<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
September 1, 1999
-----------------------------------
(Date of earliest event reported)
MK GOLD COMPANY
---------------
(Exact name of registrant as specified in its charter)
Delaware 0-23042 82-0487047
- ------------------------------- --------------------- -------------------
(State or other jurisdiction of (Commission File No.) (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, including area
code)
================================================================================
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Pursuant to a Stock Purchase Agreement dated September 1, 1999 (the
"Stock Purchase Agreement") between MK Gold Company (the "Company") and Leucadia
National Corporation ("Leucadia"), Leucadia agreed to purchase, subject to
certain conditions, and the Company agreed to sell, subject to certain
conditions, 18,058,635 shares (the "Shares") of the authorized but unissued
shares of Common Stock of the Company at the price of $0.8753 per share,
representing the book value of the Shares as at June 30, 1999.
The purpose of the sale of the Shares to Leucadia was to provide the
Company with a portion of the funds necessary for the Company to acquire the
entire share capital and subordinated debt of RioMin Exploraciones SA
("Riomin"). Because funding for this acquisition was required before the sale of
the Shares could be completed, the Company borrowed $15,806,723 from Leucadia
pursuant to a Promissory Note dated September 1, 1999 (the "Promissory Note").
On October 5, 1999, the Company and Leucadia received notice of
termination of all applicable waiting periods under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. On October 8, 1999, Leucadia
purchased the Shares and delivered the Promissory Note to the Company under the
Stock Purchase Agreement.
Leucadia now beneficially owns 27,058,635 shares of Common Stock of
the Company, which represents approximately 72.5% of the Common Stock
outstanding.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS.
(a) Financial Statements of business acquired.
Audited financial statements of Riomin Exploraciones, S.A. for the
year ended December 31, 1998
- Independent Auditors' Report - Arthur Andersen
- Balance Sheets as of December 31, 1998 and 1997
- Statements of Operations--Years ended December 31, 1998 and
1997
- Notes to financial statements
Audited financial statements of Cobre Las Cruces, S.A. (formerly
Riomin Exploraciones, S.A.) for the year ended December 31, 1997
- Independent Auditors' Report - PricewaterhouseCoopers
Auditores, S.L.
- Balance Sheet as of December 31, 1997
- Statement of Operations--Year ended December 31, 1997
- Statement of Stockholder's Equity--Year ended December 31, 1997
2
<PAGE>
- Notes to financial statements
Unaudited financial statements of Cobra Las Cruces, S.A. (formerly
Riomin Exploraciones, S.A.) for the nine months ended September
30, 1999
- Balance Sheet as of September 30, 1999
- Statements of Operations - Nine months ended September 30, 1999
and 1998
- Statements of Cash Flows- Nine months ended September 30, 1999
and 1998
(b) Unaudited pro forma consolidated financial statements of MK Gold
Company
- Unaudited pro forma condensed consolidated balance sheet as of
September 30, 1999
- Unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1998
- Unaudited pro forma condensed consolidated statement of
operations for the nine months ended September 30, 1999
- Notes to unaudited pro forma financial statements
(c) Exhibits
2.1 Sale and Purchase Agreement dated September 1, 1999 between
MK Gold Company and Rio Tinto Metals Limited.*
10.1 Stock Purchase Agreement dated September 1, 1999 between MK
Gold Company and Leucadia National Corporation.*
10.2 Promissory Note dated September 1, 1999.*
10.3 Option Agreement dated August 26, 1999 between MK Gold
Company and Straits Resources Ltd.*
23.1 Consent of Arthur Andersen.
23.2 Consent of PricewaterhouseCooopers Auditores, S.L.
_________________
* previously filed
3
<PAGE>
Audited financial statements of Riomin Exploraciones, S.A. for the year ended
December 31, 1998
4
<PAGE>
AUDITORS' REPORT ON FINANCIAL STATEMENTS
To the Shareholder of
Riomin Exploraciones, S.A.
I. We have audited the financial statements of RIOMIN EXPLORACIONES, S.A., a
Company at the commencement of its operations since it is in the
exploration phase (see Note 1), comprising the balance sheet as of December
31, 1998, and the related statement of operations and notes to financial
statements for the year then ended. The preparation of these financial
statements is the responsibility of the Company's directors. Our
responsibility is to express an opinion on the financial statements taken
as a whole based on our audit work performed in accordance with generally
accepted auditing standards in Spain, which are substantially consistent
with those in the United States of America, which require examination, by
means of selective tests, of the documentation supporting the financial
statements and evaluation of their presentation, of the accounting
principles applied and of the estimates made.
II. As required by Spanish corporate law, for comparison purposes the Directors
present, in addition to the 1998 figures for each item in the balance sheet
and statements of operations and of changes in financial position, the
figures for 1997. Our opinion refers only to the 1998 financial statements.
III. On March 11, 1999, the Company's Directors prepared the 1998 financial
statements, which were approved by the Shareholders' Meeting on March 11,
1999. On March 11, 1999, we issued our auditors' report on these financial
statements, in which we expressed an opinion containing two uncertainties.
Due to the subsequent events that occurred between March 11 and September
9, 1999, indicated in Note 17, the Company's new Directors decided to
prepare new financial statements to include the effects of the sale of the
mining rights to Riomin Iberica, S.A. and the undertaking to provide
financial support given by the Company's new shareholders (see Note 17). As
a result, we issued a new auditors' report on these new 1998 financial
statements.
IV. In our opinion, the financial statements referred to above present, in all
material respects, a true and fair view of the net worth and financial
position of RIOMIN EXPLORACIONES, S.A. (a Company at the commencement of
its operations since it is in the exploration phase -see Note 1) as of
December 31, 1998, and of the results of its operations and of the funds
obtained and applied by it in the year then ended, and contain the required
information, sufficient for their proper interpretation and comprehension,
in conformity with generally accepted accounting principles in Spain and
standards applied on a basis consistent with that of the preceding year.
5
<PAGE>
V. Accounting practices used by the Company in preparing the accompanying
financial statements conform with generally accepted accounting principles
in Spain but do not conform with accounting principles generally accepted
in the United States. A description of these differences and a
reconciliation of consolidated net income and shareholders' equity are set
forth in Note 18.
ARTHUR ANDERSEN
/s/ Jorge Segura Rodriguez
Jorge Segura Rodriguez
September 9, 1999
6
<PAGE>
Translation of a report and financial statements originally issued in Spanish
and prepared in accordance with generally accepted accounting principles
in Spain (see Note 18).
RIOMIN EXPLORACIONES, S.A.
(Sole shareholder company)
BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
-----------------------------------------------
(Currency - Thousands of Spanish pesetas)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
ASSETS 1998 1997 (*) AND LIABILITIES 1998 1997 (*)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIXED AND OTHER SHAREHOLDER'S EQUITY (Note 9):
NONCURRENT ASSETS:
Start-up expenses 4,472 5,890 Capital stock 623,141 623,141
Intangible assets- 4,262,420 3,808,252 Prior years' losses (318,718) (223,100)
Exploration expenses 4,259,197 3,802,012 Loss for the year (1,076,102) (95,618)
---------------------
Computer software 9,958 9,525 Total shareholder's equity (771,679) 304,423
---------------------
Rights on leased assets - 504
Accumulated amortization (6,735) (3,789) DEFERRED REVENUES
Tangible fixed assets 57,803 56,874 Exchange gains 415 182
--------------------
Technical installations and machinery 24,766 20,800
Other installations, tools and PROVISIONS FOR CONTINGENCIES
furniture 11,497 13,613 AND EXPENSES
Other fixed assets 40,840 39,873 Provisions for taxes - 850
--------------------
Accumulated depreciation (19,300) (17,412)
Long-term financial investments 152,189 2,899 LONG-TERM DEBT:
Payable to Group and associated
Financial investments 152,189 2,899 companies- 5,673,199 2,286,206
----------------------
Total fixed and other noncurrent assets 4,476,884 3,873,915 Payable to Group companies
----------------------
CURRENT ASSETS: (Note 10) 5,673,199 2,286,206
Other Current Assets- 756 - Total long-term debt 5,673,199 2,286,206
--------------------
Advances 756 -
Accounts receivable- 348,561 269,752 CURRENT LIABILITIES:
Customer receivables for sales and Short-term payables to Group
services - 175 and associated companies 94,413 1,403,144
Receivable from associated companies Payable to Group companies
(Note 10) 7,132 2,932 (Note 10) 94,413 1,403,144
Sundry accounts receivable - 2,132 Trade accounts payable- 79,366 378,623
Employee receivables 89 635
Tax receivables 341,340 289,878 Payables for purchases and services 79,366 378,623
Provisions - (26,000) Other nontrade payables- 10,750 16,427
Short-term financial investments- 130,407 15,543 Accrued taxes payable 10,750 6,791
Other accounts payable - 8,757
Short-term guarantees and deposits 130,407 15,543 Compensation payable - 879
Cash 128,911 230,321
Accrual accounts 945 324
---------------------- --------------------
Total current assets 609,580 515,940 Total current liabilities 184,529 1,798,194
---------------------- --------------------
TOTAL SHAREHOLDER'S
---------------------- --------------------
TOTAL ASSETS 5,086,464 4,389,855 EQUITY AND LIABILITIES 5,086,464 4,389,855
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Not subjected to compulsory audit.
The accompanying Notes 1 to 18 are an integral part of the balance sheet as
of December 31, 1998.
7
<PAGE>
Translation of a report and financial statements originally issued in Spanish
and prepared in accordance with generally accepted accounting principles in
Spain (see Note 18).
RIOMIN EXPLORACIONES, S.A.
(Sole shareholder company)
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
-----------------------------------------------------------------------
(Currency - Thousands of Spanish pesetas)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
DEBIT 1998 1997 (*) CREDIT 1998 1997 (*)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EXPENSES: REVENUES:
Materials used in operations (Note 12) 8,723 - Net sales 4,839 -
Personnel expenses (Note 12) 100,110 81,741 Capitalized expenses of in-house work
Wages, salaries, etc. 77,528 63,682 on fixed assets 1,358,684 1,737,109
Employee welfare expenses 22,582 18,059 Other operating revenues 3,275 -
Non-core and other current
Period depreciation and amortization 12,367 10,723 operating revenues 2,425 -
Other operating expenses 1,005,522 1,610,190 Overprovision for contingencies
and expenses 850 -
--------- -------- --------- -------
Operating income 240,076 34,455 Operating loss - -
--------- -------- --------- -------
Financial and similar expenses 261,277 43,409 Other interest and similar revenues 8,446 1,210
Exchange losses 28,930 79,103 Exchange gains 40,585 4,034
--------- -------- --------- -------
Financial income - - Financial loss 241,176 117,268
--------- -------- --------- -------
Income from ordinary activities - - Loss on ordinary activities 1,100 82,813
--------- -------- --------- -------
Losses on tangible fixed assets, Gains on tangible fixed asset,
intangible assets and portfolio intangible asset and portfolio
disposals (See Notes 4-b and 17) 902,111 24,362 disposals 513 -
Extraordinary expenses 9,189 1,797 Extraordinary revenues 5,770 2,508
Other years' expenses and losses 196,369 25,656 Other revenues and income 26,384 36,502
--------- -------- --------- -------
Extraordinary income - - Extraordinary loss 1,075,002 12,805
--------- -------- --------- -------
Income before taxes - - Loss before taxes 1,076,102 95,618
--------- -------- --------- -------
Income for the year - - Loss for the year 1,076,102 95,618
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Not subjected to compulsory audit.
The accompanying Notes 1 to 18 are an integral part of the 1998 statement
of operations.
8
<PAGE>
RIOMIN EXPLORACIONES, S.A.
(Sole shareholder company)
NOTES TO 1998 FINANCIAL STATEMENTS
----------------------------------
(1) COMPANY DESCRIPTION
RIOMIN EXPLORACIONES, S.A. was formed with the name BP Minera Espana, S.A.
on January 10, 1983. On October 25, 1989, it changed its name to RIOMIN
EXPLORACIONES, S.A., and it currently engages in exploration, research and
exploitation of mineral deposits and other geological resources.
The Company's capital stock, which amounts to Ptas. 623,141,000, is fully
subscribed and paid-in by its sole shareholder RIO TINTO METALS LIMITED, to
which on December 31, 1998, all the Company's shares were transferred by
RIO TINTO International Holdings Ltd., which owned them during
substantially all of 1998 in the form of a sole shareholder company. As RIO
TINTO METALS LIMITED and RIO TINTO International Holdings Ltd. are entities
under common control, the transfer of interests was reflected at the
historical cost basis of RIOMIN EXPLORACIONES, S.A.
In 1998 the Company only performed exploration work in the "Las Cruces"
project and in the opinion of Company management there are reasons to
foresee the technical success and economic and commercial profitability of
this project. However, the Company's shareholder, following its investment
strategy, decided not to complete this project and is currently in the
process of selling the Company.
