U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A
(Mark One)
X Annual report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended January 31, 1998.
___ Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ___ to ___.
Commission File No: 0-25798
HERITAGE MINES, LTD.
(Name of small business in its charter)
Colorado 84-1293168
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
1199 Main Avenue, Suite 221
Durango, Colorado 81301
(Address of Principal Office) Zip Code
Issuer's telephone number: (970) 385-0374
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
Not Applicable Not Applicable
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Class A Warrants to Purchase Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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 ____
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will 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-KSB or any amendment to this Form 10-KSB. ____
State issuer's revenue for its most recent fiscal year: $13,749.
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a
specified date within the past 60 days: $ 608,603 as of April 28,
1998.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 6,487,172 as of
April 28, 1998.
(Documents incorporated by reference.) If the following documents
are incorporated by reference, briefly describe them and identify the
part of the Form 10-KSB (e.g. Part I, Part II, etc.) into which the
document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933
("Securities Act"). The listed documents should be clearly described
for identification purposes.
Transitional Small Business Disclosure
Format:
Yes ____ No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
The Company is a junior gold exploration/mining company in
its development stage. The Company was incorporated under the
laws of the State of Colorado on January 19, 1995, and acquired
Heritage Gold Mines, Inc., a Nevada corporation, and its wholly-
owned subsidiaries, WAZCO, Inc., and GWZ Management Company,
Inc., in exchange for authorized but previously unissued common
stock on March 6, 1996. As of the end of its fiscal year ending
January 31, 1998, the Company's sole mining property, the
Bowerman Project, located in Siskiyou County, California, remained
in the developmental stage. At that time, approximately 2,500 linear
feet of underground mine development had been completed,
installation of major plant machinery was substantially complete, and
limited test operations had been conducted. The development process
was suspended at the Bowerman Project in early 1997 due to a lack of
funding.
The Company's plan of operations that is dependent on its
ability to obtain additional equity and/or debt capital is to develop the
Company into a self-sustaining, medium sized precious metals
exploration and mining firm. Its goal is to achieve a solid foundation
of credible reserves which can be developed and produced at costs
positioned in the lowest quartile of industry performance, to maximize
shareholder value.
History
In 1987, Mr. Mark Gavard, then a director of the Company,
discovered high grade gold occurrences near historic (Circa mid-late
1800's) gold mines in the mountainous terrain of Siskiyou County,
located in Northern California. The Bowerman Project, as it is
known, is situated in the Knownothing Creek Mining District
approximately eight miles south of Forks of Salmon between
Knownothing Creek and Bowerman Mountain. Heritage Mines, Ltd.
predecessor companies were formed by Mr. Gavard and his associates
beginning in 1988 to explore and develop the mineral resources of the
Bowerman Project. From 1988 to 1994, Mr. Gavard dedicated
himself to exploration of the property, development of infrastructure,
and acquisition of necessary regulatory permits.
In the period from 1994 to 1996, Mr. Gavard sought to
properly capitalize the Bowerman Project through a series of
transactions with individuals and corporations. Ultimately all of these
efforts failed, largely due to the inability of the investing entity to
provide the capital necessary.
On March 6, 1996, a stock purchase and exchange agreement
was executed which placed the Bowerman Project, and all related
companies and assets into Heritage Mines, Ltd. (the "Company"), a
Colorado corporation, in exchange for issuance of 7.4 million shares
in the Company to Mr. Gavard and others who were party to the
transaction. Heritage Mines, Ltd. was at the time a new entity
created by a reverse merger into a Colorado corporate shell.
Heritage Mines, Ltd. subsequently issued more common shares
to raise additional capital of $756,975 to pursue further exploration
and development of the Bowerman Project. Also, existing
shareholders contributed compensation and received common stock for
services aggregating $155,600 during the fiscal year 1997.
In addition to the equity financing, the Company entered into
various debt financing arrangements during fiscal 1997 and early 1998
with related parties and others to fund current operations and to
develop the Bowerman Project. These debt financing arrangements
included $600,000 of convertible notes which are currently due June
1, 1998 and are convertible at the option of the lender into common
shares at a price of $1.06 per share.
During the fiscal year ended January 31, 1997, the Company
engaged the services of James W. Cooksley, a Registered Professional
Geologist to conduct a surface and underground geo-chemical
evaluation program, and to prepare a mineral resource analysis and
report. The report prepared by Mr. Cooksley, which was initially
completed in November, 1996, reported estimated proven/probable
reserves subject to an analysis of economic viability. Subsequent to
November, 1996, the Company completed an analysis of economic
viability in support of characterization of the resource identified in the
geologist's report as ore.
With the capital raised through the aforementioned equity and
debt offerings, the Company continued, until March 1997 to explore
and develop the Bowerman Property and to take steps believed to be
necessary to complete the construction of a small processing plant on
the property. The Company has completed approximately 2,500 feet
of underground development and sampling, and completed the
construction of a small processing plant with crushing, grinding and
gravity separation circuits a short distance from the mine portal.
During the fiscal year ending January 31, 1997, the plant was used to
process a limited tonnage of feed material from the underground
development work and demonstrated a capability of processing
approximately 2.5 tons per hour. The Company was not successful in
achieving a sustaining level of production from the Bowerman Project
and was forced to suspend further underground development work in
early fiscal 1998 when its cash resources became depleted.
During the first six months of fiscal 1998, the Company hired
a new Chief Executive Officer, a new Vice President of Operations,
developed a restructuring and recapitalization plan, initiated efforts to
raise additional working capital and moved its corporate office to
Durango, Colorado. The Company commenced a private placement
offering of 15% convertible debentures intended to raise between
$500,000 and $1,000,000 of bridge financing. As of January 31,
1998, $925,000 of the debentures had been funded. The proceeds of
this offering were used to satisfy existing trade payables, hire
additional management personnel, establish business systems and
prepare for other long term financing arrangements needed to fund
development projects. In addition, the Company completed the
reacquisition of 4,034,896 shares of its common stock from a group
of its founding shareholders, reducing the number of issued and
outstanding shares to 6,487,172. The reacquisition was completed in
exchange for contingent promissory notes (For more information, see
Note 7 of the Notes to the Consolidated Financial Statements included
herein under Item 7. Financial Statements). The purpose of this share
roll-back was to reduce the number of common shares outstanding in
order to enhance the value of shares that might be acquired by new
investors.
In September 1997, the Company's Board of Directors
authorized management to proceed with the acquisition from Mr.
Gregory B. Sparks, the Company's President and CEO, of his one-
third interest in Bushmaster Mining Company, Inc. (Bushmaster), a
Guyana S.A. joint stock company. Bushmaster has the gold mining
rights for the concessions at the Million Mountain Project located in
Guyana S.A. Preliminary terms of the proposed acquisition are
summarized in Note 4 of Notes to the Consolidated Financial
Statements included herein under Item 7. Financial Statements. In
connection with the proposed acquisition and to further development
of the project, the Company provided financing for a drilling program
and advanced certain operating funds to Bushmaster aggregating
$135,503 during the fourth quarter of fiscal 1998. Consummation of
the proposed transaction and recovery of these deferred acquisition
costs are dependent on the Company's ability to obtain additional
financing and reaching a definitive agreement with the Company
President.
The Company determined during the last quarter of fiscal 1998
that the planned secondary offering to be used for working capital and
development financing was not practical because of the poor state of
the market for junior gold equities. The Company is currently in
discussions with several different parties to obtain debt and/or equity
financing. This financing is necessary for the Company to continue
operating and to initiate any significant development projects.
Employees
As of January 31, 1998, the Company employed 4 full time
persons. The Company's future success depends in significant part
upon the continued service of its key senior management personnel.
The Company has no collective bargaining agreements and believes its
relations with employees are good.
ITEM 2. DESCRIPTION OF PROPERTY.
During the fiscal year 1998, the Company moved its corporate
headquarters to Durango, Colorado. In connection therewith, it
entered into a new five-year operating lease agreement for 2,550
square feet of office space with a base rent of $2,975 per month
beginning August 1, 1997. The Company negotiated a settlement,
including cancellation, of its prior lease for office space in Newport
Beach, California.
During the fiscal year ending January 31, 1997, the Company
acquired all of the issued and outstanding stock of Heritage Gold
Mines, Inc., a Nevada corporation, and through this transaction it
acquired certain mining claims and other properties which are referred
to herein as the Bowerman Project. This property covers an area of
approximately 5 to 6 square miles and is located in the Knownothing
Creek Mining District of Siskiyou County, at the Forks of Salmon,
which is east of Eureka and southwest of Yreka, in Northern
California. The Company pays annual fees of a nominal amount to
the Federal Bureau of Land Management for the rights to use such
land to develop and extract minerals.
The property consists of thirty-one un-patented lode mining
claims. As of January 31, 1998, underground development consisting
of approximately 2,500 feet of drift on vein and cross-cutting had
been completed through one mine portal. A mill and its ancillary
facilities is located on the property. The mill operation includes
crushing, grinding, screening and concentrating equipment, as well as
gold refining equipment. Other facilities include a sawmill, explosive
magazine and mine surface buildings.
ITEM 3. LEGAL PROCEEDINGS.
