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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to __________
Commission file number 0-25170
ROYAL SILVER MINES, INC.
(Exact name of Registrant as specified in its charter)
Utah 87-0306609
(State of Incorporation) (I.R.S. Employer Ident. No.)
Address of principal offices : 10220 N. Nevada, Suite 230
Spokane, Washington 99218
Registrant's Telephone No.: (509)466-3144
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value, $0.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
YES _X_ NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K: _X_
As of December 17, 1996 the aggregate value of the voting stock held by non-
affiliates of the Registrant, computed by reference to the average of the bid
and ask price ($0.83) on such date was $5,010,525.
As of December 17, 1996, the Registrant had outstanding 10,649,854 shares of
common stock ($.01 par value). An index of the documents incorporated herein
by reference and/or annexed as exhibits to the signed originals of this report
appears beginning on page 50.
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TABLE OF CONTENTS
PAGE
ITEM NUMBER AND CAPTION NO.
PART I
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . . . . . . . 28
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . 29
ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . 29
ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operation . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 8. Financial Statements and Supplementary Data . . . . . . . . . 33
ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . 33
PART III
ITEM 10. Directors and Executive Officers of the
Company . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 39
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 13. Certain Relationships and Related Transaction . . . . . . . . 44
PART IV
ITEM 14. Exhibits, Financial Statement Schedules,
and Reports of Form 8-K . . . . . . . . . . . . . . . . . . 46
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
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PART I
ITEM 1. BUSINESS
GENERAL (Please refer to the glossary at the end of Item 1 for definitions of
certain mining terms used in this annual report.)
Royal Silver Mines, Inc. (generally referred to as 'Royal' or 'the Company'),
formerly known as Consolidated Royal Mines, Inc., and also, Royal Minerals,
Inc., is a U.S. mineral resource company incorporated under the laws of the
State of Utah. The Company is engaged in the business of acquiring and
exploring mineral properties containing silver, gold, copper, and other
mineralization, with a primary emphasis on silver. Prior to September 30,
1995, Royal acquired all of the outstanding securities of Celebration Mining
Company ('Celebration'), a development stage company, pursuant to a share
exchange agreement and plan of reorganization ('Reorganization'). Unless
indicated differently by the context, all references to 'the Company' and
'Royal' in this report shall be read to refer to Royal Silver Mines, Inc., the
corporate entity that resulted from the business combination of Consolidated
Royal Mines, Inc. and Celebration Mining Company.
Prior to the Reorganization, Celebration was a non-public, closely held
Washington corporation. It was formed in February 1994 to identify and
acquire mineral properties for subsequent exploration and development, if
warranted, through equity financing and joint venture arrangements. The
Reorganization has been accounted for as a purchase by Celebration of Royal.
Celebration was treated as the acquiring company for financial reporting
purposes because its shareholders constituted greater than 50 percent of the
combined shareholder group at the time of reorganization. In conformity with
generally accepted accounting principles and the Company's accounting policy,
Celebration is recognized as the predecessor entity. Consequently,
Celebration's assets and liabilities were not adjusted in the accompanying
financial statements. On the other hand, for purposes of reporting statutory
and corporate authority, Royal is deemed to be the acquiring corporation, and
Celebration is now a wholly-owned subsidiary of Royal. Prior to the
Reorganization, Royal had been a majority-owned subsidiary of Centurion Mines
Corporation ('Centurion'). Currently, however, Centurion holds an approximate
14 percent shareholder interest in Royal and is an affiliate and related party
of the Company.
The Company operates its business as an exploration stage company, meaning
that it intends to receive income from property sales, joint ventures, or
other business arrangements with larger companies, rather than developing and
placing its properties into production on its own. There currently are
several business arrangements, joint venture prospects, and potential property
sales from which the Company expects to receive income. The Company has owned
royalty interests in properties situated in Utah's Gold Belt. There has been
and is no assurance that the Company will receive royalties from these
properties; it received no royalty income during the fiscal year ended
September 30, 1996 ("Fiscal 1996").
The Company currently has no revenues. At September 30, 1996, the Company's
accumulated deficit was $3,057,817. Although it has recurring losses from
operations, the Company has increased its operating capital and improved its
financial condition and ability. Regarding its losses from operations, the
Company cannot assure that it will be able to fully carry out its plans as
budgeted without additional operating capital. At September 30, 1996, the
Company had a cash balance of $688,716 and working capital of $686,573, as
compared to a cash balance of
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$151,698 and a working capital deficit of $665,274 at September 30, 1995.
Royal will need capital resources of approximately $40,000 per month to meet
its estimated expenditures for the ensuing twelve months. The Board of
Directors has instructed management to consult with experienced financial and
investment advisory firms to formulate arrangements for such capital fund
raising. Currently, the Company is pursuing various alternatives, including,
if necessary, the private placement of stock.
During the twelve months ended September 30, 1996, the Company placed
1,949,332 shares of its common stock for $2,958,314 in cash. The Company also
issued 406,050 shares of its common stock in lieu of outstanding debt. The
stock was issued at $1.50 per share for a total value of $609,075. At the end
of September, 1996, the Company reached an agreement with Centurion Mines
Corporation, a related affiliate, for an option to purchase or assign up to
800,000 shares of Royal common stock, presently owned by Centurion Mines and
representing approximately seven and one-half percent of currently outstanding
shares, at an exercise price of $1.75 per share. The re-purchase option, which
is assignable to third parties, expires October 1, 1998.
As discussed in greater detail below in the section entitled 'The Company's
Strategy and Business Plan,' a substantial portion of Royal's assets consist
of investments in mineral properties for which additional exploration is
required to determine if they contain mineralization that is economically
recoverable. The realization of these investments is contingent to a large
extent upon the success of Royal's property transactions as a whole, the
existence of economically recoverable metals and other mineralized material,
the ability of the Company to obtain financing or make other arrangements for
development, and upon future profitable production. The likelihood and extent
to which these contingencies may be material is uncertain, and Royal cannot
assure that the outcome of these uncertain events will not have a material
impact and result in adverse consequences to the Company. If Royal does not
receive suitable financing or funds from its present or future business
arrangements to develop these properties, and continues to suffer losses from
operations, the Company will revise its business activities accordingly.
HISTORY
The Company was incorporated in Utah on April 6, 1969 as Royal Resources, Inc.
for the purpose of acquiring and developing mineral properties. The Company
changed its name to Royal Minerals, Inc., on January 6, 1983, and became a
public company in July 1984. Royal complied with the Securities and Exchange
Commission reporting requirements until August 1986, at which time Royal filed
Form 15 with the Commission and suspended further reporting requirements. On
January 31, 1992, Centurion owned 82.3 percent of the Company's common stock
(see the section entitled 'Centurion's Acquisition and Control of the
Company,' below.) Also on January 31, 1992, the Company shareholders
authorized a 5-for-1 reverse stock split, and on March 4, 1994, authorized a
4-for-1 reverse stock split of the common stock of the Company. On March 17,
1994, the Company changed its name to Consolidated Royal Mines, Inc. On
November 22, 1994, the Company filed a registration statement on Form 10 and
renewed its reporting requirements, effective January 23, 1995. During the
fourth quarter of Fiscal 1995, the Company revised its business plan to
concentrate on the acquisition of silver properties. That change in focus
prompted Consolidated Royal Mines, Inc. and Celebration Mining Company to
implement the Reorganization, which closed on August 8, 1995, and to change
the Company's name to Royal Silver Mines, Inc., effective September 18, 1995.
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THE COMPANY'S STRATEGY AND BUSINESS PLAN
Royal's management believes that control of land and mineral rights is the key
ingredient for financial success in the exploration and development phases of
the mining business. Previously, Royal had concentrated its main exploration
efforts in the northern Utah Gold Belt because of that area's history of
profitable metal production and because of Royal's exploration experience in
the western United States. After the Reorganization, the Company acquired a
number of significant mineral properties focusing on silver resources. The
Company expects to concentrate its main exploration efforts during Fiscal 1997
in Idaho's Coeur d' Alene Mining District and to a much lesser extent in the
Lakeview Mining District, and Utah's Ashbrook Mining District where the
Company owns a 25% interest in the Vipont Mine property. The Company was
involved in a joint venture in Australia through an agreement between
Celebration and an Australian company. A deep test exploration hole was
drilled in search of a buried massive sulfide target; however the hole
encountered only weak mineralization.
Royal's corporate strategy is directed toward the acquisition of land
positions for the exploration of mineralization in established mining
districts that have had large and profitable production histories. This
approach is referred to in the mining industry as 'headframe geology,' which
is defined as concentrating efforts near previously known, profitable ore
deposits. Royal does not currently have sufficient capital of its own to
carry out its strategy and business plan.
The Company's plan of operation for Fiscal 1997 is to proceed with its
exploration efforts and to seek business arrangements that, in conjunction
with the funds of other companies or business entities, will provide
sufficient funding to meet the initial expenditures required for the
exploration of mineralization on such properties and to acquire land positions
or other interests in mineral properties. It expects in this way to achieve
an increase in the value of its assets and to obtain production income with
less risk of its own funds for development expenditures and capital investment
in production facilities. As a consequence of the Company's plans, management
expects a reversal of the current trend of diminishing cash flow. However,
because it currently does not have sufficient capital, if the Company is not
successful in obtaining suitable joint venture commitments and funds, there is
no assurance that the Company otherwise will obtain the capital it would need
to achieve its business plan. During September 1996, the Company completed
its initial due diligence review and signed a revised option agreement with
the Placer Mining Corporation of Kellogg, Idaho, to purchase a 100 percent
ownership interest in the Bunker Hill Mine, a silver-lead-zinc mine in
Shoshone County, Idaho. The Bunker Hill Mine is the largest mine in northern
Idaho's historic Coeur d'Alene Mining District, which currently has four major
silver mines in production. The Bunker Hill Mine has produced over 35 million
tons of ore over a one hundred year period.
Under the terms of the option, the Company can acquire the mine by making
payment through one of two alternative purchase arrangements: the Company may
either (1) pay $7 million and issue 500,000 shares of its restricted common
stock to Placer Mining on or before May 10, 1997; or (2) pay $4 million and
issue 500,000 shares to Placer Mining on or before May 10, 1997, and then pay
an additional $3.5 million on or before May 10, 1998. Under either
alternative, Placer Mining will retain a 2-3/4 percent net smelter return
royalty on the property. The Company intends to raise the necessary funds via
equity and/or debt financing, or through a possible joint venture with a major
partner.
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The Bunker Hill Mine, which was originally discovered in 1881, was last
operated on a large scale in 1990. Placer Mining has reestablished small
production of high grade lead-silver ore from stopes on 10 level and 11 level,
but has lacked the requisite capital to properly redevelop the mine. In order
to achieve the necessary economies of scale, and to benefit from low cost,
bulk underground mining methods, the Company's engineers believe that a
capital investment in excess of $50 million will be required over and above
the purchase price. However, the Company believes that if the technical due
diligence is favorable and the ongoing environmental issues can be
satisfactorily resolved, an investment of that magnitude may be possible to
obtain.
The Board of Directors reasonably believes that the Company is able to engage
in nearly any size operation or scope of mining activity depending on the
circumstances and merits of each proposed operation or mining activity.
Accordingly, the Board has not limited the size of operation or scope of
project which it believes is reasonable for management to consider in
achieving the Company's business plan. Following that direction, management
of the Company pursued a vigorous and fruitful program during the last quarter
of Fiscal 1995, acquiring interests in seven distinct parcels of mineral
property. Further, management has been authorized to consider and review all
reasonable proposals and, upon satisfactory assessment, to then make a
specific determination as to an estimated range of funding amounts that each
such proposal reasonably might require.
By further direction of the Board of Directors, management may enter into new
mining arrangements with joint venturers, partners, or other third parties.
Such arrangements may be multi-party ventures to which the Company will
contribute stock, cash, and/or mineral interests. In such arrangements, the
Company's participation in revenues and profits, if any, will be reduced. At
this time, the Company has no agreement or understanding with any third
parties for the formation of a joint venture mining operation other than those
described herein. The Company will encounter significant competition from
firms currently engaged in the mining industry. In general, all of these
companies are substantially larger than the Company, and have substantially
greater resources and operating histories. (See 'Risk Factors,' below.)
Management, together with such professional advisors which the Company deems
appropriate, will investigate prospective properties through on-site
examination, reviewing available geologic reports or publications relating to
the property, and a general field reconnaissance to secure preliminary
information regarding characteristics of the property. If, from such
preliminary reviews, management deems it advisable to further investigate the
property, the Company may determine the condition of title and ownership by
using abstractors or title companies, and may obtain a preliminary feasibility
study by one or more geologists, mining engineers, or accountants. If, after
the foregoing preliminary investigation, management determines that the
property does not meet the Company's acquisition criteria, efforts to acquire
the property will be abandoned, in which case costs incurred in conducting the
investigation would not be recoverable. It should be noted, however, that the
Company has only a limited amount of funds available for working capital which
could be used for future exploration expenditures. Thus, if future
exploration is desired, additional funds would be needed. Only a limited
amount of such funds have currently been identified and there can be no
assurance that such funds would be available at an acceptable cost, if at all.
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Inasmuch as the eventual project, operation or mining activity could be of any
size or scope, management is not able at this time to provide more exact
amounts or a detailed listing of operation costs, including increases in
general and administrative expense, if any. However, the Company plans to
fund any increases in general and administrative expense principally from
joint venture revenues, fees it may receive, or additional funds it may
receive from debt or equity financing. Funds required to finance the
Company's exploration and development of mineral properties are expected to
come primarily from joint venture participant contributions with the remainder
provided by funds generated from such joint venture and other lease or royalty
arrangements.
Management has budgeted approximately $480,000 for Fiscal 1997 for general and
administrative expenses and other operating costs. To date, the Company has
made full and timely payment of its expenses, in particular to the various
governmental payees it interacts with, and has met its obligations to the
entities and contractors that provide its personnel, office space, and
equipment needs. The Company currently is seeking additional sources of
working capital sufficient to continue its present level of funding its
general and administrative expenses and meet ongoing payment obligations for
its leases to governmental bodies. Operating costs are largely dependent upon
the level of exploration and development activity engaged in, which, in turn,
is dependent upon availability of funds. The Company has determined not to
incur any operating costs related to exploration and development until
sufficient funds are available for payment.
PRIVATE PLACEMENTS. In July, 1995, the Company completed a private placement
of 8,700 shares through two Regulation S offerings, both at a price of $2.00
per share, for a total of $17,400. During September 1995, the Company
completed a private placement of 179,000 shares of common stock through a
domestic offering at a price of $1.50 per share for a total of $241,650 after
expenses. During the twelve months ended September 30, 1996, the Company
placed 1,949,332 shares of its common stock for $2,958,314 in cash. The
Company also issued 406,050 shares of its common stock in lieu of outstanding
debt of $570,919, plus accrued interest. The stock was issued at $1.50 per
share for a total value of $609,075.
COMPETITION
The mining industry is very competitive. There is a high degree of
competition to obtain favorable mining properties and suitable mining
prospects for drilling, exploration, development and mining operations. The
Company encounters competition from a handful of other similarly-situated
mining companies in the silver mining industry in connection with the
acquisition of properties capable of profitably producing silver and other
mineralization. The Company is unable to ascertain the exact number of such
competitor companies, however, the Company believes that with the acquisition
of significant properties in the Coeur d'Alene Mining District of Northern
Idaho, USA, its competitive position for exploring and developing such
properties for silver mineralization should improve. Nevertheless, the Company
may be unable to acquire attractive mining properties on terms it considers
acceptable. Accordingly, there can be no assurance that the Company's programs
will yield commercially minable reserves.
RISK FACTORS
The following risk factors with respect to the Company and its operations may
affect its strategy and business plan:
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1. Recent Status as a Public Reporting Company. The Company became a fully
reporting public company on January 23, 1995. The Company has no current
operating history and is subject to all risks inherent in a developing
business enterprise. The likelihood of success of the Company must be
considered in light of the problems, expenses, difficulties, complications,
and delays frequently encountered in connection with a new business in general
and those specific to the natural resource industry and the competitive and
regulatory environment in which the Company will operate.
2. Exploration Stage Company. Mineral exploration, particularly for gold
and silver, is highly speculative in nature, frequently is nonproductive, and
involves many risks, often greater than those involved in the discovery of
mineralization. Such risks can be considerable and may add unexpected
expenditures or delays to the Company's plans. There can be no assurance that
the Company's mineral exploration activities will be successful or profitable.
Once mineralization is discovered, it may take a number of years from the
initial phase of drilling until production is possible, during which time the
economic feasibility of production may change.
A related factor is that exploration stage companies use the evaluation work
of professional geologists, geophysicists, and engineers for estimates in
determining whether to acquire an interest in property or to commence
exploration or development work. These estimates generally rely on scientific
estimates and economic assumptions, and in some instances may not be correct,
and could result in the expenditure of substantial amounts of money on a
property before it can be determined whether or not the property contains
economically recoverable mineralization.
The economic viability of a property cannot be determined until extensive
exploration and development has been conducted and a comprehensive feasibility
study performed. The Company currently does not have any such feasibility
studies, and has not yet prepared feasibility studies on any of its
properties. Moreover, the market prices of any minerals produced are subject
to fluctuation, which may negatively affect the economic viability of
properties on which expenditures have been made. The Company is not able to
determine at present whether or not, or the extent to which, such risks may
adversely affect the Company's strategy and business plans.
3. Lack of Revenue. The Company needs additional capital but currently has
no revenues. Substantial expenditures are required to establish ore reserves
through drilling, to determine metallurgical processes to extract the
mineralization from the ore and, in the case of new properties, to construct
mining and processing facilities. The Company lacks a constant and continual
flow of revenue. The Company currently holds certain royalty interests in
several mining properties previously sold, but there is no assurance that the
Company will receive royalty payments, or that the Company will otherwise
receive adequate funding to be able to finance its exploration activities.
The Company is looking for revenue sources on an on-going basis, but there can
be no assurance that such sources can be found or that, if available, the
terms of such financing will be commercially acceptable to the Company.
Because of the Company's need for additional capital to fund its present
operations, to complete the acquisition of certain mineral rights, and to
provide for further exploration and development, the lack of consistent
revenue could be a detrimental factor in the progress of the Company.
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4. Realization of Investments in Mineral Properties and Additional Capital
Needs. The ultimate realization of the Company's investments in mineral
properties is dependent upon the success of future property sales, the
existence of economically recoverable reserves, the ability of the Company to
obtain financing or make other arrangements for development and upon future
profitable production. The Company expects to finance its operations for
Fiscal 1997 through the sale of equity securities, joint venture arrangements
(including project financing), and the sale of interests in mineral
properties. The Company does not have sufficient capital of its own to
explore and develop its mineral properties and there can be no assurance that
the Company will be successful in obtaining the required funds to finance its
long-term capital needs.
5. Retention and Attraction of Key Personnel. The Company's success will
depend, in large part, on its ability to retain and attract highly qualified
personnel. The Company's success in retaining its present staff and in
attracting additional qualified personnel will depend on many factors,
including its ability to provide them with competitive compensation
arrangements, equity participation and other benefits. There is no assurance
that the Company will be successful in retaining or attracting highly
qualified individuals in key management positions.
