<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-23042
MK GOLD COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 82-0487047
---------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 East South Temple, Suite 2100, Salt Lake City, Utah 84111
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(Address of principal executive offices) (Zip Code)
(801) 237-1700
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. On November 8,
1996, there were 19,397,800 outstanding shares of the Registrant's Common Stock,
par value $.01 per share.
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PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
As more fully described in the accompanying notes, the unaudited
interim consolidated financial statements contained in this report should be
read in conjunction with the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1996 (the "1996 10-K"). In the 1996 10-K, the Company
reported that the Company suffered significant losses in fiscal 1996 as a result
of serious problems at each of the Company's operations and projects. In
addition, the Company reported an impairment of assets totaling $33.9 million.
Accordingly, the 1996 10-K contains information relevant to an analysis of the
financial information contained in this report and for purposes of comparing the
Company's results of operations for the six months ended September 30, 1996 with
the same period in the prior year.
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MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1996 1995 1996 1995
------------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenue
Product sales 7,488 $ 5,102 8,116 $ 12,643
Mining services 2,858 2,514 5,650 4,432
----------- ----------- ----------- -----------
Total revenue 10,346 7,616 13,766 17,075
Operating expenses
Product sales 7,833 5,746 10,377 13,019
Mining services 2,035 1,849 4,289 3,186
----------- ----------- ----------- -----------
Total operating expenses 9,868 7,595 14,666 16,205
Gross profit (loss) 478 21 (900) 870
Exploration and project investigation costs (580) (512) (971) (810)
General and administrative expense (690) (1,001) (1,237) (1,660)
Provision for Closure and Reclamation of
American Girl Joint Venture
Operations and Properties (2,100) (2,100)
Equity in (loss) of unconsolidated affiliate 0 (509) 0 (762)
----------- ----------- ----------- -----------
Loss from operations (2,892) (2,001) (5,208) (2,362)
Investment income 189 362 371 863
Interest expense (23) (190) (55) (710)
----------- ----------- ----------- -----------
Loss before income taxes (2,726) (1,829) (4,892) (2,209)
Income tax benefit (expense) (290) 909 146 1,027
----------- ----------- ----------- -----------
Net loss $ (3,016) $ (920) $ (4,746) $ (1,182)
========== ========== ========== ===========
Loss per common share $ (.16) $ (.05) $ (.25) $ (.06)
Common shares used to compute loss per share 19,397,800 19,397,800 19,397,800 19,397,800
</TABLE>
The accompanying notes are an integral part of the financial statements.
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MK GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND MARCH 31, 1996 (AUDITED)
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1996 1996
- -------------------------------------------- --------- -------
<S> <C> <C>
Current assets
Cash and cash equivalents 11,963 $15,933
Securities available for sale 1,997 1,950
Gold bullion held for sale 5,895 2,915
Receivables 1,068 1,654
Refundable income taxes 917 -
Inventories
Ore and in process 1,422 3,016
Materials and supplies 1,946 1,065
Other 463 464
------- -------
Total current assets 25,671 26,997
------- -------
Investment in unconsolidated affiliates - 1,197
Property, plant and mine development, net 4,981 6,514
Deferred income taxes 3,283 3,762
Restricted cash 860 736
------- -------
TOTAL ASSETS $34,795 $39,206
======= =======
</TABLE>
(CONTINUED)
4
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<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996
- -------------------------------------------------------------- -------------- ----------
<S> <C> <C>
Current liabilities
Accounts payable 2,954 $ 3,013
Income taxes payable - 808
Deferred income taxes 203 203
Other accrued liabilities 996 780
-------- --------
Total current liabilities 4,153 4,804
-------- --------
Reclamation and mine closure reserves 4,323 1,994
Deferred revenue 6,357 7,409
-------- --------
Total liabilities 14,833 14,207
-------- --------
STOCKHOLDERS' EQUITY
Common stock, par value $.01, authorized 40,000,000 shares,
issued 19,397,800. 194 194
Capital in excess of par value 67,105 67,105
Retained deficit (47,338) (42,304)
Net unrealized gain on securities available for sale 54 57
Deferred compensation -- restricted stock (53) (53)
-------- --------
Total stockholders' equity 19,962 24,999
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 34,795 $ 39,206
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
(CONCLUDED)
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MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30
1996 1995