On or about March 3, 1998, a judgement in the amount of
$86,640.19, plus interest, was entered against the Company in the
Circuit Court of the 18th Judicial District, DuPage County, Illinois, in
the matter of Charles P. Zapotocky, Jr., et al. V. Heritage Mines,
Ltd., WAZCO, Inc., Mark E. Gavard and John W. Zane, Case No.
97L-00224. The plaintiffs in the action include Charles P.
Zapotocky, Jr., the former Chief Financial Officer of WAZCO, Inc.
The suit seeks collection of certain promissory notes that were issued
by WAZCO, Inc., a wholly-owned subsidiary of the Company. The
Company does not dispute the amounts due under the promissory
notes (principal amount of $119,758 as of January 31, 1998) and
intends to satisfy the judgement from additional financing currently
being sought.
No director, officer or affiliate of the Company, and no owner
of record or beneficial owner of more than 5% of the securities of the
Company, or any associate of any such director, officer or security
holder is a party adverse to the Company or has a material interest
adverse to the Company in reference to pending litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.
At the Company's annual meeting held on Friday, November
21, 1997, the Company's shareholders elected five directors as
recommended in the Proxy Statement, approved adoption of the 1997
Stock Option Plan, and ratified appointment of the Company's
independent auditors.
The five directors elected at the annual meeting were Gregory
G. Sparks, Peter Wilson, Douglas Drumwright, Gary S. Joiner, and
Robert K. Hanson. A total of 2,611, 336 votes were cast in favor of
election of each of the directors and a total of 200 votes were
withheld from voting int he election of each of the directors.
In the vote for approval of adoption of the 1997 Stock Option
Plan, a total of 2,564,293 votes were cast in favor of adoption,
44,018 votes were cast against adoption, 200 shares abstained, and
there were 3,025 broker non-votes.
In the vote for approval of the appointment of the Company's
independent auditors, a total of 2,591,536 votes were cast in favor of
appointment and 20,000 shares abstained.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
There is currently a limited public trading market for the
Company's securities on the OTC Bulletin Board. Trading in the
Company's shares commenced on or about September 13, 1996. The
following table sets forth, for each period indicated, the range of high
and low bid information:
<TABLE>
<CAPTION>
1998 High Low
<S> <C> <C>
First quarter 4.50 2.87
Second quarter 2.00 1.00
Third quarter 2.00 1.50
Fourth quarter 1.75 .25
1997
Third quarter 6.00 5.00
Fourth quarter 5.50 3.50
</TABLE>
The information regarding high and low bid prices is based
upon over-the-counter market quotations which reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
No dividends have been declared or paid on the Company's
securities, and it is not anticipated that any dividends will be declared
or paid in the foreseeable future.
There were approximately 450 holders of record of the
Company's common stock as of January 31, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION.
OVERVIEW.
The Company's consolidated balance sheet as of January 31,
1998, reflects total assets of $2,298,278, the most significant
component of which is property, equipment and mine development
costs of $2,064,128. The balance sheet as of January 31, 1998 also
reflects negative working capital of $2,023,974, a deficit accumulated
during the development stage of $2,777,417, and total stockholders'
equity of $211,970.
As of January 31, 1997, the Company's consolidated balance
sheet reflected total assets of $2,131,210, the most significant
component of which was property, equipment and mine development
costs of $2,061,539. The balance sheet as of January 31, 1997 also
reflected negative working capital of $919,723, a deficit accumulated
during the development stage of $1,688,113, and total stockholders'
equity of $1,176,274.
Operating revenues for fiscal year ended January 31, 1998
were $13,749 as compared to $23,274 for the fiscal year ended
January 31, 1997. Revenues for both years resulted from limited test
runs.
The changes in financial condition of the Company from
February 1, 1997, to January 31, 1998, are consistent with the
development stage activities which the Company carried on during
that period. Such activities primarily included capital raising efforts
through various equity and debt private placement offerings, and the
expenditure of such funds for general and administrative expenses and
for costs associated with development of the Bowerman Project and
other investing activities.
The Company raised a total of $1,070,700 from its various
financing activities during the fiscal year ended January 31, 1998,
including $125,000 from the sale of stock and $945,700 in proceeds
from the issuance of notes and convertible debentures payable to
related parties and others. General and administrative expenses,
including, but not limited to officer and employee compensation, the
cost of maintaining the corporate headquarters and legal and
accounting fees, totaled $896,200 for fiscal 1998 compared to
$1,299,916 for fiscal 1997. Net cash used to fund operating activities
was $808,897 for fiscal 1998.
In addition to funding operating activities during fiscal 1998,
cash of $193,772 was used to purchase property and equipment and
fund Bushmaster deferred acquisition costs of $135,503.
Effective May 30, 1997, the Company completed the
reacquisition of 4,034,896 shares of its common stock from a group
of its founding shareholders, reducing the number of issued and
outstanding shares to 6,487,172. The reacquisition was completed in
exchange for contingent promissory notes (see Note 7 of Notes to
Consolidated Financial Statement included under Item 7. Financial
Statements). The purpose of this share roll-back was to reduce the
number of common shares outstanding in order to enhance the value
of shares that might be acquired by new investors.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 1998, the Company had depleted all of its
operating capital and had a working capital deficit of $2,023,974.
This includes classifying $925,000 of convertible debentures as a
current liability because the Company is in technical default of its
debenture agreement as a result of its failure to raise additional
working capital of at least $2,000,000 by January 31, 1998, as
required by the terms of that agreement. As long as the default
exists, the debenture holders have the right to declare the entire
principal and accrued interest thereon immediately due and payable.
No debenture holders have made payment demand to the Company.
Although the Company raised significant funds during the
fiscal year ended January 31, 1998, these funds were necessary to pay
outstanding trade payables, to hire key management personnel,
establish necessary business systems, relocate the corporate office and
generally prepare for a secondary offering or other financing
arrangements to provide necessary funds for additional working
capital and development activities.
The Company is currently engaged in discussions with several
parties regarding additional equity and/or debt financing. Such
discussions have included the possible merger or sale of all or part of
the Company. At this time, such discussions are preliminary, and
there can be no assurances the Company will be able to obtain
additional financing. The additional financing will be necessary for
the Company to continue operating and to initiate any significant
development projects. Failure to obtain additional financing would
raise substantial doubts about the Company's ability to continue as a
going concern. The Independent Auditors' report on the 1998
consolidated financial statements includes an explanatory paragraph
with respect to this uncertainty (see Item 7. Financial Statements).
PLAN OF OPERATIONS.
The long-term goal of the Company is to become a self-
sustaining, medium sized precious metals exploration and mining
company that has a solid foundation of credible reserves which can be
developed and produced at a low cost. The plan of operations of the
Company for the next twelve months is to obtain additional financing
in order to operate and to provide funds necessary for the exploration
and development of its Bowerman and Bushmaster projects. As
indicated previously, there can be no assurance that the Company will
be able to obtain additional financing that will enable it to complete its
plan of operations.
This report contains various forward-looking statements that
are based on the Company's beliefs as well as assumptions made by
and information currently available to the Company. When used in
this report, the words "believe," "expect," "anticipate," "estimate"
and similar expressions are intended to identify forward-looking
statements. Such statements may include statements regarding
reserves, resources, mineralized material or deposits, mining methods,
political and related matters, planned levels of exploration, and the
like, and are subject to certain risks, uncertainties and assumptions
which could cause actual results to differ materially from projections
or estimates contained herein. Factors which could cause actual
results to differ materially include, among others, unanticipated grade,
geological, metallurgical, processing or other problems, conclusions
of feasibility studies, changes in project parameters as plans continue
to be refined, the timing of receipt of governmental permits, results of
current or planned exploration activities, environmental costs and
risks, changes in the gold price, and the like. Should one or more of
these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. The Company cautions
against placing undue reliance on forward-looking statements all of
which speak only as of the date made.
ITEM 7. FINANCIAL STATEMENTS.
HERITAGE MINES, LTD.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 31, 1998, 1997 and
For the Period from Inception (May 14, 1992) through
January 31, 1998<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report 13
Consolidated Balance Sheet 15
Consolidated Statements of Operations 17
Consolidated Statements of
Stockholders' Equity 18
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 25
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Heritage Mines, Ltd.
(A Development Stage Company)
Durango, Colorado
We have audited the accompanying consolidated balance sheet of
Heritage Mines, Ltd. (A Development Stage Company) as of January
31, 1998, and the related consolidated statements of operations, cash
flows, and stockholders' equity, for the years ended January 31,
1998, 1997 and for the period from inception (May 14, 1992) through
January 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatements.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Heritage Mines, Ltd. (A Development Stage Company) as of January
31, 1998 and the results of its operations and its cash flows for the
years ended January 31, 1998, 1997 and for the period from inception
(May 14, 1992) through January 31, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note
1, the Company has minimal revenue and needs additional funds to
carry out its plan of operations. The Company's continued existence
depends upon its ability to obtain additional equity or debt financing.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to
these matters are described in Note 1. No adjustments have been
made to the financial statements to provide for this uncertainty.