6. Regulatory Concerns. Environmental and other government regulations at
the federal, state and local level pertaining to the Company's business and
properties may include: 1) Surface Impact, 2) Water Acquisition, 3) Site
Access, 4) Reclamation, 5) Wildlife Preservation, 6) Licenses and Permits, and
7) Maintaining the Fees for unpatented mining claims. See the section below
entitled 'Government Regulation and Environmental Concerns,' for a
comprehensive discussion of the risks related to this factor.
TRANSACTIONS WITH CENTURION
The Company has disclosed pertinent information and financial data with
respect to its transactions with Centurion in its presentation found at Item
13 of this Report, entitled 'Certain Relationships and Related Transactions.'
PATENTS, TRADEMARKS, LICENSES, FRANCHISES
The Company does not own any patents, trademarks, licenses, franchises, or
concessions, except for patented mining claims <see glossary> granted by
governmental authorities and private land owners.
SEASONABILITY
The Company's business is generally not seasonal in nature except to the
extent that weather conditions at certain times of the year may affect the
Company's access to its properties.
GOVERNMENT REGULATION AND ENVIRONMENTAL CONCERNS
The Company is committed to complying and, to its knowledge, is in compliance
with all governmental and environmental regulations. The Company's activities
are subject to extensive federal, state, and local laws and regulations
controlling not only the mining of and exploration for mineral properties, but
also the possible effects of such activities upon the environment. Permits
from a variety of regulatory authorities are required for many aspects of mine
operation and reclamation. The Company cannot predict the extent to which
future legislation and regulation could cause additional expense, capital
expenditures, restrictions and delays in the development of the Company's
properties, including those with respect to unpatented mining claims.
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As used in this Annual Report, the term 'unpatented mining claim' refers to a
mining claim on federal lands which has not been converted into full fee
ownership in the name of a private person or entity. The process of
converting ownership was established under the (U.S.) General Mining Law of
1872, as amended (the 'General Mining Law'), and requires that certain
conditions be met. Once met, and all other requirements are satisfied, the
U.S. government transfers ownership of the underlying property (held to that
point in the public trust) to the private person or entity by granting fee
simple and conveying full private ownership of the subject mineral property,
including mineral rights, surface, subsurface and appurtenant rights, subject
to any vested and accrued water rights. The act of granting full fee
ownership is accomplished by a duly endorsed instrument referred to as a
'patent.' Until such time as a mining claim on federal land may be
'patented,' the claim is deemed an 'unpatented mining claim' and ownership is
held in the public trust by the U.S. government subject to existing federal
mining laws and other applicable statutory or regulatory provisions as may be
implemented by the federal bureaucracy.
In 1992, the U.S. Congress passed a number of amendments to the General Mining
Law which governs mining claims and related activities on federal lands. A
holding fee of $100 and a filing assessment of $35 per claim was imposed upon
unpatented mining claims located on federal lands. Since 1992, a variety of
legislation has been proposed to further amend the General Mining Law. The
proposed legislation would, among other things, impose royalties and add
requirements affecting reclamation, environmental controls, and restoration.
Although such legislative proposals are not currently in effect, the
likelihood or extent of subsequent enactments is not presently known and the
potential impact on the Company as a result of future congressional action
cannot be predicted.
The Company's activities are not only subject to extensive federal, state, and
local regulations controlling the mining of and exploration for mineral
properties, but also the possible effects of such activities upon the
environment. Future legislation and regulations could cause additional
expense, capital expenditures, restrictions and delays in the development of
the Company's properties, the extent of which cannot be predicted. Also, as
discussed above, permits from a variety of regulatory authorities are required
for many aspects of mine operation and reclamation. In the context of
environmental permitting, including the approval of reclamation plans, the
Company must comply with known standards, existing laws and regulations that
may entail greater or lesser costs and delays depending on the nature of the
activity to be permitted and how stringently the regulations are implemented
by the permitting authority. While it is possible that the costs and delays
associated with the compliance of such laws, regulations, and permits could
become such that the Company would not proceed with the development or
operation of a mine, the Company is not presently aware of any material
environmental constraint affecting its properties that would preclude the
economic development or operation of any specific property, other than those
relating to the Bunker Hill Mine (described in Item 2.)
At present, the Company does not have any environmental control facilities.
Thus, the Company has not made any material capital expenditures for
environmental controls, other than the nominal costs of preparing the plans
and contingencies for such environmental controls, measures and facilities as
may be required in its future activities.
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As the Company becomes more active on its properties, it is reasonable to
expect that compliance with environmental regulations will substantially
increase costs to the Company. Such compliance may include feasibility
studies on the surface impact of the Company's proposed operations; costs
associated with minimizing surface impact; water treatment and protection;
reclamation activities, including rehabilitation of various sites; on-going
efforts at alleviating the mining impact on wildlife; and permits or bonds as
may be required to ensure the Company's compliance with applicable
regulations. It is possible that the costs and delays associated with such
compliance could become so prohibitive that the Company may decide to not
proceed with the exploration, development, or mining operations on any of its
mineral properties.
Specifically as it relates to the Company's option to purchase the Bunker Hill
Mine, Royal Silver Mines has endeavored to assess the environmental issues,
including preexisting conditions such as acid water mine drainage and related
treatment efforts, and the impact of these and other issues that may arise
pertaining to environmental protection requirements and areas of concern, some
of which are tailings pond construction, mine waste rock disposal, etc.
Discussions with the State of Idaho and the EPA have been ongoing and
continue. The company expects to complete a full review and determination of
the environmental impact and requirements to bring the mine to an economically
productive level.
Future costs of compliance may depend upon the extent and type of exploration
and testing required. Moreover, there is no assurance that the Company will
be able to comply with requirements imposed on future development, or that the
Company will be able to economically develop operating mines under such
regulations. Therefore, management is not able to estimate those amounts at
this time.
NUMBER OF EMPLOYEES
The Company has five employees. The Company arranges for much of its work
through contracts with various consultants. The Company may contract with
additional consultants from time to time, as required by its operations.
Consultants are treated as independent contractors.
CENTURION'S ACQUISITION AND CONTROL OF THE COMPANY
In October 1991, Centurion entered into negotiations with the officers and
directors of Royal for the acquisition and control of the Company. In
November 1991, Centurion's Board of Directors approved this acquisition.
Subsequently, Centurion entered into subscription and investment agreements
with several of Royal's principal shareholders, whereby Centurion exchanged
174,743 restricted shares of Centurion stock and $1,600 cash for shares of
Royal common stock constituting 37.2 percent ownership of Royal's outstanding
shares. On January 10, 1992, Royal's Board of Directors authorized the
exchange of 100,000 post-split shares of Royal's common stock for
approximately 4,196 acres of unpatented mining claims and state and private
mineral leases from Centurion. On January 31, 1992, at the Royal annual
shareholders meeting, the shareholders authorized the purchase of
approximately 17,000 acres of mining properties from Centurion for 1,250,000
post-split shares of Royal common stock. This acquisition of shares gave
Centurion an 82.3 percent controlling interest in Royal. Because of the
changes in the control of shareholdings brought about by the Reorganization
with Celebration, Centurion currently holds approximately 14 percent of
Royal's outstanding common stock. Of this, Royal has been granted an
assignable option to repurchase up to half of Centurion's position at a price
of $1.75 at any time prior to October 1, 1998.
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SUBSIDIARIES
The Company currently has one subsidiary, Celebration Mining Company, of which
Royal currently is the sole shareholder. Celebration was incorporated in the
State of Washington in February 1994.
ROYAL'S REORGANIZATION WITH CELEBRATION. In May and June 1995, Royal's
management began negotiations with management of Celebration regarding a
merger or other reorganization plan of the two companies. On June 28, 1995,
the boards of directors of both companies approved a reorganization and the
companies signed an agreement based on a share exchange. Royal would acquire
100 percent of Celebration's interest in the Vipont Mine Joint Venture, the
Crescent Mine Lease, the Australia Joint Venture, and the option rights to
acquire up to 50 percent of the mineral rights on the Prospect Mine Property
in Madison County, Montana.
The Celebration shareholders approved the Reorganization and share exchange
agreement at an August 8, 1995 shareholder meeting. In exchange for 100
percent of the issued and outstanding Celebration shares, Royal agreed to
issue to the Celebration shareholders 4,143,750 shares of Royal common stock
that together would represent ownership of 63 percent of Royal shareholdings
outstanding immediately following the Reorganization. Also, Royal agreed to
honor all of the stock rights held by various Celebration shareholders and
which were subject to certain conditions and events.
Some of those stock rights had been granted contingent upon the repayment of
notes, and others had been granted as options under consultant agreements. In
total, those stock rights permitted the purchase or receipt of approximately
1,755,000 additional shares of Royal common stock. If all of the shares
underlying various stock rights were added to the initial group of 4,143,750
shares exchanged in the Reorganization, that would result in a total issuance
from the share exchange of approximately 5,898,750 shares, or 71 percent
ownership by the Celebration shareholders. However, to date, none of the
overhanging stock rights have been or are expected to be exercised.
In December 1995, stock rights to receive approximately 190,795 shares were
extinguished when the Company converted debt of $570,919 in principal, plus
interest, by issuing common stock. The noteholders of that debt amount
received approximately 406,050 shares in full satisfaction of the debt.
TERMINATION OF INTENT TO ACQUIRE FAUSETT INTERNATIONAL. On October 18, 1995,
the Company entered into an agreement with Fausett International, an Idaho
corporation, which the Company proposed acquiring as an 81 percent-owned
consolidated subsidiary. However, as of the date of this filing, management
has determined not to pursue this acquisition because of changes in Fausett
International's financial circumstances, and a projected reduction in its
operations.
ACQUISITION AND DISPOSITION OF MINERAL PROPERTIES.
ROYALTY PROPERTIES. On January 10 and January 31, 1992, Royal obtained from
Centurion a total of 23,300 acres of unpatented mining claims and State and
private mineral leases in exchange for the equivalent of 1,350,000 post-split
shares of Royal common stock.
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During the nine months ended September 30,1992, the Company sold unpatented
mining claims and state and private mineral lease properties to Kennecott
Copper Corporation, a Unit of RTZ, London ('Kennecott'). The Company sold
four unpatented mining claims (80 acres) to Kennecott in January 1992, for
$100,000 retaining a five percent production royalty. In July of 1992, Royal
sold approximately 16,880 acres of mining claims and state and private mineral
leases to Kennecott for $250,000 retaining a 2 1/2 percent production royalty.
On September 30, 1992, Kennecott purchased 6,320 acres of mining claims for
$250,000, on which Royal retained a 2 1/2 percent production royalty.
GLOSSARY OF CERTAIN MINING TERMS
ACID MINE DRAINAGE -- Acidic run-off water from mine waste dumps and mill
tailings ponds containing sulfide minerals. Also refers to ground water
pumped to surface from mines.
ADIT -- An opening driven horizontally into the side of a mountain or hill for
providing access to a mineral deposit.
ALTERATION -- Any physical or chemical change in a rock or mineral subsequent
to its formation. Milder and more localized than metamorphism.
ANTICLINE -- An arch or fold in layers of rock shaped like the crest of a
wave.
ASSAY -- A chemical test performed on a sample of ores or minerals to
determine the amount of valuable metals contained.
BACKFILL -- Waste material used to fill the void created by mining an orebody.
BALL MILL -- A steel cylinder filled with steel balls into which crushed ore
is fed. The ball mill is rotated, causing the balls to cascade and grind the
ore.
BASEMENT ROCKS -- The underlying or older rock mass. Often refers to rocks of
Precambrian age which may be covered by younger rocks.
BASE METAL -- Any non-precious metal (e.g. copper, lead, zinc, nickel, etc.).
BEDDING -- The arrangement of sedimentary rocks in layers.
BLOCK CAVING -- An inexpensive method of mining in which large blocks of ore
are undercut, causing the ore to break or cave under its own weight.
BRECCIA -- A rock in which angular fragments are surrounded by a mass of fine-
grained minerals.
BULK MINING -- Any large-scale, mechanized method of mining involving many
thousands of tons of ore being brought to surface per day.
CATHODE -- A rectangular plate of metal, produced by electrolytic refining,
which is melted into commercial shapes such as wirebars, billets, ingots, etc.
CHALCOCITE -- A sulfide mineral of copper common in the zone of secondary
enrichment.
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CHANNEL SAMPLE -- A sample composed of pieces of vein or mineral deposit that
have been cut out a small trench or channel, usually about ten cm wide and two
cm deep.
CHUTE -- An opening, usually constructed of timber and equipped with a gate,
through which ore is drawn from a stope into mine cars.
COMPLEX ORE -- An ore containing a number of minerals of economic value. The
term often implies that there are metallurgical difficulties in liberating and
separating the valuable metals.
CONE CRUSHER -- A machine which crushes ore between a gyrating cone or
crushing head and an inverted, truncated cone known as a bowl.
CONCENTRATE -- A fine, powdery product of the milling process containing a
high percentage of valuable metal.
CONGLOMERATE -- A sedimentary rock consisting of rounded, water-worn pebble or
boulders cemented into a solid mass.
CONTACT -- A geological term used to describe the line or plane along which
two different rock formations meet.
CORE -- The long cylindrical piece of rock, about an inch in diameter, brought
to surface by diamond drilling.
CROSSCUT -- A horizontal opening driven from a shaft and (or near) right
angles to the strike of a vein or other orebody.
CUT-AND-FILL -- A method of stoping in which ore is removed in slices, or
lifts, and then the excavation is filled with rock or other waste material
(backfill), before the subsequent slice is extracted.
CYANIDATION -- A method of extracting exposed gold or silver grains from
crushed or ground ore by dissolving it in a weak cyanide solution. May be
carried out in tanks inside a mill or in heaps of ore out of doors.
DECLINE -- An underground passageway connecting one or more levels in a mine,
providing adequate traction for heavy, self-propelled equipment. Such
underground openings are often driven in an upward or downward spiral, much
the same as a spiral staircase.
DEVELOPMENT -- Work carried out for the purpose of opening up a mineral
deposit and making the actual ore extraction possible.
DEVELOPMENT DRILLING -- drilling to establish accurate estimates of mineral
reserves.
DIAMOND DRILL -- A rotary type of rock drill that cuts a core of rock that is
recovered in long cylindrical sections, two centimeters or more in diameter.
DILUTION (mining) -- Rock that is, by necessity, removed along with the ore in
the mining process, subsequently lowering the grade of the ore.
DIP -- The angle at which a vein, structure or rock bed is inclined from the
horizontal as measured at right angles to the strike.
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DISSEMINATED ORE -- Ore carrying small particles of valuable minerals spread
more or less uniformly through the hose rock.
DORE -- Unparted gold and silver poured into molds when molten to form buttons
or bars. Further refining is necessary to separate the gold and silver.
DRIFT -- A horizontal underground opening that follows along the length of a
vein or rock formation as opposed to a cross-cut which crosses the rock
formation.
DRILL-INDICATED RESERVES -- The size and quality of a potential orebody as
suggested by widely spaced drill holes; more work is required before reserves
can be classified as probable or proven.
DUE DILIGENCE -- The degree of care and caution required before making a
decision; loosely, a financial and technical investigation to determine
whether an investment is sound.
ELECTROLYTIC REFINING -- The process of purifying metal ingots that are
suspended as anodes in an electrolytic bath, alternated with refined sheets of
the same metal which act as starters or cathodes.
ENVIRONMENTAL IMPACT STUDY -- A written report, compiled prior to a production
decision, that examines the effects proposed mining activities will have on
the natural surroundings.
EPITHERMAL DEPOSIT -- A mineral deposit consisting of veins and replacement
bodies, usually in volcanic or sedimentary rocks, containing precious metals,
or, more rarely, base metals.
EXPLORATION -- Work involved in searching for ore, usually by drilling or
driving a drift.
FACE -- The end of a drift, crosscut or stope in which work is taking place.
FISSURE -- An extensive crack, break or fracture in rocks.
FLOAT -- Pieces of rock that have been broken off and moved from their
original location by natural forces such as frost or glacial action.
FLOTATION -- A milling process in which valuable mineral particles are induced
to become attached to bubbles and float, and others sink.
FOOTWALL -- The rock on the underside of a vein or ore structure.
FRACTURE -- A break in the rock, the opening of which allows mineral bearing
solutions to enter. A "cross-fracture" is a minor break extending at more-or-
less right angles to the direction of the principal fractures.
FREE MILLING - Ores of gold or silver from which the precious metals can be
recovered by concentrating methods without resort to pressure leaching or
other chemical treatment.
GALENA -- Lead sulfide, the most common ore mineral of lead.
GOSSAN -- The rust-colored capping or staining of a mineral deposit, generally
formed by the oxidation or alteration of iron sulfides.
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GRAB SAMPLE -- A sample from a rock outcrop that is assayed to determine if
valuable elements are contained in the rock. A grab sample is not intended to
be representative of the deposit, and usually the best-looking material is
selected.
GRADE -- The average assay of a ton of ore, reflecting metal content.
HANGINGWALL -- The rock on the upper side of a vein or ore deposit.
HEAD GRADE -- The average grade of ore fed into a mill.
HEAP LEACHING -- A process involving the percolation of a cyanide solution
through crushed ore heaped on an impervious pad or base to dissolve minerals
or metals out of the ore.
HIGH GRADE -- Rich ore. As a verb, it refers to selective mining of the best
ore in a deposit.
HOST ROCK -- The rock surrounding an ore deposit.
HYDROMETALLURGY -- The treatment of ore by wet processes (e.g., leaching)
resulting in the solution of a metal and its subsequent recovery.
INTRUSIVE -- A body of igneous rock formed by the consolidation of magma
intruded into other rocks, in contrast to lavas, which are extruded upon the
surface.
LAGGING -- Planks or small timbers placed between steel ribs along the roof of
a stope or drift to prevent rocks from falling, rather than to support the
main weight of the overlying rocks.
LENS -- Generally used to describe a body of ore that is thick in the middle
and tapers towards the ends.
LEVEL -- The horizontal openings on a working horizon in a mine; it is
customary to work mines from a shaft, establishing levels at regular
intervals, generally about 50 meters or more apart.
LIMESTONE -- A bedded, sedimentary deposit consisting chiefly of calcium
carbonate.
LODE -- A mineral deposit in solid rock.
METAMORPHIC ROCKS -- Rocks which have undergone a change in texture or
composition as the result of heat and/or pressure.
MILL -- A processing plant that produces a concentrate of the valuable
minerals or metals contained in an ore. The concentrate must then be treated
in some other type of plant, such as a smelter, to affect recovery of the pure
metal.
MILLING ORE -- Ore that contains sufficient valuable mineral to be treated by
the milling process.
MINEABLE RESERVES -- Ore reserves that are known to be extractable using a
given mining plan.
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MINERAL -- A naturally occurring homogeneous substance having definite
physical properties and chemical composition and, if formed under favorable
conditions, a definite crystal form.
MINERALIZED MATERIAL OR DEPOSIT -- A mineralized body which has been
delineated by appropriate drilling and/or underground sampling to support a
sufficient tonnage and average grade of metal(s). Under SEC standards, such a
deposit does not qualify as a reserve until a comprehensive evaluation, based
upon unit cost, grade, recoveries, and other factors, conclude economic
feasibility.
