-----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, A2DQTo8MtPMsawdKZMxYe2fJ/wsGic8ca+FGID6ox4o2/9olgOkTNRE3zgfNqY02 uLhU2FNQI/3OQCkWrQjI+w== 0000927356-99-001870.txt : 19991117 0000927356-99-001870.hdr.sgml : 19991117 ACCESSION NUMBER: 0000927356-99-001870 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990901 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MK GOLD CO CENTRAL INDEX KEY: 0000913586 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 820487047 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-23042 FILM NUMBER: 99756500 BUSINESS ADDRESS: STREET 1: 60 E. SOUTH TEMPLE STREET 2: SUITE 2100 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 BUSINESS PHONE: 801-297-6900 MAIL ADDRESS: STREET 1: 60 E. SOUTH TEMPLE STREET 2: SUITE 2100 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 8-K/A 1 CURRENT REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 September 1, 1999 ----------------------------------- (Date of earliest event reported) MK GOLD COMPANY --------------- (Exact name of registrant as specified in its charter) Delaware 0-23042 82-0487047 - ------------------------------- --------------------- ------------------- (State or other jurisdiction of (Commission File No.) (I.R.S. Employer incorporation or organization) Identification No.) 60 East South Temple, Suite 2100 Salt Lake City, Utah 84111 (801) 297-6900 ---------------------------------------------------------------------------- (Address of principal executive offices and telephone number, including area code) ================================================================================ ITEM 1. CHANGES IN CONTROL OF REGISTRANT Pursuant to a Stock Purchase Agreement dated September 1, 1999 (the "Stock Purchase Agreement") between MK Gold Company (the "Company") and Leucadia National Corporation ("Leucadia"), Leucadia agreed to purchase, subject to certain conditions, and the Company agreed to sell, subject to certain conditions, 18,058,635 shares (the "Shares") of the authorized but unissued shares of Common Stock of the Company at the price of $0.8753 per share, representing the book value of the Shares as at June 30, 1999. The purpose of the sale of the Shares to Leucadia was to provide the Company with a portion of the funds necessary for the Company to acquire the entire share capital and subordinated debt of RioMin Exploraciones SA ("Riomin"). Because funding for this acquisition was required before the sale of the Shares could be completed, the Company borrowed $15,806,723 from Leucadia pursuant to a Promissory Note dated September 1, 1999 (the "Promissory Note"). On October 5, 1999, the Company and Leucadia received notice of termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. On October 8, 1999, Leucadia purchased the Shares and delivered the Promissory Note to the Company under the Stock Purchase Agreement. Leucadia now beneficially owns 27,058,635 shares of Common Stock of the Company, which represents approximately 72.5% of the Common Stock outstanding. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS. (a) Financial Statements of business acquired. Audited financial statements of Riomin Exploraciones, S.A. for the year ended December 31, 1998 - Independent Auditors' Report - Arthur Andersen - Balance Sheets as of December 31, 1998 and 1997 - Statements of Operations--Years ended December 31, 1998 and 1997 - Notes to financial statements Audited financial statements of Cobre Las Cruces, S.A. (formerly Riomin Exploraciones, S.A.) for the year ended December 31, 1997 - Independent Auditors' Report - PricewaterhouseCoopers Auditores, S.L. - Balance Sheet as of December 31, 1997 - Statement of Operations--Year ended December 31, 1997 - Statement of Stockholder's Equity--Year ended December 31, 1997 2 - Notes to financial statements Unaudited financial statements of Cobra Las Cruces, S.A. (formerly Riomin Exploraciones, S.A.) for the nine months ended September 30, 1999 - Balance Sheet as of September 30, 1999 - Statements of Operations - Nine months ended September 30, 1999 and 1998 - Statements of Cash Flows- Nine months ended September 30, 1999 and 1998 (b) Unaudited pro forma consolidated financial statements of MK Gold Company - Unaudited pro forma condensed consolidated balance sheet as of September 30, 1999 - Unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1998 - Unaudited pro forma condensed consolidated statement of operations for the nine months ended September 30, 1999 - Notes to unaudited pro forma financial statements (c) Exhibits 2.1 Sale and Purchase Agreement dated September 1, 1999 between MK Gold Company and Rio Tinto Metals Limited.* 10.1 Stock Purchase Agreement dated September 1, 1999 between MK Gold Company and Leucadia National Corporation.* 10.2 Promissory Note dated September 1, 1999.* 10.3 Option Agreement dated August 26, 1999 between MK Gold Company and Straits Resources Ltd.* 23.1 Consent of Arthur Andersen. 