<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 No. 0-23042
MK GOLD COMPANY
(Exact name of registrant as specified in 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
(801) 297-6900
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
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 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. [X]
As of March 18, 1997, the aggregate market value of the Registrant's voting
common stock held by nonaffiliates of the Registrant based upon the last sale
price reported for such date on the NASDAQ National Market System was
approximately $10,998,071.
The number of shares of the Registrant's Common Stock outstanding as of March
18, 1997 was 19,464,466.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the May
22, 1998 Annual Meeting of Stockholders of the Registrant is incorporated by
reference into Part III of this Form 10-K.
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<PAGE>
MK GOLD COMPANY
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
PAGE
<S> <C>
Items 1. and 2. Business and Properties I-1
Item 3. Legal Proceedings I-5
Item 4. Submission of Matters to a Vote of Security Holders I-5
Item 10. Executive Officers of the Registrant I-5
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters II-1
Item 6. Selected Financial Data II-1
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations II-3
Item 8. Financial Statements and Supplementary Data II-8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure II-29
PART III
Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation III-1
Item 12. Security Ownership of Certain Beneficial Owners and Management III-1
Item 13. Certain Relationships and Related Transactions III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K IV-1
Signatures IV-2
</TABLE>
i
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
INTRODUCTION
MK Gold Company ("MK Gold" or the "Company") was originally incorporated in
Delaware in 1990. The Company's principal executive offices are located at
Eagle Gate Tower, 60 East South Temple, Suite 2100, Salt Lake City, Utah, 84111.
The Company was a wholly owned subsidiary of Morrison Knudsen Corporation ("MK")
until December 14, 1993 when 9 million shares of the Company's stock were sold
in a public offering and 9 million shares were retained by MK. During January
1994, an underwriters' option was exercised and an additional 1,350,000 shares
of stock were sold to the public. On June 6, 1995, MK sold its 9 million shares
of the Company's stock to Leucadia National Corporation, a New York corporation
("Leucadia").
The Company is engaged in the business of mining gold and exploring for and
acquiring gold and other metal properties. The Company currently holds a joint
venture interest in one producing gold mining project, provides contract mining
services to that project, and holds a joint venture interest in a gold project
that is currently in the process of closure and reclamation. See Items 1 and 2
- - "Business and Properties--Properties and Operations."
Metals mining and development involve high levels of risk, including (i)
volatility of metals prices, (ii) imprecision of reserve estimates, (iii)
current dependence on a small number of projects with limited life spans, (iv)
uncertainties associated with converting exploration and development stage
projects to operating mines, (v) risks of development in geographically remote
areas and in foreign countries and (vi) changes in environmental and other laws
and regulations, including potential adverse effects of mining legislation
reform.
On January 30, 1997, the Board of Directors elected to change the fiscal
year end of the Company to December 31. In March 1997, the Company filed a
Transition Report on Form 10-K for the nine months ended December 31, 1996.
Accordingly, references in this report to "transition 1996" refer to the nine
month period ended December 31, 1996.
SIGNIFICANT DEVELOPMENTS
During 1997, gold prices suffered a dramatic decline. Beginning of the
year spot gold prices were $370 per ounce. Spot gold prices for 1997 closed at
$290 per ounce, a decline of 22%. This decline has had significant impact
throughout the industry, causing mine closures, reduction of operations at other
mines and a reduction of exploration efforts. MK Gold Company reviewed its
operations in light of the current gold market conditions and determined that it
would not be able to recover its investment in the Castle Mountain Venture. The
Company recorded an impairment of $1.8 million relating to its investment in the
Castle Mountain Venture.
PROPERTIES AND OPERATIONS
CASTLE MOUNTAIN. The Company holds a 25% interest in the Castle Mountain
Venture, a California general partnership (the "CMV"). Viceroy Resource Corp.
("Viceroy") holds the remaining 75% interest in the CMV. The CMV is governed by
a management committee composed of two members appointed by the Company and
three members appointed by Viceroy. Viceroy serves as the manager of the Castle
Mountain Mine which is operated by the CMV.
The Castle Mountain Mine is located in San Bernardino County, California,
approximately 70 miles south of Las Vegas, Nevada. Mining operations at the
Castle Mountain Mine commenced in June 1991, followed by commercial production
in April 1992. Operations are expected to continue through 2001, with gold
production extending into 2002. In 1998, the mining operations are expected to
have an average waste to ore ratio of approximately 2.90:1 and are expected to
produce approximately 15.9 million tons of ore and waste. Ore is subjected to a
combination of milling and heap leaching.
I-1
<PAGE>
All surface and mineral rights on all Castle Mountain Mine claims are owned
by Viceroy for the benefit of the CMV. The CMV controls a central 4.5 square
mile block containing three patented lode claims, four patented placer claims,
191 unpatented lode claims, 35 unpatented placer claims and numerous millsite
claims. The CMV also controls a surrounding 50 square mile property block
covering the majority of the Castle Mountains.
In 1991, the Company entered into a Contract Mining Agreement with the CMV
(the "Original CM Agreement"), and effective December 19, 1995 the Company
entered into a new Contract Mining Agreement with the CMV (the "New CM
Agreement"). Both the Original CM Agreement and the New CM Agreement
essentially provide that the Company will perform mining services at the Castle
Mountain Mine (i.e., all work necessary to bring the ore to the crusher,
including removal of overburden and waste materials, drilling and blasting, and
hauling). The New CM Agreement is subject to periodic price adjustments.
Contract Mining. Total tons mined at the CMV during 1997 increased to 17.9
million tons from 14.8 million tons in 1996. This increased production was
attained by higher fleet utilization, the purchase of two new trucks and the
addition of one front-end-loader. The price received by the Company during 1997
was $0.76 per ton while costs amounted to $0.72 per ton. Additionally, the
Company recorded $487,000 of net income from non-mining earth work at the CMV
during 1997.
The Company's cost containment efforts at the CMV continued during 1997 and
included the use of subcontractors for drilling and blasting, the implementation
of an improved maintenance program and the retirement of high cost equipment.
Although the New CM Agreement calls for the Company to mine 18,200,000 tons
in 1998, the Company and Viceroy are evaluating alternative mine budgets which
may result in a tonnage decrease.
CMV Operations. In 1997, MK Gold's 25% share of cash flow from CMV
operations, after capital expenditures, was $.8 million. CMV gold production
was 122,403 ounces with cash costs at $278 per ounce. The Company's 25% share
of production in 1997 was 30,601 ounces as compared to 30,548 for the year ended
December 31, 1996.
Several mining claims controlled by the CMV are subject to production-based
net smelter return royalty payments and other royalty payments. Under the terms
of the royalty agreements, the CMV is required to make annual rental or advance
royalty payments. Royalty payments for the CMV for 1997 totaled $1,024,000,
including the Company's attributable share of $256,000.
Based upon a $300 per ounce gold price, the estimated reserves and
stockpiles as of December 31, 1997 at the Castle Mountain Mine contain 479,000
ounces. The Company's attributable share is 119,750 ounces. After recovery
losses, but including residual heap leach production, the Company's share will
be 93,900 ounces. Cash operating costs are expected to be $370 per ounce in
1998, a 33% increase from 1997. Ore grade processed is expected to drop from
0.038 ounces per ton in 1997 to 0.025 ounces per ton in 1998, a reduction of
44%. Budgets are being reviewed and operating strategies examined to improve
1998's performance. The Company anticipates, beyond 1998, that future operating
costs will decrease and ore grades will increase until economic ores are
exhausted. Closure and reclamation is expected to begin in 2001 and will take
approximately three years.
The tables below present the reserve and operating data for the Castle
Mountain Mine at December 31, 1997.
I-2
<PAGE>
PROVEN AND PROBABLE RESERVES*
<TABLE>
<S> <C>
Total ore tons................................................ 13,989,000
Waste to ore ratio............................................ 2.15:1
Average ore grade (oz./ton)................................... .0342
Cutoff grade (oz./ton)........................................ .015
Total contained ounces including stockpiles................... 479,000
MK Gold share (25%) contained................................. 119,750
MK Gold share (25%) recoverable............................... 93,900
</TABLE>
*Reserves were calculated by Viceroy Resource Corp. Reserves represent mineable
and diluted tons and do not reflect losses in the recovery process. The
estimates of reserves at December 31, 1997 are based on an assumed gold price of
$300 per ounce and include previously mined ore in stockpiles near the primary
crusher. The reserves were calculated with cut high grade assay values.
Reserve estimates were determined by use of mapping, drilling, metallurgical
testing and other standard evaluation methods generally applied by the mining
industry, including computer block modeling.
OPERATING DATA
(000'S EXCEPT GRADE AND OUNCES)
(100% BASIS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS YEAR ENDED
DECEMBER 31 ENDED DECEMBER 31 MARCH 31,
----------- -----------------
1997 1996 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Tons mined 17,864 14,911 12,140 4,083 6,761
Tons ore mined 3,572 3,673 2,976 2,585 3,263
Ore tons to pad* 4,103 4,123 3,078 3,207 4,252
Tons to mill 412 407 297 338 447
Avg. grade crushed (opt) 0.038 0.038 0.038 0.049 0.046
Overall gold recovery 78.5 78.0 74.9 71.6 75.2
Avg. mill head grade (opt) .138 .122 0.113 0.165 0.160
Mill recovery** 49.7% 43.3% 42.3% 35.4% 37.8%
OUNCES OF GOLD PRODUCED
Mill** 28,264 21,427 14,139 19,783 27,026
Leach 94,139 100,765 73,473 92,749 120,086
Total gold production 122,403 122,192 87,612 112,532 147,112
Ounces of silver produced 51,901 71,088 56,975 34,095 46,085
COST PER OUNCE
Cash cost per ounce $ 278 $ 275 $ 296 $ 197 $ 210
Non-cash cost per ounce 104 92 81 158 143
Total cost per ounce $ 382 $ 367 $ 377 $ 355 $ 353
</TABLE>
______________________
*Includes previously mined ore from stockpiles.
**Based on gold extracted during milling. Does not reflect gold leached from
milled material after stacked on pad.
I-3
<PAGE>
AMERICAN GIRL - ORO CRUZ
The Company holds a 53% interest in the American Girl Mining Joint Venture,
a California general partnership (the "AGMJV"). Hecla Mining Company ("Hecla")
owns the remaining 47% interest. The AGMJV is governed by a management
committee composed of two members appointed by the Company and two members
appointed by Hecla. The Company serves as the manager of the AGMJV for a
monthly fee of 2% of the cash operating costs and capital expenditures,
excluding royalty payments. Management fees paid to the Company totaled
approximately $.06 million for 1997.
Prior to September 1996, the AGMJV operated the American Girl Mine and the
Oro Cruz Mine. These adjacent projects are located in Imperial County,
California, approximately 15 miles northwest of Yuma, Arizona where the AGMJV
controls 10 patented lode claims, 561 unpatented lode claims and 122 unpatented
placer claims, covering approximately 10,600 acres (which form a contiguous
block of land). Full scale open pit and underground mining at the AGMJV were
suspended in September 1996, crushing and milling operations ceased in October
1996 and reclamation activities of the surface and underground operations were
initiated. It is expected that full mine reclamation will be completed by the
end of 1999.
The reclamation efforts at AGMJV are ahead of schedule and significantly
below budget. Gold recovery from the leach pads has exceeded projections and
proceeds from the disposal of idle equipment have been greater than originally
estimated. As a result of these positive variances, the Company now expects the
total net cost for mine closure and reclamation will be significantly below the
amount estimated in the third quarter of 1996. Accordingly, the Company reduced
its mine closure and reclamation reserve and recognized $2.3 million of income
relating to operations at the AGMJV during the fourth quarter of 1997.
EXPLORATION
The Company is continuing to search for profitable investment
opportunities. During 1997, the Company examined mineral properties in several
countries, including Mexico, Chile, Brazil, Argentina, Peru, Bolivia, Canada,
United States, and Australia. Since none of these properties met the Company's
economic criteria, no acquisitions were made. The Company is actively
conducting exploration programs in Nevada and Brazil.
COMPETITION
The Company competes with other companies and individuals to acquire metal
mining projects and to recruit and retain qualified employees. Many of these
companies are substantially larger and have greater financial resources than the
Company. As a result of strong competition for a limited number of project
opportunities, it may be difficult for the Company to acquire metals projects on
favorable terms.
INDUSTRY SEGMENT DATA
Industry segment data for the Company is provided in Note 8 to the
Company's Consolidated Financial Statements, included in Part II of this report.
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state, and local
laws and regulations governing protection of the environment. These laws are
continually changing and, as a general matter, are becoming more restrictive.
The Company's policy is to conduct its business in a manner that safeguards
public health and mitigates the environmental effects of its mining operations.
To comply with these federal, state and local laws, the Company has made, and in
the future may be required to make, capital and operating expenditures.
However, the Company does not anticipate that it will be required to make any
extraordinary capital or operating expenditures for environmental compliance
during the remainder of its current fiscal year or the succeeding fiscal year.
I-4
<PAGE>
EMPLOYEES
At December 31, 1997 the Company employed 95 people, including 14 in the
gold mining segment, 70 in mining services, and 11 at the home office. The
Company has made, and barring exploration or acquisition success, it anticipates
that it will continue to make reductions in the number of employees of the
Company. The Company uses contract professionals to conduct exploration
throughout the world.
ITEM 3. LEGAL PROCEEDINGS
As previously reported by the Company, the Company has filed a complaint
against Morrison Knudsen Corporation ("MK"), seeking a declaration that MK's
agreement not to compete with the Company is valid, binding and enforceable. A
trial date is currently expected to be scheduled for December 1998.
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 fourth quarter of 1997.
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a schedule of names and certain information regarding all of
the executive officers of the Company, as of March 15, 1998:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert V. Hansberger 77 Chairman of the Board
G. Frank Joklik 69 President and Chief Executive Officer
Donald L. Babinchak 62 Director of Human Resources
James G. Baughman 41 Exploration Manager
John C. Farmer 48 Controller, Treasurer and Secretary
Larry L. Lackey 62 Chief Geologist
Thomas G. White 53 Manager of Operations
</TABLE>
Robert V. Hansberger became Chairman of the Board of the Company on
February 20, 1995, and has been a director since December 17, 1993 when the
Company became a publicly traded entity. Mr. Hansberger has also served as the
Chairman and Chief Executive Officer of Futura Corporation located in Boise,
Idaho, since 1972.
G. Frank Joklik has been the President and Chief Executive Officer of the
Company since November 1, 1995. Mr. Joklik has been a director since June 6,
1995. Mr. Joklik was formerly the President and Chief Executive Officer of
Kennecott Corporation.
Donald L. Babinchak has been Director of Human Resources of the Company
since March 25, 1996. Mr. Babinchak was formerly Vice President of Human
Resources of Kennecott Corporation. Mr. Babinchak is employed on a part-time
basis by the Company.
I-5
<PAGE>
James G. Baughman has been the Company's Exploration Manager since
September 15, 1996 and an officer of the Company since March 21, 1997. Prior to
joining MK Gold, Mr. Baughman was a field and staff geologist for a number of
companies at locations in the lower United States, Alaska, Mongolia and South
America.
John C. Farmer was appointed Controller, Treasurer and Secretary April 25,
1996. He was formerly the Chief Financial Officer of Dyno Nobel Inc.
Larry L. Lackey has been Chief Geologist for MK Gold since August 23, 1995.
