-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E6acXCKAEjOf9Krv71gwqABpwcMnJ3A5Hrgrwkls9taXHYnyRbMQJaZlpQwYS0E7 t+1j/F+i5bMGK7P3s0eSnA== 0000933157-98-000008.txt : 19981230 0000933157-98-000008.hdr.sgml : 19981230 ACCESSION NUMBER: 0000933157-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL SILVER MINES INC CENTRAL INDEX KEY: 0000933157 STANDARD INDUSTRIAL CLASSIFICATION: METAL MINING [1000] IRS NUMBER: 870306609 STATE OF INCORPORATION: UT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25170 FILM NUMBER: 98776616 BUSINESS ADDRESS: STREET 1: 10220 N NEVADA STREET 2: SUITE 207 CITY: SPOKANE STATE: WA ZIP: 99218 BUSINESS PHONE: 5094663144 MAIL ADDRESS: STREET 1: 10220 N NEVADA STREET 2: STE 230 CITY: SPOKANE STATE: WA ZIP: 99218 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED ROYAL MINES INC DATE OF NAME CHANGE: 19950908 10-K 1 1 ================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______ Commission file number 0-25170 ROYAL SILVER MINES, INC. (Exact name of Registrant as specified in its charter) Utah 87-0306609 (State of Incorporation) (I.R.S. Employer I.D.#) Address of principal offices: 1010 Ironwood Drive, Suite 105 Coeur, d'Alene, Idaho 83814 Registrant's Telephone No.: (208) 769-7340 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value, $0.01 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES [ x ] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [ x ] As of December 15, 1998 the aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the bid and ask price ($0.06) on such date was $841,025. As of December 15, 1998, the Registrant had outstanding 19,932,565 shares of common stock ($0.01 par value). An index of the documents incorporated herein by reference and/or annexed as exhibits to the signed originals of this report appears beginning on page 84. ===================================================================== 2 TABLE OF CONTENTS ITEM NUMBER PAGE AND CAPTION NUMBER PART I ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 3 ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 24 ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . 30 ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 30 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . 31 ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . . . 31 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . 32 ITEM 8. Financial Statements and Supplementary Data . . . . . . 35 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 74 PART III ITEM 10. Directors and Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . 74 ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . 77 ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 80 ITEM 13. Certain Relationships and Related Transaction . . . . . 82 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K . . . . . . . . . . . . . . . . 83 3 PART I ITEM 1. BUSINESS GENERAL Royal Silver Mines, Inc. (the "Company"), formerly known as Consolidated Royal Mines, Inc., and also, Royal Minerals, Inc., is a U.S. mineral resource company incorporated under the laws of the State of Utah. The Company is engaged in the business of acquiring and exploring mineral properties containing silver, gold, copper, and other mineralization, with a primary emphasis on silver. Prior to September 30, 1995, the Company acquired all of the outstanding securities of Celebration Mining Company ("Celebration"), a development stage company, pursuant to a share exchange agreement and plan of reorganization ("Reorganization"). Prior to the Reorganization, Celebration was a non-public, closely held Washington corporation. It was formed in February 1994 to identify and acquire mineral properties for subsequent exploration and development, if warranted, through equity financing and joint venture arrangements. The Reorganization was accounted for as a purchase by Celebration of the Company. Celebration was treated as the acquiring company for financial reporting purposes because its shareholders constituted greater than 50% of the combined shareholder group at the time of reorganization. In conformity with generally accepted accounting principles and the Company's accounting policy, Celebration is recognized as the predecessor entity. Consequently, Celebration's assets and liabilities were not adjusted in the accompanying financial statements. On the other hand, for purposes of reporting statutory and corporate authority, the Company is deemed to be the acquiring corporation, and Celebration is now a wholly-owned subsidiary of the Company. Prior to the Reorganization, the Company had been a majority- owned subsidiary of Centurion Mines Corporation ("Centurion"). Currently, Centurion owns approximate 1% of the outstanding shares of Common Stock of the Company. The Company operates its business as an exploration stage company, meaning that it intends to receive income from property sales, joint ventures, or other business arrangements with larger companies, rather than developing and placing its properties into production on its own. The Company currently has no revenues. At September 30, 1998, the Company's accumulated deficit was $7,466,096. Regarding its losses from operations, the Company cannot assure that it will be able to carry out its plans as budgeted without additional operating capital. At September 30, 1998, the Company had a cash balance of $3,147 and working capital of $303,600 as compared to a cash balance of $594,577 and working capital of $671,355 at September 30, 1997. The Company will need additional capital resources to continue operations and has reduced monthly expenditures to approximately $4,000 per month. The industry took a tremendous and very significant downturn in 1997 and 1998 primarily a result of the fall-out from the Bre-X scandal which resulted in substantial losses for investors and has placed a deep chill upon the ability of exploration companies to 4 raise capital. Secondly, the impact of a steadily declining gold price through 1997 placed added downward pressure on prices of mining shares in general. Further, as the Asian crises unfolded in 1998, prices for copper, lead, zinc and silver plunged to multi-year lows. As a whole, the entire industry has suffered an unprecedented decline. Given this unprecedented decline in both metal prices and the entire exploration sector, the directors of the Company have been forced to adopt a major austerity program. The Company closed its office in Spokane and laid off all of its remaining employees as of August 1998. The two principal officers of the Company have continued to work without cash compensation, and the office has been relocated to Coeur d'Alene, Idaho, where the Company is sub-letting space from one of its officers for $200 a month. The Company intends to continue to operate at a very low expenditure level until such time as recovery in the exploration sector becomes evident. The Company will continue to eschew any long term debt in order to protect the long term viability of the Company's assets. During the twelve months ended September 30, 1998, the Company placed 4,923,333 shares of its common stock for $344,500 in cash and $700,000 in notes receivable. However, in the current depressed market, it is believed that future placements will be much more difficult, if not impossible to complete. As discussed in greater detail below in the section entitled "Strategy and Business Plan" a substantial portion of the Company's assets consist of investments in mineral properties for which additional exploration is required to determine if they contain mineralization that is economically recoverable. The realization of these investments is contingent to a large extent upon the success of the Company's property transactions as a whole, the existence of economically recoverable metals and other mineralized material, the ability of the Company to obtain financing or make other arrangements for development, and upon future profitable production. The likelihood and extent to which these contingencies may be material is uncertain, and the Company cannot assure that the outcome of these uncertain events will not have a material impact and result in adverse consequences to the Company. If the Company does not receive suitable financing or funds from its present or future business arrangements to develop these properties, and continues to suffer losses from operations, the Company may have to cease operations entirely. HISTORY The Company was incorporated in Utah on April 6, 1969, as Royal Resources, Inc. for the purpose of acquiring and developing mineral properties. The Company changed its name to Royal Minerals, Inc., on January 6, 1983, and became a public company in July 1984. The Company complied with the Securities and Exchange Commission reporting requirements until August 1986, at which time the Company filed Form 15 with the Commission and suspended further reporting requirements. On January 31, 1992, Centurion owned 82.3% of the Company's common stock. See "Centurion's Acquisition and Control of the Company." Also on January 31, 1992, the Company shareholders authorized a 5-for-1 reverse 5 stock split, and on March 4, 1994, authorized a 4-for-1 reverse stock split of the common stock of the Company. On March 17, 1994, the Company changed its name to Consolidated Royal Mines, Inc. On November 22, 1994, the Company filed a registration statement on Form 10 and renewed its reporting requirements, effective January 23, 1995. During the fourth quarter of Fiscal 1995, the Company revised its business plan to concentrate on the acquisition of silver properties. That change in focus prompted Consolidated Royal Mines, Inc. and Celebration Mining Company to implement the Reorganization, which closed on August 8, 1995, and to change the Company's name to Royal Silver Mines, Inc., effective September 18, 1995. STRATEGY AND BUSINESS PLAN The Company believes that control of land and mineral rights is the key ingredient for financial success in the exploration and development phases of the mining business. Previously, the Company had concentrated its main exploration efforts in Idaho's Coeur d'Alene Mining District and to a much lesser extent in the Lakeview Mining District, and Utah's Ashbrook Mining District where the Company owns a 25% interest in the Vipont Mine property. During fiscal 1998, the Company shifted its strategy and toward the acquisition of properties and exploration in Chile, Mexico, and Argentina. The Company does not currently have sufficient capital to carry out its strategy and continue this business plan. The Company's plan of operation for fiscal 1999 is to conserve its resources and protect its assets consistent with the lowest possible level of expenditure. The Board of Directors will continue to evaluate opportunities for the Company, and will seek to pursue opportunities to enhance shareholder value, however, any such opportunities must be viewed in the context of the Company's very limited liquidity, as well as the stated goal of protecting the Company's balance sheet. PRIVATE PLACEMENTS. In July 1995, the Company completed a private placement of 8,700 shares through two Regulation S offerings, both at a price of $2.00 per share, for a total of $17,400. During September 1995, the Company completed a private placement of 179,000 shares of common stock through a domestic offering at a price of $1.50 per share for a total of $241,650 after expenses. During the twelve months ended September 30, 1996, the Company placed 1,949,332 shares of its common stock for $2,958,314 in cash. The Company also issued 406,050 shares of its common stock in lieu of outstanding debt of $570,919, plus accrued interest. The stock was issued at $1.50 per share for a total value of $609,075. On the 30th day of January, 1997, the Company sold to Britannia Holdings Limited ("Britannia"), Channel Islands, 200,000 Units, at $0.75 per Unit or a total of $150,000. The Registrant also granted Britannia an option to purchase an additional 335,000 Units on February 14, 1997 and an additional 800,000 Units on March 3, 1997. Each Unit 6 consists of one share of Common Stock and one warrant to purchase one additional share of Common Stock at $1.25 per share. The Units were issued in reliance upon the transaction exemption afforded by Regulation S, as promulgated by the Securities and Exchange Commission, under the Securities Act of 1933, as amended. Britannia Holdings Limited exercised all of these warrants. On the 14th day of February, 1997, the Registrant sold to Britannia, 335,000 Units, at $0.75 per Unit or a total of $251,250. The Registrant previously granted Britannia an option to purchase an additional 800,000 Units on March 3, 1997. The option exercise date of March 3, 1997 was extended by mutual agreement of the parties to March 24, 1997 and the option was increased to 1,200,000 units. On March 24, 1997, Britannia Holdings exercised its option and purchased 1,600,000 units at $0.75 per unit, for a total of $1,200,000. Each Unit consists of one share of Common Stock and one warrant to purchase one additional share of Common Stock at $1.25 per share. The warrants will expire two years from the date of closing of each transaction. The Units were issued in reliance upon the transaction exemption afforded by Regulation S, as promulgated by the Securities and Exchange Commission, under the Securities Act of 1933, as amended. As of the 19th day of December, 1997, Britannia Holdings Limited had not exercised any warrants. On the 26th day of February, 1997, the Company sold to Louk Jongen, ("Jongen"), Holland, 100,000 Units, at $0.75 per Unit or a total of $75,000. Each Unit consists of one share of Common Stock and one warrant to purchase one additional share of Common Stock at $1.25 per share. The warrants will expire two years from the date of closing. The Units were issued in reliance upon the transaction exemption afforded by Regulation S, as promulgated by the Securities and Exchange Commission, under the Securities Act of 1933, as amended. As of the 6th day of March, 1997, Jongen had not exercised any warrants. On the 5th day of March, 1997, the Company sold to NCL Investments Limited ("NCL"), London, England, 136,000 Units, at $0.75 per Unit or a total of $102,000. Each Unit consists of one share of Common Stock and one warrant to purchase one additional share of Common Stock at $1.25 per share. The warrants will expire two years from the date of closing. The Units were issued in reliance upon the transaction exemption afforded by Regulation S, as promulgated by the Securities and Exchange Commission, under the Securities Act of 1933, as amended. As of the 6th day of March, 1997, NCL had not exercised any warrants. In November 1997, the Company sold 10,000 "restricted" shares to a non-affiliate for $0.75 per share for a total of $7,500, pursuant to Section 4(2) of the Securities Act of 1933, as amended. In April 1998, the Company sold 913,333 "restricted" shares to a director, a major shareholder and a non-affiliated investor at $0.15 per share for a total of $136,999, pursuant to Section 4(2) of the Securities Act of 1933, as amended. 7 In June 1998, the Company sold 3,000,000 "restricted" shares to Pines International for $0.25 per share, payable as $50,000 cash down and a note for $700,000. Subsequent to the fiscal year end, the Company and Pines International negotiated a settlement agreement whereby Pines International returned 2,000,000 shares to the Company and the note was canceled, pursuant to Section 4(2) of the Securities Act of 1933, as amended. COMPETITION. The mining industry is very competitive. There is a high degree of competition to obtain favorable mining properties and suitable mining prospects for drilling, exploration, development and mining operations. The Company encounters competition from a handful of other similarly- situated mining companies in the silver mining industry in connection with the acquisition of properties capable of profitably producing silver and other mineralization. RISK FACTORS. The following risk factors with respect to the Company and its operations may affect its strategy and business plan: 1. Going Concern. The Company's auditors have raised the issue that the Company may not be able to continue as a going concern as a result of net losses; a significant accumulated deficit; and, a significant change in the Company's liquidity. 2. Recent Status as a Public Reporting Company. The Company became a fully reporting public company on January 23, 1995. The Company has no current operating history and is subject to all risks inherent in a developing business enterprise. The likelihood of success of the Company must be considered in light of the problems, expenses, difficulties, complications, and delays frequently encountered in connection with a new business in general and those specific to the natural resource industry and the competitive and regulatory environment in which the Company will operate. 3. Exploration Stage Company. Mineral exploration, particularly for gold and silver, is highly speculative in nature, frequently is nonproductive, and involves many risks, often greater than those involved in the actual mining of mineralization. Such risks can be considerable and may add unexpected expenditures or delays to the Company's plans. There can be no assurance that the Company's mineral exploration activities will be successful or profitable. Once mineralization is discovered, it may take a number of years from the initial phase of drilling until production is possible, during which time the economic feasibility of production may change. A related factor is that exploration stage companies use the evaluation work of professional geologists, geophysicists, and engineers for estimates in determining whether to acquire an interest in property or to commence exploration or development work. These estimates generally rely on scientific estimates and economic assumptions, and in some instances may not be correct, and could result in the expenditure of substantial amounts of money on a property before it can be determined whether or not the property contains economically recoverable mineralization. The 8 economic viability of a property cannot be determined until extensive exploration and development has been conducted and a comprehensive feasibility study performed. The Company currently does not have any such feasibility studies, and has not yet prepared feasibility studies on any of its properties. Moreover, the market prices of any minerals produced are subject to fluctuation, which may negatively affect the economic viability of properties on which expenditures have been made. The Company is not able to determine at present whether or not, or the extent to which, such risks may adversely affect the Company's strategy and business plans. 4. Lack of Revenue. The Company needs additional capital but currently has no revenues. Substantial expenditures are required to establish ore reserves through drilling, to determine metallurgical processes to extract the mineralization from the ore and, in the case of new properties, to construct mining and processing facilities. The Company lacks a constant and continual flow of revenue. The Company currently holds certain royalty interests in several mining properties previously sold, but there is no assurance that the Company will receive royalty payments, or that the Company will otherwise receive adequate funding to be able to finance its exploration activities. The Company is looking for revenue sources on an on-going basis, but there can be no assurance that such sources can be found or that, if available, the terms of such financing will be commercially acceptable to the Company. Because of the Company's need for additional capital to fund its present operations, to complete the acquisition of certain mineral rights, and to provide for further exploration and development, the lack of consistent revenue could be a detrimental factor in the progress of the Company. 5. Realization of Investments in Mineral Properties and Additional Capital Needs. The ultimate realization of the Company's investments in mineral properties is dependent upon the success of future property sales, the existence of economically recoverable reserves, the ability of the Company to obtain financing or make other arrangements for development and upon future profitable production. The Company expects to finance its operations for Fiscal 1999 through the sale of equity securities, joint venture arrangements (including project financing), and the sale of interests in mineral properties. The Company does not have sufficient capital of its own to explore and develop its mineral properties and there can be no assurance that the Company will be successful in obtaining the required funds to finance its long-term capital needs. 6. Retention and Attraction of Key Personnel. The Company's success will depend, in large part, on its ability to retain and attract highly qualified personnel. The Company's success in attracting qualified personnel will depend on many factors, including its ability to provide them with competitive compensation arrangements, equity participation and other benefits. There is no assurance that the Company will be successful in retaining or attracting highly qualified individuals in key management positions. 