10-Q 1 0001.txt 1 ____________________________________________________________________ ____________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: June 30, 2000 [ ] 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 or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 1010 Ironwood Drive, Suite 105, Coeur d'Alene, ID 83814 (Address of Principal Executive Offices, including Zip Code.) (208) 769-7340 Registrant's telephone number, including area code 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 [ ] The number of shares outstanding at June 30, 2000: 22,562,065 shares ____________________________________________________________________ ____________________________________________________________________ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS OF ROYAL SILVER MINES, INC. (Hereinafter referred to as Registrant or Company) Condensed financial statements, and an accompanying accountants' review report, are filed as part of this Quarterly Report. In management's opinion, these financial statements present fairly in all material respects Registrant's financial condition and changes in condition as of June 30, 2000 and September 30, 1999, and the results of operations, stockholders' equity and cash flows for the nine months and three months ended June 30, 2000, and 1999, and from inception on February 17, 1994 through June 30, 2000, in conformance with generally accepted accounting principles. The accompanying financial statements consolidate the financial statements of Celebration Mining Company and Royal Silver Mines, Inc. due to the reorganization discussed in Note 1 of the financial statements following this report. All significant intercompany accounts and transactions have been eliminated. Also, the consolidation required a change in fiscal year-end, from November 30 (Celebration) to September 30 (Royal). The financial statements account for the reorganization using the purchase method of accounting (see Note 1 to the financial statements). Celebration is treated as the acquiring company for financial reporting purposes because its shareholders constitute greater than 50 percent of the combined shareholder group. In conformity with generally accepted accounting principles and the Company's accounting policy, Celebration is recognized as the predecessor entity. Consequently, Celebration's assets and liabilities were not adjusted in the accompanying financial statements. The financial statements for the period from the inception of Celebration on February 17, 1994 to November 30, 1994 ("Fiscal 1994") do not include the balance sheet data or results of operations of Consolidated Royal Mines, Inc. The accompanying financial statements represent the activities of Royal Silver Mines and Celebration, but are not considered consolidated financial statements since Royal Silver is the successor to Celebration. As discussed in greater detail under Item 2 below, a substantial portion of Registrant's assets consist of investments in mineral properties for which additional exploration is required to determine if they contain ore reserves that are economically recoverable. The realization of these investments is contingent to a large extent upon the success of Registrant's property transactions as a whole, 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. Accordingly, the accompanying financial statements make no provision for any asset impairment or other adjustment that might result from the outcome of this uncertainty. 3 The Board of Directors Royal Silver Mines, Inc. Spokane, Washington ACCOUNTANT'S REVIEW REPORT We have reviewed the accompanying balance sheet of Royal Silver Mines, Inc. (a development stage company) as of June 30, 2000, and the related statements of operations and comprehensive loss, stockholders' equity, and cash flows for the three months and nine months ended June 30, 2000, and for the period from February 17, 1994 (inception) through June 30, 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. The balance sheet for the year ended September 30, 1999 was audited by us and we expressed an unqualified opinion on it in our report dated December 27, 1999. We have not performed any auditing procedures since that date. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company's significant operating losses raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Williams & Webster, P.S. Williams & Webster, P.S. Certified Public Accountants Spokane, Washington August 1, 2000 -1- 4 ROYAL SILVER MINES, INC. (A Development Stage Company) BALANCE SHEETS June 30, September 30, 2000 1999 ASSETS (Unaudited) CURRENT ASSETS Cash $ 24,302 $ 28,147 Note receivable 14,628 - Deposit 150 - ----------- ----------- TOTAL CURRENT ASSETS 39,080 28,147 ----------- ----------- MINERAL PROPERTIES 950,794 950,794 ----------- ----------- PROPERTY AND EQUIPMENT Mining equipment 8,343 196,389 Furniture and equipment 1,440 12,761 Less accumulated depreciation (6,005) (45,127) ----------- ----------- TOTAL PROPERTY AND EQUIPMENT 3,778 164,023 ----------- ----------- OTHER ASSETS Investments 348,883 153,162 ----------- ----------- TOTAL ASSETS $ 1,342,535 $ 1,296,126 =========== =========== See accountant's review report and accompanying notes -2- 5 ROYAL SILVER MINES, INC. (A Development Stage Company) BALANCE SHEETS June 30, September 30, 2000 1999 LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited) CURRENT LIABILITIES Accounts payable $ 133,834 $ 77,603 Payable to related parties - 44,000 ----------- ----------- TOTAL CURRENT LIABILITIES 133,834 121,603 ----------- ----------- COMMITMENTS AND CONTINGENCIES - - ----------- ----------- STOCKHOLDERS' EQUITY Common stock, $.01 par value; 40,000,000 shares authorized, 22,562,065 and 20,299,565 shares issued and outstanding, respectively 225,620 202,995 Additional paid-in capital 11,497,174 11,428,674 Deficit accumulated during development stage (10,639,808) (10,457,146) Accumulated other comprehensive income 125,715 - ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 1,208,701 1,174,523 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,342,535 $ 1,296,126 =========== =========== See accountant's review report and accompanying notes. -3- 6 ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS Period from 02/17/94 Three months ended Nine months ended (inception) June 30, June 30, June 30, June 30, through 2000 1999 2000 1999 06/30/00 (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) REVENUES $ - $ - $ - $ - $ - ---------- ----------- ---------- ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSES Mineral property expense 2,322 3,134 7,417 3,134 566,859 Depreciation and amortization 1,646 6,202 7,948 21,249 234,122 Officers' and directors' compensation 2,000 17,500 17,000 77,040 1,411,760 General and administrative 75,206 42,843 124,913 110,109 3,802,207 ---------- ----------- ---------- ----------- ----------- TOTAL EXPENSES 81,174 69,679 157,278 211,532 6,014,948 ---------- ----------- ---------- ----------- ----------- OPERATING LOSS (81,174) (69,679) (157,278) (211,532) (6,014,948) ---------- ----------- ---------- ----------- ----------- OTHER INCOME (EXPENSES) Interest income 122 - 304 7,058 58,935 Interest expense - - - - (74,348) Gain on property interest sold - - - - 1,875,281 Gain (loss) on disposition and impairment of assets 26,089 (1,146,559) (25,688) (1,393,671) (6,484,728) ---------- ----------- ---------- ----------- ----------- Total other income (expense) 26,211 (1,146,559) (25,384) (1,386,613) (4,624,860) ---------- ----------- ---------- ----------- ----------- INCOME (LOSS) BEFORE TAXES (54,963) (1,216,238) (182,662) (1,598,145) (10,639,808) INCOME TAXES - - - - - ---------- ----------- ---------- ----------- ----------- NET INCOME (LOSS) (54,963) (1,216,238) (182,662) (1,598,145) (10,639,808) OTHER COMPREHENSIVE INCOME (LOSS) Unrealized gain (loss) on market value of investments (146,426) - 125,715 - 125,715 ---------- ----------- ---------- ----------- ----------- COMPREHENSIVE INCOME (LOSS) $ (201,389) $(1,216,238) $ (56,947) $(1,598,145) $(10,514,093) ========== =========== ========== =========== ============ NET INCOME (LOSS) PER COMMON SHARE BASIC AND DILUTED $ (0.01) $ (0.06) $ nil $ (0.08) $ (0.82) ========== ========== ========== ========== ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 20,410,417 20,027,070 20,374,268 19,317,737 12,982,074 ========== ========== ========== ========== ========== See accountant's review report and accompanying notes. -4- 7 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY Total Common Stock Additional Accumu- Stock- Number Paid-in lated holders' of Shares Amount Capital Deficit 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 2,250,000 22,500 (18,500) - 4,000 Issuance in July 1994 of shares for cash at $.402 in private placement, net of costs 1,050,000 10,500 411,116 - 421,616 Issuance in August 1994 of shares to a director in exchange for services valued at $.417 per share 150,000 1,500 61,000 - 62,500 Net loss for the year ended November 30, 1994 - - - (211,796) (211,796) --------- -------- ----------- ---------- --------- Balance November 30, 1994 3,450,000 34,500 453,616 (211,796) 276,320 Issuance of share in debt offering at $.03 per share 416,250 4,163 9,712 - 13,875 Issuance of shares for mineral properties valued at $1.00 per share 262,500 2,625 259,875 - 262,500 Issuance of shares for cash at $1.00 per share 15,000 150 14,850 - 15,000 Stock issuance costs - - (58,202) - (58,202) Issuance of shares to acquire Consolidated Royal Mines, Inc. at $.15 per share 2,434,563 24,346 335,750 - 360,096 --------- -------- ----------- ---------- --------- Balance forward 6,578,313 $ 65,784 $ 1,015,601 $ (211,796) $ 869,589 --------- -------- ----------- ---------- --------- See accountant's review report and accompanying notes. -5- 8 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Additional Total Number Paid-in Accumulated Stockholders' of Shares Amount Capital Deficit Equity Balance forward 6,578,313 $ 65,784 $ 1,015,601 $ (211,796) $ 869,589 Issuance of shares to directors and employees for services at prices ranging from $2.00 to $2.50 per share 12,750 127 29,473 - 29,600 Issuance of shares in exchange for mineral properties at prices ranging from $3.13 to $3.25 per share 800,000 8,000 2,530,126 - 2,538,126 Issuance of shares for cash at prices ranging from $1.50 to $2.00 per share 166,000 1,660 247,340 - 249,000 Issuance of shares in exchange for debt at $1.50 per share 200,000 2,000 298,000 - 300,000 Net loss for the ten months ended September 30, 1995 - - - (750,939) (750,939) --------- -------- ----------- ---------- ----------- Balance September 30, 1995 7,757,063 77,571 4,120,540 (962,735) 3,235,376 Issuance of shares for cash at $1.50 per share 1,176,832 11,769 1,754,010 - 1,765,779 Issuance of shares to directors and employees for services at $1.50 per share 222,700 2,227 331,823 - 334,050 Issuance of shares in exchange for debt at $1.50 per share 406,050 4,060 605,015 - 609,075 Issuance of shares for cash at $2.20 per share 150,000 1,500 328,500 - 330,000 Issuance of warrants for cash at $.05 per warrant - - 41,068 - 41,068 --------- -------- ----------- ---------- ----------- Balance forward 9,712,645 $ 97,127 $ 7,180,956 $ (962,735) $ 6,315,348 --------- -------- ----------- ---------- ----------- See accountant's review report and accompanying notes. -6- 9 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY Total Common Stock Additional Stock- Number Paid-in Accumulated holders' of Shares Amount Capital Deficit Equity Balance forward 9,712,645 $ 97,127 $ 7,180,956 $ (962,735) $ 6,315,348 Issuance of shares for cash at $1.62 per share 65,000 650 104,650 - 105,300 Issuance of shares for cash to directors and employees at prices ranging from $1.62 to $2.08 per share 107,500 1,075 181,175 - 182,250 Issuance of shares for cash at $0.75 per share 200,000 2,000 147,985 - 149,985 Issuance of shares for cash at $1.70 per share 