23.2 Consent of PricewaterhouseCooopers Auditores, S.L. _________________ * previously filed 3 Audited financial statements of Riomin Exploraciones, S.A. for the year ended December 31, 1998 4 AUDITORS' REPORT ON FINANCIAL STATEMENTS To the Shareholder of Riomin Exploraciones, S.A. I. We have audited the financial statements of RIOMIN EXPLORACIONES, S.A., a Company at the commencement of its operations since it is in the exploration phase (see Note 1), comprising the balance sheet as of December 31, 1998, and the related statement of operations and notes to financial statements for the year then ended. The preparation of these financial statements is the responsibility of the Company's directors. Our responsibility is to express an opinion on the financial statements taken as a whole based on our audit work performed in accordance with generally accepted auditing standards in Spain, which are substantially consistent with those in the United States of America, which require examination, by means of selective tests, of the documentation supporting the financial statements and evaluation of their presentation, of the accounting principles applied and of the estimates made. II. As required by Spanish corporate law, for comparison purposes the Directors present, in addition to the 1998 figures for each item in the balance sheet and statements of operations and of changes in financial position, the figures for 1997. Our opinion refers only to the 1998 financial statements. III. On March 11, 1999, the Company's Directors prepared the 1998 financial statements, which were approved by the Shareholders' Meeting on March 11, 1999. On March 11, 1999, we issued our auditors' report on these financial statements, in which we expressed an opinion containing two uncertainties. Due to the subsequent events that occurred between March 11 and September 9, 1999, indicated in Note 17, the Company's new Directors decided to prepare new financial statements to include the effects of the sale of the mining rights to Riomin Iberica, S.A. and the undertaking to provide financial support given by the Company's new shareholders (see Note 17). As a result, we issued a new auditors' report on these new 1998 financial statements. IV. In our opinion, the financial statements referred to above present, in all material respects, a true and fair view of the net worth and financial position of RIOMIN EXPLORACIONES, S.A. (a Company at the commencement of its operations since it is in the exploration phase -see Note 1) as of December 31, 1998, and of the results of its operations and of the funds obtained and applied by it in the year then ended, and contain the required information, sufficient for their proper interpretation and comprehension, in conformity with generally accepted accounting principles in Spain and standards applied on a basis consistent with that of the preceding year. 5 V. Accounting practices used by the Company in preparing the accompanying financial statements conform with generally accepted accounting principles in Spain but do not conform with accounting principles generally accepted in the United States. A description of these differences and a reconciliation of consolidated net income and shareholders' equity are set forth in Note 18. ARTHUR ANDERSEN /s/ Jorge Segura Rodriguez Jorge Segura Rodriguez September 9, 1999 6 Translation of a report and financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Note 18). RIOMIN EXPLORACIONES, S.A. (Sole shareholder company) BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 ----------------------------------------------- (Currency - Thousands of Spanish pesetas)
- --------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDER'S EQUITY ASSETS 1998 1997 (*) AND LIABILITIES 1998 1997 (*) - --------------------------------------------------------------------------------------------------------------------------------- FIXED AND OTHER SHAREHOLDER'S EQUITY (Note 9): NONCURRENT ASSETS: Start-up expenses 4,472 5,890 Capital stock 623,141 623,141 Intangible assets- 4,262,420 3,808,252 Prior years' losses (318,718) (223,100) Exploration expenses 4,259,197 3,802,012 Loss for the year (1,076,102) (95,618) --------------------- Computer software 9,958 9,525 Total shareholder's equity (771,679) 304,423 --------------------- Rights on leased assets - 504 Accumulated amortization (6,735) (3,789) DEFERRED REVENUES Tangible fixed assets 57,803 56,874 Exchange gains 415 182 -------------------- Technical installations and machinery 24,766 20,800 Other installations, tools and PROVISIONS FOR CONTINGENCIES furniture 11,497 13,613 AND EXPENSES Other fixed assets 40,840 39,873 Provisions for taxes - 850 -------------------- Accumulated depreciation (19,300) (17,412) Long-term financial investments 152,189 2,899 LONG-TERM DEBT: Payable to Group and associated Financial investments 152,189 2,899 companies- 5,673,199 2,286,206 ---------------------- Total fixed and other noncurrent assets 4,476,884 3,873,915 Payable to Group companies ---------------------- CURRENT ASSETS: (Note 10) 5,673,199 2,286,206 Other Current Assets- 756 - Total long-term debt 5,673,199 2,286,206 -------------------- Advances 756 - Accounts receivable- 