He was formerly Regional Vice President-Central America and the Caribbean for
Independence Mining Company, Inc.
Thomas G. White has been the Manager of Operations for MK Gold since
October 8, 1993. Prior to joining MK Gold, Mr. White served as a Mining
Executive for the gold operations of Homestake Mining Co., located in San
Francisco, California (1975 to 1992).
On August 26, 1997, Mr. Joklik was named President and Chief Executive
Officer of the Salt Lake Organizing Committee (the "SLOC") for the 2002 Winter
Olympics. The Board of Directors of the Company has considered Mr. Joklik's
position with the SLOC and his commitments in connection with the organization
of the Winter Olympics. Although Mr. Joklik will be required to devote a
significant amount of time to SLOC activities, the Board of Directors believes
that Mr. Joklik remains uniquely qualified to serve as Chief Executive Officer
of the Company and that it is in the best interests of the Company for Mr.
Joklik to continue to serve in that capacity.
I-6
<PAGE>
PART II
ITEM 5: MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "MKAU".
The following table sets forth the high and low sales prices for the
Company's Common Stock as reported by the NASDAQ National Market System by
quarter for the years ended December 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Quarter Year Ended
------------------------------------------
Ended December 31, 1997 December 31, 1996
----- ----------------- -----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
3/31 $2.313 $1.375 $3.500 $1.938
6/30 2.063 1.500 2.500 1.375
9/30 2.000 1.313 1.938 1.187
12/31 1.875 .938 2.000 1.250
</TABLE>
As of January 31, 1998, the number of registered holders of the Company's
Common Stock was approximately 167 (not including beneficial owners of the
Company's Common Stock held in the name of a broker, dealer, bank, voting
trustee or other nominee).
The Company does not intend to pay any cash dividends with respect to its
Common Stock in the foreseeable future. The Company did not pay any dividends
during 1997 or the two preceding fiscal years.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their entirety
by reference to, and should be read in conjunction with, such consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," below.
II-1
<PAGE>
MKGOLD COMPANY
SELECTED FIVE-YEAR FINANCIAL DATA
(in thousands, except share and ounce amounts, per share and per ounce data)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Fiscal Year Ended Qtr. Ended Year Ended
------------------- ------------------- ------------------- ---------- ----------
December December December December March March March December
31, 1997 31, 1996 31, 1996 31, 1995 31, 1996 31, 1995 31, 1994 31, 1993
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue:
Product sales 16,656 20,929 $ 14,284 $ 19,399 $ 26,044 $ 29,636 $ 8,367 $ 25,902
Mining services 11,233 8,927 7,065 6,477 8,339 9,436 3,561 15,061
-------- -------- -------- -------- -------- -------- -------- --------
Total revenue 27,889 29,856 21,349 25,876 34,383 39,072 11,928 40,963
Gross profit (loss):
Product sales 127 (2,033) (271) (277) (2,039) 2,643 494 1,130
Mining services 1,307 1,095 757 1,292 1,630 2,953 1,241 4,895
-------- -------- -------- -------- -------- -------- -------- --------
Total gross profit (loss) 1,434 (938) 486 1,015 (409) 5,596 1,735 6,025
Exploration costs (2,306) (2,161) (1,455) (1,028) (1,734) (1,214) (691) (485)
General and administrative expenses (1,650) (2,829) (1,683) (2,655) (3,801) (2,656) (724) (1,407)
Provision for mine closure and
reclamation 2,330 (2,100) (2,100)
Equity in loss of unconsolidated -
affiliates (58) (1,480) (1,538) (629)
Provision for impairment of long-lived
assets (1,800) (27,935) - (5,946) (33,881)
-------- -------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS $ (1,992) $(36,021) $ (4,752) $(10,094) $(41,363) $ 1,097 $ 320 $ 4,133
======== ======== ======== ======== ======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE $ (.05) $ (2.06) $ (0.24) $ (0.41) $ (2.24) $ 0.04 $ 0.02
BALANCE SHEET DATA (At end of period)
Total assets $ 29,957 $ 32,978 $ 32,978 $ 67,568 $ 39,206 $ 96,566 $104,273 $103,199
Long-term debt None None None None None 16 24,320 26,615
Stockholders' equity 19,552 20,444 20,444 60,364 24,999 68,288 67,521 59,565
OTHER FINANCIAL DATA:
Depreciation, depletion, and amortization:
Product Sales 2,403 4,686 3,070 6,130 7,549 8,433 2,017 7,774
Mining services 66 165 83 801 1,133 1,107 370 1,265
Capital expenditures 1,230 2,147 1,194 7,280 6,717 3,010 1,151 6,025
Payments of long-term debt - - - 20,024 20,024 7,330 1,354 1,681
Dividends paid to Morrison Knudsen
Corporation (a) 20,000
OTHER DATA
Gold ounces sold 42,600 43,800 29,300 48,805 61,525 73,810 21,460 68,523
Gold ounces produced 34,426 54,294 38,249 46,185 61,881 74,473 19,907 68,582
Gold ounces in inventory, at end of year 7,072 16,282 16,282 6,240 7,418 10,326 11,238 12,715
Average gold price realized (per ounce) $ 351 $ 406 $ 404 $ 397 $ 400 $ 401 $ 390 $ 378
Average spot gold price (per ounce) 333 386 385 386 389 383 384 360
Average costs per ounce (b)(c):
Mine production costs 270 312 282 289 295 230 240 239
Royalties 8 12 10 17 18 18 20 21
-------- -------- -------- -------- -------- -------- -------- --------
Production costs 278 324 292 306 313 248 260 260
Depreciation, depletion and amortization
101 86 81 132 122 128 120 111
Reclamation 3 3 4 2 4 2 2 4
-------- -------- -------- -------- -------- -------- -------- --------
Full costs $ 382 $ 413 $ 377 $ 440 $ 439 $ 378 $ 382 $ 375
</TABLE>
(a) Other than the $20 million special dividend paid to Morrison Knudsen
Corporation on September 3, 1993, the company has not paid any
dividends in the past five years.
(b) Production costs include costs and operating expenses for mining,
milling, processing, project-site administration and royalties, but
exclude exploration costs and interest expense. Full costs include all
production costs, plus depreciation, depletion and amortization
relating to each operating mine, divided by total ounces of gold
produced. Per ounce costs are normalized for fluctuations in waste
stripping costs between the actual waste to ore ratio and the mine
life average waste to ore ratio. Data on average costs per ounce may
not correspond to expense reported in the financial statements in any
given year because of the timing and methods of recognizing costs of
production. Production costs represent costs incurred in the year in
which gold ounces are produced. In contrast, costs of sales are
recognized when gold ounces are delivered. Gold ounces delivered in
one year may have been produced in that year or may have been drawn
from inventory at the beginning of the year. Hence, costs associated
with gold ounces sold in one year may be reflective of average
production costs in a previous year.
(c) Average cost per ounce for the nine months ended December 31, 1996
includes only the cost for the Castle Mountain Venture.
II-2
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Five-Year Financial Data and the Consolidated Financial Statements
and related notes thereto which appear elsewhere in this report. Undivided
interests in joint ventures are reported using pro rata consolidation, whereby
the Company consolidates its proportionate share of assets, liabilities,
revenues and expenses.
On January 30, 1997 MK Gold's Board of Directors approved a change in the
Company's fiscal year end to December 31, effective beginning with the
transition period ending December 31, 1996. As used herein, "transition 1996"
refers to the nine months ended December 31, 1996 and "comparable 1995" refers
to the nine months ended December 31, 1995.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996
GOLD PRODUCTION
The Company's attributable share of gold production decreased 37% to 34,426
ounces in 1997 from 54,294 ounces in 1996. Production at the Castle Mountain
Mine increased to 30,601 ounces during 1997, as compared to 30,548 ounces during
1996. The Company's share of gold production from the AGMJV was 3,825 ounces
during 1997, as compared to 23,746 ounces during 1996, an 84% decrease, due to
the suspension of mining operations during the fourth quarter of 1996.
REVENUE
Product sales revenue decreased $4.2 million or 20% to $16.7 million for
1997, down from $20.9 million for 1996 as a result of decreased gold production
at the Company's mining ventures and reduced gold prices. The average price
realized per ounce of gold decreased to $351 during 1997, compared to $406 in
1996. The decrease in gold production is attributable to the mine closure of the
AGMJV. Gold production at the AGMJV was the result of continued leaching and
rinsing of the leach pads during reclamation and mine activities.
Revenue derived from mining services is primarily dependent upon the
quantities of materials mined during the period. Revenue from mining services
increased 26% to $11.2 million in 1997 from $8.9 million in 1996. During the
first half of 1996, mining activity was reduced during a contract dispute
between the Company and Viceroy. During 1997, production was at levels provided
in the New CM Agreement. See Items 1 and 2 - "Business and Properties--
Properties and Operations."
HEDGING ACTIVITY
For 1997, the average gold price realized per ounce for the 42,600 ounces
of gold sold was $351 compared to an average spot price of $333 per ounce.
During 1997, 19,600 ounces of the total gold sold were delivered under the
Company's hedging program at an average price of $366 per ounce. For 1996, the
average gold price realized per ounce for the 43,800 ounces of gold sold was
$406 compared to an average spot price of $386 per ounce. During 1996, 36,800
ounces of gold were delivered under the hedging program at an average price of
$407 per ounce. At December 31, 1997, for the year ended December 31, 1998, the
Company had sold forward 4,000 ounces of gold at an average price of $338 per
ounce.
II-3
<PAGE>
GROSS PROFIT
Gross profit from product sales has been negatively impacted by a 22%
decline in gold prices during 1997. Offsetting the impact of reduced gold
prices has been an improvement in production costs, the closure of mining
operations at the AGMJV, and a reduction in contract mining costs at the CMV.
Accordingly, gross profit from product sales increased to $.1 million from a
negative $2 million in 1996. As a percent of total product sales, gross profit
was .8% in 1997 compared to a negative 9.7% in 1996. The full cost per ounce of
gold produced decreased to $382 per ounce in 1997 from $413 per ounce in 1996.
Gross profit from mining services increased 19% to $1.3 million in 1997
from $1.1 million in 1996. The increase was attributable to higher volumes of
material mined. During the first quarter of 1996, mining activity was reduced
as a result of a contract dispute. The settlement of the dispute resulted in a
New CM Agreement which provided for increased production volumes at a reduced
price. As a percentage of mining service revenue gross profit was 11.6% in 1997
compared to 12.3% in 1996.
EXPLORATION COSTS
Exploration costs increased 7% to $2.3 million in 1997 compared to $2.2
million in 1996. In 1997, the Company had exploration programs in Brazil and
Nevada which resulted in the acquisition of some properties in Nevada. The
Company also examined properties in Canada, Peru, Bolivia, Chile, Australia, and
the western United States.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 42% to $1.7 million in 1997
from $2.8 million in 1996. During 1996, the Company incurred significant legal
expenses associated with its contract dispute with Viceroy. In addition, the
Company incurred expenses associated with the relocation of its corporate office
to Salt Lake City, Utah. Since its relocation in 1996, the Company has reduced
administrative staff.
EQUITY IN UNCONSOLIDATED AFFILIATES
Equity in unconsolidated affiliates represents the Company's investment in
Arlo stock. The Company sold its investment in Arlo on September 10, 1996
pursuant to which the Company received approximately $1.2 million. Prior to the
sale of Arlo in 1996, the Company's investment in Arlo was written down by $0.4
million to $1.2 million.
INTEREST EXPENSE
Interest expense increased 99% to $.14 million in 1997 from $.07 million in
1996. Interest was primarily the cost of the commitment fee on the Company's
standby credit facility.
INCOME TAXES
During 1997, the Company determined that the ability of the Company to
utilize its tax asset was uncertain. As a result it reduced its tax asset to an
amount that would more likely than not be realized through future taxable
income. Accordingly, the Company's deferred tax asset was reduced by $0.6
million. See Note 9 to the Company's Consolidated Financial Statements.
II-4
<PAGE>
TRANSITION 1996 COMPARED TO COMPARABLE 1995
GOLD PRODUCTION
The Company's attributable share of gold production decreased 17% to 38,249
ounces in transition 1996 from 46,185 ounces in comparable 1995. Production at
the Castle Mountain Mine decreased to 21,765 ounces during transition 1996, as
compared to 28,133 ounces during comparable 1995. The Castle Mountain Mine's
decreasing ore grade resulted in a 23% decrease in production. The Company's
share of gold production from the AGMJV was 16,484 ounces during transition
1996, as compared to 18,052 ounces during comparable 1995. During transition
1996, the Company suspended mining operations at the AGMJV because continued
operations could not be justified. As a result, gold production at the AGMJV
decreased 9% from comparable 1995.
REVENUE
Product sales revenue decreased $5.1 million or 26.3% to $14.3 million for
transition 1996, down from $19.4 million for Comparable 1995 as a result of
decreased gold production at the mines. The average price realized per ounce of
gold increased to $404 during transition 1996, compared to $397 in comparable
1995.
Revenue derived from mining services is primarily dependent upon the
quantities of materials mined during the period. Revenue from mining services
increased 9.1% to $7.1 million in transition 1996, from $6.5 million in
comparable 1995. Quantities mined under the Company's contract mining agreement
were up 280% from comparable 1995. The increased volumes partially offset the
impact of a reduction in price of 38% compared to comparable 1995. See Items 1
and 2 - "Business and Properties--Properties and Operations."
HEDGING ACTIVITY
For the transition period 1996, the average gold price realized per ounce
for the 29,300 ounces of gold sold was $404 per ounce compared to an average
spot price of $385 per ounce. During transition 1996, all gold sold by the
Company was delivered under the Company's hedging program. For comparable 1995,
the average gold price realized per ounce for the 48,805 ounces of gold sold was
$397 compared to an average spot price of $386 per ounce. During comparable
1995, 15,000 ounces of gold were delivered under the hedging program at an
average price of $400 per ounce.
GROSS PROFIT
Gross profit from product sales for transition 1996 was consistent with the
level of gross profit for comparable 1995. The negative impact of reduced
production volumes at both mining ventures were offset by reduced production
costs. Gross profit for transition 1996 was $(.3) million compared to $(.3)
million for comparable 1995. The full cost per ounce of gold produced for
transition 1996 was $434 compared to $440 for comparable 1995. The full cost
per ounce of gold produced for transition 1996 at the Company's continuing
operations (Castle Mountain) was $377. The reduction in the full cost of
production for transition 1996 is the result of a decrease in non-cash
production costs resulting from the asset impairments recorded in the fiscal
year ended March 31, 1996.
Gross profit from mining services decreased 41% to $.8 million in
transition 1996 from $1.3 million in comparable 1995. Under the terms of the
New CM Agreement the contract price was reduced to $.74 compared to $1.21 under
the Original CM Agreement that was in place in comparable 1995. While the
Company reduced its costs per ton and increased contract volumes under the New
CM Agreement, these adjustments did not fully offset the negative impact of the
unit price reduction during transition 1996.
II-5
<PAGE>
Mining services gross profit as a percentage of revenues was 11% for transition
1996 compared to 20% for comparable 1995. The reduction in gross margin percent
is attributable to the reduction in unit price under the New CM Agreement.
EXPLORATION COSTS
Exploration costs increased 42% to $1.5 million for transition 1996, up
from $1.0 million in comparable 1995. During transition 1996, the Company
examined mineral properties in Chile, Argentina, Peru, Mexico and Bolivia.
