHER BOY (formerly Lower Olinghouse)
Description and Location: The Butcher Boy Mine is located along the
eastern flanks of the Pah Rah range, in Washoe County Nevada, approximately 35
miles (56km) east of Reno in the Olinghouse mining district. Access is by county
maintained gravel road.
The property covers approximately 1,200 acres (3,000Ha) of which 560 acres
(1,400Ha) are leased from SFP Minerals Corporation ("SFP") for an initial period
of 10 years and 640 acres (1,600Ha) of unpatented associate placer claims are
leased from John V. Mongolo ("Mongolo") for a period of 20 years.
The SFP lease requires royalty payments of ten percent of production gross
value or ten percent in kind by weight, of the substances removed, with an
annual deductible advance royalty payment of $10 per acre. The minimum annual
royalty is $6,000 and ARC is current in its payments. The Mongolo lease requires
a semi-annual lease payment of $10,000 or a royalty on production equal to ten
percent of gross receipts, and $0.25 per cubic yard ($0.33m3) for any sand,
gravel or rock produced and sold from the property. ARC is current in all
payments under the Mongolo lease.
The Butcher Boy Mine was permitted in late 1989 and had limited production
through January 1991. A total of 414,120 bank cubic yards (316,000m3) of ore
were processed and 4,255 ounces (132kg) of gold were recovered.
Present Status & Planned Program: The mining area has been fully reclaimed
following cessation of mining operations. This activity included the cleanup and
disposal by approved means of minor mercury contamination in the ground under
the former processing facility. ARC has agreed to pay the State of Nevada a fine
of $19,500.
ARC intends to sell or otherwise terminate its leasehold interests in the
property.
The following table summarizes certain production and other operating
information relating to the Butcher Boy operation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Ore mined -- tons.................................................. -- -- 318,577
Gold produced -- ounces............................................ -- -- 1,526
</TABLE>
ASH MEADOWS
Description and Location: Ash Meadows is a 100 percent ARC-owned zeolite
mine, located in the Amargosa Valley, near Las Vegas, Nevada. Access is by
gravelled road from the paved highway connecting Death Valley Junction,
California and Pahrump, Nevada. The operation is comprised of unpatented mining
claims, fee land, plant, equipment, building, and rolling stock and is situated
along the Nevada-California border. Zeolite is a natural mineral with industrial
and agricultural uses. ARC acquired this property in 1989 from East West
Minerals.
The Ash Meadows properties cover approximately 2,460 acres (6,300Ha) and
consist of 60 unpatented lode claims and 61 placer claims in Nevada, and 60
unpatented and 62 placer claims in California. These claims are situated on
public lands administered by the United States Bureau of Land Management.
14
<PAGE> 15
ARC also owns 120 acres (49Ha) of fee land approximately five miles from
ARC's mining claims. This block of land contains the crushing, screening, and
processing plant as well an office, inventory storage, accompanying building and
adjoining airstrip. Well and water rights for the property are owned by ARC.
Production is subject to a $1.50 per ton royalty payable to Redstone USA,
Inc. ARC began limited production activities at Ash Meadows in 1993. The
operation's estimated annual production capacity is approximately 3,000 tons.
Zeolite is packaged and sold in bulk, in one ton super sacks, and in 40 lb.
sacks priced from $100 to $500 per ton. ARC is engaged in efforts to improve
production and sales volume. Proven and probable reserves, as estimated by
Anaconda, are 22.0 million tons containing 90 percent by weight recoverable
zeolite.
The following table summarizes certain operating information relating to
the Ash Meadows operation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Zeolite mined -- tons.................................................. 1,229 1,255 933
Zeolite sold -- tons................................................... 1,229 1,255 866
Cash production cost -- $/ton.......................................... 205 165 252
Non-cash production cost -- $/ton...................................... 11 12 16
Total production cost -- $/ton......................................... 216 177 268
</TABLE>
OTHER ZEOLITE EXPLORATION PROPERTIES
ARC currently holds two non-operating zeolite exploration properties. Its
Bowie, Arizona property covers approximately 680 acres (1,700Ha) and is located
approximately 100 miles (160km) east of Tucson. Its Rome, Oregon property was
released by ARC in 1990, and restaked in March 1992. It covers approximately
1,000 acres (2,500Ha) and is located approximately 125 miles (200km) southeast
of Burns, Oregon.
No active exploration program is underway or planned for either of these
properties. ARC is in preliminary discussions for the sale of the Rome property.
INDUSTRY AND BUSINESS CONSIDERATIONS
Exploration and Development Risks: The exploration for and development of
mineral deposits involves significant risks which even a combination of careful
evaluation, experience and knowledge may not eliminate. While the discovery of
an ore body may result in substantial rewards, few properties which are explored
are ultimately developed into producing mines. Major expenses may be required to
establish ore reserves, to develop metallurgical processes and to construct
mining and processing facilities at a particular site. There is aggressive
competition within the mining industry for the discovery and acquisition of
properties considered to have commercial potential. The Company competes with
other companies, many of which have significantly greater financial resources,
for the opportunity to participate in promising projects. Significant capital
investment is required to achieve commercial production from successful
exploration efforts.
Whether a mineral deposit will be commercially viable depends on a number
of factors, some of which are the particular attributes of the deposit, such as
size, grade and proximity to infrastructure, as well as metal prices which are
highly cyclical and government regulations, including regulations relating to
prices, taxes, royalties, land tenure, land use, importing and exporting of
minerals and environmental protection. The exact effect of these factors cannot
be accurately predicted, but the combination of these factors may result in the
Company not receiving an adequate return on invested capital.
Development projects have no operating history upon which to base estimates
of future cash operating costs and capital requirements. In particular,
estimates of reserves, metal recoveries and cash operating costs are to a large
extent based upon the interpretation of geologic data obtained from drill holes
and other sampling techniques and feasibility studies which derive estimates of
case operating costs based upon anticipated tonnage and grades of ore to be
mined and processed, the configuration of the ore body, expected recovery rates
of metals from the ore, comparable facility and equipment costs, anticipated
climate conditions and other factors. As a result, it is possible that actual
cash operating costs and economic returns of any and all development projects
may materially differ from the costs and returns initially estimated.
In addition, mining operations generally involve a high degree of risk. The
Company's operations are subject to all the hazards and risks normally
encountered in the exploration, development and production of gold, including
unusual and unexpected geology formations, rock bursts, cave-ins, flooding and
other conditions involved in the
15
<PAGE> 16
drilling and removal of material, any of which could result in damage to, or
destruction of, mines and other producing facilities, damage to life or
property, environmental damage and possible legal liability. Although the
Company takes precautions to minimize risk, milling operations are subject to
hazards such as equipment failure or failure of tailings dams.
Environmental Risks: Mining is subject to potential risks and liabilities
associated with pollution of the environment and the disposal of waste products
occurring as a result of mineral exploration and production. Environmental
liability may result from mining activities conducted by others prior to the
ownership of a property by the Company or as the result of the Company's
activities. Insurance against environmental risks (including potential liability
for pollution or other hazards as a result of the disposal of waste products
occurring from exploration and production) is not generally available at a
reasonable price to the Company or to other companies within the industry.
In the context of environmental permitting, including the approval of
reclamation plans, the Company must comply with standards, laws and regulations
which may entail greater or lesser costs and delays depending on the nature of
the activity to be permitted and how stringently the regulations are implemented
by the permitting authority. It is possible that the costs and delays associated
with compliance with such laws, regulations and permits could become such that
the Company would not proceed with the development of a project or the operation
or further development of a mine. Laws and regulations involving the protection
and remediation of the environment are constantly changing and are generally
becoming more restrictive. The Company has made, and expects to make in the
future, significant expenditures to comply with such laws and regulations.
The San Gregorio Project is subject to regulation under the laws of
Uruguay, The Goldfield Mine, which the Company operates under an operator and
service agreement and for which the Company has assumed certain responsibilities
for reclamation and closure, is subject to regulation under the laws of the
State of Nevada and the United States.
Foreign Operations: The Company's foreign operations and investments are
subject to the risk normally associated with conducting business in foreign
countries, including foreign exchange controls and currency fluctuations,
limitations on repatriation of earnings, foreign taxation, laws or policies of
particular countries, labor disputes and uncertain political and economic
environments as well as risk of war and civil disturbances or other risks which
could cause production difficulties or stoppages, restrict the movement of funds
or result in the deprivation or loss of contract rights or the taking of
property by nationalization or expropriation without fair compensation. Foreign
operations could also be impacted by laws and policies of the United States
affecting foreign trade, investment and taxation.
Estimates of Reserves and Mineralization Feasibility Studies: While the
estimates of the Company's reserves and mineralization have been reviewed by
independent consultants, such estimates presented herein are necessarily
imprecise and depend upon geological and engineering judgment and statistical
inferences drawn from limited drilling, which may prove unreliable. Should the
Company encounter mineralization or formations different from those predicted on
the basis of drilling, sampling and similar examinations, reserve estimates may
have to be adjusted and mining plans may have to be altered in a way that may
have a negative or positive impact on the Company's operations.
Legislation and Regulation: The Company is subject to extensive Uruguayan
and United States federal, state and local laws and regulations governing
matters relating to mine safety, occupational health, labor standards,
prospecting, exploration, production, exports and taxes. The Company has not
experienced any material difficulty emanating from these extensive laws and
regulations in the past, nor do they have any basis to expect any material
difficulty relating to existing laws and regulations in the future. The Company
believes that it has successfully complied in all material respects with all
Uruguayan and United States federal, state and local requirements for the
current operations and planned expansion of its mining activities. Compliance
with these and other laws and regulations could require significant capital
outlays. New laws and regulations, amendments to existing laws and regulations,
or more stringent enforcement of existing laws and regulations could have a
material adverse impact on the Company causing a reduction in levels of
production and delay or prevent the expansion of mining activities.
Gold Prices: The profitability of the Company's operations is
significantly affected by changes in the market price of gold. The market price
of gold has fluctuated widely and is affected by numerous factors beyond the
Company's control, including international economic trends, currency exchange
fluctuations, expectations of
16
<PAGE> 17
inflation, speculative activities, consumption patterns (such as purchases of
gold jewellery and the development of gold coin programs), purchases and sales
of bullion holdings by central banks or other large gold bullion holders or
dealers and global or regional political events, particularly in major
gold-producing countries such as South Africa and some of the countries that
formerly comprised the Soviet Union. Gold market prices are also affected by
worldwide production levels, which have increased in recent years. In addition,
the market price of gold has on occasion been subject to rapid short-term
changes because of market speculation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High.................................................... $397 $396 $398 $360 $403
Low..................................................... $372 $370 $327 $330 $344
End of period........................................... $387 $383 $386 $333 $353
</TABLE>
On March 27, 1996, the afternoon fixing price on the London Bullion Market
was $400.35 per ounce.
CUSTOMERS
During 1995, the Company sold dore to two customers. Management does not
believe that the loss of any one customer would have a material adverse impact
on the Company since similar sales terms could be negotiated with other
companies.
EMPLOYEES
The Company had 141 employees at December 31, 1995.
INDUSTRY AND GEOGRAPHIC SEGMENTS
See "Note 3 and Note 17 to Consolidated Financial Statements" in Item 8,
Financial Statements and Supplementary Data.
17
<PAGE> 18
GLOSSARY OF CERTAIN MINING TERMS
The following is a glossary of some of the terms used in the mining
industry and referenced herein:
ADR -- An acronym for adsorption, desorption, and reactivation (see definitions
for adsorption, desorption, reactivation singularly).
ADSORPTION -- A process in which soluble complexes of gold and silver physically
adhere without chemical reaction to activated carbon particles.
AGGLOMERATION -- a process whereby mineralized material is mixed with a binder
and water and cured for a relatively short period of time. Agglomeration allows
heap leaching of material that otherwise does not permit the leaching solution
to percolate through, by increasing material strength, porosity and
permeability.
BANK CUBIC YARD -- ("bcy") refers to a cubic yard of in situ resource.
BOTTLE ROLL TEST -- a small scale metallurgical laboratory test used to
determine the amenability of mineralization to the cyanidation extraction
process.
CIP -- An acronym for Carbon-In-Pulp -- the process of a solution leach plant in
which the dissolved gold in the pregnant cyanide solution is extracted through
adsorption onto activated carbon.
CIL -- An acronym for Carbon-In-Leach -- the process of a solution leach plant
in which the dissolved gold in the pregnant cyanide solution is extracted
through adsorption onto activated carbon concurrent with leaching.
COLUMN TEST -- a large scale metallurgical laboratory test used to determine the
amenability of mineralized material to the cyanidation extraction process.
CONTAINED GOLD OR GOLD EQUIVALENT -- total measurable gold or gold equivalent in
grams or ounces estimated to be contained within a mineral deposit. A
calculation or estimate of contained gold makes no allowance for mining dilution
or recovery losses.
CUTOFF GRADE -- grade of mineralization, established by reference to economic
factors, above which material is included in mineral deposit reserve/ resource
calculations and below which the material is considered waste. May be either an
external cutoff grade which refers to the grade of mineralization used to
control the external or design limits of an open pit based upon the expected
economic parameters of the operation, or an internal cutoff grade which refers
to the minimum grade required for blocks of mineralization present within the
confines of an open pit to be included in mineral deposit estimates.
DEVELOPMENT STAGE -- The period when a mineral deposit that has been estimated
to be economically viable is prepared for commercial production; including
pre-production stripping in the mine and the construction of the necessary
process plant and supporting facilities.
DESORPTION -- A process in which gold and silver physically adhered to carbon
particles in the adsorption process are stripped from the carbon particles using
a weak acid solution.
DIAMOND DRILL -- a machine designed to rotate, under pressure, an annular
diamond studded cutting tool to produce a more or less continuous solid,
cylindrical sample of the material drilled.
DORE -- unrefined gold and silver in bullion form.
GOLD DEPOSIT -- means a mineral deposit mineralized with gold but without
reference to its potential economics.
GOLD EQUIVALENT -- a method of presenting combined gold and silver
concentrations or weights for comparison purposes. Commonly involves expressing
silver as its proportionate value in gold based on the relative contents of the
two metals. When gold equivalent is used to express metal sold, the calculation
is based on actual prices received. When grades are expressed in gold
equivalent, the relative recoveries of the two metals are also taken into
account.
GRADE -- The amount of valuable mineral in each ton of mineralized material,
expressed as troy ounces (or grams) per ton or tonne of gold or as a percentage
of copper and other base metals.
HEAP LEACHING -- a method of gold and silver extraction in which mineralized
material is heaped on an impermeable pad and sodium cyanide solution is applied
to the material. The gold and silver are dissolved out of the material as the
solution percolates down through the heap, the pregnant solution is collected
from below the heap and the gold and silver are precipitated from the pregnant
solution in vessels or columns containing activated carbon or zinc powder.
18
<PAGE> 19
LEACH PAD -- A large, impermeable foundation or pad used as a base for ore
during heap leaching. The pad prevents the leach solution from escaping out of
the circuit.
LODE MINING CLAIM -- A mining claim located on a vein or lode of quartz or other
rock in place, bearing gold, silver, cinnabar, tin, lead, copper, or other
valuable deposits.
MINERAL DEPOSIT, DEPOSIT, OR MINERALIZED MATERIAL -- a mineralized body which
has been physically delineated by sufficient drilling, trenching, and/or
underground work, and found to contain a sufficient average grade of metal or
metals to warrant further exploration and/or development expenditures. Such a
deposit does not qualify under SEC standards as a commercially mineable ore body
or as containing ore reserves, until final legal, technical, and economic
factors have been resolved.
MIXED ORE -- a mixture of oxidized and unoxidized ore.
NET SMELTER RETURN ROYALTY -- a phrase used to describe a royalty payment made
by a producer of metals, usually to a previous property owner or Governmental
authority, based on the value of gross metal production from the property, less
deduction of certain limited costs including smelting, refining, transportation
and insurance costs.
NET PROFITS INTEREST ROYALTY -- a phrase used to describe a royalty payment made
by the producer of metals, usually to a property owner or Governmental
authority, based on the value of gross metal production from the property, less
deduction of certain costs including smelting, refining, transportation and
insurance costs (often referred to as realization costs) plus direct operating
costs associated with the mining and treatment of ore and the mining of
associated waste.
OPEN PIT MINING -- the process of mining an ore body from the surface in
progressively deeper steps. Sufficient waste rock adjacent to the ore body is
removed to maintain mining access and to maintain the stability of the resulting
pit walls.
ORE -- a natural aggregate of one or more minerals which, at a specified time
and place, may be mined and sold at a profit, or from which some part may be
profitably separated.
OUNCE (OZ) -- troy ounce.
OXIDIZED ORE (ALSO REFERRED TO AS "OXIDE ORE") -- mineralized rock which can be
profitably mined and in which some of the original minerals have been oxidized
by natural processes. Oxidation is a chemical process which makes the gold
mineral more amenable to recovery by direct cyanidization. In addition oxide ore
tends to be more porous, permitting a more complete permeation of cyanide
solutions so that minute particles of gold in the interior of the rock will be
more readily dissolved.
OZ/TON (OPT) -- troy ounces per short ton.
PPB -- parts per billion.
PPM -- parts per million.
PATENTED MINING CLAIM -- a mining claim on the public land of the United States,
under the mining laws, for which a patent has been issued conveying the title of
the United States to the patentees.
PORPHYRY DEPOSIT -- a disseminated mineral deposit often closely associated with
porphyritic intrusive rocks.
PORPHYRITIC -- rock texture in which one mineral has a larger grain size than
the accompanying minerals.
POSSIBLE RESERVES -- reserves for which quantitative estimates are based largely
on broad knowledge of the geological character of the deposit and for which
there are few, if any, samples or measurements, and for which the estimates are
based on an assumed continuity or repetition for which there are reasonable
geological indications, which indications may include comparison with deposits
of similar type, and bodies that are completely concealed may be included if
there is specific evidence of their presence.
PROBABLE RESERVES -- reserves for which quantity and grade and/or quality are
computed from information similar to that used for proven reserves, but the
sites for inspection, sampling and measurement are farther apart or are
otherwise less adequately spaced. The degree of assurance, although lower than
that for proven reserves, is high enough to assume continuity between points of
observation.
PROVEN / PROBABLE RESERVES -- is used if the difference in degree of assurance
between the proven and probable categories cannot be reliably defined.
19
<PAGE> 20
PROVEN RESERVES -- reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling; and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geological
character is so well defined that size, shape, depth and mineral content of
reserves are well established.
REACTIVATION -- a process in which carbon particles which have been stripped of
gold and silver during the desorption process are heated in a kiln to relieve
them of all contaminants and prepare them for reuse in the adsorption process.
RESERVE -- means that part of a mineral deposit which can be economically and
legally extracted or produced at the time of the reserve determination. Reserves
are customarily stated in terms of "ore" when dealing with metalliferous
minerals.
REVERSE CIRCULATION HOLES -- exploration drill holes in which the fine and
coarse rock chips created during drilling are rapidly flushed to the surface so
that a representative sample can be obtained.
RUN-OF-MINE -- material in its as-mined condition.
STOCK -- a body of intrusive rock that covers less than 40 square miles, has
steep dips and is generally discordant with surrounding rock.
STOCKWORK -- small veins of mineralization that have so penetrated a rock mass
that the whole rock mass can be considered mineralized.
STRIKE LENGTH -- the longest horizontal dimensions of a body or zone of
mineralization.
STRIPPING RATIO -- the tonnage of waste material required to be removed to mine
one ton of ore extracted as a ratio.
UNPATENTED MINING CLAIM -- a mining claim located on the public lands of the
United States, for which a patent has not been issued. An unpatented mining
claim is a possessory interest only, subject to the paramount title of the
United States. The validity of an unpatented mining claim depends upon the
existence of a valuable mineral deposit within the boundaries of the claim and
compliance with mining codes.
ZEOLITE -- industrial mineral that possesses infinite three dimensional crystal
structures and has the ability to exchange its cations without a change in
structure. Zeolites are used primarily in waste treatment applications.
UNITS OF MEASURE
acres -- one acre = 0.4046 hectares
feet -- one foot = 0.305 metres
gram ("g") -- one gram = 0.0322 troy ounces
hectare ("Ha") -- one hectare = 2.47 acres
kilometer ("km") -- one kilometer = 0.621 miles
meter ("m") -- one meter = 39.37 inches or 3.28 feet or 1.09 yards
miles -- one mile = 1.6093 kilometres
ton (short ton) -- one ton = 2,000 pounds
tonne (metric tonne) -- one tonne = 2,204.6 pounds
troy ounce -- one troy ounce = 31.103 grams
20
<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
In January 1995, the holder of a $3.5 million convertible secured note, due
December 31, 1996 gave notice alleging default of ARC under the terms of the
loan agreement. ARC filed a notice of dispute and the matter was resolved
through binding arbitration as required under the agreement. In June 1995, ARC
paid $6 million in settlement which retired the $3.5 million debt and related
accrued interest, removed the property lien and a right to a royalty interest
held by the note holder and resulted in a $2.4 million charge to litigation
expense.