(2) BASIS OF PRESENTATION OF THE FINANCIAL
STATEMENTS
a) True and fair view-
The accompanying financial statements as of December 31, 1998, which
were prepared from the accounting records of the Company, are presented
in accordance with the Spanish National Chart of Accounts and,
accordingly, give a true and fair view of the net worth, financial
position and results of the Company. The accompanying financial
statements as of December 31, 1998, which were prepared by the Company's
directors, will be submitted for approval by the Shareholders Meeting,
and it is expected that they will be approved without any changes.
On March 11, 1999, the Company's Directors prepared initial financial
statements as of December 31, 1998, which were approved by the
Shareholders' Meeting on the same date. These financial statements are
the definitive financial statements prepared by the Company's Directors
in order to reflect the loss of Ptas. 562,861,000 on the sale of the
projects to Riomin Iberica (see Note 17), for the purpose of including
these financial statements in the information that the Parent Company
(MK Gold) is required to file in the SEC. Accordingly, these financial
statements differ from those prepared previously, with a reduction of
Ptas. 562,861,000 in total assets and liabilities, and an increase of
the same amount in the loss for the year. The accompanying financial
statements as of December 31,
9
<PAGE>
1998 will be submitted for approval by the Shareholders' Meeting, and it
is considered that they will be approved without any changes.
b) Comparative information-
As required by Spanish corporate law, for comparison purposes, the
directors present, in addition to the 1998 figures for each item in the
balance sheet and statements of operations and changes in financial
position, the corresponding amounts for 1997. The Company's 1997
financial statements were approved by the Shareholders Meeting on June
17, 1998.
(3) ALLOCATION OF LOSS
The Company's directors propose that the Shareholders Meeting resolve to
allocate 1998 loss to "Prior Years' Losses".
(4) Valuation Standards
a) Start-up expenses-
The "Start-up Expenses" caption includes the amounts paid by the
Company in relation to its incorporation and the reduction and
subsequent increase of capital carried out in 1994 and 1995,
respectively, and are recorded at cost, less amortization, which is
taken on a straight-line basis over five years.
The charge to the 1998 statement of operations for amortization of
start-up expenses amounted to Ptas. 1,418,000.
b) Intangible assets-
This caption includes in the "Exploration" account the costs of the
Group's suppliers and other third parties, incurred in relation to the
mining exploration work. Also included are all the internal personnel
costs and the financial costs accrued for the participating loans, and
the valuation and exchange differences arising from the accounts payable
to suppliers.
In 1998, the Company only capitalized the exploration expenses arising
from the "Las Cruces" project, which are specifically itemized and their
amount clearly identified so that they can be allocated over time. Also,
management of the Company has reasons to foresee the technical success
and economic and commercial profitability of this project.
The costs incurred in preparing for mining in the "Las Cruces" project
are capitalized until the year in which the proportion of extractable
useful ore to harvest is at approximately the average estimated level
for the entire project. From this point amortization of these costs will
commence at a rate based on the proportion of ore extracted.
Since no operations on the "Las Cruces" project have begun as of
December 31, 1998, the Company has not amortized any amount in this
connection.
Also the Company's intangible assets include certain exploration
projects amounting to Ptas. 730 million (see Note 17), the permits for
which were initially granted to Riomin
10
<PAGE>
Exploraciones, S.A. Subsequently, on December 12, 1996, the Company
granted a purchase option on these exploration permits to Riomin
Iberica, S.A., an affiliated entity, which continued with all the
exploration projects. No consideration was paid by Riomin Iberica, S.A.
in connection with the acquisition of this option. The agreement between
the two companies establishes that the purchase option can be exercised
until the expiration date of each of the permits. Also, it establishes
the acquisition price of each of the permits on which the purchase
option can be exercised, which may not under any circumstances be less
than the costs recorded for each of the projects. These projects are
presented in the accompanying balance sheet at the amount of the
accumulated expenses incurred up to the date when the purchase option
was granted to Riomin Iberica, S.A. All expenses subsequent to December
12, 1996 have been expensed as incurred.
The Company's directors have reasons to believe in the technical
success and economic and commercial profitability of the projects
capitalized, which depend on the future course of the exploration
projects.
The rights on leased assets account represents furniture and
equipment acquired under a capital lease. In accordance with Spanish
GAAP, this equipment was recorded at the time of lease inception, in
addition to the related debt obligation. During 1998, the lease term
expired and the Company decided to purchase the leased equipment for
72.000. Accordingly, at that time, the Company transferred this
equipment to tangible assets.
The amounts paid for ownership or for the right to use computer
programs are recorded in the "Computer Software" account and are
amortized on a straight-line basis over five years. The amortization in
this connection in 1998 amounted to Ptas. 2,464,000.
c) Tangible fixed assets-
Tangible fixed assets are valued at the lower of cost or replacement
cost.
The costs of expansion, modernization or improvement leading to a
lengthening of the useful lives or to increased productivity, capacity
or efficiency are capitalized.
Upkeep and maintenance expenses are expensed currently.
The Company depreciates its tangible fixed assets by the straight-line
method at annual rates based on the following years of estimated useful
life:
--------------------------------------------------------------
Estimated
Useful Life
--------------------------------------------------------------
Technical installations and machinery 13
Other installations, tools and furniture 10-13
Transport equipment 7-8
Hardware 7
--------------------------------------------------------------
11
<PAGE>
d) Financial investments -
On November 5, 1998, the Company acquired a purchase option for 150,000
pesetas on all the shares that comprise the capital of Seroncillo, S.L.,
having formalized the agreement with all of the shareholders of the
latter.
Seroncillo, S.L. is the owner of the 593-hectare property on which
Riomin Exploraciones, S.A. plans to locate the "Las Cruces" mining
project, and it is for this reason that the Company entered into the
purchase option contract, the main features of which are the following:
a) Riomin Exploraciones, S.A. acquires an option to purchase all of
the shares that comprise the capital of Seroncillo, S.L. at a price
of Ptas. 150 million.
b) In the event that this purchase option is exercised by Riomin
Exploraciones, S.A., the price paid for the purchase option will be
allocated to the final purchase price of the shares, determined as
the result of multiplying the price of Ptas. 4,000 by the number of
hectares of the property owned by Seroncillo, S.L. required to
locate the mining project in accordance with the indications of
Riomin Exploraciones, which may not be less than 150 hectares.
c) The term available to the Company to exercise the purchase option
is set at 4 years, and therefore expires on November 6, 2002, and
the amounts that the Company has paid will be kept by the grantors
of the option if the option has not been exercised. However, the
Company is entitled to extend the option in accordance with the
following calendar and extension prices:
----------------------------------------------------------
Thousands of
Pesetas
Date extension commences ------------------------
Price of extending
option
----------------------------------------------------------
November 6, 2003 10,000
November 6, 2004 20,000
November 6, 2005 30,000
November 6, 2006 40,000
----------------------------------------------------------
The amounts paid by the Company to extend the purchase option are
treated as an addition to the price of the shares, and therefore are not
part of the established price described above.
e) Other Current Assets-
As of December 31, 1998, the "Other Current assets" caption
included advances from suppliers of consumables and replacement
materials. The Company values consumables and replacement materials at
the lower of cost or market.
f) Classification of debt-
Debts maturing in less than 12 months from year-end are classified
as current liabilities and those maturing at over 12 months as long-term
debt.
12
<PAGE>
These debts are valued at the amounts drawn down, plus the unmatured
accrued interest.
g) Foreign currency transactions-
Foreign currency transactions are recorded to pesetas at the exchange
rates ruling at the transaction date, and are adjusted at year-end to
the exchange rates then prevailing.
The exchange gains or losses arising on each foreign currency account
payable or receivable are classified by due date and currency, and for
this purpose currencies which, although different, are officially
convertible are grouped together.
Unrealized exchange gains in each group of currencies, as a general
rule, are not included in income and are recorded under the "Deferred
Revenues" caption on the liability side of the balance sheet. On the
contrary, the exchange losses in each group of currencies, as a general
rule, are charged to income.
However, the unrealized positive differences may be credited to income
if, for each homogeneous group, an equal amount of negative exchange
differences has been charged to prior years' income or income for the
year, up to the limit of the negative differences previously recognized
in income.
However, both positive and negative exchange differences are charged
to exploration costs provided that the accounts payable which they give
rise to relate to research projects in progress.
h) Recognition of revenues and expenses-
Revenues and expenses are recognized on an accrual basis, i.e. when
the actual flow of the related goods and services occurs, regardless of
when the resulting monetary or financial flow arises.
However, in accordance with the accounting principle of prudence, the
Company only records realized income at year-end, whereas foreseeable
contingencies and losses, including possible losses, are recorded as
soon as they become known.
i) Corporate income tax-
The expense for corporate income tax of each year is calculated on the
basis of book income before taxes, increased or decreased, as
appropriate, by the permanent differences from taxable income, net of
tax relief and tax credits, excluding tax withholdings and prepayments.
The Company does not record the tax asset arising from losses which it
plans to recover over the next 10 years.
(5) START-UP EXPENSES
The variations in the "Start-up Expenses" accounts in 1998 were as follows:
13
<PAGE>
-------------------------------------------------------
Thousands
of Pesetas
-------------------------------------------------------
Balance as of December 31, 1997 5,890
-------------------------------------------------------
Additions -
Amortization (1,418)
-------------------------------------------------------
Balance as of December 31, 1998 4,472
-------------------------------------------------------
(6) INTANGIBLE ASSETS
The variations in 1998 in the "Intangible Assets" accounts and in the
related accumulated amortization were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Thousands of Pesetas
-------------------------------------------------------------------------
Balance at Additions or Retirements or Balance at
12/31/97 Provisions Transfers Reductions 12/31/98
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost:
Exploration (see Note 17) 3,802,012 1,358,684 - (901,499) 4,259,197
Rights on leased assets 504 - (504) - -
Computer software 9,525 524 - (91) 9,958
-------------------------------------------------------------------------
Total cost 3,812,041 1,359,208 (504) (901,590) 4,269,155
-------------------------------------------------------------------------
Accumulated amortization:
Rights on leased assets (39) (25) 64 - -
Computer software (3,750) (2,464) - (521) (6,735)
-------------------------------------------------------------------------
Total accumulated amortization (3,789) (2,489) 64 (521) (6,735)
- ---------------------------------------------------------------------------------------------------------------------
Net amount 3,808,252 1,356,719 (440) (902,111) 4,262,420
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998 the Company retired R&D projects which were not considered viable
for Ptas. 902 million.
Exploration-
The additions of exploration expenses relate to external and internal costs
(labor and allocation of materials) arising from the exploration work for
the "Las Cruces" deposit.
The Company has not applied for any subsidies in relation to these
investments.
The Company's sole activity in recent years has centered on the performance
of exploration work in the "Las Cruces" project, and as of December 31,
1998, it had incurred exploration expenses in this connection amounting to
Ptas. 4,092 million, of which Ptas 1,359 million relate to work capitalized
in 1998. Management of the Company has reasons to foresee the technical
success and economic and commercial profitability of the project based on
the feasibility study carried out by the Company.
However, at the date of this report the Company's shareholder had initiated
negotiations with several companies with the objective of selling the
Company, since they have decided not to carry out this project. Therefore
the recovery of the investments made will depend on the
14
<PAGE>
successful conclusion of the sale negotiations already initiated, and on
the results that may be obtained in the future, once mining begins in the
"Las Cruces" project (see Note 17).
Rights on leased assets-
In 1998 the Company exercised the purchase option which it held on leased
assets which amounted to Ptas. 72,000, and transferred the cost of the
leased assets Ptas. 504,000 and the related accumulated amortization (Ptas.
64,000) to its tangible fixed assets.
15
<PAGE>
Transfer of tangible fixed assets-
The Company records investments in construction in progress under the
"Tangible Fixed Assets - Advances and Construction in Progress" caption,
transferring the related amounts to tangible fixed assets at the end of the
projects.
Transfer of tangible fixed assets-
(7) TANGIBLE FIXED ASSETS
The variations in 1998 in the "Tangible Fixed Assets" accounts and in the
related accumulated depreciation were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Thousands of Pesetas
----------------------------------------------------------------------------------------------------------------
Balance at Additions or Retirements or Balance at
12/31/97 Provisions Transfers Reductions 12/31/98
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cost:
Technical installations and machinery 20,800 4,177 84 (295) 24,766
Other installations, tools
and furniture 13,613 1,021 (116) (3,021) 11,497
Other tangible fixed assets 39,873 3,801 536 (3,370) 40,840
------------------------------------------------------------------------
Total cost 74,286 8,999 504 (6,686) 77,103
------------------------------------------------------------------------
Accumulated depreciation:
Technical installations and machinery (3,182) (1,886) (5) 2,154 (2,919)
Other installations, tools
And furniture (3,597) (1,025) (28) 1,398 (3,252)
Other tangible fixed assets (10,633) (5,549) (31) 3,084 (13,129)
------------------------------------------------------------------------
Total accumulated depreciation (17,412) (8,460) (64) 6,636 (19,300)
----------------------------------------------------------------------------------------------------------------
Net amount 56,874 539 440 (50) 57,803
----------------------------------------------------------------------------------------------------------------
</TABLE>
Written off and fully depreciated assets-
As of December 31, 1998, the fully depreciated assets were retired with a
credit to the related fixed asset account and a charge to the related
accumulated depreciation account.