/s/
RAIMONDO PETTIT GROUP
Torrance, California
April 11, 1998
<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
January 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents 42,629
Other 1,500
Total current assets 44,129
Property, equipment and mine
development costs, at cost
net of accumulated depreciation
(Notes 3 and 6) 2,064,128
Other assets:
Bushmaster deferred
acquisition costs (Note 4) 135,503
Restricted cash (Note 5) 17,880
Deposits 1,638
Mining claims (Note 3) 35,000
Total other assets 190,021
Total Assets 2,298,278
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable (Note 8) 148,434
Accrued expenses and other
liabilities (Note 8) 241,681
Notes payable current maturities
of long-term debt (Note 6) 152,988
Convertible note payable (Note 6) 600,000
Convertible debentures (including
related parties of $320,000)
(Note 6) 925,000
Total current liabilities 2,068,103
Long-term debt (Note 6) 18,205
Total liabilities 2,088,308
Stockholders' Equity (Notes 4, 6, 7, 10 and 11):
Preferred stock; no par value;
authorized 10,000,000 shares,
no shares issued and outstanding
Common stock, $.0025 stated value;
authorized 100,000,000 shares,
issued and outstanding
6,487,172 shares 16,218
Additional paid-in capital 2,973,169
Deficit accumulated during the
development stage (2,777,417)
Total stockholders' equity 211,970
Commitments and contingencies
(Notes 6, 7, and 10)
Total liabilities and stockholders'
equity 2,298,278
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
Year ended Year ended (May 14, 1992)
January 31, January 31, through
1998 1997 January 31, 1998
<S> <C> <C> <C>
Operating revenues 13,749 23,274 67,019
Operating costs
General and
administrative 896,200 1,299,916 2,686,727
Depreciation 61,501 75,505 213,169
Total Operating Costs 957,701 1,375,421 2,899,896
Loss from operations (943,952) (1,352,147) (2,832,877)
Other income (expense):
Interest expense, net
(Note 8) (145,352) (26,770) (181,750)
Other income - - 237,210
Total other income
(expense) (145,352) (26,770) 55,460
Net loss (1,089,304) (1,378,917) (2,777,417)
Basic and diluted net
loss per share (0.14) (.15) (1.00)
Weighted average
common shares
outstanding 7,821,092 8,936,241 2,786,131
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(page 1 of 2)
<TABLE>
<CAPTION>
Common Stock Additional
Shares Paid-In
Issued Amount Capital
<S> <C> <C> <C>
Issuance of WAZCO common
stock, May 14, 1992 25,000 25,000 180,469
Net loss for the period - - -
Balance, January 31, 1993 25,000 25,000 180,469
Issuance of GWZ common
stock, April 26, 1993 15,000 15,000 -
Net income for the year - - -
Balance, January 31, 1994 40,000 40,000 180,469
Net loss for the year - - -
Balance, January 31, 1995 40,000 40,000 180,469
Issuance of Heritage Gold
Mines common stock,
July 21, 1995, at par
($.001 per share) 310,000 310 -
Issuance of WAZCO common
stock for legal services 735 735 -
Net loss for the year - - -
Balance, January 31, 1996350,735 41,045 180,469
Net effect on common stock
to account for reverse
acquisition 3,083,265 (32,460) 32,460
Issuance of common stock in
connection with the
Reorganization,
March 6, 1996 6,566,000 16,415 1,696,998
Issuance of common stock 293,125 733 631,242
Conversion of debt to
common stock 170,943 427 141,458
Issuance of common stock
for compensation 8,000 20 23,980
Contribution of
compensation by
stockholders - - 131,600
Net loss for the year - - -
Balance,
January 31, 1997 10,472,068 26,180 2,838,207
Issuance of
common stock 50,000 125 124,875
Redemption of common
stock in connection with
roll-back plan (4,034,896) (10,087) 10,087
Net loss for the year - - -
Balance
January 31, 1998 6,487,172 16,218 2,973,169
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(page 2 of 2)
<TABLE>
<CAPTION>
Deficit Accumulated Total
During the Stockholders'
Development Stage Equity (Deficit)
<S> <C> <C>
Issuance of WAZCO common
stock, May 14, 1992 - 205,469
Net loss for the period (9,889) (9,889)
Balance, January 31, 1993 (9,889) 195,580
Issuance of GWZ common
stock, April 26, 1993 - 15,000
Net income for the year 86,655 86,655
Balance, January 31, 1994 76,766 297,235
Net loss for the year (30,797) (30,797)
Balance, January 31, 1995 45,969 266,438
Issuance of Heritage Gold
Mines common stock,
July 21, 1995, at par
($.001 per share) - 310
Issuance of WAZCO common
stock for legal services - 735
Net loss for the year (355,165) (355,165)
Balance, January 31, 1996 (309,196) (87,682)
Net effect on common stock
to account for reverse
acquisition - -
Issuance of common stock in
connection with the
Reorganization,
March 6, 1996 - 1,713,413
Issuance of common stock - 631,975
Conversion of debt to
common stock - 141,885
Issuance of common stock
for compensation - 24,000
Contribution of
compensation by
stockholders - 131,600
Net loss for the year (1,378,917) (1,378,917)
Balance,
January 31, 1997 (1,688,113) 1,176,274
Issuance of
common stock - 125,000
Redemption of common
stock in connection with
roll-back plan - -
Net loss for the year (1,089,304) (1,089,304)
Balance
January 31, 1998 (2,777,417) 211,970
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
Year ended Year ended (May 14, 1992)
January 31, January 31, through
1998 1997 January 31, 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (1,089,304) (1,378,917) (2,777,417)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 61,501 75,505 213,169
Common stock issued for
services - 24,000 25,045
Stockholders' compensation
contributed to capital - 131,600 131,600
Convertible debentures
and notes payable issued
for services including
$41,000 to related parties101,000 - 101,000
Changes in operating assets and liabilities:
Other current assets 6,755 15,346 (1,500)
Accounts payable, accrued
expenses and other
liabilities 111,151 213,483 520,530
Net cash used in operating
activities (808,897) (918,983) (1,787,573)
Cash flows from investing activities:
Purchase of property and
equipment (47,846) (107,738) (242,644)
Mine development costs (7,209) (847,526) (1,230,583)
Construction in progress (9,034) (124,037) (293,006)
Bushmaster deferred
acquisition costs (135,503) - (135,503)
(Increase) decrease in
other assets 5,820 3,000 (39,518)
Net cash used in investing
activities (193,772) (1,076,301) (1,941,254)
Cash flows from financing activities:
Issuance of common stock
for cash 125,000 631,975 869,475
Proceeds from notes
payable to and advances
from related parties 109,700 716,323 1,494,200
Proceeds from convertible
and other notes payable 75,000 625,000 736,640
Proceeds from convertible
debentures, including
related parties of
$215,000 761,000 - 761,000
Repayment of notes
payable and long-term
debt (5,780) (479) (54,659)
Repayment of notes payable
to and advances from
related parties (20,700) - (35,200)
Net cash provided by
financing activities: 1,044,220 1,972,819 3,771,456
Net increase in cash
and cash equivalents
for the year 41,551 (22,465) 42,629
Cash and cash equivalents
beginning of year 1,078 23,543 -
Cash and cash equivalents
end of year 42,629 1,078 42,629
Supplemental schedule of
noncash investing and
financing activities:
Stock issued for services - 24,000 25,045
Stockholders' compensation
contributed to capital - 131,600 131,600
Equipment exchanged for
mining claims - - 15,000
Note payable issued to
related party for
property, equipment and
mine development costs - - 327,000
Notes payable issued for
property and equipment - 31,694 106,094
Notes payable converted
to common stock - 141,885 141,885
Stock issued for
subscriptions
receivable - - 127,500
Stock issued for
equipment - - 92,969
Notes payable exchanged for
convertible debentures, all
involving related parties89,000 - 89,000
Accrued interest capitalized
on notes payable 33,119 - 33,119
Issuance of stock
in connection with the
Reorganization - 1,713,413 1,713,413
Common stock exchanged for
contingent notes payable - - -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HERITAGE MINES, LTD.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Heritage Mines, Ltd.
Heritage Mines, Ltd., ("the Company" or "Heritage") was
incorporated under the laws of the State of Colorado on January 19,
1995. On March 6, 1996, Heritage Mines, Ltd. acquired all the
outstanding shares of Heritage Gold Mines, Inc. Because Heritage
Mines, Ltd. was a non-operating shell, and considering that the
former stockholders of Heritage Gold Mines, Inc. controlled Heritage
Mines, Ltd. after the acquisition, this business combination was ac-
counted for as a reverse acquisition.
Prior to its merger with Heritage Gold Mines, Inc., Heritage Mines,
Ltd. had no full time employees, owned no real property and was
formed for the purpose of seeking out business opportunities. Under
the purchase method, the $125,000 goodwill generated by the alloca-
tion of the purchase price (mainly acquisition expenses) was complete-
ly amortized and is included in general and administrative expenses in
the fiscal 1997 Statement of Operations.
In connection with the merger with Heritage Mines, Ltd., Heritage
Gold Mines, Inc. acquired 100% of the stock of WAZCO, Inc. and
GWZ Management Company, Inc. from the common stockholders,
and several notes payable to stockholders and related parties were
contributed to capital (the "Reorganization") (Note 7). The exchange
of shares between the companies under common control was
accounted in a manner similar to a pooling of interests.