In 1995, seven related lawsuits were filed against ARC in the California
Superior Court, County of Marin. All of the actions arise out of an airplane
crash in September 1994 in Argentina.
The crash occurred during a tour by a London investment banking firm of
Argentine and Uruguayan properties owned by subsidiaries of ARC. Mr. Glover, who
was a director and consultant to ARC, took part in the tour. There were a total
of seven passengers and two crew members, all of whom were killed. The
complaints generally allege that ARC was negligent with respect to the operation
and maintenance of the aircraft and the selection of the charter company, and
that ARC has vicarious liability for the charter company's conduct. ARC contends
that it did not select the charter company, that the charter company was at most
an independent contractor, and that ARC cannot be held liable for the charter
company's maintenance or operation of the airplane. Three of these lawsuits each
request damages of $20,015,000; the other lawsuits seek unspecified damages. ARC
has notified its insurance carrier of the commencement of the actions; however,
ARC's insurance coverage for an occurrence of this type is limited to $1
million, including defense costs.
Management disagrees with the plaintiffs' claims and is vigorously
defending ARC against these lawsuits. ARC is unable at this time to accurately
assess the probability of unfavorable outcomes or to estimate the potential
recovery to the plaintiffs if unfavorable outcomes were to occur. No provision
for liability has been made in the ARC consolidated financial statements.
In February 1994, ARC received a notice from the SEC that it was conducting
a preliminary inquiry into matters relating to ARC to determine whether certain
provisions of the federal securities laws had been violated. This preliminary
inquiry is continuing as a "matter under inquiry" regarding certain aspects of
several prior year transactions entered into by ARC's former management. In
response to the SEC's request, ARC has provided the SEC documents pertaining to
such transactions and matters.
On June 3, 1996, legal counsel on behalf of Mr. Michael J. Savage
threatened action regarding, among other things, alleged misrepresentations and
omissions by ARC in the sale of APML; management intends to vigorously defend
ARC, if an action is commenced, and is of the opinion that the allegations
contained in the letter are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the last quarter of the year ended December 31, 1995.
21
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock trades in the United States on the Nasdaq
SmallCap Market under the symbol "AREE". The following table sets forth the high
and low bid prices per share of the Company's common stock for the periods
indicated, as reported on the Nasdaq.
NASDAQ SMALLCAP MARKET
<TABLE>
<CAPTION>
HIGH LOW CLOSE
------ ------ ------
<S> <C> <C> <C>
1994
First quarter..................................................... $ 8.00 $ 4.88 $ 4.88
Second quarter.................................................... 6.50 4.13 6.00
Third quarter..................................................... 6.00 3.63 5.13
Fourth quarter.................................................... 5.25 4.63 4.33
1995
First quarter..................................................... 4.88 4.31 4.75
Second quarter.................................................... 4.75 4.00 4.13
Third quarter..................................................... 4.63 4.00 4.13
Fourth quarter.................................................... 4.88 4.00 4.50
</TABLE>
Bid prices presented for the Nasdaq SmallCap Market reflect interdealer
quotations without dealer retail mark-ups, mark-downs, or commissions, and,
therefore, may not necessarily reflect actual transactions.
As of March 27, 1996 the number of shareholders of record of the common
stock was 472 and the closing price of the common stock on Nasdaq was $5.375.
The Company has registered the resale of certain shares of its common stock
under the Securities Act of 1933, as amended (the "Securities Act") by certain
holders thereof.
Holders of the Company's common stock are currently entitled to receive
such dividends, if any, that may be declared from time to time by the Company's
Board of Directors in its discretion from funds legally available therefor. The
Company has not declared any dividends since its inception and anticipates that
all earnings, if any, will be retained for development of the Company's
business, and that no dividends on its common stock will be declared in the
foreseeable future.
22
<PAGE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information for the periods
described below has been derived from the ARC consolidated financial statements
which are prepared in accordance with US GAAP. The following selected financial
information should be read in conjunction with the ARC consolidated financial
statements and related notes thereto included elsewhere herein.
ARC SELECTED CONSOLIDATED FINANCIAL INFORMATION UNDER US GAAP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992 (1) YEAR ENDED
------------------------------------------------------- ----------------------- DECEMBER 31,
1995 1994 1993 FEB. 18 TO JAN. 1 TO ------------
(AS RESTATED) (6) (AS RESTATED) (5) (AS RESTATED) (5) DEC. 31 FEB. 18 1991
----------------- ----------------- ----------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales................. $ 9,057,440 $ 1,817,667 $ 5,078,880 $ 354,161 $ 9,548 $ 267,286
Net income (loss)
before extraordinary
items and minority
interest............ 9,568,411 (33,635,337) (21,288,502) (13,848,727) (578,125) (2,165,011)
Net income (loss)
(4)................. 9,766,332 (29,368,468) (21,071,802) (13,848,727) 1,184,312 (2,165,011)
Total assets.......... 50,744,666 34,503,102 36,206,534 28,958,400 6,915,409 2,908,649
Long-term
liabilities......... 3,214,016 14,254,610 3,240,516 2,683,546 -- 55,857
Debtor certificates
(2)................. -- -- -- -- -- 3,206,770
Total shareholders'
equity
(deficiency)........ 38,492,850 12,421,629 14,228,571 12,165,284 5,963,830 (4,443,672)
Per share amounts (3)
Net income (loss)
before
extraordinary
items and minority
interest.......... 0.71 (2.89) (4.03) (43.11) (15.52) (58.11)
Net income (loss)... 0.72 (2.53) (3.99) (43.11) 31.79 (58.11)
</TABLE>
(1) ARC emerged from bankruptcy on February 18, 1992 and used "fresh start"
accounting effective February 18, 1992 in accordance with Statement of
Position 90-7 issued by the American Institute of Certified Public
Accountants (SOP 90-7). SOP 90-7 requires the reorganization value of the
emerged entity of to be allocated to its assets in conformity with the
procedures used to account for transactions under the purchase method of
accounting. The consolidated financial information for periods prior to
February 18, 1992 is delineated by a vertical black line and is not
comparable to consolidated financial statement for subsequent periods.
(2) Debtor certificates bore interest at an annual rate of 12% and, upon
confirmation of the ARC's Plan of Reorganization on February 18, 1992, were
converted into Common Stock and Warrants.
(3) Adjusted to reflect a 1:10 reverse stock split in May 1989, a 1:20 reverse
stock split in February 1992 and a 1:10 reverse stock split in December
1993.
(4) Net income for the year ended December 31, 1995 and the three months ended
March 31, 1996 reflect gains on sales of equity securities (shares of
Northern Orion) of approximately $24.9 million and $12.6 million,
respectively.
(5) See Note 3 to the consolidated financial statements of ARC.
(6) See Note 5 to the consolidated financial statements of ARC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RECENT DEVELOPMENTS AND OUTLOOK
ARC has been through significant changes during the past year. In early
June 1995, ARC sold its wholly-owned subsidiary, Recursos Americanos Argentinos
("RAA"), which held ARC's Argentine properties, to Northern Orion Explorations
Ltd. ("Northern Orion"), a majority-owned subsidiary of Miramar Mining
Corporation ("Miramar") in exchange for 15 million unregistered shares of
Northern Orion. See "Liquidity and
23
<PAGE> 24
Capital Resources". Also in June 1995, the Company's shareholders elected two
new board members, James F. Wickham and Neil Woodyer, to replace Tony D.S. Wicks
and Norman M. Ewart. The new Board of Directors immediately began developing a
new senior management team, naming Ian B. Smith as ARC's President and Chief
Executive Officer. Ralph Green, Vice-President -- Exploration and Hector Cubas,
Vice-President -- General Manager -- Uruguay continued in their senior
management positions and ARC subsequently hired Anthony T. Miller,
Vice-President -- Administration, General Counsel and Secretary; Cal Perkins,
Vice-President -- Engineering and Construction; Martin Quick, Vice-President --
Operations; and Bruce K. Thiesen, Vice-President -- Finance and Chief Financial
Officer.
During the second half of 1995 and the beginning of 1996, ARC evaluated its
existing mining operations and other properties and implemented a growth plan
for ARC. As a result of this process, management decided to (i) cease mining
operations at the Mahoma mine; (ii) recommend to the Board of Directors of APML
that it close the Goldfield mine; and (iii) focus on the development of the San
Gregorio gold project in northern Uruguay (the "San Gregorio Project") and its
undeveloped Uruguayan exploration properties. In December 1995, in conjunction
with the closure of the Goldfield mine, ARC sold its 78 percent interest in
APML. On March 5,1996, ARC entered into the merger agreement with Rea Gold
Corporation ("Rea")(the "Merger Agreement").
San Gregorio Project: ARC is currently developing the San Gregorio
Project. The projected cost for the plant, facilities, equipment, financing and
working capital is approximately $41.9 million. ARC intends to fund the cost of
the San Gregorio Project with a combination of debt and equity. ARC has entered
into a loan agreement with a financial institution for a $25 million project
gold loan facility for the construction of the mine, processing and auxiliary
facilities. Under the terms of the gold loan facility, ARC is required to repay
principal and interest in four years starting no later than June 30, 1997. As of
May 24, 1996, ARC has spent approximately $11.8 million on the development of
the San Gregorio Project; management plans to fund the remaining ARC equity
portion of the San Gregorio Project development costs with existing cash.
ARC has awarded a $16.5 million contract to an independent contractor for
the engineering and construction of the plant and related infrastructure. The
contractor is proceeding with a construction schedule which allows for the
commencement of mining operations in early 1997. Commitments to other San
Gregorio Project vendors and contractors for products and services totalled
approximately $2.6 million at May 24, 1996.
Merger Agreement with Rea Gold: Under the terms of the Merger Agreement,
ARC shareholders will receive 2.24 Rea shares for each ARC share held, subject
to an adjustment in the event that the NNO Shares held by ARC on January 10,
1996 (and the proceeds of any sale of such NNO Shares before the Effective Time)
have a value (on a per share basis) that varies (plus or minus) by more than 10
percent of a value of Cdn$4.62 negotiated on January 10, 1996. W. James Hogan,
currently President and CEO of Rea, will become the Chairman of the combined
companies ("new Rea"). Mr. Smith will become the President and CEO of new Rea.
Completion of the proposed merger, which is subject to shareholder approvals,
will result in ARC shareholders holding approximately 40 percent of the new Rea,
subject to change based on ultimate share Exchange Ratio adjustments. There is
no assurance that the proposed merger will be completed.
American Pacific Minerals Ltd.: In December 1995, ARC sold its 78 percent
interest in APML to an unrelated party, Michael J. Savage, acting for himself
and as agent for certain other principals ("Savage"), for $40,000. APML owns,
through American Pacific Minerals (U.S.A.) Inc. ("APM USA"), the Goldfield
mining properties located near Goldfield, Nevada (See Item 3. "Legal
Proceedings"). Pursuant to an operator and service agreement, ARC will continue
to manage the Goldfield properties for APM USA. Additionally, ARC is obligated
to advance APM USA funds for the costs related to the closure and reclamation of
the Goldfield mine. ARC also assumed $2 million of convertible notes of APML due
serially in December 1997, 1998 and 1999.
ARC's advances to APM USA for the Goldfield closure and reclamation, as
well as APM USA's pre-existing intercompany obligations to ARC, are secured by
the assets and stock of APM USA and are due December 29, 1996. The December 31,
1995 receivable from APM USA was written down to approximately $3.4 million,
which reflects management's best estimate of the fair value of the security
interest, including approximately $2.9 million for the mineral properties and
$0.5 million for plant and equipment and working capital.
Except for the sale of APML to Savage, all transactions between ARC and
APML during 1995 and 1994 were eliminated in consolidation. APML revenues, costs
and expenses, and net loss included in ARC's 1995 Consolidated Statement of
Operations are approximately $3.8 million, $12.2 million and $8.4 million,
respectively. During 1995,
24
<PAGE> 25
losses applicable to the minority interest of APM USA exceeded the minority's
interest in the equity capital of APML. Losses applicable to the minority
interest and charged against ARC's interest were approximately $1.3 million.
LIQUIDITY AND CAPITAL RESOURCES
During 1995, ARC sold approximately 6.9 million of the 15 million Northern
Orion shares ("NNO shares") received in exchange for RAA in three sales
transactions and used proceeds received on the sales to significantly improve
its liquidity and overall financial position. ARC sold an additional 4.1 million
NNO Shares in three sales transactions from January 1, 1996 to May 17, 1996. The
estimated fair value of ARC's remaining 4 million NNO Shares at May 17, 1996 is
$21.3 million, based on the May 17, 1996 closing market price quoted for
registered shares on the Toronto Stock Exchange. Since ARC's current operations
are being closed and the San Gregorio Project is under development, ARC's
results of operations for the remainder of 1996 will reflect a net loss if the
remaining NNO Shares are not sold.
Long-term debt has been reduced to $3.1 million at December 31, 1995 from
approximately $16 million at December 31, 1994. During 1995, payments to reduce
long-term debt were approximately $12.5 million, including $9.8 million with
proceeds received from the sale of NNO Shares. In addition, $9.3 million was
redeemed in exchange for 4.5 million NNO shares. ARC's new long-term debt
borrowings were $8.9 million during 1995.
ARC's net working capital increased to $20.9 million at December 31, 1995
from a net working capital deficit of $1.4 million at December 31, 1994.
Included in working capital at December 31, 1995 is the estimated fair value of
investments in equity securities available for sale of $25.4 million (8.1
million shares) based on the closing market prices of registered NNO shares on
the Vancouver Stock Exchange. NNO shares were listed on the Toronto Stock
Exchange in February 1996. Other summarized financial data relating to ARC's
improved liquidity and financial condition follows ($000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
(AS RESTATED) (AS RESTATED)
------------- -------------
<S> <C> <C>
Cash and equivalents................................................. $ 2,203 $ 2,521
Current liabilities (including current portion of long-term debt).... 9,038 7,262
Long-term liabilities................................................ 3,214 14,255
Current ratio........................................................ 3.31 0.81
Debt-to-equity ratio................................................. 32% 173%
</TABLE>
In December 1995, in conjunction with ARC's sale of APML, ARC assumed $2
million of convertible notes of APML, due serially in December 1997, 1998 and
1999. In January 1996, the terms of the convertible notes were amended to
provide for the mandatory conversion into ARC common stock at a price of $5.50
per share upon the completion of the proposed merger with Rea Gold by June 30,
1996. If the merger is not completed by June 30, 1996, the principal will be
paid at maturity in cash, or at the option of the note holder, be converted at
any time thereafter until maturity into ARC common stock at a price that is 90
percent of the average price for the common stock during the thirty days
preceding notice of conversion.
Subsequent to December 31, 1995, ARC issued $8 million in convertible notes
to offshore private investors, and issued a $1.1 million note to a landholder
for land surface rights at San Gregorio. Under the terms of the convertible
notes, the debt will be converted into ARC common stock at $5.75 per share upon
shareholders' approval of the proposed merger. If the proposed merger is not
completed, the outstanding principal will be paid, at ARC's option, in cash or
an equivalent value of NNO Shares at a price that is 95 percent of the average
price of NNO Shares during the 20 days immediately preceding the payment date.
Such payment will be made at the note holders' option, either 90 days after
failure of the shareholders to approve the proposed merger or in March 1997.
ARC is presently holding 4 million shares of NNO Shares and will sell these
shares during 1996 and 1997 as necessary to fund any otherwise unfunded San
Gregorio Project development costs, its $1.8 million Uruguayan exploration
program, and other financing needs.
In prior years, due to the uncertainties regarding ARC's success in
exploration, the ability to raise capital and to attain profitable operations in
the future, ARC's future as a going concern was not assured. Due to the sale of
RAA; the receipt of a $25 million project gold loan facility; and ARC's current
cash position, ARC has significantly
25
<PAGE> 26
improved its liquidity and overall financial position. Accordingly, management
believes the uncertainty regarding ARC's ability to continue as a going concern
no longer exists.
RESULTS OF OPERATIONS
Financial Statement Restatement: During 1995, management established that
certain aspects of certain transactions entered into by ARC by its former
management require a restatement of prior period consolidated financial
statements, including additional disclosures regarding the affiliations certain
parties had with ARC, ARC's former management or other affiliates. Terms of
certain of the transactions may not have been the same as those that would have
resulted from transactions among wholly unrelated parties. New management
believes that none of these matters will materially affect ARC's consolidated
financial statements, since all of these transactions have been reflected in
ARC's results of operations as of December 31, 1995, and management believes
that the ultimate resolution of any uncertainties will not have a material
adverse effect on ARC's consolidated financial statements.
Depreciation, depletion and amortization expense of ARC's Mahoma Project
reflected in prior period consolidated financial statements was not computed
using appropriate mineral reserve data, and certain assets were erroneously not
depreciated. Also, results of ARC's evaluation of its recoverability of the
December 31, 1994 net book value and estimated reclamation costs for the Mahoma
project were not determined using accurate mineral reserve date then available.
The effect of these restatements is included in 1994 and 1993 financial
information referred to herein.
During 1996, the Company restated investments in equity securities
available for sale and net deferred income taxes as of December 31, 1995 (see
Note 5 to consolidated financial statements).
Results of Mines Under Closure and Reclamation: As noted above, during
1995, management decided to cease mining operations at the Mahoma mine and
recommended to the APML Board of Directors to close the Goldfield mine. Results
of operations from Mahoma and Goldfield have been very unfavorable. The
performance of the operations has been inadequate, the equipment has required
high maintenance and gold production has been insufficient for ARC to recover
its investments in these two projects. Further discussion and a summary of the
results of operations for these two mines under closure and reclamation follows:
Mahoma: ARC acquired the Mahoma project and exploration rights in 1992
(see Note 3 and Note 16 to consolidated financial statements). Mining and
processing operations at the Mahoma mine commenced in the first quarter of 1993,
but were suspended in late 1993 to reconstruct the tailings dam and to bring it
into compliance with Uruguayan regulations. Operations resumed in December 1994,
and have essentially continued uninterrupted since then, except for a four week
period in September and October 1995, when milling operations were stopped
because the water level in the tailings dam had reached the limit stipulated in
the mine's operating permit. In June 1995, mineralized material on the Mahoma
property that could be economically mined and processed was exhausted, and ARC's
exploration drilling along strike extension to the known mineralized zones also
failed to define further economic mineralization.
ARC had considered the Veta Crucera property and Cerro San Carlos
properties potential alternative sources for Mahoma mill feed for some time,
even though they are located 150 miles (240km) and 75 miles (120km) from the
plant site, respectively. Exploration drilling was primarily directed at Cerro
San Carlos where a small, high grade resource had been identified. Title for
Cerro San Carlos is held under exploration status. This limits the quantity of
material that can be extracted prior to the completion and approval of an
Environmental Impact Authorization and subsequent conversion of the property to
exploitation status under the Uruguayan Mining Code. The identified mineable
reserve was estimated to be sufficient to sustain Mahoma plant operations
through the end of 1995. However, based on the results of exploration
activities, it was considered unlikely that sufficient additional economic
mineralization would be found that could justify the capital expenditures
required to bring the property to exploitation status and expand the capacity of
the Mahoma tailings dam. In June 1995, the decision was made to exploit this
resource on a trial basis.
In the third quarter 1995, based on its own independent evaluation, ARC's
new management decided to cease operations by the end of 1995 and commence
reclamation activities. Since then, additional economic mineralization was found
sufficient to enable mining to continue through early February 1996, when
operations ceased. Milling ceased in April 1996. The mining equipment and
several buildings and equipment will be transferred to San Gregorio. The
remaining plant will be temporarily "mothballed" and/or offered for sale.
Reclamation activities, re-contouring, mulching and seeding, are expected to be
substantially completed during 1997.
26
<PAGE> 27
A summary of certain gold production and other operating information
relating to Mahoma and Cerro San Carlos for the three years ended December 31,
1995 follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
MAHOMA
Ore mined -- tons........................................... 21,277 3,924 49,624
Gold grade -- ounces per ton................................ 0.214 0.172 0.207
Waste mined -- tons......................................... 154,305 195,892 415,089
Stripping ratio............................................. 7.3 49.9 8.4
Ore milled -- tons.......................................... 27,670 2,877 49,624
Mill feed grade -- ounces per ton........................... 0.203 0.130 0.207
Gold produced -- ounces..................................... 4,998 352 9,544
CERRO SAN CARLOS
Ore mined -- tons........................................... 33,985 -- --
Gold grade -- ounces per ton................................ 0.395 -- --
Waste mined -- tons......................................... 476,126 -- --
Stripping ratio............................................. 14.0 -- --
Ore milled -- tons.......................................... 25,411 -- --
Mill feed grade -- ounces per ton........................... 0.389 -- --
Gold produced -- ounces..................................... 8,931 -- --
TOTAL
Ore mined -- tons........................................... 55,262 3,924 49,624
Gold grade -- ounces per ton................................ 0.325 0.172 0.207
Waste mined -- tons......................................... 630,431 195,892 415,089
Stripping ratio............................................. 11.4 49.9 8.4
Ore milled -- tons.......................................... 53,081 2,877 49,624
Mill feed grade -- ounces per ton........................... 0.292 0.130 0.207
Gold produced -- ounces..................................... 13,929 352 9,544
</TABLE>
Based on management's decision to stop mining operations at Mahoma, a
charge of $2.8 million was recorded in the third quarter 1995, including $2.2
million to write-down the Mahoma plant and facilities to net realizable value
and $0.6 million for anticipated closure costs and reclamation activities. Net
realizable value was determined by a third party valuation of the main
processing plant and management's estimates of current selling prices for the
assets to be transferred to and used for ARC's San Gregorio Project. A
write-down of $3.6 million was recorded for the year ended December 31, 1994
based on an evaluation of recoverability utilizing estimated future cash flows
from proven and probable reserves. The net book value of the Mahoma plant and
facilities and related assets at December 31, 1995 is $4.5 million.