250,000 2,500 422,500 - 425,000 Cancellation of 35,000 shares received in exchange for return of mining property (35,000) (350) (109,025) - (109,375) Payment to Centurion Mines for option to repurchase stock - - - (50,000) (50,000) Issuance of shares for joint venture in mining property at $1.50 per share 100,000 1,000 149,000 - 150,000 Repurchase of 25,000 shares issued for joint venture at $1.40 per share (25,000) (250) (34,750) - (35,000) Issuance of shares for mining property at $1.50 per share 20,000 200 29,800 - 30,000 Issuance of shares to noteholders for extension of notes at $1.50 per share 39,375 394 58,669 - 59,063 Issuance of shares for services at $1.50 per share 215,334 2,153 320,848 - 323,001 ---------- --------- ----------- ------------ ----------- Balance forward 10,649,854 $ 106,499 $ 8,451,808 $ (1,012,735) $ 7,545,572 ---------- --------- ----------- ------------ ----------- See accountant's review report and accompanying notes. -7- 10 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Additional Total Number Paid-in Accumulated Stockholders' of Shares Amount Capital Deficit Equity Balance forward 10,649,854 $ 106,499 $ 8,451,808 $ (1,012,735) $ 7,545,572 Stock issuance costs - - (15,000) - (15,000) Net loss for the year ended September 30, 1996 - - - (2,045,082) (2,045,082) ---------- --------- ----------- ------------ ----------- Balance September 30, 1996 10,649,854 106,499 8,436,808 (3,057,817) 5,485,490 Issuance of shares for cash at $0.75 per share 2,491,000 24,910 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 110,500 1,105 109,395 - 110,500 $0.75 per share 25,000 250 18,500 - 18,750 Issuance of shares for services at $1.25 per share 98,250 982 121,829 - 122,811 Issuance of shares for mining property at $1.00 per share 60,000 600 59,400 - 60,000 Cancellation of 25,000 shares received in exchange for return of mining property (25,000) (250) (81,000) - (81,250) Issuance of shares for services: at $1.00 per share 25,500 255 25,245 - 25,500 $0.75 per share 47,128 471 34,875 - 35,346 Payment for extension of warrants for one year - - 5,500 - 5,500 Net loss for the year ended September 30, 1997 - - - (1,770,711) (1,770,711) ---------- --------- ----------- ------------ ----------- Balance September 30, 1997 13,482,232 $ 134,822 $10,543,892 $ (4,828,528) $ 5,850,186 ---------- --------- ----------- ------------ ----------- See accountant's review report and accompanying notes. -8- 11 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY Common Stock Additional Number Paid-in of Shares Amount Capital Balance forward 13,482,232 $ 134,822 $ 10,543,892 Issuance of shares 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 $0.15 per share 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 September 30, 1998 19,003,565 $ 190,035 $ 11,889,838 Issuance of shares to officers, directors and consultants for services at prices varying from $0.04 per share to $0.06 per share 1,876,000 18,760 89,469 Issuance of shares for cash, investment and receivable 1,070,000 10,700 66,500 Shares returned to treasury for cancellation of receivable (2,000,000) (20,000) (680,000) Stock issuance costs - - (133) Issuance of shares for cash at prices varying from $0.04 per share to $0.07 per share 1,800,000 18,000 63,000 Payment of stock subscription - - - Shares returned to treasury for cancellation of receivable and exchange of investments (1,450,000) (14,500) - Unrealized loss on market value - - - ---------- ---------- ------------ Balance Forward 20,299,565 $ 202,995 $ 11,428,674 ---------- ---------- ------------ See accountant's review report and accompanying notes. -9a- 12 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) 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 September 30, 1998 $ (700,000) $ (7,466,096) $ 3,913,777 Issuance of shares to officers, directors and consultants for services at prices varying from $0.04 per share to $0.06 per share - - 108,229 Issuance of shares for cash, investment and receivable (50,000) - 27,200 Shares returned to treasury for cancellation of receivable 700,000 - - Stock issuance costs - - (133) Issuance of shares for cash at prices varying from $0.04 per share to $0.07 per share - - 81,000 Payment of stock subscription 50,000 - 50,000 Shares returned to treasury for cancellation of receivable and exchange of investments - - (14,500) Unrealized loss on market value of investments - (2,991,050) (2,991,050) ---------- ------------ ----------- Balance Forward $ - $(10,457,146) $ 1,174,523 ---------- ------------ ----------- See accountant's review report and accompanying notes. -9b- 13 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Additional Number Paid-in of Shares Amount Capital Balance forward 20,229,565 $ 202,995 $ 11,428,674 Shares issued to consultants for services at $0.05 per share 62,500 625 2,500 Shares issued to officers for debt at $0.04 per share 2,200,000 22,000 66,000 Net loss for nine months ended June 30, 2000 - - - Unrealized gain on market value of investments - - - ---------- --------- ------------ Balance, June 30, 2000 (Unaudited) 22,562,065 $ 225,620 $ 11,497,174 ========== ========= ============ See accountant's review report and accompanying notes. 