(8) SHAREHOLDER'S EQUITY
The variations in equity accounts in 1998 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Thousands of Pesetas
--------------------------------------
Capital Prior Years' Loss for
Stock Earnings the Year
----------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1997 623,141 (223,100) (95,618)
Allocation of loss - (95,618) 95,618
Loss for 1998 per accompanying
statement of operations - - (1,076,102)
----------------------------------------------------------------------------
Balance at December 31, 1998 623,141 (318,718) (1,076,102)
----------------------------------------------------------------------------
</TABLE>
16
<PAGE>
As of December 31, 1998, the capital stock consisted of 191,500 registered
common shares of Ptas. 3,254 par value each, fully subscribed and paid by
RIO TINTO Holdings Ltd.
In compliance with the Spanish Accounting and Audit Institute's resolution
of December 20, 1996, which sets the general methods for determining book
equity for the purpose of the capital reduction and company dissolution
situation referred to by articles 163 and 260 of the revised Corporations
Law, the Shareholder's Equity figure in the accompanying balance sheet
should be increased by the amount of the participating loans which are
included in the balance sheet under the "Long-Term Debt - Payable to Group
Companies" caption for Ptas. 5,363,428,000. As a result, the detail of the
equity accounts as of December 31, 1998, would be the following:
---------------------------------------------
Thousands of
Pesetas
---------------------------------------------
Shareholder's equity (771,679)
Participating loans (Note 10) 4,699,340
------------
Net worth 3,927,661
---------------------------------------------
(9) NONTRADE PAYABLES
The detail of the "Payable to Group and Associated Companies" as of
December 31, 1998, is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
(Thousands of Pesetas)
------------------------------------
Short-term Long-term
------------------------
Accounts Accounts Accounts
Receivable Payable Payable
-----------------------------------------------------------------------------
<S> <C> <C> <C>
R.T. International Holdings LTD. - 22,087 5,673,199
R.T. Minerals Development LTD. - 63,458 -
R.T Technical Services LTD. - 869 -
R.T. Mining & Exploration LTD. 5,516 - -
Riomin Iberica, S.A. 1,073 - -
ATD CRA - 351 -
RTZ LTD. LONDON - 7,648 -
Sociedad Espanola de Talcos, S.A. 522 - -
R.T. Technical Development LTD. 21 - -
-----------------------------------------------------------------------------
Total 7,132 94,413 5,673,199
-----------------------------------------------------------------------------
</TABLE>
17
<PAGE>
The detail of the transactions with Group and associated Companies is the
following:
----------------------------------------------------------------
(Thousands of Pesetas)
----------------------------
Volume of Transactions
----------------------------
Purchases Sales
----------------------------------------------------------------
R.T. International Holdings LTD. 1,010 -
R.T Technical Services LTD. 332,948 -
R.T. Mining & Exploration LTD. 27,729 110
Riomin Iberica, S.A. 6,343 3,034
RTZ LONDON LTD 78,636 -
R.T. Technical Development LTD. 233,319 -
R.T. Brasil LTD 447 -
----------------------------------------------------------------
Total 680,432 3,144
----------------------------------------------------------------
(10) LONG-TERM DEBT
The "Long-Term Debt" caption in the balance sheet as of December 31, 1998,
includes the draw-downs under the participating loans to the Company from
RIO TINTO International Holdings Ltd., which was its sole shareholder
almost throughout the whole of 1998 (see Note 1). The conditions of the
participating loans are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
Loan 1 Loan 2
-----------------------------------------------------------------------------------
<S> <C> <C>
Grant date 04/30/1997 03/19/1998
Principal of the loan 2,286,206 2,413,134
Term 10 years 10 years
Maturity 04/30/2007 12/31/2007
Single repayment of the principal 04/30/2007 12/31/2007
Fixed interest rate (a) 0.5% per annum 0.5% per annum
Variable interest rate (b) (LIBOR + 1%) x 2 (LIBOR + 1%) x 2
-----------------------------------------------------------------------------------
</TABLE>
(a) Payable on December 31 of each year, until variable interest starts to
accrue.
(b) Payable on December 31 of each year, from the date on which production
on the "Las Cruces" project commences.
Production will be considered to have commenced when the Company,
having obtained an operating license from the mining authorities and
made the projected investment for the project, has commenced production
in a regular and continuous fashion.
The loan agreement establishes a first period of time during which the
Company may not make early repayment of the principal of the loan at its
own discretion. This period covers the time from the date the participating
loan contract is signed to the date on which the Company commences
production, from which time the Company may repay the principal early,
paying a penalty equal to the annual interest that the repaid capital would
have accrued, calculated in accordance with the conditions set out above
and discounted at an annual rate of 7% up to the date of the early
repayment agreement.
Should the early repayment take place, the Company will be obliged to
undertake a capital increase of the same amount as the repayment, and this
amount may not arise from revaluation of its assets.
18
<PAGE>
RIO TINTO International Holding LTD. may ask the Company for early
repayment of the principal of the loan in the following cases:
a) If the Company should file for Chapter 11-type insolvency proceedings
(suspension de pagos) or be declared bankrupt, or flagrantly fail to
fulfil its obligations to third parties.
b) Should the borrower fail to comply with any of the obligations under the
participating loan contract.
c) Should the RTZ Group cease to hold a majority ownership interest in the
capital stock of the Company.
In cases a) and b) the Company will have to pay RIO TINTO International
Holding LTD. a penalty calculated in the way described above, but is not
obliged to pay any penalty in case c).
In terms of seniority of debt as established by the Spanish Civil Code,
participating loans have lower priority than debts to general creditors.
RIO TINTO International Holding LTD. may at any time request the conversion
of the principal and/or the interest on the participating loans into
capital of the Company.
These participating loans are governed, in accordance with the stipulations
of the contract, by the regulations deriving from Royal Decree Law 7/96 on
urgent measures on tax and development and liberalization of economic
activity, and from Law 10/96 on urgent tax measures to correct intercompany
domestic double taxation and on company internationalization incentives.
Pursuant to the contractual conditions, the participating loans bear
interest of 0.5% per annum during the prospecting period of the "Las
Cruces" project, an interest rate that is below market rates. From the date
when production commences under the aforementioned project, these
participating loans will also bear variable interest at a rate equal to
twice the result of increasing the LIBOR by one percentage point, an
interest rate above market rates. Generally accepted accounting principles
in Spain envisage that the interperiod allocation of the financial costs of
pluriannual transactions must, necessarily, be based on methods that
conform to the revenue and expense matching principle. This principle
requires that the financial costs of all the transaction be spread over the
life of the transaction in proportion to the amount of net funding used in
each year. In accordance with this method, the Company recorded an interest
expense of Ptas. 261,277,000 and, additionally, an expense of Ptas.
53,661,000 relating to prior years. These amounts were capitalized as an
addition to exploration expenses relating to the "Las Cruces" project.
(11) TAX MATTERS
The Company has not recorded any provision for corporate income tax, since
to date it has had no taxable income.
At 1997 year-end, the Company had recorded Ptas. 22,000,000 of VAT
recoverable from 1993 and 1994, in regard to which there is a dispute with
the State Tax Agency, which considered that the Company had not commenced
its activities. As of December 31, 1998, the Company had decided to cancel
the provision that had been recorded for Ptas. 22,000,000, since the
acceptance of the tax assessment was signed, whereby the Tax Agency
recognized the commencement of the Company's activity and proposed the
settlement of the VAT refunds for 1996 and 1997, for a
19
<PAGE>
total amount of Ptas. 203,710,000. The amounts receivable relating to 1993
and 1994 will be recovered in future returns.
The Company has the last four years open for review by the tax inspection
authorities, and has reported the following tax losses:
-----------------------------------------
Year Thousands
of Pesetas
-----------------------------------------
1995 1,291,904
1996 223,055
1997 83,568
-----------------------------------------
Total 1,598,527
-----------------------------------------
(12) REVENUES AND EXPENSES
a) Net sales-
The net sales mainly relate to the supply of services to other mining
companies.
b) Average headcount-
The average number of employees in 1998 was as follows:
--------------------------------------------------
1998
--------------------------------------------------
By category-
Senior technicians 5
Technicians 4
Manual workers and clerical staff 9
--------------------------------------------------
Total 18
--------------------------------------------------
c) Allowance for bad debts-
The variations in the allowance for bad debts and losses on
unrecoverable loans in 1998 was as follows:
----------------------------------------------------
Thousands of
Pesetas
----------------------------------------------------
Balance at December 31, 1997 26,000
----------------------------------------------------
Allowance for operating bad debts used (26,000)
----------------------------------------------------
Balance at December 31, 1998 -
----------------------------------------------------
Ptas. 22 million of the allowances used in the year relate to allowances
for certain accounts receivable from the tax authorities for VAT (see Note
11).
20
<PAGE>
d) Financial revenues and short-term financial investments-
As of December 31, 1998, the Company held Ptas. 125,000,000 of short-
term financial investments in eurodeposits with weekly maturity and
that earn annual interest of 2.9%.
e) Prior years' expenses and losses-
The charge under the "Prior Years' Expenses and Losses" caption on the
statement of operations relates basically to invoices received in 1998
for professional services provided by third parties in 1997, which had
not been fully estimated as of December 31, 1997.
(13) DIRECTORS' REMUNERATION
In 1998 Riomin Exploraciones, S.A. recorded an expense of Ptas. 30 million
for remuneration and per diems earned by its Board members.
In addition, as of December 31, 1998, there were balances payable to
members of the Board of Directors amounting to Ptas. 16,000.
There were no other kinds of loans or pension or life insurance or other
similar commitments, to current or former members of the Board of
Directors.
(14) FINANCIAL SITUATION AND EVENTS SUBSEQUENT
TO YEAR-END
Subsequent to 1998 year end the Group company RIO TINTO International
Holding LTD., sole shareholder of the Company during almost the whole of
1998 (see Note 1), initiated a negotiation process with various companies
with the aim of selling the Company.
In addition, on February 25, 1999, RIO TINTO International Holding LTD
transferred the loan of Ptas. 5,390,777,000 that the Company held with it
to RIO TINTO Metals LTD, sole shareholder of Riomin Exploraciones, S.A.
from December 31, 1998. This amount related to the principal and interest
on the participating loans mentioned above (see Note 10), and to an
additional Ptas. 637,409,000 received by the Company.
This loan was formalized in a new participating loan contract with the
following conditions:
--------------------------------------------------------
Conditions
--------------------------------------------------------
Contract commencement date 1/1/1999
Principal of the loan 5,390,777
Term 10 years
Maturity 12/31/2008
Single repayment of principal 12/31/2008
Fixed interest rate (a) 0.5% per annum
Variable interest rate (b) (EUROLIBOR + 1%) x 2
--------------------------------------------------------
21
<PAGE>
(a) Payable on December 31 of each year, until variable interest starts to
accrue.
(b) Payable on December 31 of each year, from the date on which production
on the "Las Cruces" project commences.
Production will be considered to have commenced when the Company,
having obtained an operating license from the mining authorities and
made the projected investment for the project, has commenced production
in a regular and continuous fashion.
The loan agreement establishes a first period of time during which the
Company may not make early repayment of the principal of the loan at its
own discretion. This period covers the time from the date the participating
loan contract is signed to the date on which the Company commences
production, from which time the Company may repay the principal early,
paying a penalty equal to the annual interest that the repaid capital would
have accrued, calculated in accordance with the conditions set out above
and discounted at an annual rate of 7% up to the date of the early
repayment agreement.
Should the early repayment take place, the Company will be obliged to
undertake a capital increase of the same amount as the repayment, and this
amount may not arise from revaluation of its assets.
RIO TINTO Metals LTD. may ask the Company for early repayment of the
principal of the loan in the following cases:
a) If the Company should file for Chapter 11-type insolvency proceedings
(suspension de pagos) or be declared bankrupt, or flagrantly fail to
fulfil its obligations to third parties.
b) Should the borrower fail to comply with any of the obligations under
the participating loan contract.
c) Should the RIO TINTO Group cease to hold a majority ownership interest
in the capital stock of the Company.
In cases a) and b) the Company will have to pay RIO TINTO Metals LTD. a
penalty calculated in the way described above, but is not obliged to pay
any penalty in case c).
In terms of seniority of debt as established by the Spanish Civil Code,
participating loans have lower priority than debts to general creditors.
RIO TINTO Metals LTD. may at any time request the conversion of the
principal and/or the interest on the participating loans into capital of
the Company.