A summary of Mahoma operating results for the three years ended December
31, 1995 follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1994 1993
1995 (AS RESTATED) (AS RESTATED)
------- ------------- -------------
<S> <C> <C> <C>
Gold sales.................................................... $ 5,003 $ -- $ 3,350
Production costs.............................................. (4,356) (2,158) (5,312)
Depreciation, depletion and amortization expense.............. (2,522) (813) (3,444)
Write-downs of property, plant and equipment.................. (2,236) (3,627) --
------- ------------- -------------
$(4,111) $(6,598) $(5,406)
======= ========== ==========
</TABLE>
Goldfield: Development of ARC's Goldfield project commenced during 1992,
including the performance of some limited start-up sequencing activities,
although facility testing and start-up activities were conducted on an
intermittent basis at substantially less than design capacity levels through
July 1993. From August 1993 to August 1994, ARC suspended operations to develop
and implement a new mining plan. Due to mechanical and design problems in the
crushing circuit, mining activities were further suspended until repairs were
completed in September 30, 1994.
27
<PAGE> 28
During the first half of 1995, due to ore characteristics that made
economic gold recovery unattainable with ARC's mining process, production of
gold from the Goldfield operation was significantly below planned levels and the
mine again operated at a loss.
ARC's management recommended to the Board of Directors of its
then-subsidiary, APML, that the operations be closed in an orderly manner and
that reclamation activities be commenced. The mine closure was approved by the
APML Board of Directors and in July 1995, mining operations were ceased.
Crushing and stacking of ore on the leach pad continued until September 1995
with ore from that already exposed within the open pits and from existing
stockpiles. Leaching of ore on the pad is expected to continue into the second
or third quarter of 1996, at which time rinsing of the pad is expected to
commence.
A severance charge of $100,000 for work force reductions was recorded in
the third quarter of 1995. A charge of $1.6 million for reclamation and closure
costs was recorded in the fourth quarter of 1995 to increase the accrual at
December 31, 1995 to $2.3 million. The reclamation accrual is net of estimated
recoveries of $1.3 million from expected sales of gold to be obtained from
leaching of ore on the pad. Based on management's understanding of the required
closure activities at Goldfield and preliminary discussions with the State of
Nevada, the reclamation and closure accrual is considered adequate to provide
for the anticipated work to be performed ARC has deposited a bond with the State
of Nevada, in the form of a certificate of deposit for $973,000, redeemable as
phases of reclamation work are completed and approved by the State of Nevada
authorities. As the reclamation work and discussions with the State of Nevada
proceed, additional deposits may be required.
During April 1994, ARC entered into a mining venture agreement with
Kennecott Exploration Company ("Kennecott") to explore and if feasible, develop
and mine certain Goldfield properties. Pursuant to that agreement, Kennecott was
to receive a 60 percent interest in a joint venture with ARC upon spending $3.5
million to explore mineral claims adjacent to the Goldfield mine. In February
1996, Kennecott informed ARC that it had decided to no longer explore the
mineral claims or participate in the mining venture agreement.
Based on projected costs of the Goldfield mine closure and results of
Kennecott's 1995 exploration activities and to reflect management's best
estimate of net realizable value of the remaining mineral properties and plant
and equipment, ARC recorded a $1.1 million write-down in the third quarter of
1995. In 1994, based on ARC's assessment of the recoverable value of its
investment in the Goldfield mine, a write-down of $12.0 million was recorded.
The write-down was based on estimated net future cash flows using revised ore
reserve estimates and current sales prices, metallurgical recoveries and
operating costs.
A summary of certain gold production and other operating information
relating to Goldfield for the three years ended December 31, 1995 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Ore mined -- tons........................................... 263,219 260,887 209,220
Gold grade -- ounces per ton................................ 0.051 0.037 0.055
Waste mined -- tons......................................... 1,396,996 3,115,152 1,383,630
Stripping ratio............................................. 5.3 11.9 6.6
Ore milled -- tons.......................................... 284,880 230,906 209,220
Mill feed grade -- ounces per ton........................... 0.053 0.034 0.055
Gold production............................................. 9,519 3,245 2,870
</TABLE>
A summary of Goldfield operating results for the three years ended December
31, 1995 follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1993
1995 (AS RESTATED) (AS RESTATED)
--------- ------------- -------------
<S> <C> <C> <C>
Gold sales.................................................. $ 3,837 $ 1,210 $ 1,083
Production costs............................................ (8,158) (3,547) (1,087)
Depreciation, depletion and amortization expense............ (1,448) (686) (73)
Write-downs of property, plant and equipment................ (1,116) (12,000) --
--------- ------------- -------------
$ (6,885) $ (15,023) $ (77)
========= ========== ==========
</TABLE>
28
<PAGE> 29
Consolidated Results of Operations: 1995 Compared to 1994 and 1994 Compared
to 1993: ARC's net income for 1995 was $9.8 million or $.72 per share. ARC
recorded a net loss of $29.4 million or $2.53 per share and $21.1 million or
$3.99 per share in 1994 and 1993, respectively. Poor operating results are
reflected in each of the three years. The primary reason for the improvement in
1995 is the gain on sales of NNO Shares which were received by ARC from its sale
of RAA. The net loss in 1994 includes a larger write-down of property, plant and
equipment, $16.8 million, than in 1995 or 1993.
Revenues and other income were $35 million in 1995, including $24.9 million
of gain on the sales of NNO Shares, $9.0 million in product sales and $1.1
million in interest and other income. Revenues and other income in 1994 and 1993
were $2.2 million and $5.6 million, respectively.
Product sales revenues in 1995 include gold sales revenues of $5.0 million
and $3.8 million from Mahoma and Goldfield, respectively, and $200,000 of
zeolite sales revenues. Gold sales revenues were $1.2 million and $4.9 million
in 1994 and 1993, respectively. Zeolite sales revenues were $187,000 in 1994 and
$106,000 in 1993.
The fluctuation in gold sales revenue from year-to-year is primarily based
on sales volume. As discussed above, production at Mahoma and Goldfield has been
intermittent and was largely suspended at Mahoma during 1994. During 1995,
22,938 ounces of gold were sold at an average price of $385 per ounce. During
1994 and 1993, 3,245 and 12,420 ounces of gold were sold at average prices of
$385 and $357, respectively. In addition to revenues from Mahoma and Goldfield,
1993 gold revenues include approximately $500,000 from ARC's Butcher Boy mine,
which was closed in late 1993.
Production costs were $12.7 million in 1995, $6.4 million in 1994 and $8
million in 1993. Gold production was 23,448 ounces, 3,597 ounces and 13,940
ounces during 1995, 1994 and 1993, respectively. Production costs during 1995
were $8.1 for Goldfield, including $1.6 million for closure and reclamation,
$4.4 million for Mahoma, including $0.6 million for closure and reclamation and
$0.2 million for Ash Meadows. Goldfield production costs were $3.5 million and
$1.1 million during 1994 and 1993. Production costs in 1994 and 1993 were lower
than in 1995 due to the closure and reclamation accrual in 1995 and continuous
production interruptions during 1994 and 1993 due to poor equipment
availability, mechanical failures and implementation of facility expansion
plans. Mahoma production costs of $2.2 million for 1994 and $5.3 million for
1993 reflect the suspension of mining activities during 1994 and late 1993 due
to heavy rains, change of mining contractors, and other operation difficulties.
Ash Meadows and Butcher Boy costs for 1994 were $0.3 million reflecting the
suspension of mining activity at Butcher Boy, while 1993 costs for Butcher Boy
were $1.4 million and $0.2 million for Ash Meadows.
Depreciation, depletion and amortization expense, which is primarily
computed using the units-of-production method, was $4.0 million, $1.7 million
and $3.7 million in 1995, 1994 and 1993, respectively. The increase in 1995 over
1994 and the decrease in 1994 from 1993 is principally attributable to the
year-to-year fluctuations in production volume.
Reduced 1995 exploration expenses reflect the mid-year sale of RAA,
primarily an exploration subsidiary, and the resultant reduction of ARC's
exploration expenditures in Argentina to $769,000 in 1995 from $2.0 million and
$1.9 million in 1994 and 1993, respectively. Exploration expenses in Uruguay
remained relatively constant during the three year period although ARC shifted
its emphasis from the search for suitable ore to feed the Mahoma mill early in
the period to pre-feasibility activities at the Cerro San Carlos project and
ultimately to exploration projects in proximity to San Gregorio in the second
half of 1995.
During 1995, ARC continued to maintain certain of its exploration lands in
the US, principally at Goldfield and Ash Meadows. ARC has progressively reduced
its exploration expenditures in the US to $106,000 in 1995 from $169,000 and
$234,000 in 1994 and 1993, respectively, as it increased its emphasis on South
American programs and transferred certain of its exploration responsibilities in
the US to joint venture partners in 1995 and 1994.
Litigation settlement expense in 1995 reflects results of a dispute settled
through binding arbitration. In January 1995, the holder of a $3.5 million
convertible secured note, due December 31, 1996, gave notice alleging default
under the terms of the loan agreement. In response, ARC filed a notice of
dispute denying that an event of default had occurred. In June 1995, ARC paid
$6.0 million in settlement, which retired the $3.5 million debt and related
accrued interest, removed the property lien and a right to a royalty interest
held by the note holder and resulted in a $2.4 million charge to litigation
settlement expense.
ARC periodically evaluates recoverability of its investments in mineral
properties and related plant and equipment. ARC recorded write-downs of
property, plant and equipment of $3.7 million, $16.8 million and
29
<PAGE> 30
$1.2 million in 1995, 1994 and 1993, respectively. In 1995, charges of $2.2
million and $1.1 million, respectively, were recorded to write-down the Mahoma
plant and facilities and the Goldfield properties to net realizable value. In
addition, a $0.4 million write-down related to exploration properties in
Argentina was recorded in 1995. During 1994, a write-down charge of $3.6 million
was recorded for the Mahoma plant and facilities based on an evaluation of
recoverability utilizing estimated future cash flows from proven and probable
reserves. Goldfield was written down in 1994 by $12.0 million based on ARC's
assessment of the recoverable value of its investment. ARC recorded other
charges of $1.2 million, in 1994 and 1993, principally to write-down
miscellaneous South American exploration properties.
During 1995 an extraordinary net loss of $366,833 on the extinguishment of
debt was recorded. This amount is comprised of a $525,816 write-off of deferred
financing costs relating to debt redeemed early and an extraordinary gain of
$158,983 on the extinguishment of other debt.
At December 31, 1995, ARC had a net deferred tax liability of $2.7 million,
which is comprised of net deferred tax assets of $6.0 million and a deferred tax
liability of $8.7 million. The net deferred tax assets and resulting deferred
tax benefit of $6.0 million for US federal tax purposes were recognized based on
expected taxable income generated by sales of NNO Shares, net of estimated
operating losses in 1996. At December 31, 1995, ARC held 8.1 million shares of
NNO with an estimated fair value of $25.4 million, based on the closing market
price quoted on the Vancouver Stock Exchange for registered NNO Shares. Based on
ARC's history of losses from operations and management's projection of future
taxable income, no tax benefit was recognized from other sources. The deferred
tax liability at December 31, 1995 represents the taxes on the unrealized
holding gain on the NNO Shares at December 31, 1995. The related tax effect is
presented as an offset to the separate component of shareholders' equity for
unrealized holding gain on equity securities available for sale. Current taxes
were not recognized in 1995 since taxable income from operations and sales of
NNO Shares was fully offset by the loss incurred for tax purposes on the sale of
ARC's 78 percent interest in APML. Neither current nor deferred taxes were
recognized in prior years based on ARC's losses and the uncertainty regarding
ARC's ability to continue as a going concern.
RECLAMATION ACTIVITIES
All of the Company's mining and processing operations are subject to
reclamation requirement and environmental regulations. Management believes the
accrual recorded for closure costs and known reclamation requirements is
adequate at March 31, 1996. The accrual is comprised of:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Goldfield (net of recoveries).............................. $1,109,199 $1,198,994 $2,308,193
Mahoma..................................................... 941,672 -- 941,672
Other...................................................... 32,440 -- 32,440
---------- ---------- ----------
Total...................................................... $2,083,311 $1,198,994 $3,282,305
========== ========== ==========
</TABLE>
Contouring of the mined areas of Goldfield has been completed and seeding
will commence in the fall of 1996. After leaching is terminated in early 1997,
the lead pad will be rinsed for a period of up to one year with contouring,
topsoiling and seeding to follow. The State of Nevada will then monitor the
property over three growing seasons to determine the success of the reclamation
program. Final reclamation activity at Mahoma commenced in March 1996 and is
anticipated to be completed within four months. Neutralization of the tailings
area, which is expected to last one year, will be initiated in June 1996.
Reclamation at Cerro San Carlos was completed in April 1996.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" was issued by the Financial Accounting Standards Board (FASB) in March 1995.
SFAS No. 121 requires, for fiscal years beginning after December 15, 1995, that
an entity review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and that an impairment loss be recognized as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The Company
adopted SFAS No. 121 effective January 1, 1996. The adoption did not have an
effect on the Company's financial position or results of operations.
30
<PAGE> 31
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") was issued by the Financial
Accounting Standards Board in October 1995. SFAS No. 123 establishes, for fiscal
years beginning after December 15, 1995, financial and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages, but does not
require, the adoption of a fair-value-based method of accounting for such plans,
in place of current accounting standards. Companies electing to continue their
existing accounting method must make pro forma disclosures of net income as if
the fair-value-based method of accounting had been applied. The Company has
elected to continue with its existing accounting method and in accordance with
SFAS No. 123, will have pro forma disclosures of net income in its financial
statements for the year ending December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data:
<TABLE>
<CAPTION>
FORM 10-K
PAGE NO.
---------
<S> <C>
Reports of Independent Accountants..................................................... 32-33
Consolidated Balance Sheets at December 31, 1995 and 1994.............................. 34
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and
1993................................................................................. 35
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
1994 and 1993........................................................................ 36
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................. 37
Notes to Consolidated Financial Statements............................................. 38-55
Unaudited Selected Quarterly Financial Data............................................ 56
</TABLE>
31
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of American Resource Corporation, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of American
Resource Corporation, Inc. and its subsidiaries at December 31, 1995 and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
During 1995 management conducted a review and investigation of relationships
that existed between former management and the counterparties to certain
transactions entered into in prior years and have disclosed the results of their
findings in Note 3, including that it is possible the terms of certain of these
transactions are not the same as those that would result from transactions among
wholly unrelated parties.
As described in Note 5 to the consolidated financial statements, in 1996
management restated equity securities available for sale and net deferred income
taxes.
PRICE WATERHOUSE LLP
San Francisco, California
February 26, 1996, except for
the last paragraph of Note 5
for which the date is
June 1, 1996
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of American Resource Corporation, Inc.
We have audited the accompanying consolidated balance sheet of American
Resource Corporation, Inc., (the "Company") and Subsidiaries as of December 31,
1994, and the related statements of consolidated operations, shareholders'
equity and cash flows for the two years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, certain
errors were discovered by management of the Company during the current year.
Accordingly, the consolidated financial statements have been restated to reflect
correction of these errors.
In our opinion, the financial statements referred to above present fairly,
in all material respects the consolidated financial position of American
Resource Corporation, Inc. at December 31, 1994 and the results of their
operations and their cash flows for the two years then ended, in conformity with
generally accepted accounting principles.
MCDOUGAL & WILLIAMS
Reno, Nevada
April 7, 1995, except for
Note 3, as to which the date is
February 26, 1996
33
<PAGE> 34
CONSOLIDATED BALANCE SHEETS
AMERICAN RESOURCE CORPORATION, INC.
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
AS AS
RESTATED RESTATED
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................................. $2,203,337 $2,520,841
Receivables, net:
Trade.......................................................... 71,870 193,150
Other.......................................................... 468,939 405,812
Inventories:
Finished products.............................................. 504,884 86,752
Ore and in-process............................................. 618,611 1,007,984
Supplies....................................................... 370,540 544,736
Equity securities available for sale.............................. 25,433,407 --
Prepaids and other assets......................................... 225,579 1,140,424
---------- ----------
Total current assets........................................... 29,897,167 5,899,699
---------- ----------
Property, plant and equipment:
Mineral properties and mine development........................... 12,454,686 16,104,381
Property, plant and equipment..................................... 7,861,165 16,467,735
Accumulated depreciation, depletion and amortization.............. (4,113,883) (5,716,723)
---------- ----------
Net property, plant and equipment.............................. 16,201,968 26,855,393
---------- ----------
Investments and other assets:
Deferred financing cost........................................... -- 768,510
Receivable from affiliated party.................................. 3,370,515 --
Other assets...................................................... 1,275,016 979,500
---------- ----------
Total investments and other assets............................. 4,645,531 1,748,010
---------- ----------
$50,744,666 $34,503,102
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $1,409,155 $2,427,981
Accrued liabilities:
Payroll and other compensation................................. 639,379 530,257
Reclamation.................................................... 2,195,567 209,933
Income taxes payable........................................... -- --
Interest....................................................... 131,212 375,421
Other.......................................................... 952,896 821,107
Current portion of long-term debt................................. 1,050,747 2,743,410
Deferred taxes.................................................... 2,658,844 --
Other liabilities................................................. -- 154,000
---------- ----------
Total current liabilities...................................... 9,037,800 7,262,109
---------- ----------
Long-term liabilities:
Long-term debt.................................................... 2,000,000 13,229,761
Reclamation and other............................................. 1,214,016 1,024,849
---------- ----------
Total long-term liabilities.................................... 3,214,016 14,254,610
---------- ----------
Commitments and contingencies.......................................
---------- ----------
Minority interest in subsidiaries................................... -- 564,754
---------- ----------
Shareholders' equity: (shares in 000's)
Capital stock (authorized 25,000; issued 13,530 in 1996 and 1995;
13,476 in 1994)................................................ 135,299 134,764
Other capital..................................................... 76,753,434 76,575,862
Unrealized holding gain on equity securities available for sale,
net of tax..................................................... 16,126,782 --
Accumulated deficit............................................... (54,522,665) (64,288,997)
---------- ----------
Total shareholders' equity..................................... 38,492,850 12,421,629
---------- ----------
$50,744,666 $34,503,102
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 35
CONSOLIDATED STATEMENTS OF OPERATIONS
AMERICAN RESOURCE CORPORATION, INC.
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995
AS 1994 1993
RESTATED AS RESTATED AS RESTATED
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES AND OTHER INCOME:
Product sales......................................... $9,057,440 $ 1,817,667 $ 5,078,880
Gain on sales of equity securities.................... 24,869,741 -- --
Interest.............................................. 534,119 199,380 10,030
Other income.......................................... 579,190 230,940 536,795
---------- ----------- -----------
35,040,490 2,247,987 5,625,705
---------- ----------- -----------
COSTS AND EXPENSES:
Production costs...................................... 12,677,273 6,385,566 8,023,238
Depreciation, depletion and amortization.............. 4,038,899 1,694,908 3,706,351
General and administrative............................ 5,654,294 5,583,165 6,179,721
Exploration........................................... 1,588,277 3,028,745 2,902,998
Amortization of deferred debt financing costs......... 376,944 478,268 2,013,058
Interest expense...................................... 1,099,784 1,439,146 1,996,298
Litigation settlement................................. 2,430,704 -- --
Other expense......................................... 206,681 288,820 145,520
(Gain) loss on asset disposals........................ (308,376) 198,175 189,224
Write-downs of property, plant and equipment.......... 3,732,407 16,786,531 1,208,644
Equity share of loss from investment in mining
interests........................................... -- -- 549,155
---------- ----------- -----------
31,496,887 35,883,324 26,914,207
---------- ----------- -----------
Income (loss) before income taxes, extraordinary items
and minority interest............................... 3,543,603 (33,635,337) (21,288,502)
Income tax benefit (expense).......................... 6,024,808 -- --
---------- ----------- -----------
Income (loss) before extraordinary items and minority
interest............................................ 9,568,411 (33,635,337) (21,288,502)
EXTRAORDINARY ITEMS:
Equity share of gain on extinguishment of debt........ -- -- 216,700
Loss on extinguishment of debt........................ (366,833) -- --
---------- ----------- -----------
Income (loss) before minority interest................ 9,201,578 (33,635,337) (21,071,802)
Minority interest share of loss....................... 564,754 4,266,869 --
---------- ----------- -----------
Net income (loss)..................................... $9,766,332 $(29,368,468) $(21,071,802)
========== =========== ===========
PER SHARE AMOUNTS:
Income (loss) before extraordinary items and minority
interest............................................ $ 0.71 $ (2.89) $ (4.03)
Equity share of gain on forgiveness of debt........... -- -- 0.04
Loss on extinguishment of debt........................ (0.03) -- --
Minority interest share of loss....................... 0.04 0.36 --
---------- ----------- -----------
Net income (loss) per share........................... $ 0.72 $ (2.53) $ (3.99)
========== =========== ===========
Weighted average shares outstanding................... 13,518,728 11,621,799 5,287,545
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 36
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AMERICAN RESOURCE CORPORATION, INC.