MUCK -- Ore or rock that has been broken by blasting.
NATIVE METAL -- A metal occurring in nature in pure form, uncombined with
other elements.
NET PROFIT INTEREST -- A portion of the profit remaining after all charges,
including taxes and bookkeeping charges (such as depreciation) have been
deducted.
NET SMELTER RETURN -- A share of the net revenues generated from the sale of
metal produced by a mine.
OPEN PIT -- A mine that is entirely on surface. Also referred to as open-cut
or open-cast mine.
ORE -- Material that can be mined and processed at a positive cash flow.
ORE PASS -- Vertical or inclined passage for the downward transfer of ore
connecting a level with the hoisting shaft or a lower level.
OREBODY -- A natural concentration of valuable material that can be extracted
and sold at a profit.
ORE RESERVES -- The calculated tonnage and grade of mineralization which can
be extracted profitably; classified as possible, probable and proven according
to the level of confidence that can be placed in the data.
ORESHOOT -- The portion, or length, of a vein or other structure, that carries
sufficient valuable mineral to be extracted profitably.
OXIDATION -- A chemical reaction caused by exposure to oxygen that results in
a change in the chemical composition of a mineral.
PARTICIPATING INTEREST -- A company's interest in a mine, which entitles it to
a certain percentage of profits in return for putting up an equal percentage
of the capital cost of the project.
PATENT -- The ultimate stage of holding a mineral claim in the United States,
after which no more assessment work is necessary because all mineral rights
have been earned.
PATENTED MINING CLAIM -- A parcel of land originally located on federal lands
as an unpatented mining claim under the General Mining Law, the title of which
has been conveyed from the federal government to a private party pursuant to
the patenting requirements of the General Mining Law.
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PILLAR -- A block of solid ore or other rock left in place to structurally
support the shaft, walls or roof of a mine.
PORPHYRY -- Any igneous rock in which relatively large crystals, called
phenocrysts, are set in a fine-grained groundness.
PRECAMBRIAN SHIELD -- The oldest, most stable regions of the Earth's crust,
the largest of which is the Canadian Shield.
PROSPECT -- A mining property, the value of which has not been determined by
exploration.
PROVEN AND PROBABLE MINERAL RESERVES -- Reserves that reflect estimates of the
quantities and grades of mineralized material at a mine which the Company
believes could be recovered and sold at prices in excess of the cash cost of
production. The estimates are based largely on current costs and on projected
prices and demand for such mineralized material. Mineral reserves are stated
separately for each such mine, based upon factors relevant to each mine.
Proven and probable mineral reserves are based on calculations of reserves
provided by the operator of a property that have been reviewed but not
independently confirmed by the Company. Changes in reserves represent general
indicators of the results of efforts to develop additional reserves as
existing reserves are depleted through production. Grades of ore fed to
process may be different from stated reserve grades because of variation in
grades in areas mined from time to time, mining dilution and other factors.
Reserves should not be interpreted as assurances of mine life or of the
profitability of current or future operations.
PROBABLE RESERVES -- Resources for which tonnage and grade and/or quality are
computed primarily from information similar to that used for proven reserves,
but the sites for inspection, sampling and measurement are farther apart or
are otherwise less adequately spaced. The degree of assurance, although lower
than that for proven reserves, is high enough to assume continuity between
points of observation.
PROVEN RESERVES -- Resources for which tonnage is computed from dimensions
revealed in outcrops, trenches, workings or drill holes and for which the
grade and/or quality is computed from the results of detailed sampling. The
sites for inspection, sampling and measurement are spaced so closely and the
geologic character is so well defined that size, shape, depth and mineral
content of reserves are well established. The computed tonnage and grade are
judged to be accurate, within limits which are stated, and no such limit is
judged to be different from the computed tonnage or grade by more than 20
percent.
RAISE -- A vertical or inclined underground working that has been excavated
from the bottom upward.
RAKE -- The trend of an orebody along the direction of its strike.
RECLAMATION -- The restoration of a site after mining or exploration activity
is completed.
RECOVERY -- The percentage of valuable metal in the ore that is recovered by
metallurgical treatment.
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REPLACEMENT ORE -- Ore formed by a process during which certain minerals have
passed into solution and have been carried away, while valuable minerals from
the solution have been deposited in the place of those removed.
RESERVES -- That part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination.
Reserves are customarily stated in terms of "Ore" when dealing with
metalliferous minerals.
RESOURCE -- The calculated amount of material in a mineral deposit, based on
limited drill information.
RIB SAMPLES -- Ore taken from rib pillars in a mine to determine metal
content.
ROCKBOLTING -- The act of supporting openings in rock with steel bolts
anchored in holes drilled especially for this purpose.
ROCKBURST -- A violent release of energy resulting in the sudden failure of
walls or pillars in a mine, caused by the weight or pressure of the
surrounding rocks.
ROCK MECHANICS -- The study of the mechanical properties of rocks, which
includes stress conditions around mine openings and the ability of rocks and
underground structures to withstand these stresses.
ROOM-AND-PILLAR MINING -- A method of mining flat-lying ore deposits in which
the mined-out area, or rooms, are separated by pillars of approximately the
same size.
ROTARY DRILL -- A machine that drills holes by rotating a rigid, tubular
string of drill rods to which is attached a bit. Commonly used for drilling
large-diameter blastholes in open pit mines.
ROYALTY -- An amount of money paid at regular intervals by the lessee or
operator of an exploration or mining property to the owner of the ground.
Generally based on a certain amount per ton or a percentage of the total
production or profits. Also, the fee paid for the right to use a patented
process.
RUN-OF-MINE -- A loose term used to describe ore of average grade.
SAMPLE -- A small portion of rock or a mineral deposit, taken so that the
metal content can be determined by assaying.
SECONDARY ENRICHMENT -- Enrichment of a vein or mineral deposit by minerals
that have been taken into solution from one part of the vein or adjacent rocks
and redeposited in another.
SHAFT -- A vertical or steeply inclined excavation for the purpose of opening
and servicing a mine. It is usually equipped with a hoist at the top which
lowers and raises a conveyance for handling personnel and materials.
SHEAR OR SHEARING -- The deformation of rocks by lateral movement along
unnumberable parallel planes, generally resulting from pressure and producing
such metamorphic structures as cleavage and schistosity.
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SHRINKAGE STOPING -- A stoping method which uses part of the broken ore as a
working platform and as support for the walls of the stope.
SIDERITE -- Iron carbonate, which when pure, contains 48.2% iron; must be
roasted to drive off carbon dioxide before it can be used in a blast furnace.
(Roasted product is called sinter.)
SKARN -- Name for the metamorphic rocks surrounding an igneous intrusive where
it comes in contact with a limestone or dolomite formation.
SOLVENT EXTRACTION-ELECTROWINNING (SX/EW) -- A metallurgical technique, so far
applied only to copper ores, in which metal is dissolved from the rock by
organic solvents and recovered from solution by electrolysis.
SPHALERITE -- A zinc sulfide mineral; the most common ore mineral of zinc.
STEP-OUT DRILLING -- Holes drilled to intersect a mineralization horizon or
structure along strike or down dip.
STOCKPILE -- Broken ore heaped on surface, pending treatment or shipment.
STOPE -- An underground excavation from which ore has been extracted either
above or below mine level.
STRATIGRAPHY -- Strictly, the description of bedded rock sequences; used
loosely, the sequence of bedded rocks in a particular area.
STRIKE -- The direction, or bearing from true north, of a vein or rock
formation measured on a horizontal surface.
STRINGER -- A narrow vein or irregular filament of a mineral or minerals
traversing a rock mass.
STRIPPING RATIO -- The ratio of tons removed as waste relative to the number
of tons or ore removed from an open pit mine.
SUBLEVEL -- A level or working horizon in a mine between main working levels.
SULFIDE -- A compound of sulfur and some other element.
TAILINGS -- Material rejected from a mill after more of the recoverable
valuable minerals have been extracted.
TAILINGS POND -- A low-lying depression used to confine tailings, the prime
function of which is to allow enough time for heavy metals to settle out or
for cyanide to be destroyed before water is discharged into the local
watershed.
TREND -- The direction, in the horizontal plane, or a linear geological
feature (for example, an ore zone), measured from true north.
TROY OUNCE -- Unit of weight measurement used for all precious metals. The
familiar 16-ounce avoirdupois pound equals 14.583 Troy Ounces.
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UNPATENTED MINING CLAIM -- A parcel of property located on federal lands
pursuant to the General Mining Law and the requirements of the state in which
the unpatented claim is located, the paramount title of which remains with the
federal government. The holder of a valid, unpatented lode mining claim is
granted certain rights including the right to explore and mine such claim
under the General Mining Law.
VEIN -- A mineralized zone having a more or less regular development in
length, width and depth which clearly separates it from neighboring rock.
VOLCANOGENIC -- A term used to describe the volcanic origin of mineralization.
VUG -- A small cavity in a rock, frequently lined with well-formed crystals.
Amethyst commonly forms in these cavities.
WALL ROCKS -- Rock units on either side of an orebody. The hanging-wall and
footwall rocks of an orebody.
WASTE -- Barren rock in a mine, or mineralized material that is too low in
grade to be mined and milled at a profit.
WINZE -- An internal shaft.
ZONE OF OXIDATION -- The upper portion of an orebody that has been oxidized.
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ITEM 2. PROPERTIES
OVERVIEW
The properties in which the Company has an interest are divided into the
following areas:
A. CRESCENT MINE
B. OPTION TO PURCHASE BUNKER HILL MINE
C. CONJECTURE MINE
D. VIPONT MINE
E. OTHER IDAHO PROPERTIES
F. OTHER PROPERTIES
G. UTAH GOLD BELT AND ROYALTY INTERESTS
H. OFFICES
A. CRESCENT MINE
In February 1995, Celebration entered into an agreement to acquire a mineral
lease on the Crescent Mine. The Crescent Mine is an underground mine, located
in the Coeur d'Alene Mining District of Shoshone County, Idaho, about five
miles east of Kellogg, Idaho.
Operations of the Crescent Mine began prior to 1917 and, according to records
available to the Company, approximately 25 million ounces of silver have been
produced from the Crescent Mine. The mine is not currently in operation and
is flooded to approximately the 1200 foot level. The most current ore reserve
report that the Company has been able to obtain was prepared in 1985 by Norman
A. Radford, a registered professional geologist. That report, based on an
assumption that silver prices would remain below ten dollars ($10) per ounce,
indicated that the Crescent Mine contained 141,000 tons of probable reserves
averaging 31 ounces of silver per ton of mineralized material. At current
prices of under five dollars ($5.00), the Company cannot assure that any of
the mineralization could be mined at a profit.
Host rocks in the Crescent Mine, in common with the rest of the District, are
members of the Precambrian Belt Super Group. Within the Crescent Mine area,
three formations are present, in descending order: Wallace, St. Regis, and
Revett. The most favorable rocks in the Crescent Mine are the Lower St. Regis
and Upper Revett quartzites. These rocks occur in the Crescent Mine from the
1,200-foot level downward. The Coeur d'Alene 'Silver Belt' ore structures are
frequently narrow, fragmented, and sinuous, and have exhibited great vertical
continuity. For this reason, they have been discovered and mined at levels
deeper than is generally the case in other mining districts. The ore at the
Crescent Mine occurs in thin veins steeply dipping to the south. These veins
may vary in thickness from several inches to several feet. The Alhambra and
the Syndicate Faults are major reverse faults and both are present in the
Crescent Mine.
The Crescent Mine property consists of 12 patented mining claims and two Idaho
state leases located immediately adjacent to and west of the world-famous
Sunshine Mine (Sunshine Mining Company, SSC-NYSE). The Sunshine Mine has
produced nearly 400 million ounces of silver since its inception, making it
the largest primary silver mine in the world. The major structural and
stratigraphic features which have produced the major ore deposits in the
Sunshine Mine are also present in the Crescent Mine.
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The Crescent is developed to a vertical depth of 5,100 feet by two vertical
shafts. The majority of past production from the Crescent Mine occurred in
the Revett formation over 1,200 feet of dip between the 3,100 level and the
4,300 level. In the mid-1980's, the No. 2 shaft was deepened to the 5,100
level, which opened an additional 800 feet of favorable Revett quartzites for
development of the downward extensions of the East Footwall and Hook veins,
which have been the most productive veins in the Crescent Mine.
The Company's plans to reestablish significant silver production from the
Crescent Mine will be dependent upon silver prices. Management estimates that
a price of at least $6.00 per ounce would need to be sustained for a period of
six months to justify the capital investment necessary to de-water the lower
workings of the mine and rehabilitate the stopes. At December 17, 1996, the
Comex Spot price for silver was $4.89. Absent a $6.00 silver price, the
Company intends to pursue development and exploration efforts in the upper
Crescent. The workings of the upper Crescent Mine are above the water table,
and therefore can be developed without major capital investment. The Company
believes that a processing agreement for Crescent ore can be negotiated with
the neighboring Sunshine Mine on a favorable basis.
During the 1996 fiscal year, the Company's field activities at the Crescent
Mine were limited to are unsuccessful attempt to re-open the #3 level portal.
The portal was filled with unconsolidated glacial till and it was determined
that a much more expensive program will be required given the bad ground. Due
to the low silver price, no attempt to dewater the lower mine was contemplated
during the 1996 fiscal year. Further developments on the Crescent Mine for
fiscal 1997 will depend upon the price of silver, as well as the Company's
available capital.
B. OPTION TO PURCHASE THE BUNKER HILL MINE
In September 1996, the Company completed its due diligence review and
successfully renegotiated its option with Placer Mining Corporation of
Kellogg, Idaho, to purchase a 100 percent ownership interest in the Bunker
Hill Mine, a silver-lead-zinc mine in Shoshone County, Idaho and the largest
mine in northern Idaho's historic Coeur d'Alene Mining District. In pursuing
the due diligence effort during fiscal 1996 with respect to the Bunker Hill
option, the Company engaged outside legal counsel and Fulcrum Environmental,
an independent environmental consulting firm, to assist with the review. The
major environmental issues which must be considered include possible successor
liabilities to the Bunker Hill Superfund Site, the operation and maintenance
of the Central Water Treatment Plant (which handles acid mine drainage from
the portal), and other revegetation and restoration efforts in Milo gulch and
elsewhere on the property. As of the date of this filing, discussions are
ongoing with the U.S. Environmental Protection Agency and the State of Idaho
with respect to these issues. The Company believes that it may be possible to
negotiate a satisfactory solution to these issues; however, there can be no
assurance of this.
The Bunker Hill Mine has produced over 35 million tons of ore over a one
hundred year period. Option terms and financing alternatives regarding the
purchase are explained above in more detail in the section within Item 1
entitled "The Company's Strategy and Business Plan."
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The Bunker Hill complements Royal's silver focus. The Bunker Hill has
historically produced in excess of 165 million ounces of silver, making it the
second most productive silver mine in United States history. Preliminarily,
the Company has identified seven near-term exploration-development projects of
potentially high-grade silver zones. These targets were also identified by
past operators. Detailed exploration plans for these projects are available
to the Company in the records at the mine.
The Bunker Hill Mine property consists of over 6,500 acres of patented mining
claims, much of which is completely unexplored. The largest deposit of zinc
mineralization in the mine, the Quill, is open on strike to the west and down
dip. The largest and highest grade deposits of lead-silver mineralization, the
Francis, the "J", and the Emery are all open to depth. Given the extensive
vertical continuity of mineralized material in the Coeur d' Alene Mining
District, the Company believes that the existence of additional mineralized
material at depth that may be economically profitable is a rational basis for
conducting further exploration and development. Management of the Company
notes that the other four largest mines in the district have been mined and
developed at least one thousand feet deeper, in reference to sea level, than
the Bunker Hill Mine.
The Bunker Hill Mine was discovered in 1885 and produced continuously until
its first closure in 1981. Historical production from the mine exceeded
39,600,000 tons at a grade of 4.5 ounces per ton of silver, 8.6 percent lead
and 3.7 percent zinc. At present metal prices, this prior production would
have exceeded approximately five billion dollars.
Placer Mining acquired the Bunker Hill Mine in 1991 and is currently producing
approximately 50 tons per day of high-grade lead-silver ore. Upon exercising
its option, the Company intends to expand production to approximately 500 tons
per day of lead-zinc-silver ores, as well as to undertake its underground
diamond drilling program to better define, evaluate, and expand reserves and
other mineralized material.
The mineralized material is contained within 18 known ore zones.
Historically, the Bunker Hill Mine has been mined from over 60 individual ore
zones extending within a broad area approximately 1500 feet wide, 11,000 feet
long, and 7000 feet deep. Substantial inferred resources and potential
extensions are believed to be present within the mine complex. The Company
believes also that projected mining activities at the Bunker Hill Mine will
benefit from the presence of three workable shafts and over 150 miles of
drifts, crosscuts and raises, which in today's dollars represents an
infrastructure that could cost in excess of $300 million dollars to duplicate.
During Royal's extensive due diligence review, of more than six months,
technical staff of the Company completed an extensive review of mine maps,
drill logs, and other technical data which presents a preliminary overview
that approximately eight million tons of silver and other mineralized material
may be present and economically recoverable from within the mine. Thus, the
Company is preparing plans to implement exploration activities should the
Company elect to exercise its option to purchase the mine.
Exploration targets are believed to consist of large tonnage, bulk-minable
deposits as well as high-grade vein deposits. According to consulting Royal
geologist Daniel Gorski, extensive, minable bulk tonnages may be indicated by
prior drilling results. Management believes that implementation of the option
purchase agreement will allow the Company to extend its exploration strategy
for silver and other mineralized material in a known mining district.
23
<PAGE>
C. CONJECTURE MINE
In late August of 1995, the Company completed two acquisitions which included
six patented and six unpatented mining claims comprising the Conjecture Mine
property.
The Conjecture property is located in the Lakeview Mining District of Idaho,
some 30 miles to the northwest of the Coeur d'Alene mining district. The rock
groups of the Lakeview District are the same Precambrian belt series
associated with the world-class silver deposits of the Coeur d' Alene mining
district to the south.
The history of the Lakeview District in general, and the Conjecture Mine in
particular, has shown sporadic high grade silver production from shallow
workings since the late 1800's. Most recent production on a neighboring
property occurred as recently as 1987. However, within the District, only the
Conjecture Mine itself has been developed to any significant depth.
In the late 1950's and early 1960's, Federal Resources of Salt Lake City, Utah
invested approximately $3 million in shaft sinking and underground development
at the Conjecture Mine. In all, Federal Resources completed a 2,000 foot
deep, concrete lined, three compartment vertical shaft and nearly 12,000 feet
of drifts, cross-cuts and raises to establish a block of mineralized material
of 336,000 tons at a grade of 11 ounces per ton of silver, and .03 ounces of
gold, with some lead and zinc.
An additional block of 370,000 tons of similar grade was listed as a possible
block of mineralization between the levels. Since obtaining the property, the
Company has not been able to re-confirm these reserve estimates of mineralized
material, although an independent reserve report done in 1981 essentially
verified the earlier numbers.