These participating loans are governed, in accordance with the stipulations
of the contract, by the regulations deriving from Royal Decree Law 7/96 on
urgent measures on tax and development and liberalization of economic
activity, and from Law 10/96 on urgent tax measures to correct intercompany
domestic double taxation and on company internationalization incentives.
Additionally, on January 19, 1999, the Company collected Ptas. 203,710,000
from the Tax Agency relating to VAT from 1996 and 1997, the refund of which
the Company had requested (see Note 11).
22
<PAGE>
(15) "YEAR 2000 ISSUE" (UNAUDITED)
Throughout 1998 and in accordance with Group guidelines the Company has
carried out a plan to adapt its systems to the new millennium and thus
avoid any problem deriving from the "Year 2000 Issue".
Since the Company is only carrying out exploration work, the action plan
focused on the following aspects:
a) Checking all the Company's computer systems, in addition to obtaining
the relevant certificates from the various suppliers of this
equipment.
b) Reviewing all the software applications, and obtaining the relevant
certificates from the software suppliers.
c) Certification from the companies that supply services that their
systems are Year 2000 compliant.
Since the Company's computer systems and software applications have been
reviewed, Company management considers that they will not be affected by
the "Year 2000 Issue" and that the latter will not cause the Company to
incur material expenses in the coming years.
(16) STATEMENT OF CHANGES IN FINANCIAL POSITION
The 1998 statement of changes in financial position is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Thousands of Pesetas Thousands of Pesetas
------------------------ -----------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Start-up expenses - 2,579
Funds applied in operations 162,984 72,583
Exchange gains 233 182
Fixed asset additions: Long-term debt-Group companies 3,324,645 2,286,206
Intangible assets 1,359,208 1,720,989 Fixed asset disposals 560 151
Tangible fixed assets 8,999 32,445 Early repayment or transfer to
Long-term financial investments 150,000 - short term of long-term financial
investments 710 15,225
- -----------------------------------------------------------------------------------------------------------------------------
Total funds applied 1,681,191 1,828,596 Total funds obtained 3,388,496 2,301,764
- -----------------------------------------------------------------------------------------------------------------------------
FUNDS OBTAINED IN EXCESS OF FUNDS APPLIED IN EXCESS OF
FUNDS APPLIED (INCREASE IN FUNDS OBTAINED (DECREASE
WORKING CAPITAL) 1,707,305 473,168 IN WORKING CAPITAL) - -
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 3,388,496 2,301,764 TOTAL 3,388,496 2,301,764
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Thousands of Pesetas
---------------------------------------------------------------------
VARIATION IN 1998 1997
---------------------------------------------------------------------
WORKING CAPITAL Increases Decreases Increases Decreases
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Current Assets 756 - - -
Accounts receivable 78,809 - 82,235 -
Accounts payable 1,613,665 - 278,992 -
Short-term financial investments 114,864 - 9,009 -
Cash - 101,410 102,608 -
Accrual accounts 621 - 324 -
---------------------------------------------------------------------------------------------------------------
Total 1,808,715 101,410 473,168 -
---------------------------------------------------------------------------------------------------------------
VARIATION IN
WORKING CAPITAL 1,707,305 - 473,168 -
---------------------------------------------------------------------------------------------------------------
</TABLE>
The reconciliation of the income for the year per books to the funds
obtained from operations per the foregoing statement of changes in
financial position is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
(Thousands of Pesetas)
------------------------
1998 1997
------------------------------------------------------------------------------
<S> <C> <C>
Income for the year (loss) (1,076,102) (95,618)
Less-
Depreciation and amortization 12,367 10,723
Fixed asset retirements 901,601 12,312
Plus-
Overprovision for contingencies and expenses (850) -
------------------------------------------------------------------------------
Funds applied in operations (162,984) (72,583)
------------------------------------------------------------------------------
</TABLE>
(17) SUBSEQUENT EVENTS IN THE PERIOD FROM MARCH 11 TO SEPTEMBER 1, 1999
Following is a description of the most noteworthy events relating to the
situations existing as of December 31, 1998, that have occurred since March
11, 1999, the date of preparation of the 1998 financial statements:
1. On May 12, 1999, the Company terminated the agreement with Riomin
Iberica, S.A. (see Note 4-b), whereby on December 12, 1996, it granted
to the latter a purchase option on certain exploration and research
permits valued in the Company's balance sheet as of December 31, 1998,
at Ptas. 730,092,000. On that same date, the Company transferred the
mining rights under various of the aforementioned exploration and
research permits. Since the transfer was made for Ptas. 24,600,000 and
the projects transferred were valued at Ptas. 587,461,000 as of
December 31, 1998, this transaction gave rise to a loss of Ptas.
562,861,000 for the Company, the effect of which was recorded in the
present annual accounts.
2. On September 1, 1999, RIO TINTO Metals LTD., the sole shareholder of
Riomin Exploraciones, S.A. since December 31, 1998, transferred all the
Company's shares to MK GOLD COMPANY, whose registered office is in the
U.S.
Also, on that same date, RIO TINTO Metals LTD. assigned and transferred
the participating loan of Ptas. 5,390,777,000 that it had granted to
the Company (see Note 14)
24
<PAGE>
to MK GOLD COMPANY, the sole shareholder of Riomin Exploraciones, S.A.
since September 1, 1999, as described above.
3. Through December 31, 1998, Riomin Exploraciones, S.A. incurred losses
because in recent years it has focused on performing the exploration
and research work for the "Las Cruces" project, and as of December 31,
1998, it had incurred in this connection research and development
expenses amounting to Ptas. 4,092 million, of which Ptas. 1,359 relate
to projects capitalized in 1998. The Company's Directors consider that
they have grounds for foreseeing the technical success and economic and
commercial profitability of the project, as evidenced in the project's
economic feasibility study prepared by the Company. The volume of
investment required will give rise to losses in the coming years until
the production for the project commences. In this regard, the Company
has the financial support of the shareholder (MK GOLD COMPANY), which
has undertaken to provide the financial support required to ensure the
continuity of the Company's normal operations and to enable it to meet
its commitments through December 31, 2000.
25
<PAGE>
(18) DIFFERENCES BETWEEN SPANISH AND UNITED STATES
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The financial statements of Riomin Exploraciones, S.A. were prepared in
accordance with generally accepted accounting principles in Spain
("Spanish GAAP"), which differ in some respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). Following is a
summary of the adjustments to net income and shareholder's equity that
would have been required had U.S. GAAP been applied instead of Spanish
GAAP.
Statement of Operations Reconciliation:
-------------------------------------------------------------------------
Thousands of
pesetas
--------------------
Year Ended
December 31,
1998
-------------------------------------------------------------------------
Net income (loss) under Spanish GAAP (1.076.102)
Foreign currency transaction gains and losses 11,655
Tax effects of above adjustments (a)
Net income (loss) under U.S. GAAP (1.064.447)
-------------------------------------------------------------------------
(a) Since the Company presents book losses under Spanish GAAP, no tax effect
takes place
Shareholders' equity reconciliation
-------------------------------------------------------------------------
Thousands of
pesetas
--------------------
Year Ended
December 31,
1998
-------------------------------------------------------------------------
Shareholders' equity under Spanish GAAP (771,679)
Exploration costs (1,155,824)
Start-up costs (4,472)
Tax effects of above adjustments (a)
Shareholders' equity under U.S. GAAP (1,931,975)
-------------------------------------------------------------------------
(a) Since the Company presents book losses under Spanish GAAP, no tax effect
takes place
1. Exploration costs.
In accordance with Spanish GAAP, exploration costs are capitalized when
they are incurred provided that the following conditions are met:
existence of a specific project; existence of a method for allocating and
recognizing the costs relating to each project; existence of sound
26
<PAGE>
reasons to foresee the technical success of the project; existence of
reasonable assurance of the economic and business profitability of the
project; and existence of reasonable assurance that the project will be
financed through completion. Capitalized exploration costs are amortized
systematically from the date of completion of the related project over
the period in which the project will generate revenues, up to a maximum
of five years.
Under US GAAP, exploration costs prior to the successful discovery of
reserves, including interest costs, must be expensed as incurred.
Specifically, capitalization of costs cannot begin until a company has
discovered proven ore reserves that will be economic to produce. The
assessment of whether reserves will be economic to produce is based on a
feasibility study, mine plan and the development of infrastructure (e.g.,
roads).
2. Deferred foreign currency gains and losses.
Under Spanish GAAP, foreign currency transaction gains and losses can be
recorded as deferred charges or accrued liabilities, as described in Note
4-g. Under U.S. GAAP, foreign currency transaction gains and losses must
be expensed as incurred.
3. Start-up expenses.
Spanish GAAP permits the capitalization of start-up expenses. Under U.S.
GAAP, start-up expenses must be expensed as incurred.
4. Accrual of contingencies and losses
U.S. GAAP permits the accrual of contingencies and losses only when these
losses are probable and reasonably estimable. Spanish GAAP requires the
accrual of foreseeable contingencies and losses, including possible
losses, as soon as they become known. During the year ended December 31,
1998, there were no differences between U.S. and Spanish GAAP related to
the accrual of contingencies and losses.
5. Other items.
5.1 Under Spanish GAAP a cash flow statement is not required. However, a
statement of changes in financial position (similar to a statement
of sources and applications of funds) is required.
27
<PAGE>
A cash flow statement is provided below in accordance with U.S. GAAP:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Thousands of pesetas
----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Cash receipts from customers 6,543
Cash paid to suppliers and employees (1,690,629)
Cash generated from operations (1,684,086)
Interest paid 450
Cash flow before extraordinary item (1,683,636)
Proceeds from tax and deposit devolution 741
Others (2)
Net cash from operating activities (1,682,897)
Cash flows from investing activities
Purchase of property, plant and equipment (151,231)
Proceeds from sale of equipment 1,753
Interest received 8,420
Net cash use in investing activities (141,058)
Cash flows from financing activities
Proceeds from long-term borrowings 1,837,409
Net cash used in financing activities 1,837,409
Net increase in cash and cash equivalents 13,454
Cash and cash equivalents at beginning of period 245,864
Cash and cash equivalents at the end of period 259,318
----------------------------------------------------------------------------------------
</TABLE>
5.2 Extraordinary income (expense)
Under Spanish GAAP the Company recorded as extraordinary results items that
under U.S. GAAP should be considered as operating revenues (expenses).
Under U.S. GAAP this income is defined as material, unusual and infrequent
in the environment in which the entity operates. No adjustments to net
income or shareholders' equity result from these types of classification
differences under U.S. and Spanish GAAP.
28
<PAGE>
RIOMIN EXPLORACIONES, S.A.
FINANCIAL STATEMENTS
--------------------
On September 9, 1999, the Board of Directors of RIOMIN EXPLORACIONES, S.A.
prepared the Financial Statements for the year ended December 31, 1998, which
are presented on the obverse of officially stamped paper series OF, class 8,
numbered sequentially from OF3604138 to OF3604161 all inclusive, in compliance
with current legislation.
/s/ G. Frank Joklik /s/ Donald S. Babinchak
- ------------------------------- ---------------------------------
G. Frank Joklik Donald L. Babinchak
/s/ John C. Farmer /s/ Michael G. Doyle
- ------------------------------- ---------------------------------
John C. Farmer Michael G. Doyle
/s/ Gobain Overjero Zappino
- -------------------------------
Gobain Ovejero Zappino
29
<PAGE>
Audited financial statements of Cobre Las Cruces, S.A. (formerly Riomin
Exploraciones, S.A.) for the year ended December 31, 1997
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of
Cobre Las Cruces, S.A.,
We have audited the adjusted financial statements (see Note 2d) of Cobre
Las Cruces, S.A. (formerly Riomin Exploraciones, S.A., as mentioned in Note 13),
consisting of the balance sheet as at 31 December 1997, the profit and loss
account and the notes to the financial statements for the year then ended, all
expressed in Spanish pesetas. The preparation of these financial statements is
the responsibility of the Management of the Company. Our responsibility is to
express an opinion on the financial statements taken as a whole, based on the
work carried out in accordance with auditing standards generally accepted in
Spain which require the examination, on a test basis, of evidence supporting the
financial statements and an evaluation of their overall presentation, the
accounting principles applied and the estimates made.
2. The adjusted financial statements include a participating loan received
from the sole shareholder of Ptas 2.286 million as at 31 December 1997. As a
result of this loan, the Company's net worth for the purposes of Articles 163
and 260 of the Spanish Companies Act is no longer negative in the amount of Ptas
597 million being positive in the amount of Ptas 1.689 million. As at December
31, 1997, the Company shows a negative working capital of Ptas 1.282 million
basically due to debts with companies related to the RIO TINTO Group (the
Company's former owner). As is mentioned in Note 2c, the Company has received
confirmation from the MK Gold Company expressing its intention to maintain the
financial support necessary for Cobre Las Cruces, S.A. to meet its commitments
and settle its liabilities.