--------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,746) $ (1,182)
------- --------
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation, depletion and amortization 2,344 4,596
Deferred revenue (1,130) (1,004)
Deferred taxes 479 (2)
Equity in loss of unconsolidated affiliate - 761
Changes in operating assets and liabilities:
Trading securities, net - 811
Gold bullion held for sale (2,980) 309
Receivables 586 622
Refundable income taxes (917) (1,375)
Inventories 713 (75)
Other assets (1) 86
Restricted cash (125) (98)
Reclamation liabilities 2,329 123
Income taxes payable (808)
Accounts payable and accrued expenses 157 615
Other adjustments 126 194
------- --------
Total adjustments 773 5,563
------- --------
Net cash provided (used) by operating activities (3,973) 4,381
------- --------
INVESTING ACTIVITIES:
Additions to PP&E (1,153) (4,689)
Investment in Jerooy Gold Company (1,472)
Proceeds from disposition of PP&E 7 29
Investment in unconsolidated affiliate - (1,110)
Investment in securities available for sale (47) 8,634
Proceeds from close of hedge program - 1,060
Proceeds from sale of unconsolidated subsidiary 1,196 -
------- --------
Net cash (used) in investing activities 3 2,452
------- --------
FINANCING ACTIVITIES:
Net cash (used) for payment of long-term debt - (20,008)
Equipment financing - (9)
Purchase of Treasury Stock - (1)
------- --------
Net cash (used) in financing activities - (20,018)
------- --------
Increase (decrease) in cash and cash equivalents (3,970) (13,185)
Cash and cash equivalents at beginning of period 15,933 17,056
------- --------
Cash and cash equivalents at the end of the period $11,963 $ 3,871
======= ========
Supplemental disclosures of cash flow information
Interest paid $ 55 $ 112
Income taxes paid net $ 1,100 $ 0
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
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MK GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DOLLAR AMOUNTS IN THOUSANDS)
1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting of normal recurring
adjustments) that are, in the opinion of management, necessary to the fair
presentation of the financial position, results of operations, and cash
flows for the interim periods. The financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements for the
fiscal year ended March 31, 1996, which are included in the Company's Annual
Report filed on Form 10-K for such year (the "1996 10-K"). The results of
operations for the six months ended September 30, 1996, are not necessarily
indicative of the results to be expected for the full year. The
consolidated balance sheet at March 31, 1996, was extracted from the audited
annual financial statements and does not include all disclosures required by
generally accepted accounting principles for annual financial statements.
In the 1996 10-K, the Company reported significant losses as a result of
serious problems at each of the Company's operations and projects. In
addition, the Company reported an impairment of assets totaling $33.9
million. Accordingly, the 1996 10-K contains information relevant to an
analysis of the financial information contained in this report and for
purposes of comparing the Company's results of operations for the six months
ended September 30, 1996 with the same period in the prior year. On
September 5, 1996, the Company announced the suspension of operations at the
American Girl Mining Joint Venture. In addition to the operating losses of
$1.4 million incurred at the American Girl operations during the second
quarter, the Company recorded a charge of $2.1 million during the quarter
ended September 30, 1996 to provide for future mine closure and reclamation
costs.
2. RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
3. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
On September 10, 1996 MinAmerica Corporation exercised an option to purchase
the Company's investment in Arlo Resources, Ltd. for approximately $1.2
million. The purchase price has been received and the sale has been
completed.
4. MINING JOINT VENTURES
The Company owns a 53% undivided interest in the American Girl Mining Joint
Venture (the "AGMJV"), which operates a gold mine in Imperial County,
California, and owns a 25% undivided interest in the Castle Mountain Venture
(the "CMV"), which operates a gold mine in San Bernardino County,
California. Results of operations from both joint
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ventures have been proportionately reflected in the accompanying
consolidated financial statements. Any differences between the Company's
share of each venture's product sales and net income (loss) before taxes and
the amounts shown on these schedules is due to differences in the timing of
revenue recognition. Income statement information for each of these joint
ventures is summarized below. The amounts below reflect the balances on the
joint venture books and do not reflect the impairment reported in the
Company's 1996 10-K. See Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the
results of operations after adjusting for previously recognized write-offs
relating to the ventures.