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED HOLDING GAIN
COMMON STOCK ON EQUITY SECURITIES
----------------------- OTHER ACCUMULATED AVAILABLE FOR SALE,
SHARES AMOUNT CAPITAL DEFICIT (1) NET OF TAX TOTAL
--------- ----------- ----------- ----------- ----------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992....... 4,171,343 $ 41,713 $25,972,298 $(13,848,727) $ $12,165,284
Net loss (as restated).......... (21,071,802) (21,071,802)
Common stock issued............. 3,247,827 32,479 24,211,102 24,243,581
Common stock subscriptions...... 1,458,873 1,458,873
Equity financing costs.......... (2,567,365) (2,567,365)
--------- ----------- ----------- ----------- ----------------------- -----------
Balances, December 31, 1993
(as restated)................... 7,419,170 74,192 49,074,908 (34,920,529) 14,228,571
Net loss (as restated).......... (29,368,468) (29,368,468)
Common stock issued............. 6,057,240 60,572 27,874,590 27,935,162
Common stock subscriptions...... 75,000 75,000
Equity financing costs.......... (448,636) (448,636)
--------- ----------- ----------- ----------- ----------------------- -----------
Balances, December 31, 1994
(as restated)................... 13,476,410 134,764 76,575,862 (64,288,997) 12,421,629
Net income (as restated)........ 9,766,332 9,766,332
Common stock issued............. 53,512 535 177,572 178,107
Unrealized holding gain on
equity securities available
for sale, net of tax.......... 16,126,782 16,126,782
--------- ----------- ----------- ----------- ----------------------- -----------
Balances, December 31, 1995
(as restated)................... 13,529,922 $ 135,299 $76,753,434 $(54,522,665) 16,126,782 $38,492,850
========= =========== =========== =========== ====================== ===========
</TABLE>
(1) Since emerging from bankruptcy on February 18, 1992.
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
AMERICAN RESOURCE CORPORATION, INC.
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
AS RESTATED AS RESTATED AS RESTATED
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................................... $ 9,766,332 $(29,368,468) $(21,071,802)
Reconciliation to net cash used for operating activities:
Depreciation, depletion and amortization.......................... 4,038,899 1,694,908 3,706,351
Amortization of deferred debt financing costs..................... 376,944 478,268 2,013,058
Gain on sales of equity securities................................ (24,869,741) -- --
Write-downs of property, plant and equipment...................... 3,732,407 16,786,531 1,208,644
Minority interest share of loss................................... (564,754) (4,266,869) --
Loss on extinguishment of debt.................................... 366,833 -- --
Equity loss from investment in mining interests................... -- -- 332,455
(Gain) loss on asset disposals.................................... (308,376) 198,175 189,224
Loss on Central Bank bonds........................................ -- -- 109,690
Expenses paid by issuing common shares............................ -- -- 1,595,132
Effect of changes in operating working capital items:
Receivables..................................................... (151,728) 546,843 198,579
Receivables-affiliated parties.................................. -- 876,011 (1,650,578)
Inventories..................................................... 54,941 (1,065,722) (282,646)
Deferred taxes.................................................. (6,024,808) -- --
Prepaids and other assets....................................... 812,847 (779,348) (151,125)
Accounts payable and accrued liabilities........................ 1,813,628 (489,563) 1,303,218
----------- ----------- -----------
Net cash used for operating activities.............................. (10,956,576) (15,389,234) (12,499,800)
----------- ----------- -----------
INVESTING ACTIVITIES:
Additions to property, plant and equipment.......................... (3,539,542) (9,324,117) (5,852,637)
Acquisitions, net of cash acquired.................................. -- -- (1,382,290)
Sale of subsidiary, net of expenses and cash given.................. (268,694) -- --
Proceeds from sale of equity securities............................. 16,447,147 -- --
Proceeds from joint ventures........................................ 1,045,000 600,000 --
Proceeds from bond maturities....................................... -- -- 1,545,183
Proceeds from asset sales........................................... 1,526,188 27,308 33,825
Increase in other long-term assets, net............................. (848,955) (372,111) (291,076)
----------- ----------- -----------
Net cash provided by/(used for) investing activities................ 14,361,144 (9,068,920) (5,946,995)
----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings.......................................................... 8,963,430 19,100,000 11,625,422
Debt repayments..................................................... (12,544,203) (7,776,600) (3,272,551)
Proceeds from warrants exercised.................................... -- -- 6,211,909
Common stock issued................................................. -- 15,094,395 5,093,277
Common stock issued by subsidiary................................... -- 3,021,000 --
Common stock subscribed............................................. -- -- 1,458,873
Deferred financing and other costs.................................. (141,299) (3,001,177) (3,178,317)
----------- ----------- -----------
Net cash provided by/(used for) financing activities................ (3,722,072) 26,437,618 17,938,613
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS....................... (317,504) 1,979,464 (508,182)
CASH INCREASE FROM CONSOLIDATION OF SUBSIDIARY........................ -- 20,322 --
CASH AND EQUIVALENTS, BEGINNING OF THE PERIOD......................... 2,520,841 521,055 1,029,237
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF THE PERIOD............................... $ 2,203,337 $ 2,520,841 $ 521,055
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE> 38
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
American Resource Corporation, Inc. ("ARC" or the "Company") is a gold
exploration and development company based in Greenbrae, California, with
operations in Uruguay and Nevada. Results of operations from the Company's
two operating mines have not been favorable and the Company is in the
process of closing both mines. The emphasis of the Company's recent
exploration and development activities has been on properties it controls
in northern Uruguay. Management plans to continue with this emphasis in
1996 with the development of its wholly-owned San Gregorio gold mine
project (the "San Gregorio Project"). The Company also produces a small
amount of zeolite, an industrial minerals product, from a property it owns
in Nevada.
In prior years, due to the uncertainties regarding the Company's success of
exploration, the ability to raise capital and to attain profitable
operations in the future, the recovery of the Company's investments and its
future as a going concern was not reasonably assured. During 1995, the
Company significantly improved its liquidity and overall financial position
with the proceeds from the sales of equity securities (see Note 5). In
addition, the Company recently received a conditional commitment for a $25
million project gold loan facility; and received a preliminary commitment
from private offshore investors for $8 million in convertible notes (see
Note 16). Accordingly, management believes the uncertainty regarding the
Company's ability to continue as a going concern no longer exists.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with generally accepted accounting principles, which require
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. A summary of the Company's significant accounting policies
follows:
CONSOLIDATION
The consolidated financial statements include the Company, its subsidiaries
and their undivided interests in joint ventures after elimination of
intercompany accounts. Undivided interests in joint ventures are reported
using pro-rata consolidation which includes the Company's proportionate
share of assets, liabilities, income and expenses. Investments in less than
50 percent owned entities over which the Company exercises significant
influence are reported using the equity method of accounting.
EXPLORATION
Exploration property acquisition costs are capitalized. Acquisition costs
of an exploration property determined not to be economically feasible are
expensed in the period management makes that determination. Exploration
costs are expensed as incurred until it is established that a property has
mineral reserves which can be recovered economically; exploration costs
incurred thereafter are capitalized.
MINERAL PROPERTIES AND MINE DEVELOPMENT COSTS
Mineral property acquisition costs are capitalized. Mine development costs,
including those incurred in advance of commercial production and those
incurred to expand capacity of existing mines, are capitalized. Mine
development costs incurred to maintain production at existing mines are
expensed as incurred. Depletion and amortization expense related to
capitalized mineral properties and mine development costs is computed using
the units-of-production method based on proven and probable reserves.
PLANT AND EQUIPMENT
Plant and equipment are recorded at cost. Depreciation of major plant
facilities, including capitalized interest, is computed using the
units-of-production method based on proven and probable reserves.
Depreciation of other plant and equipment is computed using straight-line
or accelerated methods over the estimated lives of
38
<PAGE> 39
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the assets (three to ten years). Amortization of assets acquired through
capitalized leases is included in depreciation, depletion and amortization
expense. Costs of normal maintenance and repairs are expensed as incurred.
RECLAMATION COSTS
Costs expected to be incurred for reclamation are estimated using current
environmental and regulatory requirements and are expensed over the
estimated life of the property, principally using the units-of-production
method.
PROPERTY EVALUATION
Recoverability of investments in mineral properties and related plant and
equipment is periodically evaluated. The Company evaluates operating
properties utilizing estimated future cash flows from proven and probable
reserves based on current and projected estimates of production and
reclamation costs and metals prices, and capital requirements. Evaluation
of non-operating properties incorporates the use of estimates of expected
development costs of known mineralization, costs to hold the property,
future capital cost estimates to bring the property into production and
expected production costs and metals prices. Future costs and metals prices
are estimated using historical and current information as a basis for the
projections. Investments in mineral properties in excess of expected future
net cash flows that are deemed to be other than temporary are written off
when that determination is made. Properties which have not been explored or
evaluated sufficiently to determine whether development of the property is
economically feasible, are carried at original cost. When the Company makes
a decision to abandon a property, a write-down is recorded to reflect
management's best estimate of the net realizable value of the assets and an
accrual for estimated reclamation and closure costs is recorded.
INVENTORIES
Gold, zeolite and supplies inventories are stated at the lower of cost or
market and are valued using average costs.
CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with a maturity of
three months or less at the date of purchase.
INVESTMENTS IN EQUITY SECURITIES
Equity securities available for sale include equity securities not
classified as either held to maturity or trading securities. The Company's
equity securities available for sale are carried at estimated fair value
based on the closing market price quoted on the applicable exchange for the
Northern Orion shares. (Prior to listing on the Toronto Stock Exchange in
February 1996, Northern Orion shares were only listed on the Vancouver
Stock Exchange.) Unrealized gains and losses from equity securities
available for sale are excluded from earnings and reported as a separate
component of shareholders' equity (see Note 4 and Note 5).
DEFERRED FINANCING COSTS
Costs incurred in obtaining financing through the issuance of promissory
notes are amortized and expensed over the life of the note. The unamortized
portion of deferred financing costs for convertible promissory notes that
are converted into common stock are charged to contributed capital. Costs
incurred to issue common stock through private placements are charged to
other capital.
FOREIGN CURRENCY
The US dollar is the Company's functional and reporting currency. All
significant transactions of foreign subsidiaries are recorded in US dollars
and accordingly, the resulting foreign exchange gains and losses, if any,
are negligible.
39
<PAGE> 40
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NET INCOME (LOSS) PER SHARE
The number of shares used to calculate per share information for the
periods presented are based on the weighted average number of common shares
and common share equivalents outstanding during each period.
RECLASSIFICATION
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current period financial statement
presentation.
NOTE 3: PRIOR PERIOD ADJUSTMENTS
During the third quarter of 1995, the Company's new management became aware
of certain aspects of several transactions entered into by the Company
under its former management and began a review and investigation of these
transactions and the relationships between former management and the
counterparties to such transactions. Due to the relationships of certain of
the parties referred to below with the Company, the Company's former
management or other affiliates, terms of certain of the transactions below
may not have been the same as those that would have resulted from
transactions among wholly-unrelated parties. New management believes that
none of these matters will materially affect the Company's consolidated
financial statements, since all of these transactions have been reflected
in the Company's results of operations as of December 31, 1995, and
management believes that the ultimate resolution of a claim made by Mr.
Gasser in January 1996 (see Note 16) will not have a material adverse
effect on the Company's consolidated financial statements.
The Company has established that certain aspects of these prior years'
transactions require the Company to restate prior period consolidated
financial statements and to include additional disclosures regarding the
affiliations certain parties had with the Company, the Company's former
management or other affiliates.
FINANCIAL STATEMENT RESTATEMENT: Depreciation, depletion and amortization
expense of the Company's Mahoma project in southern Uruguay reflected in
prior period consolidated financial statements was not computed correctly.
Also, results of the Company's evaluation of its recoverability of the
December 31, 1994 net book value and estimated reclamation costs for the
Mahoma project were not correctly reflected. The effect of the restatements
for these errors is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------------------- -----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Write-downs of property, plant
and equipment.................. $ 13,159,186 $16,786,531 $ 1,208,644 $ 1,208,644
Depreciation, depletion and
amortization expense........... 1,633,690 1,694,908 1,757,056 3,706,351
Production costs................. 6,355,666 6,385,566 7,644,138 8,023,238
Net loss......................... (25,650,005) (29,368,468) (18,743,407) (21,071,802)
Net loss per share............... (2.21) (2.53) (3.55) (3.99)
Accumulated deficit.............. (58,242,139) (64,288,997) (32,592,134) (34,920,529)
</TABLE>
40
<PAGE> 41
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Due to the restatement of property, plant and equipment and depreciation,
depletion and amortization, net deferred tax assets at December 31, 1994
and December 31, 1993 have also been restated. The net deferred tax assets
after valuation allowance as previously reported and as restated are
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------- ----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets
Mineral property write-downs.......... $ 6,486,593 $ 7,314,808 $ 2,304,256 $ 2,558,899
Tax loss carryforwards................ 14,986,097 14,986,097 7,787,069 7,787,069
Allowance for bad debt................ 17,550 17,550 17,550 17,550
------------- ----------- ------------- -----------
21,490,240 22,318,455 10,108,875 10,363,518
Deferred tax liabilities................ (43,421) (43,421) (1,983) (1,983)
------------- ----------- ------------- -----------
Net deferred tax assets................. 21,446,819 22,275,034 10,106,892 10,361,535
Valuation allowance..................... (21,446,819) (22,275,034) (10,106,892) (10,361,535)
------------- ----------- ------------- -----------
Net deferred tax assets after valuation
allowance............................. $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
41
<PAGE> 42
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic information as previously reported and as restated is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
---------------------------- ----------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
U. S.................................. $ 1,691,278 $ 1,691,278 $ 1,998,938 $ 1,998,938
South America......................... 556,709 556,709 3,626,767 3,626,767
------------- ----------- ------------- -----------
$ 2,247,987 $ 2,247,987 $ 5,625,705 $ 5,625,705
=========== =========== =========== ===========
Operating loss: (1)
U. S.................................. $(15,837,076) $(15,837,076) $ (1,801,070) $(1,801,070)
South America......................... (7,010,188) (10,728,652) (6,970,987) (9,299,382)
------------- ----------- ------------- -----------
$(22,847,264) $(26,565,728) $ (8,772,057) $(11,100,452)
=========== =========== =========== ===========
Identifiable assets:
U. S.................................. $ 13,815,708 $13,815,708 $ 27,495,158 $27,495,158
South America......................... 26,325,252 20,687,394 10,119,302 8,170,006
------------- ----------- ------------- -----------
$ 40,140,960 $34,503,102 $ 37,614,460 $35,665,164
=========== =========== =========== ===========
Exploration:
U. S.................................. $ 168,816 $ 168,816 $ 287,471 $ 287,471
South America......................... 2,859,929 2,859,929 2,615,527 2,615,527
------------- ----------- ------------- -----------
$ 3,028,745 $ 3,028,745 $ 2,902,998 $ 2,902,998
=========== =========== =========== ===========
Depreciation, depletion and
amortization:
U. S.................................. $ 760,761 $ 760,761 $ 265,905 $ 265,905
South America......................... 872,929 934,147 1,491,151 3,440,446
------------- ----------- ------------- -----------
$ 1,633,690 $ 1,694,908 $ 1,757,056 $ 3,706,351
=========== =========== =========== ===========
Additions to property, plant and
equipment:
U. S.................................. $ 5,397,107 $ 5,397,107 $ 2,802,279 $ 2,802,279
South America......................... 3,927,010 3,927,010 9,007,723 9,007,723
------------- ----------- ------------- -----------
$ 9,324,117 $ 9,324,117 $ 11,810,002 $11,810,002
=========== =========== =========== ===========
</TABLE>
(1) The Company also incurred net corporate and other costs amounting to
$7,069,609 and $10,188,050 in 1994 and 1993, respectively.
DISCLOSURE RELATED TO TRANSACTIONS ENTERED INTO BY FORMER MANAGEMENT: A
summary of the transactions reviewed and investigated by new management and
the additional disclosures is presented below:
42
<PAGE> 43
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TAROT TRANSACTION: Tarot Financial Investments, Inc. ("Tarot"), a
Panamanian holding company, entered into a purchase contract with Bond Gold
Limited ("Bond Gold") on January 22, 1992 to acquire all the outstanding
shares of the capital stock of Compania Minera de San Jose de Uruguay, a
Cayman Islands corporation ("CMSJ CI") (the "CMSJ Purchase Contract"),
which in turn controlled its wholly-owned subsidiary, Compania Minera de
San Jose, a Uruguayan corporation ("CMSJ SA"). CMSJ SA either directly or
through one or more subsidiaries, owned the Mahoma mine property, mineral
exploration lands and other facilities and equipment in southern Uruguay.
On January 31, 1992, the Company entered into an option agreement (the
"Tarot Transaction") to purchase all the outstanding shares of the capital
stock of Tarot (the "Tarot Shares") with Mr. Hansueli Gasser. Mr. Gasser
represented himself to the Company as the owner of the Tarot Shares. The
Tarot Transaction required the delivery of 1,000,000 shares of the
Company's common stock to Mr. Gasser or his designees and the delivery of
the Tarot Shares to the Company (see Note 16). Mr. Gasser ultimately
requested the shares of the Company's common stock to be designated as
follows:
<TABLE>
<CAPTION>
COMMON SHARES
-------------
<S> <C>
Dellwood Holdings Ltd.......................................................... 255,000
Belgrove Holdings Ltd.......................................................... 220,000
Rayka Holdings Ltd............................................................. 260,000
Aramorfa, S.A.................................................................. 265,000
-------------
1,000,000
============
</TABLE>
The Company placed a value of $5 million ($5.00 per share) on the shares to
be issued to Mr. Gasser or his designees and capitalized this amount as a
direct acquisition cost of Tarot. This value was determined by former
management using an approximate discount rate of 50 percent on the then
current share price of the Company's unrestricted common stock. None of the
1,000,000 shares of the Company's common stock were delivered to Mr. Gasser
or his designees in 1992, and Mr. Gasser did not deliver the Tarot Shares
to the Company. During 1993 or 1994, 475,000 shares of the Company's common
stock were delivered by the Company to Mr. Gasser registered in the names
of Dellwood Holdings Ltd. ("Dellwood") and Belgrove Holdings Ltd. As of
February 26, 1996, 525,000 shares remain in the Company's possession and
the Tarot Shares have not been received by the Company. The Company has not
restricted the voting (or other shareholder rights) for these 525,000
shares, and has told Mr. Gasser it is prepared and willing to deliver them
to Mr. Gasser upon receipt of the Tarot Shares.
Since February 1992, the Mahoma Mine and all other CMSJ SA assets have been
in the care, custody and control of the Company, and the Company has at all
times dealt with CMSJ SA as its owner. The Company has performed all of the
obligations of Tarot under the CMSJ Purchase Contract, has in its
possession the CMSJ SA bearer shares and has been at full economic risk for
the mining operations, including reclamation liabilities. New management
has been actively trying to conclude this transaction since August 1995.
The CMSJ SA results of operations, which have been a loss for each year
since the Company entered into the Tarot Transaction, have been included
with the Company's consolidated results of operations (see Note 16).
GOLDFIELD ACQUISITION: In November 1991, the Company entered into an
agreement with Woodhill Consultants Limited ("Woodhill"), under which
Woodhill granted to the Company the right to acquire Woodhill's option
rights to the Goldfield Joint Venture with Red Rock Mining (USA) Inc.
("Goldfield") in exchange for $500,000 in promissory notes. Mr. Norman M.
Ewart was a Woodhill director and consultant in 1991, and named a director
and officer of the Company in December 1992.