That independent reserve report was prepared by Richard W. Morris, a
registered professional geologist, for a company known as Minerals Management,
Inc. Nevertheless, no assurance can be made that this mineralized material
constitutes a proven or probable 'ore reserve', if at all, until it can be
reverified.
The Company's geologists have noted the striking similarities between the
Lakeview District and the nearby Coeur d'Alene District. High grade silver
mineralization has been shown to extend laterally for over two miles, and
vertically for over 3,000 feet in the Conjecture Mine. The same rock unit
sequence (i.e., Wallace, St. Regis, Revett) is found in both districts, with
the same important ore minerals (tetrahedrite, galena, sphalerite) defining
productive ore shoots. However, within the Lakeview District, only the
conjecture shaft has penetrated the less favorable Wallace formation into the
better quartzite units.
Because of heavy snows in the winter of 1995 and spring of 1996, the Company's
planned exploration activities at the Conjecture were delayed. With the
Company's resources currently being devoted to its due diligence and financing
activities for the Bunker Hill Mine, no further work is planned at the
Conjecture Mine in fiscal year 1997.
24
<PAGE>
D. VIPONT MINE
The Vipont Mine is located in the Ashbrook Mining District, a remote area in
the extreme northwestern corner of Box Elder County, Utah, approximately ten
miles east of the Nevada state line and one mile south of the Idaho state line
near the headwaters of the Little Birch Creek. It is accessible by asphalt,
gravel, and dirt roads. The mine property consists of 53 patented (deeded)
mining claims covering nearly 1,000 acres with a 25% undivided interest owned
by Celebration Mining Company (a wholly-owned subsidiary of the Company.)
The Vipont Mine was at one time one of the foremost silver-producing mines in
the State of Utah. Its greatest period of activity was from 1919 through mid-
1923 after the passage of the Pittman Silver Purchase Act ('Pittman Act')
which authorized the purchase of 200,000,000 ounces of silver. The Mine
closed in August 1923 with the expiration of the Pittman Act after producing
nearly 1,000,000 ounces of silver per year. Some leasing was done in the
1930's and the Mine was closed in 1942 when Congress passed War Order L-208
closing all gold and silver mines. From 1977 through 1987, United Silver
Mines began further development and leached the old mill tailings.
The mineralization in the Mine occurs predominantly as the mineral argentite
in the Vipont limestone. Two other units, the Phelan limestone, and the
Sentinel limestone have produced high-grade ore. Neither the Phelan nor the
Sentinel have been seriously explored for additional ore.
The mineralization in the Vipont limestone occurs as a continuous tabular
'manto' mineralization body in the crests of folds (crenulations) superimposed
upon a shallowly dipping (22 degrees) syncline. The continuity of the
mineralization down-dip has been shown by past mining operations and by a line
of drill holes below the old workings. It is thought by geologists that the
mineralization will continue to down-dip toward an igneous intrusive 4,600
feet southwest of the old mine.
There are two distinct mineralization deposits on the Vipont Property: the
oxide deposit and the sulfide deposit. The characteristics of each are unique
and require different approaches to development and exploration. According to
a 1994 report by Dr. Armond H. Beers, the oxide deposit contains 1,100,000
tons of mineralized material grading 6.9 ounces per ton in silver and with a
small gold credit. The Company has not independently re-verified those
findings and cannot and does not make any assurance as to their accuracy or
compliance with regulatory standards.
The report of Marston and Marston, completed in 1981, provides different
grades and tonnage. Marston and Marston did not have access to additional
drilling results completed subsequent to their report; however, based on the
information then available, Marston and Marston reported 1.5 million tons of
mineralized material at a silver grade of 4.47 ounces per ton. Because the
mineralization is oxidized, it is believed that recovery of the precious
metals can be achieved with cyanide heap leaching. It is also believed that
mining can be accomplished with open pit methods. The Company will evaluate
its plans for development of the Vipont Property after further review of all
technical data. Any development is anticipated to require amendments to the
United Silver Mines permits to allow construction of leaching pads, completion
of engineering design of the leach pads and recovery plant, selection of a
mining contractor, building and installing crushing circuits, agglomerating
unit, leach pads, and recovery plant.
25
<PAGE>
The sulfide deposit is currently defined in the Beers Report as 478,000 tons
of mineralized material at an estimated average grade of 13.52 ounces per ton
in silver. Geologic interpretation of the manto-type replacement deposit,
however, may establish upon further exploration that this mineralized resource
may be larger. The Company's management and professional staff believe that
the sulfide deposits will represent the long-term future of the Vipont Mine.
During the 1996 fiscal year, the Company elected not to proceed further with
the Vipont joint venture, but as a result of the Company's successful effort
at removing all liens on the property at a Box Elder County Sheriff's sale,
the Company's wholly-owned subsidiary now owns a 25% undivided interest in the
property. The company has no plans to proceed further with the Vipont joint
venture until such time as silver prices improve.
E. OTHER IDAHO PROPERTIES
BISMARK MINE PROPERTY. In September of 1995, the Company obtained a 10-year
lease on three patented mining claims in Shoshone County, known as the Bismark
claims. The claims lie about one mile south of the main shaft of the
Sunshine Mine and are surrounded by Sunshine holdings. The property is
developed by a 1,500 foot adit which was driven to the northwest to intersect
the Bismark vein. Royal has re-opened and re-timbered the portal of the
Bismark adit to permit accessing and sampling of the Bismark vein. This work
was planned for the 1996 field season, however, due to other priorities it was
deferred.
The geology of the Bismark claims, given the proximity to the Sunshine Mine,
is highly favorable to ore deposition. The Bismark vein lies entirely with
the Revett formation, which is the most favorable rock unit for ore
emplacement in the Coeur d'Alene mining district. Limited exploration by
Sunshine Mining Company on the 2,600 level established the downward projection
of mineralization in the Bismark vein structure.
Bismark Mining Company, the property owner and lessor, will receive a 2.5
percent net smelter return on commercial production from the claims, under the
terms of the Company's lease.
COEUR D' ALENE SYNDICATE PROPERTY. No significant mineral production has to
date occurred on the Coeur d'Alene Syndicate property and there are no known
proven or probable reserves. In September of 1995, the Company acquired fee
simple ownership of the 24 patented mining claims that comprise the Coeur
d'Alene Syndicate property, located in Burke Canyon some six miles northeast
of Wallace, Idaho. The property is near the eastern end of the Coeur d'Alene
mining district, and is an undeveloped portion of a major mineralized trend
running through the Star-Morning Mines and on to the Frisco and Black Bear
Mines.
Geologists have long considered the Syndicate property to be an outstanding
exploration target where the highly productive Star fault turns to the
southwest and intersects the Commander fault. This structural anomaly,
occurring in favorable Revett and Burke formation quartzite rocks is exactly
what develops major ore shoots within the Coeur d'Alene district.
The property is currently developed by an adit from the Black Bear property,
but could ultimately be accessed by deep shafts on either end of the strike.
26
<PAGE>
Subsequent to September 30, 1995, the Company entered into an agreement with
an independent timber company to sell the mature timber for cash. The
transaction was expected to close in Fiscal 1996, but was not concluded as a
timber consultant recommended allowing the timber crop to achieve greater
maturity prior to harvesting.
THE LIBERAL KING MINE. In the fourth quarter of Fiscal 1995, the Company
acquired fee simple ownership of the Liberal King Mine, consisting of five
patented claims located southwest of the famous Bunker Hill Mine in the Pine
Creek area of the Coeur d'Alene Mining District. At the time the mine was
last operated by Spokane National in the 1960's, that company reported a
defined block of mineralized material totaling 81,000 tons at 12 percent zinc
and 2.5 ounces of silver. In the early 1980's, Cominco-American conducted an
exploration program on the Liberal King property in search of a large,
stratabound zinc-silver deposit. Such potential has not been fully explored
at this time. Royal has not been able to evaluate this property as of the
date of this filing, and no current reserve estimates can be given.
F. OTHER PROPERTIES
FRISCO STANDARD SILVER MINE. As of the first quarter of fiscal 1997, the
Company has fully divested itself of any ownership in the Frisco Standard
Mine. In September 1995, the Company had acquired fee simple ownership of the
seven patented claims that comprised this property.
NEW DEPARTURE MINE. There are no known proven or probable reserves identified
at the New Departure Mine. In August 1995, the Company acquired a long term
mineral lease for the New Departure Mine in Beaverhead County, Montana. This
property is located in southeastern Montana near the town of Bannock. The
property consists of eight patented claims and has a history of very high
grade silver production. Royal management has not as yet developed an
exploration plan for the property, which was acquired by lease in September
1995, subject to a three percent net smelter return.
AUSTRALIA JOINT VENTURE PROPERTY. There are no known proven or probable
reserves identified at the Australia Joint Venture Property. On March 21,
1995, Celebration entered into a joint venture with Metallurgical Refining &
Development PTY, LTD. ('Metallurgical'), of Brisbane, Queensland, Australia,
for the exploration of EL 3854, a prospecting license in western New South
Wales. For the three prior years, Metallurgical was engaged in an active
program of geophysics, geochemistry, satellite reconnaissance, and other
proprietary exploration methods seeking to identify large, buried,
polymetallic deposits. In July of 1995, the joint venture completed an
exploratory diamond drill hole to a depth of 700 meters (2100 feet). While
the hole did not encounter significant mineralization, there was geologic
indication that a large porphyry system may be nearby. Results of additional
scientific testing of the core are being evaluated before conducting further
magnetics and geophysics to determine plans for further drilling.
G. UTAH GOLD BELT AND ROYALTY INTERESTS
The Company is not currently involved in active exploration with respect to
any of the property holdings or royalty interests within the Utah Gold Belt.
Subject to the progress of Royal's plan for Fiscal 1997 regarding its mineral
properties, the Company does not anticipate pursuing significant exploration
activities within the Utah Gold Belt properties during Fiscal 1997.
27
<PAGE>
The Utah Gold Belt is a major mineralized north-south zone, including the
Oquirrh Mountain range, situated on the west side of the Salt Lake valley.
The Utah Gold Belt is close to Salt Lake City, and major highways and
railroads make up a well-developed infrastructure. The Utah Gold Belt
includes the well-known Bingham and Mercur mining districts, plus smaller
Ophir, Stockton, and Greeley districts.
The Utah Gold Belt has been a major producer of copper, gold, silver, and
other metals since the late 1800's. Discovery and profitable production of
new ore bodies has continued up to the present time. Indeed, important new
gold mines have been developed within the last decade. Centurion initiated a
land acquisition program in 1987 and Royal subsequently purchased Utah Gold
Belt properties because management recognized that these properties had not
been fully explored and it offered excellent potential for the discovery of
new gold ore bodies.
The Company sold various Utah Gold Belt mining properties to Kennecott during
1992, and has retained production royalty interests on these properties.
These sold properties are contiguous to or near properties held previously by
Kennecott in the Utah Gold Belt.
Management of the Company believed it was to the Company's advantage to allow
the ownership of these properties to pass to Kennecott, with the Company
retaining a production royalty interest. There is no assurance that the
Company will receive or continue to receive royalties from these properties,
or of the amount, if any, of such royalties.
The Company's land holdings in the Utah Gold Belt consist of Utah State
mineral leases, fee leases and unpatented lode mining claims totaling over
12,000 acres. The Company did not undertake any exploration efforts on these
holdings during fiscal 1996 and does not plan any activities during fiscal
1997.
H. OFFICES
The Company's executive office is located at 10220 North Nevada, Suite 230,
Spokane, Washington 99218. In addition, the Company maintains its registered
corporate office at 331 South Rio Grande Street, Suite 208, Salt Lake City,
Utah 84101. The Company leases its principal office in Spokane, Washington,
on a renewable one-year term with rental costs of $988 per month, including
basic maintenance and janitorial services. The Company does not currently
have any other branch offices.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material pending legal proceedings incidental
to the Company or any of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the solicitation
of proxies or otherwise during the Fiscal 1996.
28
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common shares are traded on the NASDAQ Bulletin Board under the
symbol RSMI. The prices listed below were obtained from the National
Quotation Bureau, Inc., and are the highest and lowest bids reported during
each fiscal quarter for the period December 31, 1994, through September 30,
1996. These bid prices are over-the-counter market quotations based on
interdealer bid prices, without markup, markdown, or commission and may not
necessarily represent actual transactions:
<TABLE>
<CAPTION>
Fiscal Quarter Ended High Bid ($) Low Bid ($)
- - -------------------- ------------ -----------
<S> <C> <C>
December 31, 1994 4.125 3.000
March 31, 1995 2.500 1.125
June 30, 1995 3.750 0.875
September 29, 1995 3.124 2.750
December 31, 1995 2.87 2.43
March 31, 1996 2.75 2.25
June 30, 1996 2.94 1.62
September 30, 1996 2.12 1.00
</TABLE>
On December 17, 1996, the average of the high bid and low ask quotation for
the Company's common shares as quoted on the NASDAQ Bulletin Board was $0.83.
The approximate number of holders of common stock of record on December 17,
1996, was approximately 390.
Since its inception, the Company has not paid any dividends on its common
shares. The Company does not anticipate that dividends will be paid in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data included in the following table have been derived
from and should be read in conjunction with and are qualified by the Company's
financial statements and notes set forth elsewhere in this report. Historical
financial data for certain periods may be derived from financial statements
not included herein.
29
<PAGE>
<TABLE>
<CAPTION>
For the Ten From Inception From Inception:
For the Year Months Ended on 2/17/94 on 2/17/94
Ended 9/30/96 9/30/95 to 11/30/94 to 9/30/96
------------- ------------- ------------ ---------------
Results of
Operations:
<S> <C> <C> <C> <C>
Revenues $ -0- $ -0- $ -0- $ -0-
Net Income (loss)$ (2,045,082) $ (750,939) $(211,796) $(3,007,817)
Net income (loss)
per common
share $ (.22) $ (.17) $ (.09) $ (.53)
Balance Sheet
Data:
Total Assets $ 5,605,357 $ 4,056,698 $ 366,619 $ 5,605,357
Working Capital
(deficit) $ 686,573 $ (665,274) $ 25,754 $ 686,573
Long-Term debt $ -0- $ -0- $ 59,000 $ 0
Stockholders'
equity $ 5,485,490 $ 3,235,376 $ 276,321 $ 5,485,490
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
Pursuant to the Reorganization discussed above in Item 1 of this Report, the
accompanying consolidated financial statements include those of Celebration
Mining Company and Royal Silver Mines, Inc., which was known as Consolidated
Royal Mines, Inc. before the Reorganization. All significant intercompany
accounts and transactions have been eliminated. The accounting of financial
statements following the Reorganization also required a change in fiscal year-
end date, namely, from November 30 (Celebration's) to September 30 (Royal's).
The financial statements account for the Reorganization using the purchase
method of accounting. (See Note 1 to the financial statements.) Celebration
is treated as the acquiring company for financial reporting purposes because
its shareholders constitute greater than 50 percent of the combined
shareholder group. In conformity with generally accepted accounting
principles and the Company's accounting policy, Celebration is recognized as
the predecessor entity. Consequently, Celebration's assets and liabilities
were not adjusted in the accompanying financial statements. The financial
statements for the period from the inception of Celebration on February 17,
1994 to November 30, 1994 ('Fiscal 1994') do not include the balance sheet
data or results of operations of Consolidated Royal Mines, Inc.
30
<PAGE>
There is considerable risk in any mining venture, and there can be no
assurance that the Company's operations will be successful or profitable.
From inception of the Company to September 30, 1996, the Company has an
accumulated deficit of $3,057,817. Exploration for commercially minable ore
deposits is highly speculative and involves risks greater than those involved
in the discovery of mineralization. Mining companies use the evaluation work
of professional geologists, geophysicists, and engineers in determining
whether to acquire an interest in a specific property, or whether or not to
commence exploration or development work. These estimates are often based on
scientific estimates and economic assumptions, and in some instances result in
the expenditure of substantial amount of money on a property before it is
possible to make a final determination as to whether or not the property
contains economically minable ore bodies. The economic viability of a
property cannot be finally determined until extensive exploration and
development work, plus a detailed economic feasibility study, has been
performed. Also, the market prices for mineralization produced are subject to
fluctuation and uncertainty, which may negatively affect the economic
viability of properties on which expenditures have been made.
As of September 30, 1996, $4,785,665 of the Company's total assets of
$5,605,357 are investments in mineral properties for which additional
exploration is required to substantiate or determine whether they contain ore
reserves that are economically recoverable. The realization of these
investments is dependent upon the success of future property sales, the
existence of economically recoverable reserves, the ability of the Company to
obtain financing, the Company's success in carrying out its present plans or
making other arrangements for development, and upon future profitable
production. The ultimate outcome of this matter cannot be determined at this
time; accordingly, no provision for any asset impairment that may result, in
the event the Company is not successful in developing or selling these
properties, has been made in the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no revenues. At September 30, 1996, the Company's
accumulated deficit was $3,057,817. Although it has recurring losses from
operations, the Company has increased its operating capital and improved its
financial condition and ability. Regarding its losses from operations, the
Company cannot assure that it will be able to fully carry out its plans as
budgeted without additional operating capital. At September 30, 1995, the
Company had negative working capital of $665,274. However, at September 30,
1996, the company had positive working capital of $686,573. The following
factors explain the principal increase in working capital during Fiscal 1996.
The change in working capital from a negative $665,274 at September 30, 1995
to a positive $686,573 at September 30, 1996 was due to the successful
conversion of $570,920 of debt into 406,050 shares of common stock as well as
the successful placement of 1,949,332 shares of common stock for $2,958,314 in
cash. The Company's cash balance increased significantly from $151,698 at
September 30, 1995 to $688,716 at September 30, 1996. However, during fiscal
1996 the Company continued to incur more in expenses as a result of increased
activity in evaluating and acquiring mineral properties.
The Company has estimated that it will need capital resources of approximately
$40,000 per month to meet its estimated expenditures for the ensuing twelve
months. The Board of Directors has instructed management to consult with
experienced financial and investment advisory firms to formulate arrangements
for such capital fund raising. Currently, the Company is pursuing various
alternatives, including the possible private placement of equity.
31
<PAGE>
The Board of Directors reasonably believes that the Company is able to engage
in nearly any size operation or scope of mining activity depending on the
circumstances and merits of each proposed operation or mining activity.
Accordingly, the Board has not limited the size of operation or scope of
project which it believes is reasonable for management to consider in
achieving the Company's business plan. Therefore, management has been
authorized to consider and review all reasonable proposals and, upon
satisfactory assessment, to then make a specific determination as to an
estimated range of funding amounts that each such proposal reasonably might
require.
Inasmuch as the eventual project, operation or mining activity could be of any
size and scope, management is not able at this time to provide a detailed
listing or exact range of operation costs, including increases in general and
administrative expense, if any. However, the Company plans to fund any
increases in general and administrative expense principally from joint venture
revenues or funds it may receive from debt or equity financing. Funds
required to finance the Company's exploration and development of mineral
properties are expected to come primarily from joint venture participant
contributions with the remainder provided by funds generated from such joint
venture and other lease or royalty arrangements.