AMERICAN GIRL MINING JOINT VENTURE
<TABLE>
<CAPTION>
TOTAL VENTURE
--------------------
Results of Operations
Six Months Ended Sept 30 1996 1995
------------------------------------- -------- -------
<S> <C> <C>
Product sales $ 9,904 $ 8,601
(Loss) before taxes (14,860) (2,988)
</TABLE>
CASTLE MOUNTAIN VENTURE
<TABLE>
<CAPTION>
TOTAL VENTURE
-------------------
Results of Operations
Six Months Ended Sept 30 1996 1995
------------------------------------- -------- -------
<S> <C> <C>
Product sales $ 24,228 $27,772
Income (loss) before taxes (1,792) 2,450
</TABLE>
5. INCOME TAXES
The benefit for income taxes includes the cash refund that would result from
the carry-back of the loss for the six months ended September 30, 1996,
provided that the Company does not incur additional income tax expense for
the remainder of fiscal year 1997. In the prior year, the Company recorded
a tax benefit relating to deferred revenue. The amount of deferred revenue
recognized during the second quarter did not result in the recognition of a
tax benefit. Accordingly, the Company reduced its deferred tax asset.
6. JEROOY GOLD COMPANY DISPUTE
On August 9, 1996, the Company received notice that Kyrghyzaltyn State
Concern ("Kyrghyzaltyn") had filed a Request for Arbitration with the
Arbitration Institute of the Stockholm Chamber of Commerce relating to the
Jerooy Gold Project located in the Kyrghyz Republic in the former Soviet
Union. The Company owns a 30% interest in the Jerooy Gold Company
("Jerooy"), a joint stock company established to study, develop and mine the
Jerooy Gold Project. Kyrghyzaltyn owns the remaining 70%. In view of
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unresolved political and logistic problems and economic uncertainties
associated with Jerooy, the Company recorded an impairment of its remaining
investment in Jerooy in fiscal 1996.
The Company responded to Kyrghyzaltyn's request for arbitration by filing a
counter claim with the Arbitration Institute of the Stockholm Chamber of
Commerce. The Company subsequently entered into negotiation with
Kyrghyzaltyn to determine if Kyrghyzaltyn was willing to modify the existing
agreements to allow the project to be more attractive to lenders and parties
required to provide loan guarantees. Upon determination that Kyrghyzaltyn
was unwilling or unable to modify project agreements, the Company and
Kyrghyzaltyn entered into negotiations to dissolve Jerooy Gold Company,
release the Company from liability (including liability from additional
legal proceedings and arbitration), and compensate the Company for certain
expenditures related to the study of the feasibility of the project.
The Company and Kyrghyzaltyn reached an agreement on October 22, 1996 to
dissolve Jerooy Gold Company under the following conditions:
. MK Gold is released from further liability for events surrounding the
investigation and feasibility study of the project.
. Kyrghyzaltyn will pay MK Gold $1,000,000 if Kyrghyzaltyn executes a
development agreement with another party.
. Kyrghyzaltyn will pay MK Gold an additional $1,500,000 from future
revenue, if any, generated from gold production at the project.
Kyrghyzaltyn withdrew its request for arbitration and the Company has no
further obligations with respect to the Jerooy project. Due to the
uncertainty as to whether the Company will receive any further payments
under the provisions of the agreement, no value for the future payments has
been recorded on the September 30, 1996 balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The purpose of this section is to discuss and analyze the Company's consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996.
GENERAL
In the 1996 10-K, the Company reported serious problems with respect to each of
its operations and projects. As a result of these difficulties, the Company
suffered significant losses in fiscal 1996. Additionally, the Company
determined an impairment of assets totaling $33.9 million.
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The impairment of assets and a reduction of the Company's deferred tax assets,
added to operating losses of $7.1 million, resulted in a combined loss of $43.4
million for fiscal 1996.
American Girl--Oro Cruz. The Company holds a 53% interest in the American Girl
Mining Joint Venture (the "AGMJV"). After completing a thorough evaluation of
shut-down and alternative operating strategies for operations at the AGMJV, the
Company determined that no practical mining and processing methods could be
developed which would justify continued operations. On September 5, 1996 the
Company therefore announced that it was suspending operations at the AGMJV.