7. Regulatory Concerns. Environmental and other government regulations at the federal, state and local level pertaining to the Company's business and properties may include: (a) surface impact; (b) water acquisition; (c) site access; (d) reclamation; (e) wildlife 9 preservation; (f) licenses and permits; and, (e) maintaining the fees for unpatented mining claims. See "Business - Government Regulation and Environmental Concerns." 8. Working Capital; Accumulated Deficit; Auditor's Report. Although it commenced operations more than two years ago, the Company remains in the development stage. At September 30, 1998, the Company had working capital of $303,600 and an accumulated deficit of $7,466,096, with deficits and losses expected to continue for the foreseeable future. The Company's operations are subject to numerous risks associated with the mining industry. 9. Reliance Upon Directors and Officers. The Company is wholly dependent, at the present, upon the personal efforts and abilities of its Officers and Directors who exercise control over the day to day affairs of the Company. There can be no assurance as to the volume of business, if any, which the Company may succeed in obtaining, nor that its proposed operations will prove to be profitable. 10. Indemnification of Officers and Directors for Securities Liabilities. The Bylaws of the Company provide that the Company may indemnify any Director, Officer, agent and/or employee as to those liabilities and on those terms and conditions as are specified in the Utah Business Corporation Act. Further, the Company may purchase and maintain insurance on behalf of any such persons whether or not the corporation would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by the Company and prevent any recovery from such Officers, Directors, agents and employees for losses incurred by the Company as a result of their actions. Further, the Company has been advised that in the opinion of the Securities and Exchange Commission, indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. 11. Cumulative Voting, Preemptive Rights and Control. There are no preemptive rights in connection with the Company's Common Stock. Cumulative voting in the election of Directors is not provided for. Accordingly, the holders of a majority of the shares of Common Stock, present in person or by proxy, will be able to elect all of the Company's Board of Directors. See "Description of the Securities." 12. Potential Future Sales Pursuant to Rule 144. At December 15, 1998, there were issued and outstanding approximately 19,932,565 shares of Common Stock of which 8,035,337 shares were "Restricted Securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended. In general, under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a one (1) year holding period, may sell within any three month period, an amount which does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits the sale of shares, under certain circumstances, without any quantity limitation, by persons who are not affiliates of the Company and who have beneficially owned the shares for a minimum period of two (2) years. Hence, the possible sale of these restricted shares may, in the future dilute an investors percentage of free-trading shares and may have a 10 depressive effect on the price of the Company's securities and such sales, if substantial, might also adversely effect the Company's ability to raise additional equity capital. 13. No Dividends. The holders of the Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors out of funds legally available therefore. To date, the Company has not paid any cash dividends. The Board does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in the Company's business operations. As the Company will be required to obtain additional financing, it is likely that there will be restrictions on the Company's ability to declare any dividends. 14. Impact of Year 2000 Issue. The Company has reviewed its internal computer systems and products and their capability of recognizing the year 2000 and years thereafter. The Company expects that any costs relating to enuring such systems to be a year 2000 compliant will not be material to the financial condition or results of operations of the Company. PATENTS, TRADEMARKS, LICENSES, FRANCHISES. The Company does not own any patents, trademarks, licenses, franchises, or concessions, except for patented mining claims granted by governmental authorities and private land owners. SEASONABILITY. The Company's business is generally not seasonal in nature except to the extent that weather conditions at certain times of the year may affect the Company's access to its properties. GOVERNMENT REGULATION AND ENVIRONMENTAL CONCERNS. The Company is committed to complying and, to its knowledge, is in compliance with all governmental and environmental regulations. The Company's activities in the United States are subject to extensive federal, state and local laws and regulations controlling not only the mining of and exploration for mineral properties, but also the possible effects of such activities upon the environment. Permits from a variety of regulatory authorities are required for many aspects of mine operation and reclamation. The Company cannot predict the extent to which future legislation and regulation could cause additional expense, capital expenditures, restrictions and delays in the development of the Company's U.S. properties, including those with respect to unpatented mining claims. The Company's activities are not only subject to extensive federal, state, and local regulations controlling the mining of and exploration for mineral properties, but also the possible effects of such activities upon the environment. Future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development of the Company's properties, the extent of which cannot be predicted. Also, as discussed above, permits from a variety of regulatory authorities are required for many aspects of mine operation and reclamation. In the context of environmental permitting, 11 including the approval of reclamation plans, the Company must comply with known standards, existing laws and regulations that may entail greater or lesser costs and delays depending on the nature of the activity to be permitted and how stringently the regulations are implemented by the permitting authority. The Company is not presently aware of any specific material environmental constraint affecting its properties that would preclude the economic development or operation of any specific property. However, the general obstructionist regulatory environment within the United States impedes development of its properties and the Company plans to do limited work in the United States, unless metal prices rise significantly or the regulatory environment grows dramatically more favorable to industry. At present, the Company does not have any environmental control facilities. Thus, the Company has not made any material capital expenditures for environmental controls, other than the nominal costs of preparing the plans and contingencies for such environmental controls, measures and facilities as may be required in its future activities. If the Company becomes more active on its U.S. properties, it is reasonable to expect that compliance with environmental regulations will increase costs to the Company. Such compliance may include feasibility studies on the surface impact of the Company's proposed operations; costs associated with minimizing surface impact; water treatment and protection; reclamation activities, including rehabilitation of various sites; on-going efforts at alleviating the mining impact on wildlife; and permits or bonds as may be required to ensure the Company's compliance with applicable regulations. It is possible that the costs and delays associated with such compliance could become so prohibitive that the Company may decide to not proceed with the exploration, development, or mining operations on any of its mineral properties. OFFSHORE REGULATION. The Company is aware of comparable environmental regulation in offshore countries where it was operating. The Company was committed to full compliance with these regulations and engaged legal counsel in Mexico, Chile and Argentina who assisted the Company to assure compliance. OFFICES The Company's executive office is located at 1010 Ironwood Drive, Suite 105, Coeur d'Alene, Idaho 83814. The Company sub-leases its office from one of its officers for $200.00 per month. EMPLOYEES The Company has no employees. The Company, therefore, arranges for its work through contracts with various consultants. The Company may contract with additional consultants from time to time, as required by its operations. Consultants are treated as independent contractors. 12 CENTURION'S ACQUISITION AND CONTROL OF THE COMPANY In October 1991, Centurion entered into negotiations with the officers and directors of the Company for the acquisition and control of the Company. In November 1991, Centurion's Board of Directors approved this acquisition. Subsequently, Centurion entered into subscription and investment agreements with several of the Company's principal shareholders, whereby Centurion exchanged 174,743 "restricted" shares of Centurion stock and $1,600 cash for shares of Company common stock constituting 37.2% ownership of the Company's outstanding shares. On January 10, 1992, the Company's Board of Directors authorized the exchange of 100,000 post-split shares of the Company's common stock for approximately 4,196 acres of unpatented mining claims and state and private mineral leases from Centurion. On January 31, 1992, at the Company's Annual Shareholders Meeting, the shareholders authorized the purchase of approximately 17,000 acres of mining properties from Centurion for 1,250,000 post-split shares of Company common stock. This acquisition of shares gave Centurion an 82.3% controlling interest in the Company. Because of the changes in the control of shareholdings brought about by the Reorganization with Celebration, Centurion currently holds approximately 4% of the Company's outstanding common stock. THE COMPANY'S OWNERSHIP INTEREST IN GRAND CENTRAL SILVER MINES On November 25, 1997, Centurion issued 5,000,000 (500,000 post- split) shares of Common Stock to the Company in exchange for certain patented and unpatented mining claims located in the state of Idaho. In March 1998,the Company sold its 35% interest in the Sierra Mojada project to Grand Central Silver Mines (formerly Centurion) in exchange for 735,000 shares of stock and a $350,000 promissory note (see Mexican properties). As a result of the foregoing transactions, the Company owns 11.89% of the outstanding Common Stock of Grand Central Silver Mines, Inc. SUBSIDIARIES The Company currently has four subsidiaries: Celebration Mining Company, of which the Company currently is the sole shareholder, was incorporated in the State of Washington in February 1994; Minera Plata Real, Mexico, which was incorporated in March 1997 and of which the Company is the principal shareholder; Minera Plata Real, Argentina, which was incorporated in March 1997 and of which the Company is the principal shareholder; and, Minera Plata Real, Chile, which was incorporated in June 1997 and of which the Company is the principal shareholder. REORGANIZATION WITH CELEBRATION. In May and June 1995, Management began negotiations with management of Celebration regarding a merger or other reorganization plan of the two companies. On June 28, 1995, the boards of directors of both companies approved a reorganization and the companies signed an agreement based on a share exchange. The Company would acquire 100% of Celebration's interest in the Vipont Mine Joint Venture, the Crescent Mine Lease, the Australia Joint Venture, and the option rights to 13 acquire up to 50% of the mineral rights on the Prospect Mine Property in Madison County, Montana. The Celebration shareholders approved the Reorganization and share exchange agreement at an August 8, 1995 shareholder meeting. In exchange for 100% of the issued and outstanding Celebration shares, the Company agreed to issue to the Celebration shareholders 4,143,750 shares of Company common stock that together would represent ownership of 63% of Company shareholdings outstanding immediately following the Reorganization. Also, the Company agreed to honor all of the stock rights held by various Celebration shareholders and which were subject to certain conditions and events. Some of those stock rights had been granted contingent upon the repayment of notes, and others had been granted as options under consultant agreements. In total, those stock rights permitted the purchase or receipt of approximately 1,755,000 additional shares of Company common stock. If all of the shares underlying various stock rights were added to the initial group of 4,143,750 shares exchanged in the Reorganization, that would result in a total issuance from the share exchange of approximately 5,898,750 shares, or 71% ownership by the Celebration shareholders. However, to date, none of the overhanging stock rights have been or are expected to be exercised. In December 1995, stock rights to receive approximately 190,795 shares were extinguished when the Company converted debt of $570,919 in principal, plus interest, by issuing common stock. The noteholders of that debt amount received approximately 406,050 shares in full satisfaction of the debt. ACQUISITION AND DISPOSITION OF MINERAL PROPERTIES. On January 10 and January 31, 1992, the Company obtained from Centurion a total of 23,300 acres of unpatented mining claims, and state and private mineral leases in exchange for the equivalent of 1,350,000 post-split shares of Company common stock. UNPATENTED MINING CLAIMS/STATE LEASES. In fiscal 1997, the Company allowed to lapse certain Utah state mineral leases and did not pay the annual maintenance fee on certain unpatented claims located in the Oquirrh Mountains in Utah due to an evaluation by the Company that the mineral potential of such property was low and did not warrant continuing to hold the ground. The Company continues to held unpatented claims in Idaho. GLOSSARY OF CERTAIN MINING TERMS. ACID MINE DRAINAGE Acidic run-off water from mine waste dumps and mill tailings ponds containing sulfide minerals. Also refers to ground water pumped to surface from mines. ADIT An opening driven horizontally into the side of a mountain or hill for providing access to a mineral deposit. 14 ALTERATION Any physical or chemical change in a rock or mineral subsequent to its formation. Milder and more localized than metamorphism. ANTICLINE An arch or fold in layers of rock shaped like the crest of a wave. ASSAY A chemical test performed on a sample of ores or minerals to determine the amount of valuable metals contained. BACKFILL Waste material used to fill the void created by mining an orebody. BALL MILL A steel cylinder filled with steel balls into which crushed ore is fed. The ball mill is rotated, causing the balls to cascade and grind the ore. BASEMENT ROCKS The underlying or older rock mass. Often refers to rocks of Precambrian age which may be covered by younger rocks. BASE METAL Any non-precious metal (e.g. copper, lead, zinc, nickel, etc.). BEDDING The arrangement of sedimentary rocks in layers. BLOCK CAVING An inexpensive method of mining in which large blocks of ore are undercut, causing the ore to break or cave under its own weight. BRECCIA A rock in which angular fragments are surrounded by a mass of fine-grained minerals. BULK MINING Any large-scale, mechanized method of mining involving many thousands of tons of ore being brought to surface per day. CATHODE A rectangular plate of metal, produced by electrolytic refining, which is melted into commercial shapes such as wirebars, billets, ingots, etc. CHALCOCITE A sulfide mineral of copper common in the zone of secondary enrichment. CHANNEL SAMPLE A sample composed of pieces of vein or mineral deposit that have been cut out a small trench or channel, usually about ten cm wide and two cm deep. CHUTE An opening, usually constructed of timber and equipped with a gate, through which ore is drawn from a stope into mine cars. 15 COMPLEX ORE An ore containing a number of minerals of economic value. The term often implies that there are metallurgical difficulties in liberating and separating the valuable metals. CONE CRUSHER A machine which crushes ore between a gyrating cone or crushing head and an inverted, truncated cone known as a bowl. CONCENTRATE A fine, powdery product of the milling process containing a high percentage of valuable metal. CONGLOMERATE A sedimentary rock consisting of rounded, water- worn pebble or boulders cemented into a solid mass. CONTACT A geological term used to describe the line or plane along which two different rock formations meet. CORE The long cylindrical piece of rock, about an inch in diameter, brought to surface by diamond drilling. CROSSCUT A horizontal opening driven from a shaft and (or near) right angles to the strike of a vein or other orebody. CUT-AND-FILL A method of stoping in which ore is removed in slices, or lifts, and then the excavation is filled with rock or other waste material (backfill), before the subsequent slice is extracted. CYANIDATION A method of extracting exposed gold or silver grains from crushed or ground ore by dissolving it in a weak cyanide solution. May be carried out in tanks inside a mill or in heaps of ore out of doors. DECLINE An underground passageway connecting one or more levels in a mine, providing adequate traction for heavy, self-propelled equipment. Such underground openings are often driven in an upward or downward spiral, much the same as a spiral staircase. DEVELOPMENT Work carried out for the purpose of opening up a mineral deposit and making the actual ore extraction possible. DEVELOPMENT DRILLING Drilling to establish accurate estimates of mineral reserves. 16 DIAMOND DRILL A rotary type of rock drill that cuts a core of rock that is recovered in long cylindrical sections, two centimeters or more in diameter. DILUTION (mining) Rock that is, by necessity, removed along with the ore in the mining process, subsequently lowering the grade of the ore. DIP The angle at which a vein, structure or rock bed is inclined from the horizontal as measured at right angles to the strike. DISSEMINATED ORE Ore carrying small particles of valuable minerals spread more or less uniformly through the hose rock. DORE Unparted gold and silver poured into molds when molten to form buttons or bars. Further refining is necessary to separate the gold and silver. DRIFT A horizontal underground opening that follows along the length of a vein or rock formation as opposed to a cross-cut which crosses the rock formation. DRILL-INDICATED RESERVES The size and quality of a potential orebody as suggested by widely spaced drill holes; more work is required before reserves can be classified as probable or proven. DUE DILIGENCE The degree of care and caution required before making a decision; loosely, a financial and technical investigation to determine whether an investment is sound. ELECTROLYTIC REFINING The process of purifying metal ingots that are suspended as anodes in an electrolytic bath, alternated with refined sheets of the same metal which act as starters or cathodes. ENVIRONMENTAL IMPACT STUDY A written report, compiled prior to a production decision, that examines the effects proposed mining activities will have on the natural surroundings. EPITHERMAL DEPOSIT A mineral deposit consisting of veins and replacement bodies, usually in volcanic or sedimentary rocks, containing precious metals, or, more rarely, base metals. EXPLORATION Work involved in searching for ore, usually by drilling or driving a drift. 17 FACE The end of a drift, crosscut or stope in which work is taking place. FISSURE An extensive crack, break or fracture in rocks. FLOAT Pieces of rock that have been broken off and moved from their original location by natural forces such as frost or glacial action. FLOTATION A milling process in which valuable mineral particles are induced to become attached to bubbles and float, and others sink. FOOTWALL The rock on the underside of a vein or ore structure. FRACTURE A break in the rock, the opening of which allows mineral bearing solutions to enter. A "cross- fracture" is a minor break extending at more-or- less right angles to the direction of the principal fractures. FREE MILLING Ores of gold or silver from which the precious metals can be recovered by concentrating methods without resort to pressure leaching or other chemical treatment. GALENA Lead sulfide, the most common ore mineral of lead. GOSSAN The rust-colored capping or staining of a mineral deposit, generally formed by the oxidation or alteration of iron sulfides. GRAB SAMPLE A sample from a rock outcrop that is assayed to determine if valuable elements are contained in the rock. A grab sample is not intended to be representative of the deposit, and usually the best-looking material is selected. GRADE The average assay of a ton of ore, reflecting metal content. HANGINGWALL The rock on the upper side of a vein or ore deposit. HEAD GRADE The average grade of ore fed into a mill. HEAP LEACHING A process involving the percolation of a cyanide solution through crushed ore heaped on an impervious pad or base to dissolve minerals or metals out of the ore. HIGH GRADE Rich ore. As a verb, it refers to selective mining of the best ore in a deposit. HOST ROCK The rock surrounding an ore deposit. 