The Company consistently has made full and timely payment of its expenses, in
particular to the various governmental payees it interacts with, and has met
its obligations to the entities which provide its personnel, office space, and
equipment needs. The Company currently is seeking alternate sources of
working capital sufficient to increase the funding of additional general and
administrative expenses that may become necessary as the Company's business
plan develops, and to continue meeting its ongoing payment obligations for its
leases to governmental bodies.
RESULTS OF OPERATIONS
FISCAL 1996 AS COMPARED TO FISCAL 1995. General and administrative expenses
increased from $543,644 during fiscal 1995 to $1,835,548 during fiscal 1996.
The increase is principally due to additional staff and outside technical and
environmental consultants and legal fees associated with the Company's due
diligence related to the Bunker Hill Mine option. As a result, from Fiscal
1995, to Fiscal 1996, the net loss increased from $(750,939) to $(2,045,082)
and the net loss per share increased from $(0.17) to $(0.22).
The Company is unable to fully determine the impact of its current lack of
adequate operating capital. Other than as described herein, in particular
with respect to the option to purchase the Bunker Hill Mine, the Company has
determined not to incur and does not have any commitments or plans for
material capital expenditures during Fiscal 1997 for which it does not have a
reasonably available source or basis for making payment. For additional
information regarding the Company's present commitments and plans for which it
does have reasonably definable and available payment sources, for example the
option to purchase the Bunker Hill Mine, please refer to the "Properties"
discussion under Item 2 above, at Section B, entitled "Option to Purchase The
Bunker Hill Mine".
It is uncertain what the scope or impact will be of the Company's decision to
restrict capital expenditures. On the one hand, if the Company were to
continue such restriction, the likely effect might be adverse to the
preservation of its assets and capital base, thereby narrowing the scope of
plans for future operations and constricting liquidity. On the other hand, if
32
<PAGE>
the Company were to discontinue such restriction without an increase in
sustained cash flow, the likely effect of that might be an increase in
accumulated deficits which could be adverse to the Company's financial
condition with respect to liabilities and stockholders' equity. Therefore,
the Company's plan for the next twelve months is to closely monitor its
capital expenditures while it pursues a joint venture participant or other
sources of capital for financing operations.
FISCAL 1995 AS COMPARED TO FISCAL 1994. General and administrative expenses
increased from $211,796 during Fiscal 1994 to $543,644 during Fiscal 1995.
The increase was principally due to an increase in the amount of stock issued
to officers, directors, and a consultant as compensation for services and
bonus. As a result, from Fiscal 1994 to Fiscal 1995, the net loss increased
from $(211,796) to $(750,939) and the net loss per share increased from $(.09)
to $(.17), respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements and the Report of Independent Public
Accountants are filed as part of this report on pages F-1 through F-19.
C O N T E N T S
<TABLE>
<S> <C>
Independent Auditors' Reports . . . . . . . . . . . . . F-1
Consolidated Balance Sheets . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . F-10
Notes to the Consolidated Statements . . . . . . . . . .F-13
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A. CHANGES OR DISAGREEMENTS WITH PRINCIPAL ACCOUNTANT. There have been no
disagreements with the Company's independent public accountants.
B. CHANGE IN PRINCIPAL ACCOUNTANT. As a result of increased activity at its
executive office in Spokane, the Company changed the engagement of its
principal independent accountant to audit its financial statements. The
former principal accountant, Jones, Jensen & Company, was replaced by Williams
& Webster, P.S. as principal independent accountant. This decision was not
based on any disagreement between Royal or Jones, Jensen and Company nor was
it based on any information that would have led Jones, Jensen and Company to
resign or decline to stand for reelection.
Jones, Jensen and Company's report on the financial statements of Royal at
September 30, 1995 did not contain an adverse opinion or a disclaimer of
opinion, nor was its report qualified as to uncertainty, audit scope, or
accounting principles. During the period described above and up through
September 30, 1995, for the period preceding such dismissal:
33
<PAGE>
(1) The Company had no disagreements with Jones, Jensen and Company on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure;
(2) Jones, Jensen and Company did not advise the Company that the internal
controls necessary for the Company to develop financial statements do not
exist;
(3) Jones, Jensen and Company did not advise the Company of any information
leading Jones, Jensen and Company to be unable to rely on management's
representations, or unwilling to be associated with the financial statements
prepared by management;
(4) Jones, Jensen and Company did not advise the Company of any need to
significantly expand the scope of its audit, or of any information that may or
would (i) materially affect the fairness or reliability of, or prevent it from
rendering an unqualified opinion regarding, its audit report or any of the
underlying financial statements, or (ii) cause Jones, Jensen and Company to be
unwilling to rely on management's representations or be associated with the
Company's financial statements; and
(5) Jones, Jensen and Company did not, as a result of its dismissal, expand
its audit or conduct any investigation of information that came to its
attention of the type referred to above in subparagraph (4), or have any
issues that were unresolved to its satisfaction prior to dismissal.
The Company has provided Jones, Jensen and Company with a copy of the above
disclosures in a timely manner and requested and received from Jones, Jensen
and Company a letter addressed to the Commission stating Jones, Jensen and
Company's agreement with these disclosures. A copy of such letter is attached
to this registration statement and filed as Exhibit 16.2.
C. DESIGNATION OF NEW ACCOUNTANT. The Company has designated the continuing
services of the accounting firm of Williams and Webster, P.S. to serve as
principal independent accountant for the Company effective November 8, 1996.
During the period of Jones, Jensen and Company engagement as principal
independent accountant and up to November 8, 1996, prior to designating
Williams and Webster, P.S. as principal accountant:
(1) Neither the Company nor any person or entity acting on its behalf has
consulted Williams and Webster, P.S. regarding the application of accounting
principles to any specified transaction, or the type of audit opinion that
might be rendered on the Company's financial statements, or any matter
characterized as a 'disagreement' or 'reportable event' (as defined by
Regulation S-K, Item 304(a)(1)(iv) and (v)); and
(2) Williams and Webster, P.S. did not provide the Company with either a
written report or oral advice containing any conclusions by Williams and
Webster, P.S. of any important factors considered by the Company in reaching a
decision as to any accounting, auditing, or financial reporting issues.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
On March 31, 1995, the Company restructured its Board of Directors and
management. The Board formally named Howard Crosby as President, Hal Cameron
as Vice President, LaRoy Orr as Treasurer and Carlos M. Chavez as Secretary.
On August 8, 1995, in accordance with the terms of the Reorganization with
Celebration, the Board appointed Robert E. Jorgensen as Director and Executive
Vice President; Ronald Kitching and James W. Prier as Directors; and Jerry
Stacey as Vice President of Operations. On August 31, 1995, upon receiving
the resignation of Mr. Orr, the Board appointed Mr. Jorgensen to the position
of Treasurer. In September 1996, the Board appointed John Ryan to the
position of Vice President, Corporate Development.
INFORMATION REGARDING DIRECTORS AND EXECUTIVE OFFICERS. The following table
sets forth the name, age, position, and length of service for each of Royal's
present directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position(s) Held Director
Since
- - ----------------- ---- ------------------------------- -------------
<S> <C> <C> <C>
Howard M. Crosby 44 President and Director February 1994
E. Hal Cameron 78 Vice President and Director April 1969
Spenst Hansen 63 Director November 1991
Carlos M. Chavez 44 Corporate Secretary and Director March 1995
Robert E. Jorgensen 43 Executive Vice President,
Treasurer and Director August 1995
Jerry Stacey 52 Vice President, Operations August 1995
John Ryan 35 Vice President, Corp. Dev. September 1996
Ronald Kitching 66 Director August 1995
James W. Prier 49 Director August 1995
</TABLE>
The authorized number of directors of the Company is presently fixed at ten.
Each director serves for a term of one year that expires at the following
annual shareholders' meeting. Each officer serves at the pleasure of the
Board of Directors and until a successor has been qualified and appointed.
There are no family relationships, or other arrangements or understandings
between or among any of the directors, executive officers or other person
pursuant to which such person was selected to serve as a director or officer.
Set forth below is certain biographical information regarding each director
and executive officer of the Company:
35
<PAGE>
HOWARD M. CROSBY received a B.A. degree from the University of Idaho in 1974.
Since 1989, Mr. Crosby has been president of Crosby Enterprises, Inc., a
family-owned business advisory and public relations firm. From September 1992
to May 1993, Mr. Crosby was employed by Digitran Systems, Inc., of Logan,
Utah, in the marketing department. In May of 1993, Mr. Crosby entered into a
business consulting relationship with Centurion Mines Corporation, and has
served as president and director of Mammoth Mining Company and Gold Chain
Mining Company, both Centurion subsidiaries. In July, 1992, Mr. Crosby filed
a Chapter 13 petition for bankruptcy. The reorganization plan was approved in
October, 1992.
HAL CAMERON founded the Company in 1969, has held the position of President
and Director, and was engaged, virtually full-time, in the business affairs of
the Company from May 1983 up through November 1991. Mr. Cameron is a graduate
of West High School in Salt Lake City, Utah, and has been involved in the
natural resource field since 1953, including the active management of
publicly-held natural resource exploration and development companies. In
1953, Mr. Cameron was one of the founders of Federal Uranium Corp., now a
publicly-held Nevada corporation known as Federal Resources Corporation, and
served as an independent consultant to Federal Resources from 1955 to 1960. He
was also one of the founders and a director of Cherokee Utah Uranium, a
publicly-held Utah corporation, in 1954, and served as a consultant until 1960
to its successor, Beaver Mesa Uranium. From 1964 until 1974, Mr. Cameron was
the vice-president and a licensed commercial real estate salesman for Meeks-
Wirthlin Real Estate Company in Salt Lake City, Utah. From 1974 to the
present, Mr. Cameron has been engaged in commercial real estate acquisitions,
sales, and development for himself. Mr. Cameron was president of Cameo
Minerals, Inc., a publicly-held Utah corporation, from its inception in 1969
until its merger in 1981 with Hendon Exploration, Inc., a Texas oil and gas
company.
SPENST HANSEN was awarded a Ph.D. degree in geology from the University of
Missouri, Columbia, Missouri; a Masters degree in mining engineering from the
Missouri School of Mines, Rolla, Missouri; and a Bachelor of Science degree in
geological engineering from the University of Utah, Salt Lake City, Utah. Dr.
Hansen is a registered professional geologist in California (#2067) and Idaho
(#38). Dr. Hansen has been principally employed by Centurion Mines
Corporation since November, 1984, where he is currently President, Chief
Executive Officer, a Director, and Chairman of the Board of Directors. Dr.
Hansen has worked on mining projects in the western United States for more
than 20 years. From 1982 to 1989, he also conducted an independent
geophysical and geologic contracting business as a sole proprietorship under
the name Axis Geophysics Company. Dr. Hansen still retains ownership of this
company.
CARLOS M. CHAVEZ has been principally employed as Centurion's in-house legal
counsel since March 1994. Mr. Chavez received his J.D. in 1980 from Stanford
Law School, Palo Alto, California, and has been admitted to the Utah State Bar
and the Bar of the District of Columbia. From 1991 to his employment with
Centurion, Mr. Chavez was employed with Suitter, Axland & Hanson and Jay
Gurmankin, Esq., P.C., law firms in Salt Lake City, Utah. During 1989 and
1990, Mr. Chavez taught full-time as a Visiting Assistant Professor of Law on
the faculty of the Whittier College School of Law, Los Angeles, California.
Prior to that position, Mr. Chavez taught and supervised the academic support
program as Adjunct Professor of Law on the faculty of the University of Utah
College of Law, and also served in the dual capacity as assistant attorney
general for Higher Education and as associate legal counsel for the University
of Utah. Mr. Chavez also serves as a director of Dotson Exploration Company.
36
<PAGE>
ROBERT E. JORGENSEN received a degree in Business Administration from the
University of Idaho. He has served as vice-president, secretary and director
of Celebration Mining Company since its inception. In May 1992, Mr. Jorgensen
retired from the brokerage business and has since been a private investor.
From 1987 to 1991, Mr. Jorgensen was an investment broker and owner of RCL
Northwest, Inc., a regional investment firm. He was a broker with Cohig &
Associates, Inc., from January 1992 to May 1992. Mr. Jorgensen filed for
protection under Chapter 7 of the Bankruptcy Code in August 1992.
JERRY STACEY is a professional mining engineer with over 20 years experience
in open pit and underground mining. He earned a B.S. Degree in Mining
Engineering from Montana Tech in 1974 while working in Butte, Montana mines.
Between 1974 and 1981, Mr. Stacey worked in senior supervisory positions as a
Shift Foreman for the Anaconda Company; as mine superintendent for Day Mines
at the Sherman Mine, mining 1,000 tons per day of silver ore; as mine manager
for Choctaw Mining supervising the construction and operation of a tungsten
mine and mill complex; as mine manager for Mountain Mineral's barite mines in
British Columbia; and as a mine manager at the Goodnews Bay platinum placer
operation. In 1981, Mr. Stacey formed General Mine Services Corp., a mine
consulting and contracting firm for junior mining and exploration companies,
where he continued as CEO until 1994, when he joined with Celebration and has
continued full time as Vice President of Operations with Royal. His current
responsibilities focus on the engineering, design, installation, and operation
of complete mine and metallurgical plants involving base and precious metals
and industrial minerals.
JOHN RYAN, a professional mining engineer, was recently appointed to the
position of Vice President of Corporate Development for the Company. Up
through his appointment, Mr. Ryan has served most recently as a consultant in
mine engineering services, and will continue in these activities during his
tenure as Vice President of Corporate Development, as well as engage in other
matters in accordance with the direction and assignment of the Board of
Directors. In addition to his professional degree in
Mining Engineering, which he received from the University of Idaho, Mr. Ryan
also holds a juris doctorate (J.D.) law degree from the Boston College School
of Law.
RONALD KITCHING resides in Australia. Prior to his retirement five years ago,
Mr. Kitching was involved in he mining industry from over 35 years holding
various positions, including serving as president of Overland Drilling
Company, an Australian exploration drilling company, and as co-founder of
Glindeman-Kitching Enterprises, an exploration drilling company. He has
served as a director for Celebration Mining Company since May 1994.
JAMES W. PRIER has been active in the Canadian resource industry for the past
14 years as a principal and through his consulting firm, James Prier &
Associates, Ltd. From 1986 to 1990, Mr. Prier was associated with Energex
Minerals, Ltd., a natural resource company listed on the Toronto Stock
Exchange, serving as vice-president of corporate development from 1987 to
1990. While with Energex, Mr. Prior participated in the development,
evaluation and sale of an open-pit gold deposit in northern British Columbia
and the subsequent acquisition of a Houston-based oil and gas company.
37
<PAGE>
Mr. Prier was a founding director of Minerex Resources Ltd., a gold producer
listed on the Toronto Stock Exchange. He served as vice-president of
corporate development for Black Swan Gold Mines Ltd., a Toronto Stock Exchange
listed resource company, from 1991 to 1993. He is a principal and director of
Argosy Mining Corp., a Vancouver-based resource company engaged in a US $8.5
million diamond exploration joint venture in Zimbabwe and Tanzania. Mr. Prier
is a director and corporate secretary of Urandel Minerals Corporation, listed
on the Vancouver Stock Exchange. Prior to 1979, Mr. Prier was a financial
analyst for a private Ontario investment group.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934. Section
16(a) of the Securities and Exchange Act of 1934 requires certain defined
persons to file reports of and changes in beneficial ownership of a registered
security with the Securities and Exchange Commission and the National
Association of Securities Dealers in accordance with the rules and regulations
promulgated by the Commission to implement the provisions of Section 16.
Under the regulatory procedure, officers, directors, and persons who own more
than ten percent of a registered class of a company's equity securities are
also required to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of Forms 3, 4, and 5 furnished to the
Company for transactions occurring between October 1, 1995, and September 30,
1996, or with respect to transactions which occurred between October 1, 1994,
and September 30, 1995, and should have been reported in Fiscal 1995 but were
not, or were untimely reported and that untimeliness was not disclosed in the
Form 10-K for Fiscal 1995, and on representations that no other transactions
were required to be reported and no other Forms were required to be filed, the
Company has determined that the pertinent officers, directors, and principal
shareholders have complied with all applicable Section 16(a) requirements,
except as follows:
Howard Crosby, President, CEO and a Director of the Company, filed Form 5 for
Fiscal 1995 on December 22, 1995. That form should have been filed by
November 14, 1995. The Form 5 reported two September 1995 transactions.
Robert E. Jorgensen, Executive Vice President, Treasurer and a Director of the
Company, filed Form 3 on December 22, 1995. That Form 3 should have been
filed by August 18, 1995. A Form 5 for Fiscal 1995 was filed on December 22,
1995. That Form 5 should have been filed by November 14, 1995. The Form 5
reported two September 1995 transactions.
Jerry Stacey, a Vice President and a Director of the Company, filed Form 3 on
December 22, 1995. The Form 3 should have been filed by August 18, 1995.
Carlos M. Chavez, Secretary and a Director of the Company, filed Form 5 for
Fiscal 1995 on December 22, 1995. That form and the two exempt transactions
it reported should have been filed and disclosed by November 14, 1995.
Spenst Hansen, a Director of the Company, should have filed a Form 5 for
Fiscal 1995 by November 14, 1995. Registrant believes that the Form 5 has not
been filed, but is unaware of any other Form 4 or Form 5 transactions that
should be reported on that Form 5 or that otherwise have not been filed.
38
<PAGE>
Ronald Kitching, a Director of the Company, should have filed a Form 3 for
Fiscal 1995 by November 14, 1995. Registrant believes the that Form 3 has not
been filed, but is unaware of any Form 4 or Form 5 transactions that have not
been filed.
James W. Prier, a Director of the Company, filed Form 3 on December 22, 1995.
That form should have been filed by August 18, 1995.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation. The following table sets forth the compensation paid by
Royal during each of the last three fiscal years to its Chief Executive
Officer, and to the other four most highly compensated officers and executive
officers, but only if the total annual salary and bonus of any such executive
officer exceeded $100,000 for Fiscal 1995 (the 'Named Executive Officers').
This information includes the dollar value of base salaries, bonus awards and
number of stock options granted, and certain other compensation, if any.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Secur-
and Restric ities
Prin- Other ted Under LTIP All
cipal Annual Stock lying Pay Other
Posi- Compen Award (1) Options/ Outs Compen
tion Year Salary Bonus sation ($) SAR's(#) ($) sation
- - ----- ---- ------ ----- ------- --------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CEO 1996 $78,000 $0 $0 $0 0 $0 $0
Howard 1995 $48,000 $0 $0 $0 0 $0 $0
Crosby 1994 $16,000(2) $0 $0 $40,000 0 $0 $0
1993 $0 $0 $0 $0 0 $0 $0
Named
Execu-
tive
Officers
- - ------
None n/a n/a n/a n/a n/a n/a n/a n/a
</TABLE>
(1) The above shares were issued for Directors fees, for service to Royal.
No awards were made for service to Celebration.
(2) This represents salary received as an officer of Celebration, $4,000 per
month, beginning with June 1994.
Other than the Company's Stock Option and Award Plan, there are no retirement,
pension, or profit sharing plans for the benefit of the Company's officers and
directors.