As part of the suspension plan, the Company and its joint venture partner, Hecla
Mining Company, agreed to a modified program and budget for the remainder of the
year which called for a suspension of full scale open pit and underground mining
effective mid-September. Crushing and milling operations ceased in mid-October.
Reclamation activities of the surface and underground operations began in mid-
September. It is expected that full mine reclamation will be completed in
approximately two years. All appropriate government agencies were informed as
to the Company's actions.
Cost estimates and budgets for the suspension of operations, closure and
reclamation have been developed. The Company's share of expected costs, from
October 1, 1996, associated with the closure resulted in a second quarter charge
of $2.1 million. This charge is in addition to the losses of $(1.4) million and
$(3.0) million for the Company's share of the operating losses incurred by the
AGMJV for the quarter and six months ended September 30, 1996.
Castle Mountain. The Company holds a 25% interest in the Castle Mountain
Venture (the "CMV"). As described in the 1996 10-K and first quarter 10-Q, the
Castle Mountain Mine ore grades dropped as new and lower grade pits were phased
in. These lower grades led to the Company taking a charge related to its
investment in fiscal 1996. With the move to the new pit areas, gold production
has declined and operating costs have increased significantly compared to the
old pit areas. The Company's share of the CMV income, after giving effect to
its reduced investment, was $.4 million and $.5 million for the three and six
month periods ended September 30, 1996, respectively.
Contract Mining. Mining services are provided to CMV at the Castle Mountain
Mine by the Company. The Company is operating under the new Mining Contract
which resulted from the settlement of a contract dispute. The 1996 10-K
described the dispute which led to the adoption of a new mining contract and
unit price of $.74 per ton.
The new contract price is significantly below the original contract price. To
improve contract mining profitability, cost reduction programs have been
implemented. These programs have been successful in reducing the cost-per-ton
mined. Contract mining profitability was compromised during the second quarter
by longer truck hauls, poor loading unit availability, and reduced truck load
factors. A new loading unit was delivered and put into service at the end of
the second quarter which will significantly improve loader availability. The
lower density ores currently being mined have reduced the truck load factors.
Sideboards have been added to the haul trucks to increase haul truck capacity.
The Company recorded a profit related to its
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contract mining operations of $.1 million and $.3 million for the three and six
months ended September 30, 1996, respectively.
Exploration. The Company has under way a vigorous search for profitable
investment opportunities. During the second quarter mineral properties in Chile
and Russia were examined. Since none of these met the Company's economic
criteria, no acquisitions were made. The search for prospective properties in
South America continues.
In the month of August, a gold exploration program in the Basin and Range
Province of Nevada and California was initiated. This effort is based on
intensive use of topographic, geological, geochemical, and geophysical data
bases, portions of which have not been previously used in gold exploration.
This program will continue through the winter, weather permitting.
Results of Operations
Gold Production: The Company's attributable share of gold production for the
three and six month periods ended September 30, 1996 was 14,161 ounces and
29,129 ounces, respectively, compared to 13,258 ounces and 29,660 ounces for the
three and six month periods ended September 30, 1995. This represents a 7%
increase in production for the second quarter and a 2% decrease in production
for the six months ended September 30, 1996.
The Company's share of production at the Castle Mountain Venture decreased 13%
to 15,568 ounces for the six months ended September 30, 1996, compared to 17,918
ounces for the six months ended September 30, 1995. The reduction in production
is due to the lower ore grade experienced in the new Oro Belle, Hart Tunnel and
Jumbo (collectively, "OBHT") pits. Operations in the higher grade Lesley Ann
and Jumbo South pits ceased in December, 1995.
The Company's share of gold production from the AGMJV increased 15% to 13,561
ounces for the six months ended September 30, 1996, compared to 11,742 ounces
for the six months ended September 30, 1995. Production volumes at the AGMJV
during the second quarter of fiscal year 1997 increased compared to the second
quarter of fiscal year 1996. Production volumes at the AGMJV were lower for the
six months ended September 30, 1995 as a result of permitting delays associated
with the Oro Cruz Mine. As mentioned above, mining operations have been
suspended at the AGMJV. A limited amount of gold production will be obtained
from continued leaching and rinsing of the heap leach pads and revenue therefrom
will be used to defray a portion of closure and reclamation costs.