348,561 269,752 CURRENT LIABILITIES: Customer receivables for sales and Short-term payables to Group services - 175 and associated companies 94,413 1,403,144 Receivable from associated companies Payable to Group companies (Note 10) 7,132 2,932 (Note 10) 94,413 1,403,144 Sundry accounts receivable - 2,132 Trade accounts payable- 79,366 378,623 Employee receivables 89 635 Tax receivables 341,340 289,878 Payables for purchases and services 79,366 378,623 Provisions - (26,000) Other nontrade payables- 10,750 16,427 Short-term financial investments- 130,407 15,543 Accrued taxes payable 10,750 6,791 Other accounts payable - 8,757 Short-term guarantees and deposits 130,407 15,543 Compensation payable - 879 Cash 128,911 230,321 Accrual accounts 945 324 ---------------------- -------------------- Total current assets 609,580 515,940 Total current liabilities 184,529 1,798,194 ---------------------- -------------------- TOTAL SHAREHOLDER'S ---------------------- -------------------- TOTAL ASSETS 5,086,464 4,389,855 EQUITY AND LIABILITIES 5,086,464 4,389,855 - ---------------------------------------------------------------------------------------------------------------------------------
(*) Not subjected to compulsory audit. The accompanying Notes 1 to 18 are an integral part of the balance sheet as of December 31, 1998. 7 Translation of a report and financial statements originally issued in Spanish and prepared in accordance with generally accepted accounting principles in Spain (see Note 18). RIOMIN EXPLORACIONES, S.A. (Sole shareholder company) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 ----------------------------------------------------------------------- (Currency - Thousands of Spanish pesetas)
- ----------------------------------------------------------------------------------------------------------------------------------- DEBIT 1998 1997 (*) CREDIT 1998 1997 (*) - ----------------------------------------------------------------------------------------------------------------------------------- EXPENSES: REVENUES: Materials used in operations (Note 12) 8,723 - Net sales 4,839 - Personnel expenses (Note 12) 100,110 81,741 Capitalized expenses of in-house work Wages, salaries, etc. 77,528 63,682 on fixed assets 1,358,684 1,737,109 Employee welfare expenses 22,582 18,059 Other operating revenues 3,275 - Non-core and other current Period depreciation and amortization 12,367 10,723 operating revenues 2,425 - Other operating expenses 1,005,522 1,610,190 Overprovision for contingencies and expenses 850 - --------- -------- --------- ------- Operating income 240,076 34,455 Operating loss - - --------- -------- --------- ------- Financial and similar expenses 261,277 43,409 Other interest and similar revenues 8,446 1,210 Exchange losses 28,930 79,103 Exchange gains 40,585 4,034 --------- -------- --------- ------- Financial income - - Financial loss 241,176 117,268 --------- -------- --------- ------- Income from ordinary activities - - Loss on ordinary activities 1,100 82,813 --------- -------- --------- ------- Losses on tangible fixed assets, Gains on tangible fixed asset, intangible assets and portfolio intangible asset and portfolio disposals (See Notes 4-b and 17) 902,111 24,362 disposals 513 - Extraordinary expenses 9,189 1,797 Extraordinary revenues 5,770 2,508 Other years' expenses and losses 196,369 25,656 Other revenues and income 26,384 36,502 --------- -------- --------- ------- Extraordinary income - - Extraordinary loss 1,075,002 12,805 --------- -------- --------- ------- Income before taxes - - Loss before taxes 1,076,102 95,618 --------- -------- --------- ------- Income for the year - - Loss for the year 1,076,102 95,618 - ---------------------------------------------------------------------------------------------------------------------------------
(*) Not subjected to compulsory audit. The accompanying Notes 1 to 18 are an integral part of the 1998 statement of operations. 8 RIOMIN EXPLORACIONES, S.A. (Sole shareholder company) NOTES TO 1998 FINANCIAL STATEMENTS ---------------------------------- (1) COMPANY DESCRIPTION RIOMIN EXPLORACIONES, S.A. was formed with the name BP Minera Espana, S.A. on January 10, 1983. On October 25, 1989, it changed its name to RIOMIN EXPLORACIONES, S.A., and it currently engages in exploration, research and exploitation of mineral deposits and other geological resources. The Company's capital stock, which amounts to Ptas. 623,141,000, is fully subscribed and paid-in by its sole shareholder RIO TINTO METALS LIMITED, to which on December 31, 1998, all the Company's shares were transferred by RIO TINTO International Holdings Ltd., which owned them during substantially all of 1998 in the form of a sole shareholder company. As RIO TINTO METALS LIMITED and RIO TINTO International Holdings Ltd. are entities under common control, the transfer of interests was reflected at the historical cost basis of RIOMIN EXPLORACIONES, S.A. In 1998 the Company only performed exploration work in the "Las Cruces" project and in the opinion of Company management there