Field examinations also were carried out in Tanzania, Spain and Eastern Russia.
Since none of these properties met the Company's economic criteria, no
acquisitions were made. See Items 1 and 2 - "Business and Properties-
Exploration."
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased to $1.7 million for
transition 1996 compared to $2.7 million in comparable 1995. The principal costs
included salaries ($.7 million), insurance ($0.2 million), and outside services
($.6 million). The reduction in general and administrative costs resulted from
a reduction in legal expenses and payroll related costs. Since the Company's
relocation to Salt Lake City, the Company has reduced administrative staff.
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 90.5% to $0.1 million in the nine months ended
December 31, 1996 from $.7 million in fiscal 1996. Interest was reduced as a
result of the repayment of a $20 million bank loan in fiscal 1996.
INCOME TAXES
During comparable 1995, the Company recorded an income tax benefit based on
the expectation that the Company would be able to utilize certain tax benefits
in the future. During transition 1996, the Company determined that the ability
of the Company to utilize its deferred tax asset was uncertain. As a result,
the Company reduced its tax asset to an amount that will more likely than not be
realized through future taxable income. Accordingly, the Company's deferred
tax asset was reduced by $2.3 million in transition 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are its available resources of
cash and cash equivalents, a $20 million credit facility and cash generated from
mining operations and contract mining services.
At December 31, 1997, the Company had cash and cash equivalents of $18.2
million and gold bullion of $2 million, representing an increase in cash and
cash equivalents and gold bullion of $.4 million from December 31, 1996.
In September 1993, the Company entered into a $20.0 million credit facility
(the "Credit Facility") with Canadian Imperial Bank of Commerce ("CIBC"). The
Credit Facility was originally guaranteed by MK. In February 1995, CIBC
notified the Company that the loan was in default due to MK's default on
II-6
<PAGE>
certain financial covenants contained in MK's guarantee of the Credit Facility.
In April 1995, the Company repaid $5 million to CIBC. In connection with the
acquisition by Leucadia of MK's 46.4% interest in the Company in June 1995,
Leucadia purchased, at par, all of CIBC's interest as lender under the Credit
Facility and released MK from its guarantee obligations. During the 1996 fiscal
year, the Company repaid all amounts due under the revolving credit facility
with Leucadia. In March 1998, the Company renegotiated the Credit Facility and
entered into a new credit agreement with Leucadia. Pursuant to the new credit
agreement, the Credit Facility will expire on September 15, 2000, unless
terminated earlier. The Credit Facility may be terminated by Leucadia on
December 15 of any year, provided Leucadia notifies the Company of such
termination prior to September 15 of such year.
Net cash provided (used) by operating activities was $5.0 million for 1997
compared to $(10.3) million for 1996. Although the Company expects that its
cash and cash equivalents will be sufficient to cover operating expenses for
several years, the cash generated by the Company's operations is not sufficient
to cover the Company's projected operating expenses, general and administrative
expenses and exploration costs. Accordingly, the Company's cash and cash
equivalents are being depleted under current operating conditions. Further, the
significant decline in gold prices has had an adverse impact on the amount of
cash provided by operating activities. The Company's estimated cash operating
costs per ounce of gold produced in 1998 are expected to exceed current gold
prices. Therefore, unless gold prices increase or the Company is able to
significantly reduce its costs of production, the Company's cash and cash
equivalents will be depleted more rapidly than in prior years.
The Company's current sources of funds are insufficient to fund new mining
projects. Accordingly, the ability of the Company to commence new mining
projects will be dependent upon the Company's ability to obtain additional
sources of funds to finance any such mining projects. While the Company
believes that it may be able to obtain financing for new mining projects through
project financing or otherwise, no assurances can be given that such financing
will be available or that the Company would be able to obtain such financing on
favorable terms.
Additions to property, plant and equipment totaled $1.2 million for 1997,
$1.2 million for transition 1996 and $6.7 million for the fiscal year ended
March 31, 1996. For all periods presented, 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
December 31, 1997, $2.5 million was accrued for such costs. In addition to the
accruals, the Company and its joint venture partner are 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.
THE YEAR 2000 ISSUE
The Company is converting its financial systems to year 2000 compliant
systems. The Company does not anticipate a significant cost to modify its
systems to accommodate the impact of the upcoming change in the century.
CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION
Statements included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may relate, but not be limited, to projections of revenues, income or
loss and capital
II-7
<PAGE>
expenditures; exploration efforts; plans for growth and future operations;
financing needs; as well as assumptions relating to the foregoing. Forward-
looking statements are inherently subject to risks and uncertainties, some of
which cannot be predicted or quantified. When used in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
words "estimates", "expects", "anticipates", "forecasts", "plans", "intends",
and variations of such words or similar expressions are intended to identify
forward-looking statements that involve risks and uncertainties. Future events
and actual results could differ materially from those set forth in, contemplated
by or underlying the forward-looking statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Thousands of dollars except share data)
Selected quarterly financial data for the year ended December 31, 1997, the
nine month transition period ended December 31, 1996 and the fiscal year ended
March 31, 1996 is presented below.
<TABLE>
<CAPTION>
1997 QUARTERS 1ST 2ND 3RD 4TH
<S> <C> <C> <C> <C>
Revenue $8,884 $ 6,068 $ 4,612 $ 8,325
Gross profit (loss) 990 565 325 (446)
Net income (loss) 175 (53) (514) (610)
Income (loss) per share 0.01 (0.00) (0.03) (0.03)
TRANSITION PERIOD QUARTERS 1ST 2ND 3RD
Revenue $3,420 $10,346 $ 7,583
Gross profit (loss) (1,378) 478 1,386
Net income (loss) (1,730) (3,016) 165
Income (loss) per share ( 0.09) ( 0.16) .01
FISCAL 1996 QUARTERS 1ST 2ND 3RD 4TH
Revenue $9,459 $ 7,616 $ 8,801 $ 8,507
Gross profit (loss) 849 21 145 (1,424)
Net income (loss) (262) (920) (6,812) (35,399)
Loss per share (0.01) (0.05) (0.35) (1.83)
</TABLE>
II-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of MK Gold Company
We have audited the accompanying consolidated balance sheets of MK Gold
Company as of December 31, 1997 and December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended December 31, 1997, the nine months ended December 31, 1996 and
the fiscal year ended March 31, 1996. Our audits also included the financial
statement schedule listed in Item 14. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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.
In our opinion, based on our audits, such consolidated financial statements
present fairly, in all material respects, the financial position of MK Gold
Company at December 31, 1997 and December 31, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1997, the nine
months ended December 31, 1996 and the fiscal year ended March 31, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 13, 1998
II-9
<PAGE>
MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
REVENUE:
Product sales $ 16,656 $ 14,284 $ 26,044
Mining services 11,233 7,065 8,339
----------- ----------- -----------
Total revenue 27,889 21,349 34,383
----------- ------------ -----------
COSTS AND OPERATING EXPENSES:
Product sales 16,529 14,555 28,083
Mining services 9,926 6,308 6,709
----------- ----------- -----------
Total costs and operating expenses 26,455 20,863 34,792
----------- ----------- -----------
GROSS PROFIT (LOSS) 1,434 486 (409)
EXPLORATION COSTS (2,306) (1,455) (1,734)
GENERAL AND ADMINISTRATIVE EXPENSES (1,650) (1,683) (3,801)
EQUITY IN LOSS OF UNCONSOLIDATED
AFFILIATE (1,538)
PROVISION FOR MINE CLOSURE AND
RECLAMATION 2,330 (2,100)
PROVISION FOR IMPAIRMENT OF
LONG-LIVED ASSETS (1,800) (33,881)
LOSS FROM OPERATIONS (1,992) (4,752) (41,363)
Gain on sale of assets 141
Investment income and dividends, net 1,013 572 1,096
Interest expense (137) (69) (732)
----------- ----------- -----------
Loss before income taxes (975) (4,249) (40,999)
Income tax provision (27) (332) (2,394)
----------- ----------- -----------
NET LOSS $ (1,002) $ (4,581) $ (43,393)
=========== =========== ===========
Basic and diluted loss per common share $ (0.05) $ (0.24) $ (2.24)
Basic and diluted weighted average shares used
to compute loss per common share 19,464,466 19,397,800 19,397,800
</TABLE>
See notes to consolidated financial statements.
II-10
<PAGE>
MK GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December DECEMBER
ASSETS 31, 1997 31, 1996
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 18,189 $ 13,925
Receivables 1,637 1,014
Other receivables 918
Refundable income taxes 594 2,346
Inventories 3,100 8,585
Deferred income taxes 175
Other 191 248
--------- ---------
Total current assets 24,804 26,118
Property, plant and mine development, net 1,971 4,526
Deferred income taxes 412 1,124
Restricted cash 1,430 1,210
--------- ---------
TOTAL ASSETS $ 28,617 $ 32,978
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,358 $ 2,486
Current portion of mine closure liabilities 1,934 700
Other accrued liabilities 1,149 606
--------- ---------
Total current liabilities 4,441 3,792
Mine closure and reclamation liabilities 569 3,208
Deferred revenue 4,055 5,534
--------- ---------
Total liabilities 9,065 12,534
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; authorized 40,000,000 shares,
issued 19,464,466 shares and 19,397,800 shares, respectively 195 194
Capital in excess of par value 67,272 67,214
Accumulated deficit (47,887) (46,885)
Deferred compensation (28) (79)
--------- ---------
Total stockholders' equity 19,552 20,444
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,617 $ 32,978
========= =========
</TABLE>
See notes to consolidated financial statements.
II-11
<PAGE>
MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
SHARES OF GAIN ON
COMMON CAPITAL IN ACCUM- SECURITIES DEFERRED
STOCK COMMON EXCESS OF ULATED AVAILABLE COMPEN-
ISSUED STOCK PAR VALUE (DEFICIT) FOR SALE SATION
------ ----- --------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
April 1, 1995 19,397,800 $ 194 $ 67,093 $ 1,089 $ (88)
Net loss (43,393)
Deferred compensation 12 35
Net unrealized gain of securities
available for sale $ (57)
---------- ----- --------- --------- -------- ------
March 31, 1996 19,397,800 194 67,105 (42,304) (57) (53)
Net loss (4,581)
Deferred compensation 109 (26)
Realized gain on securities
available for sale (57)
---------- ------ ---------- --------- ---------- --------
December 31, 1996 19,397,800 194 67,214 (46,885) - (79)
Net loss (1,002)
Deferred compensation 51
Shares issued 66,666 1 58
---------- ------ ---------- --------- ---------- --------
December 31, 1997 19,464,466 $195 $67,272 $(47,887) - $(28)
</TABLE>
See notes to consolidated financial statements.
II-12
<PAGE>
MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER MARCH 31,
1997 31, 1996 1996
---- -------- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,002) $ (4,581) $(43,393)
Adjustment to reconcile net loss to net cash
provided (used) by operating activities:
Deferred compensation 51 83
Deferred taxes 628 2,344 450
Equity in loss of unconsolidated affiliate 1,538
Provision for impairment of long-lived assets 1,800 33,881
Depreciation, depletion, and amortization 2,510 3,168 8,702
Gain on sale of assets (141)
Changes in operating assets and liabilities:
Trading securities, net 811
Receivables (623) 640 406
Income taxes payable/refundable 1,752 (3,154) 1,583
Inventories 5,485 (1,589) (597)
Other current assets (34) 307 447
Restricted cash (220) (474) (228)
Deferred revenue (1,479) (1,875) (3,175)
Mine closure and reclamation liabilities (3,094) 1,914 258
Accounts payable and other accrued liabilities (585) (701) 465
------- --------- --------
Net cash provided (used) by operating activities 5,048 (3,918) 1,148
------- --------- --------
INVESTING ACTIVITIES:
Additions to property, plant, and mine development (1,230) (1,194) (6,717)
Proceeds from disposition of property and plant 387 14 1,094
Proceeds from sale of unconsolidated affiliate 1,197
Investments in unconsolidated affiliates (765)
Proceeds from sale of securities available for sale 1,893 17,636
Investment in Jerooy Gold Project (2,420)
Castle Mountain lawsuit settlement 8,925
------- --------- --------
Net cash provided (used) by investing activities (843) 1,910 17,753
------- --------- --------
</TABLE>
(Continued)
II-13
<PAGE>
MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER DECEMBER MARCH 31,
31, 1997 31, 1996 1996
-------- -------- ----
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Issuance of common stock 59
Payments of long-term debt (20,024)
------- -------- --------
Net cash provided (used) by financing activities 59 (20,024)
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,264 (2,008) (1,123)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 13,925 15,933 17,056
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 18,189 $ 13,925 $ 15,933
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Interest paid $ 137 $ 695 $ 1,201
Income taxes paid (refund), net $ (2,557) $ 1,123 $ 1,919
</TABLE>
See notes to consolidated financial statements.
II-14
<PAGE>
MK GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1. ORGANIZATION, OPERATIONS, AND BASIS OF ACCOUNTING
MK Gold (the "Company") is engaged in the business of mining gold and
exploring for and acquiring gold and other metal properties. The Company owns a
53% undivided interest in the American Girl Mining Joint Venture ("AGMJV"). The
Company also owns a 25% undivided interest in the Castle Mountain Venture
("CMV"), and performs mining services under a contract mining agreement with the
CMV. In the fiscal year ended March 31, 1996, the Company recorded impairment
for these investments (see Note 2).
PRINCIPLES OF CONSOLIDATION - The Company owns an undivided interest in each
asset and pursuant to its agreements, is severally liable for its share of each
liability of the AGMJV and the CMV. The consolidated financial statements
include the accounts of the Company and reflect the Company's pro rata share of
each of the joint venture's assets, liabilities, revenues and expenses, after
elimination of intercompany accounts. The Company does not recognize losses
from joint ventures in excess of its pro-rata share unless the other venturer's
ability to absorb such losses is uncertain and the Company determines that
underwriting the other venturer's share of losses is in the best long-term
interest of the Company.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. One estimate particularly susceptible to change in the
near term is the provision for mine closure and reclamation.
CASH EQUIVALENTS - Cash equivalents consist of investments in highly liquid
securities having an original maturity of three months or less.
RESTRICTED CASH - CMV is funding its future reclamation liabilities by
establishing a separate bank account for the funds and charging each partner for
its proportionate share. The funding amount is based on the estimated ultimate
liability and is funded over the remaining life of the mine. AGMJV has funded a
restricted cash account which will be utilized for reclamation of the AGMJV mine
property.
INVESTMENT SECURITIES - The Company classifies investment securities as
either trading, available for sale, or held to maturity. Trading securities are
reported at fair value with unrealized gains and losses included in the results
of operations. Available for sale securities are reported at fair value with
unrealized gains and losses recorded as a separate component of stockholders'
equity. Held to maturity securities are recorded at amortized cost.
INVENTORIES - Gold bullion, ore and in-process inventories and materials
and supplies are stated at the lower of average cost or net realizable value.
PROPERTY, PLANT AND MINE DEVELOPMENT - Depreciation, depletion and
amortization of mining properties, mine development costs and major plant
facilities is computed principally by the
II-15
<PAGE>
units-of-production method based on estimated proven and probable ore reserves.
Proven and probable ore reserves reflect estimated quantities of economically
recoverable reserves which can be recovered in the future from known mineral
deposits. Such estimates are based on current and projected costs and prices.
Mining equipment and other plant facilities are depreciated using straight-line
or accelerated methods principally over estimated useful lives of 3 to 10 years.