Revenue: Product sales revenue was $7.5 million and $8.1 million for the three
and six month periods ended September 30, 1996, respectively, compared to $5.1
million and $12.6 million for the same periods in 1995. Product sales revenue
includes the recognition of $.3 and .4 million of deferred revenue associated
with hedging activity for three and six months ended September 30, 1996,
respectively. During the first quarter only one delivery was made under a
forward sale agreement. Gold production for the first quarter was temporarily
held in inventory and forward sales contracts maturing during the first quarter
were rolled forward to the second quarter. During July, 1996 delivery was made
on several forward contracts. The average price realized per ounce of gold was
$401 for each of the three and six month periods
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ended September 30, 1996, compared to $401 and $397 during the same periods for
the prior year.
Revenue from mining services is primarily dependent upon the quantities of
materials mined during the period. For the three and six month periods ended
September 30, 1996, revenue increased to $2.9 million and $5.7 million,
respectively, compared to $2.5 million and $4.4 million for the same periods in
1995. The recognition of deferred revenue relating to the settlement of the
dispute with the Company's joint venture partner in fiscal 1996 represents $.4
million and $4.8 million of the increase, respectively. Mining services revenue
increased despite a reduction in the contract price from $1.21 to $.74 per ton
under the Company's contract mining agreement with the CMV. Volumes at the
Castle Mountain Mine increased during the first quarter of fiscal 1997 as a
result of the increased volumes experienced in the OBHT pits compared to volumes
in the Lesley Ann pit during the comparable periods in fiscal 1996.
Hedging Activity: For the six month period ended September 30, 1996, the
average gold price realized was $401 per ounce compared to an average spot price
of $388. For the six months remaining in fiscal 1997, the Company has sold
forward 13,400 ounces at an average price of $412 per ounce, sold call options
on 9,600 ounces at an average price of $416 per ounce, and bought put options on
4,800 ounces at an average price of $375 per ounce. For fiscal 1998, the
Company has sold forward 4,000 ounces at an average price of $406 per ounce.
The Company has the ability to extend forward and option positions into the
future.
Gross Profit: Gross profit from product sales before recognition of deferred
revenue decreased to ($.6) million and ($2.6) million for the three and six
months ended September 30, 1996, respectively, compared to a loss of ($0.6)
million and ($0.4) million for the three months and six months ended September
30, 1995. Product margins have declined as a result of increased operating
costs. Reduced ore grades at both the AGMJV and the CMV have negatively impacted
mining costs. As described above, mining operations have been suspended at the
AGMJV.
Gross profit from mining services before recognition of deferred revenue
decreased to $.4 and $.6 million for the three and six month periods ended
September 30, 1996, respectively, from $0.7 million and $1.5 million for the
same periods in 1995. Mining service margins have decreased as a result of a
decrease in the contract price from $1.21 to $.74 per ton. Volumes have
increased, but have not fully offset the impact of the reduced price. The
Company has applied a stringent cost reduction program to its contract mining
operations; however, the benefits of the cost reduction program were partially
offset by higher fuel costs, equipment maintenance costs and increased truck
operating time.
Exploration Costs. Exploration and project investigation costs were $.6 million
and $1.0 million for the three and six months ended September 30, 1996,
respectively, compared to $0.5 and $.8 million for the same periods during 1995,
an increase of 13% and 20%, respectively. The Company's current objective is to
grow through the discovery and acquisition of profitable mining properties and
operations. Exploration activities have focused on precious metal properties in
the Western U.S. and South America. No properties have been acquired during the
current fiscal year.
General and Administrative Expenses: General and administrative costs decreased
to $.7 million and $1.2 million for the three and six month periods ended
September 30, 1996, respectively,
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compared to $1.0 million and $1.7 million for the same periods during 1995. Cost
reduction efforts and lower legal fees have reduced general and administrative
costs.
Equity in Unconsolidated Affiliates: Equity in unconsolidated affiliates
represents the Company's investment in the stock of Arlo Resources, Ltd. The
Company sold its investment in Arlo on September 10, 1996 pursuant to which the
Company received approximately $1.2 million.