18 HYDRO METALLURGY The treatment of ore by wet processes (e.g., leaching) resulting in the solution of a metal and its subsequent recovery. INTRUSIVE A body of igneous rock formed by the consolidation of magma intruded into other rocks, in contrast to lavas, which are extruded upon the surface. LAGGING Planks or small timbers placed between steel ribs along the roof of a stope or drift to prevent rocks from falling, rather than to support the main weight of the overlying rocks. LENS Generally used to describe a body of ore that is thick in the middle and tapers towards the ends. LEVEL The horizontal openings on a working horizon in a mine; it is customary to work mines from a shaft, establishing levels at regular intervals, generally about 50 meters or more apart. LIMESTONE A bedded, sedimentary deposit consisting chiefly of calcium carbonate. LODE A mineral deposit in solid rock. METAMORPHIC ROCKS Rocks which have undergone a change in texture or composition as the result of heat and/or pressure. MILL A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to affect recovery of the pure metal. MILLING ORE Ore that contains sufficient valuable mineral to be treated by the milling process. MINEABLE RESERVES Ore reserves that are known to be extractable using a given mining plan. MINERAL A naturally occurring homogeneous substance having definite physical properties and chemical composition and, if formed under favorable conditions, a definite crystal form. MINERALIZED MATERIAL OR DEPOSIT A mineralized body which has been delineated by appropriate drilling and/or underground sampling to support a sufficient tonnage and average grade of metal(s). Under SEC standards, such a deposit does not qualify as a reserve until a comprehensive evaluation, based upon unit cost, grade, recoveries, and other factors, conclude economic feasibility. 19 MUCK Ore or rock that has been broken by blasting. NATIVE METAL A metal occurring in nature in pure form, uncombined with other elements. NET PROFIT INTEREST A portion of the profit remaining after all charges, including taxes and bookkeeping charges (such as depreciation) have been deducted. NET SMELTER RETURN A share of the net revenues generated from the sale of metal produced by a mine. OPEN PIT A mine that is entirely on surface. Also referred to as open-cut or open-cast mine. ORE Material that can be mined and processed at a positive cash flow. ORE PASS Vertical or inclined passage for the downward transfer of ore connecting a level with the hoisting shaft or a lower level. OREBODY A natural concentration of valuable material that can be extracted and sold at a profit. ORE RESERVES The calculated tonnage and grade of mineralization which can be extracted profitably; classified as possible, probable and proven according to the level of confidence that can be placed in the data. ORESHOOT The portion, or length, of a vein or other structure, that carries sufficient valuable mineral to be extracted profitably. OXIDATION A chemical reaction caused by exposure to oxygen that results in a change in the chemical composition of a mineral. PARTICIPATING INTEREST A company's interest in a mine, which entitles it to a certain percentage of profits in return for putting up an equal percentage of the capital cost of the project. PATENT The ultimate stage of holding a mineral claim in the United States, after which no more assessment work is necessary because all mineral rights have been earned. 20 PATENTED MINING CLAIM A parcel of land originally located on federal lands as an unpatented mining claim under the General Mining Law, the title of which has been conveyed from the federal government to a private party pursuant to the patenting requirements of the General Mining Law. PILLAR A block of solid ore or other rock left in place to structurally support the shaft, walls or roof of a mine. PORPHYRY Any igneous rock in which relatively large crystals, called phenocrysts, are set in a fine- grained groundness. PRECAMBRIAN SHIELD The oldest, most stable regions of the Earth's crust, the largest of which is the Canadian Shield. PROSPECT A mining property, the value of which has not been determined by exploration. PROVEN AND PROBABLE MINERAL RESERVES Reserves that reflect estimates of the quantities and grades of mineralized material at a mine which the Company believes could be recovered and sold at prices in excess of the cash cost of production. The estimates are based largely on current costs and on projected prices and demand for such mineralized material. Mineral reserves are stated separately for each such mine, based upon factors relevant to each mine. Proven and probable mineral reserves are based on calculations of reserves provided by the operator of a property that have been reviewed but not independently confirmed by the Company. Changes in reserves represent general indicators of the results of efforts to develop additional reserves as existing reserves are depleted through production. Grades of ore fed to process may be different from stated reserve grades because of variation in grades in areas mined from time to time, mining dilution and other factors. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. PROBABLE RESERVES Resources for which tonnage and grade and/or quality are computed primarily from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. 21 PROVEN RESERVES Resources for which tonnage is computed from dimensions revealed in outcrops, trenches, workings or drill holes and for which the grade and/or quality is computed from the results of detailed sampling. The sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. The computed tonnage and grade are judged to be accurate, within limits which are stated, and no such limit is judged to be different from the computed tonnage or grade by more than 20%. RAISE A vertical or inclined underground working that has been excavated from the bottom upward. RAKE The trend of an orebody along the direction of its strike. RECLAMATION The restoration of a site after mining or exploration activity is completed. RECOVERY The percentage of valuable metal in the ore that is recovered by metallurgical treatment. REPLACEMENT ORE Ore formed by a process during which certain minerals have passed into solution and have been carried away, while valuable minerals from the solution have been deposited in the place of those removed. RESERVES That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves are customarily stated in terms of "Ore" when dealing with metalliferous minerals. RESOURCE The calculated amount of material in a mineral deposit, based on limited drill information. RIB SAMPLES Ore taken from rib pillars in a mine to determine metal content. ROCKBOLTING The act of supporting openings in rock with steel bolts anchored in holes drilled especially for this purpose. ROCKBURST A violent release of energy resulting in the sudden failure of walls or pillars in a mine, caused by the weight or pressure of the surrounding rocks. 22 ROCK MECHANICS The study of the mechanical properties of rocks, which includes stress conditions around mine openings and the ability of rocks and underground structures to withstand these stresses. ROOM-AND-PILLAR MINING A method of mining flat-lying ore deposits in which the mined-out area, or rooms, are separated by pillars of approximately the same size. ROTARY DRILL A machine that drills holes by rotating a rigid, tubular string of drill rods to which is attached a bit. Commonly used for drilling large-diameter blast holes in open pit mines. ROYALTY An amount of money paid at regular intervals by the lessee or operator of an exploration or mining property to the owner of the ground. Generally based on a certain amount per ton or a percentage of the total production or profits. Also, the fee paid for the right to use a patented process. RUN-OF-MINE A loose term used to describe ore of average grade. SAMPLE A small portion of rock or a mineral deposit, taken so that the metal content can be determined by assaying. SECONDARY ENRICHMENT Enrichment of a vein or mineral deposit by minerals that have been taken into solution from one part of the vein or adjacent rocks and redeposited in another. SHAFT A vertical or steeply inclined excavation for the purpose of opening and servicing a mine. It is usually equipped with a hoist at the top which lowers and raises a conveyance for handling personnel and materials. SHEAR OR SHEARING The deformation of rocks by lateral movement along numerous parallel planes, generally resulting from pressure and producing such metamorphic structures as cleavage and schistosity. SHRINKAGE STOPING A stoping method which uses part of the broken ore as a working platform and as support for the walls of the stope. SIDERITE Iron carbonate, which when pure, contains 48.2% iron; must be roasted to drive off carbon dioxide before it can be used in a blast furnace. (Roasted product is called sinter.) 23 SKARN Name for the metamorphic rocks surrounding an igneous intrusive where it comes in contact with a limestone or dolomite formation. SOLVENT EXTRACTION- ELECTRO WINNING (SX/EW) A metallurgical technique, so far applied only to copper ores, in which metal is dissolved from the rock by organic solvents and recovered from solution by electrolysis. SPHALERITE A zinc sulfide mineral; the most common ore mineral of zinc. STEP-OUT DRILLING Holes drilled to intersect a mineralized horizon or structure along strike or down dip. STOCKPILE Broken ore heaped on the surface, pending treatment or shipment. STOPE An underground excavation from which ore has been extracted either above or below mine level. STRATIGRAPHY Strictly, the description of bedded rock sequences; used loosely, the sequence of bedded rocks in a particular area. STRIKE The direction, or bearing from true north, of a vein or rock formation measured on a horizontal surface. STRINGER A narrow vein or irregular filament of a mineral or minerals traversing a rock mass. STRIPPING RATIO The ratio of tons removed as waste relative to the number of tons of ore removed from an open pit mine. SUBLEVEL A level or working horizon in a mine between main working levels. SULFIDE A compound of sulfur and some other element. TAILINGS Material rejected from a mill after more of the recoverable valuable minerals have been extracted. TAILINGS POND A low-lying depression used to confine tailings, the prime function of which is to allow enough time for heavy metals to settle out or for cyanide to be destroyed before water is discharged into the local watershed. TREND The direction, in the horizontal plane, or a linear geological feature (for example, an ore zone), measured from true north. 24 TROY OUNCE Unit of weight measurement used for all precious metals. The familiar 16-ounce avoirdupois pound equals 14.583 Troy Ounces. UNPATENTED MINING CLAIM A parcel of property located on federal lands pursuant to the General Mining Law and the requirements of the state in which the unpatented claim is located, the paramount title of which remains with the federal government. The holder of a valid, unpatented lode mining claim is granted certain rights including the right to explore and mine such claim under the General Mining Law. VEIN A mineralized zone having a more or less regular development in length, width and depth which clearly separates it from neighboring rock. VOLCANO GENIC A term used to describe the volcanic origin of mineralization. VUG A small cavity in a rock, frequently lined with well-formed crystals. Amethyst commonly forms in these cavities. WALL ROCKS Rock units on either side of an orebody. The hanging-wall and footwall rocks of an orebody. WASTE Barren rock in a mine, or mineralized material that is too low in grade to be mined and milled at a profit. WINZE An internal shaft. ZONE OF OXIDATION The portion of an orebody that has been oxidized, usually in the upper portion of the ore zone. ITEM 2. MINERAL PROPERTIES CHILEAN PROPERTIES Mocha Copper Porphyry The prospect was submitted in early 1997 to the Company through one of the directors of the Company and a field exam was made by personnel working in Argentina at the time. The decision to begin to acquire and unitize the Mocha District was based on a number of factors. More than 50% of a known large porphyry system at Mocha is covered by Tertiary gravels and ignimbrites (post-mineral cover). The best grade primary and oxide copper, noted from surface sampling and drilling, is on the west side of the prospect just before going under the post-mineral cover. On average, the cover is believed to be less than 200 meters in thickness. A large north-south trending aero-magnetic low anomaly west of Mocha has never been tested by exploratory drilling. These anomalies are often indicative of major copper porphyry systems. 25 Since 1995, several junior and major mining companies have held positions and attempted unsuccessfully to make a deal on the claim group held by the Escala family of Santiago, Chile. In April 1997, the Oregon and Chilean Exploration Mining Company, staked 95 "pedimentos" or exploration claims totaling 28,300 hectares and surrounding the known Mocha District claims of the Escala Family and Conoco Minerals, and including the large aeromagnetic low 5-7 kilometers west of Mocha. The Company was successful at consolidating the District. Agreements were signed on June 23, 1997 and July 31, 1997 between Company and the Escala and Oregon LTDA properties. The Company during the 1998 fiscal year expended substantial effort and financial resources pursing its option on the Mocha Porphyry Copper project in Northern Chile. In November 1997, the Company commenced negotiations with the Teck Corporation of Canada, a mining company, and in February 1998, a joint venture agreement ("Joint Venture") was signed. Under the terms of the Joint Venture, Teck would have an initial due diligence period (to July 1998) during which they would complete an initial geophysical survey and a minimum of 3,000 feet of reverse circulation drilling. Once this due diligence period was complete, Teck could proceed to cover 100% of all expenses through to production to earn a 60% interest in the project. In March 1998, Teck's staff completed a geophysical survey and proceeded, based upon some positive indications, to commence an initial drilling program. Six holes were completed by April 1, 1998 and all six holes encountered copper mineralization throughout the holes. However, the ore grades averaged 0.4% Cu, which was less then hoped for. Meanwhile, as the date approached for Teck to make their decision, the world copper price plunged further to a new ten year low. In mid-July, Teck notified the Company that it would not exercise its option to proceed. Upon receiving Teck's decision, the Board of Directors decided to return the properties to the underlying owners and depart from Chile. MEXICAN PROPERTIES Nayarit Property. In November and December 1997, the Company constructed an eight hole drilling program at its leased Nayarit property located near Ruiz, Nayarit, Mexico. The drilling program was designed to delineate further reserves down-dip on the Frazadas zinc/silver vein, a prolific mineral structure which had been successfully mined by previous operators. Three of the eight holes intersected mineralized zones of sufficient width and grade to be economically mined. Two of the eight holes failed to reach the projection of the Frazadas vein, and three holes intersected either low grade zones or voids which possibly represent areas previously mined by earlier operators. 26 Due to lower zinc prices and the inability to raise further capital to continue the drilling program, the Company opted to return the property to the underlying owners. Sierra Mojada Project In March 1998, the Company acquired a 35% participating interest in a large copper-silver-lead-zinc project in Coahuila, Mexico from Dakota Mining. The interest was purchased for $100,000 in cash, 200,000 shares of Common Stock and 200,000 shares of Metalline Mining Common Stock owned by the Company. In light of the ongoing financing requirements as a minority participant, in March 1998, the Company elected to sell its interest to Grand Central Silver Mines for 735,000 Grand Central common shares and a promissory note for $350,000 due February 15, 1999. The transaction was reported in the Form 10-Q filing for the period ending June 30, 1998. ARGENTINA PROPERTIES The Company held various options on a dozen different mineral concessions in the La Rioja Province, Argentine. Due to the difficult financing climate for exploration projects which prevailed throughout the 1998 fiscal year, the Directors elected to return the properties to the owners and withdraw from Argentina. UNITED STATES PROPERTIES Crescent Mine In February 1995, Celebration Mining Company entered into an agreement to acquire a mineral lease on the Crescent Mine. The Crescent Mine is an underground mine, located in the Coeur d'Alene Mining District of Shoshone County, Idaho, about five miles east of Kellogg, Idaho. Operations of the Crescent Mine began prior to 1917 and, according to records available to the Company, approximately 25 million ounces of silver have been produced from the Crescent Mine. The mine is not currently in operation and is flooded to approximately the 1200 foot level. The most current ore reserve report that the Company has been able to obtain was prepared in 1985 by Norman A. Radford, a registered professional geologist. That report, based on an assumption that silver prices would remain below ten dollars ($10) per ounce, indicated that the Crescent Mine contained 141,000 tons of probable reserves averaging 31 ounces of silver per ton of mineralized material. At current prices of under six dollars ($6.00), the Company cannot assure that any of the mineralization could be mined at a profit. Host rocks in the Crescent Mine, in common with the rest of the District, are members of the Precambrian Belt Super Group. Within the Crescent Mine area, three formations are present, in descending order: Wallace, St. Regis, and Revett. The most favorable rocks in the Crescent Mine are the Lower St. Regis and Upper Revett quartzites. These rocks occur in the Crescent Mine from the 1,200-foot level downward. 