Generally, mineral exploration costs are expensed as incurred. When it has
been determined that a mineral property has proven and probable reserves, the
cost of subsequent reserve definition and expansion and the costs incurred to
develop such property are capitalized as mine development costs and charged to
operations on a units-of-production method based on proven and probable ore
reserves. Carry forward mine development costs include costs incurred for shaft
sinking, permanent excavations, roads, tunnels and advance removal of overburden
and waste rock. Costs relating to stockpiled ore are initially deferred as mine
development costs and expensed in future periods when the ore is processed.
Major mine development expenditures at operating properties and at new mining
properties not yet producing are capitalized.
PROPERTY EVALUATION - Recoverability of investments in operating mines is
evaluated periodically. Estimated future net cash flows from each mine are
calculated using estimates of proven and probable ore reserves, estimated future
gold prices (considering historical and current prices, price trends and related
factors) and operating capital and reclamation costs on an undiscounted basis.
Impairment is measured based on discounted future net cash flows.
DEFERRED STRIPPING COSTS - The costs of waste stripping in excess of the
expected mine life average stripping ratio are deferred and charged to
production on a units-of-production method when the actual ratio of waste mined
to ore processed is less than the mine life average.
MINE CLOSURE, RECLAMATION, AND ENVIRONMENTAL REMEDIATION OF MINED AREAS -
The Company is subject to federal, state and local environmental laws and
regulations. The Company has put in place ongoing pollution control and
monitoring programs at the mine sites, and posted surety bonds as required for
compliance with state and local environmental obligations including reclamation.
Estimated future reclamation and mine closure costs are based principally on
legal and regulatory requirements and are accrued and charged over the expected
operating lives of the Company's mines on a units-of-production method. Ongoing
reclamation activities are expensed in the period incurred. Provision (benefit)
for mine closure and reclamation liabilities charged to operations totaled
$(2,212) for the year ended December 31, 1997, $2,450 for the nine months ended
December 31, 1996 and $258 for the year ended March 31, 1996, respectively (see
Note 2).
INCOME TAXES - The Company utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes are
provided for temporary differences in the basis of assets and liabilities as
reported for financial statement purposes and income tax purposes.
REVENUE RECOGNITION - Revenue from product sales is recognized when the
gold is delivered to customers. Mining services revenue is recognized using the
units of delivery method based on quantities of materials moved. The revenue
recognized for each unit of material moved is determined on an individual pit
basis. The effect of changes in estimated total contract revenues, costs or
units of material to be moved for each pit is reflected in the accounting period
in which the change becomes known and over the remaining units to be mined in
each pit. Differences between customer billings and earned revenue using this
method are recorded as deferred revenue.
DEFERRED REVENUE - Amounts received in advance of recognition of revenue
are recorded as deferred revenue. At December 31, 1997, deferred revenue of
$4,055 consists of cash received in
II-16
<PAGE>
December 1995 in the settlement of a lawsuit with the CMV partner. Such amount
is being recognized as revenue over the life of the operating contract.
HEDGING ACTIVITIES - The Company enters into option contracts and forward
sales contracts to establish a minimum price on certain ounces of gold it
produces. Gains and losses realized on such instruments, as well as any cost or
revenue associated therewith, are recognized as sales when the related
production is delivered to customers.
EARNINGS PER SHARE - Effective December 31, 1997, the Company adopted SFAS
No. 128, "Earnings Per Share", and retroactively restated its earnings per share
for the nine months ended December 31, 1996 and the fiscal year ended March 31,
1996, to conform with the statement. Accordingly, net loss per common share is
computed by both the basic method, which uses the weighted average number of the
Company's common shares outstanding, and the diluted method, which includes the
dilutive common shares from stock options and warrants, as calculated using the
treasury stock method. For the periods presented, the outstanding stock options
were antidulitive. Since there is no difference between the Company's basic and
diluted earnings per share, dual presentation was accomplished in one line on
the income statement for all periods presented.
NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The impact of the adoption of SFAS No. 130
has not yet been fully determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information". SFAS No. 131 established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The impact of the adoption of SFAS No. 131 has not yet been
fully determined.
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to
conform with the current year's presentation.
CHANGE IN FISCAL YEAR - The Company changed its fiscal year end from March
31 to December 31 effective December 31, 1996.
2. PROVISION FOR MINE CLOSURE AND RECLAMATION
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.
II-17
<PAGE>
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 September 1996. Crushing and milling operations ceased in
October 1996. Reclamation activities of the surface and underground operations
began in September 1996. It is expected that full mine reclamation will be
completed by the end of 1999. All appropriate government agencies were informed
as to the Company's actions.
Cost estimates and budgets for the suspension of operation, closure and
reclamation were developed. In 1996, the Company recorded a charge for its
share of the expected closure and reclamation costs of $2,100.
During 1997, the Company continued its closure and reclamation efforts.
Actual gold recovery has exceeded the initial estimates. The amount realized
from the sale of idled equipment has also exceeded the initial estimates while
closure costs have been below estimates. As a result of these favorable
developments, the Company has revised its cost estimate for the closure and
reclamation at the AGMJV. Accordingly, the Company recognized $2,330 of income
in 1997.
3. PROVISION FOR IMPAIRMENT OF LONG-LIVED ASSETS
During the fiscal year ended March 31, 1996, the Company recorded
provisions for impairment of certain long-lived assets as follows:
<TABLE>
<S> <C>
American Girl Mining Joint Venture $ 9,063
Castle Mountain Venture 10,016
Arlo Resources, Ltd. (Note 7) 366
Jerooy Gold Project (Note 7) 14,436
-------
Total $33,881
=======
</TABLE>
During the fiscal year ended March 31, 1996, AGMJV exhausted the ore
reserves in the American Girl Mine and started production in the Oro Cruz ore
body. The experience of mining at Oro Cruz resulted in the downgrading of the
surface and underground reserves. Actual ore yields as well as the recoverable
ounces were less than originally projected. The Company concluded that, despite
drastic cost reduction measures at the Oro Cruz Mine, revenues from the AGMJV
would barely cover the cash costs of gold production and likely would not repay
the investment made in the development of the Oro Cruz Mine. Accordingly, an
impairment of $9,063 for the Company's investment in the AGMJV was recorded
during the year ended March 31, 1996.
Also during the year ended March 31, 1996, the Company determined that the
CMV would not generate sufficient cash flow to recover the $16,200 recorded
value of the Company's investment in the CMV. Accordingly, the Company recorded
an impairment of $10,016 related to its investment in the CMV in the fourth
quarter of the fiscal year ended March 31, 1996.
During 1997, gold prices suffered a dramatic decline. The Company reviewed
its operations in light of the current gold market conditions and determined
that it would not be able to recover its investment in the CMV. The Company
recorded an impairment of $1.8 million relating to its investment in the CMV.
II-18
<PAGE>
4. MINING JOINT VENTURES
CASTLE MOUNTAIN VENTURE - The Company's 25% undivided interest in the
Castle Mountain Venture, which operates a gold mine in San Bernardino County,
California has been proportionately reflected in the accompanying consolidated
financial statements. The following financial statements of CMV are reported on
a 100% basis and do not reflect the provision for impairment of long-lived
assets as recorded on the records of the Company.
<TABLE>
<CAPTION>
DECEMBER DECEMBER
FINANCIAL POSITION 31, 1997 31, 1996
-------- --------
<S> <C> <C>
Current assets $ 17,013 $ 15,054
Property, plant and mine development, net 61,190 73,548
Current liabilities (3,806) (3,022)
Long-term liabilities (1,787) (2,431)
Reclamation liabilities (2,275) (1,865)
--------- ---------
Net assets $ 70,335 $ 81,284
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER MARCH 31,
Results of Operations 31, 1997 31, 1996 1996
--------- --------- ----
<S> <C> <C> <C>
Product sales $ 40,641 $ 33,780 $57,114
Gross profit (loss) (11,253) (3,899) 7,472
Income (loss) before income taxes (13,061) (5,453) 5,191
</TABLE>
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER MARCH 31,
CASH FLOWS 31, 1997 31, 1996 1996
--------- --------- ----
<S> <C> <C> <C>
Net cash provided (used) by operating activities $ 7,367 $ 7,509 $ 33,006
Net cash provided (used) by investing activities (4,105) (1,736) (19,602)
Net cash provided (used) by financing activities (1,010) (1,365) (17,132)
Net increase (decrease) in cash $ 4,272 $ 4,408 $ (3,728)
======== ========= ========
</TABLE>
AMERICAN GIRL MINING JOINT VENTURE - The Company holds a 53% undivided
interest in the AGMJV, which operated a gold mine in Imperial County,
California. Mining operations were terminated in 1996. The closure and
reclamation efforts are underway at the AGMJV.
II-19
<PAGE>
5. INVENTORIES
The components of inventory are shown below:
<TABLE>
<S> <C> <C>
Gold bullion $ 2,031 $ 5,933
Ore and in-process 395 1,456
Materials and supplies 674 1,196
--------- --------
$ 3,100 $ 8,585
========= =========
</TABLE>
6. PROPERTY, PLANT AND MINE DEVELOPMENT
The components of property, plant and mine development are shown below:
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, 1997 31, 1996
--------- ---------
<S> <C> <C>
Mining properties, net of impairment allowance
of $5,337 and $5,881 at December 31, 1997 and 1996, respectively $ 7,200 $ 6,726
Mine development, net of impairment allowance
of $3,558 and $2,926 at December 31, 1997 and 1996, respectively 9,188 13,315
Plant and equipment, net of impairment allowance
of $2,655 at December 31, 1996 13,509 24,402
--------- ---------
29,897 44,443
Less accumulated depreciation, depletion and amortization (27,926) (39,917)
--------- ---------
Property, plant and mine development, net $ 1,971 $ 4,526
========= =========
</TABLE>
Maintenance and repair expenses charged to operations were $7,698, $8,474,
and $8,086 for the year ended December 31, 1997, the nine months ended December
31, 1996 and for the fiscal year ended March 31, 1996, respectively.
7. INVESTMENT IN UNCONSOLIDATED AFFILIATE
ARLO RESOURCES, LTD. - On September 10, 1996, the Company sold its 30%
interest in Arlo Resources, Ltd. for $1,197. Arlo is a Canadian company whose
business is to acquire, explore, and develop mineral properties in the Republic
of Panama. During the year ended March 31, 1996, Arlo dropped four of its
exploration concessions. The Company determined that the economic potential of
Arlo's concessions was insufficient to warrant further investment by the
Company. The Company wrote down its investment in Arlo to $1,197 in the year
ended March 31, 1996.
JEROOY GOLD PROJECT - The Company owned a 30% interest in the Jerooy Gold
Company ("Jerooy"), a joint stock company established to study, develop, and
mine the Jerooy Gold Project. Kyrghyzaltyn, a mining Company owned by the
government of Kyrgyztan, owned the remaining 70%.
II-20
<PAGE>
In view of unresolved political and logistic problems and economic uncertainties
associated with Jerooy, the Company recorded an impairment of its investment in
Jerooy for the year ended March 31, 1996.
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 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 if Kyrghyzaltyn executes a development
agreement with another party.
. Kyrghyzaltyn will pay MK Gold an additional $1,500 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
Company's balance sheet.
II-21
<PAGE>
8. INDUSTRY SEGMENT INFORMATION
The Company is not economically dependent on a limited number of customers
for the sale of its gold because gold commodity markets are well-developed
worldwide. The Company operated primarily in two industry segments, product
sales and mining services in the United States. The majority of the mining
service revenues are derived from one customer (CMV).
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Product sales $16,728 $14,604 $26,907
Mining services 14,911 9,421 11,439
Corporate and eliminations (3,750) (2,676) (3,963)
------- ------- -------
Total revenue $27,889 $21,349 $34,383
======= ======= =======
Gross profit:
Product sales $ 199 $ (271) $(1,996)
Mining services 1,307 757 2,085
Corporate and eliminations (72) (498)
------- -------
Total gross profit $ 1,434 $ 486 $ (409)
======= ======= =======
Identifiable:
Product sales 10,656 $ 9,841 $12,586
Mining services 2,243 1,641 1,883
Corporate and eliminations 17,058 21,496 24,737
------- ------- -------
Total assets $29,957 $32,978 $39,206
======= ======= =======
Depreciation, depletion and amortization:
Product sales $ 2,403 $ 3,070 $ 7,549
Mining services 66 83 1,133
Corporate and eliminations 41 15 20
------- ------- -------
Total depreciation, depletion and amortization $ 2,510 $ 3,168 $ 8,702
======= ======= =======
Capital expenditures:
Product sales $ 1,026 $ 1,156 $ 6,551
Mining services 152 0 160
Corporate and eliminations 52 38 6
------- ------- -------
Total capital expenditures $ 1,230 $ 1,194 $ 6,717
======= ======= =======
</TABLE>
II-22
<PAGE>
9. INCOME TAXES
The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER MARCH 31,
31, 1997 31, 1996 1996
--------- --------- ----
<S> <C> <C> <C>
Currently payable (refundable):
U.S. federal $ (601) $ (1,625) $1,570
State - (387) 374
--------- --------- ------
Total currently payable (refundable) (601) (2,012) 1,944
--------- --------- ------
Deferred:
U.S. federal 504 1,894 363
State 124 450 87
--------- --------- ------
Total deferred 628 2,344 450
--------- --------- ------
Total $ 27 $ 332 $2,394
========= ========= ======
</TABLE>
The deferred income tax provision (benefit) consists of:
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER MARCH 31,
31, 1997 31, 1996 1996
--------- --------- ----
<S> <C> <C> <C>
Depreciation, depletion and amortization $ 2,517 $ (1,735) $ 971
Reclamation and other liabilities 629 (778) 53
Deferred revenue 687 381 (2,770)
Inventory valuation (159) 498 (1,125)
Other 754 354 (887)
AMT credit 594 698 (794)
Basis difference in affiliate (145) (721)
Asset impairment 961 4,322 (13,091)
Net operating loss (5,648) (3,189)
Valuation allowance 293 1,938 18,814
--------- --------- --------
Deferred income taxes $ 628 $ 2,344 $ 450
========= ========= ========
</TABLE>
II-23
<PAGE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------ -----------------------------------------
ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL
<S> <C> <C> <C> <C> <C> <C>
Depreciation, depletion
and amortization $ 5,850 $(5,146) $ 704 $ 8,264 $(5,043) $ 3,221
Reclamation and other
liabilities 755 755 1,384 1,384
Deferred revenue 2,349 2,349 3,036 3,036
Inventory valuation 341 341 328 (146) 182
Other 329 (323) 6 1,094 (334) 760
AMT credit 122 122 716 716
Basis difference in
affiliate 1,133 1,133 1,133 1,133
Impairment of long-
lived assets 7,808 7,808 8,769 8,769
Net operating losses 8,837 8,837 3,189 3,189
Valuation allowance (21,468) (21,468) (21,175) (21,175)
-------- ------- -------- -------- -------- --------
$ 6,056 $(5,469) $ 587 $ 6,738 $(5,523) $ 1,215
======== ======= ======== ======== ======= ========
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred tax
assets reflect management's estimate of the amount which will be realized from
future taxable income of the character necessary to recognize such asset.