In January 1992, Woodhill assigned the agreement, subject to the Company's
rights, to Harris Mining, Ltd. ("Harris"). On February 18, 1992, the
Company exercised its option by issuing to Harris a $1 million short-term
note payable and to Harris designees 1,000,000 shares of its common stock
and 1,000,000 warrants to purchase an additional 1,000,000 shares of the
Company's common stock at $10.00 per share, exercisable at any time on or
before February 28, 1997. Former management placed a value of $5 million
($5.00 per share) on the shares to be issued to Harris or its designees,
determining this value by using an approximate discount
43
<PAGE> 44
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rate of 50 percent on the then current share price for the Company's
unrestricted common stock, and capitalized the approximate $6.5 million of
consideration to Woodhill and Harris as a direct acquisition cost of its
interest in Goldfield. In February 1993, in consideration for retiring the
short-term note payable of $1 million plus accrued interest of 10 percent
per annum, the Company issued 109,300 shares of the Company's restricted
common stock.
In November 1993, the Company reduced the exercise price of the warrants to
$7.50 each. In 1992, the Company recorded a $5.7 million write-down of its
investment in Goldfield. American Pacific Minerals Ltd. ("APML") increased
its interest in the Goldfield mine from 50 percent to 100 percent in 1994
and the Company recorded a $12 million write-down of its investment in
Goldfield that same year (see Note 7).
The 1,000,000 shares of the common stock were issued to Harris designees as
follows:
<TABLE>
<CAPTION>
COMMON SHARES
-------------
<S> <C>
Dellwood Holdings Ltd.......................................................... 180,000
Belgrove Ltd................................................................... 185,000
Hillsborough Investments Ltd................................................... 175,000
Pasco Holdings Ltd............................................................. 150,000
Fabry SA....................................................................... 175,000
Clearview Ltd.................................................................. 135,000
-------------
1,000,000
============
</TABLE>
The 1,000,000 warrants were issued to Harris designees as follows:
<TABLE>
<CAPTION>
WARRANTS
-------------
<S> <C>
Harris Mining, Ltd............................................................. 190,000
Parkgate Properties Ltd........................................................ 180,000
Guyane Investments Ltd......................................................... 75,000
Clearview Ltd.................................................................. 55,000
Valois Holdings, Ltd........................................................... 175,000
Rona Investments............................................................... 150,000
Theodore Holdings Ltd.......................................................... 175,000
-------------
1,000,000
============
</TABLE>
DELLWOOD DEBT: On September 10, 1993, the Company received $800,000 in cash
from Dellwood. Ten days later, $500,000 of this amount was repaid to
Dellwood through New World Trust and the remaining $300,000 plus accrued
interest was recorded as a note due on demand until it was paid in February
1996 (see Note 16).
BOLIR ACQUISITION: On February 28, 1992, ARC acquired mineral exploration
properties in Uruguay through the purchase of one hundred percent of the
capital stock of Bolir, SA ("Bolir") from Florecer Corporation
("Florecer"). The original cost to the Company to acquire Bolir was 50,000
shares of ARC's restricted common stock valued at $250,000. On March 30,
1992, shares of ARC were issued to Florecer and then transferred to the
following individuals on July 10, 1992:
<TABLE>
<CAPTION>
COMMON SHARES
-------------
<S> <C>
Mike Schwabe................................................................... 12,500
Jack Crawford.................................................................. 5,000
George Young................................................................... 10,000
Tony Healey.................................................................... 10,000
Stephen Everett................................................................ 12,500
--------
50,000
--------
--------
</TABLE>
44
<PAGE> 45
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As previously reported by the Company in its September 28, 1993 Proxy
Statement, Messrs. Schwabe, Crawford and Young were officers and
shareholders of Florecer in February 1992. Mr. Young was named an officer
of the Company and to its Board of Directors in April 1992; Mr. Schwabe was
named an officer of the Company in March 1992; and Mr. Crawford joined the
Company as an employee in March 1992.
ACQUISITION OF MAHOMA PLANT: In February 1992, the Company signed an $8.25
million turn-key construction contract with Bardem Machinery and Equipment
Limited, ("Bardem"), c/o Kwan Wong Tan and Fong for the Mahoma Plant and
facilities. Mr. Young signed this contract under power of attorney on
behalf of Bardem. James Askew Associates, Inc. ("Askew"), an unrelated
party, was named as a subcontractor to perform technical services under
this agreement. Bardem purchased a used gold plant from Pacific Goldmines
NL ("Pacific") for $1.5 million under the above contract. ARC made the $1.5
million payment to Pacific on Bardem's behalf.
Askew personnel arrived on site in April 1992 and the plant arrived in
Uruguay in June 1992. At about the same time, ARC canceled the turn-key
contract with Bardem. Bardem ultimately requested payment under the
turn-key contract in the aggregate amount of $3.8 million, including the
$1.5 million paid by the Company to Pacific on Bardem's behalf. The Bardem
demand letter, dated June 1, 1992, stipulated that ARC accept that it was
buying the plant "at site in Australia and prior to any renovation". ARC
ultimately paid Bardem and Pacific approximately $2.4 million (including
$100,000 interest) and $1.5 million, respectively. ARC also paid another
subcontractor, Metallurgy International Pty Ltd., $1.1 million for
refurbishment and shipment of the gold plant to Uruguay. The Askew contract
terminated in September 1992 and CMSJ personnel completed the construction
and commissioning. New management has not been able to determine the basis
for the contract settlement amount of $3.9 million.
Mr. Ewart was a consultant to Bardem when ARC acquired the equipment from
Bardem. As discussed above (see Goldfield Acquisition), in December 1992,
Mr. Ewart was named an officer and director of ARC. As previously reported
by the Company in its September 28, 1993 Proxy Statement, the Company
entered into a consulting agreement with Mr. Ewart dated as of February 28,
1992, to provide for the consulting services of Mr. Ewart in relation but
not limited to capital structure, accounting and cost control procedures.
The agreement was effective through September 1992, although both parties
continued to perform thereunder until March 1, 1993, when Mr. Ewart entered
into an employment agreement with the Company which provided for payment to
Mr. Ewart of $15,000 per month. Mr. Ewart received $135,000 in consulting
fees from the Company during 1992 under this agreement. In 1990 and 1994,
Mr. Ewart was an officer, director and minority shareholder of Pacific. It
has not been determined whether Mr. Ewart had affiliations with Pacific in
1992.
Cameron Glover was named Chairman of ARC's Board of Directors in February
1992. In 1990 and 1994, Mr. Glover was a minority shareholder of Pacific.
It has not been determined whether Mr. Glover was a shareholder of Pacific
in 1992.
NOTE 4: FINANCIAL INSTRUMENTS
The carrying and fair value of the Company's financial instruments at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
Cash equivalents................................................ $1,649,084 $1,649,084
Equity securities available for sale............................ 25,433,407 25,433,407
Bond with State of Nevada....................................... 973,000 973,000
Receivable from APM U.S.A....................................... 3,370,515 3,370,515
Long-term debt.................................................. 3,050,747 3,050,747
</TABLE>
The carrying value of cash equivalents and the certificate of deposit held
as a bond with the State of Nevada for the Goldfield reclamation
approximate fair value due to the short maturity of the instruments. The
fair value of the receivable from American Pacific Minerals (USA) Inc.
("APM U.S.A.") is based on management's
45
<PAGE> 46
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimate of the fair market value of the underlying security (see Note 6).
The fair value of the long-term debt is based on borrowing rates currently
available to the Company for debt with similar terms.
Equity securities available for sale represent the Company's investment in
unregistered shares of Northern Orion (see Note 5). The estimated fair
value is based on the closing market price of the Northern Orion shares
quoted on the Vancouver Stock Exchange on December 31, 1995.
The Company does not acquire or issue derivative financial instruments.
NOTE 5: ACQUISITION OF NORTHERN ORION SHARES AND EQUITY SECURITIES AVAILABLE FOR
SALE
ACQUISITION OF NORTHERN ORION SHARES
In June 1995, the Company sold to Northern Orion, a Canadian company which
is a majority-owned subsidiary of Miramar Mining Corporation ("Miramar"),
the Company's wholly-owned subsidiary, Recursos Americanos Argentinos
("RAA"), which held the Company's Argentine properties, in exchange for
fifteen million unregistered shares of Northern Orion. Under the terms of
the transaction, in June 1996 Northern Orion will use its best efforts to
qualify the Company's remaining Northern Orion shares for resale by a
secondary offering in Canada. No gain was recorded on the sale of RAA,
since Northern Orion has limited prior operations and realization of the
gain is dependent upon future operations of Northern Orion and the
Company's ability to sell the shares. Accordingly, the investment in
Northern Orion shares was recorded at the historical carrying value of RAA
of $1.2 million.
The Company recognizes gains in income as the Northern Orion shares are
converted to cash. The Northern Orion shares acquired are presented as
equity securities available for sale (see below). Separately, Miramar
agreed to lend the Company $10 million (Canadian). In August 1995, amounts
due Miramar under the loan facility were repaid, and the loan facility was
terminated. During 1995, the Company sold approximately 6.9 million shares
of Northern Orion stock for approximately $26 million and recorded gains of
$24.9 million on these sales. At December 31, 1995, the Company held
approximately 8.1 million shares of Northern Orion stock. During January
and February 1996, the Company sold an additional 2.7 million shares of
Northern Orion for approximately $13.2 million. No gain has been recorded
in the 1995 Consolidated Statement of Operations for the 1996 sales.
EQUITY SECURITIES AVAILABLE FOR SALE AT DECEMBER 31, 1995
At December 31, 1995, the investment in unregistered shares of Northern
Orion are carried at estimated fair value based on the closing market price
quoted on the Vancouver Stock Exchange for registered Northern Orion
Shares. Unrealized holding gains represent the excess of estimated fair
value over historical carrying value.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
Fair value of Northern Orion shares........................................ $25,433,407
Historical carrying value.................................................. (622,973)
-----------------
Gross unrealized holding gain on equity securities available for sale...... 24,810,434
Less deferred taxes........................................................ 8,683,652
-----------------
Net unrealized holding gain on equity securities available for sale........ $16,126,782
=============
Number of Northern Orion shares held....................................... 8,099,811
Closing market price....................................................... $3.14
-----------------
</TABLE>
During 1996, management reassessed the accounting for these equity
securities available for sale at historical cost and restated the December
31, 1995 financial statements to present the Northern Orion shares and
unrealized holding gains on equity securities available for sale, net of
deferred income taxes, as disclosed above. In addition, management restated
net deferred tax assets at December 31, 1995 to reflect projected
utilization
46
<PAGE> 47
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of net operating loss carryforwards to offset estimated future taxable
income from the sale of the remaining Northern Orion shares (see Note 9).
The effect of the restatements is summarized below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Equity securities available for sale............................. $ 622,973 $25,433,407
Deferred tax asset (liability), net.............................. 2,618,495 (2,658,844)
Unrealized holding gain on equity securities available for sale,
net of tax..................................................... -- 16,126,782
Income tax benefit............................................... 2,618,495 6,024,808
Net income....................................................... 6,360,019 9,766,332
Net income per share............................................. 0.47 0.72
Accumulated deficit.............................................. (57,928,978) (54,522,665)
</TABLE>
NOTE 6: AMERICAN PACIFIC MINERALS, LTD.
In December 1995, the Company sold its 78 percent interest in APML to an
unrelated party, Michael J. Savage, acting for himself and as agent for
certain other principals ("Savage"), for $40,000 and the conversion of
existing intercompany debt of APML and APM U.S.A. to the Company into a
note. APML owns, through its subsidiary company, APM U.S.A. the Goldfield
mining properties located near Goldfield, Nevada. Pursuant to an operator
and service agreement, the Company will continue to manage the Goldfield
properties for APM U.S.A. Additionally, the Company will continue to be
obligated to advance APM U.S.A. funds for the costs related to the closure
and reclamation of the Goldfield mine (see Note 7). The Company also
assumed $2 million of convertible notes of APML due serially in December
1997, 1998 and 1999.
The Company's advances to APM U.S.A. for the Goldfield closure and
reclamation, as well as APM U.S.A.'s pre-existing obligations to the
Company, are secured by the assets and stock of APM U.S.A. and are due
December 29, 1996. The December 31, 1995 receivable from APM U.S.A. was
written down to approximately $3.4 million, and reflects management's best
estimate of the fair value of the security interest, including
approximately $2.9 million for mineral properties and $500,000 for plant
and equipment and working capital.
Except for the sale of APML to Savage, all transactions between the Company
and APML during 1995 and 1994 were eliminated in consolidation. APML
revenues, costs and expenses and net loss included in the Company's 1995
Consolidated Statement of Operations are approximately $3.8 million, $12.2
million and $8.4 million, respectively. During 1995, losses applicable to
the minority interest of APML exceeded the minority's interest in the
equity capital of APML. Losses applicable to the minority interest and
charged against the Company's interest during 1995 were approximately $1.3
million.
In February 1995, stock options to purchase 60,000 common shares of APML
were exercised at $0.35 per share by a third party for $21,000 in cash. In
May 1995, the Company acquired an additional 6,956,522 shares of APML for
$3 million.
Prior to February 1994, the Company made certain payments on behalf of APML
and made additional contributions to Goldfield on behalf of APML. The
Company also borrowed amounts from APML. In February 1994, the net advances
to and on behalf of APML were repaid to the Company and the Company sold
its fifty percent interest in Goldfield to APML in exchange for 12 million
shares of APML common stock. The Company also purchased an additional 12
million shares increasing its interest in APML to approximately 74 percent.
The increase in ownership required consolidation of APML, which previously
was reported as an equity investment in mining interests.
NOTE 7: WRITE-DOWNS OF PROPERTY, PLANT AND EQUIPMENT
MAHOMA: In June 1995, minable mineralized material at the Mahoma Mine in
southern Uruguay was exhausted and the Company's exploration drilling along
strike extension to the known mineralized zones also failed to define
economic mineralization. Exploration activities focused on identifying
alternative sources of
47
<PAGE> 48
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
mill feed for the Mahoma plant within a reasonable transportation distance.
The Company identified high grade minable resources at Cerro San Carlos
with sufficient tonnage to sustain operations of the Mahoma plant for a
limited time, but not enough to justify the expenditures required to bring
the exploration properties to exploitation status under the Uruguayan
Mining Code and justify additional capital expenditures to increase the
capacity of the tailings dam.
Management decided in the third quarter of 1995 to cease milling operations
at the Mahoma plant by year-end 1995, when the limited reserves at Cerro
San Carlos would be exhausted and commence reclamation activities.
Operations were discontinued in early February 1996 and reclamation
activities were started. The activities, including re-contouring, mulching
and seeding, are expected to be completed in 1997.
Based on these decisions, a charge of $2.8 million was recorded in 1995,
including $2.2 million to write-down the Mahoma plant and facilities to net
realizable value and $0.6 million for anticipated closure cost and
reclamation activities. Net realizable value was determined by a third
party valuation of the main processing plant and management's estimates of
current selling prices for the assets to be transferred to and used for the
Company's San Gregorio Project. The net book value of the Mahoma plant and
facilities and related assets at December 31, 1995 is $4.5 million. As
disclosed in Note 3, a write-down of the Mahoma project is reflected in the
1994 Consolidated Statement of Operations based on estimated recoverable
amounts at that time.
GOLDFIELD: During the first half of 1995, due to ore characteristics that
made economic gold recovery unattainable with the Company's current
process, gold production from the Goldfield operation was significantly
below planned levels and the mine operated at a loss. The Company's
management recommended to the Board of Directors of its then-subsidiary,
APML, that the operations be closed in an orderly manner and that
reclamation activities be commenced. The mine closure was approved by the
APML Board of Directors and in July 1995, mining operations ceased.
Crushing and stacking of ore on the leach pad continued until September
1995 with ore sourced from that already exposed within the open pits and
from existing stockpiles. Leaching of ore on the pad is expected to
continue into the second or third quarter of 1996, at which time rinsing of
the pad is expected to commence.
A severance charge of $100,000 for work force reductions was recorded in
the third quarter of 1995. A charge of $1.6 million for reclamation and
closure costs was recorded in the fourth quarter of 1995 to increase the
accrual at December 31, 1995 to $2.3 million. As part of the agreement with
APM (USA), ARC is committed to advance APM (USA) funds for the costs
related to the closure and reclamation. ARC manages Goldfield under an
operator and service agreement. Prior to using its own funds, ARC will use
expected proceeds from sales of gold obtained in the reclamation process to
pay for the costs related to the closure and reclamation. Thus, the
reclamation accrual is net of estimated recoveries of $1.3 million from
expected sales of gold to be obtained from reclamation activity. Based on
management's analysis of the required closure activities at Goldfield and
preliminary discussions with the State of Nevada, the reclamation and
closure accrual is considered adequate to provide for the anticipated work
to be performed. The Company has deposited a bond with the State of Nevada,
in the form of a certificate of deposit for $973,000, redeemable as phases
of reclamation work are completed and approved by the State of Nevada
authorities. This bond is included with Other Assets in the December 31,
1995 Consolidated Balance Sheet. As the reclamation work and discussions
with the State of Nevada proceed, additional deposits may be required.
During April 1994, the Company entered into a mining venture agreement with
Kennecott Exploration Company ("Kennecott") to explore and if feasible,
develop and mine certain Goldfield properties. Pursuant to that agreement,
Kennecott was to receive a 60 percent interest in a joint venture with the
Company upon spending $3.5 million to explore mineral claims adjacent to
the Goldfield mine. In February 1996, Kennecott informed the Company that
it had decided to no longer explore the mineral claims or participate in
the mining venture agreement.
Based on projected costs of the Goldfield mine closure and results of
Kennecott's 1995 exploration activities and to reflect management's best
estimate of net realizable value of the remaining mineral properties and
plant and equipment, the Company recorded a $1.1 million write-down in the
third quarter of 1995. In 1994, based
48
<PAGE> 49
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the Company's assessment of the recoverable value of its investment in
the Goldfield mine, a write-down of $12 million was recorded. The
write-down was based on estimated net future cash flows using revised ore
reserve estimates and current sales prices and operating costs.
NOTE 8: LONG-TERM DEBT
During 1995, payments to reduce long-term debt were $12.5 million,
including $9.8 million with proceeds received from the sale of Northern
Orion shares (see Note 5). In addition, other debt in the amount of $9.3
million was redeemed in exchange for 4.5 million Northern Orion shares.
Early redemption of this debt resulted in the write-off of certain deferred
financing costs and the recognition of an extraordinary loss of $525,816.
The Company's new long-term debt borrowings were $8.9 million during 1995.
In 1994, the Company suspended installment payments for a $300,000 note
payable to Compania Minera Aguilar SA ("Aguilar") due to a dispute the
Company had with Aguilar over mining rights the Company had acquired from
Aguilar in 1992. In August 1995, the Company reached an agreement with
Aguilar whereby Aguilar forgave $150,000 of the $300,000 note payable. An
extraordinary gain of $158,983 was recorded in the third quarter of 1995 to
reflect the August 1995 agreement. This gain is reflected on the
Consolidated Statement of Operations net of the extraordinary loss recorded
on the early debt redemption discussed above.
In December 1995, in conjunction with the Company's sale of APML, the
Company assumed $2 million of convertible notes of APML, due serially in
December 1997, 1998 and 1999. In January 1996, the terms of the convertible
notes were amended to provide for the mandatory conversion into ARC common
stock at a price of $5.50 per share upon the completion of the proposed
merger with Rea Gold by June 30, 1996 (see Note 16). If the merger is not
completed by June 30, 1996, the principal will be paid at maturity in cash,
or at the option of the note holder, be converted at any time thereafter
until maturity into ARC common stock at a price that is 90 percent of the
average price for the common stock during the thirty days preceding notice
of conversion.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
--------- ----------
<S> <C> <C>
10% convertible notes (at $5.50 per share), due serially in
December 1997, 1998 and 1999................................... $2,000,000 $2,000,000
4.5% plus LIBOR installment purchase contract due in equal
quarterly installments through November 1996 secured by
equipment...................................................... 639,103 1,339,399
10% demand note to Dellwood...................................... 300,000 300,000
12% (imputed) note, secured by 100% of the shares of Brimol SA:
Due in two $50,000 installments, February 1996 and............. -- --
August 1996.................................................... 91,517 --
Due in three $100,000 installments, March 1993, 1994 and
1995........................................................ -- 237,394
6.85% note due in four $50,000 annual installments............... -- 90,589
10% to 11% convertible notes..................................... -- 6,600,000
8% convertible secured note...................................... -- 3,500,000
10% convertible secured notes due December 1994.................. -- 200,000
12% (imputed) notes secured by CMSJ SA shares due in five
installments, February 1993 through August 1995................ -- 914,747
Notes due local suppliers........................................ 20,127 --
Capital lease obligations........................................ -- 791,042
--------- ----------
Total............................................................ 3,050,747 15,973,171
Less: current portion.......................................... (1,050,747) (2,743,410)
--------- ----------
Long-term debt................................................... $2,000,000 $13,229,761
========= ==========
</TABLE>
49
<PAGE> 50
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt maturities for the five years ending December 31, 2000 for
debt outstanding at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.......................................................................... $1,050,747
1997.......................................................................... 666,666
1998.......................................................................... 666,667
1999.......................................................................... 666,667
2000.......................................................................... --
----------
$3,050,747
==========
</TABLE>
NOTE 9: INCOME TAXES
Statement on Financial Accounting Standards No. 109 requires an asset and
liability approach for financial accounting and reporting for income taxes.