Description of Business
The Company is developing the business to mine, mill and refine gold
ore from its unpatented mining claims. Final product will consist of
dore bullion bars and gold concentrates.
Once in production, the 80% fine dore gold bars will be recovered
and refined by the Company from its own free gold on site. The
concentrates, after the free gold and the Company production of 80%
fine dore gold bars, will be further refined under contract with outside
independent processors and refiners into 99.99% pure gold bullion
bars, which are then sold by the Company throughout recognized
outlets into the readily available domestic and international gold
market.
Development Stage
From its inception (considered to be May 14, 1992 for the purpose of
these consolidated financial statements), to January 31, 1998, the
Company has been in the development stage. The Company has
concentrated its activities to acquire, explore, claim and permit
mineral properties, acquire, repair, retrofit and bring mining
equipment to its intended use, develop the mineral properties to get
them ready for operations and to raise capital to finance the activities
described above. From inception through January 31, 1998, there
have been no active mining operations, although small test runs
generated minimal revenues.
Going Concern
The Company has incurred operating losses from inception through
January 31, 1998, has an accumulated deficit of $2,777,417, and
negative working capital of $2,023,974. The Company's cash during
fiscal 1998 was provided from the issuance of 50,000 shares of
common stock and issuance of notes and convertible debentures
payable to related parties and others. Management expects that the
Company's cash expenditures for the fiscal year ended January 31,
1999, will not be less than $600,000. Larger expenditures may be
incurred based on the Company's development projects and available
cash resources from operating cash flow and/or from additional
financing.
In order to continue operating and to start any significant development
projects, the Company will require additional financing. The
Company is in discussions with several different parties to obtain debt
and/or equity financing. However, there can be no assurances that
additional funds can be raised. No adjustments have been made to the
accompanying financial statements to provide for this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Heritage
Mines, Ltd. and its wholly owned subsidiaries. All significant inter-
company balances and transactions have been eliminated.
Management's Estimates
In conformity with generally accepted accounting principles, the
preparation of the financial statements requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions that may be undertaken in the future, actual results may
ultimately differ from these estimates.
Cash and Cash Equivalents and Supplemental Cash Flow Information
Cash and cash equivalents consist of all cash balances and highly
liquid investments with an initial maturity of three months or less.
Income taxes and interest paid for all periods presented were not
significant.
Fair Value of Financial Instruments
The carrying value of financial instruments included in current assets
and liabilities approximates fair value because of their short maturity.
The carrying value of long-term debt approximates fair value since
these instruments bear rates consistent with current market interest
rates.
Inventories
It is the Company's policy to state ore and in-process inventories and
materials and supplies at the lower of average cost or net realizable
value. Precious metals are stated at market value. Because there
were no active operations, there was no inventory at January 31,
1998.
Property, Plant, Equipment and Mine Development Costs
Expenditures for new property, plant and equipment or expenditures
which extend the useful lives of existing assets are capitalized and
depreciated using the straight-line method at rates sufficient to
depreciate such costs over their estimated productive lives, which
range from five to ten years.
Mineral exploration costs are expensed as incurred. When it has been
determined that a mineral property can be economically developed,
the costs incurred to develop such property, including the costs to
further delineate the ore body and remove overburden to initially
expose the ore body, are capitalized. Such costs and estimated future
development costs will be amortized using a unit-of-production
method over the estimated life of the ore body. No amortization was
recorded for all years presented as there have been no active mining
operations from inception to January 31, 1998.
In accordance with SFAS 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of," long-
lived assets held and used by the Company, including Bushmaster
deferred acquisition costs, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of these assets may not be recoverable. If the fair value of the assets
is less than the carrying amount of the asset, a loss is recognized for
the difference.
Interest expense allocable to the cost of developing mining properties
and to constructing new facilities is capitalized until operations com-
mence. Interest capitalized for all periods presented was insignificant.
Expenditures for maintenance and repairs are charged to expense as
incurred.
Mining Operations
Mining revenues are recognized upon passage of title of the gold. In
general, mining costs are charged to operations as incurred.
Estimated future reclamation and mine closure costs are based princi-
pally on legal and regulatory requirements and are accrued and
charged over the expected operating lives of the Company's mines
using a unit-of-production method. No costs have been accrued to
date because there have been no active mining operations from
inception to January 31, 1998.
Income Taxes
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the recognition of
deferred tax assets and liabilities for the expected future tax conse-
quences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement
and the tax basis of assets and liabilities using enacted rates in effect
for the year in which the differences are expected to reverse. Valua-
tion allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Issuance of Stock for Services
Shares of the Company's common stock issued for services are
recorded in accordance with Accounting Principles Board Opinion No.
16, "Business Combinations", and Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation
("SFAS 123"), at the fair market value of the stock issued or the fair
market value of the services provided, whichever value is the more
clearly evident.
Stock Compensation Plan
SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at
fair value. The Company has elected to continue accounting for
stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the
grant over the exercise price. In accordance with the requirements of
SFAS No. 123, the Company provides pro forma disclosure of net
income (loss) and income (loss) per share as if the fair value method
under the Statement had been applied.
Net Loss per Common Share
The Company adopted SFAS No. 128, "Earnings per Share," in fiscal
1998. This Statement requires the presentation of both basic net
income (loss) per share and diluted net income (loss) per share in the
financial statements.
Basic net loss per common share is computed by dividing net loss by
the weighted average number of outstanding common shares during
the periods presented. For purposes of SFAS No. 128, basic loss per
share and diluted loss per share are the same amount as the impact of
additional common shares that might have been issued under the
Company's stock option plan, warrants, stock appreciation rights and
convertible debt would be anti-dilutive.
Reclassification
Certain prior period amounts have been reclassified to conform with
the current year presentation.
3. PROPERTY, EQUIPMENT AND MINE DEVELOPMENT
AND MINING CLAIMS
The following is a breakdown by asset classification:
<TABLE>
<CAPTION>
January 31, 1998
<S> <C>
Mine equipment 377,195
Mine development 1,230,583
Construction in progress 620,006
Office furniture
and equipment 47,846
2,275,630
Less accumulated
depreciation (211,502)
TOTAL 2,064,128
</TABLE>
<PAGE>
The significant components of mine development costs as of January
31, 1998, are as follows:
<TABLE>
<CAPTION>
January 31, 1998
<S> <C>
Mine payroll 542,701
Construction materials
and supplies 211,218
Contractor fees 183,837
Roads 136,542
Fuel and electric 82,180
Equipment rent, maintenance
and other costs 74,105
TOTAL 1,230,583
</TABLE>
The Company's facilities, deposits, and claims are located in the
Knownothing Creek Mining District at the Forks of Salmon in North-
ern California. The Company pays annual fees of a nominal amount
to the Federal Bureau of Land Management for the rights to use such
land to develop and extract minerals. At January 31, 1998, there are
thirty-one claims in various stages of exploration and development,
valued at cost of $35,000.
Mine development costs are capitalized to the extent they are recover-
able from future mining operations, assuming the Company will
continue as a going concern. The analysis of cost recovery is based
on estimated ore reserves that are considered to be economically
recoverable. Because of the inherent uncertainties surrounding the
determination of such estimates, it is possible that estimated reserves
may change, and the mine development costs may not be entirely
recoverable.
Construction in progress consists of a mill and its ancillary facilities,
which are connected by Company-improved roads to various claims
and operational mining locations. The mill operation includes
crushing, grinding, separation shaker screen and concentration
equipment, and a furnace house, saw mill house, and dynamite
storage house.
4. BUSHMASTER MINING, INC., DEFERRED ACQUISITION
COSTS.
During the fiscal year 1998, the Company's Board of Directors
authorized management to proceed with the acquisition from the
Company's President of his one-third interest in Bushmaster Mining,
Inc. (Bushmaster), a Guyana S. A. joint stock company. Bushmaster,
which is also in the development stage, has the gold mining rights for
the concessions at the Million Mountain Project located in Guyana S.
A. Preliminary terms approved by the Board are summarized as
follows:
1. Consideration for acquisition of the one-third interest from
the Company's President would be 1,100,000 shares of the
Company's common stock that would be issued upon commencement
of commercial gold production and $200,000 cash to be paid one-half
upon completion of a definition drilling program and one-half upon
commencement of commercial production.
2. The Company would provide a working capital loan of
$50,000 to Bushmaster to be secured by a pledge of one-third of the
issued stock of Bushmaster and to be repaid on a priority basis from
operating cash flow of Bushmaster.
3. The Company would provide development financing of
$2,000,000 to Bushmaster following successful completion of due
diligence and receipt by the Company of additional financing in an
amount not less than $2,500,000. The development loan would be
secured by all assets of Bushmaster.
4. The Company would execute a management agreement
with Bushmaster whereby the Company will agree to manage the
business operations of Bushmaster for a management fee equal to the
Company's costs in providing such management.