are reasons to foresee the technical success and economic and commercial profitability of this project. However, the Company's shareholder, following its investment strategy, decided not to complete this project and is currently in the process of selling the Company. (2) BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS a) True and fair view- The accompanying financial statements as of December 31, 1998, which were prepared from the accounting records of the Company, are presented in accordance with the Spanish National Chart of Accounts and, accordingly, give a true and fair view of the net worth, financial position and results of the Company. The accompanying financial statements as of December 31, 1998, which were prepared by the Company's directors, will be submitted for approval by the Shareholders Meeting, and it is expected that they will be approved without any changes. On March 11, 1999, the Company's Directors prepared initial financial statements as of December 31, 1998, which were approved by the Shareholders' Meeting on the same date. These financial statements are the definitive financial statements prepared by the Company's Directors in order to reflect the loss of Ptas. 562,861,000 on the sale of the projects to Riomin Iberica (see Note 17), for the purpose of including these financial statements in the information that the Parent Company (MK Gold) is required to file in the SEC. Accordingly, these financial statements differ from those prepared previously, with a reduction of Ptas. 562,861,000 in total assets and liabilities, and an increase of the same amount in the loss for the year. The accompanying financial statements as of December 31, 9 1998 will be submitted for approval by the Shareholders' Meeting, and it is considered that they will be approved without any changes. b) Comparative information- As required by Spanish corporate law, for comparison purposes, the directors present, in addition to the 1998 figures for each item in the balance sheet and statements of operations and changes in financial position, the corresponding amounts for 1997. The Company's 1997 financial statements were approved by the Shareholders Meeting on June 17, 1998. (3) ALLOCATION OF LOSS The Company's directors propose that the Shareholders Meeting resolve to allocate 1998 loss to "Prior Years' Losses". (4) Valuation Standards a) Start-up expenses- The "Start-up Expenses" caption includes the amounts paid by the Company in relation to its incorporation and the reduction and subsequent increase of capital carried out in 1994 and 1995, respectively, and are recorded at cost, less amortization, which is taken on a straight-line basis over five years. The charge to the 1998 statement of operations for amortization of start-up expenses amounted to Ptas. 1,418,000. b) Intangible assets- This caption includes in the "Exploration" account the costs of the Group's suppliers and other third parties, incurred in relation to the mining exploration work. Also included are all the internal personnel costs and the financial costs accrued for the participating loans, and the valuation and exchange differences arising from the accounts payable to suppliers. In 1998, the Company only capitalized the exploration expenses arising from the "Las Cruces" project, which are specifically itemized and their amount clearly identified so that they can be allocated over time. Also, management of the Company has reasons to foresee the technical success and economic and commercial profitability of this project. The costs incurred in preparing for mining in the "Las Cruces" project are capitalized until the year in which the proportion of extractable useful ore to harvest is at approximately the average estimated level for the entire project. From this point amortization of these costs will commence at a rate based on the proportion of ore extracted. Since no operations on the "Las Cruces" project have begun as of December 31, 1998, the Company has not amortized any amount in this connection. Also the Company's intangible assets include certain exploration projects amounting to Ptas. 730 million (see Note 17), the permits for which were initially granted to Riomin 10 Exploraciones, S.A. Subsequently, on December 12, 1996, the Company granted a purchase option on these exploration permits to Riomin Iberica, S.A., an affiliated entity, which continued with all the exploration projects. No consideration was paid by Riomin Iberica, S.A. in connection with the acquisition of this option. The agreement between the two companies establishes that the purchase option can be exercised until the expiration date of each of the permits. Also, it establishes the acquisition price of each of the permits on which the purchase option can be exercised, which may not under any circumstances be less than the costs recorded for each of the projects. These projects are presented in the accompanying balance sheet at the amount of the accumulated expenses incurred up to the date when the purchase option was granted to Riomin Iberica, S.A. All expenses