27 The Coeur d'Alene "Silver Belt" ore structures are frequently narrow, fragmented, and sinuous, and have exhibited great vertical continuity. For this reason, they have been discovered and mined at levels deeper than is generally the case in other mining districts. The ore at the Crescent Mine occurs in thin veins steeply dipping to the south. These veins may vary in thickness from several inches to several feet. The Alhambra and the Syndicate Faults are major reverse faults and both are present in the Crescent Mine. The Crescent Mine property consists of 12 patented mining claims, nine unpatented claims, and two Idaho state leases located immediately adjacent to and west of the world-famous Sunshine Mine owned by Sunshine Mining Company (SSC-NYSE). The Sunshine Mine has produced nearly 400 million ounces of silver since its inception, making it the most productive primary silver mine in North America. The major structural and stratigraphic features which have produced the major ore deposits in the Sunshine Mine are also present in the Crescent Mine. The Crescent is developed to a vertical depth of 5,100 feet by two vertical shafts. The majority of past production from the Crescent Mine occurred in the Revett formation over 1,200 feet of dip between the 3,100 level and the 4,300 level. In the mid-1980's, the No. 2 shaft was deepened to the 5,100 level, which opened an additional 800 feet of favorable Revett quartzites for development of the downward extensions of the East Footwall and Hook veins, which have been the most productive veins in the Crescent Mine. The Company's plans to re-establish significant silver production from the Crescent Mine will be dependent upon silver prices. Management estimates that a price of at least $6.00 per ounce would need to be sustained for a period of six months to justify the capital investment necessary to de-water the lower workings of the mine and to rehabilitate the stopes. At December 9, 1997, the Comex Spot price for silver was $5.36. Absent a $6.00 silver price, the Company intends to pursue development and exploration efforts in the upper Crescent. The workings of the upper Crescent Mine are above the water table, and therefore can be developed without major capital investment. The Company believes that a processing agreement for Crescent ore can be negotiated with the neighboring Sunshine Mine on a favorable basis. During the 1996 fiscal year, the Company's field activities at the Crescent Mine were limited to are unsuccessful attempt to re-open the #3 level portal. The portal was filled with unconsolidated glacial till and it was determined that a much more expensive program will be required given the bad ground. Due to the low silver price, no attempt to dewater the lower mine was contemplated during the 1997 fiscal year. Any further developments on the Crescent Mine for fiscal 1999 will depend upon the price of silver, as well as the Company's available capital. In June 1998, the Company sought to clarify a long standing possible cloud on its Crescent Mine lease resulting from the lessor's acquisition of the property at a Bankruptcy Court proceeding in 1991. Through its counsel in June 1998, the Company filed a lawsuit in 28 Federal Court in Boise, Idaho against the lessor Fawsett International, Shoshone County and the U. S. Environmental Protection Agency as defendants. The Company is seeking a declaratory judgment from the Court as to the validity of its lease. Counsel has told the Company that its case is strong and management believes the Company will prevail in this matter. Conjecture and Liberal King Mines In July 1998, the Company sold its interest in the Conjecture and Liberal King Mines to a third party in exchange for 60,000 shares of Synfuels Technology stock valued at $480,000. Vipont Mine The Vipont Mine, which is owned by Celebration Mining Company, is located in the Ashbrook Mining District, a remote area in the extreme northwestern corner of Box Elder County, Utah, approximately ten miles east of the Nevada state line and one mile south of the Idaho state line near the headwaters of the Little Birch Creek. It is accessible by asphalt, gravel, and dirt roads. The mine property consists of 53 patented (deeded) mining claims covering nearly 1,000 acres with a 25% undivided interest owned by Celebration Mining Company (a wholly-owned subsidiary of the Company.) The Vipont Mine was at one time one of the foremost silver- producing mines in the State of Utah. Its greatest period of activity was from 1919 through mid-1923 after the passage of the Pittman Silver Purchase Act ("Pittman Act") which authorized the purchase of 200,000,000 ounces of silver. The Mine closed in August 1923 with the expiration of the Pittman Act after producing nearly 1,000,000 ounces of silver per year. Some leasing was done in the 1930's and the Mine was closed in 1942 when Congress passed War Order L-208 closing all gold and silver mines. From 1977 through 1987, United Silver Mines began further development and leached the old mill tailings. The mineralization in the Mine occurs predominantly as the mineral argentite in the Vipont limestone. Two other units, the Phelan limestone, and the Sentinel limestone have produced high-grade ore. Neither the Phelan nor the Sentinel have been seriously explored for additional ore. The mineralization in the Vipont limestone occurs as a continuous tabular "manto" mineralized body in the crests of folds (crenulations) superimposed upon a shallowly dipping (22 degrees) syncline. The continuity of the mineral down-dip has been shown by past mining operations and by a line of drill holes below the old workings. It is thought by geologists that the mineralization will continue to down-dip toward an igneous intrusive 4,600 feet southwest of the old mine. There are two distinct mineralized deposits on the Vipont Property: the oxide deposit and the sulfide deposit. The characteristics of each are unique and require different approaches to development and exploration. According to a 1994 report by Dr. Armond H. Beers, the oxide deposit contains 1,100,000 tons of mineralized material grading 6.9 ounces per ton in silver and with a small gold credit. The Company 29 has not independently re-verified those findings and cannot and does not make any assurance as to their accuracy or compliance with regulatory standards. The sulfide deposit is currently defined in the Beers Report as 478,000 tons of mineralized material at an estimated average grade of 13.52 ounces per ton in silver. Geologic interpretation of the manto- type replacement deposit, however, may establish upon further exploration that this mineralized resource may be larger. The Company's management and professional staff believe that the sulfide deposits will represent the long-term future of the Vipont Mine. During the 1996 fiscal year, the Company elected not to proceed further with the Vipont joint venture, but as a result of the Company's successful effort at removing all liens on the property at a Box Elder County Sheriff's sale, the Company's wholly-owned subsidiary now owns a 25% undivided interest in the property. The company has no plans to proceed further with the Vipont until such time as silver prices improve significantly. The Company is also a defendant in a lawsuit filed by Thomas F. Miller (et al.), in the First Judicial Court in and for Box Elder County, State of Utah. The suit, which alleges that the Company failed to transfer common stock in exchange for a mining interest, asks for actual and punitive damages. The Company believes that this lawsuit is without merit and has filed a countersuit alleging fraudulent misrepresentation. The Company is seeking both full title to the aforementioned mineral property and punitive damages, and believes its countersuit will prevail. Coeur d'Alene Syndicate Property. In November 1997, the Company sold these 24 patented claims to Centurion Mines Corporation for 5,000,000 shares of Centurion Common Stock. Subsequently, in January 1998, Centurion underwent a 1-for-10 reverse split and changed its name to Grand Central Silver Mines, Inc. Shoshone County Claims The Company continues to hold nine unpatented mining claims in Shoshone County, Idaho which lie immediately adjacent to the holdings of Sterling Mining Company just south of the Galena Mine, which is owned and operated by Silver Valley Resources. Utah Properties and Royalty Interests. The Company is not currently involved in active exploration with respect to any of the property holdings or royalty interests within the Utah Gold Belt. During Fiscal 1997, the Company engaged an independent geologist to evaluate the mineral potential of the Company's holdings. Based upon his recommendations, the company dropped some property and has held onto only claims and leases which are low-cost to hold and evaluated as having some mineral merit. The Company does not anticipate pursuing significant exploration activities on the Utah Gold Belt properties during Fiscal 1998. 30 ITEM 3. LEGAL PROCEEDINGS The Officers and Directors of the Company certify that to the best of their knowledge, neither the Company nor any of its Officers and Directors are parties to any legal proceeding or litigation. Further, the Officers and Directors know of no threatened or contemplated legal proceedings or litigation with the exception of the following: (1) The Company is a defendant in a lawsuit filed by some of its shareholders for alleged violations of securities laws. The suit was filed in the U.S. District Court in Denver on January 22, 1998 with Rounds et al as plaintiffs vs. Royal Silver Mines, Inc. et al as defendants. Plaintiffs seek damages and attorneys' fees in their lawsuit, which alleges that defendants made false/misleading statements and omitted material disclosures in connection with public trading of Royal's common stock during the period May 1996 through August 1997. The Company believes that this lawsuit is completely without merit. The Company is not aware of any similar actions(s) contemplated or instituted by governmental authorities. The trial court sustained the Company's motion for summary judgment dismissing claims against it for omissions of material disclosures. (2) The Company is also a defendant in a lawsuit filed by Thomas F. Miller (et al.), in the First Judicial Court in and for Box Elder County, State of Utah. The suit, which alleges that the Company failed to transfer common stock in exchange for a mining interest, asks for actual and punitive damages. The Company believes that this lawsuit is without merit and has filed a countersuit alleging fraudulent misrepresentation. The Company is seeking both full title to the aforementioned mineral property and punitive damages, and believes its countersuit will prevail. (3) In July 1998, the Company filed an action in federal court in Boise, Idaho for declaratory judgment regarding the validity of its Crescent Mine mineral lease. Defendants in the action include the U.S. Environmental Protection Agency, Shoshone County, and Fawcett International. Management believes that there is a good likelihood of prevailing in this matter. None of the Officers and Directors have been convicted of a felony or none have been convicted of any criminal offense, felony and misdemeanor relating to securities or performance in corporate office. To the best of the knowledge of the Officers and Directors, no investigations of felonies, misfeasance in office or securities investigations are either pending or threatened at the present time. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There has been no vote of security holders during the annual period ended September 30, 1998. 31 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common shares are traded on the Bulletin Board Operated by the National Association of Securities Dealers, Inc. under the symbol "RSMI." The prices listed below were obtained from the National Quotation Bureau, Inc., and are the highest and lowest bids reported during each fiscal quarter for the period December 31, 1994, through September 30, 1998. These bid prices are over-the-counter market quotations based on inter-dealer bid prices, without markup, markdown, or commission and may not necessarily represent actual transactions: Fiscal Quarter Ended High Bid($) Low Bid ($) -------------------- --------- ----------- [S] [C] [C] December 31, 1994 4.125 3.000 March 31, 1995 2.500 1.125 June 30, 1995 3.750 0.875 September 29, 1995 3.124 2.750 December 31, 1995 2.87 2.43 March 31, 1996 2.75 2.25 June 30, 1996 2.94 1.62 September 30, 1996 2.12 1.00 December 31, 1996 1.35 0.75 March 31, 1997 1.56 0.91 June 30, 1997 1.15 0.63 September 30, 1997 0.97 0.69 December 31, 1997 0.62 0.56 March 31, 1998 0.45 0.42 June 30, 1998 0.20 0.18 September 30, 1998 0.10 0.09 On December 15, 1998, the average of the high bid and low ask quotation for the Company's common shares as quoted on the Bulletin Board was $0.06. The approximate number of holders of common stock of record on December 15, 1998, was approximately 366. ITEM 6. SELECTED FINANCIAL DATA The selected financial data included in the following table have been derived from and should be read in conjunction with and are qualified by the Company's financial statements and notes set forth elsewhere in this report. Historical financial data for certain periods may be derived from financial statements not included herein. 32 [CAPTION] 09/30/98 09/30/97 09/30/96 09/30/95 09/30/94 (Audited) (Audited) (Audited) (Audited) (Audited) Statement of Operations and Accumulated Deficit Data: Revenues $ 0 $ 0 $ 0 $ 0 $ 0 Operating Expenses $ 1,063,715 $ 1,558,823 $ 1,835,548 $ 962,735 $ 211,796 Net loss $(2,637,568) $(1,770,771) $(2,045,082) $ (962,735) $(211,796) Net Loss per share $ (0.16) $ (0.14) $ (0.22) $ (0.15) $ (0.03) Balance Sheet Data: Work Capital (Deficit) $ 303,600 $ 671,355 $ 686,573 $ (665,274) $ 25,754 Total Assets $ 3,982,592 $ 5,891,527 $ 5,605,357 $ 4,056,698 $ 366,620 Long-term Debt $ 0 $ 0 $ 0 $ 0 $ 0 Stockholders' Equity $ 3,913,777 $ 5,850,186 $ 5,485,490 $ 3,235,376 $ 276,321
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Financial Condition, Liquidity and Capital Resources. There is considerable risk in any mining venture, and there can be no assurance that the Company's operations will be successful or profitable. Exploration for commercially mineable ore deposits is highly speculative and involves risks greater than those involved in the discovery of mineralization. Mining companies use the evaluation work of professional geologists, geophysicists, and engineers in determining whether to acquire an interest in a specific property, or whether or not to commence exploration or development work. These estimates are not always scientifically exact, and in some instances result in the expenditure of substantial amount of money on a property before it is possible to make a final determination as to whether or not the property contains economically mineable ore bodies. The economic viability of a property cannot be finally determined until extensive exploration and development work, plus a detailed economic feasibility study, has been performed. Also, the market prices for mineralization produced are subject to fluctuation and uncertainty, which may negatively affect the economic viability of properties on which expenditures have been made. During the development stage of the Company, from inception to September 30, 1998, the Company accumulated a deficit of $7,466,096. At September 30, 1998, $2,229,411 of the Company's total assets of $3,982,593 were investments in mineral properties and $926,250 of the Company's assets is an investment in Grand Central Silver Mines, Inc., a minerals exploration company traded on NASDAQ. Additional exploration is required to substantiate determine whether these mineral properties contain ore reserves that are economically recoverable. The realization of these investments is dependent upon the success of future property sales, the existence of economically recoverable reserves, the ability of the Company to obtain financing, the Company's success in carrying out its present plans or making other arrangements for development, and upon future profitable production. The ultimate outcome of these investments cannot be determined at this time; 33 accordingly, no provision for any asset impairment that may result, in the event the Company is not successful in developing or selling these properties, has been made in the Company's financial statements. Liquidity and Capital Resources. The Company currently has no revenues but, as explained above, has an accumulated deficit. Although it has recurring losses from operations, the Company has increased its operating capital and improved its financial condition and ability. Regarding its losses from operations, the Company cannot assure that it will be able to fully carry out its plans as budgeted without additional operating capital. At September 30, 1998, the Company had working capital of $303,600. This amount represents severe deterioration from the working capital of $671,355 at September 30, 1997. In the year ending September 30, 1998, the Company's working capital has decreased by $367,755 primarily because of decreased cash received by the Company from its sales of common stock. During the same twelve-month period, the Company's cash decreased from $594,577 to $3,147 while the Company's notes receivable and investments both increased substantially. Due to the foregoing conditions, the Company's independent certified public accountants included a paragraph in the Company's financial statements relative to a going concern uncertainty. In fiscal year 1998, the Company's current liabilities increased by $27,474 primarily due to a build up of accounts payable from the September 30, 1997 level. The Company's current liabilities of $68,815 at September 30, 1998 represent an unfavorable increase from the Company's current liabilities of $41,341 at September 30, 1997. The Company has no long-term debt. The Company has estimated that it will need minimal capital resources of approximately $4,000 per month to meet its estimated expenditures for fiscal 1999. In 1997 and in 1998, management met with experienced financial and investment firms throughout Europe and North America and negotiated arrangements for capital fund raising. During the fiscal year ending September 30, 1997, the Company raised $1,843,750 in funds primarily through the private placement of shares and warrants. In fiscal 1998, the Company raised $344,500 in cash and $700,000 in notes, primarily through the private placement of shares. The Company is continuing with the previously described negotiations and various alternatives to raise capital. Inasmuch as the Company has not yet determined in detail the specifications of the project, operation or mining activity that it intends to undertake, management is not able at this time to provide a detailed listing or exact range of operation costs, including increases in general and administrative expense, if any. However, the Company plans to fund any increases in general and administrative expense principally from joint venture revenues or private placement funds. Financing for the Company's exploration and development of mineral properties is expected to come primarily from the contributions of its joint venture participants and from the funds generated from such joint ventures and other lease or royalty arrangements. 34 The Company consistently has made full and timely payment of its expenses, in particular to the various governmental payees it interacts with, and has met its obligations to the entities which provide its personnel, office space, and equipment needs. The Company currently is seeking alternate sources of working capital sufficient to increase the funding of additional general and administrative expenses that may become necessary as the Company's business plan develops, and to continue meeting its ongoing payment obligations for its leases to governmental entities. RESULTS OF OPERATIONS Comparison of the Year Ended September 30, 1997 and September 30, 1998, Respectively. General and administrative expenses decreased from $1,079,160 during fiscal 1997 to $616,600 during fiscal 1998. This decrease is principally due to decreased salaries and a decrease in the cost of fundraising associated with the Company's recent private placements of its stock. Also, during the twelve months of fiscal 1997, the Company incurred officers/directors compensation of $403,660 while such compensation expenses were reduced to $117,652 in the twelve months of fiscal 1998. As a principal result of the Company's cost reduction efforts in fundraising and compensation, total expenses of $1,558,823 for fiscal 1997 decreased to $1,063,715 (total expenses) in fiscal 1998. In the second quarter of fiscal 1998, the Company sold some patented mining properties for common stock valued at $1,500,000, which resulted in a gain of $406,250. In this same quarter the Company sold a 35% working interest in a minerals exploration joint venture in exchange for stock valued at $1,424,062 and a promissory note for $350,000, resulting in a gain of $1,454,062. There were no comparable transactions in the prior year. In the last quarter of fiscal 1998, the Company elected to withdraw from most of its foreign mineral concessions and accordingly recorded losses of $592,065 by writing off its exploration properties in Chile, Argentina and Mexico. In the same quarter, the Company elected to sell its Conjecture Mine in Washington state and incurred a loss of $830,700 on this disposition. Also in the fourth quarter of fiscal 1998, the value of the Company's common stock investment in Grand Central Silver Mines, Inc. dropped significantly and the Company posted a loss of $1,997,812 on the decreased value of its investments. The Company is unable to fully determine the impact of future transactions on its operating capital. Hence, the Company has determined not to incur and does not have any commitments or plans for material capital expenditures in the near future for which it does not have a reasonably available source of payment. It is uncertain what effect this decision may have with respect to restricting capital expenditures. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA C O N T E N T S Independent Auditor's Report . . . . . . . . . . . . . . . F-1 Balance Sheets . . . . . . . . . . . . . . . . . . . F-2 - F-3 Statement of Operations . . . . . . . . . . . . . . . . . . F-4 Statement of Shareholders' Equity . . . . . . . . . .F-5 - F-10 Statement of Cash Flows . . . . . . . . . . . . . . F-11 - F-12 Notes to the Financial Statements . . . . . . . . . F-13 - F-27 36 The Board of Directors Royal Silver Mines, Inc. (A Development Stage Company) Spokane, Washington INDEPENDENT AUDITOR'S REPORT We have audited the accompanying balance sheet of Royal Silver Mines, Inc. (a development stage company) as of September 30, 1998 and 1997, and the related statements of operations, shareholders' equity, and cash flows for the years then ended, and from inception on February 17, 1994 through September 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Royal Silver Mines, Inc. as of September 30, 1998 and 1997, and the results of their operations and their cash flows for the years then ended and from inception on February 17, 1994 through September 30, 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 19 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statement do not include any adjustments that might result from the outcome of this uncertainty. Williams & Webster, P.S. Certified Public Accountants Spokane, Washington December 21, 1998 37 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