The provision for income taxes differs from the amounts computed by
applying the U.S. corporate income tax statutory rate of 35% for the following
reasons:
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
DECEMBER DECEMBER MARCH 31,
31, 1997 31, 1996 1996
-------- --------- ----
<S> <C> <C> <C>
U.S. corporate income tax expense
(benefit) at statutory rate $ (331) $ (1,553) $(14,060)
Percentage depletion in excess of basis (106) (598)
Valuation reserve 293 1,938 18,814
State income taxes, net of federal
tax benefit (49) (228) (1,949)
Other, net 114 281 187
--------- --------- --------
Income tax expense (benefit) $ 27 $ 332 $ 2,394
========= ========= ========
</TABLE>
II-24
<PAGE>
10. LONG-TERM DEBT
At December 31, 1997 and December 31, 1996, the Company had a $20,000
credit facility (the "Credit Facility") with Leucadia National Corporation
("Leucadia"). As of December 31, 1997 and December 31, 1996, the Company had no
amounts borrowed under this credit facility.
11. BENEFIT PLANS
The Company maintains a 401(k) Savings Plan (the "Plan") for all full-time
active employees and matches 50% of employee contributions to the Plan up to 5%
of eligible pay. Cost of the Plan was $93, $307 and $398 for the year ended
December 31, 1997, the nine months ended December 31, 1996, and the fiscal year
ended March 31, 1996, respectively.
12. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL - The Company's mining operations and exploration activities
are subject to various federal, state and local laws and regulations governing
protection of the environment. These laws are continually changing and, as a
general matter, are becoming more restrictive. The Company's policy is to
conduct its business in a manner that safeguards public health and mitigates the
environmental effects of its mining operations. To comply with these federal,
state and local laws, the Company has made and in the future may be required to
make capital and operating expenditures. However, the Company currently has no
significant environmental activities under development and does not anticipate
incurring any unforeseen capital or operating expenditures for environmental
compliance during the remainder of its current fiscal year or the succeeding
fiscal year.
Surety bonds totaling $3,038 (the Company's share is $1,046) have been
provided as required by various governmental agencies for environmental
protection, including reclamation bonds at the American Girl Mine and Castle
Mountain Mine.
PRODUCT SALES COMMITMENTS - The Company sells gold at spot and under gold
hedge contracts. Precious metal hedge contracts include forward sales contracts
and put and call options. Realization under these contracts is dependent upon
the counterparties performing in accordance with the terms of the contracts.
The Company does not anticipate nonperformance by the counterparties. The
Company hedges gold production to insure a minimum price for a significant level
of production. In general, the Company will provide a greater hedge for near
term and/or higher cost production. Hedging takes the form of selling forward
and creating collars. A collar includes buying put options and selling call
options. A put option gives the buyer the right, but not the obligation, to sell
gold to the put seller at a predetermined price on or before a predetermined
date. A call option gives the buyer the right, but not the obligation, to buy
gold from the call seller at a predetermined price on or before a predetermined
date. The risks associated with hedging are generally twofold. First, that
production may not be available to deliver gold against the hedged position; and
second, that the call options limit the amount of upside potential if the price
of gold increased above the option strike price. Under the Company's hedging
policies and production levels it is unlikely that the Company would not have
gold to deliver against hedged positions.
At December 31, 1997, for the year ended December 31, 1998, the Company had
sold forward 4,000 ounces of gold at an average price of $338 per ounce and had
purchased call options on 10,000 ounces of gold at an average price of $360 per
ounce.
These hedging arrangements allow the Company to selectively extend maturity
dates, thereby postponing delivery against sales commitments. This flexibility
allows the Company to sell gold into the
II-25
<PAGE>
spot market when conditions are favorable, while at the same time retaining the
benefits of the contango, or premium that is paid for gold when delivered in
settlement of forward sales contracts at maturity.
OTHER - CMV and AGMJV are committed to pay royalties to landowners
generally based on a percent of refined gold bullion. Effective net smelter
return royalties paid as a percent of the realized gold price were 2.1% for the
year ended December 31, 1997, 4.1% for the nine months ended December 31, 1996,
and 4.6% for the year ended March 31, 1996.
13. RELATED PARTY TRANSACTIONS
The Company's joint venture partner, Viceroy Gold Corporation ("VGC"), is
the manager of CMV and, as such, is entitled to receive a management fee of 1%
of capital expenditures and 2% of allowable costs as defined in the Castle
Mountain Venture Agreement. Management fees charged by VGC attributable to the
Company amounted to $167 for the year ended December 31,1997, $142 for the nine
months ended December 31, 1996 and $145 for the year ended March 31, 1996.
The Company is the manager of the AGMJV and under the terms of the American
Girl Mining Joint Venture Agreement is entitled to receive a management fee of
2% of allowable costs as defined in the Agreement. Management fee revenue
recognized by the Company amounted to $61 for the year ended December 31, 1997,
$139 for the nine months ended December 31, 1996, and $403 for the year ended
March 31, 1996.
The Company performs contract mining services for the CMV. Mining services
revenue recognized by the Company was $14,911 for the year ended December 31,
1997, $9,421 for the nine months ended December 31, 1996, and $11,439 for the
year ended March 31, 1996. See Note 8.
14. STOCK PLANS
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS - The Company has 180,000
authorized options in a non-employee director stock option plan. These options
are awarded at 50% of the fair market value of the stock on the date of the
award. Compensation expense is then recognized equally over the three year
vesting period. As of December 31, 1997, 150,000 non-employee director stock
options have been granted and 30,000 non-employee director stock options are
available for grant.
STOCK INCENTIVE PLAN - The Company has a stock incentive plan which allows
for a maximum of 2,500,000 options to be awarded. Options granted under the
stock incentive plan have an exercise price equal to the fair market value of
the stock on the date of grant and expire 10 years after the date of grant. The
following table summarizes the stock plan activities for both the non-employee
director and stock incentive plans:
II-26
<PAGE>
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31, ENDED MARCH 31,
1997 1996 1996
--------------------- --------------------- ---------------------
NUMBER PRICE NUMBER PRICE NUMBER PRICE
OF RANGE OF RANGE OF RANGE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Options:
Outstanding beginning of year 1,945,000 $1.47 - $4.00 685,000 $1.81 - $5.38 816,000 $2.72 - $5.38
Granted 250,000 $1.50 1,680,000 $1.47 - $1.72 299,000 $1.81 - $3.94
Canceled (151,200) $4.00 (420,000) $1.81 - $5.38 (430,000) $1.81 - $4.00
Outstanding end of year 2,043,800 $1.47 - $1.72 1,945,000 $1.47 - $4.00 685,000 $1.81 - $5.38
Weighted average fair market $0.71 $0.84 $0.73
value of options granted during year
</TABLE>
The Company accounts for stock options granted using Accounting Principles
Board (APB) Opinion 25. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with Statement of Financial
Accounting Standards (SFAS) No. 123, the Company's net loss and net loss per
common share would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ---------
<S> <C> <C> <C>
Net loss:
As reported $ 1,002 $ 4,581 $43,393
Pro forma 1,411 4,736 43,397
Net loss per common share (basic and diluted):
As reported $(0.05) $(0.24) $(2.24)
Pro forma $(0.07) $(0.24) $(2.24)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used: dividend yield of 0%; expected volatility of 20%; risk-free
interest rate of 6.34% and expected lives of 7 years subsequent to vesting date.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
A summary of the carrying amounts and estimated fair values of the
Company's forward contracts at December 31, 1997 and December 31, 1996 was as
follows:
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUES AMOUNT FAIR VALUES
<S> <C> <C> <C> <C>
Forward contracts and options None $194 None $314
</TABLE>
16. SELECTED COMPARABLE FINANCIAL DATA
The following table provides selected comparable financial data for the
year ended December 31,1997 and year ended December 31, 1996 (unaudited):
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Revenue $27,889 $ 29,856
Gross profit 1,434 (938)
Loss from operations (1,992) (36,021)
Income tax benefit (provision) (27) 4,534
Net loss (1,002) (39,980)
Net loss per common share (0.05) (2.06)
</TABLE>
******
II-28
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
II-29
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the Company's
definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the May
22, 1998 annual meeting of stockholders of the Company (the "Proxy Statement")
and is incorporated herein by reference. In addition, reference is made to Item
10 in Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included in the Proxy Statement
and is incorporated herein by reference.
III-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
<S> <C>
(a) Financial Statements, Schedules and Exhibits.
1. Financial Statements included in Part II of this Form 10-K:
Independent Auditors' Report II-9
Consolidated Statements of Operations for the year ended December 31,
1997, the nine months ended December 31, 1996 and the fiscal year
ended March 31, 1996 II-10
Consolidated Balance Sheets at December 31, 1997 and 1996 II-11
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997, the nine months ended December 31, 1996 and the
fiscal year ended March 31, 1996 II-12
Consolidated Statements of Cash Flows for the year ended December 31,
1997, the nine months ended December 31, 1996 and the fiscal year
ended March 31, 1996 II-13
Notes to Consolidated Financial Statements II-15 - II-29
2. Financial Statement Schedules as of December 31, 1997 included
in Part IV of this Form 10-K:
Valuation and Qualifying Accounts IV-3
3. Exhibits:
The exhibits to this Form 10-K are listed in the Exhibit Index contained
elsewhere in this Form 10-K.
(b) Reports on Form 8-K.
[None]
</TABLE>
IV-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 20, 1998.
MK Gold Company
By /s/ G.F. Joklik
-------------------------------------
G.F. Joklik
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 20, 1998 by the following persons on behalf of
the Corporation in the capacities indicated.
/s/ R.V. Hansberger Chairman of the Board
- --------------------------
R.V. Hansberger
/s/ G.F. Joklik President, Chief Executive Officer
- -------------------------- and Director
G.F. Joklik (Principal Executive Officer)
/s/ J.C. Farmer Controller, Treasurer and Secretary
- -------------------------- (Principal Financial and Accounting Officer)
J.C. Farmer
/s/ I.M. Cumming Director
- --------------------------
I.M. Cumming
/s/ G.J. Humphrey Director
- --------------------------
G.J. Humphrey
/s/ J.P. Miscoll Director
- --------------------------
J.P. Miscoll
/s/ R.S. Shriver Director
- --------------------------
R.S. Shriver
/s/ J.S. Steinberg Director
- --------------------------
J.S. Steinberg
IV-2
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
------- -------- ---------- ----
<S> <C> <C> <C> <C>
Provision for impairment of long-lived assets:
December 31, 1996 $33,881 none $22,419 $11,462
December 31, 1997 $11,462 $1,800 $ 4,367 $ 8,895
Valuation for income taxes:
December 31, 1996 $19,237 $1,938 none $21,125
December 31, 1997 $21,175 $ 293 none $21,468
</TABLE>
IV-3
<PAGE>
EXHIBIT INDEX
Exhibits marked with an asterisk are filed herewith, the remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference.
EXHIBIT
NUMBER EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company
(filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1996, and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996, and incorporated herein by reference).
10.1 Form of Indemnification Agreement to be entered into with Officers and
Directors of the Company (filed as Exhibit 10.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995,
and incorporated herein by reference).
10.2 Castle Mountain Contract Mining Agreement (filed as Exhibit 10.2 to
the Registrant's Form S-1 Registration Statement No. 33-70348 on
October 14, 1993, and incorporated herein by reference).
10.3 Castle Mountain Joint Venture Agreement (filed as Exhibit 10.3 to the
Registrant's Form S-1 Registration Statement No. 33-70348 on October
14, 1993, and incorporated herein by reference).
10.4 American Girl Venture Agreement (filed as Exhibit 10.4 to the
Registrant's Form S-1 Registration Statement No. 33-70348 on October
14, 1993, and incorporated herein by reference).
10.5 Oro Cruz Memorandum of Understanding (Memorandum of Agreement), (filed
as Exhibit 10.5 to the Registrant's Form S-1 Registration Statement
No. 33-70348 on October 14, 1993, and incorporated herein by
reference).
10.6 Agreement Not to Compete, Dated December 17, 1993, between the Company
and Morrison Knudsen (filed as Exhibit 10.12 to the Registrant's Form
S-1 Registration Statement No. 33-70348 on October 14, 1993, and
incorporated herein by reference).
10.7 Tax Agreement, Dated December 17, 1993, between the Company and
Morrison Knudsen (filed as Exhibit 10.15 to the Registrant's Form S-1
Registration Statement No. 33-70348 on October 14, 1993, and
incorporated herein by reference).
10.8 Registration Rights Agreement, Dated December 17, 1993, between the
Company and Morrison Knudsen (filed as Exhibit 10.16 to the
Registrant's Form S-1 Registration Statement No. 33-70348 on October
14, 1993, and incorporated herein by reference).
10.9 Equipment Lease Agreement, Dated December 17, 1993, between the
Company and Morrison Knudsen (filed as Exhibit 10.17 to the
Registrant's Form S-1 Registration Statement No. 33-70348 on October
14, 1993 and incorporated herein by reference).
10.10 Representative Arrangement with Johnson Mathey & Co. (filed as Exhibit
10.19 to the Registrant's Form S-1 Registration Statement No. 33-70348
on October 14, 1993, and incorporated herein by reference).
IV-4
<PAGE>
10.11 Benefit Plans (filed as Exhibit 10.23 of Amendment 1 to the
Registrant's Form S-1 Registration Statement No. 33-70348 on October
14, 1993, and incorporated herein by reference).1
+ Executive Incentive Plan
+ Stock Incentive Plan
+ Stock Option Plan for Non-Employee Directors
10.12 American Girl Amended and Restated Mining Joint Venture Agreement,
Dated January 1, 1994 (filed as Exhibit 10.20 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995
and incorporated herein by reference).
10.13 Employment Agreement with Thomas G. White effective January 1, 1995
(filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1995 and incorporated herein by
reference).1
10.14 Credit Agreement, Effective as of March 1, 1998, between Leucadia
National Corporation and MK Gold Company .*
10.15 Amended and Restated MK Gold Company Executive Incentive Plan, Dated
January 9, 1995 (filed as Exhibit 10.28 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995 and
incorporated herein by reference).1
10.16 Confidentiality Agreement, Dated May 4, 1995, between Leucadia
National Corporation and Morrison Knudsen Corporation regarding the
purchase of MK Gold Company common stock (filed as Exhibit 10.29 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated herein by reference).
10.17 Standstill Agreement, Dated May 22, 1995, between Leucadia National
Corporation and MK Gold Company (filed as Exhibit 10.30 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated herein by reference).
10.18 List of additional signers of the Indemnification Agreement submitted
under Exhibit 10.1 (filed as Exhibit 10.31 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996 and
incorporated herein by reference).
10.19 Stock Incentive Plan, as approved and amended by stockholders through
August 5, 1996 (filed as Exhibit 10.22 to the Registrant's Transition
Report on Form 10-K for the transition period from April 1, 1996 to
December 31, 1996).
10.20 Amendment No. 1 to Stock Option Plan for Non-Employee Directors,
approved by shareholders on July 14, 1994 (filed as Exhibit 10.33 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1995 and incorporated herein by reference).1
10.21 Republic National Bank Facility Letter and Metal Options & Master
Netting Agreement (filed as Exhibit 10.36 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 and
incorporated herein by reference).
23.1 Consent of Deloitte & Touche L.L.P. *
27 Financial Data Schedule *
________________
* Filed herewith.
1 Management contracts and compensatory plans and arrangements identified
pursuant to Item 14(a)(3) of Form 10-K.