If based on the weight of available evidence, it is more likely than not
that some or all of a deferred tax asset will not be realized, a valuation
allowance for that portion is recorded. The December 31, 1995 deferred tax
balance has been restated (see Note 5). In addition, the December 31, 1994
and December 31, 1993 deferred tax asset balances have been restated (see
Note 3).
Deferred tax assets and liabilities at December 31, 1995 are comprised of
the following (as restated):
<TABLE>
<S> <C>
Deferred tax assets
Net operating loss carryforwards (NOL's)
U.S. federal and state.................................................. $12,289,603
Foreign................................................................. 6,073,144
Net property, plant and equipment.......................................... 3,204,464
Investment in equity securities............................................ 1,189,178
Receivable from APM U.S.A.................................................. 321,950
Other...................................................................... 1,078,381
-----------
Total deferred tax assets.................................................. 24,156,720
Valuation allowance........................................................ (18,131,912)
-----------
Deferred tax assets, net of valuation allowance.............................. 6,024,808
===========
Deferred tax liability
Unrealized holding gain on equity securities available for sale............ (8,683,652)
-----------
Net deferred tax liability................................................... $(2,658,844)
===========
</TABLE>
Deferred tax assets are recorded on the basis of separate tax
jurisdictions. The net deferred tax asset of $6.0 million at December 31,
1995 has been recognized as an income tax benefit based on management's
projected utilization of NOL's to offset estimated future taxable income
from the sale of the remaining Northern Orion shares, net of estimated
operating losses in 1996. At December 31, 1995, 8.1 million shares of
Northern Orion were held with an estimated fair value of $25.4 million,
based on the closing market price quoted on the Vancouver Stock Exchange
for registered Northern Orion shares (see Note 5). The deferred tax
liability of $8.7 million represents the taxes on the unrealized holding
gain on the Northern Orion Shares at December 31, 1995. The related tax
effect is presented as an offset to the separate component of shareholders'
equity for unrealized holding gain on equity securities available for sale
(see Note 5). The decrease in the valuation allowance of $4.1 million
during 1995 is primarily due to management's projected utilization of NOL's
as discussed above.
At December 31, 1995, the Company had U.S. federal and state NOL's of
approximately $37 million available to offset future U.S. taxable income
and approximately $20 million Uruguayan NOL's available to offset future
Uruguayan taxable income. Approximately $6.5 million of the U.S. federal
NOL's were incurred prior to the
50
<PAGE> 51
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company emerging from bankruptcy on February 18, 1992. Due to ownership
changes, approximately $8 million of the U.S. federal NOL's are subject to
restrictions. Such restrictions generally limit the Company to using a
portion of the NOL's existing at the date of the ownership changes, based
on the fair market values of the Company's stock immediately before the
ownership changes. The Uruguayan NOL's are limited to utilization by the
company which generated the loss and expire three years from the year
incurred. Due to the limited carryforward period of NOL's created by the
Company's Uruguayan subsidiaries, management believes that these NOL's may
expire before they can be utilized. Accordingly, a full valuation allowance
for the Uruguayan NOL's has been recorded.
A summary of the NOL's and years of expiration follows:
<TABLE>
<CAPTION>
U.S. FEDERAL
AND STATE URUGUAY
------------ ----------
<S> <C> <C>
1996............................................................ $ 243,300 $7,332,175
1997............................................................ 626,105 3,199,901
1998............................................................ 688,106 9,711,738
1999............................................................ 438,281 --
2000............................................................ 562,162 --
2001-2010....................................................... 34,302,349 --
------------ ----------
Total........................................................... $36,860,303 $20,243,814
========== ==========
</TABLE>
Income/(loss) before taxes, extraordinary items and minority interest for
the year ended December 31, 1995 from U.S. and foreign operations was
$9,259,317 and $(5,715,714), respectively.
NOTE 10: SHAREHOLDERS' EQUITY
In December 1993, the Company effected a one-for-ten reverse stock split
resulting in a reduction in the number of shares of common stock
outstanding and in the number of warrants outstanding to purchase shares of
common stock. The par value and the contributed capital of the shares
outstanding and the exercise price of warrants were also adjusted. Unless
otherwise noted, all ARC common share, warrant and stock option
transactions discussed in these consolidated financial statements are
expressed in post-December 1993 one-for-ten reverse split amounts.
51
<PAGE> 52
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's 1993 Long Term Incentive Plan (the "Plan") provides for the
issuance of options to employees to purchase shares of the Company's common
stock. The Plan authorizes the granting of non-qualified or incentive stock
options and allows for all options to be exercised upon grant. The Plan
limits the number of shares of common stock available for issuance based on
the overall number of shares of common stock outstanding and limits the
number of shares of common stock available pursuant to incentive stock
options to 1,000,000. In addition, during 1994, 12,000 options were granted
to directors separate from the Plan. During 1995, 7,000 of these options
were forfeited. All issued options have been granted with an exercise price
equal to the market price at the date of grant. Changes in the stock
options during 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- -------------
<S> <C> <C>
Options:
Outstanding at beginning of year........................... 251,000 --
Granted.................................................... 759,000 261,000
Exercised.................................................. -- (10,000)
Forfeited.................................................. (65,000) --
-------------- -------------
Outstanding at year-end.................................... 945,000 251,000
============= ============
Option price range:
Granted.................................................... $3.80 - $4.625 $3.80 - $6.14
Exercised.................................................. -- 4.75
Forfeited.................................................. 3.80 - 6.14 --
Outstanding at year-end.................................... 3.80 - 6.14 3.80 - 6.14
</TABLE>
Warrants to purchase 1,666,645 shares of common stock were outstanding at
December 31, 1995 as follows:
<TABLE>
<CAPTION>
CLASS NUMBER EXERCISE PRICE EXPIRATION DATE
----------------------------------------------- -------- -------------- -----------------
<S> <C> <C> <C>
A.............................................. 297,940 $12.76 June 30, 1996
B1............................................. 122,329 16.53 June 30, 1996
B2............................................. 117,730 22.82 June 30, 1996
B3............................................. 128,646 29.11 June 30, 1996
Unclassified................................... 1,000,000 7.50 February 28, 1997
</TABLE>
NOTE 11: RELATED PARTY TRANSACTIONS
During 1995 and 1994, Mineral Resources Development, Inc. ("MRDI"),
performed feasibility studies and provided other consulting services on
behalf of the Company. Ian B. Smith, the Company's Chairman, CEO and
President since June 19, 1995, was President of MRDI during 1994 and until
August 1995. In November 1993, Mr. Smith was named a director of the
Company. In return for these consulting services, MRDI received from the
Company $365,000 and $250,000 during 1995 and 1994, respectively. The
Company owed MRDI $85,000 and $27,000 at December 31, 1995 and December 31,
1994, respectively.
MRDI was acquired by H.A. Simons in January 1995. During 1995, H.A. Simons
performed engineering design and other consulting services on behalf of the
Company. H.A. Simons charged the Company $454,000 for these services. At
December 31, 1995, the Company owed H.A. Simons $115,000.
During 1995 and 1994, Endeavour Financial Corporation ("Endeavour")
performed business and financial planning consulting services on behalf of
the Company. Neil Woodyer, who was named a director of the Company in June
1995, is an Endeavour principal. Endeavour charged the Company $365,000 and
$89,000 for these services in 1995 and 1994, respectively. The Company owed
Endeavour $27,000 and $9,000 at December 31, 1995 and December 31, 1994,
respectively.
52
<PAGE> 53
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
James F. Wickham was named a director of the Company in June 1995. Since
then, Mr. Wickham has performed engineering consulting services on behalf
of the Company. Mr. Wickham charged the Company $15,000 for these services.
During 1995, Ruden, McClosky, Smith, Schuster & Russell, PA ("Ruden")
performed certain legal services. Richard Berman, a partner in Ruden, was
named a director of the Company in November 1993. Ruden charged the Company
$14,000.
During 1994 and 1993, Cameron Glover, a director of the Company, performed
certain consulting and capital raising services on behalf of the Company.
Mr. Glover charged the Company fees and expenses totaling $296,000 and
$149,000 during 1994 and 1993, respectively.
NOTE 12: EMPLOYEE BENEFIT PLANS
During 1994, the Company established a voluntary defined contribution
401(k) plan that covers all domestic employees twenty-one years of age or
older. Although the plan allows for employer matching contributions, the
Company has not made any contributions.
The Company also issues stock options to its employees and directors. See
Note 10 for disclosure related to issued stock options.
NOTE 13: COMMITMENTS
The Company leases various facilities and equipment pursuant to operating
leases that expire at various dates through 1996. At December 31, 1995,
non-cancelable operating leases with initial or remaining terms in excess
of one year require minimum future payments of $68,000 in 1996. No payments
are due thereafter. Operating lease rent expense was $251,000, $404,400 and
$1,518,000, in 1995, 1994 and 1993, respectively.
NOTE 14: LITIGATION AND OTHER CONTINGENCIES
In 1995, seven related lawsuits were filed against the Company in the
California Superior Court, County of Marin. All of the actions arise out of
an airplane crash in September 1994 in Argentina.
The crash occurred during a tour by a London investment banking firm of
Argentine and Uruguayan properties owned by subsidiaries of the Company.
Mr. Glover, who was a director and consultant to the Company, took part in
the tour. There were a total of seven passengers and two crew members, all
of whom were killed. The complaints generally allege that the Company was
negligent with respect to the operation and maintenance of the aircraft and
the selection of the charter company, and that the Company has vicarious
liability for the charter company's conduct. The Company contends that it
did not select the charter company, that the charter company was at most an
independent contractor, and that the Company cannot be held liable for the
charter company's maintenance or operation of the airplane. Three of these
lawsuits each request damages of $20,015,000; the other lawsuits seek
unspecified damages. The Company has notified its insurance carrier of the
commencement of the actions; however, the Company's insurance coverage for
an occurrence of this type is limited to $1 million, including defense
costs.
Management disagrees with the plaintiffs' claims and is vigorously
defending the Company against these lawsuits. The Company is unable at this
time to accurately assess the probability of unfavorable outcomes or to
estimate the potential recovery to the plaintiffs if unfavorable outcomes
were to occur. No provision for liability has been made in the Company's
consolidated financial statements.
In January 1995, the holder of a $3.5 million convertible secured note, due
December 31, 1996, gave notice alleging default under the terms of the loan
agreement. In response, the Company filed a notice of dispute denying that
an event of default had occurred. The agreement provided for the dispute to
be resolved through binding arbitration. In June 1995, the Company paid
$6.0 million in settlement, which retired the $3.5 million debt and related
accrued interest, removed the property lien and a right to a royalty
interest held by the note holder and resulted in a $2.4 million charge to
litigation settlement expense.
53
<PAGE> 54
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the Company's mining and processing operations are subject to
reclamation requirements and environmental regulations. Management believes
the accrual recorded for closure costs and known reclamation requirements
is adequate at December 31, 1995. The accrual is comprised of:
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
--------- --------- ---------
<S> <C> <C> <C>
Goldfield (net of recoveries)........................ $1,109,199 $1,198,994 $2,308,193
Mahoma............................................... 1,053,928 -- 1,053,928
Other................................................ 32,440 -- 32,440
--------- --------- ---------
Total................................................ $2,195,567 $1,198,994 $3,394,561
========= ========= =========
</TABLE>
The Company is subject to various other legal proceedings in the ordinary
course of business. Management does not believe the resolution of these
matters will have a materially adverse effect on results of operations or
financial position of the Company.
NOTE 15: ADDITIONAL CASH FLOW INFORMATION
The following table presents additional cash flow information for the three
years ended December 31, 1995 including interest paid and non-cash
investing and financing activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest paid, net of amount capitalized.................. $ 628,287 $1,681,942 $ 823,137
Issuance of note for purchase of land surface rights......
Issuance of note payable for cancellation of operating
lease................................................... 41,599 -- --
Issuance of note payable for payment of accrued
interest................................................ 268,333 -- --
Issuance of common stock for:
Property................................................ -- -- 57,500
Creditor payments....................................... -- -- 1,565,000
Payment of accrued interest............................. -- 191,049 --
Payment of accrued commissions.......................... 161,374 1,878,930 1,211,298
Payment of other accrued expenses....................... 16,733 60,938 93,424
Conversion of notes payable............................. -- 13,880,000 8,413,400
Notes payable redeemed in exchange for marketable
securities.............................................. 9,368,333
Acquisitions by issuance of notes payable................. -- -- 4,026,639
Property and equipment acquired by issuance of notes
payable................................................. -- 579,788 1,931,032
Equipment acquired by capital lease....................... 117,150 822,619 3,354
Return of equipment for cancellation of lease payable..... 302,071 -- --
Equipment sales for cancellation of accounts payable...... 48,000 -- --
Net book value of terminated capital leases............... -- -- 517,509
Debt relieved on termination of capital leases............ -- -- 366,068
Investment reduction by consolidation of former
investee................................................ -- (1,170,120) --
Effect of 1995 sale of subsidiaries and 1994 consolidation
of former investee:
Cash and equivalents.................................... (198,252) 20,322 --
Noncash working capital................................. 1,278,771 (3,578,447) --
Property, plant and equipment, net...................... (4,002,805) 7,564,153 --
Investments and other long-term assets.................. (469,063) 37,850 --
Long-term liabilities................................... 5,515,450 (1,064,474) --
Shareholders' equity.................................... (2,124,101) (2,979,404) --
</TABLE>
54
<PAGE> 55
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: SUBSEQUENT EVENTS
PROPOSED MERGER WITH REA GOLD
In January 1996, the Company announced it had entered into an
agreement-in-principle to merge with Rea Gold Corporation ("Rea"). Under
the terms of the proposed merger, ARC shareholders will receive 2.24 Rea
shares for each ARC share held, subject to an adjustment in the event that
the Northern Orion shares held by ARC on January 10, 1996 (and the proceeds
of any sale of such shares before the merger) have a value (on a per share
basis) that varies (plus or minus) by more than 10 percent of a value of
$4.62 (Canadian) negotiated on January 10, 1996. W. James Hogan, currently
President and CEO of Rea, will become the Chairman of the combined
companies ("new Rea"). Ian B. Smith, Chairman, President and CEO of ARC,
will become the President and CEO of new Rea. The proposed merger is
subject to completion of due diligence by the two companies, documentation,
completion of independent fairness opinions by both companies, and
shareholder and regulatory approvals. Completion of the proposed merger
transaction will result in ARC shareholders holding approximately 40
percent of new Rea, subject to change based on ultimate share exchange
ratio adjustments. There is no assurance that the merger with Rea will be
completed.
SAN GREGORIO PROJECT
The Company is currently developing the San Gregorio Project and has
received bids from independent contractors for the engineering and
construction of the plant and related infrastructure. Management expects to
award the bid in March 1996. Commitments to San Gregorio Project vendors
and contractors at February 26, 1996 for products and services totaled
approximately $5 million. In January 1996, the Company received a
conditional commitment from a financial institution for a $25 million
project gold loan facility for the further development of the San Gregorio
Project. Under the terms of the proposed project gold loan facility, ARC is
required to repay principal and interest in four years starting no later
than June 30, 1997. While management is confident that project financing
for the development of the San Gregorio Project will be obtained, there is
no assurance that such funding will be received.
CONVERTIBLE DEBT
In February 1996, the Company received a preliminary commitment from
offshore private investors for $8 million in convertible notes. Under the
proposed terms, the debt would be converted into ARC common stock at $5.75
per share upon the completion of the merger with Rea Gold. If the merger is
not completed, the outstanding principal would be paid, at the Company's
option, in cash or an equivalent value of restricted Northern Orion shares
at a price that is 95 percent of the average price of Northern Orion shares
during the twenty days immediately preceding the payment date. Such payment
will be made at the note holders' option, either ninety days after failure
of the merger agreement or in March 1997. There is no assurance that such
financing will be received.
GASSER CLAIM AND SETTLEMENT OF DELLWOOD DEBT
In January 1996, the Company received a claim from Mr. Gasser for alleged
damages resulting from the Tarot Transaction (see Note 3). As part of the
Tarot Transaction, Bond Gold received $4 million for the sale of CMSJ CI,
including (i) a $500,000 deposit from Tarot; (ii) a $1 million payment on
closing from the Company on behalf of Tarot; and (iii) $2.5 million in
principal and interest from the Company during February 1993 to August 1995
pursuant to a note between Bond Gold and Tarot. In exchange for the Tarot
Shares, Mr. Gasser or his designees were to receive 1,000,000 shares of the
Company's restricted common stock, valued by the Company in 1992 at $5
million ($5.00 per share) and a cash option fee of $1 million.
As of February 26, 1996, 525,000 of the issued ARC shares remain in the
Company's possession and the Tarot Shares have not been received by the
Company. In 1995, the Company's new management contacted Mr. Gasser to
arrange for the delivery of the Tarot Shares, but was told by Mr. Gasser
that he would discuss the exchange of the Tarot Shares for the remaining
525,000 shares of the Company's common stock only after the Company paid
him $300,000 plus $71,000 accrued interest to retire a debt owed by the
Company to
55
<PAGE> 56
AMERICAN RESOURCE CORPORATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dellwood. Mr. Gasser represented to the Company that the debt had been
assigned to him, but did not provide new management with satisfactory
evidence of the assignment. On February 20, 1996, the Company received a
personal guarantee from Mr. Gasser's attorney that, should Dellwood receive
a final judgment against the Company for the debt, he will personally be
responsible for reimbursing the Company the amount of the judgment. Upon
receiving this guarantee, the Company paid Mr. Gasser $371,000 in full and
final settlement of the debt to Dellwood.
Mr. Gasser's January 1996 claim is for $1.5 million plus unspecified other
losses incurred by him and/or his designees due to the Company's
non-delivery of the remaining 525,000 ARC shares. The $1.5 million claim is
comprised of the reimbursement of the $500,000 deposit paid by Tarot to
Bond Gold and $1 million payment made by the Company to Bond Gold on behalf
of Tarot. Management intends to deliver the ARC shares to Gasser upon
receipt of the Tarot shares and has not restricted the voting or other
shareholder rights of the designees of the shares. Also, as of December 31,
1995, the Company's carrying value of assets of CMSJ was $6.4 million and
liabilities were approximately $3.1 million. For the year ended December
31, 1995, a net loss of approximately $5.3 million was included in the
Consolidated Statement of Operations. Consolidation of the CMSJ operations
and presentation of the 525,000 shares as issued and outstanding continue
to represent management's best estimate of ultimate resolution of this
matter. The Company intends to vigorously defend itself in any proceeding
that might arise from Mr. Gasser's January 1996 claim and believes that
ultimate resolution of the above uncertainties will not have a material
adverse effect on the Company's consolidated financial statements.
NOTE 17: GEOGRAPHIC INFORMATION
The Company is a gold exploration and development company with current
operations in Uruguay and Nevada. Prior to the sale of RAA, the Company had
operations in Argentina (see Note 5). The Company also produces a small
amount of zeolite, an industrial minerals product, from a property it owns
in Nevada. Uruguay is subject to changing economic, regulatory and
political risks. Also, gold prices are subject to price volatility.
Financial information by geographic area for 1995 is as follows:
<TABLE>
<CAPTION>
SOUTH
US AMERICA TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Revenues....................................... $ 4,153,435 $ 6,017,314 $10,170,749
Operating loss (1)............................. (7,152,906) (5,969,448) (13,122,354)
Identifiable assets............................ 34,102,145 16,642,521 50,744,666
Exploration.................................... 106,883 1,481,394 1,588,277
Depreciation, depletion and amortization....... 1,490,588 2,548,311 4,038,899
Additions to property, plant and equipment..... 334,116 3,205,426 3,539,542
</TABLE>
(1) The Company also reported other net income of $16,665,957, which is
comprised of corporate income and other expenses.
56
<PAGE> 57
UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
(000's except per share amounts)
<TABLE>
<CAPTION>
FOURTH QUARTER THIRD QUARTER SECOND QUARTER FIRST QUARTER
------------------------ ------------------------ ------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995
Revenues and other
income................ $ 2,565 $ 2,565 $ 22,086 $22,086 $ 2,543 $ 8,292(1) $ 2,097 $ 2,097
Operating loss.......... (1,702) (1,702) (13,115) (5,845) (2,697) (2,812) (2,545) (2,620)
Income (loss) before
extraordinary items
and minority
interest.............. 626 4,032 3,499 10,769 152 (1,218) (3,925) (4,015)
Net income (loss)....... 615 4,021 3,417 10,413 643 (1,124) (3,455) (3,544)
Per share:
Income (loss) before
extraordinary items
and minority
interest............ 0.05 0.30 0.26 0.80 0.01 (0.09) (0.29) (0.30)
Net income (loss)..... 0.04 0.30 0.25 0.77 0.05 (0.08) (0.26) (0.26)
1994
Revenues and other
income................ $ 549 $ 549 $ 840 $ 840 $ 298 $ 298 $ 561 $ 561
Operating loss.......... (16,141) (19,859) (2,544) (2,544) (2,737) (2,737) (938) (938)
Loss before
extraordinary items
and minority
interest.............. (18,434) (22,152) (4,111) (4,111) (4,722) (4,722) (2,650) (2,650)
Net loss................ (14,641) (18,359) (3,856) (3,856) (4,702) (4,702) (2,451) (2,451)
Per share:
Loss before
extraordinary items
and minority
interest............ (1.53) (1.85) (0.31) (0.31) (0.40) (0.40) (0.33) (0.33)
Net loss.............. (1.22) (1.54) (0.29) (0.29) (0.40) (0.40) (0.30) (0.30)
</TABLE>
The selected quarterly financial data have been restated to reflect the
following adjustments:
(1) Depreciation, depletion and amortization expense of the Company's Mahoma
Project reflected in the 1995 and 1994 quarterly financial data was not
computed correctly (see Note 3 to Consolidated Financial Statements).