September 30, September 30, ASSETS 1998 1997 ------------- ------------- CURRENT ASSETS Cash $ 3,147 $ 594,577 Note receivable 350,000 100,000 Interest receivable 17,106 7,583 Prepaid expenses 2,162 10,536 ----------- ----------- TOTAL CURRENT ASSETS 372,415 712,696 ----------- ----------- MINERAL PROPERTIES 2,229,411 4,915,579 ----------- ----------- PROPERTY AND EQUIPMENT Mining equipment 83,889 188,888 Furniture and equipment 12,761 15,185 Less accumulated depreciation (19,868) (17,005) ----------- ----------- TOTAL PROPERTY AND EQUIPMENT 76,782 187,068 ----------- ----------- OTHER ASSETS Investments 1,298,750 70,000 Organization costs, net 5,234 6,184 ----------- ----------- TOTAL OTHER ASSETS 1,303,984 76,184 ----------- ----------- TOTAL ASSETS $ 3,982,592 $ 5,891,527 =========== ===========
The accompanying notes are an integral part of these financial statements. F-2 38 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
September 30, September 30, LIABILITIES AND 1998 1997 SHAREHOLDERS' EQUITY ------------- ------------- CURRENT LIABILITIES Accounts payable $ 65,815 $ 20,355 Accrued expenses 3,000 20,986 ----------- ----------- TOTAL CURRENT LIABILITIES 68,815 41,341 ----------- ----------- LONG TERM DEBT - - ----------- ----------- COMMITMENTS AND CONTINGENCIES - - ----------- ----------- SHAREHOLDERS' EQUITY Common stock,$.01 par value; 40,000,000 shares authorized, 19,003,565 and 13,482,232 shares issued and outstanding, respectively 190,035 134,822 Additional paid-in capital 11,889,838 10,543,892 Stock subscription receivable (700,000) - Deficit accumulated during development stage (7,466,096) (4,828,528) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 3,913,777 5,850,186 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,982,592 $ 5,891,527 =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 39 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Operations, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
Year Ended Year Ended September 30, September 30, 1998 1997 ------------- ------------- REVENUES $ - $ - ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSES Mineral property expense 276,476 31,378 Depreciation and amortization 52,987 44,625 Officers' and directors' compensation 117,652 403,660 General and administrative 616,600 1,079,160 ----------- ----------- Total expenses 1,063,715 1,558,823 ----------- ----------- OPERATING LOSS (1,063,715) (1,558,823) ----------- ----------- OTHER INCOME (EXPENSES) Interest income 27,582 31,025 Interest expense - (2,257) Loss on disposition of assets (3,476,716) (240,656) Grain on property interest sold 1,875,281 - ----------- ----------- Total other income (expense) (1,573,853) (211,888) ----------- ----------- NET LOSS $(2,637,568) $(1,770,711) ----------- ----------- NET LOSS PER COMMON SHARE $ (0.16) $ (0.14) =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,348,120 12,305,987 =========== =========== The accompanying notes are an integral part of these financial statements. F-4a 40 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Operations, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS February 17, Year Ended 1994 (Inception) September 30, Through 1996 September 30, 1998 ------------- ------------------ REVENUES $ - $ - ----------- ------------ GENERAL AND ADMINISTRATIVE EXPENSES Mineral property expense 8,122 555,706 Depreciation and amortization 35,736 195,681 Officers' and directors' Compensation 492,715 1,353,260 General and administrative 1,298,975 3,397,765 ----------- ------------ Total expenses 1,835,548 5,502,412 ----------- ------------ OPERATING LOSS (1,835,548) (5,502,412) ----------- ------------ OTHER INCOME (EXPENSES) Interest income - 58,607 Interest expense (9,534) (74,348) Loss on disposition of assets (200,000) (3,823,223) Gain on property interest sold - 1,963,683 ----------- ------------ Total other income (expense) (209,534) (1,963,683) ----------- ------------ NET LOSS $(2,045,082) $ (7,466,095) ----------- ------------ NET LOSS PER COMMON SHARE $ (0.22) $ (0.79) =========== ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 9,221,191 9,431,759 =========== ============
The accompanying notes are an integral part of these financial statements. F-4b 41 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Number of Shares Amount ----------- ----------- Balance February 17, 1994 - $ - Issuance in May 1994 of shares at $.002 per share to officers and directors in exchange for assignment of mining property option 2,250,000 22,500 Issuance in July 1994 of shares for cash at $.402 in private placement, net of costs 1,050,000 10,500 Issuance in August 1994 of shares to a director in exchange for services, valued at $.417 per share 150,000 1,500 Net loss for the year ended November 30, 1994 - - --------- -------- Balance, November 30, 1994 3,450,000 34,500 Issuance of shares in debt offering at $.03 per share 416,250 4,163 Issuance of shares for mineral properties valued at $1.00 per share 262,500 2,625 Issuance of shares for cash at $1.00 per share 15,000 150 Stock issuance costs - - --------- -------- Balance forward 4,143,750 $ 41,438 --------- -------- The accompanying notes are an integral part of these financial statements. F-5a 42 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Additional Total Paid-in Deficit Stockholders' Capital Accumulated Equity Balance February 17, 1994 $ - $ - $ - --------- ----------- ---------- Issuance in May 1994 of shares at $.002 per share to officers and directors in exchange for assignment of mining property option (18,500) - 4,000 Issuance in July 1994 of shares for cash at $.402 in private placement, net of costs 411,116 - 421,616 Issuance in August 1994 of shares to a director in exchange for services, valued at $.417 per share 61,000 - 62,500 Net loss for the year ended November 30, 1994 - (211,796) (211,796) --------- ---------- ---------- Balance, November 30, 1994 453,616 (211,796) 276,320 Issuance of shares in debt offering at $.03 per share 9,712 - 13,875 Issuance of shares for mineral properties valued at $1.00 per share 259,875 - 262,500 Issuance of shares for cash at $1.00 per share 14,850 - 15,000 Stock issuance costs (58,202) - (58,202) --------- ----------- ---------- Balance forward $ 679,851 $ (211,796) $ 509,493 --------- ---------- ----------
The accompanying notes are an integral part of these financial statements. F-5b 43 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Number of Shares Amount ---------- -------- Balance forward 4,143,750 $ 41,438 Issuance of shares to acquire Consolidated Royal Mines, Inc. at $.15 per share 2,434,563 24,346 Issuance of shares to directors and employees for services at prices ranging from $2.00 to $2.50 per share 12,750 127 Issuance of shares in exchange for mineral properties at prices ranging from $3.13 to $3.25 per share 800,000 8,000 Issuance of shares for cash at prices ranging from $1.50 to $2.00 per share 166,000 1,660 Issuance of shares in exchange for debt at $1.50 per share 200,000 2,000 Net loss for the ten months ended September 30, 1995 - - --------- -------- Balance, September 30, 1995 7,757,063 $ 77,571 --------- -------- The accompanying notes are an integral part of these financial statements. F-6a 44 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Additional Total Paid-in Deficit Stockholders' Capital Accumulated Equity ------------- ----------- ------------- Balance forward $ 679,851 $ (211,796) $ 509,493 Issuance of shares to acquire Consolidated Royal Mines, Inc. at $.15 per share 335,750 - 360,096 Issuance of shares to directors and employees for services at prices ranging from $2.00 to $2.50 per share 29,473 - 29,600 Issuance of shares in exchange for mineral properties at prices ranging from $3.13 to $3.25 per share 2,530,126 - 2,538,126 Issuance of shares for cash at prices ranging from $1.50 to $2.00 per share 247,340 - 249,000 Issuance of shares in exchange for debt at $1.50 per share 298,000 - 300,000 Net loss for the ten months ended September 30, 1995 - (750,939) (750,939) ----------- ---------- ----------- Balance, September 30, 1995 $ 4,120,540 $ (962,735) $ 3,235,376 ----------- ---------- -----------
The accompanying notes are an integral part of these financial statements. F-6b 45 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Number of Shares Amount ------------ ---------- Balance forward 7,757,063 $ 77,571 Issuance of shares for cash at $1.50 per share 1,176,832 11,769 Issuance of shares to directors and employees for services at $1.50 per share 222,700 2,227 Issuance of shares in exchange for debt at $1.50 per share 406,050 4,060 Issuance of shares for cash at $2.20 per share 150,000 1,500 Issuance of warrants for cash at $.05 per warrant - - Issuance of shares for cash at $1.62 per share 65,000 650 Issuance of shares for cash to directors and employees at prices ranging from $1.62 to $2.08 per share 107,500 1,075 Issuance of shares for cash at $0.75 per share 200,000 2,000 Issuance of shares for cash at $1.70 per share 250,000 2,500 ---------- --------- Balance forward 10,335,145 $ 103,352 ---------- --------- The accompanying notes are an integral part of these financial statements. F-7a 46 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Additional Total Paid-in Deficit Stockholders' Capital Accumulated Equity ----------- ------------ ------------- Balance forward $ 4,120,540 $ (962,735) $ 3,235,376 Issuance of shares for cash at $1.50 per share 1,754,010 - 1,765,779 Issuance of shares to directors and employees for services at $1.50 per share 331,823 - 334,050 Issuance of shares in exchange for debt at $1.50 per share 605,015 - 609,075 Issuance of shares for cash at $2.20 per share 328,500 - 330,000 Issuance of warrants for cash at $.05 per warrant 41,068 - 41,068 Issuance of shares for cash at $1.62 per share 104,650 - 105,300 Issuance of shares for cash to directors and employees at prices ranging from $1.62 to $2.08 per share 181,175 - 182,250 Issuance of shares for cash at $0.75 per share 147,985 - 149,985 Issuance of shares for cash at $1.70 per share 422,500 - 425,000 ----------- ---------- ----------- Balance forward $ 8,037,266 $ (962,735) $ 7,177,883 ----------- ---------- -----------
The accompanying notes are an integral part of these financial statements. F-7b 47 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Number of Shares Amount ----------- ----------- Balance forward 10,335,145 $ 103,352 Cancellation of 35,000 shares received in exchange for return of mining property (35,000) (350) Payment of Centurion Mines for option to repurchase stock - - Issuance of shares for joint venture in mining property at $1.50 per share 100,000 1,000 Repurchase of 25,000 shares issued for joint venture at $1.40 per share (25,000) (250) Issuance of shares for mining property at $1.50 per share 20,000 200 Issuance of shares for noteholders for extension of notes at $1.50 per share 39,375 394 Issuance of shares for services at $1.50 per share 215,334 2,153 Stock issuance costs - - Net loss for the year ended September 30, 1996 - - ---------- ----------- Balance, September 30, 1996 10,649,854 $ 106,499 ---------- ----------- The accompanying notes are an integral part of these financial statements. F-8a 48 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Additional Total Paid-in Deficit Stockholders' Capital Accumulated Equity ----------- ------------ ------------ Balance forward $ 8,037,266 $ (962,735) $ 7,177,883 Cancellation of 35,000 shares received in exchange for return of mining property (109,025) - (109,375) Payment of Centurion Mines for option to repurchase stock - (50,000) (50,000) Issuance of shares for joint venture in mining property at $1.50 per share 149,000 - 150,000 Repurchase of 25,000 shares issued for joint venture at $1.40 per share (34,750) - (35,000) Issuance of shares for mining property at $1.50 per share 29,800 - 30,000 Issuance of shares for noteholders for extension of notes at $1.50 per share 58,669 - 59,063 Issuance of shares for services at $1.50 per share 320,848 - 323,001 Stock issuance costs (15,000) - (15,000) Net loss for the year ended September 30, 1996 - (2,045,082) (2,045,082) ----------- ----------- ----------- Balance, September 30, 1996 $ 8,436,808 $(3,057,817) $ 5,485,490 ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-8b 49 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. A Development Stage Company STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Number of Shares Amount ---------- ---------- Balance forward 10,649,854 $ 106,499 Issuance of shares for cash at $0.75 per share 2,491,000 24,910 Stock issuance costs - - Issuance of shares to directors and employees for services: at $1.00 per share 110,500 1,105 at $0.75 per share 25,000 250 Issuance of shares for services at $1.25 per share 98,250 982 Payment for extension of warrants for one year - - Issuance of shares for mining property at $1.00 per share 60,000 600 Cancellation of 25,000 shares received in exchange for return of mining property (25,000) (250) Issuance of shares for services: at $1.00 per share 25,500 255 at $0.75 per share 47,128 471 Payment for extension of warrants for one year - - Net loss for the year ended September 30, 1997 - - ---------- --------- Balance, September 30, 1997 13,482,232 $ 134,822 ========== ========= The accompanying notes are an integral part of these financial statements. F-9a 50 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. A Development Stage Company STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Additional Total Paid-in Accumulated Stockholders' Capital Deficit Equity ---------- ------------ ------------ Balance forward $ 8,436,808 $ (3,057,817) $ 5,485,490 Issuance of shares for cash at $0.75 per share 1,843,340 - 1,868,250 Stock issuance costs (30,000) - (30,000) Issuance of shares to directors and employees for services: at $1.00 per share 109,395 - 110,500 at $0.75 per share 18,500 - 18,750 Issuance of shares for services at $1.25 per share 121,829 - 122,811 Payment for extension of warrants for one year 3,000 - 3,000 Issuance of shares for mining property at $1.00 per share 59,400 - 60,000 Cancellation of 25,000 shares received in exchange for return of mining property (81,000) - (81,250) Issuance of shares for services: at $1.00 per share 25,245 - 25,500 at $0.75 per share 34,875 - 35,346 Payment for extension of warrants for one year 2,500 - 2,500 Net loss for the year ended September 30, 1997 - (1,770,711) (1,770,711) ----------- ------------ ----------- Balance, September 30, 1997 $ 10,543,892 $ 4,828,528 $ 5,850,186 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. F-9b 51 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. A Development Stage Company STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Number Paid-in of Shares Amount Capital --------- ------ ---------- Balance forward 13,482,232 $ 134,822 $ 10,543,892 Issuance of share for cash at $0.75 per share 10,000 100 7,400 Issuance of shares to directors, consultants and employees for services: at prices varying from $0.34 per share to $0.91 per share 398,000 3,980 202,680 Issuance of shares for mining property at $0.75 per share 200,000 2,000 148,000 Issuance of shares for cash at $0.75 1,913,333 19,133 267,866 Issuance of shares in exchange for cash and note at $0.25 per share 3,000,000 30,000 720,000 Net loss for year ended September 30, 1998 - - - ---------- ---------- ---------- Balance at September 30, 1998 19,003,565 $ 190,035 $11,889,838 ========== ========== =========== The accompanying notes are an integral part of these financial statements. F-10a 52 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Shareholders Equity, has been formatted to fit across two pages. ROYAL SILVER MINES, INC. A Development Stage Company STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) Total Subscription Accumulated Stockholders' Receivable Deficit Equity ------------ ----------- -------------- Balance forward $ - $ (4,828,528) $ 5,850,186 Issuance of shares for cash at $0.75 per share - - 7,500 Issuance of shares to directors, consultants and employees for services: at prices varying from $0.34 per share to $0.91 per share - - 206,660 Issuance of shares for mining property at $0.75 per share - - 150,000 Issuance of shares for cash at $0.15 per share - - 286,999 Issuance of shares in exchange for cash and note at $0.25 per share (700,000) - 50,000 Net loss for year ended September 30, 1998 - (2,637,568) (2,637,568) ---------- ----------- ----------- Balance at September 30, 1998 $ (700,000) $(7,466,096) $3,913,777 ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-10b 53 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Cash Flows, has been formatted to fit across four pages. This is page 1 of 4. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
For the Year For the Year Ended Ended September 30, September 30, 1998 1997 ------------ ------------ Cash flows from operating activities: Net loss $ (2,637,568) $ (1,770,711) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 45,649 44,625 Issuance of common stock for services 206,658 312,907 Write off of joint venture costs 10,000 - Loss on sale of equipment 12,585 - Write off of option costs 517,871 - Write off of mineral properties 1,097,737 - Loss on devaluation of investments 1,997,813 - Changes in assets and liabilities: Note receivable (250,000) - Interest receivable (9,523) (7,250) Prepaid expenses 5,831 (19,040) Other assets - (6,000) Mineral properties (4,674) - Accounts payable 45,460 (4,780) Accrued expenses (18,798) (13,457) Payable to related parties - (289) ---------- ---------- Net cash provided (used) operating activities 1,019,041 (1,463,995) ---------- ---------- Cash flows from investing activities: Purchase of investments (2,934,062) (70,000) Purchase and development of mineral properties (185,690) (151,164) Purchase of fixed assets (4,154) (193,230) Sale of investments 70,000 - Sale of fixed assets 5,185 500 Sale of mineral properties 1,093,750 - ------------ ------------ Net cash used in investing activities (1,954,971) (413,894) ------------ ------------ F-11a 54 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Cash Flows, has been formatted to fit across four pages. This is page 2 of 4. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS For the Year For the Year Ended Ended September 30, September 30, 1998 1997 ------------ ------------ Cash flows from financing activities: Stock issuance and offering costs - (30,000) Proceeds received on long-term debt - - Payments made on notes payable - (60,000) Issuance of common stock for cash 344,500 1,868,250 Payment for option to repurchase stock - - Issuance of common stock for accrued interest - - Issuance of common stock for extension of notes payable maturation - - Payment for return of stock issued for mining property interest - - Payment of joint venture costs - - Issuance of warrants or warrants extensions for cash - 5,500 ------------ ------------ Net cash provided by financing activities 344,500 1,783,750 ------------ ------------ Net increase (decrease) in cash $ (591,430) $ (94,139) ------------ ------------ The accompanying notes are an integral part of these financial statements. F-11b 55 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Cash Flows, has been formatted to fit across two pages. This is page 3 of 4. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS From 02/17/94 For the Year (Inception) Ended Through 09/30/96 09/30/98 ------------ ----------- Cash flows from operating activities: Net loss $ (2,045,082) $(7,416,095) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 35,736 190,890 Issuance of common stock for services 657,051 1,268,716 Write off of joint venture costs 150,000 160,000 Loss on sale of equipment - 12,585 Write off of option costs - 517,871 Write off of mineral properties - 1,097,737 Loss on devaluation of investments - 1,997,813 Changes in assets and liabilities: Note receivable (100,000) (350,000) Interest receivable (333) (17,106) Prepaid expenses (13,041) (30,600) Other assets 19,836 (9,801) Mineral properties - (4,674) Accounts payable (34,891) 65,815 Accrued expenses (55,645) 2,188 Payable to related parties - 300,000 ---------- ----------- Net cash provided (used) operating activities (1,386,369) (2,214,661) ---------- ----------- Cash flows from investing activities: Purchase of investments - (3,004,062) Purchase and development of mineral properties (979,043) (1,941,690) Purchase of fixed assets (4,173) (213,187) Sale of investments - 70,000 Sale of fixed assets - 5,685 Sale of mineral properties - 1,093,750 ----------- ----------- Net cash provided (used) in investing activities (983,216) (3,989,504) F-11c 56 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Cash Flows, has been formatted to fit across four pages. This is page 4 of 4. For the Year For the Year Ended Ended September 30, September 30, 1998 1997 ------------ ------------ Cash flows from financing activities: Stock issuance and offering costs (15,000) (174,835) Proceeds received on long-term debt - 675,000 Payments made on notes payable (40,000) (174,206) Issuance of common stock for cash 2,958,314 5,872,564 Payment for option to repurchase stock (50,000) (50,000) Issuance of common stock for accrued interest 38,158 38,158 Issuance of common stock for extension of notes payable maturation 59,063 59,063 Payment for return of stock issued for mining property interest (35,000) (35,000) Payment of joint venture costs (50,000) (50,000) Issuance of warrants or warrants extensions for cash 41,068 46,568 ----------- ----------- Net cash provided by financing activities 2,906,603 6,207,312 ----------- ----------- Net increase (decrease) in cash $ 537,018 $ 3,147 ----------- -----------