Interest Expense: Interest expense decreased to $23,000 and $55,000 for the
three and six month period ended September 30, 1996, respectively, compared to
$.2 million and $.7 million for the same periods in 1995. During fiscal year
1996, the Company repaid its outstanding bank debt. The Company maintains a
credit facility but has not utilized it during fiscal year 1997.
Income Taxes: The benefit for income taxes for the six month period ended
September 30, 1996 was $146,000. The benefit for income taxes includes the cash
refund that would result from the carry-back of the loss for the six months
ended September 30, 1996, provided that the Company does not incur additional
income tax expense for the remainder of fiscal year 1997. In the prior year,
the Company recorded a tax benefit relating to deferred revenue. The amount of
deferred revenue recognized during the second quarter did not result in the
recognition of tax benefit. Accordingly, the Company reduced its deferred tax
asset. The effective tax rate (benefit) for the six months ended September 30,
1996 was (3%).
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its available resources of cash and
cash equivalents, gold bullion, a $20 million credit facility, and cash
generated from mining operations and contract mining services.
At September 30, 1996, the Company had cash and cash equivalents and securities
of $13,960,000 and gold bullion of $5,895,000 representing a decrease in cash
and cash equivalents, securities and gold bullion of $943,000 from March 31,
1996.
Net cash used by operating activities was $3,973,000 for the six months ended
September 30, 1996 compared to net cash provided by operating activities of
$4,381,000 for the same period in 1995. The negative cash flow was primarily
the result of a cash operating loss at the AGMJV and an increase in gold
inventories.
On September 10, 1996, the Company sold its investment in Arlo Resources for
approximately $1.2 million. The purchase price has been received and the sale
has been completed.
Additions to property, plant and equipment totaled $1,153,000 for the six
months ended September 30, 1996. Additions to property, plant and equipment
consisted of (i) mine development expenditures; (ii) construction expenditures
for buildings, machinery, plant and equipment; and (iii) expenditures for mobile
mining service equipment.
Upon completion of production at a mine, the Company must make expenditures for
reclamation and closure of the mine. The Company provides for future
reclamation and mine closure liabilities on a units-of-production basis. At
September 30, 1996, $4.4 million were accrued for
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such costs. In addition to these accruals, the Company and its joint venture
partner is depositing cash in separate funds to cover future reclamation costs
at the CMV properties.
The Company reviews the adequacy of its reclamation and mine closure liabilities
in light of current laws and regulations and adjusts its liabilities as
necessary. As a result of the decision to suspend operations at AGMJV the
Company accrued an additional $2.1 million in the second quarter to provide for
future closure and reclamation costs of the AGMJV properties.
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
- ------ -----------------
MORRISON KNUDSEN LITIGATION
Morrison Knudsen Corporation (MK), the Company's former parent, entered into an
Agreement Not to Compete (the "Agreement"), dated December 20, 1993, in
connection with the Company's initial public offering. The Agreement generally
prohibits MK from engaging in the businesses of (a) mining gold, silver or
platinum (collectively, "Precious Metals"), (b) performing contract mining
services for Precious Metals mining projects, and (c) owning interests in
Precious Metals mining projects.
In a letter dated September 18, 1996, MK asserted that the Agreement was not
enforceable, and MK informed the Company that it would "no longer consider
(itself) bound by the terms of the Agreement Not to Compete."
On October 18, 1996, the Company filed a complaint in the Third Judicial
District of Salt Lake County, State of Utah against Morrison Knudsen Corporation
("MK"). In the action, entitled MK Gold Company, a Delaware Corporation vs.
-------------------------------------------
Morrison Knudsen Corporation, a Delaware Corporation, Civil No. 960907272CV, the
- ----------------------------------------------------
Company is seeking a declaration that MK's agreement not to compete with the
Company is valid, binding and enforceable.
KYRGHYZALTYN ARBITRATION
On August 9, 1996, the Company received notice that Kyrghyzaltyn State Concern
("Kyrghyzaltyn") had filed a Request for Arbitration with the Arbitration
Institute of the Stockholm Chamber of Commerce relating to the Jerooy Gold
Project located in the Kyrghyz Republic in the former Soviet Union. The Company
owns a 30% interest in the Jerooy Gold Company ("Jerooy"), a joint stock company
established to study, develop and mine the Jerooy Gold Project. Kyrghyzaltyn
owns the remaining 70%. In view of unresolved political and logistic problems
and economic uncertainties associated with Jerooy, the Company recorded an
impairment of its remaining investment in Jerooy in fiscal 1996.