(2) Results of the Company's evaluation of its recoverability of the
December 31, 1994 net book value and estimated reclamation cost for the
Mahoma Project were not correctly reflected (see Note 3 to Consolidated
Financial Statements).
(3) Depreciation, depletion and amortization expense of the Goldfield
Project reflected in the 1995 quarterly financial data was not computed
correctly.
(4) The gain on sale of subsidiary as reported in the 1995 second quarter
was adjusted to be consistent with the 1995 year-end reporting.
(5) Other corrections were made, including restatement for incorrect
absorption of minority interest in 1995 and reclassifications to be
consistent with 1995 year-end reporting.
(6) Equity securities available for sale were restated to present the
Northern Orion shares and unrealized holding gains on equity securities
available for sale, net of deferred income taxes. In addition,
management restated deferred tax assets at December 31, 1995 and the
three month period then ended to reflect projected utilization of net
operating loss carryforwards to offset future taxable income from the
sale of remaining Northern Orion shares.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported in its Form 8-K dated September 6, 1995, the Company
engaged Price Waterhouse LLP as its independent accountants as of September 6,
1995. The Company dismissed McDougal & Williams as its independent accountants
on August 30, 1995.
57
<PAGE> 58
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------- --- ----------------------------------------------------------------
<S> <C> <C>
Ian B. Smith............. 50 Chairman of the Board of Directors, President and
Chief Executive Officer
Richard E. Berman........ 46 Director; Member of Audit Committee
James F. Wickham......... 65 Director; Member of Compensation Committee
Neil Woodyer............. 52 Director; Member of Audit and Compensation Committees
Hector Cubas............. 46 Vice President -- General Manager, Uruguay
Ralph E. Green........... 49 Vice President -- Exploration
Anthony T. Miller........ 54 Vice President -- Administration, General Counsel and Secretary
Cal Perkins.............. 71 Vice President -- Engineering and Construction
Martin Quick............. 52 Vice President -- Operations
Bruce K. Thiesen......... 38 Vice President -- Finance and Chief Financial Officer
</TABLE>
The following is information on each of the directors and executive
officers of the Company.
Ian B. Smith -- Director since November 5, 1993 and Chairman of the Board
of ARC since May 26, 1994. Mr. Smith became President and Chief Executive
Officer on June 19, 1995 immediately following the 1995 Annual Meeting of ARC
stockholders. Mr. Smith is a mining engineer and served as president of Mineral
Resources Development, Inc., a privately-held consulting firm in the fields of
geology, ore reserve estimation, mining, process and environmental engineering
from 1990 until August 31, 1995. From 1982 to 1988, Mr. Smith served as a
project manager for copper and coal mine development projects in Africa, China
and Latin America for Fluor Engineers, Inc. where he held the positions of
Manager Mining and Manager Projects. Mr. Smith has over 29 years experience in
the international mining industry covering operations, planning, engineering,
project management and consulting. Mr. Smith holds a Bachelor of Engineering in
Mining (Honours) from the University of Queensland, Australia.
Richard E. Berman -- Director since November 5, 1993. Mr. Berman is an
attorney who has practiced since 1977 in Florida. Mr. Berman is Name Partner and
leads the litigation department of Katz, Barron, Squitero, Faust & Berman, PA in
Miami. Mr. Berman holds a J.D., magna cum laude, from Syracuse University,
Syracuse, N.Y. He earned his B.A. at the University of Buffalo in Buffalo, New
York.
James F. Wickham -- Director since June 19, 1995. Mr. Wickham is a mining
and metallurgical engineer and held positions of Vice President of Bechtel
Overseas, Inc. and from 1990 until his retirement in 1992 was Manager
Engineering for Bechtel's Mining and Metallurgical Division in San Francisco.
From 1992 to date, Mr. Wickham is a practicing consulting engineer and holds
professional registrations in thirteen States. Mr. Wickham has over 44 years
experience in the international mining industry in mine operations, engineering
and project management. He holds a B.S. Mining and B.S. Metallurgy from the
University of Arizona.
Neil Woodyer -- Director of ARC since June 19, 1995. Mr. Woodyer has held
general and senior financial management positions in the United Kingdom and the
United States spanning a 25 year period. Through these positions, Mr. Woodyer
has had over 20 years experience in natural resource marketing and financing.
For the past seven years, Mr. Woodyer has been Managing Director of Endeavour.
He is also a director of Bema Gold Corp. and a member of the board of directors
of Compania Minera Maricunga. From July 25, 1995 until December 29, 1995, Mr.
Woodyer was Chairman of the Board of APML. He is a fellow of the Institute of
Chartered Accountants in England and Wales.
Hector Cubas -- General Manager -- Uruguay of ARC since February 1, 1994
and Vice President and General Manager -- Uruguay since November 1995. From 1982
to 1994 he held the position of Financial Director with Johnson and Johnson
Uruguay S.A. and Controller for Johnson and Johnson Southern Region in Latin
America. Mr. Cubas has over 18 years experience in corporate finance and
accounting. He has an MBA from the University of Navarra, Spain and a B.A. in
Economics from the University de la Republica, Montevideo, Uruguay. Mr. Cubas is
also a Certified Public Accountant.
58
<PAGE> 59
Ralph E. Green -- Vice President -- Exploration of ARC since January 1995.
Mr. Green has over 25 years experience in minerals exploration. He has
previously held the positions of Vice President of Exploration for LAC North
America Inc. from May 1994 until the Barrick Resources Ltd.'s take-over of LAC
Minerals Ltd. in September 1994. From 1990 to 1994 he was corporate Exploration
Manager for Coeur Explorations, Inc. and was previously employed by Homestake
Mining Company from 1977 to 1990 where he served as Regional Manager, US
Exploration Manager and during the period 1987 through 1990 as Director of
Exploration. Mr. Green holds a B.S. in Geology from Weber State University and
did graduate work in economic geology and geochemistry at Arizona State
University.
Anthony T. Miller -- Vice President -- Administration, General Counsel and
Secretary of ARC since November, 1995. Mr. Miller was in private law practice in
San Francisco from July 1992 until November 1995 when he joined ARC. Before
private practice, Mr. Miller was a member of Bank of America's Legal Department
for 21 years where his last position was that of Assistant General Counsel. Mr.
Miller holds a B.A. in Political Science from Stanford University and a J.D.
from Hastings College of Law.
A.C. (Cal) Perkins -- V.P. Engineering and Construction of ARC since
October 1995. Mr. Perkins is a Civil Engineer with 38 years design and
construction management experience, 25 of which were in the US Navy's Civil
Engineer Corps and Seabees constructing bases in Spain, Antarctica and South
Pacific region including Vietnam. He was President of a heavy industrial design
and construction company for four years, and a project manager for 13 years for
Bechtel Engineering on major projects such as OK TEDI in Papua New Guinea,
Nevada Moly, and Cerro Matoso in Columbia. Specific projects while at Bechtel
during the last 5 years were: 1990, Project Manager, Weapons Storage & Security
System Project for the US Air Force; 1991, Project Manager of a New Zealand
forest products modernation program; 1992, Project Manager of Pico Iron Ore Mine
development in Brazil. During 1993 and 1994 he served as consultant and lecturer
on project management at Stanford University, and in 1995, as a consultant and
lecturer in project management to Hyundi Corporation. He has held the position
of Chairman of Construction Industry Institute's task force on constructability.
A graduate of the US Naval Academy at Annapolis, he also holds a B.C.E. from
Renssellaer Polytechic Institute as well as a M.S. in management.
Martin Quick -- Vice President Operations of ARC since November 1995. From
1988 to 1992 he was President and General Manager of Sonora Mining, Inc. From
1992 until joining ARC he was Vice President -- Operations for Dakota Mining.
Mr. Quick has over 32 years experience in both underground and open pit
operations in Africa, Australia, Fiji, Canada and the United States. He is a
mining engineering graduate of the Camborne School of Mines, Cornwall, United
Kingdom.
Bruce K. Thiesen -- Vice President -- Finance and Chief Financial Officer
of ARC since November, 1995. Mr. Thiesen is a Certified Public Accountant with
14 years experience in corporate finance, accounting and auditing. He joined
Price Waterhouse LLP as an Audit Manager in 1990. From 1993 until joining ARC,
he served as Senior Manager in the Price Waterhouse LLP world-wide energy group.
His experience also includes three years with an energy exploration and
development company as Assistant to the Controller. He holds a B.S. (Honors) in
Business Administration with a major in accounting from San Francisco State
University.
No officer of ARC is related to any other officer of ARC by blood, marriage
or adoption.
Directors of ARC are elected to serve until the next annual meeting of
Stockholders and until their successors have been elected, or until their prior
death, resignation or removal. The directors of ARC will be determined by the
Rea Board of Directors following the Merger. Officers of ARC are elected to
serve at the pleasure of the Board of Directors of ARC.
No arrangement or understanding exists between any director or officer and
any other person under which any director was selected as a director or any
executive officer was selected as an officer.
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<PAGE> 60
ITEM 11. EXECUTIVE COMPENSATION
The following table provides a summary of cash and non-cash compensation
for each of the last three fiscal years ended December 31, 1995 and 1994 and
1993, with respect to executive officers of ARC who received compensation that
exceeded $100,000 during the year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------- ----------------------
(E) (F) (G)
OTHER RESTRICTED OPTIONS/ (H)
(A) (B) (C) (D) ANNUAL STOCK SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION AWARDS (#) COMPENSATION(2)
- ---------------------------------- ----- -------- -------- ------------ ---------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ian B. Smith...................... 1995 $168,325(3) -0- -0- -0- 100,000 $ 39,500(4)
Chairman of the Board, President 1994 -0- -0- -0- -0- -0- 29,858(4)
and Chief Executive Officer 1993 -0- -0- -0- -0- -0- -0-
Tony D.S. Wicks (5)(6)(7)......... 1995 95,631(8) -0- -0- -0- 65,000 110,292
Former President and 1994 192,000 -0- -0- -0- 35,500 -0-
Chief Executive Officer 1993 157,000 -0- -0- 4,375 -0- -0-
Norman M. Ewart (6)(9)(10)........ 1995 100,115 -0- -0- -0- 50,000 2,500
Former Vice President -- 1994 192,000 -0- -0- -0- 35,500 -0-
Finance 1993 157,000 -0- 10,117 1,688 -0- -0-
</TABLE>
Notes:
(1) ARC does not currently offer any short-term bonus plan to executive
officers.
(2) ARC does not currently offer a retirement plan to executive officers.
(3) Mr. Smith became President and Chief Executive Officer of ARC on June 19,
1995. Prior to that time he was Chairman of the Board of ARC. At the time
Mr. Smith became President and Chief Executive Officer of ARC, he was
employed by MRDI and he continued to be so employed until January 8, 1996
when he entered an employment agreement with ARC. Prior to January 8, 1996,
Mr. Smith received no salary from ARC. Pursuant to a services agreement
between ARC and MRDI dated June 26, 1995, ARC paid a fee to MRDI to obtain
Mr. Smith's services as an officer of ARC, together with MRDI's
out-of-pocket expenses related to the performance of such services by Mr.
Smith. The amount shown in the table under "Salary" is the total of all
payments (excluding travel expenses)made by ARC to MRDI under the services
agreement in 1995.
(4) Represents Mr. Smith's fees as Chairman and director of ARC prior to
becoming President and Chief Executive Officer of ARC.
(5) Mr. Wicks resigned as an officer and employee of ARC effective June 19, 1995
and as an officer, director and employee of American Pacific Minerals Ltd.
effective August 25, 1995. Mr. Wicks received a severance of $160,000
($100,000 and $60,000 paid in 1995 and 1996, respectively) and the ARC
automobile he was using valued at $10,000. Such amounts are included in the
table under "Salary."
(6) As part of their employment agreements, ARC paid insurance premiums on
behalf of Mr. Wicks and Mr. Ewart. Mr. Wicks also received the use of a
Company provided automobile. Mr. Ewart received an allowance of $500 per
month in lieu of an ARC provided vehicle. The annual value of such insurance
premiums and automobile was less than 10 percent of their annual salary.
(7) Salary amounts included in table include amounts paid by APML. Mr. Wicks'
salary from APML was $34,115, $60,000 and $25,000 in 1995, 1994 and 1993,
respectively.
(8) Includes $7,500 of compensation deferred pursuant to a deferred compensation
plan which was adopted on Mr. Wicks' behalf in September 1994.
(9) Salary amounts included in table include amounts paid by APML. Mr. Ewart's
salary from APML was $34,115, $60,000 and $25,000 in 1995, 1994 and 1993,
respectively.
(10)Mr. Ewart was deemed to have resigned as a director, officer and employee of
ARC and APML effective June 19, 1995. Mr. Ewart received a severance of
$350,000, which was paid in 1996.
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<PAGE> 61
The following table sets forth stock options granted in 1995 to each of
ARC's executive officers named in the Summary Compensation Table and its current
executive officers. ARC did not issue any stock appreciation rights. The table
also sets forth the hypothetical gains that would exist for the options at the
end of their terms, assuming compounded rates of stock appreciation of five
percent (5%) and ten percent (10%). The actual value of the options will depend
on the market value of ARC's Common Stock. All option exercise prices are based
on market price on the date of grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS/ STOCK PRICE
UNDERLYING SARS GRANTED APPRECIATION
OPTIONS/ TO EMPLOYEES EXERCISE OR FOR OPTION TERM
DATE OF SARS GRANTED IN FISCAL BASE PRICE EXPIRATION --------------------
NAME GRANT (#) YEAR (US$/SH) DATE 5% 10%
- --------------------------------- -------- ------------ ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Ian B. Smith..................... 12/29/95 100,000 13.8% $4.25 12/29/05 $267,280 $677,341
Hector Cubas..................... 2/10/95 25,000 10% 4.62 2/9/00 72,637 184,077
11/22/95 50,000 4.18 11/22/05 131,439 333,092
Ralph E. Green................... 2/10/95 12,000 8.9% 4.62 2/9/00 34,866 88,357
11/22/95 50,000 4.18 11/22/05 131,439 333,092
Anthony T. Miller................ 11/22/95 50,000 6.9% 4.18 11/22/05 131,439 333,092
A.C. Perkins..................... 12/29/95 50,000 6.9% 4.25 12/29/05 133,640 338,670
Martin Quick..................... 11/22/95 50,000 6.9% 4.18 11/22/05 131,439 333,092
Bruce K. Thiesen................. 11/22/95 50,000 6.9% 4.18 11/22/05 131,439 333,092
Norman M. Ewart.................. 2/9/95 50,000 6.9% 4.62 6/19/96 11,550 23,100
Tony D.S. Wicks.................. 2/9/95 65,000 9.0% 4.62 6/19/96 14,950 29,900
</TABLE>
The following table sets forth the number of shares subject to unexercised
options and the value thereof at December 31, 1995 for each of ARC's executive
officers named in the Summary Compensation Table and its current executive
officers. All of such option were exercisable at December 31, 1995. No options
were exercised by such officers during 1995.
AGGREGATED FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
NAME YEAR END (#) AT FISCAL YEAR-END($) (1)
- --------------------------------------------- ---------------------------------- -------------------------
<S> <C> <C>
Ian B. Smith................................. 102,500 25,850
Hector Cubas................................. 75,000 15,600
Ralph E. Green............................... 65,000 15,600
Anthony T. Miller............................ 50,000 15,600
A.C. Perkins................................. 50,000 12,500
Martin Quick................................. 50,000 15,600
Bruce K. Thiesen............................. 50,000 15,600
Tony D.S. Wicks.............................. 98,000 --
Norman M. Ewart.............................. 83,000 --
</TABLE>
(1) Based on $4.50 per share value at December 31, 1995.
DIRECTORS COMPENSATION
ARC pays each non-employee director who attends any Board or Committee
meeting a fee of $1,000 per day irrespective of the number of meetings attended
on that day. Mr. Wickham, who serves in a consulting capacity in addition to his
Director responsibilities, receives a retainer of $500 per month. ARC has no
policy of additional compensation with respect to committees. During 1995, Mr.
Smith was employed by MRDI which performs feasibility studies and consulting
services to ARC. Mr. Woodyer is Managing Director of Endeavour which acts as a
consultant to ARC. See "Certain Relationships and Related Transactions".
61
<PAGE> 62
EMPLOYMENT AGREEMENTS
Mr. Ian B. Smith entered into an employment agreement with ARC on January
8, 1996. The agreement is for a three-year term expiring January 31, 1999 (the
"Term") and provides for (i) the payment of a minimum base salary of $225,000;
(ii) salary increases at the sole direction of the Board of Directors; (iii)
benefits, including group health, life insurance and pension/retirement plans,
to the extent that they are available to other executives of ARC; and (iv) use
of an automobile and reimbursement of expenses necessary to operate and maintain
the automobile. If ARC should terminate the agreement with cause, Mr. Smith is
entitled to receive any accrued but unpaid salary to the date of such
termination. If ARC should terminate the agreement without cause, Mr. Smith is
entitled to up to an additional twelve months of salary; provided, however, that
if there has been a "change of control" of ARC as defined in the agreement Mr.
Smith is entitled to salary for the remaining months in the Term but in no event
less than six months.
Mr. Anthony T. Miller, Martin Quick, and Bruce K. Thiesen entered into
employment agreements with ARC on November 7, 13 and 6, 1995 respectively. The
agreements are for three year terms expiring November 30, 1998 (the "Term") and
provide for (i) the payment of a minimum annual base salaries of $135,000;
$130,000; and $130,000; respectively (ii) salary increases at the sole direction
of the Board of Directors; (iii) and benefits, including group health, life
insurance and pension/retirement plans, to the extent that they are available to
other executives of ARC. If ARC should terminate the agreement with cause, the
individual is entitled to receive any accrued but unpaid salary to the date of
such termination. If ARC should terminate the agreement without cause, the
individual is entitled to up to an additional six months of salary, provided,
however, that if there has been a "change of control" of ARC as defined in the
agreement the individual is entitled to salary for the remaining months in the
Term but in no event less than six months.
Mr. A.C. (Cal) Perkins entered into an employment agreement with ARC on
January 1, 1996. The agreement covers the period of construction of the San
Gregorio Project through to commercial production, expected first quarter 1997
(the "Term") and provides for (i) the payment of a minimum annual base salary of
$150,000 (ii) salary increases at the sole direction of the Board of Directors;
(iii) and benefits, including group health, life insurance and
pension/retirement plans, to the extent that they are available to other
executives of ARC. The employment agreement can be extended by mutual consent of
both parties. If ARC should terminate the agreement with cause, Mr. Perkins is
entitled to receive any accrued but unpaid salary to the date of such
termination. If ARC should terminate the agreement without cause, Mr. Perkins is
entitled to up to an additional three months of salary.
Tony D.S. Wicks, the former President and Chief Executive Officer of ARC,
entered into an Employment Agreement with ARC effective March 1, 1993, which had
a three-year term with continuously renewing one-year terms thereafter unless
terminated by ARC or the employee. His agreement provided for (i) the payment of
a minimum base salary of $132,000; (ii) salary increases at the sole discretion
of the Board of Directors; (iii) benefits, including group health, life
insurance and pension/retirement plans, to the extent that they are available to
other executives of ARC; and (iv) use of an automobile and reimbursement of
expenses necessary to operate and maintain the automobile. Mr. Wicks resigned on
June 19, 1995 and received as severance $160,000 and the ARC car he was then
using. In addition Mr. Wicks was paid an annual salary of $60,000 as Chairman,
President and CEO of American Pacific Minerals Limited.
Norman M. Ewart, the former Vice President - Finance and Chief Financial
Officer of ARC, entered into an employment agreement with ARC effective March 1,
1993, which had a three-year term with continuously renewing one-year terms
thereafter unless terminated by ARC or the employee. His agreement provided for
(i) the payment of a minimum base salary of $132,000; (ii) salary increases at
the sole discretion of the Board of Directors; (iii) benefits, including group
health, life insurance and pension/retirement plans, to the extent that they are
available to other executives of ARC; and (iv) use of an automobile and
reimbursement of expenses necessary to operate and maintain the automobile. In
addition, Mr. Ewart was paid an annual salary of $60,000, as Vice President -
Finance of APML. Mr. Ewart was deemed to have resigned as a director, officer
and employee of ARC and APML effective June 19, 1995. Mr. Ewart received a
severance of $350,000, which was paid in 1996.