10-a 14 ROYAL SILVER MINES, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (Continued) Accumulated Other Total Subscription Accumulated Comprehensive Stockholders' Receivable Deficit Loss Equity Balance forward $ - $ (10,457,146) $ - $ 1,174,523 Shares issued to consultants at $0.05 per share - - - 3,125 Net loss for year ended March 31, 2000 - (127,699) - (127,699) Unrealized gain on market value of investments - - 272,141 272,141 ---- ------------- ---------- ----------- Balance, March 31, 2000 (Unaudited) $ - $ (10,584,845) $ 272,141 $ 1,322,090 ==== ============= ========== =========== See accountant's review report and accompanying notes. -10b- 15 ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS From 02/17/94 Nine months ended (Inception) June 30, June 30, Through 2000 1999 June 30, 2000 (Unaudited) (Unaudited) (Unaudited) Cash flows from operating activities: Net income (loss) $ (182,662) $ (1,598,145) $ (10,639,808) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Loss on sale of equipment 86,284 - 98,869 Equipment traded for services 4,137 - 4,137 Depreciation and amortization 7,948 21,249 229,331 Issuance of common stock for services 3,125 104,940 1,380,071 Write-off of option costs - - 517,871 Write-off of joint venture costs - - 160,000 Write-off of mineral properties - - 2,421,354 Write-off of other assets - 1,000 - Loss on devaluation of investments - 1,150,922 3,121,060 Changes in assets and liabilities: Note receivable (14,628) 340,000 (14,628) Deposit (150) - (150) Prepaid expenses - 2,162 (28,438) Other assets - - (9,801) Interest receivable - 17,106 (4,674) Accounts payable 56,231 3,277 133,834 Accrued expenses - (3,000) 43,188 Payable to related party (44,000) - 256,000 ---------- ------------ ------------- Net cash provided (used) in operating activities (83,715) 39,511 (2,331,784) ---------- ------------ ------------- Cash flows from investing activities: Purchase of investments (152,752) 105,415 (3,275,902) Purchase and development of mineral properties - (45,000) (1,986,690) Purchase of fixed assets - - (325,687) Sale of mineral properties - - 1,093,750 Sale of investments 144,622 (115,630) 356,051 Sale of fixed assets - (100,000) 5,685 ---------- ------------ ------------- Net cash provided (used) in investing activities (8,130) (155,215) (4,132,793) ---------- ------------ ------------- See accountant's review report and accompanying notes. -11- 16 ROYAL SILVER MINES, INC. (A Development Stage Company) STATEMENTS OF CASH FLOWS From 02/17/94 Nine months ended (Inception) June 30, June 30, Through 2000 1999 June 30, 2000 (Unaudited) (Unaudited) (Unaudited) Cash flows from financing activities: Stock issuance and offering costs - 19,868 (189,468) Proceeds received on long-term debt - - 675,000 Payments made on notes payable - - (174,206) Issuance of common stock for cash - 131,000 6,030,764 Issuance of common stock for accrued interest - - 38,158 Issuance of common stock for extension of notes payable maturation - - 59,063 Issuance of common stock for payment to related party 88,000 - 88,000 Payment for return of stock issued for mining property interest - - (35,000) Payment of joint venture costs - - (50,000) Issuance of warrants for cash - - 46,568 ------------ ---------- ------------- Net cash provided by financing activities 88,000 150,868 6,488,879 ------------ ----------- ------------- Cash, beginning of period 28,147 3,147 - ------------ ----------- ------------- Cash, end of period $ 24,302 $ 38,311 $ 24,302 ============ =========== ============= Supplemental cash flow disclosure: Income taxes paid in cash $ - $ - $ 350 Interest paid in cash $ - $ - $ 25,655 Non-cash financing activities: Common stock issued for services rendered $ 3,125 $ 104,940 $ 1,347,381 Common stock issued in exchange for debt $ 88,000 $ - $ 1,040,950 Common stock issued in acquisition of Consolidated Royal Mines, Inc. $ - $ - $ 360,096 Option rights acquired in exchange for a payable $ - $ - $ 79,000 Common stock issued for assignment of mining property options $ - $ - $ 4,000 Common stock issued in exchange for investments $ - $ 7,200 $ 7,200 See accountant's review report and accompanying notes. -12- 17 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 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. The Company has elected a September 30 fiscal year-end. 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 controlled 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 $950,794 cost of mineral properties included in the accompanying balance sheet as of June 30, 2000 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. -13- 18 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 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 This summary of significant accounting policies of Royal Silver Mines, Inc. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. 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. 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. 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. -14- 19 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Mineral Properties Costs of acquiring, exploring and developing mineral properties are capitalized by project area. Costs to maintain the mineral rights and leases are expensed as incurred. When a property reaches the production 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 June 30, 2000, the Company had net operating loss carryforwards of approximately $5,590,000 that may be offset against future taxable operating income through 2014. Additionally, the Company has capital loss carryovers of approximately $4,327,000. 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." In complying with this standard, 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 throughout fiscal 1998 and fiscal 1999, the Company does not believe any further adjustments are needed to the carrying value of its assets at June 30, 2000. Financial Accounting Standards The Company has adopted the fair value accounting rules to record all transactions in equity instruments for goods or services. -15- 20 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Change in Accounting Policies During the year ended September 30, 1999, the Company changed its method of accounting for organization costs to conform to the requirements of Statement on Position 98-5, which requires start-up and organization costs to be expensed as incurred. The effect of the change was to increase net loss for the year ended September 30, 1999, by $3,502 ($0.0002 per share). The change has no effect on prior years. Derivative Instruments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. At June 30, 2000, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities. Interim Financial Statements The interim financial statements as of and for the nine months ended June 30, 2000 included herein have been prepared for the Company without audit. They reflect all adjustments, which are, in the opinion of management, necessary to present fairly the results of operations for these periods. All such adjustments are normal recurring adjustments. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year. Investments Investments, consisting of equity securities of private and small public companies, are stated at current market value. -16- 21 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 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. Washington and Idaho Mineral Properties During the year ended September 30, 1995, Celebration purchased, through the issuance of 800,000 shares of its common stock, various mineral properties located in the states of Washington and Idaho. The mineral properties were recorded at the fair market value of the shares paid on the date of issuance ranging from $3.13 to $3.25 per share for a total purchase price of $2,538,126. In May 1996, the Company sold back the Frisco Standard Silver Mine to its original seller in exchange for the same price (35,000 shares of Royal stock) received by the seller when the mine was purchased. The shares received were 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). Other Domestic Properties In February 1999, in connection with the settlement agreement with Grand Central (described in Note 14), the Company received a number of patented mining claims in Utah and a number of unpatented mining claims in Idaho. In aggregate, these mining claims were recorded at $45,000. * * * 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. -17- 22 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Major additions and improvements are capitalized. Minor replacements, maintenance and repairs that do not increase the useful life of the assets are expensed as incurred. Depreciation of property and equipment is determined using the straight-line method over the expected useful lives of the assets of five years. NOTE 5 - INVESTMENTS During 1999, certain investments were written down to their estimated realizable value. The amount of the loss, $281,498, has been charged to operations in 1999. At June 30, 2000 and September 30, 1999, the market values of investments were as follows: 06/30/00 09/30/99 Elite Logistics, Inc. $ 231,517 $ 101,127 Rigid Airship USA, Inc. 5,813 31,002 Ashington Mining Company 7,200 7,200 Tintic Coalition Mines 5,000 5,000 American Health Providers Corp. - 6,795 Metalline Mining Company 57,902 - Minimally Invasive Surgery - 2,038 Envirogold, LLC 8,000 - Bitterroot Mountain Mining Co. 7,500 - Sterling Mining Co. 5,951 - Silver Belle Mining Co. 20,000 - --------- ---------- $ 348,883 $ 153,162 ========= ========== Other information regarding the Company's investments follows: Grand Central Silver Mines, Inc. 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 matured in 1999. A total gain of $1,454,062 was realized on this transaction. The promissory note was satisfied in February 1999 through a settlement agreement with Grand Central (See Note 12). -18- 23 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 5 - INVESTMENTS (CONTINUED) Grand Central Silver Mines, Inc. (Continued) At September 30, 1998, the Company owned 1,235,000 shares of Grand Central Silver Mines, Inc. common stock, which was then approximately 12% of the total outstanding shares. In the second and third quarters of fiscal 1999, the Company disposed of all of its holdings in Grand Central in connection with a settlement agreement. Rigid Airship USA, 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 3). SynFuel Technology, Inc. changed its name to Rigid Airship in November 1998. As of June 30, 2000, the stock had a market value of $5,813. Envirogold, LLC During January 2000, the Company announced that together with Nuvotec, Inc. (Nuvotec), it has formed Envirogold LLC (Envirogold). Envirogold is 50% owned by each and has signed a revised technology licensing agreement with Integrated Environmental Technologies (Integrated) for the development and use of certain patented technology for applications in the mining and mineral processing industries. Exclusive rights to the technology is expected to be acquired over the next 36 months. Envirogold will operate as licensee of the technology and will be managed by two of the Company's directors and two Nuvotec directors. Under terms of the aforementioned agreement, the Company will assign to the LLC its license agreement and will also supply concentrates needed for bulk tests required to acquire the exclusive rights. Nuvotec will pay for the costs of the test and provide technical and management expertise to oversee the project. Upon successful completion of the tests, each party will be responsible for one-half of all future costs. See Note 13. Metalline Mining During May 2000, the Company traded equipment for 15,000 restricted common shares of Metalline Mining Company which was then trading at $4.12 per share. As of June 30, 2000, the Company's investment in Metalline Mining Company stock had a market value of $57,902. NOTE 6 - COMMON STOCK During the year ended November 30, 1994, Celebration issued 1,500,000 shares of common stock to directors for services rendered, valued at $.002 to $.625 per share, which is the fair market value of the share on the date of issuance. -19- 24 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 6 - COMMON STOCK (Continued) 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. 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. The Company also issued 277,500 shares in connection with the issuance of notes payable. (See Note 8). During the year ended September 30, 1996, the Company sold 1,949,332 shares of its common stock for $2,958,314 in cash. The Company also issued 222,700 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 $1.50 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. -20- 25 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 6 - COMMON STOCK (Continued) 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. 