3. In our opinion, the accompanying adjusted financial statements for 1997
referred to above present fairly, in all material respects, the financial
position of Cobre Las Cruces, S.A. at 31 December 1997 and the results of its
operations and its cash flows for the year then ended and contain sufficient
information for their proper interpretation and comprehension, and have been
prepared in accordance with accounting principles generally accepted in Spain
applied on a basis consistent with those used in the preceding year.
PRICEWATERHOUSECOOPERS AUDITORES, S.L.
/s/ Jorge Moya del Castillo
- ------------------------------
Jorge Moya del Castillo
29 October 1999
31
<PAGE>
Cobre Las Cruces, S.A.
Abridged Balance sheet as at December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
1997
----
ASSETS
Fixed assets 2.972.422
Formation expenses 5.890
Intangible fixed assets 2.906.759
Tangible fixed assets 56.874
Deposits and guarantees 2.899
Current assets 515.940
Debtors 269.752
Refundable deposits 15.543
Cash at bank and in hand 230.321
Prepayments and accrued income 324
---------
Total 3.488.362
=========
-32-
<PAGE>
Cobre Las Cruces, S.A.
Abridged balance sheet as at December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
1997
----
LIABILITIES
Capital and accumulated deficit (597.070)
Share capital 623.141
Profit and loss account brought forward (223.100)
Loss for the year (997.111)
Deferred income 182
Provisions for liabilities and charges 850
Creditors: amounts falling due after more than one year 2.286.206
Creditors: amounts falling due in less than one year 1.798.194
---------
Total 3.488.362
=========
-33-
<PAGE>
Cobre Las Cruces, S.A.
Abridged profit and loss account for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
1997
----
EXPENSES 2.778.474
Staff costs 81.741
Wages, salaries and similar remuneration 63.682
Social security contributions 18.059
Fixed assets depreciation 10.723
Other operating expenses 1.610.190
Operating profit 34.455
Financial expense and similar costs 43.409
Amounts owed to group companies 40.554
Other debts 2.855
Losses on exchange 79.103
Net financial income -
Loss on disposal of tangible and
intangible fixed assets (see note 13 f) 587.223
Extraordinary expenses 1.797
Prior-year expenses (see note 13 e) 364.288
-34-
<PAGE>
Cobre Las Cruces, S.A.
Abridged profit and loss account for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Pths
---------
1997
----
INCOME 1.781.363
Operating income 1.737.109
Other operating income (capitalisation of mine development
costs) 1.737.109
Operating losses -
Financial income 1.210
Other 1.210
Gains on exchange 4.034
Net financial expense 117.268
Loss from ordinary activities 82.813
Extraordinary income 2.508
Prior-year income 36.502
Net extraordinary loss 914.298
Loss before tax 997.111
---------
Loss for the year 997.111
=========
-35-
<PAGE>
Cobre Las Cruces, S.A.
Statement of Stockholders' Equity (Deficit) for the year ended December 31,1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
<TABLE>
<CAPTION>
Common Stock Total
------------------------- Accumulated Stockholders'
Shares Amount Deficit Deficit
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 191.500 623.141 (223.100) 400.041
Net loss for the year - - (997.111) (997.111)
---------- ---------- ----------- -------------
Balance at December 31, 1997 191.500 623.141 (1.220.211) (597.070)
========== ========== =========== =============
</TABLE>
-36-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN SPANISH PREPARED IN
ACCORDANCE WITH GENERALLY ACCEPTED PRINCIPLES IN SPAIN
(see Note 2b)
1. Activities
The Company primarily carries out exploration, research and mining activities
throughout Spain in relation to mineral deposits and other geological resources,
particularly, nickel, lead, zinc, silver, lithium, iron and diamonds.
Its share capital amounts to Pths 623.141 (Note 7 - Capital and accumulated
deficit) and was fully subscribed and paid in by its single shareholder, Rio
Tinto International Holdings Ltd. The Company is therefore a single-shareholder
company in accordance with the Spanish Private Limited Companies Act which came
into force on 1 June 1995. Pursuant to this legislation, the operations and
transactions carried out with group companies in 1997 are disclosed in Note 11.
The name of the Company was changed to Cobre Las Cruces, S.A. from Riomin
Exploraciones, S.A. on September 6, 1999 based on a resolution made by the
General Shareholders Meeting. This was executed in a public deed on October 13,
1999, pending to be registered in the Mercantile Register (see Note 13).
2. Basis of presentation
a) True and fair view
These Spanish financial statements are presented in accordance with
applicable accounting legislation so as to provide a true and fair view of
the Company's net worth, financial situation and the results of its
operations. They are presented in the accounting format required by the
Spanish General Accounting Plan.
b) Accounting principles
In 1997 the Company's reported loss has been determined in accordance with
generally accepted accounting principles in Spain and the accounting
policies laid down in the Spanish General Accounting Plan. (see Note 2d).
c) Going concern
Mk Gold Company has agreed to support the Company to the extent necessary.
On the basis of the support of its current shareholders, management have
concluded that the company has adequate resources to continue operations
for the foreseeable future and as a result have prepared the financial
statements on a going concern basis.
d) Financial statements preparation
These financial statements differ from the 1997 Annual Accounts approved by
the Board of Directors on February 18, 1998 and filed in the Mercantile
Register.
-37-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
The differences come from the introduction of the following adjustments to
the financial statements previously filed in the Mercantile Register:
Debit Credit
----- ------
Prior - year expenses (P & L) 338.632 -
Intangible fixed assets (1) - 338.632
Loss on disposal of intangible fixed assets (P & L) 562.861 -
Intangible fixed assets (2) - 562.861
------- -------
901.493 901.493
======= =======
(1) See comments included in note 13e)
(2) See comments included in note 13f).
As a result of the introduction of these adjustments the captions affected
have consequently changed to record the above adjustments. Additionally,
this Note, and Note 13 and Note 14 have been added to these financial
statements that were not included in the 1997 Annual Accounts.
3. Distribution of results
It will be proposed to shareholders that the losses generated in the year be
transferred to "Prior- year losses" so that they may be offset against future
profits.
4. Accounting policies
a) Intangible fixed assets
This heading records:
- Computer applications which are stated at cost. They are amortized on
a straight-line basis at a rate of 25% each year.
- Mine development expenses are capitalized at an amount equivalent to
the cost of each project which the Company considers will be a
technical success and financially and commercially profitable.
When there are doubts as to a project's feasibility, the project is
amortized in the year. In any event, projects must be written off within
five years as from the date of completion.
b) Tangible fixed assets
Tangible fixed assets are stated at cost. Repair and maintenance costs are
charged directly to expense in the year in which they are incurred provided
that they do not represent an improvement or increase in the assets' useful
lives.
-38-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Depreciation is calculated systematically using the straight-line method on
the basis of cost using the following rates:
Machinery 8%
Furniture 10%
Vehicles 14%
Data-processing equipment 14%
Fixtures and fittings 8%
c) Trade debtors and creditors
Accounts receivable and payable in less than one year which relate to
debits and credits resulting from the Company's transactions are recorded
at their face value.
When the collectibility of balances receivable is considered doubtful, the
relevant appropriations are made to the provision for bad debts using
financial criteria.
d) Exchange differences
Accounts receivable and payable denominated in foreign currency are
converted to pesetas at the exchange rate on the date of the related
transaction. At the year end, they are stated at the year-end exchange
rate.
Unrealized exchange gains are recorded as deferred income in the balance
sheet and are generally not taken to income. Conversely, exchange losses
are taken directly to profit and loss.
e) Recognizing income and expenses
Purchases of goods and materials are recorded, including purchase expenses,
direct transport expenses and any taxes levied on the acquisitions,
excluding VAT. All discounts included in the invoice, other than cash
discounts, which are regarded as financial income, are regarded as a
decrease in the amount of the transaction.
Other income and costs are recognized on an accruals basis, irrespective of
the date on which the related collection or payment is made.
f) Corporate income tax
The profit and loss account records the corporate income tax expense which
is calculated taking into account the tax accrued in the year, the effect
of the deferral of the differences between the tax base and reported
results which reverse in subsequent periods and any tax credits and
deductions to which the Company is entitled.
-39-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
5. Fixed assets
Intangible fixed assets are comprised of the following:
<TABLE>
<CAPTION>
Property,
plant and
mine Assets being
development acquired
expenses Computer under finance
COST capitalised applications leases Total
----------- ------------ ------ -----
<S> <C> <C> <C> <C>
Balance at 1/1/96 1.088.150 11.264 - 1.099.414
Increases 1.113.069 8.879 - 1.121.948
Write-offs (107.240) (11.013) - (118.253)
----------- -------- - ---------
Balance at 31/12/96 2.093.979 9.130 - 2.103.109
----------- -------- ------ ---------
Increases 1.720.090 395 504 1.720.989
Write-offs (913.550) - - (913.550)
----------- -------- ------ ---------
Balance at 31/12/97 2.900.519 9.525 504 2.910.548
----------- -------- ------ ---------
AMORTISATION
Balance at 1/1/96 - 7.850 - 7.850
Increases - 640 - 640
Write-offs - (7.850) - 7.850
----------- -------- ------ ---------
Balance at 31/12/96 - 640 - 640
----------- -------- ------ ---------
Increases - 3.110 39 3.149
Write-offs - - - -
----------- -------- ------ ---------
Balance at 31/12/97 - 3.750 39 3.789
----------- -------- ------ ---------
NET BOOK VALUE
Balance at 1/1/96 1.088.150 3.414 - 1.091.564
=========== ======== ====== =========
Balance at 31/12/96 2.093.979 8.490 - 2.102.469
=========== ======== ====== =========
Balance at 31/12/97 2.900.519 5.775 465 2.906.759
=========== ======== ====== =========
</TABLE>
The most important project which makes up the balance of Property, Plant and
Mine development expenses capitalized at 31 December 1997 are as follows:
Project name Commencement date Amount (Ptas'000)
- ------------ ----------------- -----------------
Las Cruces 1990 2.733.283
---------
2.733.283
=========
-40-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Tangible fixed assets consist of the following:
<TABLE>
<CAPTION>
Fixtures Data-
Plant and and processing Other fixed
COST machinery Tooling fittings Furniture equipment Vehicles assets Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at 1/1/96 9.252 - 1.714 10.746 28.940 22.415 - 73.067
Increases 5.739 - 1.330 1.504 6.928 7.557 75 23.133
Write-offs (7.130) - (991) (6.727) (20.761) (17.325) - (52.934)
------ ----- ----- ------ ------- ------- --- --------
Balance at 31/12/96 7.861 - 2.053 5.523 15.107 12.647 75 43.266
------ ----- ----- ------ ------- ------- --- --------
Increases 12.939 2.330 2.147 1.560 5.013 8.085 371 32.445
Write-offs - - - - (497) (928) - (1.425)
------ ----- ----- ------ ------- ------- --- --------
Balance at 31/12/97 20.800 2.330 4.200 7.083 19.623 19.804 446 74.286
====== ===== ===== ====== ======= ======= === ========
DEPRECIATION
Balance at 1/1/96 3.827 - 50 4.389 9.195 12.176 - 29.637
Increases 1.889 - 956 1.315 3.831 2.786 - 10.777
Write-offs (2.813) - (605) (4.043) (10.128) (11.088) - (28.677)
------ ----- ----- ------ ------- ------- --- --------
Balance at 31/12/96 2.903 - 401 1.661 2.898 3.874 - 11.737
------ ----- ----- ------ ------- ------- --- --------
Increases 279 19 910 606 2.533 2.325 22 6.694
Write-offs - - - - (250) (769) - (1.019)
------ ----- ----- ------ ------- ------- --- --------
Balance at 31/12/97 3.182 19 1.311 2.267 5.181 5.430 22 17.412
====== ===== ===== ====== ======= ======= === ========
NET BOOK VALUE
Balance at 31/1/96 5.425 - 1.664 6.357 19.745 10.239 - 43.430
====== ===== ===== ====== ======= ======= === ========
Balance at 31/12/96 4.958 - 1.652 3.862 12.209 8.773 75 31.529
====== ===== ===== ====== ======= ======= === ========
Balance at 31/12/97 17.618 2.311 2.889 4.816 14.442 14.374 424 56.874
====== ===== ===== ====== ======= ======= === ========
</TABLE>
Deposits and guarantees
<TABLE>
<S> <C>
Balance at 1/ 1/96 14.933
Increases 13.862
Decreases (10.671)
--------
Balance at 31/12/96 18.124
--------
Increases 1.490
Decreases (16.715)
--------
Balance at 31/12/97 2.899
========
</TABLE>
-41-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
6. Debtors
Debtors at December 31, 1997 can be broken down as follows:
Trade debtors 175
Trade debtors 175
Sundry debtors 2.132
Advances to suppliers 947
Other debtors 1.185
-------
Amounts receivable from group companies 2.932
Riomin Iberica 897
ATD-CRA Advanced Technical 1.513
Sdad. Espanola de Talcos 522
-------
Loans to employees 635
Taxes refundable 289.878
VAT refundable 289.471
Interim payments refundable 407
Provisions ------- (26.000)
=======
269.752
=======
7. Capital and accumulated deficit
Share capital at the year end amounts to Pths. 623.141 and is made up of 191.500
shares with a par value of Ptas 3.254 each, fully subscribed and paid in.