The accompanying notes are an integral part of these financial statements. F-11d 57 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Cash Flows, has been formatted to fit across two pages. This is page 1 of 2. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year For the Year Ended Ended September 30, September 30, 1998 1997 -------------- -------------- Net decrease in cash (balance forward) $(591,430) $ (94,139) Cash, beginning of period 594,577 688,716 --------- --------- Cash, end of period $ 3,147 $ 594,577 ========= ========= Supplemental cashflow disclosure: Income taxes $ - $ - Interest $ - $ 2,257 Non-cash financing activities: Common stock issued for services rendered $ 206,660 $ 312,907 Common stock issued for mineral properties $ 150,000 $ 60,000 Common stock issued for exchange for debt $ - $ - Common stock issued in acquisition of Consolidated Royal Mines, Inc. $ - $ - Option rights acquired in exchange for a payable $ - $ - Common stock issued for assignment of mining property options $ - $ - The accompanying notes are an integral part of these financial statements. F-12a 58 In order to transmit these documents to the SEC via EDGAR, Royal Silver Mines, Inc., a development stage enterprise, Statements of Cash Flows, has been formatted to fit across two pages. This is page 2 of 2. ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year From Ended 02/17/94 September 30, Through 1996 09/30/98 ------------- ---------------- Net decrease in cash (balance forward) $ 537,018 $ 3,147 Cash, beginning of period 151,698 - ------------ ------------- Cash, end of period $ 688,716 $ 3,147 ============ ============= Supplemental cashflow disclosure: Income taxes $ - $ 350 Interest $ 5,715 $ 25,655 Non-cash financing activities: Common stock issued for services rendered $ 657,051 $ 1,268,718 Common stock issued for mineral properties $ 180,000 $ 3,190,626 Common stock issued for exchange for debt $ 570,917 $ 922,950 Common stock issued in acquisition of Consolidated Royal Mines, Inc. $ - $ 360,096 Option rights acquired in exchange for a payable $ 360,096 $ 79,000 Common stock issued for assignment of mining property options $ - $ 4,000
The accompanying notes are an integral part of these financial statements. F-12b 59 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Royal Silver Mines, Inc. (Royal) was incorporated in April of 1969 under the laws of the state of Utah primarily for the purpose of acquiring and developing mineral properties. Royal conducts its business as a "junior" natural resource company, meaning that it intends to receive income from property sales or joint ventures with larger companies. Celebration Mining Company (Celebration), currently a wholly-owned subsidiary of Royal, was incorporated for the purpose of identifying, acquiring, exploring and developing mining properties. Celebration was organized on February 17, 1994 as a Washington corporation. Celebration has not yet realized any revenues from its planned operations. On August 8, 1995, Royal and Celebration completed an Agreement and plan of reorganization whereby the Company issued 4,143,750 shares of its common stock and 1,455,000 warrants in exchange for all of the outstanding common stock of Celebration. Pursuant to the reorganization, the name of the Company was changed to Royal Silver Mines, Inc. Immediately prior to the Agreement and Plan of Reorganization, the Company had 2,375,463 common shares issued and outstanding. The acquisition was accounted for as a purchase by Celebration of Royal, because the shareholders of Celebration control the Company after the acquisition. Therefore, Celebration is treated as the acquiring entity. There was no adjustment to the carrying value of the assets or liabilities of Royal in the exchange as the market value approximated the net carrying value. Royal is the acquiring entity for legal purposes and Celebration is the surviving entity for accounting purposes. The $2,229,411 cost of mineral properties included in the accompanying balance sheet as of September 30, 1998 is related to exploration properties. The Company has not determined whether the exploration properties contain ore reserves that are economically recoverable. The ultimate realization of the Company's investment in exploration properties is dependent upon the success of future property sales, the existence of economically recoverable reserves, the ability of the company to obtain financing or make other arrangements for development and upon future profitable production. The ultimate realization of the Company's investment in exploration properties cannot be determined at this time and, accordingly, no provision for any asset impairment that may result, in the event the Company is not successful in developing or selling these properties, has been made in the accompanying financial statements. F-13 60 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS (Continued) The Company is seeking additional capital and management believes the properties can ultimately be sold or developed to enable the Company to continue its operations. However, there are inherent uncertainties in mining operations and management cannot provide assurances that it will be successful in this endeavor. Furthermore, the Company is in the development stage, as it has not realized any significant revenues from its planned operations. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Method The Company's financial statements are prepared using the accrual method of accounting. Development Stage The company is in the development stage and has not commenced the sale of any products. Year End The Company's year-end is September 30. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Loss Per Share Loss per share was computed by dividing the net loss by the weighted average number of shares outstanding during the year. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time they were outstanding. Loss Per Share (continued) Outstanding warrants were not included in the computation of loss per share because the exercise price of the outstanding warrants is higher than the market price of the stock, thereby causing the warrants to be antidilutive. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. F-14 61 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Mineral Properties Costs of acquiring, exploring and developing mineral properties are capitalized by project area. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production state, the related capitalized costs will be amortized, using the units of production method on the basis of periodic estimates of ore reserves. Mineral properties are periodically assessed for impairment of value and any losses are charged to operations at the time of impairment. Should a property be abandoned, its capitalized costs are charged to operations. The Company charges to operations the allocable portion of capitalized costs attributable to properties sold. Capitalized costs are allocated to properties sold based on the proportion of claims sold to the claims remaining within the project area. Provision For Taxes At September 30, 1998, the Company had net operating loss carryforwards of approximately $7,400,000 that may be offset against future taxable income through 2012. No tax benefit has been reported in the financial statements as the Company believes there is a significant chance the net operating loss carryforwards will expire unused. Accordingly, the potential tax benefits of the net operating loss carryforwards are offset by a valuation allowance of the same amount. Impaired Asset Policy In March 1995, the Financial Accounting Standards Board issued a statement titled "Accounting for Impairment of Long-lived Assets." This standard is effective for years beginning after December 15, 1995. In complying with this, the Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. Because of write-downs and write-offs taken in the fourth quarter of fiscal 1998, the Company does not believe any further adjustments are needed to the carrying value of its assets at September 30, 1998. F-15 62 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Financial Accounting Standards In October 1995, the Financial Accounting Standards Board issued a statement titled "Accounting for Stock-Based Compensation" (FAS 123). The statement is effective for fiscal years beginning after December 15, 1995. FAS 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on fair value. The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services. Principles of Consolidation The financial statements include those of Royal Silver Mines, Inc. and Celebration Mining Company. All significant inter-company accounts and transactions have been eliminated. The financial statements are not considered consolidated statements since Royal Silver Mines, Inc. was the successor by merger to Celebration Mining Company. NOTE 3 - MINERAL PROPERTIES Utah Mining Property Joint Venture In October 1994, Celebration and United Silver Mine, Inc., (United) entered into a joint venture agreement, whereby Celebration could acquire up to an 80% interest in a mining property located in the State of Utah. Under the terms of the agreement, United was to contribute real properties for an initial 75% interest in the joint venture, and Celebration was to remove all liens associated with the real properties by paying $175,000 to a bank which was the primary lien holder for its initial 25% interest in the venture. Celebration expended $175,000 to purchase the aforementioned promissory note. The property was auctioned in a public auction in May 1995 and by virtue of Celebration's first position lien, Celebration was able to successfully bid the full amount of the underlying promissory note. Although additional expenditures have been made on the property through September 30, 1998, no further funds towards the joint venture have been expended by Celebration, which owns an undivided 25% interest in the property. See Note 16 on related litigation. Washington and Idaho Mineral Properties During the year ended September 30, 1995, Celebration purchased, through the issuance of 800,000 shares of its common stock, various mineral properties located in the states of Washington and Idaho. The Mineral Properties were recorded at the fair market value of the shares paid on the date of issuance ranging from $3.13 to $3.25 per share for a total purchase price of $2,538,126. F-16 63 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 3 - MINERAL PROPERTIES (Continued) Washington and Idaho Mineral Properties (continued) In May 1996, the Company sold back the Frisco Standard Silver Mine to its original seller in exchange for the same price (35,000 shares of Royal stock) received by the seller when the mine was purchased. The shares received were canceled and no gain or loss was recorded on the transaction. In the fourth quarter of 1998, the Company disposed of additional Idaho properties. See Note 4. Shoshone County Idaho Mineral Lease (Crescent Mine) In February 1995, Celebration entered into an agreement to acquire a fifty-year renewable mineral lease on a property in Shoshone County, Idaho. The mining property consists of twelve patented claims and associated Idaho unpatented claims. In connection with this lease, Celebration has paid $50,000 and issued 175,000 share of common stock. In addition, 10,000 shares were issued to a new director for his assistance in obtaining this lease. Celebration was originally obligated to pay $950,000 by September 1, 1995 as "an advance royalty." The original due date was extended and the Company paid the aforementioned $950,000 and has the option of extending its lease for an additional forty-nine years. When, and if, the property achieves gross sales of $40,000,000, Celebration will be obligated to pay an additional 0.5% royalty on future sales. Furthermore, beginning after September 1, 1995, and at such time as the average price of silver has reached $6.00 per ounce for a 30-day period, Celebration is obligated to spend not less than $2,000,000 during the subsequent 36 months to de-water and repair the mine. Thereafter, Celebration will be required to maintain the mine in a condition to allow it to be put into production within sixty days. There are certain claims by the U.S. Environmental Protection Agency and the County on this property for which the lessor is obligated to pay. In the event these claims are not satisfactorily resolved, they may effect Celebration's rights to the property. See Note 16 on litigation regarding this lease. Australian Mineral Property Joint Venture In March 1995, Celebration entered into a joint venture agreement with an Australian company for exploration of a certain mineral property in Australia. Under the original terms of the Joint venture agreement, Celebration could acquire a 10% interest by paying $100,000 in April 1995. No additional funds were paid or required to be paid subsequent to the initial payment. The Company's proposed future mining activities will be subject to laws and regulations controlling not only the exploration and mining of mineral properties, but also the effect of such activities on the environment. Compliance with such laws and regulations may necessitate additional capital outlays, affect the economics of a project, and cause changes or delays in the Company's activities. The Company's mineral properties are valued at the lower of cost or net realizable value. 64 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 4 - MINERAL PROPERTY DISPOSITIONS Chilean Properties During 1997, the Company acquired options on a minerals concession and adjacent property in northern Chile. During the third quarter of fiscal 1998, following a decision by Teck Exploration Ltd. not to pursue its joint venture option, the Company elected to drop its options on the Chilean properties and recorded a loss of $403,530 on its Chilean investments. Argentine Properties On February 10, 1997 the Company negotiated an option to buy 12 different potential mine sites in Argentina. During the second quarter of fiscal 1998, the Company elected to drop the option, returned the properties to their owner, and recorded a loss of $114,341. Mexican Properties On January 20, 1997, the Company executed an agreement to acquire four mining properties in Nayarit, Mexico with stipulated annual payment to be applied against a purchase price of $5,000,000. In the fourth quarter of fiscal 1998, the Company elected to forfeit its interest in the aforementioned Mexican properties and, resultantly, recorded a loss of $74,194. On February 19, 1998, the Company sold a working interest in a Mexican joint venture which resulted in a gain of $1,454,062. This transaction is more fully described in Note 17. Conjecture Mine and Liberal King Mine (in U.S.) On June 26, 1998, the Company traded six patented mining claims (known as the Liberal King Mine) located in Shoshone County, Idaho for 50,000 shares of SynFuels Technology, Inc. valued at $8.00 per share. No gain or loss was recognized on this transaction. In 1995, the Company issued 280,000 shares of its common stock to acquire the Conjecture Mine, a silver-bearing property in the state of Idaho. During the fourth quarter of fiscal 1998, the Company traded the Conjecture Mine property for 10,000 shares of common stock in SynFuels Technology, Inc., (subsequently renamed Rigid Airship) valued at $8.00 per share. This transaction resulted in a recorded loss on disposition of $830,700. F-18 65 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Major additions and improvements are capitalized. Minor replacements, maintenance and repairs that do not increase the useful life of the assets are expensed as incurred. Depreciation of property and equipment is determined using the straight-line method over the expected useful lives of the assets of five years. NOTE 6 - INVESTMENTS Metalline Mining Company During the quarter ended June 30, 1997, the Company invested $70,000 in 200,000 shares of Metalline Mining Stock. This investment represented approximately 5.7% of the total outstanding stock in Metalline Mining at the time of purchase. This stock was valued at cost, which is substantially less than the market value of $1.68 per share at December 31, 1997. On January 12, 1998, this stock was transferred to Dakota Mining Corporation plus $100,000 cash in exchange for a 35% working interest in a joint venture with Metalline Mining co. for exploration and development of the Sierra Mojada District, Coahuila, Mexico. No gain or loss was recognized on this transaction. See information below and Note 20. Grand Central Silver Mines, Inc. In the quarter ended March 31, 1998, the Company finalized the sale of certain patented mining properties to Centurion Mines Corporation (subsequently renamed Grand Central Silver Mines, Inc.) for 500,000 shares of Centurion's common stock then valued at $1,500,000. This transaction resulted in a gain of $406,250. During the quarter ended March 31, 1998, the Company sold a 35% working interest in a joint venture (with Metalline Mining Co.) engaged in exploration and development of the Sierra Mojada District, Coahuila, Mexico. In connection with this transaction, the Company acquired 735,000 shares of common stock (in Grand Central Silver Mines, inc.) which was valued at $1,424,062 and also acquired a promissory note of $350,000 from Grand Central which is uncollateralized, bears interest at 8%, and matures in 1999. A total gain of $1,454,062 was realized on this transaction. See Note 15. The Company currently owns 1,235,000 shares of Grand Central Silver Mines, Inc. common stock, which is approximately 12% of the total outstanding shares at September 30, 1998. On September 30, 1998, the market value of the Company's investment in Grand Central had dropped to $926,250 ($0.75 per share), at which time the Company recorded a loss on its investment of $1,997,812 in accordance with the Company's policy on the impairment of assets. F-19 66 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 6 - INVESTMENTS (Continued) SynFuels Technology, Inc. On June 26, 1998, the Company traded six patented mining claims acquired in Shoshone County Idaho in 1995 for 50,000 shares of SynFuels Technology, Inc. which was then trading at $8.00 per share. The Company acquired an additional 10,000 shares of SynFuels Technology, Inc. common stock in September 1998 in exchange for another mining property. (See Note 4). The Company's cost of $392,000 is the recorded value of this investment at September 30, 1998. SynFuels Technology, Inc. changed its name to Rigid Airship in November 1998. Summit Silver, Inc. In July, 1998, the Company acquired 400,000 shares of Summit Silver common stock valued at $0.15 per share in exchange for transferring mining equipment with an original cost of $98,767. This transaction resulted in a loss of $11,233. NOTE 7 - INTANGIBLE ASSETS Deferred debt issuance costs and organization costs are recorded at cost. Amortization of these intangible assets is determined using the straight-line method over the expected useful lives of the assets as follows: Description Useful Life ----------------------------- ------------- Deferred debt issuance costs 1 year Organization costs 5 years NOTE 8 - COMMON STOCK During the year ended November 30, 1994, Celebration issued 1,500,000 shares of common stock to directors for services rendered, valued at $.003 to $.625 per share, which is the fair market value of the share on the date of issuance. During the year ended September 30, 1995, the Company issued 12,750 shares of common stock to directors and employees for services rendered, valued at prices ranging from $2.00 to $2.50 per share, which is the fair market value of the shares on the date of issuance. During the year ended September 30, 1995, Celebration issued 975,000 shares of common stock in exchange for mineral properties (See Note 3) and sold 176,000 shares of common stock for $264,000 cash. F-20 67 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 8 - COMMON STOCK (Continued) The