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. In November 1998, the Company sold 220,000 shares of its common stock at $0.06 per share to Ashington Mining for a short-term note in the amount of $5,000 and 100,000 shares of Ashington Mining stock valued at $7,200 (Note 5). An additional 1,500,000 shares of common stock were sold in January 1999 at $0.04 per share. During the year ended September 30, 1999, the Company issued 1,876,000 shares of common stock for services received. The shares were valued at their fair market value at the date of issuance, which ranged from $0.04 to $0.07. As part of a settlement agreement with Grand Central Silver Mines, Inc. and other parties, Royal received 1,450,000 shares of Royal Silver Mines, Inc. stock, which were returned to treasury and cancelled. During the period ended June 30, 2000, the Company issued 62,500 shares of common stock for services and 2,200,000 shares of common stock for payment of related party payables. The shares were valued at their fair market value at the date of issuance, which ranged from $0.04 to $0.05. NOTE 7 - COMMON STOCK OPTIONS AND WARRANTS In January 1992, the shareholders of Royal approved a 1992 Stock Option and Stock Award Plan under which up to ten percent of the issued and outstanding shares of the Company's common stock could be awarded based on merit of work performed. As of June 30, 2000, 12,750 shares of common stock have been awarded under the Plan. -21- 26 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 7 - COMMON STOCK OPTIONS AND WARRANTS (Continued) Celebration, prior to the exchange agreement with Royal, had granted securities to certain shareholders, which represented rights to purchase or receive shares of Celebration's common stock. These options were assumed by the Company after the merger at a rate of 1.5 shares for each option still outstanding. Thus, the Company has granted options, with varying conditions and requirements, to purchase a total of 1,455,000 shares of its common stock. Of these stock options, 255,000 exercisable at $1.50 per share expired 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 June 30, 2000, 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. As of June 30, 2000, none of these warrants have been exercised. On March 22, 1996, the board of directors approved the issuance of warrants to purchase 625,000 shares 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. Ultimately, 320,666 of these warrants were 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 June 30, 2000, none of the warrants had been exercised. NOTE 8 - 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 June 30, 2000, 1,455,000 options have been granted under the plan although none have been exercised in the period ending June 30, 2000. The old existing options are attributed to the merger of Celebration Mining Company with Royal in August 1995. -22- 27 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 8 - COMPANY STOCK OPTION AND AWARD PLAN (Continued) Of the total of 2,500,000 common stock shares authorized for issuance under the plan, 179,000 shares at values ranging from $0.34 to $0.91 per share were issued to employees and directors during the year ended September 30, 1998 and 1,259,000 shares at values ranging from $0.04 to $0.07 per share were issued to employees and directors during the year ended September 30, 1999. Following is a summary of the stock options during the year ended September 30, 1999 and the period ended June 30, 2000. Weighted Number Average of Exercise Shares Price Outstanding at 10/1/1998 1,455,000 $ 1.03 Granted Exercised - - Forfeited - - --------- ------ Outstanding at 9/30/1999 1,455,000 $ 1.03 ========= ====== Options exercisable at 9/30/1999 1,455,000 $ 1.03 ========= ====== Weighted average fair value of options granted during the year ended 9/30/1999 $ - ========= Outstanding at 10/1/1999 1,455,000 $ 1.03 Granted Exercised - - Forfeited (255,000) 1.50 --------- ------ Outstanding at 6/30/2000 1,200,000 $ 0.93 ========= ====== Options exercisable at 6/30/2000 1,200,000 $ 0.93 ========= ====== Weighted average fair value of options granted during the period ended 6/30/2000 $ - NOTE 9 - ADDITIONAL PAID-IN CAPITAL The following is a summary of additional paid-in capital at June 30, 2000, and September 30, 1999: -23- 28 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 9 - ADDITIONAL PAID-IN CAPITAL (Continued) June 30, 2000 September 30, 1999 Applicable to: Common Stock $ 11,450,606 $ 11,382,106 Stock Warrants 46,568 46,568 ------------ ------------ $ 11,497,174 $ 11,428,674 ============ ============ NOTE 10 - 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, 1999, no shares were acquired from Centurion under this option agreement which lapsed. NOTE 11 - COMMITMENTS AND CONTINGENCIES The Company was a defendant in a lawsuit alleging that the Company failed to transfer common stock in exchange for a mining property interest. In June 1999, Box Elder County Superior Court rejected the plaintiff's lawsuit and let stand the Company's countersuit alleging fraudulent misrepresentation. Although the plaintiff has filed an appeal (regarding the originally filed lawsuit) with the Utah Supreme Court, the Company believes that the appeal is completely without merit and will not be sustained. In its countersuit, the Company is seeking both full title to the aforementioned mineral property and punitive damages. The Company believes its countersuit will prevail. -24- 29 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued) 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. Although the Company has recently decided to write down its interest in the Crescent Mine mineral lease, the Company has elected to pursue this lawsuit, which is in the discovery phase. The Company sublets office space on