In connection with the proposed acquisition and to further
development of the Project, the Company provided financing for a
drilling program and advanced certain operating funds to Bushmaster
during the fourth quarter of fiscal 1998. These costs are reflected as
Bushmaster deferred acquisition costs on the consolidated balance
sheet. While the Company and its President intend to move forward
with the acquisition, consummation of the acquisition and recovery of
the deferred acquisition costs are dependent on the Company's ability
to obtain additional financing and reaching a definitive agreement with
the President.
5. RESTRICTED CASH
As of January 31, 1998, the Company had $17,880 in restricted cash
to serve as collateral for several U.S. Forest Service reclamation
bonds. The bonds are required to insure reclamation and stabilization
of surface resources, and are subject to yearly changes in the
Company's operations and costs of reclamation and erosion control.
6. NOTES PAYABLE, CONVERTIBLE DEBT AND LONG-
TERM DEBT
Notes Payable
Notes payable includes demand notes at 10% interest to four
individuals with an aggregate principal balance of $119,758 at January
31, 1998 (including $69,513 to a related party). After making
demand for payment during fiscal 1998, the note terms were
renegotiated whereby the notes, including accrued interest, were due
October 31, 1997, and existing unpaid interest was added to the note
balances. The notes are secured by certain mining assets of the
Company and are guaranteed by a principal stockholder and former
director of the Company. The notes were not paid on October 31,
1997 because of the lack of funding and are currently past due. The
Company agreed to issue the borrowers 59,879 of its Class A
warrants to delay any legal action for non-payment on or before
January 31, 1998. The Class A warrants were issued subsequent to
January 31, 1998. In March, 1998, the borrowers filed a judgement
in an Illinois Circuit Court seeking payment of amounts due plus
attorney fees and costs. The Company does not dispute the amounts
due under the notes and intends to satisfy these obligations when and
if additional financing is obtained.
During the fiscal year 1998, the Company reached settlement with a
former officer that included the issuance of an unsecured promissory
note to the former officer of $26,000. The note is non-interest
bearing and is due in full on its first anniversary (September 26,
1998) or within thirty days of the Company's receipt of funds in the
amount of not less than $3,000,000 from its contemplated equity
offering, whichever is sooner. This note is included in notes payable
in the accompanying consolidated balance sheet.
Long-term Debt
Long-term debt consists of 8.5% notes payable to a bank with a
remaining principal balance of $25,435, and have a combined monthly
payment of $649, including interest. The notes which are
collateralized by equipment mature on December 15, 2001. The
current portion of the notes amounted to $7,230 at January 31, 1998.
Convertible Note Payable
The convertible note with a principal balance of $600,000 at January
31, 1998 is payable to an individual and bears an interest rate of 10%.
The note is convertible into the Company's common stock at $1.06
per share and is secured by a deed of trust on one of the Company's
mining claims and by certain other Company assets and production
from mining claims. Certain note terms were renegotiated during
fiscal 1998 whereby the maturity date of October 30, 1997 for
payment of principal and interest was extended to June 1, 1998. In
exchange for the extension, the note holder is entitled to an additional
100,000 shares of the Company's common stock if the note is not
paid in full on or before June 1, 1998. Due to the redemption of
certain Company stock during the year, the conversion price was
reduced from $1.25 to $1.06 per share.
Convertible Debentures
On April 28, 1997, the Company commenced a private placement
offering of 15% convertible debentures intended to raise between
$500,000 and $1,000,000 of bridge financing. As of January 31,
1998, $925,000 of the debentures had been funded. The debentures
are due twenty-four months after date of issue and interest accrues
from one year from the date of issue, or until redemption or
conversion, if earlier. Thereafter, until maturity, interest will be paid
quarterly. The debentures can be redeemed at the option of the
Company at a price equal to 100% of the original purchase price.
The debenture holder has the right, at any time six months following
date of issuance to convert, in whole or part, into common stock of
the Company. The conversion price is $1.25 per share until the first
anniversary date of the debenture and thereafter is $2.50 per share
(see Note 11). All attachable assets of the Company secure the
debentures.
If any Events of Default (Default) occur as specified in the debenture
agreement, debenture holders may, so long as the condition exists,
declare the entire principal and accrued interest thereon immediately
due and payable, by notice to the Company. As of January 31, 1998,
the Company was in technical Default of paragraph 4(F) of the
agreement that required the Company to obtain additional working
capital (exclusive of working capital obtained through the sale of the
debentures) of not less than $2,000,000 by January 31, 1998. This
additional working capital has not been obtained. Although no
debenture holders have notified the Company of their intent to
demand payment of principal and interest, the debentures have been
classified as a current liability in the accompanying consolidated
balance sheet because of the Default.
7. STOCKHOLDERS' EQUITY
Share Redemption Agreement and Contingent Promissory Notes
In connection with a Share Redemption Agreement (Agreement) dated
May 30, 1997, the Company reacquired 4,034,896 shares of its
common stock from a group of its founding shareholders, thereby
reducing the number of issued and outstanding shares from
10,522,068 to 6,487,172. The shares were reacquired in exchange
for the issuance of contingent promissory notes with an aggregate base
principal value of $8,069,792 (equal to $2.00 per common share
redeemed). The notes which are non-interest bearing are convertible
at any time, at the option of the Company, into newly issued shares of
common stock. To the extent not converted by the Company, the
notes are payable at the rate of $2.00 per share purchased for each
500,000 ounces of proven/probable gold reserves discovered on the
Bowerman Project within five years. No payments are due under the
notes unless a minimum of 500,000 ounces of proven/probable gold
reserves are discovered at the Bowerman Project within five years
from the date of reacquisition of the shares.
The number of shares to be issued upon conversion is determined by
dividing the adjusted principal amount of the notes by an amount
equal to 75% of the market price of the common stock of the
Company as of the conversion date. The adjusted principal balance of
the note is calculated by multiplying the base principal amount of the
note by a fraction, the numerator of which is the number of ounces of
proven/probable gold reserves and the denominator is 500,000.
In connection with the reacquired common shares, the Company
considered its existing financial condition and the limited trading of its
stock and assigned a nominal value to the redeemed stock. In
reaching this decision, Company management also considered the
contingent nature of the notes and the uncertainty as to the amount, if
any, of payments that might eventually be due. The Company
concluded that, at this time, no value should be ascribed to the
contingent notes or redeemed stock in the accompanying consolidated
balance sheet. It is currently management's intent to cause the
contingent notes to be converted to common stock if the threshold of
500,000 ounces of proven/probable gold reserves is reached on the
Bowerman Project within the five-year period.
Phantom Stock Appreciation Agreements
During the quarter ending October 31, 1997, the Company entered
into settlement agreements with two former officers that included the
issuance of phantom stock contracts that provide the former officers
with the right to the appreciation, if any, on an aggregate 240,000
shares of the Company's common stock above a strike price of $2.00
per share (see Note 11). Appreciation rights have been granted on
160,000 common shares with the remaining rights to be vested over a
two-year period. The rights are exercisable for a period of five years.
If the grantee decides to exercise his rights, the appreciation value
would be paid in shares of the Company's common stock.
Reorganization
Pursuant to the Stock Purchase and Exchange Agreement between
Heritage and Heritage Gold Mines (the "Acquisition"), which was
consummated on March 6, 1996, (i) Heritage Gold Mines'
stockholders received 7,400,000 Heritage common shares in exchange
for all of the outstanding shares of Heritage Gold Mines; (ii) Heritage
Acquisition Corp. ("Heritage Acquisition"), a former Heritage Gold
Mines stockholder, re-contributed 934,000 of its Heritage common
shares; (iii) Heritage issued 100,000 common shares to Heritage
Acquisition in exchange for the assignment by Heritage Acquisition of
a $1,000,000 Revolving Promissory Note due from Heritage Gold
Mines. In connection with the Reorganization, the total number of
issued and outstanding shares increased by 6,566,000, from 3,434,000
at January 31, 1996 to 10,000,000 at March 6, 1996.
In order to reflect the reverse acquisition (Note 1), the Statement of
Stockholders' Equity was adjusted by 3,083,265 common shares to
reconcile the January 31, 1996 Heritage Gold Mines common shares
of 350,735 to Heritage's 3,434,000 outstanding common shares on
that date.
Concurrent with and related to the Acquisition, certain obligations and
receivables of the Company were contributed to capital as follows:
<TABLE>
<CAPTION>
<S> <C>
$1,000,000 note payable, plus accrued
interest of $5,026, due to Heritage
Acquisition, $323,000 of which was
outstanding at January 31, 1996, and
assigned to Heritage on March 6, 1996,
was converted to 598,998 common shares
as part of the 6,566,000 newly issued
Acquisition shares. 1,005,026
$353,000 note payable, plus accrued
interest of $40,387, due to a
stockholder was contributed to
capital. 393,387
Non-interest bearing advance due to a
related party was assumed by a
stockholder and contributed to
capital. 250,000
Amount payable to a stockholder for
legal fees was assumed by a stockholder
and contributed to capital. 50,000
Non-interest bearing advance due to a
former stockholder was assumed by a
stockholder and contributed to capital.30,000
Subscriptions receivable settled as part
of the Reorganization. (15,000)
1,713,413
</TABLE>
Private Placements
During the current year, the Company issued 50,000 common shares
at a price of $2.50 per share for a total of $125,000.