Movements in the accounts under this heading in 1997 are as follows:
<TABLE>
<CAPTION>
Losses Profit /(loss)
Share capital Brought forward for Total
--------------- the year -----
--------
<S> <C> <C> <C> <C>
Balance at 1/1/96 1.915.000 - (1.291.904) 623.096
Increases - - (223.055) (223.055)
Decreases (1.291.859) (45) 1.291.904 -
----------- -------- ---------- -
Balance at 31/12/96 623.141 (45) (223.055) 400.041
----------- -------- ---------- ----------
Increases - - (997.111) (997.111)
Decreases - (223.055) 223.055 -
----------- -------- --------- ----------
Balance at 31/12/97 623.141 (223.100) (997.111) (597.070)
=========== ======== ========= ==========
</TABLE>
-42-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Pursuant to the Resolution of 20 December 1996 of the Spanish Institute of
Auditors which lays down general criteria for determining net worth for the
purposes of reducing capital and dissolving companies, the figure for capital
and reserves indicated above should be increased by the participating loans
which are included in the balance sheet under Amounts owed to group companies
falling due after more than one year totaling Pths. 2.286.206.
For purposes of this calculation the resulting figure for net worth at 31
December 1997 is therefore as follows:
Pths
---------------
Capital and accumulated deficit (597.070)
Participating loans 2.286.206
---------
1.689.136
=========
8. Creditors: amounts falling due after more than one year
This heading records the participating loan arranged with RTZ International
Holdings Ltd amounting to Pths 2.286.206. This loan matures on 30 April 2007 and
currently bears interest at the rate of 0.5% per annum (see Note 13).
9. Creditors: amounts falling due in less than one year
Set out below is an analysis of this heading at 31 December 1997:
<TABLE>
<CAPTION>
Pths
----------------------------------
<S> <C> <C>
Trade creditor 378.623
Amounts owed to Group companies 1.403.144
RTZ Minerals Development 48.498
RTZ Technical Services 34.483
RTZ Mining and Exploration 56.202
RTZ International Holdings 1.231.200
RTZ Limited London 32.761
----------
Wages and salaries 879
Taxes and social security contributions 6.791
Taxes payable 5.146
Social security contributions payable 1.645
----------
Interest payable 8.757
---------
1.798.194
=========
</TABLE>
-43-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
10. Tax situation
Given that the Company has significant tax losses carried forward, there is no
need to record a provision for corporate income tax.
At 31 December 1997, the Company's returns for the following taxes are open to
tax inspection:
Corporate income tax 1992 - 1997
VAT 1992 - 1997
Personal income tax 1992 - 1997
Tax on business and professional activities 1992 - 1997
11. Transactions and balances with related companies
The Company maintains accounts with a number of group companies, the balances of
which are as follows. These balances are included as part of debtors and
creditors in the balance sheet.
<TABLE>
<CAPTION>
Pths
-------------------------------
Debtor Creditor
--------- ---------
<S> <C> <C>
Riomin Iberica S.A. 897
ATD-CRA Advanced Technical 1.513
Sdad. Espanola de Talcos 522
RT Minerals Development Ltd - 48.498
RTZ International Holding (participating loan) - 2.286.206
RTZ Technical Services Ltd - 34.483
RTZ Mining & Exploration - 56.202
RTZ International Holding - 1.231.200
RTZ Limited London - 32.761
- ---------
---------
2.932 3.689.350
========= =========
</TABLE>
-44-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year Ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
The transactions made during the year with related companies are as follows:
Pths
----
RTZ Technical Services Ltd
Provision of services 470.839
US Borax Inc
Payments on its behalf 995
RTZ Mining & Exploration
Provision of services 79.871
RTZ International Holdings
Loans 2.606.006
RTZ Consultants for America
Provision of services 139
RTZ Limited London
Provision of services 74.437
Riomin Iberica
Payments on its behalf 8.070
ATD CRA Advanced Technical Dev.
Provision of services 85.270
Sociedad Espanola de Talcos
Provision of services 522
12. Other information
The members of the Board of Directors have received PThs 16.638 in respect of
salaries and PThs 2.686 in respect of remuneration in kind.
No advances or loans have been granted to the members of the Board of Directors.
No pension commitments have been entered into with the members of the Board of
Directors.
-45-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
13. Subsequent events
The most significant events since December 31, 1997 up to the issuance of these
financial statements are summarized as follows:
a) Transfer of the ownership of the Company's shares
On December 31, 1998, Rio Tinto International Holdings Ltd., the Company's
Single Shareholder transferred its entire shares to another company
belonging to the Rio Tinto Group, Rio Tinto Metals Ltd.
Subsequently, on September 1, 1999, the Company executed the sale of the
shares to the new Single Shareholder, MK Gold Company. On September 6,
1999, the Single Shareholder resolved to change the name of the Company
(formerly Riomin Exploraciones, S.A.) to Cobre Las Cruces, S.A. This was
executed in a public deed on October 13, 1999, pending to be registered in
the Mercantile Register.
b) Participating loans
On March 19, 1998, the Company's shareholder at the time, Rio Tinto
International Holdings, Ltd. entered into an additional participating loan
agreement with the Company for Pths 2.412.194 which will be repaid upon
maturity on December 31, 2007.
In the following year, on February 25, 1999, the Company assigned the above
participating loan and the one recorded as such by the Company at the end
of 1997 to its new shareholder, Rio Tinto Metals Ltd. At the same time, it
was agreed that the outstanding amount, together with other amounts
contributed by the former shareholder of the Company and not formalized in
a participating loan, would be repaid under a single participating loan.
The conditions of the new loan agreement being as follows:
Principal: Ptas. 5.390.777.000.
Maturing on : 31 December 2008, the date on which the
outstanding principal will be repaid in a single payment.
Interest: Fixed interest of 0.5% per annum until the commencement of
the mining of the "Las Cruces" mineral deposit.
Henceforth and until the maturity date of the loan,
variable interest of (EUROLIBOR+1)x2.
In accordance with the estimated financing for the investments envisaged by
the Company stated in the Feasibility Study prepared to this end, if the
relevant authorization is finally granted to mine the Las Cruces mineral
deposit, and depending on the cost of the financing taking into account the
above financial conditions, the Company has estimated a market rate of
interest for the entire envisaged operation and recorded financial expenses
totaling Pths 309.771 in the year ended December 31, 1998 as Mine
Development expenses relating to the project, "Las Cruces".
-46-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
On September 1, 1999, simultaneously with the signing of the sale of the
Company's shares, the assignment of the above participating loan to MK Gold
Company was formalized.
c) Relations with the Tax Authorities
On October 30, 1998, the assessment relating to the VAT inspection carried
out for the years 1996 and 1997 was signed in agreement. Therefore, VAT for
these two years are closed to tax inspection. The assessment established a
refund of input VAT relating to said years, totaling Pths 203.711 and the
payment of Pths 665 in respect of late-payment interest which was received
by the Company in 1999.
Simultaneously, the Company cancelled a provision of Pths 22.000 for VAT
relating to 1993, recorded in relation to disputes with the tax authorities
and abandoned the claims filed with the National Tax and Treasury Court in
relation to the refund of VAT relating to 1993 and 1995, totaling Pths
21.552 and Pths 64.082, respectively.
d) Purchase option agreement with respect to shares in Seroncillo, S.L.
On November 6, 1998, the Company entered into a purchase option agreement
with respect to all the shares in Seroncillo, S.L., a company owning
property with a surface area of 593 hectares, approximately, located in the
province of Seville, where the "Las Cruces" mineral deposit is located. The
agreement laid down as a premium for the option, Pths 150.000, to be
deducted from the purchase price of the shares if the option is exercised.
The exercising of the option is related to the surface area of land to be
acquired from the Company. A minimum surface area of 150 hectares is
established with a price per hectare of Pths 4.000.
The option may be exercised over a period of four years, i.e. until 6
November 2002. Additional annual extensions to said period may be
requested, increasing the cost of exercising the option by Pths 10.000 per
year.
e) Write-off of Mine development costs capitalized
The company has written-off mine development costs capitalized as at
December 31, 1997 totaling Pths 338.632 during 1998 as these costs were not
individually identified with the projects in process (See Note 2d). These
costs were expensed in these adjusted 1997 financial statements.
-47-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
f) Transfer of mining rights to Riomin Iberica, S.A
On May 12, 1999, the Company and Riomin Iberica, S.A. entered into an
agreement for the transfer of mining rights for a price of Pths 24.600, in
accordance with an independent expert's appraisal, with respect to drilling
and research in the Spanish pyretic belt owned by Riomin Exploraciones,
S.A. (currently named Cobre Las Cruces, S.A.). The book value at the time
of concluding the agreement amounted to Pths 587.461. As a result, the
Company charged the loss totaling Pths 562.861 to the profit and loss
account for 1999 in its official books (see Note 2d) but are expensed in
these adjusted 1997 financial statements.
Simultaneously, the parties agreed to terminate the agreement for the
purchase option in respect of the mining rights, concluded on December 12,
1996 stating a purchase price for the rights covered by the agreement of
Pths. 730.505, the majority of these rights were included in the agreement
explained in the above paragraph. Any rights and obligations deriving from
the above purchase option agreement were declared as no longer applicable.
g) Year 2000
The Company is year 2000 compliant, in accordance with the policy
established by the Rio Tinto Group and considers that its computer systems
and equipment are adequately adapted to the year 2000. The cost incurred in
this respect is insignificant.
14. Summary of certain differences between Spanish GAAP and US GAAP for the
year ended December 31, 1997
The financial statements of the Company have been prepared in accordance with
Spanish GAAP which in certain areas differ significantly from U.S. GAAP. The
Company's accounting policies are set out in Note 4 of the "Notes to the
Financial Statements" for the year ended December 31, 1997.
The following paragraphs summarize the areas in which differences between
Spanish GAAP and US GAAP could be significant to the Company's financial
position and result of operations.
The Company has quantified these differences in section a) of this note and
estimates the net effect that applying U.S. GAAP would have on its financial
position on results of operations, or any component thereof, in any of the
presentation of financial information included in these financial statements.
No attempt has been made to identify future differences between Spanish GAAP and
US GAAP as the result of prescribed changes on accounting standards. Regulatory
bodies that promulgate Spanish GAAP and US GAAP have significant projects
ongoing that could affect future comparisons such as this one. Finally, no
attempt has been made to identify all future differences between Spanish GAAP
and US GAAP that may affect the financial statements as a result of transaction
or events that may occur in the future.
-48-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Exploration costs
Spanish GAAP
Under Spanish GAAP, mineral exploration costs relating to feasible projects are
capitalized and charged to the Profit and Loss account during the estimated
production period of the project.
US GAAP
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 based on
proven and probable reserves.
Start up Expenses
Spanish GAAP
Such costs are generally capitalized and amortized to income over the period
estimated to be benefited.
US GAAP
Such costs are generally expensed as incurred.
Deferred tax assets
Spanish GAAP
Under Spanish GAAP, deferred tax assets are only recorded for ten years and
where realization is considered highly probable.
US GAAP
Under US GAAP, deferred tax assets are recognized in the balance sheet at full
value, but reduced by a valuation allowance based on the likelihood of
realization of these benefits in future periods.
Extraordinary income and expenses and prior year income and expenses
Spanish GAAP
The Company has recorded certain income and expenses as extraordinary in the
profit and loss account.
-49-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
US GAAP
These extraordinary income and expense and prior year income and expense items
would not have been classified as extraordinary items but would have been
included in the determination of operating results or, in the case of the
transfer of assets between parties under common control, such as the sale of
shares, no profit and loss would be recorded on such transactions. Any amount
received in excess of or below costs would be recorded in shareholders' equity.
Under US GAAP only extraordinary items, defined as those material items which
derive from events or transactions that are both unusual and infrequent would be
included.
These are limited, for example to losses arising from natural disasters,
expropriations of assets and gain/losses on the early extinguishment of debt,
and are presented separately on the face of the income statement net of taxes.
Earnings Per Share
Spanish GAAP
This is not required under Spanish GAAP.
US GAAP
It is required to present basic and diluted earnings per share for listed
companies.
Statement of Comprehensive Income
Spanish GAAP
A statement of comprehensive income is not required.
US GAAP
SFAS 130 defines comprehensive income as a measure of all changes in equity of
an enterprise during a period that result from transactions and other economic
events of the period other than transaction with owners.
Other comprehensive income refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are included in comprehensive
income but excluded from net income: i.e. foreign currency items, minimum
pension liabilities adjustments and unrealized gains or losses on certain
investments in debt and equity securities.