a month to month basis from one of its officers in Coeur d'Alene, Idaho for $200 per month. Total rent paid for this office space during the period ended June 30, 2000 and the year ended September 30, 1999 was $1,800 and $2,400, respectively. For commitments and contingencies regarding the Company's investment in Envirogold LLC, see Note 5. NOTE 12 - SETTLEMENT AGREEMENTS In February 1999, the Company entered into a settlement arrangement wherein Grand Central Silver Mines, Inc. (hereinafter "Grand") transferred equipment, mining claims, and securities (including 450,000 shares of Royal Silver Mines, Inc. stock) to Royal in full settlement of a $350,000 promissory note (and accrued interest) owed by Grand to Royal. In connection with the same transaction, the Company transferred to an individual 154,375 shares of Grand common stock (previously held by Royal) and in turn received from this same individual 1,000,000 shares of Royal Silver Mines, Inc. common stock and 333,333 shares of Summit Silver, Inc. common stock. While this settlement agreement involved mutual releases of liability for all parties affected, the net effect of the settlement was the Company's recording losses in 1999 of $247,112 from assets disposed in the second quarter and $810,469 in the third quarter as this transaction was finalized. (See Note 5). The Company was a defendant in a lawsuit filed by some of its shareholders for alleged financial improprieties. Although the directors of the Company vigorously disputed the plaintiffs' claims, the directors elected to settle this matter out of court in September 1999 after receiving advice from counsel that the costs of defending the litigation would exceed the costs of settling out of court. In the resulting settlement, the Company agreed to pay the plaintiffs $60,000 in cash and in addition, two Company officers agreed to transfer personally owned investments to the plaintiffs. Accordingly, in turn, the Company indemnified the aforementioned corporate officers by transferring to them stock in Summit Silver Mines, Inc. and a mineral property interest in the Imperial Mine. The transaction resulted in a charge to operations of $103,950. -25- 30 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 13 - LICENSING AGREEMENT In January 1999, the Company entered into a technology licensing agreement with Integrated Environmental Technologies, LLC (IET), a New York limited liability company, to acquire, develop and exploit mineral deposits using IET technology. IET technology involves high temperature systems that utilize plasma technology for processing materials and includes trade secrets, inventions, (whether patented or unpatented), information, data and experience. Upon completion of agreed upon conditions, the Company will be granted a worldwide exclusive license to practice IET technologies necessary for the extraction and recovery of copper from enargite ores and gold and silver from arsenic rich ores or residual process streams from milling and smelting operations not to include certain properties in and around the Yuma, Arizona region. Subsequent to September 30, 1999, the Company renegotiated certain terms and conditions of the licensing agreement and assigned its interest in the license agreement to Envirogold, LLC. See Note 5. NOTE 14 - GOING CONCERN As shown in the accompanying financial statement, the Company has no revenues, has incurred a net loss of $182,662 for the nine month period ended June 30, 2000 and an accumulated deficit of $10,639,808 since inception. 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 in 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. The Company also believes that the occasional sale of its equity investments will provide cash as needed for operations. NOTE 15 - RELATED PARTIES Related party transactions are disclosed in Notes 5 and 13. -26- 31 ROYAL SILVER MINES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS June 30, 2000 NOTE 16 - YEAR 2000 ISSUES Like other companies, Royal Silver Mines, Inc. could be adversely affected if the computer systems it, its suppliers or customers use do not properly process and calculate date-related information and data from the period surrounding and including January 1, 2000. This is commonly known as the "Year 2000" issue. Additionally, this issue could impact non-computer systems and devices such as production equipment, elevators, etc. At this time there have been no known problems related to the Year 2000 issue. The Company has reviewed its business and processing systems and believes that the majority of its systems are already year 2000 compliant or can be made so with software updates. Based on its assessments, the Company regards the costs associated with Year 2000 readiness to be immaterial. All costs associated with the Year 2000 issue will be expensed as incurred. NOTE 17 - SUBSEQUENT EVENTS Subsequent to the date of these financial statements, in July 2000, the Company signed a letter of intent to acquire all of the outstanding shares of Nuvotec, Inc. (Nuvotec) through a reverse merger. Nuvotec is a privately held company based in Richland, Washington, whose business is focused on technology commercialization, with operating subsidiaries in the energy and environmental, and information services sectors. Under terms of the letter of intent, the Company will reverse split its common stock and subsequently issue new shares of its common stock for each outstanding share of Nuvotec. Following the merger, the Nuvotec shareholders will own approximately 92.4 percent of the outstanding stock in the surviving company. -27- 32 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 minable ore deposits is highly speculative and involves risks greater than those involved in the discovery of mineralization. Mining companies use the evaluation work of professional geologists, geophysicists, and engineers in determining whether to acquire an interest in a specific property, or whether or not to