Option/SAR Grants Table. Information concerning individual grants of stock
options, whether or not in tandem with stock appreciation rights ('SARs'), and
freestanding SARs made during Fiscal 1996 to the CEO and each of the Named
Executive Officers, if any, is reflected in the table below.
39
<PAGE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN FISCAL 1996
Potential Realizable Alterna-
Value at Assumed tive to
Annual Rates of Stock (f) and
Price Appreciation (g) Grant
Individual Grants for Option Term Date Value
- - ------------------------------------------------- ---------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h)
Number of Percent of
Securities Total Options/ Grant
Underlying SARs Granted Exercise Expira- Date
Options/SARs to Employees or Base tion Present
Name Granted (#) in Fiscal Year Price Date 5%($) 10%($) Value $
- - ---- ------------ ------------- -------- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
CEO
- - ----
Howard
Crosby 0 0 N/A N/A N/A N/A N/A
Named
Execu-
tive
Officers
- - ------
None n/a n/a n/a n/a n/a n/a n/a
</TABLE>
Aggregated Option/SAR Exercises and Fiscal 1996 Year-End Option/SAR Value
Table. The following table sets forth certain information with respect to
each exercise, if any, of stock options and SARs during Fiscal 1996 by the
CEO and each of the Named Executive Officers, if any, and the Fiscal 1996
year-end value of unexercised options and SARs. The dollar values in columns
(c) and (e) are calculated by determining the difference between the fair
market value of the underlying stock and the exercise price or base price of
the options at exercise or Fiscal 1996 year-end, respectively. The stock's
fair market value on September 30, 1996 was $1.1875 per share. There are no
outstanding option awards to management. Even if there were, it is possible
they might never be exercised. Actual gains realized, if any, on stock option
exercises and Common Stock holdings are dependent on the future performance
and value of the Common Stock and overall stock market conditions. There can
be no assurance that projected gains and values would be realized.
40
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1996
AND OPTION/SAR VALUES AT SEPTEMBER 30, 1996
(a) (b) (c) (d) (e)
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-End($)
at FY-End (#)
Dollar
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized($) Unexercisable Unexercisable
- - ---- --------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
CEO
- - ----
Howard
Crosby 0 $0 0/0 0/0
Execu-
tive
Officers
- - ---------
None n/a n/a n/a n/a
</TABLE>
LONG-TERM INCENTIVE PLAN AWARDS. The Company does not have any formalized
long-term incentive plan (excluding restricted stock, stock option and SAR
plans) that provides compensation intended to serve as incentive for
performance to occur over a period longer than one fiscal year, whether such
performance is measured by reference to financial performance of the Company
or an affiliate, the Company's stock price, or any other measure.
COMPENSATION OF DIRECTORS. Directors receive for their services a retainer
fee payable in shares of the Company's Common Stock, currently at the rate of
2,500 shares per quarter of completed service. During Fiscal 1996, 150,000
shares were awarded to directors as compensation. The Board has not
implemented a plan to award options, authorized under the Company's Stock
Option and Award Plan and none have been granted. There are no contractual
arrangements with any member of the Board of Directors, other than the
employment and salary arrangements for compensating two of its members for
their service as executive officers: Howard Crosby as President and CEO, and
Robert Jorgensen as Executive Vice President and Treasurer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. There are no
compensation committee interlocks. With respect to insider participation,
Howard Crosby, Hal Cameron and Carlos Chavez, participated in deliberations of
the Company's Board of Directors during Fiscal 1996, concerning executive
officer compensation.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION. The following is a
summary of the Board of Directors Report:
41
<PAGE>
It is the Board's responsibility to review and set compensation levels of the
executive officers of the Company, evaluate the performance of management and
consider management appointments and related matters. All decisions are
decisions of the full Board. The Board considers the performance of the
Company and how compensation paid by the Company compares to compensation
generally in the mining industry and among similar companies. In establishing
executive compensation, the Board bases its decisions, in part, on achievement
and performance regarding broad-based objectives and targets relating to the
continued acquisition of favorable silver properties and the progress of
exploration and development of such properties, as well as the Company's
financial performance.
For Fiscal 1996, the Company's executive compensation policy consisted of two
elements: base salary and stock awards. The policy factors which determine
the setting of these compensation elements are largely aimed at attracting and
retaining executives considered essential to the Company's long-term success.
The granting of stock is designed as an incentive for executives to keep
management's interests in close alignment with the interests of shareholders.
The Company's executive compensation policy seeks to engender committed
leadership to favorably posture the Company for continued growth, stability
and strength of shareholder equity.
The Company paid salaries to its officers for the fiscal year-ended September
30, 1996, as follows: President and CEO, Howard Crosby, $78,000 yearly;
Executive Vice President and Treasurer, Robert Jorgensen, $72,000 yearly; Vice
President of Operations, Jerry Stacey, $70,000 yearly; and Vice President of
Development, John Ryan, $48,000 yearly. These amounts were approved by the
Board in recognition of the work and efforts and in completing the acquisition
of a large number of silver mining properties prior to the end of Fiscal 1996.
Further, the Board recognized the significant role of these four individuals
in managing the Company's principal office in Spokane, Washington and in
raising funds for the Company's exploration and development activities.
Finally, the Board of Directors took into account the reasonableness of these
salaries in comparison with Executive salaries within the mining region. On
the basis of the above factors, the Board determined that these salaries were
proper and fitting. No other officers received a salary during Fiscal 1996.
With respect to stock awards during Fiscal 1996, the Board of Directors did
not change the amount of shares, 2,500 per quarter, which each director is
entitled to receive as partial compensation for service to the Company.
The Board believes that executive compensation during Fiscal 1996
substantially reflects the Company's compensation policy.
PERFORMANCE GRAPH. The Company is not presently able to provide a line graph
covering five consecutive years that compares (1) the yearly percentage change
in the Company's cumulative total shareholder return on its Common Stock with
(2) the cumulative total return of a broad equity market index and (3) the
cumulative total return of an industry index, peer line-of-business index, or
a group of similarly capitalized issuer companies. The Company continues
every reasonable effort to compile or locate commercially available and
reliable data of its historical stock price for the period required by the
SEC, or to compile such data for a lesser period of sufficient range in time
from which the Company could be able to prepare a meaningful performance
graph. However, the Company has been unable to obtain this information or
prepare such a performance graph. Nevertheless, the Company continues its
search for such data.
42
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners and Management. The following
table sets forth as of October 4, 1996, the beneficial ownership of Common
Stock with respect to: (1) All persons known to the Company to be the
beneficial owners of more than five percent of the outstanding shares of
Common Stock (the 'Principal Shareholders'); (2) Each director and director
nominee of the Company; (3) Each Named Executive Officer (as that term is
defined in the section entitled 'Executive Compensation', below) who is listed
in the 'Summary Compensation Table', below, and (4) All directors and
executive officers as a group. At October 4, 1996, the number of shares of
common stock of the Company issued and outstanding was 10,649,854.
<TABLE>
<CAPTION>
Common Stock Beneficially Owned No. of Shares Percent of Class
1. Name and Address of
Principal Shareholders
<S> <C> <C>
Centurion Mines Corporation 1,537,267 14.4%
331 South Rio Grande, Suite 201
Salt Lake City, UT 84101
Howard Crosby 632,500(1) 5.9%
105 N. First, Ste. 232
Sandpoint, ID 83864
James Kontes 635,000(2) 5.6%
P.O. Box 112
Firth, ID 83236
Thomas Miller 600,000(3) 5.3%
2508 Zinfadel Dr.
Rancho Cordova, CA 95670
Robert E. Jorgensen 595,000(4) 5.5%
W. 2719 Strong Rd.
Spokane, WA 99208
2. Directors
Howard Crosby 632,500 5.9%
Robert E. Jorgensen 595,000 5.5%
Ronald Kitching 157,500 1.4%
Hal Cameron 48,028 *
Spenst Hansen 106,100 *
Carlos M. Chavez 20,000 *
3. Named Executive Officers (Excluding
Any Director Named Above)
Jerry Stacy 20,500 *
John Ryan 22,500 *
4. All Directors and Executive Officers
as a Group (8 Persons) 1,602,128 15.0%
</TABLE>
All shares are owned beneficially and of record, unless otherwise noted.
Percentage ownership of less than 1% is marked with an asterisk (*).
43
<PAGE>
(1) Mr. Crosby is a director, executive officer and 50% shareholder of Extol
International Corp., a privately-held Washington corporation. As a 50%
shareholder, Mr. Crosby holds indirect beneficial ownership of one-half of the
restricted shares retained by Extol following the closing of the share
exchange with Celebration. Also, the Board approved the release of a
previously authorized grant of 200,000 restricted shares to Crosby
Enterprises, Inc. for its work in putting together for the Company no fewer
than five major business proposals, culminating in the reorganization with
Celebration. Mr. Crosby holds indirect beneficial ownership of those
restricted shares as a director, executive officer and majority shareholder of
Crosby Enterprises, a private, closely-held Washington corporation. Mr.
Crosby holds all remaining shares in his name, 15,000 shares of which he
received in Fiscal 1995 as partial compensation for his service as a director
and executive officer.
(2) Mr. Kontes owns 35,000 issued and outstanding shares, but received options
to purchase 600,000 restricted shares in exchange for the options he had held
in Celebration. None of these options have been exercised, but are
exercisable within 60 days. For purposes of reporting beneficial ownership in
this Item 12 only, the securities underlying Mr. Kontes' options are deemed
outstanding and have been added to the 10,649,854 actual shares outstanding to
compute the percentage owned.
(3) Mr. Miller does not own any of the actual shares that are outstanding, but
received options to purchase 600,000 restricted shares in exchange for the
options he had held in Celebration. None of these options have been
exercised, but are exercisable within 60 days. For purposes of reporting
beneficial ownership in this Item 12 only, the securities underlying Mr.
Miller's options are deemed outstanding and have been added to the 10,649,854
actual shares outstanding to compute the percentage owned.
(4) The Company notes that in addition to the awards of shares for his service
as a director and officer of the Company, Mr. Jorgensen initially received
550,000 restricted shares as part of the share exchange with Celebration.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS AND TRANSACTIONS PERTAINING TO ROYAL AND CELEBRATION. Certain
of the directors and/or officers of the Company also serve as directors and/or
officers of other companies involved in natural resource exploration and
development and, consequently, there exists the possibility for such directors
and officers to be in a position of conflict. Any decision made by such
directors and officers involving the Company, as the case may be, will be made
in accordance with their duties and obligation to deal fairly and in good
faith with the Company and such other companies. In addition, such directors
and officers are required to declare and refrain from voting on any matter in
which such directors and officers may have a conflict of interest. In this
respect, Howard Crosby, who was the President of Celebration and of Royal at
the time of the Reorganization, refrained from voting on any matter related
to the Reorganization or any other matter pertaining to both companies.
The Company has engaged in transactions with its officers, directors and
principal shareholders, including the issuance of the initial shares of the
Company. Such transactions may be considered as not having occurred at arm's
length. The Company may be engaged in transactions with management and others
involving conflicts of interest, including conflicts on salaries and other
44
<PAGE>
payments to such parties, as well as business opportunities which may arise.
In this regard, the directors of the Company are involved in other companies
and may have conflicts of interest in allocating time between the Company and
other entities to which they are affiliated.
RELATIONSHIPS AND TRANSACTIONS PERTAINING TO ROYAL. From time to time, at the
Company's request, Centurion may, at its discretion, provide funds to the
Company or pay certain expenses directly. The Company is current in its
payments to Centurion and management intends to continue the immediate
repayment to Centurion as expenses are incurred.
During Fiscal 1994, Royal carried over the previous balance owed by Centurion
of $5,055 and loaned Centurion $8,075, resulting in cumulative total advances
made by Royal to Centurion of $13,130. Also during Fiscal 1994, Centurion
accrued $54,335 of Royal taxes, loaned $83,700 to Royal, and paid $140,932 of
Royal expenses (including certain land costs of Royal), resulting in total
advances made by Centurion to Royal of $278,967. Centurion repaid these and
previous amounts by paying certain of the Company's expenses and by
transferring to the Company $467,236 of mineral properties. Thus, for Fiscal
1994 transactions between Royal and Centurion, including balance carryovers,
the net cumulative result was a balance of $265,838 owed by Royal to
Centurion.
During Fiscal 1995, Centurion made net total advances to the Company of
$38,086. The net result was a balance of approximately $300,000 owed by Royal
to Centurion, which Royal repaid prior to the end of Fiscal 1995 by issuing
200,000 shares of its common stock to Centurion at the then prevailing market
price of $1.50 per share. At September 30, 1995, and at September 30, 1996,
the Company owed $289 to Centurion.
RELATIONSHIPS AND TRANSACTIONS PERTAINING TO CELEBRATION. In May 1994,
Celebration issued, pursuant to Board resolution, an aggregate of 1,000,000
shares of common stock to Extol International Corporation, an affiliate of
Howard M. Crosby, an officer and director of the Company, and 500,000 shares
of Common Stock to Robert Jorgensen, an officer and director of the Company,
in exchange for a transfer of the rights under an option on the Montana
Property. Mr. Crosby and Mr. Jorgensen are considered founders of the
Company. The Company has not received a fairness opinion or other valuation of
the rights transferred in exchange for the shares issued to Mr. Jorgensen and
Extol International Corporation. The cost basis of the rights under the
Montana Property was estimated to be $4,000. The perceived value of the
shares issued was determined as of the time of transfer by Mr. Crosby and Mr.
Jorgensen as sole officers and directors of the Company. The determination
was not based on arms length negotiations. In June 1994, the Company repaid
to Crosby Enterprises, Inc., an affiliate of Howard M. Crosby, $20,000 for
funds advanced on the Montana Property prior to the transfer of the rights
under the option to the Company.
In August 1994, Celebration issued 100,000 shares of Common Stock to Ronald
Kitching, a director, as compensation for his services as a director. Mr.
Crosby and Mr. Jorgensen also received compensation from the Company as
executive officers.
45
<PAGE>
In August 1994, Thomas Miller, a director of Celebration up to August 8, 1995,
received options to purchase up to 400,000 shares as compensation for his
consulting services in field exploration management through August 1995. Mr.
Miller was also an officer, director and principal shareholder of United
Silver Mines, Inc., the Company's Joint Venture Partner on the Vipont Property
and its subsidiary, Bannock Silver Mining Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
A. INDEX TO SUPPLEMENTAL SCHEDULES AND EXHIBITS.
1. Supplemental Schedule Number I --
Weighted Average Shares for the Year Ended September 30, 1996
<TABLE>
<CAPTION>
Weighted
Days Average
Date Issued Shares Outstanding Shares
___________________ ___________ ___________ _____________
<S> <C> <C> <C>
October 1, 1995 7,757,063 366 7,757,063
October 4, 1995 200,000 362 197,814
October 11, 1995 15,000 355 14,549
October 26, 1995 13,000 340 12,077
November 10, 1995 17,700 325 15,717
November 20, 1995 2,500 315 2,152
December 4, 1995 3,000 301 2,467
December 20, 1995 135,000 285 105,123
December 20, 1995 14,200 285 11,057
December 29, 1995 375,300 276 317,987
December 29, 1995 30,750 276 23,189
December 29, 1995 25,000 276 18,852
January 4, 1996 60,000 270 44,262
January 11, 1996 200,000 263 143,716
January 16, 1996 3,000 258 2,115
January 29, 1996 7,500 245 5,020
February 12, 1996 3,000 231 1,893
March 1, 1996 3,000 213 1,746
March 5, 1996 1,700 209 971
March 14, 1996 20,000 200 10,929
March 20, 1996 31,875 194 16,895
March 21, 1996 3,000 193 1,582
April 1, 1996 68,000 182 33,814
April 2, 1996 66,667 181 32,969
April 3, 1996 1,700 180 836
April 4, 1996 50,000 179 24,454
April 5, 1996 5,000 177 2,418
April 17, 1996 70,000 166 31,749
April 18, 1996 47,500 165 21,414
April 24, 1996 200,000 159 86,885
46
<PAGE>
Weighted
Days Average
Date Issued Shares Outstanding Shares
___________________ ___________ ___________ _____________
<S> <C> <C> <C>
April 25, 1996 66,666 158 28,779
April 26, 1996 2,900 157 1,244
April 26, 1996 120,000 157 51,475
April 29, 1996 41,667 154 17,532
April 29, 1996 3,000 154 1,262
May 6, 1996 41,000 147 16,467
May 6, 1996 (cancel) -103,334 147 -41,503
May 14, 1996 150,000 139 56,967
May 24, 1996 8,000 129 2,820
June 6, 1996 1,500 116 475
June 30, 1996 (cancel) -10,000 92 -2,514
July 1, 1996 95,500 91 23,745
July 1, 1996 250,000 91 62,158
July 19, 1996 115,000 73 22,937
July 23, 1996 272,500 69 51,373
July 29, 1996 15,000 63 2,582
July 30, 1996 (cancel) -25,000 63 -4,303
August 19, 1996 200,000 42 22,951
September 30, 1996 -25,000 0 0
TOTAL SHARES: 10,649,854 WEIGHTED AVERAGE: 9,221,191
========== =========
</TABLE>
2. Supplemental Schedule No. II --
Weighted Average Shares, For the Year Ended September 30, 1995
<TABLE>
<CAPTION>
Weighted
Days Average
Date Issued Shares Outstanding Shares
___________________ ___________ ___________ _____________
<S> <C> <C> <C>
February 17, 1994 3,450,000 304 3,450,000
January 17, 1995 416,250 256 350,526
March 21, 1995 262,500 193 166,653
March 25, 1995 15,000 189 9,326
August 8, 1995 2,434,563 53 424,447
September 13, 1995 166,000 17 9,283
September 29, 1995 800,000 1 2,632
September 29, 1995 12,750 1 42
September 29, 1995 200,000 1 658
TOTAL SHARES: 7,757,063 WEIGHTED AVERAGE: 4,413,566
========= =========
</TABLE>
3. Supplemental Schedule No. III --
Weighted Average Shares, For the Period From Inception on February 17,
1994, Through November 30, 1994
47
<PAGE>
<TABLE>
<CAPTION>
Weighted
Days Average
Date Issued Shares Outstanding Shares
___________________ ___________ ___________ _____________
<S> <C> <C> <C>
February 17, 1994 0 286 0
May 1, 1994 2,250,000 213 1,675,699
July 16, 1994 1,050,000 137 502,972
August 20, 1994 150,000 102 53,497
TOTAL SHARES: 3,450,000 WEIGHTED AVERAGE: 2,232,168
========= =========
</TABLE>
4. Supplemental Schedule No. IV --
Weighted Average Shares, For the Period From Inception on February 17,
1994
Through September 30, 1996
<TABLE>
<CAPTION>
Weighted
Days Average
Date Issued Shares Outstanding Shares
___________________ ___________ ___________ _____________
<S> <C> <C> <C>
February 17, 1994 0 956 0
May 1, 1994 2,250,000 883 1,675,699
July 16, 1994 1,050,000 807 502,972
August 20, 1994 150,000 742 53,497
January 17, 1995 416,250 622 350,526
March 21, 1995 262,500 559 166,653
March 25, 1995 15,000 555 9,326
August 8, 1995 2,434,563 419 424,447
September 13, 1995 166,000 383 9,283
September 29, 1995 800,000 367 2,632
September 29, 1995 12,750 367 42
September 29, 1995 200,000 367 658
October 4, 1995 200,000 362 197,814
October 11, 1995 15,000 355 14,549
October 26, 1995 13,000 340 12,077
November 10, 1995 17,700 325 15,717
November 20, 1995 2,500 315 2,152
December 4, 1995 3,000 301 2,467
December 20, 1995 135,000 285 105,123
December 20, 1995 14,200 285 11,057
December 29, 1995 375,300 276 317,987
December 29, 1995 30,750 276 23,189
December 29, 1995 25,000 276 18,852
January 4, 1996 60,000 270 44,262
January 11, 1996 200,000 263 143,716
January 16, 1996 3,000 258 2,115
January 19, 1996 12,000 255 8,361
January 29, 1996 7,500 245 5,020
February 12, 1996 3,000 231 1,893
48
<PAGE>
Weighted
Days Average
Date Issued Shares Outstanding Shares
___________________ ___________ ___________ _____________
<S> <C> <C> <C>
March 1, 1996 3,000 213 1,746
March 5, 1996 1,700 209 971
March 14, 1996 20,000 200 10,929
March 20, 1996 31,875 194 16,895
March 21, 1996 3,000 193 1,582
April 1, 1996 68,000 182 33,814
April 2, 1996 66,667 181 32,969
April 3, 1996 1,700 180 836
April 4, 1996 50,000 179 24,454
April 5, 1996 5,000 177 2,418
April 17, 1996 70,000 166 31,749
April 18, 1996 47,500 165 21,414
April 24, 1996 200,000 159 86,885
April 25, 1996 66,666 158 28,779
April 26, 1996 2,900 157 1,244
April 26, 1996 120,000 157 51,475
April 29, 1996 41,667 154 17,532
April 29, 1996 3,000 154 1,262
May 6, 1996 41,000 147 16,467
May 6, 1996 (cancel) -103,334 147 -41,503
May 14, 1996 150,000 139 56,967
May 24, 1996 8,000 129 2,820
June 6, 1996 1,500 116 475
June 30, 1996 (cancel) -10,000 92 -2,514
July 1, 1996 95,500 91 23,745
July 1, 1996 250,000 91 62,158
July 19, 1996 115,000 73 22,937
July 23, 1996 272,500 69 51,373
July 29, 1996 15,000 63 2,582
July 30, 1996 (cancel) -25,000 63 -4,303
August 19, 1996 200,000 42 22,951
September 30, 1996 -25,000 0 0
TOTAL SHARES: 10,649,854 WEIGHTED AVERAGE: 5,596,841
========== ==========
</TABLE>
All other schedules have been omitted because they are not applicable or the
required information is included in the financial statements, or notes
thereto, or in the above schedules.