-50-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Statement of Cash Flow
Spanish GAAP
Spanish GAAP does not require a statement of cash flow.
US GAAP
US GAAP requires the presentation of a statement of cash flow as one of the
primary financial statements. We have included a cash flow statement in section
b) of this note.
Accounting for Leases
Spanish GAAP
Capital leases are shown as intangible assets, and are shown therein when the
economic terms of the contract leave no doubt that the option will be exercised.
Related interest costs are recorded as deferred expenses. Spanish GAAP defines
operating leases as those where the right of use is transferred for a specific
with no purchase option threshold.
US GAAP
Under US GAAP, leases qualifying for capitalization under prescriptive criteria
are reported as tangible fixed assets at their fair value. Interest cost are
recorded as incurred.
Recently Issued US GAAP
Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Financial
"Accounting Standard No. 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) which will now be effective for fiscal years beginning
after June 15, 2000. This is not presently required for Spanish GAAP and
management believes the impact of this rule is not expected to be material.
-51-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
a) Reconciliation of net loss and accumulated deficit between Spanish GAAP and
US GAAP.
<TABLE>
<CAPTION>
1997 Prior year Accumulated
Net loss net losses deficit
--------- ---------- -------
<S> <C> <C> <C>
As reported in the accompanying financial
statements at December 31, 1997 (997.111) (223.100) (1.220.211)
--------- ---------- ----------
Adjustments for US GAAP purposes:
1. Exploration costs (1.155.824) (1.155.824)
2. Tax effect ( 35%) - 404.538 404.538
3. Recognition of tax loss carry-forwards 348.989 78.085 427.074
4. Tax deferred asset, valuation allowance (348.989) (78.085) (427.074)
5. Start-up costs - (5.890) (5.890)
6. Tax effect ( 35%) - 2.061 2.061
7. Tax deferred asset relating to points
1 and 5 valuation allowance - (406.599) (406.599)
--------- ---------- ----------
Total adjustments net of taxes - (1.161.714) (1.161.714)
--------- ---------- ----------
Net loss and accumulated deficit in accordance
with US GAAP at December 31, 1997 ( Pths) (997.111) (1.384.814) (2.381.925)
========= ========== ==========
</TABLE>
The above adjustments are explained as follows:
1. According to Spanish GAAP, mineral exploration costs relating to specific
projects considered feasible are capitalized and charged to the Profit and
Loss account within five years from the date of completion of the project.
In accordance with US GAAP, these costs should be expensed as incurred. The
breakdown of this adjustment is as follows:
- As explained in Note 5, the total costs incurred and capitalized
relating to "Las Cruces" project were Pths 2.733.283. The Company
estimates that costs incurred totaling Pths 1.013.188 could be
considered as mineral exploration costs and, therefore should be
expensed as incurred under US GAAP.
-52-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year Ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
- The company has capitalized costs relating to certain projects as the
company considers them feasible at present.
. "Faralaes I" project totaling Pths 55.476.
. "Faralaes III" project totaling Pths 56.219.
. "Viar" project totaling Pths 16.812.
. "Olivares" project totaling Pths 14.129.
------------
Pths 142.636
------------
In addition under US GAAP, these costs could be assimilated to mineral
exploration costs as there is no proven existence of mineral reserves
and, therefore should be expensed as incurred through the Profit and
Loss Account.
2. Recognition of the deferred tax asset resulted from the adjustment
explained in Paragraph 1. Deferred tax is calculated at the current
statutory rate of 35%.
3. Recognition of the Deferred tax asset in the balance sheet at full value
for tax loss carry-forwards and loss for the year ended December 31,1997.
Deferred tax is calculated at the current statutory rate of 35%.
4. A 100% valuation allowance for gross deferred taxes has been established
from tax loss carryforwards and book tax timing differences since
realization of those benefits cannot be reasonably assured. These net
operating loss carryforwards expire at various future dates through 2007.
While the need for the valuation allowance is subject to periodic review,
if the allowance is reduced, the tax benefit of the carryforwards will be
recorded in future operations as a reduction of the Company's income tax
expense.
5. Start-up expenses capitalized that should be written-off as incurred under
US GAAP.
6. Recognition of the deferred tax asset resulted from the adjustment
explained in Paragraph 5. Deferred tax is calculated at the current
statutory rate of 35%.
-53-
<PAGE>
Cobre Las Cruces, S.A.
Notes to the financial statements for the year Ended December 31, 1997
(Expressed in thousands of pesetas - Pths; unless otherwise indicated)
b) Statement of stockholders' equity (deficit) for the year ended December 31,
1997(share amounts expressed in pesetas):
<TABLE>
<CAPTION>
Common Stock Total
--------------------- Accumulated Stockholders'
Shares Amount Deficit Deficit
-------- ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 191 500 623 141 (223 100) 400 041
Net loss for the year - - (997 111) (997 111)
-------- ---------- --------------- ----------------
Balance at December 31, 1997 191 500 623 141 ( 1 220 211) (597 070)
======== ========== =============== ================
</TABLE>
c) Statement of cash flows
<TABLE>
<CAPTION>
For the year
ended
December 31,1997
------------------------
<S> <C>
Net cash flows from operating activities:
Net loss (997.111)
Adjustments to reconcile net loss to net cash used in operating
activities: (787.744)
-----------
Depreciation 10.723
Positive exchange differences (182)
Own work capitalized (1.720.090)
Write-offs of R&D expenses 913.550
Donations 8.000
Profit/loss on fixed assets 255
Changes in operating assets and liabilities: (370.560)
-----------
Increase in accounts receivable 82.235
Increase in prepaid expenses and other 324
Increase in current assets and intangibles and other assets 9.009
Decrease in accounts payable and accrued liabilities (278.992)
-----------
Net cash used for operating activities (2.155.415)
-----------
Net cash flows used for investing activities: (28.183)
-----------
Acquisition of equipment and furniture (43.972)
Sale of fixed assets 564
Decrease in cash used in investing activities 15.225
Cash flows from financing activities: 2.286.206
-----------
Proceeds from participating loans payable to stockholders 2.286.206
Net increase in cash and cash equivalents: 102.608
Cash and cash equivalents, beginning of period 127.713
-----------
Cash and cash equivalents, end of period 230.321
===========
</TABLE>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest -
d) Adjusted 1997 Balance Sheet
<TABLE>
<CAPTION>
Balance sheet as Balance sheet as per
per 1997 Annual 1997 adjusted
Accounts Adjustments financial statements
--------- ----------- --------------------
ASSETS
<S> <C> <C> <C>
Fixed assets 3.873.915 (901.493) 2.972.422
Formation expenses 5.890 - 5.890
Intangible fixed assets 3.808.252 (901.493) 2.906.759
Tangible fixed assets 56.874 - 56.874
Investments 2.899 - 2.899
Current assets 515.940 - 515.940
Debtors 269.752 - 269.752
Investments 15.543 - 15.543
Cash at bank and in hand 230.321 - 230.321
Prepayments and accrued income 324 - 324
--------- ----------- --------------------
Total 4.389.855 (901.493) 3.488.362
========= =========== ====================
LIABILITIES
Capital and reserves 304.423 (901.493) (597.070)
Share capital 623.141 - 623.141
Profit and loss account brought forward (223.100) - (223.100)
Profit/(loss) for the year (95.618) (901.493) (997.111)
Deferred income 182 - 182
Provisions for liabilities and charges 850 - 850
Creditors: amounts falling due after
more than one year 2.286.206 - 2.286.206
Creditors: amount falling due in less
than one year 1.798.194 - 1.798.194
--------- ----------- --------------------
Total 4.389.855 (901.493) 3.488.362
========= =========== ====================
</TABLE>
e) Adjusted 1997 Profit and Loss Account
<TABLE>
<CAPTION>
P&L as per P&L as per1997
1997 Annual adjusted financial
Accounts Adjustments statements
----------- ----------- ------------------
<S> <C> <C> <C>
EXPENSES 1.876.981 901.493 2.778.474
Staff costs 81.741 - 81.741
Wages, salaries and similar remuneration 63.682 - 63.682
Social security contributions 18.059 - 18.059
Fixes assets depreciation 10.723 - 10.723
Other operating expenses 1.610.190 - 1.610.190
Operating profit 34.455 - 34.455
Financial expense and similar costs 43.409 - 43.409
Amounts owed to group companies 40.554 - 40.554
Other debts 2.855 - 2.855
Losses on exchange 79.103 - 79.103
Net financial income - - -
Loss on disposal of tangible and intangible fixed assets 24.362 562.861 587.223
Extraordinary expenses 1.797 - 1.797
Prior-year expenses 25.656 338.632 364.288
INCOME 1.781.363 - 1.781.363
Operating income 1.737.109 - 1.737.109
Other operating income 1.737.109 - 1.737.109
Operating losses - - -
Financial income 1.210 - 1.210
Other 1.210 - 1.210
Gains on exchange 4.034 - 4.034
Net financial expense 117.268 - 117.268
Loss from ordinary activities 82.813 - 82.813
Extraordinary income 2.508 - 2.508
Prior-year income 36.502 - 36.502
Net extraordinary loss 12.805 901.493 914.298
Loss before tax 95.618 901.493 997.111
----------- ----------- ------------------
Loss for the year 95.618 901.493 997.111
=========== =========== ==================
</TABLE>
-54-
<PAGE>
Unaudited financial statements of Cobre Las Cruces, S.A. (formerly Riomin
Exploraciones, S.A.) for the nine months ended September 30, 1999
-55-
<PAGE>
COBRE LAS CRUCES, S.A.
Balance Sheets
(Thousands of Pesetas)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
------------------- -----------------
<S> <C> <C>
Assets
Fixed assets 4,443,646 4,476,884
Formation expenses 3,407 4,472
Intangible fixed assets 4,236,099 4,262,420
Tangible fixed assets 51,951 57,803
Deposits and guarantees 152,189 152,189
Current Assets 320,166 609,580
Debtors 84,903 349,506
Refundable deposits 2,234 130,407
Cash and bank and in hand 232,546 128,911
Prepayments and accrued income 483 756
-------------- -----------------
Total 4,763,812 5,086,464
LIABILITIES
Capital and accumulated deficit 4,647,570 4,901,520
Share Capital 623,141 623,141
Long term debt payable to Group C. 5,673,199 5,673,199
Profit and loss account brought forward -1,394,820 -318,718
Loss for the year -253,950 -1,076,102
Deferred income 0 415
Provisions for liabilities and charges 0 0
Creditors: amounts falling due in
less than one year 116,242 184,529
-------------- -------------
Total 4,763,812 5,086,464
</TABLE>
-56-
<PAGE>
COBRE LAS CRUCES, S.A.
Statement of Operations
(Thousands of Pesetas)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
(Unaudited)
1999 1998
------------ ----------------
<S> <C> <C>
EXPENSES
Staff costs
Wages, salaries and similar remuneration 72,569 55,210
Social security contributions 15,745 15,497
Fixed assets depreciation 9,514 8,974
Other operating expenses 145,604 898,042
Operating profit 0 0
Financial expense and similar costs
Amounts owed to group companies 0 0
Other debts 9 423
Losses on exchange 7,084 9,508
Net financial income 0 33,407
Loss on disposal of tangible and intangible
fixed assets 0 0
Extraordinary expenses 759 6,552
Prior-year expenses 16,597 106,374
INCOME
Operating income 7,457 3,405
Other operating income 2,193 1,243
Operating Losses 233,782 973,075
Financial income 3,263 0
Other 0 5,857
Gains of exchange 252 37,482
Net Financial Expense 3,578 0
Loss from ordinary activities 237,360 939,668
Extraordinary income 537 928
Prior-year income 229 178
Net Extraordinary loss 16,590 111,820
Loss before tax 253,950 1,051,488
------------ -------------
Net loss 253,950 1,051,488
</TABLE>
-57-
<PAGE>
COBRE LAS CRUCES, S.A.
Statements of cash flows
(Thousands of Pesetas)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
1999 1998
(Unaudited) (Unaudited)
--------------- ------------------
<S> <C> <C>
Net cash flows from operating activities:
Net loss (253,950) (1,051,488)
--------------- -----------------
Adjustments to reconcile net loss to net cash 7,567 8,974
--------------- -----------------
provided (used) by operating activities:
Depreciation 9,514 8,974
Negative exchange differences (1,947) -
Changes in assets and liabilities: 328,637 1,078,933
--------------- -----------------
Decrease in accounts receivable 263,657 (945,677)
Decrease in prepaid expenses and other 1,222 (3,286)
Decrease in current assets and intangibles and other assets 129,874 (32,036)
Increase in accounts payable an accrued liabilities (66,116) 2,059,932
--------------- -----------------
Net cash provided by operating activities 82,254 36,419
Net cash flows provided (used) used for investing activities: 21,796 (6,666)
--------------- -----------------
Acquisition of equipment and furniture (640) (6,666)
Sale of fixed assets 22,436 -
Cash flows from financing activities: (415) (178)
Deferred Income (415) (178)
--------------- -----------------
Net increase in cash and cash equivalents 103,635 29,575
Cash and cash equivalents, beginning of period 129,911 230,321
--------------- -----------------
Cash and cash equivalents, end of period 232,546 259,896
=============== =================
</TABLE>
RIOMIN EXPLORACIONES, S.A.