The Company responded to Kyrghyzaltyn's request for arbitration by filing a
counter claim with the Arbitration Institute of the Stockholm Chamber of
Commerce. The Company subsequently entered into negotiation with Kyrghyzaltyn to
determine if Kyrghyzaltyn was willing to modify
14
<PAGE>
the existing agreements to allow the project to be more attractive to lenders
and parties required to provide loan guarantees. Upon determination that
Kyrghyzaltyn was unwilling or unable to modify project agreements, the Company
and Kyrghyzaltyn entered into negotiations to dissolve Jerooy Gold Company,
release the Company from liability (including liability from additional legal
proceedings and arbitration), and compensate the Company for certain
expenditures related to the study of the feasibility of the project.
The Company and Kyrghyzaltyn reached an agreement on October 22, 1996 to
dissolve Jerooy Gold Company under the following conditions:
. MK Gold is released from further liability for events surrounding the
investigation and feasibility study of the project.
. Kyrghyzaltyn will pay MK Gold $1,000,000 if Kyrghyzaltyn executes a
development agreement with another party.
. Kyrghyzaltyn will pay MK Gold an additional $1,500,000 from future revenue,
if any, generated from gold production at the project.
Kyrghyzaltyn withdrew its request for arbitration and the Company has no further
obligations with respect to the Jerooy project. Due to the uncertainty as to
whether the Company will receive any further payments under the provisions of
the agreement, no value for the future payments has been recorded on the
September 30, 1996 balance sheet.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 5, 1996, the Company held its annual meeting of stockholders in Salt
Lake City Utah. The first item of consideration was the election of two
directors with the votes tabulated as follows: Gordon J. Humphrey received
17,052,935 shares voting in favor and 608,763 shares were withheld; James P.
Miscoll received 17,049,835 shares voting in favor and 611,863 shares were
withheld. Five directors who were not up for re-election continue to serve as
directors of the company: Ian M. Cumming, Robert V. Hansberger, G. Frank Joklik,
Robert S. Shriver, and Joseph S. Steinberg.
The second item for consideration was the proposal to change the name of the
Company to "AdAdastra Resource Corporation." This proposal received 17,501,814
shares voting in favor of the proposal, 121,124 shares voting against, and
38,630 shares abstaining.
The third item for consideration was proposal to amend the Company's Stock
Incentive Plan, by (i) increasing by 1,500,000 the number of shares available
under the plan, (ii) limiting to 1,500,000 the number of shares with respect to
which awards may be made to a participant under the plan in a two year period,
and (iii) establishing a requirement that the committee administering the plan
be comprised of outside directors. This proposal received 11,965,172 shares
voting for, 899,685 shares voting against, and 1,031,580 shares abstaining.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
(a) The following exhibits are filed with this report.
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter for which this
report is filed.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MK GOLD COMPANY
/s/ John C. Farmer
--------------------------------------
JOHN C. FARMER
Controller, Treasurer and Secretary
(Authorized Signatory and
Principal Accounting Officer)
Date: November 13, 1996
17
<PAGE>
INDEX TO EXHIBITS
Exhibits
27 Financial Data Schedule.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1996
<CASH> 11,963
<SECURITIES> 1,997
<RECEIVABLES> 1,068
<ALLOWANCES> 0
<INVENTORY> 3,368
<CURRENT-ASSETS> 25,671
<PP&E> 55,386
<DEPRECIATION> (50,405)
<TOTAL-ASSETS> 34,795
<CURRENT-LIABILITIES> 4,153
<BONDS> 0
0
0
<COMMON> 194
<OTHER-SE> 19,962
<TOTAL-LIABILITY-AND-EQUITY> 34,795
<SALES> 8,116
<TOTAL-REVENUES> 13,766
<CGS> 10,377
<TOTAL-COSTS> 14,666
<OTHER-EXPENSES> 2,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (55)
<INCOME-PRETAX> (4,892)
<INCOME-TAX> (146)
<INCOME-CONTINUING> (4,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,746)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