IV-5
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-84754 and 333-16765 on Forms S-8 of MK Gold Company of our report dated
February 13, 1998, appearing in and incorporated by reference in this Annual
Report on Form 10-K of MK Gold Company for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 26, 1998
<PAGE>
CREDIT AGREEMENT
DATED AS OF MARCH 1, 1998
BETWEEN
MK GOLD COMPANY
AND
LEUCADIA NATIONAL CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS.................................................... 2
1.1. Defined Terms.................................................. 2
1.2. Accounting Terms; Utilization of GAAP for Purposes.............
of Calculations Under Agreement................................ 6
1.3. Other Definitional Provisions.................................. 6
SECTION 2. AMOUNTS AND TERMS OF COMMITMENT AND LOANS...................... 6
2.1. Commitment; Loans; Notes....................................... 6
2.2. Interest on the Loans.......................................... 7
2.3. Commitment Fee................................................. 8
2.4. Repayments and Prepayments; General Provisions.................
Regarding Payments............................................. 8
2.5. Use of Proceeds................................................ 9
SECTION 3. CONDITIONS TO LOANS............................................ 9
3.1. Closing Conditions............................................. 9
3.2. Further Conditions to Each Loan................................ 10
SECTION 4. REPRESENTATIONS AND WARRANTIES................................. 10
4.1. Financial Condition............................................ 11
4.2. Organization, Powers, Qualification, and Good Standing......... 11
4.3. Authorization, Etc............................................. 11
4.4. No Legal Bar................................................... 11
4.5. No Material Adverse Effect..................................... 12
4.6. Title to Properties; Liens..................................... 12
4.7. Taxes.......................................................... 12
4.8. No Material Litigation......................................... 12
4.9. Use of Proceeds................................................ 12
SECTION 5. AFFIRMATIVE COVENANTS.......................................... 12
5.1. Financial Statements and Other Reports......................... 12
5.2. Maintenance of Existence and Conduct of Business............... 14
5.3. Payment of Obligations......................................... 14
5.4. Books and Records.............................................. 14
5.5. Insurance...................................................... 14
5.6. Compliance with Laws........................................... 14
5.7. Proposed Projects.............................................. 15
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.8. Further Assurances............................................... 15
SECTION 6. NEGATIVE COVENANTS............................................... 15
6.1. Mergers, Subsidiaries, Etc....................................... 15
6.2. Investments; Loans and Advances.................................. 15
6.3. Indebtedness..................................................... 15
6.4. Liens............................................................ 16
6.5. Financial Covenants.............................................. 16
6.6. Capital Structure and Business................................... 16
6.7. Change of Fiscal Year............................................ 16
6.8. No Speculative Transactions...................................... 17
SECTION 7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES........................... 17
7.1. Events of Default................................................ 17
7.2. Remedies......................................................... 19
7.3. Termination...................................................... 19
SECTION 8. MISCELLANEOUS.................................................... 19
8.1. Fees and Expenses................................................ 19
8.2. Severability..................................................... 19
8.3. Heading.......................................................... 19
8.4. Applicable Law................................................... 19
8.5. Waiver of Jury Trial............................................. 20
8.6. Successors and Assigns........................................... 20
8.7. Notices.......................................................... 20
8.8. Survival......................................................... 20
8.9. Entire Agreement................................................. 20
8.10. Counterparts; Effectiveness...................................... 21
</TABLE>
INDEX OF EXHIBITS
Exhibit I - Form of Notice of Borrowing
Exhibit II - Form of Note
ii
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT (the "Agreement") is entered into as of March 1,
1998, between MK GOLD COMPANY, a Delaware corporation ("Borrower"), and LEUCADIA
NATIONAL CORPORATION, a New York corporation ("Lender"). Capitalized terms used
herein and not otherwise defined shall have the meanings set forth in subsection
1.1 of this Agreement.
RECITALS
WHEREAS, Borrower desires that Lender extend a revolving credit
facility to Borrower for certain corporate purposes of Borrower as specified in
subsection 2.5 hereof.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrower and Lender agree as follows:
SECTION 1. DEFINITIONS
-----------
1.1. DEFINED TERMS.
-------------
The following terms used in this Agreement shall have the following
meanings:
"Agreement" means this Credit Agreement between MK Gold Company and
---------
Leucadia National Corporation as it may be amended, restated, supplemented or
otherwise modified from time to time.
"Borrower" has the meaning specified in the Preamble hereto.
--------
"Business Day" means any day other than Saturday, Sunday and any other
------------
day on which banking institutions located in New York are authorized or required
to close.
"Charges" shall mean all national and local, foreign or other
-------
governmental taxes at the time due and payable, levies, assessments, charges,
liens, claims or encumbrances upon or relating to (i) the Obligations, (ii)
Borrower's employees, payroll, income or gross receipts, (iii) Borrower's
ownership or use of any of its assets or (iv) any other aspect of Borrower's
business.
"Closing Date" means March 1, 1998.
------------
2
<PAGE>
"Commitment" means the aggregate commitment of Lender to make Loans,
----------
which aggregate commitment shall be $20,000,000 on the Closing Date and
thereafter until the Termination Date, as such amount may be reduced from time
to time in accordance with the Agreement.
"Consolidated" or "consolidated" means with reference to any term
------------ ------------
defined herein, that term as applied to the accounts of Borrower consolidated in
accordance with GAAP
"Consolidated Current Assets" means, as at any date of determination,
---------------------------
the total assets of Borrower that are or are required to be classified as
current assets in conformity with GAAP.
"Consolidated Current Liabilities" means, as at any date of
--------------------------------
determination, all liabilities of Borrower that are or are required to be
classified as current liabilities in conformity with GAAP.
"Consolidated Net Worth" means, with respect to Borrower as of any
----------------------
date of determination, all amounts which should be included under shareholders'
equity on Borrower's consolidated balance sheet; provided that, in calculating
--------
shareholders' equity, marketable securities that have not suffered a decline in
value (other than a decline of a temporary nature) shall be reflected at the
amortized cost thereof, and marketable securities that have suffered a decline
in value considered to be other than temporary shall be reflected at the current
value thereof.
"Consolidated Tangible Net Worth" means, with respect to Borrower at
-------------------------------
any date, the Consolidated Net Worth of Borrower at such date, excluding,
---------
however, from the determination of the total assets at such date, (a) all
- -------
goodwill, capitalized organizational expenses, capitalized research and
development expenses, trademarks, trade names, copyrights, patents, patent
applications, licenses and rights in any thereof, and other intangible items in
accordance with GAAP, (b) all unamortized debt discount and expense, (c)
deferred income tax assets, (d) capital stock held in treasury and (e) any
write-up in the book value of any asset resulting from a revaluation thereof.
"Contractual Obligation" means any provision of any security issued by
----------------------
Borrower or of any agreement, instrument or undertaking to which Borrower is a
party or by which it or any of its property is bound.
"Default" means an Event of Default or an event that with notice or
-------
lapse of time or both would become an Event of Default.
"Event of Default" means each of the events set forth in Section 7.
----------------
"Fiscal Year" means the fiscal year of Borrower ending on December 31
-----------
3
<PAGE>
of each calendar year.
"Funding Date" means the date of funding of any Loan.
------------
"GAAP" means generally accepted accounting principles set forth in
----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, in each case as the same are applicable to the circumstances as of
the date of determination.
"Governmental Authority" means any nation or government, any state or
----------------------
other political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Indebtedness" means, as at any date of determination, the aggregate
------------
amount of all items which in conformity with GAAP would be classified as
liabilities on the balance sheet of Borrower.
"IRC" means the Internal Revenue Code of 1986 (or any successor
---
legislation thereto), as amended from time to time.
"Lender" has the meaning specified in the Preamble hereto.
------
"Lien" means any mortgage or deed of trust, pledge, hypothecation,
----
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
under the Uniform Commercial Code or comparable law of any jurisdiction).
"Loan Documents" means this Agreement, the Note, and any applications,
--------------
reimbursement agreements and other documents or certificates executed in favor
of Lender relating to this Agreement.
"Loans" means the loans made from time to time by Lender to Borrower
-----
pursuant to subsection 2.1.
"Material Adverse Effect" means (i) a material adverse effect upon the
-----------------------
business, operations, properties, assets, condition (financial or otherwise) or
prospects of Borrower or (ii) a material adverse effect on the ability of
Borrower to perform, or
4
<PAGE>
of Lender to enforce, the Obligations.
"Note" has the meaning specified in subsection 2.1(d).
----
"Notice of Borrowing" has the meaning specified in subsection 2.1(b).
-------------------
"Obligations" means all obligations of every nature of Borrower from
-----------
time to time owed to Lender under the Loan Documents, whether for principal,
interest, fees, expenses, indemnification or otherwise.
"Permitted Encumbrances" means the following encumbrances: (i) Liens
----------------------
for taxes or assessments or other governmental charges or levies, either not yet
due and payable or to the extent that nonpayment thereof is permitted by the
terms of this Agreement; (ii) any attachment or judgment lien, unless the
judgment it secures shall not, within thirty (30) days after the entry thereof,
have been discharged or execution thereof stayed pending appeal, or shall not
have been discharged within thirty (30) days after the expiration of any such
stay and (iii) mechanics and similar liens arising in ordinary course of
business that do not secure indebtedness and do not impair the use by the
Borrower of assets subject thereto in the course of its business.
"Person" means and includes natural persons, corporations, limited
------
partnerships, limited liability companies, general partnerships, joint stock
companies, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations, whether or not
legal entities, and governments and agencies and political subdivisions thereof.
"Prime Rate" means, for any day, a floating rate equal to the prime
----------
rate publicly quoted from time to time in the "Money Rates" section of The Wall
--------
Street Journal (or, if The Wall Street Journal ceases quoting a base rate of the
- -------------- -----------------------
type described, a rate of interest to be reasonably determined by Lender).
"Responsible Officer" means, with respect to any Person, any one of
-------------------
the Chairman of the Board, president, chief financial officer and the treasurer
of such Person.
"Termination Date" shall mean December 15, 2000, or such earlier date
----------------
as may be determined in accordance with subsection 2.1(e).
1.2. ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF
-----------------------------------------------------
CALCULATIONS UNDER AGREEMENT. Except as otherwise expressly provided in this
- ----------------------------
Agreement, all accounting terms not otherwise defined herein shall have the
meanings assigned to them in conformity with GAAP. Financial statements and
other information required to be delivered by Borrower to Lender pursuant to
clauses (a) and (b) of subsection 5.1 shall be prepared in accordance with GAAP
as in effect as the
5
<PAGE>
time of such preparation.
1.3. OTHER DEFINITIONAL PROVISIONS. References to "Sections" and
-----------------------------
"subsections" shall be to Sections and subsections, respectively, of this
Agreement unless otherwise specifically provided. Any of the terms defined in
subsection 1.1 may, unless the context otherwise requires, be used in the
singular or the plural, depending on the reference.
SECTION 2. AMOUNTS AND TERMS OF COMMITMENT
-------------------------------
AND LOANS
---------
2.1. COMMITMENT; LOANS; NOTES.
------------------------
(a) Commitment. Subject to the terms and conditions of this
----------
Agreement and in reliance upon the representations and warranties of Borrower
herein set forth, Lender hereby agrees to lend to Borrower from time to time
from and including the Closing Date through but excluding the Termination Date
an aggregate amount not exceeding the Commitment to be used for the purposes
identified to and approved by Lender in accordance with subsection 2.5. The
amount of the Commitment may be permanently reduced from time to time pursuant
to subsection 2.4(a)(ii). Within the limits of the Commitment, amounts borrowed
under this subsection 2.1(a) may be repaid and reborrowed up to but excluding
the Termination Date.
(b) Borrowing Mechanics. Each Loan shall be made on notice,
-------------------
given by Borrower to Lender not later than 10:00 a.m. (New York time) on the
third Business Day prior to the date of the proposed borrowing. Each such notice
(a "Notice of Borrowing") shall be made in writing substantially in the form of
Exhibit I annexed hereto, specifying (i) the amount of the proposed Loan and
- ---------
(ii) the proposed Funding Date with respect to such Loan. Each Loan shall be in
a minimum amount of $500,000 and integral multiples of $100,000 in excess of
that amount.
(c) Disbursement of Funds. Lender shall make the proceeds of any
---------------------
Loan available to Borrower on the Funding Date specified in the applicable
Notice of Borrowing by causing an amount of immediately available funds equal to
the proceeds of such Loan to be wired to the account of Borrower in the United
States specified by Borrower.
(d) Note. Loans made by Lender shall be evidenced by a
----
promissory note to be executed and delivered by Borrower on the Closing Date, in
the form of Exhibit II annexed hereto (the "Note"). The Note shall be payable to
----------
the order of Lender and shall represent the obligation of Borrower to pay the
amount of the Commitment or, if less, the aggregate unpaid principal amount of
all Loans made by
6
<PAGE>
Lender to Borrower with interest thereon as provided in subsection 2.2. The date
and amount of each Loan and each payment of principal with respect thereto shall
be recorded on the books and records of Lender, which books and records shall
constitute prima facie evidence of the accuracy of the information therein
----- -----
recorded. The entire unpaid balance of the Loans shall be due and payable on the
Termination Date.
(e) Change by Lender of the Termination Date. Lender shall have
----------------------------------------
the right, to be exercised in its sole discretion, at any time on or before
September 15 of each year, commencing on September 15, 1998, by notice to
Borrower, to change the Termination Date hereunder to the December 15
immediately following the date of such notification to Borrower. All Obligations
hereunder and under the other Loan Documents shall be due and payable on such
Termination Date. Lender shall have no obligation to change the Termination
Date.
2.2. INTEREST ON THE LOANS.
---------------------
(a) Rate of Interest. Borrower shall pay interest to Lender on
----------------
the outstanding principal amount of each Loan from the date made until repaid at
the Prime Rate.
(b) Interest Payments. Interest on each Loan shall be payable by
-----------------
Borrower to Lender in arrears on and to each of March 31, June 30, September 30
and December 31, commencing on the first such date to occur after the initial
Funding Date, and on the Termination Date.
(c) Default Interest. Upon the occurrence and during the
----------------
continuance of an Event of Default, the outstanding principal amount of all
Loans and, to the extent permitted by applicable law, any interest payments on
the Loans not paid when due, shall thereafter bear interest payable on demand at
the Prime Rate plus 2.0%.
(d) Computation of Interest. Interest on the Loans shall be
-----------------------
computed on the basis of a 360-day year, in each case for the actual number of
days elapsed in the period during which it accrues.
2.3. COMMITMENT FEE. Borrower shall pay to Lender a quarterly
--------------
commitment fee equal to the average of the daily excess of the Commitment over
the aggregate principal amount of Loans outstanding multiplied by 0.375% per
annum, such commitment fee to be calculated on the basis of a 360-day year and
the actual number of days elapsed and to be payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each year, commencing on the
first such date to occur after the Closing Date, and on the Termination Date.
2.4. REPAYMENTS AND PREPAYMENTS; GENERAL PROVISIONS
----------------------------------------------
7
<PAGE>
REGARDING PAYMENTS.
-------------------
(a) Prepayment and Reductions in Commitments.
----------------------------------------
(i) Voluntary Prepayments. Borrower may, on not less than
---------------------
[one (1)] Business Day prior written or telephonic notice, confirmed in writing
to Lender, on any Business Day prepay any Loans in whole or in part, in a
minimum amount of $100,000 and integral multiples of $100,000 in excess of that
amount.