FINANCIAL STATEMENTS
On October 29, 1999, the Board of Directors of Cobre Las Cruces, S.A. (formerly
Riomin Exploraciones, S.A.) prepared the notes 2, 13 and 14 to the Financial
Statements for the year ended December 31, 1997, in compliance with current
legislation.
/s/ G. Frank Joklik /s/ Donald L. Babinchak
- ------------------------------ ------------------------------
G. Frank Joklik Donald L. Babinchak
/s/ Michael G. Doyle /s/ Michael G. Doyle
- ------------------------------ ------------------------------
John C. Farmer Michael G. Doyle
/s/ Gobain Overjero Zappino
- ------------------------------
Gobain Overjero Zappino
-58-
<PAGE>
Unaudited Pro Forma Consolidated Financial Statements of MK Gold Company
-59-
<PAGE>
MK Gold Company
Introduction to Unaudited Pro Forma
Consolidated Financial Statements
The accompanying unaudited pro forma consolidated balance sheet as of
September 30, 1999 and unaudited pro forma statements of operations for the year
ended December 31, 1998 and the nine month period ended September 30, 1999 are
presented to reflect the acquisition by MK Gold Company (the "Company") of the
entire share capital and subordinated debt of Cobre Las Cruces, S.A. (formerly
Riomin Exploraciones, S.A.) ("Las Cruces") (the "Acquisition") from Rio Tinto
plc for a purchase price of $42 million in cash. The Acquisition was accounted
for under the purchase method of accounting. The accompanying unaudited pro
forma consolidated financial statements reflect the effects of a preliminary
allocation of the purchase price.
The accompanying unaudited pro forma consolidated financial statements
should be read in conjunction with the respective company's historical
consolidated financial statements and notes thereto. The unaudited pro forma
consolidated financial statements are presented for informational purposes only
and are not necessarily indicative of actual results had the foregoing
transaction occurred as described in the preceding paragraph, nor do they
purport to represent results of future operations of the merged companies .
The pro forma consolidated balance sheet assumes the Acquisition occurred
on September 30, 1999. The pro forma consolidated statements of operations
present the Company's historical consolidated statements of operations for the
fiscal year ended December 31, 1998 and the nine months ended September 30,
1999, along with Las Cruces' statements of operations for the same periods
adjusted to give effect to the Acquisition as if the Acquisition had occurred on
January 1, 1998.
-60-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 1999
(Thousands of dollars)
<TABLE>
<CAPTION>
Pro forma
ASSETS Historical Pro forma as
--------------------------------
Company (a) Riomin (b) adjustments (c) adjusted (d)
-------------------------------- ---------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,804 $ 1,508 $ (6,193) (e) $ 9,119
Gold bullion held for sale 1,210 - - 1,210
Receivables 1,969 546 - 2,515
Inventories 1,630 - - 1,630
Deferred income taxes 123 - - 123
Other 234 3 - 237
---------- ---------- ----------- -----------
Total current assets 18,970 2,057 (6,193) 14,834
---------- ---------- ----------- -----------
Mining rights, property, plant and mine development net 1,203 28,551 16,388 (f) 46,142
Deferred Income taxes 304 - - 304
Subordinated debt receivable - - - -
Restricted cash 1,053 - - 1,053
---------- ---------- =========== ===========
TOTAL ASSETS $ 21,531 $ 30,608 $ 10,195 $ 62,333
========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,606 $ 747 $ - $ 2,353
Current portion of mine closure liabilities 454 - - 454
Short-term note payable - Leucadia National Corporation - - 15,807 (k) 15,807
Other accrued liabilities 380 - - 380
---------- ----------- ----------- -----------
Total current liabilities 2,441 747 15,807 18,994
---------- ----------- ----------- -----------
Mine closure and reclamation liabilities 743 743
Subordinated debt - 36,451 (36,451) (g) -
Line of credit - Leucadia National Corporation - - 20,000 (h) 20,000
Long term deferred taxes - - 4,249 (i) 4,249
Deferred revenue 1,970 - - 1,970
---------- ----------- ----------- -----------
Total liabilities 5,153 37,198 (3,605) 45,956
STOCKHOLDERS' EQUITY:
Common Stock 193 4,004 (4,004) (j) 193
Capital in excess of par value 67,146 - - (k) 67,146
Accumulated deficit (50,962) (10,594) 10,594 (l) (50,962)
Translation adjustment - - - -
---------- ----------- ----------- -----------
Total stockholders' equity 16,377 (6,590) 6,590 16,377
---------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,530 $ 30,608 $ 10,195 $ 62,333
========== =========== =========== ===========
</TABLE>
-61-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the year ended December 31, 1998
(Thousands of dollars except per share data)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma
--------------------------
Company (m) Riomin (n) adjustments (o) as adjusted (p)
----------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUE:
Product sales $ 9,017 $ 598 $ - $ 9,615
Mining services 11,065 - - 11,065
----------- ---------- --------------- ---------------
Total revenue 20,082 598 - 20,680
----------- ---------- --------------- ---------------
COSTS AND OPERATING EXPENSES:
Product sales 8,617 17 - 8,634
Mining services 9,335 - - 9,335
----------- ---------- --------------- ---------------
Total costs and operating expenses 17,952 17 - 17,969
----------- ---------- --------------- ---------------
GROSS PROFIT 2,130 581 - 2,711
EXPLORATION COSTS (3,068) - - (3,068)
GENERAL AND ADMINISTRATIVE EXPENSES (1,661) - - (1,661)
----------- ---------- --------------- ---------------
LOSS FROM OPERATIONS (2,599) 581 - (2,018)
Gain (loss) on sale of assets 455 (6,034) - (5,579)
Investment income and dividends, net 1,104 - - 1,104
Interest expense (81) (1,749) (1,830)
----------- ---------- --------------- ---------------
Loss before income taxes (1,121) (7,202) - (8,323)
Income tax provision (160) - - (160)
----------- ---------- --------------- ---------------
Net loss $ (1,281) $ (7,202) $ - $ (8,483)
=========== ========== =============== ===============
Basic and diluted loss per share (0.07) (0.44)
Basic and diluted weighted average shares used
to compute loss per share 19,406,679 19,406,679
</TABLE>
-62-
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the nine months ended September 30, 1999
(Thousands of dollars except per share data)
<TABLE>
<CAPTION>
Historical Pro forma Pro forma
----------------------------
Company (q) Riomin (r) adjustments (s) as adjusted (t)
---------------------------- ---------------------------------
<S> <C> <C>
REVENUE:
Product sales $ 6,007 $ 90 $ - $ 6,097
Mining services 8,324 - - 8,324
----------- ----------- ------------ -----------
Total revenue 14,331 90 - 14,421
----------- ----------- ------------ -----------
COSTS AND OPERATING EXPENSES:
Product sales 7,024 1,733 8,757
Mining services 6,564 - - 6,564
----------- ------------ ------------ -----------
Total costs and operating expenses 13,588 1,733 - 15,321
----------- ----------- ------------ -----------
GROSS PROFIT 743 (1,643) - (900)
EXPLORATION COSTS (1,717) - - (1,717)
GENERAL AND ADMINISTRATIVE EXPENSES (1,269) - - (1,269)
---------- ----------- ------------ -----------
LOSS FROM OPERATIONS (2,243) (1,643) - (3,886)
Gain on sale of assets 92 - - 92
Investment income and dividends, net 513 - - 513
Interest expense (156) - - (156)
---------- ----------- ------------ -----------
Loss before income taxes (1,794) (1,643) - (3,437)
Income tax provision - - - -
---------- ----------- ------------ -----------
Net loss $ (1,794) $ (1,643) $ - $ (3,437)
========== =========== ============ ===========
Basic and diluted loss per share (0.09) (0.18)
Basic and diluted weighted average shares used to
compute loss per share 19,261,365 19,261,365
</TABLE>
-63-
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated balance sheet as of September 30, 1999
reflects the adjustments necessary to record the acquisition as though it had
occurred on September 30, 1999.
The unaudited pro forma consolidated statements of operations for the year ended
December 31, 1998 and the unaudited pro forma consolidated statements of
operations for the nine months ended September 30, 1999 have been prepared
assuming the acquisition occurred on January 1, 1998 and reflect the effects of
certain adjustments to the historical consolidated financial statements that
result from the acquisition.
The method of accounting for the acquisition is the purchase method. The
acquisition was funded through (i) borrowings of $20,000,000 pursuant to the
Company's existing credit agreement with Leucadia National Corporation
("Leucadia"), (ii) the sale of 18,058,635 shares of the Company's authorized but
unissued shares of Common Stock to Leucadia for $15,806,723 and (iii) $6,193,277
from the Company's working capital. The purchase price of Cobre Las Cruces was
$42,000,000. The excess purchase price over net asset value of Riomin was
recorded as an increase in mining rights. As a result of the acquisition the
company also recorded a deferred income tax liability that was also recorded as
an increase in mining rights.
The following notes pertain to the unaudited pro forma consolidated balance
sheet as of September 30, 1999:
(a) Represents the consolidated balance sheet of the Company as of
September 30, 1999.
(b) Represents the balance sheet of Riomin as of September 30, 1999.
(c) Includes proforma adjustments for the Riomin acquisition relating to
the financing and sale of common stock to Leucadia and the entries
needed for consolidation.
(d) Represents the Company's pro forma as adjusted balance sheet as if the
Riomin acquisition, related financing and sale of common stock to
Leucadia had occurred on September 30, 1999.
(e) Represents the portion of the purchase price funded through the
Company's working capital.
(f) Represents the allocation to mining rights of the excess purchase
price over fair value of net assets acquired and the deferred income
tax liability.
(g) Represents the elimination of intercompany subordinated debt needed
for consolidation.
(h) Represents borrowings under the line-of-credit facility used to
finance part of the Riomin acquisition.
(i) Represents the adjustments to the deferred income tax balances for the
tax effects of the pro forma adjustments.
(j) Represents the elimination of Riomin's common stock needed for
consolidation.
-64-
<PAGE>
(k) Represents a promissory note payable to Leucadia National Corporation.
Pending regulatory approval of the sale of all authorized but unissued
shares of MK Gold common stock to Leucadia, Leucadia loaned the
Company approximately $15,807,000.
(l) Represents the elimination of Riomin's accumulated deficit for
consolidation purposes.
The following notes pertain to the unaudited pro forma consolidated statements
of operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999. There are no material pro forma adjustments. No mining
rights were amortized because the Las Cruces Project is still in the feasibility
and development stage:
(m) Represents the consolidated statement of operations of the Company for
the year ended December 31, 1998.
(n) Represents the statement of operations of Riomin for the year ended
December 31, 1998.
(o) Includes any proforma adjustments necessary for consolidation.
(p) Represents the Company's pro forma as adjusted consolidated statement
of operations as if the Riomin acquisition had occurred on January 1,
1998.
(q) Represents the consolidated statement of operations of the Company for
the nine months ended September 30, 1999.
(r) Represents the statement of operations of Riomin for the nine months
ended September 30, 1999.
(s) Includes any proforma adjustments necessary for consolidation.
(t) Represents the Company's pro forma as adjusted consolidated statement
of operations as if the Riomin acquisition had occurred on January 1,
1998.
-65-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MK GOLD COMPANY
/s/ John C. Farmer
--------------------------------------
John C. Farmer
Chief Financial Officer
Date: November 15, 1999
-66-
<PAGE>
INDEX TO EXHIBITS
Exhibits
2.1 Sale and Purchase Agreement dated September 1, 1999 between
MK Gold Company and Rio Tinto Metals Limited.*
10.1 Stock Purchase Agreement dated September 1, 1999 between MK
Gold Company and Leucadia National Corporation.*
10.2 Promissory Note dated September 1, 1999.*
10.3 Option Agreement dated August 26, 1999 between MK Gold
Company and Straits Resources Ltd.*
23.1 Consent of Arthur Andersen
23.2 Consent of PricewaterhouseCoopers Auditores, S.L.
_______________________
* previously filed
-67-
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 8-K of MK Gold Company of our report dated September 9,
1999 included in Registration Statement Nos. 33-84754 and 333-16765. It should
be noted that we have not audited any financial statements of the company
subsequent to December 31, 1998 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN
Jorge Segura Rodriguez
November 11, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-84754 and 333-16765 on Form S-8 of MK Gold Company of our report dated
October 29, 1999, appearing in this Amendment No. 1 to MK Gold Company's Current
Report on Form 8-K.
PRICEWATERHOUSECOOPERS AUDITORES, S.L.
November 15, 1999