subsequent to December 12, 1996 have been expensed as incurred. The Company's directors have reasons to believe in the technical success and economic and commercial profitability of the projects capitalized, which depend on the future course of the exploration projects. The rights on leased assets account represents furniture and equipment acquired under a capital lease. In accordance with Spanish GAAP, this equipment was recorded at the time of lease inception, in addition to the related debt obligation. During 1998, the lease term expired and the Company decided to purchase the leased equipment for 72.000. Accordingly, at that time, the Company transferred this equipment to tangible assets. The amounts paid for ownership or for the right to use computer programs are recorded in the "Computer Software" account and are amortized on a straight-line basis over five years. The amortization in this connection in 1998 amounted to Ptas. 2,464,000. c) Tangible fixed assets- Tangible fixed assets are valued at the lower of cost or replacement cost. The costs of expansion, modernization or improvement leading to a lengthening of the useful lives or to increased productivity, capacity or efficiency are capitalized. Upkeep and maintenance expenses are expensed currently. The Company depreciates its tangible fixed assets by the straight-line method at annual rates based on the following years of estimated useful life: -------------------------------------------------------------- Estimated Useful Life -------------------------------------------------------------- Technical installations and machinery 13 Other installations, tools and furniture 10-13 Transport equipment 7-8 Hardware 7 -------------------------------------------------------------- 11 d) Financial investments - On November 5, 1998, the Company acquired a purchase option for 150,000 pesetas on all the shares that comprise the capital of Seroncillo, S.L., having formalized the agreement with all of the shareholders of the latter. Seroncillo, S.L. is the owner of the 593-hectare property on which Riomin Exploraciones, S.A. plans to locate the "Las Cruces" mining project, and it is for this reason that the Company entered into the purchase option contract, the main features of which are the following: a) Riomin Exploraciones, S.A. acquires an option to purchase all of the shares that comprise the capital of Seroncillo, S.L. at a price of Ptas. 150 million. b) In the event that this purchase option is exercised by Riomin Exploraciones, S.A., the price paid for the purchase option will be allocated to the final purchase price of the shares, determined as the result of multiplying the price of Ptas. 4,000 by the number of hectares of the property owned by Seroncillo, S.L. required to locate the mining project in accordance with the indications of Riomin Exploraciones, which may not be less than 150 hectares. c) The term available to the Company to exercise the purchase option is set at 4 years, and therefore expires on November 6, 2002, and the amounts that the Company has paid will be kept by the grantors of the option if the option has not been exercised. However, the Company is entitled to extend the option in accordance with the following calendar and extension prices: ---------------------------------------------------------- Thousands of Pesetas Date extension commences ------------------------ Price of extending option ---------------------------------------------------------- November 6, 2003 10,000 November 6, 2004 20,000 November 6, 2005 30,000 November 6, 2006 40,000 ---------------------------------------------------------- The amounts paid by the Company to extend the purchase option are treated as an addition to the price of the shares, and therefore are not part of the established price described above. e) Other Current Assets- As of December 31, 1998, the "Other Current assets" caption included advances from suppliers of consumables and replacement materials. The Company values consumables and replacement materials at the lower of cost or market. f) Classification of debt- Debts maturing in less than 12 months from year-end are classified as current liabilities and those maturing at over 12 months as long-term debt. 12 These debts are valued at the amounts drawn down, plus the unmatured accrued interest. g) Foreign currency transactions- Foreign currency transactions are recorded to pesetas at the exchange rates ruling at the transaction date, and are adjusted at year-end to the exchange rates then prevailing. The exchange gains or losses arising on each foreign currency account payable or receivable are classified by due date and currency, and for this purpose currencies which, although different, are officially convertible are grouped together. Unrealized exchange gains in each group of currencies, as a general rule, are not included in income and are recorded under the "Deferred Revenues" caption on the liability side of the balance sheet. On the contrary, the exchange losses in each group of currencies, as a general rule, are charged to