On June 21, 1995, ARC confirmed to Mr. Hector Cubas and Mr. Ralph E. Green
that if ARC terminated their employment within six months of a merger or
acquisition, they would be entitled to their base salary for six months
following termination.
62
<PAGE> 63
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Board of Directors of ARC
are Messrs. James F. Wickham and Neil Woodyer. They have served as such since
July 13, 1995. Prior to June 19, 1995, Mr. Ian B. Smith was a member of the
Compensation Committee of ARC, resigning that position upon becoming President
and Chief Executive Officer of ARC. Mr. Berman was a member of the Compensation
Committee of ARC from November 5, 1993 to July 13, 1995.
Mr. Smith was President of MRDI until August 31, 1995; MRDI has performed
feasibility studies and provided other consulting services on behalf of ARC with
respect to certain of its mining prospects and projects. During 1995, ARC paid
$365,000 to MRDI for these services (which includes $168,325 for Mr. Smith's
services to ARC).
H.A. Simons Ltd. ("Simons"), owner of MRDI since January 1, 1995, has
performed engineering design and other consulting services on behalf of ARC for
the San Gregorio Project. ARC has paid Simons $339,000 for these services.
Mr. Woodyer is Managing Director of Endeavour. On March 25, 1994, ARC
engaged Endeavour to act as its exclusive financial advisor to structure and
arrange project finance for the San Gregorio Gold Project. ARC agreed to pay a
retainer of $7,500 per month and to pay a success fee on the closing of a
project loan of 1.5% of the value of the loan. Endeavour has waived the right to
receive warrants issued by ARC as well as an additional entitlement to receive
$7,500 per month following receipt of ARC's project loan commitment that
otherwise would have been payable under the arrangement. Neil Woodyer, a
principal of Endeavour, was subsequently elected to the Board of Directors of
ARC at the Annual Meeting of Shareholders on June 19, 1995.
In April 1995, ARC also engaged the services of Endeavour to assist it in
arranging a joint venture partner for the San Gregorio Gold Project and to
advise it on potential mergers. On July 7, 1995 ARC expanded the scope of this
mandate to include the identification of business opportunities, evaluate and
assist in assets acquisitions and dispositions (including sales of the NNO
shares), identify and advise on corporate combinations and to assist in
implementing a growth plan for ARC. ARC agreed to pay a monthly retainer of
$7,500 and a success fee based upon the value of resulting transactions. The
retainer has been waived by Endeavour during the term of its San Gregorio Gold
Project finance mandate. The success fee, payable on transaction closing, is
based upon 4% of the first $10 million and 2% thereafter of the value of the
consideration paid to or exchanged with ARC or ARC stockholders in the
transaction, except as to sales of NNO shares where the fee is 1% of the
consideration paid. Endeavour has agreed to reduce its success fee payable at
closing of the proposed Merger by the amounts realized by Endeavour on ARC's NNO
Share sale transactions. During 1995, Endeavour charged ARC $365,000 for
services provided to ARC.
During 1995, Mr. Wickham was paid a total of $11,250 for consulting
services performed on behalf of ARC, including directors' fees but excluding
reimbursable travel expenses.
63
<PAGE> 64
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning stock
ownership of each person who is known to ARC to be the direct or indirect
beneficial owner of five percent (5%) or more of ARC's outstanding Common Stock
and of each director, each executive officer named in the Summary Compensation
Table in "Executive Compensation" above and its current executive officers and
all directors and executive officers as a group as of February 23, 1996. Each
percentage is calculated by assuming that the named holder converted or
exercised all of such holder's securities convertible into, or exercisable for,
shares of ARC Common Stock at a time when no other holder did so, irrespective
of the conversion or exercise price thereof. Except as otherwise noted, each
person has sole voting and investment power with respect to the shares shown as
beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING STOCK (1)
- --------------------------------------------------------- -------------------- ---------------------
<S> <C> <C>
Casa di Risparmio di Venezia (2)......................... 948,000 7.01%
Piazzo San Marco, 4216
Venezia 30124
Italy
DIRECTORS AND EXECUTIVE OFFICERS
Ian B. Smith............................................. 102,766(3) *
Tony D.S. Wicks.......................................... 98,751(4) *
Norman M. Ewart.......................................... 83,000(5) *
Richard E. Berman........................................ 53,425(6) *
James F. Wickham......................................... 50,000(5) *
Neil Woodyer............................................. 50,000(5) *
Hector Cubas............................................. 75,000(5) *
Ralph E. Green........................................... 62,000(5) *
Anthony T. Miller........................................ 50,000(5) *
A.C. Perkins............................................. 50,000(5) *
Martin Quick............................................. 50,000(5) *
Bruce K. Thiesen......................................... 50,000(5) *
All Directors and Executive Officers as a group (12 774,942(7) 5.52%
persons)...............................................
</TABLE>
Notes:
* less than 1%
(1) As of February 26, 1996, there were 13,529,922 ARC Common Stock issued and
outstanding.
(2) These shares have been issued upon conversion of the $7,000,000 principal
amount of the 14% convertible subordinated notes of ARC due December 31,
1998, which were issued and converted in April 1994.
(3) Includes currently exercisable options to purchase 102,500 shares of ARC
Common Stock and 266 shares of ARC Common Stock owned by Catherine C. Smith,
the wife of Mr. Smith, of which Mr. Smith disclaims beneficial ownership.
(4) Includes currently exercisable options to purchase 98,000 shares of ARC
Common Stock.
(5) Consists of currently exercisable options for number of shares shown.
(6) Includes currently exercisable options to purchase 52,500 shares of ARC
Common Stock.
(7) Includes currently exercisable options to purchase 773,000 shares of ARC
Common Stock.
64
<PAGE> 65
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ARC
During 1995, ARC owned a majority of the issued and outstanding capital
stock of APML. ARC sold all of its shares of APML on December 29, 1995. Prior to
August 25, 1995, Mr. Tony D.S. Wicks, ARC's former President and Chief Executive
Officer, was Chairman of the Board, President and Chief Executive Officer of
APML. Prior to June 19, 1995, Mr. Norman M. Ewart, ARC's former Vice President
- -- Finance and a director, was the Secretary of APML. After July 25, 1995, Mr.
Neil Woodyer, a director of ARC, became Chairman of the Board, President and
Chief Executive Officer of APML until December 29, 1995. He received no
compensation.
In May 1995, ARC acquired an additional 6,956,522 shares of APML for $3
million.
On December 29, 1995, ARC sold its 78 percent interest in APML to an
unrelated party, Michael J. Savage, acting for himself and as agent for certain
other principals ("Savage"), for $40,000.
APML owns, through its subsidiary company, APM USA, the Goldfield mining
properties located near Goldfield, Nevada. Prior to the sale, a corporate
reorganization of APML was completed pursuant to which all assets and
liabilities of APML were transferred to and assumed by APM USA.
Pursuant to an operator and service agreement, ARC will continue to manage
the Goldfield properties for APM USA. Additionally ARC will continue to be
obligated to advance APM USA funds for the costs related to the closure and
reclamation of the Goldfield Mine. ARC also assumed $2 million of convertible
notes due serially in December 1997, 1998 and 1999 from APML.
ARC's advances to APM USA for the Goldfield closure and reclamation, as
well as APM USA's pre-existing obligations to ARC, are secured by the assets and
stock of APM USA and are due December 29, 1996. Under the loan terms, APML
agreed to cause the election and appointment of ARC's designees as the directors
and officers of AMP USA. The December 31, 1995 receivable from APM USA, was
written down to approximately $3.4 million, and reflects management's best
estimate of the fair value of the security interest, including approximately
$2.9 million for mineral properties and $500,000 for plant and equipment and
working capital.
Except for the sale of APML to Savage, all transactions between ARC and
APML during 1995 and 1994 were eliminated in consolidation. APML revenues, costs
and expenses and loss on operations included in ARC's 1995 Consolidated
Statement of Operations are approximately $3.8 million, $12.2 million and $8.4
million, respectively.
During 1995, losses applicable to the minority interest of APML exceeded
the minority's interest in the equity capital of APML. Losses applicable to the
minority interest and charged against ARC's interest during 1995 were
approximately $1.3 million.
ARC agreed to indemnify APML from and against any and all tax liabilities
arising from the corporate reorganization of APML or from the filing of APML tax
returns through December 31, 1995, liabilities of APML existing on December 28,
1995, and environmental liabilities arising from APML's mining properties or
mining thereon. (See "Item 3. Legal Proceedings.")
Reference is made to the description of related transactions in Item 11,
"Executive Compensation -- Compensation Committee Interlocks and Insider
Participation" which is hereby incorporated by reference.
65
<PAGE> 66
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Refer to Part II, Item 8.
(2) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- --------------------------------------------------------------------------------------
<C> <S>
2.1 Second Amended Plan of Reorganization dated December 31, 1991 of New Gold Inc.
(incorporated by reference to Exhibit 2* to the Registrant's Form 10 filed on January
14, 1992 as amended on May 8, 1992, July 2, 1992, August 20, 1992 and September 1,
1992).
2.2 Merger Agreement and Plan of Reorganization, dated March 5, 1996, among Rea Gold
Corporation, American Resource Corporation, Inc., Rea Gold (US) Corporation and Rea
America Corp. (attached as Appendix A to the Prospectus/Joint Proxy Statement)
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3a* to the
Registrant's Form 10 filed on January 14, 1992 as amended on May 8, 1992, July 2,
1992, August 20, 1992 and September 1, 1992).
3.2 By-Laws (incorporated by reference to Exhibit 3b* to the Registrant's Form 10 filed on
January 14, 1992 as amended on May 8, 1992, July 2, 1992, August 20, 1992 and
September 1, 1992).
4 Form of Warrant Agreement (incorporated by reference to Exhibit 4b to the Company's
Registration Statement on Form 10 filed on January 14, 1992, as amended on May 8,
1992, July 2, 1992, August 20, 1992 and September 1, 1992).
10.5 Option dated as of January 31, 1992 to Purchase Common Stock of Tarot Financial
Investments, Inc. between American Resources Corporation, Inc. and Hanusueli Gasser.
(incorporated by reference to Exhibit 10m to the Company's Registration Statement on
Form 10 filed on January 14, 1992, as amended on May 8, 1992, July 2, 1992, August 20,
1992 and September 1, 1992)
10.6 Stock Purchase Agreement, dated January 22, 1992, by and among Bond Gold Limited, Bond
International Gold, Inc. and Tarot Financial Investments, Inc. (incorporated by
reference to Exhibit 10n to the Company's Registration Statement on Form 10 filed on
January 14, 1992, as amended on May 8, 1992, July 2, 1992, August 20, 1992 and
September 1, 1992)
10.7 Royalty Deed dated as of February 21, 1992, from Tarot Financial Investments, Inc. to
Bond Gold Limited (incorporated by reference to Exhibit 10o to the Company's
Registration Statement on Form 10 filed on January 14, 1992, as amended on May 8,
1992, July 2, 1992, August 20, 1992 and September 1, 1992)
10.8 Mining Venture Agreement, dated as of August 1, 1988, between Gold Standard, Inc. and
Compania Minera San Jose, S.A. (incorporated by reference to Exhibit 10t to the
Company's Registration Statement on Form 10 filed on January 14, 1992, as amended on
May 8, 1992, July 2, 1992, August 20, 1992 and September 1, 1992)
10.9 Cerro San Carlos Production Agreement, dated February 22, 1995, between Gold Standard,
Inc. and Compania Minera San Jose, S.A. (incorporated by reference to Exhibit 10.20 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994)
10.10* Agreement between American Resource Corporation, Inc. and Endeavour Financial Inc.
dated March 21, 1994, for advisory services to assist with the financing of the San
Gregorio Project.
10.11* Agreement between American Resource Corporation, Inc. and Endeavour Financial Inc.,
effective July 7, 1995, for exclusive financial advisory services to American Resource
Corporation, Inc. to identify opportunities and to assist in implementing a growth
plan for the Company
10.12 Agreement between American Resource Corporation, Inc. and H.A. Simons Limited for
Phase 1 Basic Engineering Services for the San Gregorio Gold Project in Uruguay
(incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995)
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- --------------------------------------------------------------------------------------
<C> <S>
10.13* Contracts with Michael J. Savage, American Pacific Minerals, Ltd. and American Pacific
Minerals (U.S.A.) Inc. relating to the sale of American Pacific Minerals, Ltd., as
follows:
(a) Offer to Purchase between Michael J. Savage and American Resource
Corporation, Inc. dated November 24, 1995.
(b) Amending Agreement dated December 15, 1995, between Michael J. Savage and
American Resource Corporation, Inc.
(c) Operator and Service Agreement dated December 28, 1995, between American
Pacific Minerals (U.S.A.) Inc. and American Resource Corporation, Inc.
(d) Indemnity Agreement dated December 28, 1995, between American Resource
Corporation, Inc. and American Minerals Ltd.
(e) Loan Agreement dated December 31, 1995, between American Resources
Corporation, Inc. and American Pacific Minerals (U.S.A.) Inc.
(f) Guarantee and Stock Pledge Agreement dated December 31, 1995, between
American Pacific Minerals Ltd. And American Resource Corporation, Inc.
10.14* Employment contracts with the following executive officers:
(a) Ian B. Smith
(b) Hector Cubas
(c) Ralph E. Green
(d) Anthony T. Miller
(e) A.C. Perkins
(f) Martin Quick
(g) Bruce K. Thiesen
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
(B) REPORTS FILED ON FORM 8-K.
None.
67
<PAGE> 68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to its
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
AMERICAN RESOURCE CORPORATION, INC.
DATE: June 4, 1996 by: /s/ BRUCE K. THIESEN
---------------------------------------
Bruce K. Thiesen
Chief Financial Officer and
Principal Accounting Officer
68
<PAGE> 69
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
- -------- ----------------------------------------------------------------------------
<C> <S> <C>
2.1 Second Amended Plan of Reorganization dated December 31, 1991 of New Gold
Inc. (incorporated by reference to Exhibit 2* to the Registrant's Form 10
filed on January 14, 1992 as amended on May 8, 1992, July 2, 1992, August
20, 1992 and September 1, 1992).
2.2 Merger Agreement and Plan of Reorganization, dated March 5, 1996, among Rea
Gold Corporation, American Resource Corporation, Inc., Rea Gold (US)
Corporation and Rea America Corp. (attached as Appendix A to the
Prospectus/Joint Proxy Statement)
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3a* to the
Registrant's Form 10 filed on January 14, 1992 as amended on May 8, 1992,
July 2, 1992, August 20, 1992 and September 1, 1992).
3.2 By-Laws (incorporated by reference to Exhibit 3b* to the Registrant's Form
10 filed on January 14, 1992 as amended on May 8, 1992, July 2, 1992, August
20, 1992 and September 1, 1992).
4 Form of Warrant Agreement (incorporated by reference to Exhibit 4b to the
Company's Registration Statement on Form 10 filed on January 14, 1992, as
amended on May 8, 1992, July 2, 1992, August 20, 1992 and September 1,
1992).
10.5 Option dated as of January 31, 1992 to Purchase Common Stock of Tarot
Financial Investments, Inc. between American Resources Corporation, Inc. and
Hanusueli Gasser. (incorporated by reference to Exhibit 10m to the Company's
Registration Statement on Form 10 filed on January 14, 1992, as amended on
May 8, 1992, July 2, 1992, August 20, 1992 and September 1, 1992)
10.6 Stock Purchase Agreement, dated January 22, 1992, by and among Bond Gold
Limited, Bond International Gold, Inc. and Tarot Financial Investments, Inc.
(incorporated by reference to Exhibit 10n to the Company's Registration
Statement on Form 10 filed on January 14, 1992, as amended on May 8, 1992,
July 2, 1992, August 20, 1992 and September 1, 1992)
10.7 Royalty Deed dated as of February 21, 1992, from Tarot Financial
Investments, Inc. to Bond Gold Limited (incorporated by reference to Exhibit
10o to the Company's Registration Statement on Form 10 filed on January 14,
1992, as amended on May 8, 1992, July 2, 1992, August 20, 1992 and September
1, 1992)
10.8 Mining Venture Agreement, dated as of August 1, 1988, between Gold Standard,
Inc. and Compania Minera San Jose, S.A. (incorporated by reference to
Exhibit 10t to the Company's Registration Statement on Form 10 filed on
January 14, 1992, as amended on May 8, 1992, July 2, 1992, August 20, 1992
and September 1, 1992)
10.9 Cerro San Carlos Production Agreement, dated February 22, 1995, between Gold
Standard, Inc. and Compania Minera San Jose, S.A. (incorporated by reference
to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994)
10.10 Agreement between American Resource Corporation, Inc. and Endeavour
Financial Inc. dated March 21, 1994, for advisory services to assist with
the financing of the San Gregorio Project.
10.11 Agreement between American Resource Corporation, Inc. and Endeavour
Financial Inc., effective July 7, 1995, for exclusive financial advisory
services to American Resource Corporation, Inc. to identify opportunities
and to assist in implementing a growth plan for the Company
</TABLE>
<PAGE> 70
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION OF EXHIBIT PAGE NUMBER
<C> <S> <C>
10.12 Agreement between American Resource Corporation, Inc. and H.A. Simons
Limited for Phase 1 Basic Engineering Services for the San Gregorio Gold
Project in Uruguay (incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1995)
10.13 Contracts with Michael J. Savage, American Pacific Minerals, Ltd. and
American Pacific Minerals (U.S.A.) Inc. relating to the sale of American
Pacific Minerals, Ltd., as follows:
(a) Offer to Purchase between Michael J. Savage and American Resource
Corporation, Inc. dated November 24, 1995.
(b) Amending Agreement dated December 15, 1995, between Michael J.
Savage and American Resource Corporation, Inc.
(c) Operator and Service Agreement dated December 28, 1995, between
American Pacific Minerals (U.S.A.) Inc. and American Resource
Corporation, Inc.
(d) Indemnity Agreement dated December 28, 1995, between American
Resource Corporation, Inc. and American Minerals Ltd.
(e) Loan Agreement dated December 31, 1995, between American Resources
Corporation, Inc. and American Pacific Minerals (U.S.A.) Inc.
(f) Guarantee and Stock Pledge Agreement dated December 31, 1995,
between American Pacific Minerals Ltd. And American Resource
Corporation, Inc.
10.14 Employment contracts with the following executive officers:
(a) Ian B. Smith
(b) Hector Cubas
(c) Ralph E. Green
(d) Anthony T. Miller
(e) A.C. Perkins
(f) Martin Quick
(g) Bruce K. Thiesen
21 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
<PAGE> 1
AMERICAN RESOURCE CORPORATION
EXHIBIT NO. 21
SUBSIDIARIES OF THE REGISTRANT
The Registrant has no parent.
<TABLE>
<CAPTION>
STATE OR OTHER PERCENTAGE OF
JURISDICTION OF OWNERSHIP BY
INCORPORATION IMMEDIATE
OR ORGANIZATION PARENT
---------------------- -------------
<S> <C> <C>
Registrant:
American Resource Corporation Nevada
Consolidated Subsidiaries:
American Diamond Resource Inc. British Columbia 100%
Bolir S.A. Uruguay 100
Brimol S.A. Uruguay 100
Dalvan S.A. Uruguay 100
Glendora S.A. Uruguay 95
Montemura, S.A. Uruguay 100
Stel (BVI) Inc. British Virgin Islands 100
Stel S.A. Uruguay 100
Tarot Financial Investments, Inc. Panama 100
Compania Minera San Jose de Uruguay Uruguay 100
Compania Minera San Jose S.A. Uruguay 100
Maria Albina SRL Uruguay 100
La Meseta, S.A. Uruguay 100
Santa Barbara SRL Uruguay 100
Puenta Nuevo S.A. Uruguay 100
Retamosa SRL Uruguay 100
Mendoza SRL Uruguay 100
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMERICAN
RESOURCE CORPORATION INC., FORM 10K/A FOR THE PERIOD ENDED DECEMBER 31, 1995 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,203
<SECURITIES> 25,433
<RECEIVABLES> 71
<ALLOWANCES> 0
<INVENTORY> 1,494
<CURRENT-ASSETS> 29,897
<PP&E> 16,202
<DEPRECIATION> 4,113
<TOTAL-ASSETS> 50,745
<CURRENT-LIABILITIES> 9,038
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 76,753
<TOTAL-LIABILITY-AND-EQUITY> 50,744
<SALES> 9,057
<TOTAL-REVENUES> 35,040
<CGS> 16,716
<TOTAL-COSTS> 31,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,100
<INCOME-PRETAX> 3,544
<INCOME-TAX> (6,024)
<INCOME-CONTINUING> 9,568
<DISCONTINUED> 0
<EXTRAORDINARY> 367
<CHANGES> 0
<NET-INCOME> 9,766
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
</TABLE>