commence exploration or development work. These estimates are 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 minable ore bodies. The economic viability of a property cannot be 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 June 30, 2000, the Company accumulated a deficit of $10,639,808. At June 30, 2000, $950,794 of the Company's total assets of $1,342,535 were investments in mineral properties. Additional exploration is required to substantiate or 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; 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 and, as explained above, has an accumulated deficit. Because it has sustained recurring 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 June 30, 2000, the Company had negative working capital of $94,754. This amount represents a further deterioration in liquidity and capital resources from its negative working capital position of $93,456 at September 30, 1999 and represents severe deterioration from working capital of $303,600 at September 30, 1998. While the largest single element of working capital at September 30, 1998 was a promissory note of $350,000 (from Grand Central Silver Mines, Inc.), this note was redeemed in February 1999 at a loss in exchange for mining properties and other investments. This transaction greatly reduced the Company's current assets and liquidity. While sales of the Company's stock have traditionally constituted its primary source of cash generation, depressed metals prices in 1999 and 2000 have lessened the Company's recent ability 33 to obtain cash from sales of its stock. Company sales of its stock generated the following cash amounts: $0 in the current fiscal year; $131,000 in the year ending September 30, 1999, $303,600 in the year ending September 30, 1998; and $1,843,750 in the year ending September 30, 1997. In adjusting to smaller cash resources, the Company has substantially decreased its expenses for office, personnel and compensation, and consulting expenses. In the first nine months of fiscal 2000, the Company increased its accounts payable from $77,603 to $133,834 while issuing common stock to discharge $44,000 of related party payables. Accordingly, the Company's current liabilities moved from $121,603 at September 30, 1999 to $133,834 at June 30, 2000. The Company had no long-term debt at September 30, 1999 or at June 30, 2000. The Company has estimated that it will need minimal capital resources of approximately $3,000-4,000 per month to meet its estimated expenditures for fiscal 2000. In recent years, several key members of management met with experienced financial and investment firms throughout Europe and North America and negotiated preliminary terms and arrangements for capital fund raising. During the fiscal year ending September 30, 1998, the Company raised over $300,000 in funds, (primarily through the private placement of shares and warrants) and during the fiscal year ending September 30, 1999, the Company raised approximately half of this amount from private placement of its shares. While no cash from stock sales was raised in the nine-month period ending June 30, 2000, the Company's cash was primarily raised from sales of investments ($144,622) and the sales of old equipment ($86,284). 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 expenses principally from joint venture revenues or funds it may receive or savings it may realize through corporate restructuring or business combination arrangements. Funds required to finance the Company's exploration and development of mineral properties are 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. 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 from governmental entities. 34 RESULTS OF OPERATIONS COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 2000, RESPECTIVELY. General and administrative expenses plummeted from $211,532 during the three quarters of fiscal 1999 to $157,278 during the same period in fiscal 2000. This decrease is principally due to greatly reduced compensation to officers and directors. As a result, during the first three quarters of fiscal 1999 compared to the first three quarters of 2000, the Company's loss from operations decreased correspondingly. In the first nine months of 1999, the Company experienced a loss of $1,393,671 on property impaired and sold, which had the effect of substantially increasing the Company's net loss to $1,598,145 (or $0.08 per share) for the first three quarters of 1999. Without this favorable loss in 2000, the Company experienced a net loss of $182,662 (or less than one cent loss per share) for the first nine months of 2000. 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 during the remainder of its current fiscal year 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. On the one hand, if the Company were to continue such restriction, the likely effect might be adverse to the preservation of its assets and capital base, thereby narrowing the scope of plans for future operations and constricting liquidity. On the other hand, if the Company were to discontinue such restriction without an increase in sustained cash flow, the likely effect of that might be an increase in accumulated deficits which could be adverse to the Company's financial condition with respect to liabilities and stockholders' equity. Therefore, while the Company continues to seek a joint venture participant and additional sources of capital for financing operations during the remainder of its current fiscal year, the Company will continue to carefully monitor its capital expenditures. 35 PART II. OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description 27 Financial Data Schedule (b) No reports on Form 8-K have been filed for the period ended June 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Dated this 12th day of August, 2000. ROYAL SILVER MINES, INC. BY: /s/ Howard Crosby Howard Crosby, President, Treasurer, Chief Financial Officer and a member of the Board of Directors