(ii) Voluntary Reductions of Commitment. Borrower may, on
----------------------------------
not less than three (3) Business Days' prior written or telephonic notice
confirmed in writing to Lender, at any time and from time to time terminate in
whole or permanently reduce in part, without premium or penalty, the Commitment
in an amount up to the amount by which the Commitment exceeds the outstanding
amount of the Loans at the time of such termination or reduction; provided that
--------
any such partial reduction of the Commitment shall be in an aggregate minimum
amount of $1,000,000 and integral multiples of $500,000 in excess of that
amount. Borrower's notice to Lender shall designate the date (which shall be a
Business Day) of such termination or reduction and the amount of any partial
reduction, and such termination or reduction of the Commitment shall be
effective on the date specified in Borrower's notice.
(b) General Provisions Regarding Payments.
-------------------------------------
(i) Manner and Time of Payment. All payments by Borrower of
--------------------------
principal, interest, fees and other Obligations hereunder and under the Note
shall be made in immediately available funds and without defense, setoff or
counterclaim, free of any restriction or condition, and delivered to Lender not
later than 2:00 p.m. (New York time) on the date due at the office specified on
the signature pages hereof (or such other office as may be designated by Lender)
for the account of Lender; funds received by Lender after that time on such due
date shall be deemed to have been paid by Borrower on the next succeeding
Business Day.
(ii) Payments on Business Days. Whenever any payment to be
-------------------------
made hereunder shall be stated to be due on a day that is not a Business Day,
such payment shall be made on the next succeeding Business Day and such
extension of time shall be included in the computation of the payment of
interest hereunder or of the commitment fee hereunder, as the case may be.
2.5. USE OF PROCEEDS. The proceeds of the Loans shall be applied by
---------------
Borrower for funding proposed business projects, (i) which projects are
satisfactory to, and have been approved in advance in writing by, Lender in its
sole discretion, and (ii) for which Borrower has submitted to Lender business
plans, projections, and any other documentation reasonably requested by Lender.
8
<PAGE>
SECTION 3. CONDITIONS TO LOANS
-------------------
3.1. CLOSING CONDITIONS. The obligation of Lender to make the Loan on
------------------
the initial Funding Date, or to take, fulfill or perform any other action
hereunder, is subject to the following conditions having been satisfied or
provided for in a manner satisfactory to Lender, or waived in writing by Lender:
(a) This Agreement or counterparts hereof shall have been duly
executed by, and delivered to, Borrower and Lender; the Note shall have been
executed by Borrower and delivered to Lender; and Lender shall have received
such documents, instruments, agreements and legal opinions as Lender shall
request in connection with the transactions contemplated by this Agreement and
the other Loan Documents, each in form and substance reasonably satisfactory to
Lender.
(b) Lender shall have received (i) resolutions of the board of
directors of Borrower, as necessary or appropriate, certified by the Secretary
or Assistant Secretary of Borrower, as of the Closing Date, to be duly adopted
and in full force and effect on such date, authorizing (A) the consummation of
each of the transactions contemplated by the Loan Documents and (B) specific
officers to execute and deliver this Agreement and the other Loan Documents and
(ii) a copy of the organizational charter and all amendments thereto of
Borrower, certified as of a recent date by the Secretary of State of Delaware,
and a copy of Borrower's by-laws, each certified by the Secretary or Assistant
Secretary of Borrower as true and correct as of the Closing Date.
(c) Lender shall have received such additional information and
materials in respect of Borrower as Lender may reasonably request, including,
without limitation copies of any debt agreements, security agreements and other
material contracts.
3.2. FURTHER CONDITIONS TO EACH LOAN. The obligation of Lender to
-------------------------------
fund any Loan on the Funding Date thereof is subject to the following:
(a) Lender shall have received before the Funding Date, in
accordance with the provisions of subsection 2.1(b), an originally executed
Notice of Borrowing, in each case signed by a Responsible Officer.
(b) No representation or warranty by Borrower contained herein
or in any of the other Loan Documents shall be untrue or incorrect as of such
date, except to the extent that such representation or warranty expressly
relates to an earlier date.
(c) No event or circumstance having a Material Adverse
9
<PAGE>
Effect shall have occurred since the date hereof.
(d) No Default or Event of Default shall have occurred and be
continuing or would result after giving effect to any Loans.
(e) Borrower shall have performed in all material respects all
agreements and satisfied all conditions which this Agreement provides shall be
performed or satisfied by it on or before that Funding Date.
The request and acceptance by Borrower of the proceeds of any Loan shall be
deemed to constitute, as of the date of such request or acceptance, a
representation and warranty by Borrower that the conditions in this subsection
3.2 have been satisfied.
SECTION 4. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants to Lender that:
4.1. FINANCIAL CONDITION. The audited consolidated balance sheet of
-------------------
Borrower as at December 31, 1996, and the related consolidated statements of
income, statements of changes in shareholders' equity and statements of cash
flows (including the notes thereto) for the Fiscal Year ended on such date, and
the unaudited consolidated balance sheet of Borrower as at September 30, 1997,
and the related consolidated statements of income, statements of changes in
shareholders' equity and statements of cash flow for the nine months ended on
such date, copies of each of which have heretofore been furnished to Lender, are
complete, true and correct, and present fairly in accordance with GAAP the
financial condition of Borrower as at such date, and the results of its
operations and changes in cash flows for the respective period then ended. All
such financial statements, including the related schedules and notes thereto,
have been prepared in accordance with GAAP applied consistently.
4.2. ORGANIZATION, POWERS, QUALIFICATION, AND GOOD STANDING.
------------------------------------------------------
(a) Organization and Powers. Borrower is a corporation duly
-----------------------
organized, validly existing and in good standing under the laws of Delaware, and
has no subsidiaries. Borrower has all requisite corporate power and authority
to own and operate its properties, to carry on its business as now conducted and
as proposed to be conducted, to enter into each of the Loan Documents to which
it is a party, to carry out the transactions contemplated thereby and to issue
and pay the Note.
(b) Qualification and Good Standing. Borrower is qualified to do
-------------------------------
business and is in good standing in every jurisdiction where its assets are
located and wherever necessary to carry out its business and operations, except
in jurisdictions where the failure to be so qualified or in good standing has
not had and will not have a
10
<PAGE>
Material Adverse Effect.
4.3. AUTHORIZATION, ETC. The execution, delivery and performance of
-------------------
the Loan Documents have been duly authorized by all necessary corporate action
on the part of Borrower.
4.4. NO LEGAL BAR. The execution, delivery and performance of this
------------
Agreement and the Notes, the borrowings hereunder and the use of the proceeds
thereof, (a) do not contravene any provision of Borrower's charter or bylaws,
(b) do not violate any law or regulation, or any order or decree of any court or
Governmental Authority, (c) do not violate any Contractual Obligation and (d)
will not result in, or require, the creation or imposition of any Lien on any of
its properties or revenues pursuant to any applicable provisions of law or
Contractual Obligation.
4.5. NO MATERIAL ADVERSE EFFECT. Since December 31, 1996, no event or
--------------------------
change has occurred that has caused or evidences, either individually or in the
aggregate, a Material Adverse Effect except for the decline in the price of gold
after December 31, 1996 and prior to the date hereof.
4.6. TITLE TO PROPERTIES; LIENS. Borrower has good, sufficient and
--------------------------
legal title to all of its respective properties and assets reflected in the
financial statements referred to in subsection 4.1, except for assets and
properties not constituting a material portion of the assets and properties of
Borrower and for assets disposed of since the date of such financial statements
in the ordinary course of business. Except as permitted by this Agreement, all
such properties and assets are free and clear of Liens.
4.7. TAXES. All tax returns, reports and statements, including
-----
information returns, required by any Governmental Authority to be filed by
Borrower have been filed with the appropriate Governmental Authority and all
Charges have been paid prior to the date on which any fine, penalty, interest or
late charge may be added thereto for nonpayment thereof (or any such fine,
penalty, interest, late charge or loss has been paid).
4.8. NO MATERIAL LITIGATION. Except as set forth in Schedule 4.8
----------------------
hereto, no litigation, investigation or proceeding of or before any arbitrator
or Governmental Authority is pending or, to the knowledge of Borrower,
threatened by or against Borrower or against any of its respective properties or
revenues (a) with respect to any of the Loan Documents or any of the
transactions contemplated hereby or thereby, or (b) which could reasonably be
expected to have a Material Adverse Effect.
4.9. USE OF PROCEEDS. The proceeds of any Loan are being used only
---------------
for purposes approved by Lender pursuant to subsection 2.5.
11
<PAGE>
SECTION 5. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, so long as the Commitment shall
remain in effect and until payment in full of all of the Loans and other
Obligations, it shall perform all covenants in this Section 5.
5.1. FINANCIAL STATEMENTS AND OTHER REPORTS. Borrower shall maintain
--------------------------------------
a system of accounting established and administered in accordance with sound
business practices to permit preparation of financial statements in conformity
with GAAP. Borrower shall deliver to Lender:
(a) Quarterly Financials. As soon as available and in any event
--------------------
within fifty-five (55) days after the end of each of the first three fiscal
quarters of each Fiscal Year, Borrower's quarterly report to shareholders on
Form 10-Q, as filed with the Securities and Exchange Commission, certified by a
Responsible Officer as being fairly stated in all material respects (subject to
normal year-end audit adjustments).
(b) Year-End Financials. As soon as available and in any event
-------------------
within one hundred (100) days after the end of each Fiscal Year, the audited
consolidated financial statements of Borrower including the balance sheet of
Borrower as at the end of such Fiscal Year and the related consolidated
statements of income, changes in stockholders' equity and cash flows of Borrower
for such Fiscal Year, setting forth in comparative form the corresponding
figures for the previous Fiscal Year.
(c) Compliance Certificate. Concurrent with the delivery of the
----------------------
financial statements referred to in subsections 5.1(a) and 5.1(b), a certificate
of a Responsible Officer stating that, to the best of such Responsible Officer's
knowledge, Borrower during such period has observed or performed all of its
covenants and other agreements, and satisfied every condition, contained in this
Agreement and the other Loan Documents to which it is a party to be observed,
performed or satisfied by it, and that such Responsible Officer has obtained no
knowledge of any Default or Event of Default except as specified in such
certificate and setting forth a calculation of the financial covenants referred
to in subsection 6.5 in reasonable detail with the computation needed to
demonstrate compliance therewith at the end of such fiscal period.
(d) Reports to Securityholders. Within ten (10) days after the
--------------------------
same are sent or made available, copies of all financial statements, reports,
notices and proxy statements sent or made available generally by Borrower to its
security holders and within ten (10) days after the same are filed, copies of
all financial statements and reports which Borrower may make to, or file with,
the Securities and Exchange
12
<PAGE>
Commission.
(e) Events of Default, etc. Promptly upon any Responsible
----------------------
Officer of Borrower obtaining knowledge: (i) of any condition or event that
constitutes a Default or Event of Default; (ii) of any condition or event that
would be required to be disclosed in a current report filed by Borrower with the
Securities and Exchange Commission on Form 8-K (Items 1,2,4,5, and 6 of such
Form as in effect on the date hereof) if Borrower were required to file such
reports under the Securities Exchange Act of 1934, as amended; or (iii) of the
occurrence of any event or change that has caused or evidences or could
reasonably be expected to cause a Material Adverse Effect, an officer's
certificate of Borrower specifying the nature and period of existence of such
condition, event or change.
(f) Other Information. With reasonable promptness, such other
-----------------
information and data with respect to Borrower as from time to time may be
reasonably requested by Lender.
5.2. MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. Borrower
------------------------------------------------
shall: (i) do or cause to be done all things necessary to preserve and keep in
full force and effect its corporate existence and its rights and franchises;
(ii) continue to conduct its business substantially as now conducted or as
otherwise permitted hereunder; (iii) at all times maintain, preserve and protect
all of its assets and properties used or useful in the conduct of its business,
and keep the same in good repair, working order and condition in all material
respects (taking into consideration ordinary wear and tear) and from time to
time make, or cause to be made, all necessary or appropriate repairs,
replacements and improvements thereto consistent with industry practices; and
(iv) transact business only in such corporate and trade names as are set forth
in Schedule 5.2 or have been disclosed in writing to the Lender prior to such
------------
use.
5.3. PAYMENT OF OBLIGATIONS. Borrower shall pay and discharge or
----------------------
cause to be paid and discharged promptly all Charges payable by it, including
(a) Charges imposed upon it, its income and profits, or any of its property
(real, personal or mixed) and all Charges with respect to tax, social security
and unemployment withholding with respect to its employees, and (b) lawful
claims for labor, materials, supplies and services or otherwise, before any
thereof shall become past due.
5.4. BOOKS AND RECORDS. Borrower shall keep adequate books and
-----------------
records with respect to its business activities in which proper entries,
reflecting all financial transactions, are made in accordance with GAAP and on a
basis consistent with the financial statements of Borrower delivered pursuant to
subsection 4.1.
5.5. INSURANCE. Borrower shall, at its sole cost and expense,
---------
maintain policies of insurance with financially sound and reputable insurers
against risks and in amounts comparable to those maintained by corporations in
the same or similar
13
<PAGE>
businesses similarly situated.
5.6. COMPLIANCE WITH LAWS. Borrower shall comply with all federal,
--------------------
state, local and foreign laws and regulations applicable to it, including,
without limitation, all environmental laws, except to the extent that the
failure to comply, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect.
5.7. PROPOSED PROJECTS. The proceeds of any Loan shall be used only
-----------------
for purposes approved by Lender pursuant to subsection 2.5. and Borrower shall
provide to Lender all information reasonably necessary for Lender to make an
informed decision with respect to any proposed business project pursuant to
subsection 2.5.
5.8. FURTHER ASSURANCES. At any time or from time to time, upon the
------------------
request of Lender, Borrower shall execute and deliver such further documents and
do such other acts and things as Lender may reasonably request in order to
effect fully the purposes of this Agreement and the other Loan Documents and to
provide for payment of the Obligations in accordance with the terms of this
Agreement and the other Loan Documents.
SECTION 6. NEGATIVE COVENANTS
------------------
Borrower agrees that without the prior written consent of Lender, from
and after the date hereof until the later of the Termination Date and payment in
full of all of the Loans and other Obligations:
6.1. MERGERS, SUBSIDIARIES, ETC. Borrower shall not directly or
---------------------------
indirectly, by operation of law or otherwise, (a) form or acquire any subsidiary
other than subsidiaries engaged in joint ventures with an aggregate investment
by Borrower not exceeding $3,000,000; (b) merge with, consolidate with, acquire
all or substantially all of the assets or capital stock of, or otherwise combine
with or acquire, any Person or any operating division of any Person; (c)
liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution); or (d) dispose of all or any substantial part of its property or
business.
6.2. INVESTMENTS; LOANS AND ADVANCES. Borrower shall not make or
-------------------------------
permit to exist any investment in, or make, accrue or permit to exist loans or
advances of money to, any Person, through the direct or indirect lending of
money, holding of securities or otherwise; provided that Borrower can make
investments in subsidiaries engaged in joint ventures to the extent permitted by
Section 6.1(a) and make loans or advances in the ordinary course of its business
in an aggregate outstanding amount not in excess of $500,000.