During the year ended January 31, 1997, and pursuant to a private
placement offering, 293,125 shares of the Company's common stock
were issued at prices ranging from $2.00 to $2.50 per share for a
total of $631,975.
Convertible Debt
In June 1996, the Company issued a sixty-day $100,000 10% convert-
ible note payable to an individual. In August 1996, the note was
converted into 150,000 shares of the Company's common stock at an
approximate price of $0.667 per share.
In May, 1996, the Company received a $40,000 advance from an
officer of the Company, bearing interest at 8%. In December, 1996,
the advance plus accrued interest of $1,885 was converted into 20,943
shares of the Company's common stock at an approximate price of
$2.00 per share.
Stock Issued in Lieu of Compensation
In July, 1996, an officer of the Company converted $24,000 in
accrued compensation into 8,000 shares of the Company's common
stock at a conversion price of $3.00 per share.
Executive Compensation Contributed to Capital
During the year ended January 31, 1997, three officers of the Compa-
ny, who are also stockholders, contributed $131,600 in accrued com-
pensation to capital.
Preferred Stock
The Company is authorized to issue up to 10,000,000 shares of its no
par value preferred stock. The preferred stock may be issued in
series, from time to time, with such designations, rights, preferences,
and limitations as the Board of Directors may determine by resolution.
As of January 31, 1998, no shares of preferred stock were issued or
outstanding.
Warrants
During the year ended January 31, 1995, the Company issued
2,695,000 each of Class A and Class B Warrants (the "Warrants").
The Class B Warrants were canceled in January, 1996, in connection
with the Acquisition. 1,500 and 44,000 Class A Warrants were
issued during the year ended January 31, 1998 and 1997. Each Class
A Warrant entitles the holder to purchase one share of the Company's
common stock at an exercise price of $2.00 per share. The Warrants
are exercisable and expire on December 31, 1999. No Warrants have
been exercised.
The Company reserves the right to extend the expiration date or
reduce the exercise price of the Warrants upon giving five days
notice. The Warrants can only be exercised when the shares
underlying the Warrants are registered.
Stock Option Plan
On November 21, 1997, the Company's shareholders approved the
adoption of the 1997 Stock Option Plan (the Plan). The Plan
authorizes the granting of incentive and non-statutory stock options,
and stock appreciation rights relating to certain non-statutory stock
options, to eligible employees, directors and consultants. Up to
1,500,000 shares of the Company's common stock may be issued
under the Plan.
The exercise price of any incentive stock options shall not be less than
the fair market value (FMV) of the common stock at date of grant
(not less than 110% of the FMV for over 10% shareholders). The
exercise price of non-statutory options must not be less than 85% of
FMV of the common stock on date of grant. The options are
exercisable over ten and five years for incentive and non-statutory
options and vest in increments that may be determined at the date of
grant. The aggregate FMV of incentive stock options exercisable by
any optionee during any calendar year may not exceed $100,000.
During the fiscal year ending January 31, 1998, the Board of
Directors granted incentive options under the Plan totaling 1,035,000
shares at an option price of $1.67 per share to directors and officers
of the Company. The vesting dates of these options range from
immediate to five years. At January 31, 1998, options for 110,000
common shares were vested, none of which had been exercised.
Subsequent to January 31, 1998, the Company's Board of Directors in
recognition of the significant drop in market price of the Company's
common stock, reduced the option price to $.75 per share (see Note
11).
During the year ended January 31, 1997, the Company's Board of
Directors approved the adoption of the 1996 Stock Option Plan,
subject to the ratification by the Company's shareholders, and granted
options to certain former officers of the Company. This plan was
never effective as it was not submitted to the Company's shareholders
for approval, and option agreements had not been issued to the former
officers.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company
had accounted for its stock option plan under the fair value based
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for the year
ended January 31, 1998: risk-free interest rate of 6.2%, no dividend,
volatility factor of the expected market price of the Company's
common stock of 242%, and an expected weighted average life of the
options of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting or
trading restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, the
existing models do not necessarily provide a reliable single measure of
the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
pro forma information for the year ended January 31, 1998, is as
follows:
Pro forma net loss - $ (1,132,304)
Pro forma net loss per common share - $ (0.14)
8. RELATED PARTY TRANSACTIONS
In addition to related party transactions disclosed elsewhere in these
consolidated financial statements, the following are other significant
related party transactions:
a. Legal expense for the fiscal year 1998 includes $45,200
for services provided by the law firm of a Company director.
Included in accounts payable at January 31, 1998 is $28,300 due to
the law firm.
b. Accounts payable and accrued expenses and other
liabilities in the consolidated balance sheet includes amounts due other
related parties of $63,500 and $63,850, respectively.
c. A stockholder who provided legal services to the Company
received 735 shares of the Company's common stock for legal
services provided during the year ended January 31, 1996. Legal
expense in connection with services rendered by this individual was
$2,666, $949, and $56,815 for the years ended January 31, 1998,
1997 and from inception through January 31, 1998, respectively.
$50,000 in accrued legal fees due to this individual as of January 31,
1996 was assumed by a stockholder, and contributed to capital during
the year (Note 7).
d. Interest cost incurred to related parties was $34,100,
$12,475, and $89,755 for the years ended January 31, 1998, 1997,
and from inception through January 31, 1998, respectively.
9. INCOME TAXES
The Company and subsidiaries have incurred operating losses for all
periods presented. As a result, no income tax expense has been
recorded, and the tax benefit of net operating losses is offset by
valuation allowances of the same amount. Since the Reorganization,
Heritage Mines, Ltd. has filed a consolidated tax return with a
January 31 year end.
The components of the net deferred tax asset are as follows for the
years ended January 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net operating loss
carryforward 113,500 47,054
Capitalized costs 810,600 569,563
Subtotal 924,100 616,617
Valuation allowance (924,100) (616,617)
Total -- --
</TABLE>
As of January 31, 1998, the Company had net operating loss carry
forwards available to offset future taxable income of approximately
$333,900, which expire at various times through 2013. For income
tax purposes, only a portion of the net operating loss can be utilized
in any given year if the company that generated the loss has more
than a fifty percent change in ownership in a three year prior period.
Accordingly, there may be limitations on the use of the Company's
net operating loss carryforwards.
10. COMMITMENTS AND CONTINGENCIES
Non-Cancelable Operating Leases
During the fiscal year 1998, the Company moved its corporate
headquarters to Durango, Colorado and signed a new five year
operating lease agreement for office space. The base monthly rent is
$2,950 beginning August 1, 1997 and is adjusted annually based on
the CPI increase, if any. At January 31, 1998, future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Year ended January, 31, Amount
<S> <C>
1999 35,400
2000 35,400
2001 35,400
2002 35,400
2003 17,700
Total 159,300
</TABLE>
In connection with the relocation, the Company negotiated a
settlement with the lessee of its old office space in Newport Beach,
California, and the lease was canceled.
Total rent expense for the years ended January 31, 1998 and 1997,
and from inception through January 31, 1998 was $43,100, $37,771
and $81,402, respectively.
Employment Contracts
Effective as of March 1, 1997, the Company entered into an
employment agreement with its new President and Chief Executive
Officer. It provides for a base salary of $180,000 per year, with 5%
annual increases at each anniversary date, and an annual discretionary
bonus payable in January of each year, in an amount to be determined
by the Board of Directors. The contract is for three years, with two
one-year extension options, and includes an acceleration clause,
making the full amount of the contract due and payable in full, in the
event of the sale or takeover of the Company. The contract also
provides for the grant of options to purchase up to 360,000 shares of
common stock.
Effective May 1, 1997, the Company entered into an employment
agreement with its new Vice President of Operations. The contract
provides for a base salary of $80,000 per year from the effective date
until receipt by the Company of not less than $2.5 million in
additional equity capital. At that time, the base salary is to increase
to $100,000 per year, with an annual increase of 5% at each
anniversary date, and the Company will provide reimbursement for
relocation expenses in an amount not to exceed $10,000. The
contract also provides for an annual discretionary bonus payable in
January of each year, in an amount to be proposed by the President
and approved by the Board of Directors. The contract is for three
years, with two one-year extension options, and includes an
acceleration clause, making the full amount of the contract due and
payable in full, in the event of the sale or takeover of the Company.
The contract also provides for the grant of options to purchase up to
195,000 shares of common stock.
Litigation Settlement
In May 1993, WAZCO, Inc. entered into a joint venture agreement
with Sky Scientific, Inc. ("Sky"), a California corporation, with the
purpose of raising equity to develop its mining operations. In 1994,
Sky issued stock and deposited $220,000 in exchange for the
Company's twelve mining claims. The funds were recorded in other
income in 1994. Other than this transaction, the joint venture was
never consummated and WAZCO, Inc. sued Sky to recover its
claims, and Sky countersued. In March 1996, the litigation was
settled as follows: Sky was given two of the twelve claims, the
remaining ten claims were returned to WAZCO, Inc. and the stock
issued to WAZCO, Inc. was canceled.
11. SUBSEQUENT EVENTS
At its February 19, 1998 Board meeting, the Company's Board of
Directors in recognition of the significant drop in market price of the
Company's common stock subsequent to the granting of the options to
directors and officers during fiscal year 1998, cancelled the 1,035,000
outstanding options previously granted. The Board then granted to
the same directors and officers new options to purchase 1,035,000
common shares at a reduced exercise price of $.75 per share. The
Company has not yet executed individual option agreements reflecting
the reduced exercise price.