B. REPORTS ON FORM 8-K
Royal filed one report on Form 8-K, dated August 8, 1995, during the last
quarter of the period covered by this report.
49
<PAGE>
C. INDEX TO EXHIBITS
The following documents are incorporated herein by reference to Royal's
Registration Statement on Form 10, as filed with the Securities and Exchange
Commission:
<TABLE>
<CAPTION>
Exh. No. Sec No. Name Of Document
<S> <C> <C>
3.1 3(i) Articles of Incorporation
3.2 3(i) Articles of Amendment
3.3 3(i) Amendment to Articles of Incorporation Limiting Director
Liability
3.4 3(ii) By-Laws
10.1 10 Sale of Mining Properties By Centurion Mines Corporation
to Royal Minerals, Inc. - June 1992 through September
1993
10.2 10 Deed with Reservation of Mineral Royalty - January 1992 to
Kennecott
10.3 10 July 1992 Purchase and Sale Agreement of 16,880 acres to
Kennecott
10.4 10 July 1992 Kennecott Option to Purchase 6,320 acres
10.5 10 Deed and Assignment with Reservation of Mineral Royalty -
August 1992 (16,880 acres) to Kennecott
10.6 10 Deed and Assignment with Reservation of Mineral Royalty -
December 1992 (6,320 acres) to Kennecott
The following documents are incorporated herein by reference to Royal's Current
Report on Form 8-K, dated August 8, 1995, as filed with the Securities and
Exchange Commission:
2.01 2 Agreement and Plan of Reorganization
3.05 3 Articles of Share Exchange ( Utah)
3.06 3 Articles of Share Exchange (Washington)
4.01 4 Subscription and Investment Agreement
4.02 4 Stock Purchase Option Certificate
19.01 19 Material Furnished to Celebration Security Holders
20.01 20 Letter from Royal to Share Exchange Security Holders
</TABLE>
POWER OF ATTORNEY
The Registrant and each person whose signature appears below has designated
and appointed Howard M. Crosby and Robert E. Jorgensen and each of them as its
or his true attorneys-in-fact ('Attorneys-in-Fact') with full power to act
alone and authority to execute in the name of each such person, and to file
with the Securities and Exchange Commission, together with any exhibits
thereto and other documents therewith, any and all amendments to this Form 10-
K that may be necessary or advisable to enable the Registrant to comply with
the Securities Exchange Act of 1934, as amended, and all rules, regulations
and requirements pertaining thereto, which amendments may make such other
changes in the Form 10-K as the aforesaid Attorneys-in-Fact executing the same
deem appropriate.
50
<PAGE>
- - ------------------------------------------------------------------------------
SIGNATURES
- - ------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) 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.
DATED: October 4, 1996
ROYAL SILVER MINES, INC.
By: /s/ Howard Crosby
--------------------------------
Howard Crosby, President
Principal Executive Officer
By: /s/ Robert E. Jorgensen
--------------------------------
Robert E. Jorgensen, Principal
Financial and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
DATED: October 4, 1996
ROYAL SILVER MINES, INC.
By: /s/ Howard M. Crosby
--------------------------------------
Howard M. Crosby, Director and Chairman
By: /s/ Robert E. Jorgensen
--------------------------------------
Robert E. Jorgensen, Director
By: /s/ Robert E. Jorgensen
--------------------------------------
E. Hal Cameron, Director
By: /s/ Robert E. Jorgensen
--------------------------------------
Spenst Hansen, Director
By: /s/ Robert E. Jorgensen
--------------------------------------
Carlos M. Chavez, Director
By: /s/ Robert E. Jorgensen
--------------------------------------
Ronald Kitching, Director
By: /s/ Robert E. Jorgensen
--------------------------------------
James W. Prier, Director
51
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Audited Financial Statements
September 30, 1996 and 1995
<PAGE>
C O N T E N T S
Independent Auditors' Reports . . . . . . . . . . . . . F-1
Balance Sheets . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations . . . . . . . . . . . . . . . . F-3
Statements of Stockholders' Equity . . . . . . . . . . . F-4
Statements of Cash Flows . . . . . . . . . . . . . . . . F-10
Notes to the Financial Statements . . . . . . . . . . . . F-13
<PAGE>
(Company Logo)
Williams & Webster, P.S.
Certified Public Accountants
Seafirst Financial Center
601 W. Riverside, Suite 1970
Spokane, WA 99201-0611
Tel: (509) 838-5111
Fax: (509) 624-5001
The Board of Directors
Royal Silver Mines, Inc.
(A Development Stage Company)
Spokane, Washington
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheet of Royal Silver Mines, Inc. (a
development stage company) as of September 30, 1996, and the related statements
of operations, shareholders' equity, and cash flows for the year then ended, and
from inception on February 17, 1994 through September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Royal Silver Mines, Inc. as of
September 30, 1996, and the results of their operations and their cash flows
for the year then ended and from inception on February 17, 1994 through
September 30, 1996 in conformity with generally accepted accounting principles.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
December 13, 1996
F-1
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
_____________ _____________
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 688,716 $ 151,698
Note receivable 100,000 -
Interest receivable 333 -
Prepaid expenses 17,391 4,350
_____________ _____________
TOTAL CURRENT ASSETS 806,440 156,048
_____________ _____________
MINERAL PROPERTIES 4,785,665 3,869,515
PROPERTY AND EQUIPMENT
Furniture and equipment 15,802 11,629
Less - accumulated depreciation (2,809) (589)
_____________ _____________
TOTAL PROPERTY AND EQUIPMENT 12,993 11,040
_____________ _____________
OTHER ASSETS
Deferred debt issuance costs, net - 19,736
Organization costs, net 259 359
_____________ _____________
TOTAL OTHER ASSETS 259 20,095
_____________ _____________
TOTAL ASSETS $ 5,605,357 $ 4,056,698
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 25,135 $ 60,026
Payable to related parties 289 289
Accrued expenses 34,443 90,088
Notes payable 60,000 670,919
_____________ _____________
TOTAL CURRENT LIABILITIES 119,867 821,322
_____________ _____________
LONG-TERM DEBT - -
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; 40,000,000 shares
authorized, 10,649,854 and 7,757,063 shares
issued and outstanding, respectively 106,499 77,571
Additional paid-in capital 8,436,808 4,120,540
Deficit accumulated during development stage (3,057,817) 962,735
_____________ _____________
TOTAL SHAREHOLDERS' EQUITY 5,485,490 3,235,376
_____________ _____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,605,357 $ 4,056,698
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ROYAL SILVER MINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
February 17,
1994
Ten months (inception)
Year ended ended through
September 30, September 30, September 30,
1996 1995 1996
_____________ _____________ _____________
<S> <C> <C> <C>
REVENUES $ - $ - $ -
_____________ _____________ _____________
GENERAL AND ADMINISTRATIVE EXPENSES
Mineral leases 8,122 843 8,965
Depreciation and amortization 35,736 59,822 98,069
Officers and directors
compensation 492,715 209,733 831,948
Other administrative expenses 1,298,975 273,246 1,652,006
_____________ _____________ _____________
Total expenses 1,835,548 543,644 2,590,988
_____________ _____________ _____________
OPERATING LOSS (1,835,548) (543,644) (2,590,988)
_____________ _____________ _____________
OTHER EXPENSES
Interest expense (9,534) (62,557) (72,091)
Loss on disposition of assets (200,000) (144,738) (344,738)
_____________ _____________ _____________
Total other expenses (209,534) (207,295) (416,829)
_____________ _____________ _____________
NET LOSS $ (2,045,082) $ (750,939) $ (3,007,817)
============= ============= =============
NET LOSS PER COMMON SHARE $ (0.22) $ (0.17) $ (0.53)
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 9,221,191 4,413,566 5,596,841
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION> Common Stock Total
_________________________ Additional Stock-
Number Paid-in Accumulated holders
of Shares Amount Capital Deficit Equity
___________ ___________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Balance
February 17,
1994 - $ - $ - $ - $ -
___________ ___________ ____________ ____________ ____________
Issuance in
May 1994
of shares
at $.002
per share
to officers
and directors
in exchange
for assignment
of mining
property
option 2,250,000 22,500 (18,500) - 4,000
Issuance in
July 1994 of
shares for
cash at $.402
in private
placement,
net of costs 1,050,000 10,500 411,116 - 421,616
Issuance in
August 1994
of shares to
a director
in exchange
for services,
valued at
$.417 per
share 150,000 1,500 61,000 - 62,500
Net loss for
the year
ended
November
30, 1994 - - - (211,796) (211,796)
____________ ___________ ____________ ____________ ____________
Balance,
November
30, 1994 3,450,000 34,500 453,616 (211,796) 276,320
____________ ___________ ____________ ____________ ____________
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION> Common Stock Total
_________________________ Additional Stock-
Number Paid-in Accumulated holders
of Shares Amount Capital Deficit Equity
___________ ___________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Balance, forward
November
30, 1994 3,450,000 34,500 453,616 (211,796) 276,320
____________ ___________ ____________ ____________ ____________
Issuance of
shares in
debt offering
at $.03
per share 416,250 4,163 9,712 - 13,875
Issuance of
shares for
mineral
properties
valued at
$1.00 per
share 262,500 2,625 259,875 - 262,500
Issuance of
shares for
cash at $1.00
per share 15,000 150 14,850 - 15,000
Stock issuance
costs - - (58,202) - (58,202)
Issuance of
shares to
acquire
Consolidated
Royal Mines,
Inc. at $.15
per share 2,434,563 24,346 335,750 - 360,096
Issuance of
shares to
directors and
employees for
services at
prices ranging
from $2.00
to $2.50
per share 12,750 127 29,473 - 29,600
____________ ___________ ____________ ____________ ____________
Balance
forward 6,591,063 65,911 1,045,074 (211,796) 899,189
____________ ___________ ____________ ____________ ____________
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION> Common Stock Total
_________________________ Additional Stock-
Number Paid-in Accumulated holders
of Shares Amount Capital Deficit Equity
___________ ___________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Balance,
forward 6,591,063 65,911 1,045,074 (211,796) 899,189
____________ ___________ ____________ ____________ ___________
Issuance of
shares in
exchange for
mineral
properties
at prices
ranging
from $3.13
to $3.25
per share 800,000 8,000 2,530,126 - 2,538,126
Issuance of
shares for
cash at
prices
ranging from
$1.50 to
$2.00 per
share 166,000 1,660 247,340 - 249,000
Issuance of
shares in
exchange for
debt at $1.50
per share 200,000 2,000 298,000 - 300,000
Net loss for
the ten
months ended
September
30, 1995 - - - (750,939) (750,939)
____________ ___________ ____________ ____________ ____________
Balance,
September 30,
1995 7,757,063 $ 77,571 $ 4,120,540 $ (962,735) $ 3,235,376
____________ ___________ ____________ ____________ ____________
Issuance of
shares for
cash at
$1.50 per
share 1,176,832 11,769 1,754,010 - 1,765,779
____________ ___________ ____________ ____________ ____________
Balance
forward 8,933,895 89,340 5,874,550 (962,735) 5,001,155
____________ ___________ ____________ ____________ ____________
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION> Common Stock Total
_________________________ Additional Stock-
Number Paid-in Accumulated holders
of Shares Amount Capital Deficit Equity
___________ ___________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Balance,
forward 8,933,895 89,340 5,874,550 (962,735) 5,001,155
___________ ___________ ____________ ____________ ____________
Issuance of
shares to
directors and
employees for
services at
$1.50
per share 222,700 2,227 331,823 - 334,050
Issuance of
shares in
exchange for
debt and accrued
interest
at $1.50
per share 406,050 4,060 605,015 - 609,075
Issuance of
shares for
cash at
$2.20
per share 150,000 1,500 328,500 - 330,000
Issuance of
warrants
for cash
at $.05
per warrant - - 41,068 - 41,068
Issuance of
shares for
cash at
$1.62
per share 65,000 650 104,650 - 105,300
Issuance of
shares for
cash to
directors and
employees
at prices
ranging
from $1.62
to $2.08
per share 107,500 1,075 181,175 - 182,250
____________ ___________ ____________ ____________ ____________
Balance
forward 9,885,145 98,852 7,466,781 (962,735) 6,602,830
____________ ___________ ____________ ____________ ____________
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION> Common Stock Total
_________________________ Additional Stock-
Number Paid-in Accumulated holders
of Shares Amount Capital Deficit Equity
___________ ___________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Balance,
forward 9,885,145 98,852 7,466,781 (962,735) 6,602,830
___________ ___________ ____________ ____________ ____________
Issuance of
shares for
cash at
$0.75
per share 200,000 2,000 147,985 - 149,985
Issuance of
shares for
cash at $1.70
per share 250,000 2,500 422,500 - 425,000
Cancellation
of 35,000
shares
received in
exchange for
return of
mining
property (35,000) (350) (109,025) - (109,375)
Payment to
Centurion Mines
for option to
repurchase
stock - - - (50,000) (50,000)
Issuance of
shares for
joint venture
in mining
property
at $1.50
per share 100,000 1,000 149,000 - 150,000
Repurchase of
25,000 shares
issued for
joint venture
at $1.40
per share (25,000) (250) (34,750) - (35,000)
____________ ___________ ____________ ____________ ____________
Balance
forward 10,375,145 103,752 8,042,491 (1,012,735) 7,133,508
____________ ___________ ____________ ____________ ____________
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (Continued)
<TABLE>
<CAPTION> Common Stock Total
_________________________ Additional Stock-
Number Paid-in Accumulated holders
of Shares Amount Capital Deficit Equity
___________ ___________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C>
Balance,
forward 10,375,145 103,752 8,042,491 (1,012,735) 7,133,508
___________ ___________ ____________ ____________ ____________
Issuance of
shares for
mining
property
at $1.50
per share 20,000 200 29,800 - 30,000
Issuance of
shares to
noteholders
for extension
of notes
at $1.50
per share 39,375 394 58,669 - 59,063
Issuance of
shares for
services at
$1.50
per share 215,334 2,153 320,848 - 323,001
Stock
issuance
costs - - (15,000) - (15,000)
Net loss for
the year
ended
September
30, 1996 - - - (2,045,082) (2,045,082)
____________ ___________ ____________ ____________ ____________
Balance,
September 30,
1996 10,649,854 $ 106,499 $ 8,436,808 $ (3,057,817) $ 5,485,490
============ =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION> From
February 17,
For the year For the Ten 1994 (Inception)
Ended Months Ended Through
September 30, September 30, September 30,
1996 1995 1996
______________ ______________ ______________
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (2,045,082) $ (750,939) $ (3,007,817)
______________ ______________ ______________
Adjustments to reconcile
net loss to net cash used
by operating activities:
Depreciation and
amortization 35,736 59,822 100,616
Issuance of common stock
for services 657,051 29,600 749,151
Write-off of joint
venture costs 150,000 - 150,000
Changes in assets and liabilities:
Note receivable (100,000) - (100,000)
Interest receivable (333) - (333)
Prepaid expenses (13,041) 22,627 (17,391)
Other assets 19,836 (23,137) (3,801)
Accounts payable (34,891) 53,727 25,135
Accrued expenses (55,645) 90,088 34,443
Payable to related parties - 300,289 300,289
______________ ______________ ______________
Net cash used in operating
activities (1,386,369) (217,923) (1,769,708)
______________ ______________ ______________
Cash flows from investing
activities:
Purchase and development of
mineral properties (979,043) (455,418) (1,604,836)
Purchase of fixed assets (4,173) (11,629) (15,802)
______________ ______________ ______________
Net cash provided used in
investing activities (983,216) (467,047) (1,620,638)
______________ ______________ ______________
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
</TABLE>
<TABLE>
<CAPTION> From
February 17,
For the year For the Ten 1994 (Inception)
Ended Months Ended Through
September 30, September 30, September 30,
1996 1995 1996
______________ ______________ ______________
<S> <C> <C> <C>
Cash flows from financing
activities:
Stock issuance and offering
costs (15,000) (58,202) (144,835)
Proceeds received on
long-term debt - 675,000 675,000
Payments made on notes payable (40,000) (74,206) (114,206)
Issuance of common stock for
cash 2,958,314 264,000 3,659,814
Payment for option to
repurchase stock (50,000) - (50,000)
Issuance of common stock
for accrued interest 38,158 - 38,158
Issuance of common stock for
extension of notes payable
maturation 59,063 - 59,063
Payment for return of stock
issued for mining property
interest (35,000) - (35,000)
Payment of joint venture costs (50,000) - (50,000)
Issuance of warrants for cash 41,068 - 41,068
______________ ______________ ______________
Net cash provided by financing
activities 2,906,603 806,592 4,079,062
Net increase in cash $ 537,018 $ 121,622 " $ 688,716
Cash, beginning of period 151,698 30,076 -
______________ ______________ ______________
Cash, end of period $ 688,716 $ 151,698 $ 688,716
============== ============== ==============
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS (Continued)
</TABLE>
<TABLE>
<CAPTION> From
February 17,
For the year For the Ten 1994 (Inception)
Ended Months Ended Through
September 30, September 30, September 30,
1996 1995 1996
______________ ______________ ______________
<S> <C> <C> <C>
Supplemental cashflow disclosure:
Income taxes $ - $ 250 $ 350
Interest $ 5,715 $ 17,683 $ 23,398
Non-cash financing activities:
Common stock issued for
services rendered $ 657,051 $ 29,600 $ 749,151
Common stock issued for
mineral properties $ 180,000 $ 2,800,626 $ 2,980,626
Common stock issued for
exchange for debt $ 570,917 $ 313,875 $ 922,950
Common stock issued in
acquisition of
Consolidated Royal
Mines, Inc. $ - $ 360,096 $ 360,096
Option rights acquired in
exchange for a payable $ - $ - $ 79,000
Common stock issued for
assignment of mining
property options $ - $ - $ 4,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Royal Silver Mines, Inc. (Royal) was incorporated in April of 1969 under the
laws of the State of Utah primarily for the purpose of acquiring and
developing mineral properties. Royal conducts its business as a "junior"
natural resource company, meaning that it intends to receive income from
property sales or joint ventures with larger companies.