14
<PAGE>
6.3. INDEBTEDNESS. Borrower shall not create, incur, assume or permit
------------
to exist any Indebtedness, except (without duplication) (i) the Loans and the
other Obligations, (ii) deferred taxes, (iii) unfunded pension fund and other
employee benefit plan obligations and liabilities to the extent they are
permitted to remain unfunded under applicable law, (iv) purchase money
financings and capital lease obligations in an aggregate outstanding amount at
any time not greater than $100,000, (iv) existing Indebtedness described in
Schedule 6.3 and refinancings thereof or amendments or modifications thereto
- ------------
which do not have the effect of increasing the principal amount thereof or
changing the amortization thereof (other than to extend the same) and which are
otherwise on terms and conditions no less favorable to Borrower or Lender, as
determined by Lender, than the terms of the Indebtedness being refinanced,
amended or modified.
6.4. LIENS. Borrower shall not create, incur, assume or permit to
-----
exist any Lien on or with respect to any of its properties or assets (whether
now owned or hereafter acquired) except for (a) Permitted Encumbrances and (b)
Liens in existence on the date hereof and summarized on Schedule 6.4. In
------------
addition, Borrower shall not become a party to any agreement, note, indenture or
instrument, or take any other action, which would prohibit the creation of a
Lien on any of its properties or other assets in favor of Lender, as collateral
for the Obligations, except leases or licenses which prohibit Liens upon the
assets that are subject thereto.
6.5. FINANCIAL COVENANTS.
-------------------
(a) Minimum Current Ratio. Borrower shall not permit the ratio
---------------------
of Consolidated Current Assets to Consolidated Current Liabilities at any time
to be less than 3.0 to 1.0.
(b) Debt to Equity Ratio. Borrower shall not permit the ratio of
--------------------
(i) Consolidated Indebtedness to (ii) Consolidated Net Worth at any time to
exceed 1.25 to 1.0.
(c) Minimum Tangible Net Worth. Borrower shall maintain at all
--------------------------
times Consolidated Tangible Net Worth not less than the sum of (i) $15,000,000
and (ii) 40% of consolidated net income of Borrower for each fiscal quarter,
commencing with the fiscal quarter ended December 31, 1997, provided, however,
-------- -------
that the amount determined pursuant to this clause (ii) shall equal zero for any
fiscal quarter for which there is a net loss.
6.6. CAPITAL STRUCTURE AND BUSINESS. Borrower shall not make any
------------------------------
changes in any of its business objectives, purposes or operations which could
adversely affect the repayment of the Loans or any of the other Obligations or
could have or result in a Material Adverse Effect. Borrower shall not engage in
any business other than the businesses currently engaged in by it.
15
<PAGE>
6.7. CHANGE OF FISCAL YEAR. Borrower shall not change its Fiscal
---------------------
Year.
6.8. NO SPECULATIVE TRANSACTIONS. Borrower shall not engage in any
---------------------------
transaction involving commodity options, futures contracts or similar
transactions, except solely to hedge against fluctuations in the prices of
commodities owned or purchased by it and the values of foreign currencies
receivable or payable by it and interest swaps, caps or collars.
SECTION 7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES; TERMINATION
---------------------------------------------------
7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the
-----------------
following events (regardless of the reason therefor) shall constitute an "Event
of Default" hereunder:
(a) Borrower shall fail (i) to make any payment of principal of,
or interest on any Loan, or fees owing hereunder or any of the other Obligations
when due and payable or (ii) to pay or reimburse Lender for any expense
reimbursable hereunder or under any other Loan Document, in each case within ten
(10) Business Days following Lender's demand for such reimbursement or payment
of expenses; or
(b) Borrower shall fail to comply with subsection 2.5, 5.1(e) or
5.5 or Section 6 of this Agreement; or
(c) Borrower shall fail or neglect to perform, keep or observe
any other provision of this Agreement or of any of the other Loan Documents
(other than any provision embodied in or covered by any other clause of this
Section 7) and the same shall remain unremedied for twenty (20) days or more; or
(d) a default or breach under any other agreement, document or
instrument to which Borrower is a party which is not cured within any applicable
grace period, and such default or breach (i) involves the failure to make any
payment when due in respect of any Indebtedness (other than the Obligations) of
Borrower in excess of $500,000 in the aggregate, or (ii) causes, or permits any
holder of such Indebtedness or a trustee to cause, Indebtedness or a portion
thereof in excess of $500,000 in the aggregate to become due prior to its stated
maturity or prior to its regularly scheduled dates of payment, regardless of
whether such right is exercised, by such holder or trustee; or
(e) a case or proceeding shall have been commenced against
Borrower in a court having competent jurisdiction seeking a decree or order in
respect
16
<PAGE>
of Borrower (i) under any applicable bankruptcy or other similar law, (ii)
appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator
(or similar official) of Borrower or of any substantial part of its properties
or (iii) ordering the winding-up or liquidation of the affairs of Borrower and
such case or proceeding shall remain undismissed or unstayed for thirty (30)
consecutive days or such court shall enter a decree or order granting the relief
sought in such case or proceeding; or
(f) Borrower shall (i) file a petition seeking relief under any
applicable bankruptcy or other similar law, (ii) consent to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) of Borrower or of any
substantial part of its properties, (iii) fail generally to pay its debts as
such debts become due or (iv) take any corporate action in furtherance of any
such action; or
(g) there shall occur an event which would have a Material
Adverse Effect; or
(h) any representation or warranty herein or in any other Loan
Document or in any written statement, report, financial statement or certificate
made or delivered to Lender by Borrower is untrue or incorrect in any material
respect as of the date when made or deemed made; or
(i) assets of Borrower with a fair market value of $500,000 or
more shall be attached, seized, levied upon or subjected to a writ or distress
warrant, or come within the possession of any receiver, trustee, custodian or
assignee for the benefit of creditors of Borrower and such condition continues
for thirty (30) days or more; or
(j) a final judgment or judgments for the payment of money in
excess of $500,000 in the aggregate at any time outstanding shall be rendered
against Borrower and the same shall not, within thirty (30) days after the entry
thereof, have been discharged or execution thereof stayed or bonded pending
appeal, or shall not have been discharged prior to the expiration of any such
stay; or
(k) any material provision of any Loan Document shall for any
reason cease to be valid, binding and enforceable in accordance with its terms
(or Borrower shall challenge the enforceability of any Loan Document or shall
assert in writing, or engage in any action or inaction based on any such
assertion, that any provision of any of the Loan Documents has ceased to be or
otherwise is not valid, binding and enforceable in accordance with its terms).
7.2. REMEDIES. If any Event of Default shall have occurred and be
--------
continuing, Lender may, without notice, terminate the Commitment to make Loans
17
<PAGE>
hereunder and/or declare all Obligations to be forthwith due and payable,
whereupon the Commitment to make Loans hereunder shall terminate and all
Obligations shall become and be due and payable, without presentment, demand,
protest or further notice of any kind, all of which are expressly waived by
Borrower; provided, however, that upon the occurrence of an Event of Default
-------- -------
specified in subsection 7.1(e), (f) or (i) hereof, the Commitment to make Loans
hereunder shall automatically terminate and the Obligations shall automatically
become due and payable without declaration, notice or demand by Lender.
7.3. TERMINATION. If Lender shall cease, for any reason, to own at
-----------
least forty-five percent (45%) of the outstanding capital stock of Borrower,
then Lender shall have the right, on not less than ninety (90) days' notice to
Borrower, to terminate the Commitment to make Loans hereunder and declare all
Obligations to be forthwith due and payable, whereupon the Commitment to make
loans hereunder shall terminate and all Obligations shall become due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are expressly waived by Borrower.
SECTION 8. MISCELLANEOUS
-------------
8.1. FEES AND EXPENSES. Borrower shall reimburse Lender for all out-
-----------------
of-pocket expenses incurred in connection with the preparation and
administration of the Loan Documents and any amendments thereto or waivers
thereunder, including the reasonable fees and expenses of its counsel.
8.2. SEVERABILITY. In case any provision in or obligation under this
------------
Agreement or the other Loan Documents shall be invalid, illegal or unenforceable
in any jurisdiction, the validity, legality, and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
8.3. HEADING. Section and subsection headings in this Agreement are
-------
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
8.4. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND
--------------
THE LEGAL RELATIONS BETWEEN THE PARTIES SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
8.5. WAIVER OF JURY TRIAL. EACH OF BORROWER AND LENDER HEREBY
--------------------
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND
ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, THE NOTE OR THE TRANSACTIONS CONTEMPLATED
18
<PAGE>
HEREBY.
8.6. SUCCESSORS AND ASSIGNS. This agreement shall be binding upon the
----------------------
parties hereto and their respective successors and assigns and shall inure to
the benefit of the parties hereto and the successors and assigns of Lender.
Borrower may not assign any of its rights or obligations hereunder without the
consent of Lender. The terms and provisions of this Agreement shall inure to
the benefit of any assignee or transferee of Lender, and in the event of any
such transfer or assignment the rights and privileges herein conferred upon
Lender shall automatically extend to and be vested in such transferee or
assignee, all subject to the terms and conditions hereof.
8.7. NOTICES. Except as otherwise provided herein, whenever it is
-------
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by another, or whenever any of the parties desires to give or serve upon
another any communication with respect to this Agreement, each such notice,
demand, request, consent, approval, declaration or other communication shall be
in writing and either shall be delivered in person with receipt acknowledged or
by registered or certified mail, return receipt requested, postage prepaid, or
telecopied and confirmed by telecopy answerback and addressed as set forth on
the signature pages hereto. The giving of any notice required hereunder may be
waived in writing by the party entitled to receive such notice. Every notice,
demand, request, consent, approval, declaration or other communication hereunder
shall be deemed to have been duly given or served on the date on which
personally delivered, with receipt acknowledged, or three (3) Business Days
after the same shall have been deposited in the United States mail. Failure or
delay in delivering copies of any notice, demand, request, consent, approval,
declaration or other communication to the persons designated above to receive
copies shall in no way adversely affect the effectiveness of such notice,
demand, request, consent, approval, declaration or other communication.
8.8. SURVIVAL. The representations and warranties of Borrower in this
--------
Agreement shall survive the execution, delivery and acceptance hereof by the
parties hereto and the closing of the transactions described herein or related
hereto.
8.9. ENTIRE AGREEMENT. This Agreement, taken together with all of the
----------------
other Loan Documents and all certificates and other documents delivered by
Borrower to Lender pursuant to the Loan Documents, embodies the parties' entire
agreement and supersedes all prior agreements, written and oral, relating to the
subject matter hereof.
8.10. COUNTERPARTS; EFFECTIVENESS. This Agreement and any
---------------------------
amendments, waivers, consents or supplements hereto or in connection herewith
may be executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an
19
<PAGE>
original, but all such counterparts together shall constitute but one
and the same instrument; signature pages may be detached from multiple separate
counterparts and attached to a single counterpart so that all signature pages
are physically attached to the same document.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
BORROWER:
MK GOLD COMPANY
By:____________________________
Name:
Title:
NOTICE ADDRESS:
MK Gold Company
60 East South Temple, Suite 2100
Salt Lake City, Utah 84014
Attn: John Farmer
Fax: (801) 297-6950
Tel: (801) 297-6900
LENDER:
LEUCADIA NATIONAL CORPORATION
By:______________________________
Name:
Title:
NOTICE ADDRESS:
Leucadia National Corporation
315 Park Avenue South
New York, NY 10010-3679
Attn: Joseph A. Orlando
Vice President and
Chief Financial Officer
Fax: (212) 598-3241
Tel: (212) 460-1932
21
<PAGE>
EXHIBIT I
(FORM OF NOTICE OF BORROWING)
NOTICE OF BORROWING
Pursuant to that certain Credit Agreement, dated as of January __, 1998 (the
"Credit Agreement"), by MK GOLD COMPANY, a Delaware corporation ("Borrower"),
and LEUCADIA NATIONAL CORPORATION, a New York corporation ("Lender"), this
represents Borrower's request to borrow on __________, 199__, from Lender a Loan
of $________________. Capitalized terms used herein and not defined shall have
the meanings assigned to them in the Credit Agreement. The proceeds of such
Loan are to be deposited at:
____________________________________
____________________________________
____________________________________
____________________________________
The undersigned officer and Borrower certify that:
(i) No event has occurred and is continuing or would result from the
consummation of the borrowing contemplated hereby that would
constitute a Default or Event of Default;
(ii) Borrower has satisfied all conditions which the Credit Agreement
and the other Loan Documents provide shall be satisfied on or before
the date of the Loan requested hereby; and
(iii) Each of the representations and warranties contained in the
Credit Agreement are true and correct on the date hereof, except to
the extent that such representation or warranty expressly relates to
an earlier date.
DATED:________________ MK GOLD COMPANY
By:______________________
Name:
Title:
<PAGE>
EXHIBIT II
(FORM OF NOTE)
MK GOLD COMPANY
PROMISSORY NOTE
U.S. $20,000,000 New York, New York
March 1, 1998
FOR VALUE RECEIVED, MK GOLD COMPANY, a Delaware corporation
("Borrower"), promises to pay to the order of LEUCADIA NATIONAL CORPORATION, a
New York corporation ("Payee"), on or before the Termination Date (as defined in
the Credit Agreement referred to below) the lesser of (x) TWENTY MILLION DOLLARS
($20,000,000) and (y) the unpaid principal amount of all Loans made by Payee to
Borrower under the Credit Agreement referred to below.
Borrower also promises to pay interest on the unpaid principal amount
hereof, from the date hereof until paid in full, at the rates and at the times
provided by that certain Credit Agreement, dated as of March 1, 1998, between
Borrower and Payee ( as it may be amended, the "Credit Agreement"). Capitalized
terms used herein and not defined have the meanings assigned to them in the
Credit Agreement.
This Note is Borrower's "Note" and is issued pursuant to and entitled
to the benefits of the Credit Agreement, to which reference is hereby made for a
more complete statement of the terms and conditions under which the Loans
evidenced hereby were made and are to be repaid.
All payments of principal and interest in respect of this Note shall
be made in lawful money of the United States of America in immediately available
funds at the location designated by Payee.
Whenever any payment on this Note shall be stated to be due on a day
which is not a Business Day, such payment shall be made on the next succeeding
<PAGE>
Business Day and such extension of time shall be included in the computation of
the payment of interest on this Note.
This Note is subject to prepayment at the option of Borrower as
provided in subsection 2.4(a)(i) of the Credit Agreement.
Upon the occurrence of an Event of Default, the unpaid balance of the
principal amount of this Note, together with all accrued and unpaid interest
thereon, may become, or may be declared to be, due and payable in the manner,
upon the conditions and with the effect provided in the Credit Agreement.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
and delivered by its officer thereunto duly authorized as of the date and at the
place first written above.
MK GOLD COMPANY
By:______________________
Name:
Title:
II-2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN MK GOLD COMPANY'S ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,189
<SECURITIES> 0
<RECEIVABLES> 3,149
<ALLOWANCES> 0
<INVENTORY> 3,100
<CURRENT-ASSETS> 24,804
<PP&E> 29,897
<DEPRECIATION> 27,926
<TOTAL-ASSETS> 28,617
<CURRENT-LIABILITIES> 4,441
<BONDS> 0
0
0
<COMMON> 195
<OTHER-SE> 19,552
<TOTAL-LIABILITY-AND-EQUITY> 28,617
<SALES> 16,656
<TOTAL-REVENUES> 27,889
<CGS> 16,529
<TOTAL-COSTS> 26,455
<OTHER-EXPENSES> 3,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> (975)
<INCOME-TAX> (27)
<INCOME-CONTINUING> (1,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,002)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