Company issued 200,000 shares of its common stock during the year ended September 30, 1995 in lieu of outstanding debt that was owed to Centurion Mines Corporation (Centurion), a related entity. The stock was issued at $1.50 per share in payment of $300,000 of outstanding debt (See Note 11). The Company also issued 277,500 shares in connection with the issuance of notes payable (See Note 11). (See also the disclosure in Note 1). During the year ended September 30, 1996, the Company sold 1,949,332 shares of its common stock of $2,958,314 in cash. The Company also issued 222,700 share to directors and employees for services rendered valued at $1.50 per share, which is the fair market value of the share on the date of issuance. Also during the year ended September 30, 1996, the Company issued 100,000 shares of its common stock for a joint venture in a mining property and 20,000 common shares for a mining property. The stock issued was valued at $1.50 per share, which is the fair market value of the shares at the date of issuance. In the same twelve-month period, the Company also issued 406,050 shares of its common stock in payment of outstanding debt of $570,917 and accrued interest of $38,158. The stock was issued at $1.50 per share for a total value of $609,075. In addition, the Company issued 39,375 shares of common stock to noteholders for extending the maturity date of their loans. Again, the shares were valued at $1.50 each, which was the fair market value of the shares when issued. Also during the year ended September 30, 1996, the Company issued 215,334 shares of its common stock for services received. The shares were valued at 41.50 per share, which was the fair market value of the shares at the date of issuance. In the year ended September 30, 1997, the Company issued 306,378 shares of its common stock for services received. The shares were valued at their fair market value at the dates of issuance which ranged from $0.75 to $1.25 per share. During the year ended September 30, 1998, the Company issued 398,000 shares of common stock for services received. The shares were valued at their fair market value at the date of issuance which ranged from $0.34 to $0.91 per share. Also during the same twelve months, the Company sold 4,923,333 shares of its common stock for $344,500 in cash and $700,000 in stock subscriptions receivable. F-21 68 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 9 - COMMON STOCK OPTIONS AND WARRANTS In January 1992, the shareholders of Royal approved a 1992 Stock Option and Stock Award Plan under which up to ten percent of the issued and outstanding shares of the Company's common stock could be awarded based on merit of work performed. As of September 30, 1998, 12,750 shares of common stock have been awarded under the Plan. Celebration, prior to the exchange agreement with Royal, had granted securities to certain shareholders which represented rights to purchase or receive shares of Celebration's common stock. These options were assumed by the Company after the merger at a rate of 1.5 shares for each option still outstanding. Thus, the Company has granted options, with varying conditions and requirements, to purchase a total of 1,455,000 share of its common stock. There are 255,000 of the stock options exercisable at $1.50 per share which expire March 21, 2000. The remaining 1,200,000 stock options are exercisable at $0.93 per share and expire on August 31, 2001. As of September 30, 1998, none of these options have been exercised. On January 9, 1996, the Board of Directors approved the issuance of warrants to two of its officers to purchase a total of 300,000 shares for a purchase price of $2.50 per share, exercisable from the date of issuance until January 9, 1999. On March 22, 1996, the Board of Directors approved the issuance of warrants to purchase 625,000 share of common stock of the Company to an investor in partial completion of a private placement of stock. These warrants were exercisable until September 30, 1998, at which time they expired unused. On April 10, 1996, following the close of the second quarter of fiscal 1996, the Board of Directors authorized the issuance of 420,666 warrants to unaffiliated investors as part of the private placement of stock. These warrants were exercisable until April 12, 1998 at prices ranging from $2.50 to $2.625 per share. As of March 31, 1998, 320,666 warrants have been issued (but not exercised) for a total amount of $46,568, with the balance of 100,000 warrants expiring unused. In the quarter ending March 31, 1997, the Company sold 2,491,000 "units" to unaffiliated investors as part of a private placement of stock. Each unit consisted of a share of the Company's common stock and one warrant enabling the investor to purchase one additional share of common stock for a purchase price of $1.25 per share during the next two years. At September 30, 1998, none of the warrants had been exercised. F-22 69 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 10 - COMPANY STOCK OPTION AND AWARD PLAN The Company has a stock-based compensation plan whereby the Company's board of directors may grant common stock to its employees and directors. At September 30, 1998, no options have been granted under the plan. Of the total of 1,064,650 common stock shares authorized for issuance under the plan, 110,500 shares valued at $1.00 per share were issued to employees and directors during the twelve months ended September 30, 1997 and 179,000 shares at values ranging from $0.34 to $0.91 per share were issued to employees and directors during the twelve months ended September 30, 1998. NOTE 11 - ADDITIONAL PAID-IN CAPITAL The following is a summary of additional paid in capital at September 30, 1998 and September 30, 1997: September 30, September 30, 1998 1997 Applicable to: ------------ ------------ Common stock $ 11,843,270 $ 10,497,324 Stock Warrants 46,568 46,568 ------------ ------------ $ 11,889,838 $ 10,543,892 ============ ============ NOTE 12 - OPTIONS INVOLVING MINERAL PROPERTIES Option with Placer Mining In April 1996, the Company entered into an option with Placer Mining Corporation ("Placer") of Kellogg, Idaho whereby the Company could acquire a joint venture interest in the Bunker Hill Mine, a silver- lead-zinc mine in Shoshone County, Idaho. After issuing 100,000 shares valued at $1.50 per share and spending a nonrefundable $50,000 on the option, the Company elected to renegotiate this option agreement and entered into a second option agreement with Placer on September 18, 1996 for the nonassignable option of acquiring a 100% interest in the Bunker Hill Mine. In the second agreement, the Company paid $100,000 in September 1996 for the nonassignable option of acquiring a 100% interest in the Bunker Hill Mine. In order to exercise this option, the company must issue 500,000 shares of its common stock to placer by May 10, 1997 and pay Placer either $7,000,000 by that date or $4,000,000 by that date and $3,500,000 by May 10, 1998. Under the terms of this agreement, the Company will pay Placer a 2 3/4% net smelter return royalty in perpetuity with stipulated annual advance minimum royalty payments to Placer ranging from $100,000 (in 1999) to $250,000 (in year 2002 through 2010). All advance minimum royalties paid are to be credited against actual production royalties. F-23 70 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 12 - OPTIONS INVOLVING MINERAL PROPERTIES (Continued) Option With Placer Mining (continued) Subsequent to March 31, 1997, due to regional environmental concerns and the prospect of related litigation, the Company concluded that it would not exercise its option on the Bunker Hill Mine. Accordingly, the $238,887 in option costs and related expenses toward the purchase of this property were written off during the quarter ended March 31, 1997. Option for Joint Venture On June 19, 1998, the Company executed an option agreement with Eastfield Resources (USA) Inc. and Prism Resources Inc. Under the terms of the three month agreement expiring September 30, 1998, Eastfield and Prism granted an option to the Company to enter into a joint venture arrangement with these two firms for the exploration and development of certain mining properties within the Three Hills project in the Tonopah mining district of Nevada. At the end of the option period, the Company dropped its option to acquire a 50% interest in the joint venture and recorded a loss of $10,000 on its option deposit. NOTE 13 - STOCK OPTION AGREEMENT WITH CENTURION MINES CORPORATION In September 1996, the company executed an agreement with Centurion Mines Corporation ("Centurion") whereby the Company acquired an option from Centurion to purchase up to 800,000 shares of its common stock held by Centurion for the exercise price of $1.75 per share during the two-year period ending September 30, 1998. The Cost of this two-year stock purchase option was $50,000 which was paid by the Company and charged to stockholders' equity (accumulated deficit). Effective April 15, 1997, the aforementioned stock option agreement was renegotiated (at no cost to the Company) and amended to extend the exercise period until September 30, 1999 and to revise the exercise price to $1.50 per share during this same period. At September 30, 1998, no shares were acquired from Centurion under this option agreement. See Note 15. F-24 71 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 14 - LETTER OF INTENT WITH TECK EXPLORATION LTD. On October 1997, the Company signed a letter of intent with Teck Corporation (dba Teck Exploration, Ltd.) of Vancouver, B.C. to jointly explore and develop the Mocha porphyry copper prospect in region I of northern Chile. The agreement contemplated initial drilling program funded by Teck. In July 1998, the Company and Teck mutually agreed to terminate their option agreement. See Note 4 for related disclosures on Chilean options. NOTE 15 - PROSPECTIVE COMBINATION (MERGER) WITH CENTURION MINES CORPORATION On November 24, 1997, Royal and Centurion Mines Corporation, headquartered in Salt Lake City, announced plans to combine the two companies. Centurion (subsequently renamed Grand Central Silver Mines, Inc.) is a significant owner of gold, silver, and copper mining properties in Utah. As a first stage in the combination of the companies, Centurion purchased certain Coeur d'Alene, Idaho silver properties plus other patented mining properties owned by Royal in exchange for Centurion shares then valued at $1,500,000. See Note 6. As a result of differences in determining fair valuations, the directors of the two companies have decided to postpone merger plans for the foreseeable future; however, the two companies continue to share one common director and a common officer. NOTE 16 - COMMITMENTS AND CONTINGENCIES The Company is a defendant in a lawsuit filed by some of its shareholders for alleged violations of securities laws. The suit asks for actual damages. The Company believes the suit is completely without merit and intends to vigorously defend its position. The Company is also a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. The suit asks for actual and punitive damages. The Company believes the suit is completely without merit and has filed a countersuit alleging fraudulent misrepresentation. The Company is seeking both full title to the aforementioned mineral property and punitive damages, and believes its countersuit will prevail. In July 1998, the Company filed an action in federal court in Boise, Idaho for declaratory judgment regarding the validity of its Crescent Mine mineral lease. Defendants in the action include the U.S. Environmental Protection Agency, Shoshone County, and Fawcett International. Management believes that there is a good likelihood of prevailing in this matter. 72 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 17 - WORKING INTEREST IN JOINT VENTURE WITH METALLINE MINING CO. On January 15, 1998, the Company acquired a 35% working interest in a joint venture with Metalline Mining Co. for exploration and development of the Sierra Mojada District, Coahuila, Mexico. The project was formerly a joint venture between Metalline and Dakota Mining Corp. Royal acquired the interest from Dakota in exchange for $100,000 cash, 200,000 shares of Metalline common stock which Royal carried on its books as an investment and 200,000 shares of Royal Silver common stock. Dakota retained a net smelter return royalty on future production from the project. See Note 6. On February 19, 1998, the Company sold the 35% working interest for exploration and development of the Sierra Mojada District, Coahuila, Mexico to Grand Central Silver Mines (GSLM) in exchange for a note receivable of $350,000, payable within one year and bearing interest of 8% per annum, and 735,000 share of GSLM valued at $1,424,062. (See Note 4). A total gain of $1,454,062 was recognized on this transaction. NOTE 18 - NOTES RECEIVABLE At September 30, 1998, the Company's note receivable consisted of a $350,000 receivable from Grand Central Silver Mines, Inc. This note bears interest at 8%, is uncollateralized, and matures February 15, 1999. At September 30, 1997, the Company's note receivable consisted of a $100,000 receivable from Grosvenor Capital ltd. This note, together with accrued interest of $12,458 was later cancelled in lieu of consulting fees owed at September 30, 1998. NOTE 19 - GOING CONCERN As shown in the financial statement, the Company incurred a net loss of $2,637,568 for the year ending September 30, 1998 and an accumulated deficit of $7,466,096 since inception. At September 30, 1998, there has been a significant change in the Company's liquidity. Cash to accumulated deficits has decreased from a ratio of 12.31% as of September 30, 1997 to 0.04% as of September 30, 1998. These factors indicate that the company may be unable to continue in existence. The financial statements do not include any adjustments related to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue existence. The Company's management has strong beliefs that significant and imminent private placements will generate sufficient cash for the Company to operate for the next few years. F-26 73 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS September 30, 1998 NOTE 20 - SUBSEQUENT EVENT In May 1998, the Company sold 3,000,000 shares of its common stock at $0.25 per share in exchange for $50,000 in cash and a short-term note in the amount of $700,000. Because of a subsequent decrease in the market value of the Company's stock, the Company and shareholder renegotiated the transaction. In November 1998, the aforementioned shareholder returned 2,000,000 shares of stock to the Company for cancellation and in return the Company rescinded the $700,000 note, which was recorded as stock subscriptions receivable at September 30, 1998. The net effect of the renegotiated stock transaction was a sale of common stock at $0.05 per share for cash only. F-27 74 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE A. Changes or disagreements with Principal Accountant. There have been no disagreements with the Company's independent public accountants. B. Change in Principal Accountant. As of November 8, 1996 there has been no change in the Company's principal accountants. C. Designation of New Accountant. The Company designated the accounting firm of Williams and Webster, P.S. to serve as principal independent accountant for the Company effective November 8, 1996. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the name, age and position of each Officer and Director of the Company: Name Age Position Howard M. Crosby 46 President, Treasurer and a member of the Board of Directors John Ryan 35 Vice President, Secretary and a member of the Board of Directors Jerry Stacey 52 Vice President of Operations Ronald Kitching 66 Member of the Board of Directors Kevin Stulp 41 Member of the Board of Directors The authorized number of directors of the Company is presently fixed at ten. Each director serves for a term of one year that expires at the following annual shareholders' meeting. Each officer serves at the pleasure of the Board of Directors and until a successor has been qualified and appointed. There are no family relationships, or other arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer. 75 Set forth below is certain biographical information regarding each director and executive officer of the Company: Howard M. Crosby - President, Treasurer and a member of the Board of Directors. Since February 1994, Mr. Crosby is the President and a member of the Board of Directors and since January 1998, Mr. Crosby has been the Treasurer of Company. Since 1989, Mr. Crosby has been president of Crosby Enterprises, Inc., a family-owned business advisory and public relations firm. From September 1992 to May 1993, Mr. Crosby was employed by Digitran Systems, Inc., of Logan, Utah, in the marketing department. In May of 1993, Mr. Crosby entered into a business consulting relationship with Centurion Mines Corporation, and has served as president and director of Mammoth Mining Company and Gold Chain Mining Company, both Centurion subsidiaries. In July, 1992, Mr. Crosby filed a Chapter 13 petition for bankruptcy. The reorganization plan was approved in October 1992. Mr. Crosby received a B.A. degree from the University of Idaho in 1974. John Ryan - Vice President, Secretary and a member of the Board of Directors. Mr. Ryan has been a member of the Board of Directors since April 1997, has been Vice President of Corporate Development since September 1996 and has been Secretary since October 1998. Mr. Ryan is a professional mining engineer. Since June 1996, Mr. Ryan has been a Vice President and member of the Board of Directors of Metalline Mining Company. From September 1993 to August 1994, Mr. Ryan was a registered representative with Shearson Lehman Brothers, Inc. From August 1994 to April 1995, Mr. Ryan has served as a consultant in mine engineering services, and will continue in these activities during his tenure, as well as, engage in other matters in accordance with the direction and assignment of the Board of Directors. From April 1995 to April 1996, Mr. Ryan was a registered representative with Pennaluna Securities Corp., a SEC/NASD registered broker/dealer. In addition to his professional degree in Mining Engineering, which he received from the University of Idaho, Mr. Ryan also holds a juris doctorate (J.D.) law degree from Boston College School of Law School. Jerry Stacey - Vice President of Operations Since August 1995, Mr. Stacey has been the Vice President of Operations. Mr. Stacey is a professional mining engineer with over 20 years experience in open pit and underground mining. Between 1974 and 1981, Mr. Stacey worked in senior supervisory positions as a Shift Foreman for the Anaconda Company; as mine superintendent for Day Mines at the Sherman Mine, mining 1,000 tons per day of silver ore; as mine manager for Choctaw Mining supervising the construction and operation of a tungsten mine and mill complex; as mine manager for Mountain Mineral's barite mines in British Columbia; and as a mine manager at the Goodnews Bay platinum placer operation. In 1981, Mr. Stacey formed General Mine Services Corp., a mine consulting and contracting firm for junior mining and exploration companies, where he continued as CEO until 1994, when he joined with Celebration 76 Mining Company and has continued full time as Vice President of Operations with the Company. His current responsibilities focus on the engineering, design, installation, and operation of complete mine and metallurgical plants involving base and precious metals and industrial minerals. Mr. Stacey received a B.S. Degree in Mining Engineering from Montana Tech in 1974 while working in Butte, Montana mines. Ronald Kitching - Member of the Board of Directors Since August 1995, Mr. Kitching has been a member of the Board of Directors of the Company. Prior to his retirement five years ago, Mr. Kitching was involved in the mining industry for over 35 years holding various positions, including serving as president of Overland Drilling Company, an Australian exploration drilling company, and as co-founder of Glindeman-Kitching Enterprises, an exploration drilling company. Mr. Kitching has served as a director for Celebration Mining Company since May 1994. Kevin Stulp - Member of the Board of Directors Mr. Stulp was appointed to the Board of Directors of the Company to fill the vacancy created by the resignation of Hal Cameron. Since August 1995, Mr. Stulp has been an independent consultant in the fields of volume electronics and manufacturing, general business consulting, business strategy, business use of the Internet, automation and integration through computers, and financial analysis. From July 1994 to July 1995, Mr. Stulp was Director of Manufacturing Reengineering for Compaq Computer Corporation, Houston, Texas. From September 1992 to June 1994, Mr. Stulp was Director of Manufacturing for Compaq Computer Corporation. From September 1986 to September 1992, Mr. Stulp was PCA Operations Manager for Compaq Computer Corporation. From December 1983 to September 1986, Mr. Stulp held various positions with Compaq Computer Corporation, including industrial engineer, new products planner and manufacturing manager. From July 1980 to December 1983, Mr. Stulp was a financial planner with Texas Instruments, Houston, Texas. Mr. Stulp holds the degree of Masters in Business Administration and the degree of Bachelor of Science Mechanical Engineering, both from the University of Michigan, and the degree of Bachelor of Science from Calvin College, Grand Rapids, Michigan. In January 1998, Mr. Robert E. Jorgensen, the Executive Vice President, Treasurer and a member of the Board of Directors, resigned. Mr. Jorgensen did not have any disagreements with the Company on any matter relating to the Company's operations, policies or practices. In October 1998, Mr. Thomas Henricksen, the Secretary and a member of the Board of Directors, resigned. Mr. Henricksen did not have any disagreements with the Company on any matter relating to the Company's operations, policies or practices. 