Celebration Mining Company (Celebration), currently a wholly-owned subsidiary
of Royal was incorporated for the purpose of identifying, acquiring, exploring
and developing mining properties. Celebration was organized on February 17,
1994 as a Washington Corporation. Celebration has not yet realized any
revenues from its planned operations.
On August 8, 1995, Royal and Celebration completed an Agreement and Plan of
Reorganization whereby the Company issued 4,143,750 shares of its common stock
and 1,455,000 warrants in exchange for all of the outstanding common stock of
Celebration. Pursuant to the reorganization the name of the Company was
changed to Royal Silver Mines, Inc. Immediately prior to the Agreement and
Plan of Reorganization, the Company had 2,375,463 common shares issued and
outstanding.
The acquisition was accounted for as a purchase by Celebration of Royal,
because the shareholders of Celebration control the company after the
acquisition. Therefore, Celebration is treated as the acquiring entity.
There was no adjustment to the carrying value of the assets or liabilities of
Royal in the exchange as the market value approximated the net carrying value.
Royal is the acquiring entity for legal purposes and Celebration is the
surviving entity for accounting purposes.
The $4,785,665 cost of mineral properties included in the accompanying balance
sheet as of September 30, 1996 is related to exploration properties. The
Company has not determined whether the exploration properties contain ore
reserves that are economically recoverable. The ultimate realization of the
Company's investment in exploration properties is dependent upon the success
of future property sales, the existence of economically recoverable reserves,
the ability of the Company to obtain financing or make other arrangements for
development and upon future profitable production. The ultimate realization
of the Company's investment in exploration properties cannot be determined at
this time and, accordingly, no provision for any asset impairment that may
result, in the event the Company is not successful in developing or selling
these properties, has been made in the accompanying financial statements.
The Company is actively seeking additional capital and management believes the
properties can ultimately be sold or developed to enable the Company to
continue its operations. However, there are inherent uncertainties in mining
operations and management cannot provide assurances that it will be successful
in this endeavor. Furthermore, the Company is in the development stage as it
has not realized any significant revenues from its planned operations.
F-13
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting.
Loss Per Share
Loss per share was computed by dividing the net loss by the weighted average
number of shares outstanding during the year The weighted average number of
shares was calculated by taking the number of shares outstanding and weighing
them by the amount of time they were outstanding.
The outstanding warrants were not included in the computation of loss per
share because the exercise price of the outstanding warrants is higher than
the market price of the stock, thereby causing the warrants to be
antidilutive.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Mineral Properties
Costs of acquiring, exploring and developing mineral properties are
capitalized by project area. Costs to maintain the mineral rights and leases
are expensed as incurred. When a property reaches the production stage, the
related capitalized costs will be amortized, using the units of production
method on the basis of periodic estimates of ore reserves. Mineral properties
are periodically assessed for impairment of value and any losses are charged
to operations at the time of impairment.
Should a property be abandoned, its capitalized costs are charged to
operations. The Company charges to operations the allocable portion of
capitalized costs attributable to properties sold. Capitalized costs are
allocated to properties sold based on the proportion of claims sold to the
claims remaining within the project area.
Concentration of Risk
The Company maintains its cash accounts in primarily one commercial bank in
Spokane, Washington. Accounts are guaranteed by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. The Company's cash balance exceeds that
amount by $588,716 at September 30, 1996.
F-14
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
Provision For Taxes
At September 30, 1996, the Company had net operating loss carryforwards of
approximately $3,130,000 that may be offset against future taxable income
through 2011 No tax benefit has been reported in the financial statements as
the Company believes there is a 50% or greater chance the net operating loss
carryforwards will expire unused. Accordingly, the potential tax benefits of
the net operating loss carryforwards are offset by a valuation allowance of
the same amount.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued a new statement
titled "Accounting for Impairment of Long-Lived Assets." This new standard is
effective for years beginning after December 15, 1995 and would change the
Company's method of determining impairment of long-lived assets. Although the
Company has not performed a detailed analysis of the impact of this new
standard on the Company's financial statements, the Company does not believe
that adoption of the new standard will have a material effect on the financial
statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation " (FAS 123). The
new statement is effective for fiscal years beginning after December 15, 1995.
FAS 123 encourages, but does not require, companies to recognize compensation
expense for grants of stock, stock options, and other equity instruments to
employees based on fair value. Companies that do not adopt the fair value
accounting rules must disclose the impact of adopting the new method in the
notes to the financial statements. Transactions in equity instruments with
non-employees for goods or services must be accounted for on the fair value
method. The Company currently intends to adopt the fair value accounting
prescribed by FAS 123. However, the Company intends to continue its analysis
of FAS 123 to determine its ultimate effect in the future.
Restatement
The restatement of the financial statements have resulted in certain changes
in presentation which have no effect on the net losses or shareholder's equity
for September 30, 1995 or the year then ended.
NOTE 3 - MINERAL PROPERTIES
Utah Mining Property Joint Venture
In October 1994, Celebration and United Silver Mine, Inc., (United ) entered
into a joint venture agreement, whereby Celebration could acquire up to an 80%
interest in a mining property located in the State of Utah. Under the terms
of the agreement, United contributed real properties for an initial 75%
interest in the joint venture, and Celebration was to remove all liens
associated with the real properties by paying $175,000 to a bank which was the
primary lien holder for its initial 25% interest in the venture.
F-15
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 3 - MINERAL PROPERTIES (Continued)
Celebration expended $175,000 to purchase the aforementioned promissory note.
The property was auctioned in a public auction in May, 1995 and by virtue of
Celebration's first position lien, Celebration was able to successfully bid
the full amount of the underlying promissory note. Although additional
expenditures have been made on the property through September 30, 1996, no
further funds toward the joint venture have been expended by Celebration,
which owns an undivided 25% interest in the property.
Shoshone County Idaho Mineral Lease
In February 1995, Celebration entered into an agreement to acquire a fifty-
year renewable mineral lease on a property in Shoshone County, Idaho. The
mining property consists of twelve patented claims and associated Idaho state
leases. In connection with this lease, Celebration paid $50,000 and issued
175,000 shares of common stock. In addition, 10,000 shares were issued to a
new director for his assistance in obtaining this lease. Celebration
subsequently paid $950,000 for the option of extending its lease for an
additional forty-nine years. When, and if, the property achieves gross sales
of $40,000,000, Celebration will be obligated to pay an additional .5% royalty
on future sales. Furthermore, beginning after September 1, 1995, and at such
time as the average price of silver has reached $6.00 per ounce for a 30-day
period, Celebration is obligated to spend not less than $2,000,000 during the
subsequent 36 months to de-water and repair the mine. Thereafter, Celebration
will be required to maintain the mine in a condition to allow it to be put
into production within sixty days. There are certain claims by the U.S.
Environmental Protection Agency and the County on this property for which the
lessor is obligated to pay. In the event these claims are not satisfactorily
resolved, they may effect Celebration's rights to the property.
Australian Mineral Property Joint Venture
In March 1995, Celebration entered into a joint venture agreement with an
Australian company for exploration of a certain mineral property in Australia.
Under the original terms of the joint venture agreement, Celebration acquired
a 10% interest by paying $100,000 in April 1995. No additional funds where
paid or required to be paid subsequent to the initial payment.
Washington and Idaho Mineral Properties
During the year ended September 30, 1995, Celebration purchased through the
issuance of 800,000 shares of its common stock, various mineral properties
located in the States of Washington and Idaho. The mineral properties were
recorded at the fair market value of the shares paid on the date of issuance
ranging from $3.13 to $3.25 per share for a total purchase price of
$2,538,126.
In May 1996, the Company sold back the Frisco Standard Silver Mine to its
original seller in exchange for the same price (35,000 shares of Royal stock)
received by the seller when the mine was purchased. The shares received were
cancelled and no gain or loss was recorded on the transaction.
F-16
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 3 - MINERAL PROPERTIES (Continued)
The Company's proposed future mining activities will be subject to laws and
regulations controlling not only the exploration and mining of mineral
properties, but also the effect of such activities on the environment.
Compliance with such laws and regulations may necessitate additional capital
outlays, affect the economics of a project, and cause changes or delays in the
Company's activities.
The total mineral properties at September 30, 1996 are classified as follows:
Mineral properties under joint ventures $ 366,510
Other mineral properties 4,419,155
_____________
Total Mineral Properties $ 4,785,665
=============
The Company's mineral properties are valued at the lower of cost or net
realizable value.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Major additions and improvements
are capitalized. Minor replacements, maintenance and repairs that do not
increase the useful life of the assets are expensed as incurred. Depreciation
of property and equipment is determined using the straight-line method over
the expected useful lives of the assets of five years.
NOTE 5 - INTANGIBLE ASSETS
Deferred debt issuance costs and organization costs are recorded at cost.
Amortization of these intangible assets is determined using the straight-line
method over the expected useful lives of the assets as follows:
Description Useful Lives
___________________________ ____________
Deferred debt issuance costs 1 year
Organization costs 5 years
NOTE 6 - COMMON STOCK
During the year ended November 30, 1994, Celebration issued 1,500,000 shares
of common stock to directors for services rendered, valued at $.003 to $.625
per share, which is the fair market value of the shares on the date of
issuance.
During the year ended September 30, 1995, the Company issued 12,750 shares of
common stock to directors and employees for services rendered, valued at
prices ranging from $2.00 to $2.50 per share, which is the fair market value
of the shares on the date of issuance.
F-17
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 6 - COMMON STOCK (Continued)
During the year ended September 30, 1995, Celebration issued 975,000 shares of
common stock in exchange for mineral properties (See Note 3) and sold 176,000
shares of common stock for $264,000 cash.
The Company issued 200,000 shares of its common stock during the year ended
September 30, 1995 in lieu of outstanding debt that was owed to Centurion
Mines Corporation (Centurion), a related entity. The stock was issued at
$1.50 per share in payment of $300,000 of the then outstanding debt (See Note
10). The Company also issued 277,500 shares in connection with the issuance
of notes payable (See Note 9). (See also the disclosure in Note 1).
During the year ended September 30, 1996, the Company sold 1,949,332 shares of
its common stock for $2,958,314 in cash. The Company also issued 222,700
shares to directors and employees for services rendered valued at $1.50 per
share, which is the fair market value of the shares on the date of issuance.
Also during the year ended September 30, 1996, the Company issued 100,000
shares of its common stock for a joint venture in a mining property and 20,000
common shares for a mining property (See Note 12). The stock issued was
valued at $1.50 per share, which is the fair market value to the shares at the
date of issuance.
In the same twelve-month period, the Company also issued 406,050 shares of its
common stock in payment of outstanding debt of $570,917 and accrued interest
of $38,158. The stock was issued at $1.50 per share for a total value of
$609,075. In addition, the Company issued 39,375 shares of common stock to
noteholders for extending the maturity date of their loans. Again, the shares
were valued at $1.50 each, which is the fair market value of the shares when
issued.
NOTE 7 - COMMON STOCK OPTIONS AND WARRANTS
In January 1992, the shareholders of Royal approved a 1992 Stock Option and
Stock Award Plan under which up to ten percent of the issued and outstanding
shares of the Company's common stock could be awarded based on merit of work
performed. As of September 30, 1996, 12,750 shares of common stock have been
awarded under the Plan.
Also during the year ended September 30, 1996, the Company issued 215,334
shares of its common stock for services received. The shares were valued at
$1.50 per share, which is the fair market value of the shares at the date of
issuance.
F-18
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 7 - COMMON STOCK OPTIONS AND WARRANTS (Continued)
Celebration, prior to the exchange agreement with Royal, had granted
securities to certain shareholders which represented rights to purchase or
receive shares of Celebration's common stock. These options were assumed by
the Company after the merger at a rate of 1.5 shares for each option still
outstanding. Thus, the Company has granted options, with varying conditions
and requirements, to purchase a total of 1,455,000 shares of its common stock.
There are 255,000 of the stock options exercisable at $1.50 per share which
expire March 21, 2000. The remaining 1,200,000 stock options are exercisable
at $0.93 per share and expire on August 31, 2001. As of September 30, 1996,
none of these options have been exercised.
On January 9, 1996, the Board of Directors approved the issuance of warrants
to two of its officers to purchase a total of 300,000 shares for a purchase
price of $2.50 per share, exercisable from the date of issuance until January
9, 1999.
On March 22, 1996, the Board of Directors approved the issuance of warrants to
an investor to purchase 625,000 shares of common stock of the Company in
partial completion of a private placement of stock. These warrants are
exercisable until September 30, 1998, at a price of $1.50 per share, which is
67% of the closing price on March 22, 1996.
On April 10, 1996, following the close of the second quarter of fiscal 1996,
the Board of Directors authorized the issuance of 420,666 warrants to
unaffiliated investors as part of the private placement of stock. These
warrants are exercisable until April 12, 1997 at prices ranging from $2.50 to
$2.625 per share. As of September 30, 1996, 320,666 warrants have been issued
(but not exercised) for a total amount of $41,068.
NOTE 8 - ADDITIONAL PAID-IN CAPITAL
The following is a summary of additional paid-in capital at September 30, 1996
and September 30, 1995:
September 30, September 30,
1996 1995
_____________ _____________
Applicable to:
Common stock $8,395,740 $4,120,540
Stock warrants 41,068 -
_____________ _____________
$8,436,808 $4,120,540
============= =============
F-19
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 9 - NOTES PAYABLE
In February 1995, Celebration raised $555,000 through the issuance of
promissory notes. During the second quarter ended March 31, 1996, $470,000 of
the total amount plus accrued interest of $29,265 was converted into 332,800
shares of the Company's common stock, leaving an amount owing of $85,000,
which was further reduced by cash payments to $60,000 at September 30, 1996.
The notes bear interest at 10% per annum and will be due on the earlier of
January 1, 1997 or the closing of any public offering of equity securities by
the Company. The note holders also received 277,500 shares of Celebration's
common stock. A 10% commission was charged by an underwriter on the sale of
almost all of the notes.
In April 1995, Celebration raised $120,000 in 10% convertible debentures. In
late 1995, $105,000 of the total amount plus accrued interest of $4,810 was
converted into 73,250 shares of the Company's common stock, leaving an amount
owing of $15,000. During the third quarter ended September 30, 1996, this
remaining $15,000 plus accrued interest was paid.
NOTE 10 - RELATED PARTY TRANSACTIONS
After receiving advances from a related party for payment of operating
expenses, the Company approved the issuance of 200,000 shares of common stock
in payment of $300,000 of the then outstanding balance (See Note 6). The
balance outstanding at September 30, 1996 was $289.
NOTE 11 - FUTURE LEASE OBLIGATIONS
The Company is obligated under its lease arrangements to make additional lease
payments subsequent to September 30, 1996 as follows:
Year Ended
September 30, Amount
_____________ _________
1997 $ 9,440
1998 4,500
1999 4,500
2000 and thereafter 22,500
_________
Total $ 40,940
=========
NOTE 12 - OPTIONS WITH PLACER MINING CORPORATION
In April 1996, the Company entered into an option with Placer Mining
Corporation ("Placer") of Kellogg, Idaho whereby the Company could acquire a
joint venture interest in the Bunker Hill Mine, a silver-lead-zinc mine in
Shoshone County, Idaho. After issuing 100,000 shares valued at $1.50 per
share and spending a non-refundable $50,000 on this option, the Company
elected to renegotiate this option agreement and entered into a second option
agreement with Placer on September 18, 1996.
F-20
<PAGE>
ROYAL SILVER MINES, INC.
(A Development Stage Company)
Notes to the Financial Statements
September 30, 1996
NOTE 12 - OPTIONS WITH PLACER MINING CORPORATION (Continued)
In the second agreement, the Company paid $100,000 in September 1996 for the
nonassignable option of acquiring a 100% interest in the Bunker Hill Mine. In
order to exercise this option, the Company must issue 500,000 shares of its
common stock to Placer by May 10, 1997 and pay Placer either $7,000,000 by
that date or $4,000,000 by that date and $3,500,000 by May 10, 1998. Under
the terms of this agreement, the Company will pay Placer a 2 3/4% net smelter
return royalty in perpetuity with stipulated annual advance minimum royalty
payments to Placer ranging from $100,000 (in 1999) to $250,000 (in years 2002
through 2010). All advance minimum royalties paid are to be credited against
actual production royalties.
At September 30, 1996, the Company had expended $101,715 in option and related
expenses toward the purchase of the Bunker Hill Mine. These costs are
included in the cost of mineral properties (Note 3) on the Company's balance
sheet.
NOTE 13 - STOCK OPTION AGREEMENT WITH CENTURION MINES CORPORATION
In September 1996, the Company executed an agreement with Centurion Mines
Corporation ("Centurion") whereby the Company acquired an option from
Centurion to purchase up to 800,000 shares of its common stock held by
Centurion for the exercise price of $1.75 per share during the two-year period
ending September 30, 1998. The cost of this two-year stock purchase option
was $50,000, which was paid by the Company and charged to stockholders' equity
(accumulated deficit).
At September 30, 1996, no shares were acquired from Centurion under this
option agreement.
F-21
<PAGE>
<TABLE> <S> <C>
<ARTICLE>5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN REGISTRANT'S
FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ITS FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 688,716
<SECURITIES> 0
<RECEIVABLES> 100,133
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 806,440
<PP&E> 15,802
<DEPRECIATION> 2,809
<TOTAL-ASSETS> 5,605,357
<CURRENT-LIABILITIES> 199,867
<BONDS> 0
<COMMON> 106,499
0
0
<OTHER-SE> 5,378,991
<TOTAL-LIABILITY-AND-EQUITY> 5,605,357
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,835,548
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