The Board of Directors also authorized the Company to complete and
execute financial settlements with two individuals who are currently
directors and shareholders. The settlement arrangement provides for
issuance of phantom stock contracts that give the directors the right to
the appreciation, if any, on shares of the Company's common stock
above a strike price of $.75 per share. One of the directors who also
owns more than 5% of the Company's common stock is to receive the
appreciation on 310,000 common shares to compensate him primarily
for exclusion from the incentive stock options that other directors
have been granted under the 1997 Stock Option Plan, for his
continuing assistance in actively raising funds for the Company and
for assisting in maintaining shareholder relationships. The settlement
arrangement for the other director who has the right to the
appreciation on 30,000 common shares is to compensate him
primarily for reduction of options granted to him under the 1997
Option Plan. If the grantees decide to exercise their rights to
appreciation, the appreciation value would be paid in shares of the
Company's common stock. The Company has not yet executed
individual phantom stock contracts with the two directors.
In connection with phantom stock contracts executed with settlement
agreements with two other former officers during the year ended
January 31, 1998 (see Note. 7), the Board of directors approved a
reduction in strike price from $1.67 per share to $.75 per share. The
Company has not yet executed individual phantom stock contracts
reflecting this change in strike price.
The Board of Directors also authorized the Company, if deemed
appropriate, in order either to improve the financial position of the
Company following receipt of a major capital investment, or in order
to enhance its ability to obtain a major capital investment, to offer
holders of outstanding convertible debentures (see Note 6) the option
of converting their debentures into shares of the Company's common
stock at a conversion price of not less that $.75 per share. This
reduction in option price is currently under consideration in
connection with the additional financing alternatives being discussed
with other parties.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Comiskey & Company, P.C., 2851 S. Parker Road, Suite
1125, Aurora, Colorado 80014-9921, the independent accountant
previously engaged as the principal accountant to audit the Company's
financial statements, was dismissed, effective February 22, 1996.
The report of Comiskey & Company, P.C., on the financial
statements of the Company for the fiscal year ending January 31,
1996, did contain an explanatory paragraph with respect to the
existence of substantial doubt about the Company's ability to continue
as a going concern, but did not contain any other adverse opinion,
disclaimer of opinion or qualification as to uncertainty, audit scope or
accounting principles. The decision to change accountants was
recommended and approved by the board of directors of the Company
and occurred in conjunction with a change in control of the Company.
There were no disagreements with Comiskey & Company,
P.C., at any time, on any matters of accounting principles or
practices, financial statement disclosures, or auditing scope or
procedures.
Effective as of February 22, 1996, the Company engaged new
independent accountants, Raimondo Pettit Group, a Partnership
including Professional Corporations, Union Bank Tower, Suite 1250,
21515 Hawthorne Boulevard, Torrance, California 90503, as the
principal accountants to audit the Company's financial statements.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT.
The names, ages and positions held of the directors and executive
officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions Held
<S> <C> <C>
Gregory B. Sparks 47 President, Chief
Executive Officer
& Director
Douglas L. Drumwright 50 Director,
Chief Financial
Officer
Peter Wilson 44 Director
Gary S. Joiner 48 Director
Robert K. Hanson 57 Director
Timothy M. Sadler 47 Vice President
of Operations
</TABLE>
Gregory B. Sparks has been President and Chief Executive
Officer of the Company since March, 1997. Mr. Sparks, a
Registered Professional Mining Engineer, has held executive and
other senior management positions with companies such as Echo Bay
Mines, Standard Metals Corporation, American Mine Services and
Tenneco Minerals/American Borate. His extensive experience
included prospect evaluations, acquisition negotiations, infrastructure
establishment, environmental consultations and due diligence reviews
of both surface and underground mining of base and precious metals.
Douglas L. Drumwright, has served as a Director of the
Company since March, 1995, and as Chief Financial Officer since
September, 1997. He served as Vice President and Chief Financial
Officer of Homestake Mining Company from 1980-1983. Homestake
is the largest producer of precious metals in the United States,
operating both base and precious metal mining operation domestically
and internationally. While at Homestake, Mr. Drumwright supervised
the placement of substantial equity and pollution control bond
financing, as well as the establishment of revolving credit lines in the
United States and Europe. Since leaving Homestake, Mr.
Drumwright has been actively engaged as a consultant and principal in
various start up and turn around situations. In this connection in the
last five years he has served as CEO of numerous public and private
companies, including Care Enterprises, Inc. (NYSE), Tustin, CA;
Maxum Health Corp. (NASDAQ), Dallas, TX; and United Western
Medical Centers, Santa Anna, CA.
Peter Wilson became a Director of the Company in March,
1995. Mr. Wilson has been involved in the founding and
management of Molson Development Company, a residential real
estate firm; Quicksilver USA, Inc. and Barely Legal, Inc., major
sportswear manufacturers and distributors. In 1989, Mr. Wilson
founded Electrosci, Inc., a California corporation that purchased the
worldwide patents for an electrolytic process. Mr. Wilson graduated
from the University of Southern California with a degree in architec-
ture.
Gary S. Joiner became Secretary and a Director of the
Company in September, 1997. He has also served as legal counsel
for the Company since its formation. He is an officer, director and
shareholder of Frascona, Joiner & Goodman, P.C., a law firm located
in Boulder, Colorado.
Robert K. Hanson became a Director of the Company in
November, 1997. He is currently Chairman of RKH Limited
(financial and business consultants) and Senior Vice President and a
Director of United Tri-Star Resources, Ltd. From 1993 to 1996, Mr.
Hanson was Vice President of Emtech, Ltd. and Executive Director of
Marketing for Energy Device Alliance. From 1989 to 1993, Mr.
Hanson was a Director, President and CEO of Battery Technologies,
Inc., and a Director of Battery Technologies (International) Limited,
Ireland.
Timothy M. Sadler became Vice President of Operations for
the Company in May, 1997. Mr. Sadler is a Registered Professional
Engineer with more than 20 years experience in domestic and
international mining. During the course of his career, he has held
positions in mine operations, engineering, contracting, in addition to
senior management positions. He has been employed by Crystallex
International, Sharon Steel Corporation (Natural Resources Division),
American Mine Services, American Borate Company and Tenneco
Minerals. Mr. Sadler's experience includes project development from
"grass roots" exploration to project commissioning, engineering
design, surface and underground operations, environmental resolution
of "superfund projects", negotiation of mineral leases and joint
venture agreements, and financial analysis of project viability.
The term of office of each person elected as a director will
continue until the next Annual Meeting of Shareholders or until a
successor has been elected and qualified.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation provided by
the Company to its President and Chief Executive Officer for services
rendered in all capacities to the Company during the fiscal years
ended January 31, 1998 and 1997. No other executive officer
received compensation in excess of $100,000 for services rendered in
all capacities to the Company during the fiscal years ended January
31, 1998 and 1997.
<TABLE>
<CAPTION>
Name Year Salary
<S> <C> <C>
Gregory B. Sparks 1998 180,000
James D. Stout 1998 15,000<F2>
1997 95,000<F1>
<FN>
<F1>
Mr. Stout ceased serving as President and CEO of the Company on or
about March 1, 1997.
<F2>
$75,000 was paid in cash and $20,000 was contributed to capital
during the year ended January 31, 1997.
</FN>
</TABLE>
EMPLOYMENT CONTRACTS. Effective as of March 1, 1997,
the Company entered into an employment agreement with Gregory B.
Sparks, its new President and Chief Executive Officer. It provides
for a base salary of $180,000 per year, with 5% annual increases at
each anniversary date, and an annual discretionary bonus payable in
January of each year, in an amount to be determined by the Board of
Directors. The contract is for three years, with two one-year
extension options, and includes an acceleration clause, making the full
amount of the contract due and payable in full, in the event of the sale
or takeover of the Company. The contract also provides for the grant
of options to purchase up to 360,000 shares of common stock.
DIRECTOR COMPENSATION. The Board has approved a cash
compensation plan for non-employee directors' attendance at Board
meetings. Non-employee directors receive $1,000 for meetings
attended in person, but payment of such fees has been waived until
the Company becomes adequately capitalized. Gary Joiner will
receive legal fees of $1,000 per meeting, in lieu of directors fees,
during the period of time in which directors fees are being waived.
Directors are also reimbursed for expenses incurred in attending
Board meetings.
STOCK OPTION PLAN. On November 21, 1997, the Company's
shareholders adopted the 1997 Stock Option Plan. The Plan
authorizes the granting of incentive and non-qualified stock options
and stock appreciation rights relating to certain non-qualified stock
options, to employees, directors and consultants. Up to 1,500,000
shares of the Company's common stock may be issued under the Plan.
As of January 31, 1998, options to purchase a total of 1,035,000
shares of common stock at a purchase price of $1.67 per share were
outstanding under the Plan, including 360,000 options held by
Gregory B. Sparks. A total of 60,000 of Mr. Sparks' outstanding
options were exercisable as of January 31, 1998.