77 Indemnification. The Company's Bylaws provide that the Company's directors and officers will be indemnified to the fullest extent permitted by the Utah Corporation Code, however, such indemnification shall not apply to acts of intentional misconduct; a knowing violation of law; or, any transaction where an officer or director personally received a benefit in money, property, or services to which to the director was not legally entitled. The Company has been advised that in the opinion of the Securities and Exchange Commission indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities and Exchange Act of 1934 requires certain defined persons to file reports of and changes in beneficial ownership of a registered security with the Securities and Exchange Commission and the National Association of Securities Dealers in accordance with the rules and regulations promulgated by the Commission to implement the provisions of Section 16. Under the regulatory procedure, officers, directors, and persons who own more than ten percent of a registered class of a company's equity securities are also required to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of Forms 3, 4, and 5 furnished to the Company for transactions occurring between October 1, 1997 and September 30, 1998, or with respect to transactions which occurred between October 1, 1997 and September 30, 1998, all reports which were required to be filed under Section 16(a) of the Exchange Act were in fact so filed. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation. The following table sets forth the compensation paid by the Company during each of the last three fiscal years to its Chief Executive Officer, and to the other four most highly compensated officers and executive officers, but only if the total annual salary and bonus of any such executive officer exceeded $100,000 for Fiscal 1997 (the "Named Executive Officers"). This information includes the dollar value of base salaries, bonus awards and number of stock options granted, and certain other compensation, if any. 78 Summary Compensation Table. Annual Compensation ------------------- Principal Name Position Year Salary ($) - ------------- --------- ---- ---------- Howard Crosby President 1998 $ 78,000 [1] 1997 $ 78,000 1996 $ 78,000 1995 $ 48,000 Named Executive Officers None n/a n/a [1] Crosby received four months salary in cash, $19,500, and the balance in Common Stock. Other than the Company's Stock Option and Award Plan, there are no retirement, pension, or profit sharing plans for the benefit of the Company's officers and directors. Option/SAR Grants. No individual grants of stock options, whether or not in tandem with stock appreciation rights ("SARs"), and freestanding SARs were made during Fiscal 1997 to the CEO or any Executive Officer. No stock options were exercised by the CEO or any executive officers in Fiscal 1998. Long-Term Incentive Plan Awards. The Company does not have any formalized long-term incentive plan (excluding restricted stock, stock option and SAR plans) that provides compensation intended to serve as incentive for performance to occur over a period longer than one fiscal year, whether such performance is measured by reference to financial performance of the Company or an affiliate, the Company's stock price, or any other measure. Compensation of Directors. Directors receive for their services a retainer fee payable in shares of the Company's Common Stock, currently at the rate of 2,500 shares per quarter of completed service. During Fiscal 1997, 184,000 shares were awarded to directors as compensation. The Board has not implemented a plan to award options, authorized under the Company's Stock Option and Award Plan and none have been granted. There are no contractual arrangements with any member of the Board of Directors, other than the employment and salary arrangements for compensating two of its members for their service as executive officers: Howard Crosby as President and CEO, and Robert Jorgensen as Executive Vice President and Treasurer. 79 Compensation Committee Interlocks and Insider Participation. There are no compensation committee interlocks. With respect to insider participation, Howard Crosby, Hal Cameron and Carlos Chavez, participated in deliberations of the Company's Board of Directors during Fiscal 1996, concerning executive officer compensation. Board of Directors Report on Executive Compensation. The following is a summary of the Board of Directors Report: It is the Board's responsibility to review and set compensation levels of the executive officers of the Company, evaluate the performance of management and consider management appointments and related matters. All decisions are decisions of the full Board. The Board considers the performance of the Company and how compensation paid by the Company compares to compensation generally in the mining industry and among similar companies. In establishing executive compensation, the Board bases its decisions, in part, on achievement and performance regarding broad-based objectives and targets relating to the continued acquisition of favorable silver properties and the progress of exploration and development of such properties, as well as the Company's financial performance. For Fiscal 1998, the Company's executive compensation policy consisted of two elements: base salary and stock awards. The policy factors which determine the setting of these compensation elements are largely aimed at attracting and retaining executives considered essential to the Company's long-term success. The granting of stock is designed as an incentive for executives to keep management's interests in close alignment with the interests of shareholders. The Company's executive compensation policy seeks to engender committed leadership to favorably posture the Company for continued growth, stability and strength of shareholder equity. The Company paid salaries to its officers for the fiscal year- ended September 30, 1998, as follows: Name of Officer Position Salary Howard Crosby President $78,000 yearly Robert Jorgensen[1] Executive Vice President $18,000 Jerry Stacey Vice President $70,000 yearly John Ryan Vice President of $48,000 yearly Corporate Development [1] Resigned. These amounts were approved by the Board in recognition of the work and efforts and in completing the acquisition of a large number of silver mining properties prior to the end of fiscal 1998. Further, the Board recognized the significant role of these four individuals in managing the Company's principal office in Spokane, Washington and in raising funds for the Company's exploration and development activities. Finally, the Board of Directors took into 80 account the reasonableness of these salaries in comparison with Executive salaries within the mining region. On the basis of the above factors, the Board determined that these salaries were proper and fitting. No other officers received a salary during Fiscal 1998. With respect to stock awards during fiscal 1998, the Board of Directors did not change the amount of shares, 2,500 per quarter, which each director is entitled to receive as partial compensation for service to the Company. The Board believes that executive compensation during fiscal 1998 substantially reflects the Company's compensation policy and the Board anticipates paying a like sum during the fiscal year ending September 30, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as of December 15, 1998, the outstanding Common Stock of the Company owned of record or beneficially by each person who owned of record, or was known by the Company to own beneficially, more than 5% of the Company's Common Stock, and the name and shareholdings of each Officer and Director and all Officers and Directors as a group. At December 15, 1998, the number of shares of common stock of the Company issued and outstanding was 19,932,565. Percentage Shares of Common Name Owned Stock Owned Howard Crosby [1] 1,535,000 7.70% 105 North First Suite 232 Sandpoint, ID 83864 John Ryan [2] 425,000 2.13% 200 Riverwood Court Post Falls, ID 83854 Jerry Stacey [3] 22,800 0.11% 406 N. Stonewall Spokane, WA 99208 Ronald Kitching 157,500 0.79% P. O. Box 9809 Frenchville, QD 4701 Australia Kevin Stulp 494,000 2.48% 5639 Doliver Houston, TX 77056 81 ALL OFFICERS AND DIRECTORS AS A GROUP 2,634,300 13.21% (Five Individuals) Grand Central Silver Mines, Inc. 746,180 3.74% 1010 Ironwood Drive Suite 105 Coeur d'Alene, ID 83814 Britannia Holdings Ltd. [4] 3,485,000 17.48% Kings House, The Grange St. Peter Port Guernsey, GY1 2QJ Channel Island All shares are held beneficially and of record and each record shareholder has sole voting and investment power. [1] Mr. Crosby is a director, executive officer and 50% shareholder of Extol International Corp., a privately-held Washington corporation. As a 50% shareholder, Mr. Crosby holds indirect beneficial ownership of one-half of the restricted shares retained by Extol following the closing of the share exchange with Celebration. Also, the Board approved the release of a previously authorized grant of 200,000 restricted shares to Crosby Enterprises, Inc. for its work in putting together for the Company no fewer than five major business proposals, culminating in the reorganization with Celebration. Mr. Crosby holds indirect beneficial ownership of those restricted shares as a director, executive officer and majority shareholder of Crosby Enterprises, a private, closely-held Washington corporation. Mr. Crosby holds all remaining shares in his name, 15,000 shares of which he received in Fiscal 1995 as partial compensation for his service as a director and executive officer. Does not include Warrants to purchase 850,000 shares of Common Stock. [2] Does not include Warrants to purchase 200,000 shares of Common Stock. [3] Does not include Warrants to purchase 300,000 shares of Common Stock. [4] Does not include Warrants to purchase 2,135,000 shares of Common Stock. 82 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Relationships and Transactions pertaining to the Company and Celebration. Certain of the directors and/or officers of the Company also serve as directors and/or officers of other companies involved in natural resource exploration and development and, consequently, there exists the possibility for such directors and officers to be in a position of conflict. Any decision made by such directors and officers involving the Company, as the case may be, will be made in accordance with their duties and obligation to deal fairly and in good faith with the Company and such other companies. In addition, such directors and officers are required to declare and refrain from voting on any matter in which such directors and officers may have a conflict of interest. In this respect, Howard Crosby, who was the President of Celebration and of the Company at the time of the Reorganization, refrained from voting on any matter related to the Reorganization or any other matter pertaining to both companies. The Company has engaged in transactions with its officers, directors and principal shareholders, including the issuance of the initial shares of the Company. Such transactions may be considered as not having occurred at arm's length. The Company may be engaged in transactions with management and others involving conflicts of interest, including conflicts on salaries and other payments to such parties, as well as business opportunities which may arise. In this regard, the directors of the Company are involved in other companies and may have conflicts of interest in allocating time between the Company and other entities to which they are affiliated. Relationships and Transactions Pertaining to the Company. From time to time, at the Company's request, Centurion may, at its discretion, provide funds to the Company or pay certain expenses directly. The Company is current in its payments to Centurion and management intends to continue the immediate repayment to Centurion as expenses are incurred. During Fiscal 1994, the Company carried over the previous balance owed by Centurion of $5,055 and loaned Centurion $8,075, resulting in cumulative total advances made by the Company to Centurion of $13,130. Also during Fiscal 1994, Centurion accrued $54,335 of the Company's taxes, loaned $83,700 to the Company, and paid $140,932 of the Company's expenses (including certain land costs of the Company), resulting in total advances made by Centurion to the Company of $278,967. Centurion repaid these and previous amounts by paying certain of the Company's expenses and by transferring to the Company $467,236 of mineral properties. Thus, for Fiscal 1994 transactions between the Company and Centurion, including balance carryovers, the net cumulative result was a balance of $265,838 owed by the Company to Centurion. 83 During Fiscal 1995, Centurion made net total advances to the Company of $38,086. The net result was a balance of approximately $300,000 owed by the Company to Centurion, which the Company repaid prior to the end of Fiscal 1995 by issuing 200,000 shares of its common stock to Centurion at the then prevailing market price of $1.50 per share. At September 30, 1995, and at September 30, 1996, the Company owed $289 to Centurion. Relationships and Transactions pertaining to Celebration. In May 1994, Celebration issued, pursuant to Board resolution, an aggregate of 1,000,000 shares of common stock to Extol International Corporation, an affiliate of Howard M. Crosby, an officer and director of the Company, and 500,000 shares of Common Stock to Robert Jorgensen, an officer and director of the Company, in exchange for a transfer of the rights under an option on the Montana Property. Mr. Crosby and Mr. Jorgensen are considered founders of the Company. The Company has not received a fairness opinion or other valuation of the rights transferred in exchange for the shares issued to Mr. Jorgensen and Extol International Corporation. The cost basis of the rights under the Montana Property was estimated to be $4,000. The perceived value of the shares issued was determined as of the time of transfer by Mr. Crosby and Mr. Jorgensen as sole officers and directors of the Company. The determination was not based on arms length negotiations. In June 1994, the Company repaid to Crosby Enterprises, Inc., an affiliate of Howard M. Crosby, $20,000 for funds advanced on the Montana Property prior to the transfer of the rights under the option to the Company. In August 1994, Celebration issued 100,000 shares of Common Stock to Ronald Kitching, a director, as compensation for his services as a director. Mr. Crosby and Mr. Jorgensen also received compensation from the Company as executive officers. In August 1994, Thomas Miller, a director of Celebration up to August 8, 1995, received options to purchase up to 400,000 shares as compensation for his consulting services in field exploration management through August 1995. Mr. Miller was also an officer, director and principal shareholder of United Silver Mines, Inc., the Company's Joint Venture Partner on the Vipont Property and its subsidiary, Bannock Silver Mining Company. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K REPORTS ON FORM 8-K The Company has not filed any reports on Form during the annual period ended September 30, 1998. 84 INDEX TO EXHIBITS The following documents are incorporated herein by reference to the Company's Registration Statement on Form 10, as filed with the Securities and Exchange Commission: Number Document - --------------------------------------------------------------------- 3.1 Articles of Incorporation. 3.2 Articles of Amendment. 3.3 Amendment to Articles of Incorporation Limiting Director Liability. 3.4 Bylaws. 10.1 Sale of Mining Properties By Centurion Mines Corporation to Royal Minerals, Inc. - June 1992 through September 1993. 10.2 Deed with Reservation of Mineral Royalty - January 1992 to Kennecott. 10.3 July 1992 Purchase and Sale Agreement of 16,880 acres to Kennecott. 10.4 July 1992 Kennecott Option to Purchase 6,320 acres. 10.5 Deed and Assignment with Reservation of Mineral Royalty - August 1992 (16,880 acres) to Kennecott. 10.6 Deed and Assignment with Reservation of Mineral Royalty - December 1992 (6,320 acres) to Kennecott. The following documents are incorporated herein by reference from the Registrant's Current Report on Form 8-K, dated August 8, 1995, as filed with the Securities and Exchange Commission: 2.01 Agreement and Plan of Reorganization. 3.05 Articles of Share Exchange (Utah). 3.06 Articles of Share Exchange (Washington). 4.01 Subscription and Investment Agreement. 4.02 Stock Purchase Option Certificate. 19.01 Material Furnished to Celebration Securityholders. 20.01 Letter from Royal to Share Exchange Securityholders. 85 The following documents are incorporated herein by reference from the Registrant's Form S-8 Registration Statement filed with the Commission on July 17, 1995. 4.1 1995 Stock Option and Stock Award Plan with Amendment No. 1 to the Plan. The following documents are incorporated herein by reference from the Registrant's Form SB-2 Registration Statement filed with the Commission on February 10, 1997: 10.7 Vipoint Joint Venture Agreement. 10.8 Option to Joint Venture with Placer Mining Corporation, dated April 19, 1996. 10.9 Amendment to Option to Joint Venture with Placer Mining Corporation dated the 22nd day of July, 1996. 10.10 Exploration Agreement and Purchase/Joint Venture Option. 10.11 Purchase Agreement with Imperial Energy Corp. The following documents are incorporated herein by reference from the Registrant's Form SB-2 Registration Statement filed with the Commission on September 12, 1997: 10.12 Unilateral option to Purchase Mining Concessions from Sociedad de Exploarciones Y Explotaciones Mineras Oregon Limitada. 10.13 Modification of Unilateral Purchase Option Contract of Mining Concessions. 10.14 Unilateral option to Purchase Mining Concessions from Compania Minera San Enrique S.C.M. Y Otra. 28.1 Warrant Agreement. 28.2 Selling Agent Agreement. All other schedules and exhibits are omitted, as the required information is not applicable or is not present in amount sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto. 86 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, hereunto duly authorized, in Spokane, Washington, on this 28th day of December, 1998. ROYAL SILVER MINES, INC. BY: /s/ Howard M. Crosby Howard M. Crosby, President KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Howard M. Crosby, as true and lawful attorney-in-fact and agent, with full power of substitution, for his and in his name, place and stead, in any and all capacities, to sign any and all amendments to this registration statement, and to file the same, therewith, with the Securities and Exchange Commission, and to make any and all state securities law or blue sky filings, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying the confirming all that said attorney-in-fact and agent, or any substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated: Signature Title Date /s/ Howard M. Crosby 12/28/98 Howard M. Crosby President, Treasurer and a member of the Board of Directors /s/ John P. Ryan John Ryan Vice President, Secretary 12/28/98 and a member of the Board of Directors ___________________________ 12/___/98 Jerry Stacey Vice President of Operations /s/ Ronald Kitching 12/28/98 Ronald Kitching Member of the Board of Directors /s/ Kevin Stulp 12/22/98 Kevin Stulp Member of the Board of Directors EX-27 2
5 This schedule contains summary financial information extracted from the Consolidated Statement of Financial Condition for year ended on September 30, 1998 (Audited) and the Consolidated Statement of Income for the twelve months ended September 30, 1998 (Audited) and is qualified in its entirety by reference to such finanical statements. YEAR SEP-30-1998 SEP-30-1998 3,147 0 367,106 0 0 372,415 96,650 19,868 3,982,592 68,815 0 0 0 190,035 3,723,742 3,982,592 0 0 0 1,063,715 1,573,853 0 0 (2,637,568) 0 (2,637,568) 0 0 0 (2,637,568) (0.16) 0
-----END PRIVACY-ENHANCED MESSAGE-----