Subsequent to January 31, 1998, the Company's Board of Directors in
recognition of the significant drop in market price of the Company's
common stock subsequent to granting the outstanding options,
canceled the 1,035,000 options. The Board then issued 1,035,000
new options to the same persons at a reduced price of $.75 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT.
As of January 31, 1998, the Company had a total of 6,487,172
shares of its Common Stock issued and outstanding. The following
table sets forth, as of January 31, 1998, the number of shares of
Common Stock owned of record and beneficially by executive
officers, directors and persons who hold five percent (5%) or more of
the outstanding Common Stock of the Company.
<TABLE>
<CAPTION>
Number of Percentage
Shares Owned of Class
Name/Address Beneficially Owned
<S> <C> <C>
Mark Gavard
P. O. Box 1
Forks of Salmon, CA 96031 1,321,650<F2> 20.37%
Peter Wilson<F1>
3334 E. Coast Hwy. #412
Corona del Mar, CA 92625 1,526,645<F3> 23.53%
<F4><F5>
Mark Zane
215 Booker St.
Tonopah, NV 89049 1,163,466 17.93%
Heritage Acquisition Corp
3334 E. Coast Highway #412
Corona del Mar, CA 92625 363,179<F6> 5.60%
Cede & Co.
P. O. Box 20
Bowling Green Station
New York, NY 10004 644,525<F7> 9.94%
Douglas Drumwright<F1>
39 Harbor Ridge Drive
Newport Beach, CA 92660 80,943<F8> 1.25%
Telford Walker
P.O. Box 8083
Newport Beach, CA 92658 445,470<F9> 6.87%
Gregory B. Sparks<F1>
420 Blue Ridge
Durango, CO 81301 500<F10> 0.01%
Timothy M. Sadler<F1>
1401 West 3rd Avenue, #2
Durango, CO 81301 0<F11> 0.00%
Gary S. Joiner
898 Rockway Place
Boulder, CO 80303 33,025<F12> 0.51%
Robert K. Hanson<F1>
90 Adelaide Street, West
Suite 300
Toronto, Ontario
CANADA M5H 3V9 0<F12> 0.00%
M.K. Bunker
23 Corporate Plaza, Suite 135
Newport Beach, CA 92260 390,000 6.01%
All Officers and Directors
as a Group (6 in number) 1,641,113<F3> 25.30%
<FN>
<F1> The person listed is an officer, a director or both, of the
Company.
<F2> Does not include 500,000 shares subject to Class A Warrants
owned which are exercisable at $2.00 per share.
<F3> Includes 363,179 shares owned by Heritage Acquisition
Corporation of which Mr. Wilson, as the principal shareholder of Heritage
Acquisition Corp, may be deemed to be the beneficial owner.
<F4> Includes 1,163,466 shares owned by Mark Zane for which Mr.
Wilson has voting control and may be deemed to be the beneficial owner.
<F5> Does not include 156,000 common shares that would be
obtained upon conversion of convertible debentures.
<F6> Does not include 945,386 shares subject to Class A Warrants
owned which are exercisable at $2.00 per share.
<F7> Does not include 12,750 shares subject to Class A Warrants
owned which are exercisable at $2.00 per share.
<F8> Does not include 30,000 shares subject to Class A Warrants
owned which are exercisable at $2.00 per share, or options to purchase 10,000
shares of common stock that are currently exercisable or 8,000 common shares
that would be obtained upon conversion of convertible debentures.
<F9> Does not include 10,000 shares subject to Class A Warrants
owned which are exercisable at $2.00 per share.
<F10> Does not include options to purchase 60,000 shares of common
stock that are currently exercisable or 40,000 common shares that would be
obtained upon conversion of convertible debentures.
<F11> Does not include options to purchase 20,000 shares of common
stock that are currently exercisable or 8,000 common shares that would be
obtained upon conversion of convertible debentures.
<F12> Does not include options to purchase 10,000 shares of common
stock that are currently exercisable.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Peter Wilson is a Director of the Company. He is also
President and principal shareholder of Heritage Acquisition Corp. On
January 5, 1996, Heritage Acquisition Corp. acquired a controlling
interest in the Company through purchase of 1,282,500 shares of its
issued and outstanding stock, representing approximately 74.69%
thereof. Heritage Acquisition Corp. also acquired 2,165,000 of the
issued and outstanding Class A Warrants, representing approximately
79.04% thereof. Heritage Acquisition Corp. paid a total of $50,000
for the acquisition, of which $25,000 was paid to the sellers of the
securities (who were the former officers, directors and principal
shareholders of the Company), and $25,000 was allocated to fees,
expenses, and costs related to the acquisition.
Heritage Acquisition Corp. acquired a controlling interest in
the Company in anticipation of the subsequent acquisition by the
Company of all of the issued and outstanding stock of Heritage Gold
Mines, Inc., a Nevada corporation. As described herein, the
Company completed the acquisition of Heritage Gold Mines, Inc., on
or about March 6, 1996.
In addition, Heritage Acquisition Corp. has entered into an
agreement to purchase 1,163,466 shares of the Company's Common
Stock from Mr. Mark A. Zane.
During the fiscal year 1998, the Company's Board of Directors
authorized management to proceed with the acquisition from Mr.
Gregory B. Sparks, the Company's President and CEO, his one-third
interest in Bushmaster Mining Company (Bushmaster). Consideration
for the acquisition would include issuance of 1,100,000 shares of the
Company's common stock and cash of $200,000. Preliminary terms
of the proposed acquisition are summarized in Note 4 of Notes to the
Consolidated Financial Statements included herein under Item 7.
Financial Statements.
In connection with the proposed acquisition and to further
development of the project, the Company provided financing for a
drilling program and advanced certain operating funds to Bushmaster
aggregating $135,503 during the fourth quarter of fiscal 1998.
Consummation of the proposed transaction and recovery of these
deferred acquisition costs are dependant on the Company's ability to
obtain additional financing and reaching a definitive agreement with
the Company's President.
Effective May 30, 1997, the Company reacquired a total of
4,034,896 of its common stock from Mr. Mark Gavard, a former
director and officer of the Company (1,648,350 common shares), and
Mr. Peter Wilson, a current director of the Company (2,386,546
common shares). In exchange for the common shares, Mr. Gavard
and Mr. Wilson received contingent promissory notes with an
aggregate base principal balance of $3,296,700 and $4,773,092,
respectively. The notes which are non-interest bearing are convertible
at any time, at the option of the Company, into newly issued shares of
common stock. To the extent not converted by the Company, the
notes are payable at the rate of $2.00 per share purchased for each
500,000 ounces of proven/probable gold reserves discovered on the
Bowerman Project within five years. No payments are due under the
notes unless a minimum of 500,000 ounces of proven/probable
reserves are discovered within the five year period.
Subsequent to January 31, 1998, the Board of Directors authorized the
Company to complete and execute a financial settlement with Mr.
Peter Wilson who is a director and owns or controls more than 5% of
the Company's common stock. The purpose of the settlement is to
compensate Mr. Wilson for exclusion from the incentive stock options
that other directors have been granted under the 1997 Stock Option
Plan, for his continuing assistance in actively raising funds for the
Company and for assisting in maintaining shareholder relationships.
The arrangement provides Mr. Wilson with a phantom stock contract
that gives him the right to the appreciation, if any, on 310,000 shares
of the Company's common stock above a strike price of $.75 per
share. If Mr. Wilson decides to exercise his rights to the
appreciation, the appreciation value would be paid in shares of the
Company's common stock. The Company has not yet executed an
individual phantom stock contract with Mr. Wilson.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-KSB.
a. The Exhibits listed below are filed as part of this
Annual Report.
<TABLE>
<CAPTION>
Exhibit No. Document
<S> <C>
3.1 Articles of Incorporation (incorporated by
reference to Form 10-KSB filed with the Securities and Exchange
Commission on behalf of the Company on May 19, 1997)
3.2 Bylaws (incorporated by reference to Form 10-
KSB filed with the Securities and Exchange Commission on behalf of
the Company on May 19, 1997)
4.1 Specimen Class A Warrant Certificate
(incorporated by reference to Form 10-KSB filed with the Securities
and Exchange Commission on behalf of the Company on May 19,
1997)
21 List of Subsidiaries (incorporated by reference to
Form 10-KSB filed with the Securities and Exchange Commission on
behalf of the Company on May 19, 1997)
27 Financial Data Schedule (incorporated by
reference to Form 10-KSB filed with the Securities and Exchange
Commission on behalf of the Company on May 19, 1997)
</TABLE>
b. The Company filed no reports Form 8-K during the last
quarter of its fiscal year ending January 31, 1998.
Signatures
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
HERITAGE MINES, LTD.
By: /s/_______________________________
Gregory B. Sparks
President, CEO and Director
Date: May 19, 1998
By: /s/_______________________________
Douglas L. Drumwright
Chief Financial Officer and
Director
Date: May 19, 1998
By: /s/_______________________________
Peter Wilson
Director
Date: May 19, 1998
By: /s/_______________________________
Gary S. Joiner
Director
Date: May 19, 1998
By: /s/_______________________________
Robert K. Hanson
Director
Date: May 19, 1998