income. However, the unrealized positive differences may be credited to income if, for each homogeneous group, an equal amount of negative exchange differences has been charged to prior years' income or income for the year, up to the limit of the negative differences previously recognized in income. However, both positive and negative exchange differences are charged to exploration costs provided that the accounts payable which they give rise to relate to research projects in progress. h) Recognition of revenues and expenses- Revenues and expenses are recognized on an accrual basis, i.e. when the actual flow of the related goods and services occurs, regardless of when the resulting monetary or financial flow arises. However, in accordance with the accounting principle of prudence, the Company only records realized income at year-end, whereas foreseeable contingencies and losses, including possible losses, are recorded as soon as they become known. i) Corporate income tax- The expense for corporate income tax of each year is calculated on the basis of book income before taxes, increased or decreased, as appropriate, by the permanent differences from taxable income, net of tax relief and tax credits, excluding tax withholdings and prepayments. The Company does not record the tax asset arising from losses which it plans to recover over the next 10 years. (5) START-UP EXPENSES The variations in the "Start-up Expenses" accounts in 1998 were as follows: 13 ------------------------------------------------------- Thousands of Pesetas ------------------------------------------------------- Balance as of December 31, 1997 5,890 ------------------------------------------------------- Additions - Amortization (1,418) ------------------------------------------------------- Balance as of December 31, 1998 4,472 ------------------------------------------------------- (6) INTANGIBLE ASSETS The variations in 1998 in the "Intangible Assets" accounts and in the related accumulated amortization were as follows:
- --------------------------------------------------------------------------------------------------------------------- Thousands of Pesetas ------------------------------------------------------------------------- Balance at Additions or Retirements or Balance at 12/31/97 Provisions Transfers Reductions 12/31/98 - --------------------------------------------------------------------------------------------------------------------- Cost: Exploration (see Note 17) 3,802,012 1,358,684 - (901,499) 4,259,197 Rights on leased assets 504 - (504) - - Computer software 9,525 524 - (91) 9,958 ------------------------------------------------------------------------- Total cost 3,812,041 1,359,208 (504) (901,590) 4,269,155 ------------------------------------------------------------------------- Accumulated amortization: Rights on leased assets (39) (25) 64 - - Computer software (3,750) (2,464) - (521) (6,735) ------------------------------------------------------------------------- Total accumulated amortization (3,789) (2,489) 64 (521) (6,735) - --------------------------------------------------------------------------------------------------------------------- Net amount 3,808,252 1,356,719 (440) (902,111) 4,262,420 - ---------------------------------------------------------------------------------------------------------------------
In 1998 the Company retired R&D projects which were not considered viable for Ptas. 902 million. Exploration- The additions of exploration expenses relate to external and internal costs (labor and allocation of materials) arising from the exploration work for the "Las Cruces" deposit. The Company has not applied for any subsidies in relation to these investments. The Company's sole activity in recent years has centered on the performance of exploration work in the "Las Cruces" project, and as of December 31, 1998, it had incurred exploration expenses in this connection amounting to Ptas. 4,092 million, of which Ptas 1,359 million relate to work capitalized in 1998. Management of the Company has reasons to foresee the technical success and economic and commercial profitability of the project based on the feasibility study carried out by the Company. However, at the date of this report the Company's shareholder had initiated negotiations with several companies with the objective of selling the Company, since they have decided not to carry out this project. Therefore the recovery of the investments made will depend on the 14 successful conclusion of the sale negotiations already initiated, and on the results that may be obtained in the future, once mining begins in the "Las Cruces" project (see Note 17). Rights on leased assets- In 1998 the Company exercised the purchase option which it held on leased assets which amounted to Ptas. 72,000, and transferred the cost of the leased assets Ptas. 504,000 and the related accumulated amortization (Ptas. 64,000) to its tangible fixed assets. 15 Transfer of tangible fixed assets- The Company records investments in construction in progress under the "Tangible Fixed Assets - Advances and Construction in Progress" caption, transferring the related amounts to tangible fixed assets at the end of the projects. Transfer of tangible fixed assets- (7) TANGIBLE FIXED ASSETS The variations in 1998 in the "Tangible Fixed Assets" accounts and in the related accumulated depreciation were as follows:
---------------------------------------------------------------------------------------------------------------- Thousands of Pesetas ---------------------------------------------------------------------------------------------------------------- Balance at Additions or Retirements or Balance at 12/31/97 Provisions Transfers Reductions 12/31/98 ---------------------------------------------------------------------------------------------------------------- Cost: Technical installations and machinery 20,800 4,177 84 (295) 24,766 Other installations, tools and furniture 13,613 1,021 (116) (3,021) 11,497 Other tangible fixed assets 39,873 3,801 536 (3,370) 40,840 ------------------------------------------------------------------------ Total cost 74,286 8,999 504 (6,686) 77,103 ------------------------------------------------------------------------ Accumulated depreciation: Technical installations and machinery (3,182) (1,886) (5) 2,154 (2,919) Other installations, tools And furniture (3,597) (1,025) (28) 1,398 (3,252) Other tangible fixed assets (10,633) (5,549) (31) 3,084 (13,129) ------------------------------------------------------------------------ Total accumulated depreciation (17,412) (8,460) (64) 6,636 (19,300) ---------------------------------------------------------------------------------------------------------------- Net amount 56,874 539 440 (50) 57,803 ----------------------------------------------------------------------------------------------------------------
Written off and fully depreciated assets- As of December 31, 1998, the fully depreciated assets were retired with a credit to the related fixed asset account and a charge to the related accumulated depreciation account. (8) SHAREHOLDER'S EQUITY The variations in equity accounts in 1998 were as follows:
--------------------------------------------------------------------------- Thousands of Pesetas -------------------------------------- Capital Prior Years' Loss for Stock Earnings the Year ---------------------------------------------------------------------------- Balance at December 31, 1997 623,141 (223,100) (95,618) Allocation of loss - (95,618) 95,618 Loss for 1998 per accompanying statement of operations - - (1,076,102) ---------------------------------------------------------------------------- Balance at December 31, 1998 623,141 (318,718) (1,076,102) ----------------------------------------------------------------------------
16 As of December 31, 1998, the capital stock consisted of 191,500 registered common shares of Ptas. 3,254 par value each, fully subscribed and paid by RIO TINTO Holdings Ltd. In compliance with the Spanish Accounting and Audit Institute's resolution of December 20, 1996, which sets the general methods for determining book equity for the purpose of the capital reduction and company dissolution situation referred to by articles 163 and 260 of the revised Corporations Law, the Shareholder's Equity figure in the accompanying balance sheet should be increased by the amount of the participating loans which are included in the balance sheet under the "Long-Term Debt - Payable to Group Companies" caption for Ptas. 5,363,428,000. As a result, the detail of the equity accounts as of December 31, 1998, would be the following: --------------------------------------------- Thousands of Pesetas --------------------------------------------- Shareholder's equity (771,679) Participating loans (Note 10) 4,699,340 ------------ Net worth 3,927,661 --------------------------------------------- (9) NONTRADE PAYABLES The detail of the "Payable to Group and Associated Companies" as of December 31, 1998, is as follows:
----------------------------------------------------------------------------- (Thousands of Pesetas) ------------------------------------ Short-term Long-term ------------------------ Accounts Accounts Accounts Receivable Payable Payable ----------------------------------------------------------------------------- R.T. International Holdings LTD. - 22,087 5,673,199 R.T. Minerals Development LTD. - 63,458 - R.T Technical Services LTD. - 869 - R.T. Mining & Exploration LTD. 5,516 - - Riomin Iberica, S.A. 1,073 - - ATD CRA - 351 - RTZ LTD. LONDON - 7,648 - Sociedad Espanola de Talcos, S.A. 522 - - R.T. Technical Development LTD. 21 - - ----------------------------------------------------------------------------- Total 7,132 94,413 5,673,199 -----------------------------------------------------------------------------
17 The detail of the transactions with Group and associated Companies is the following: ---------------------------------------------------------------- (Thousands of Pesetas) ---------------------------- Volume of Transactions ---------------------------- Purchases Sales ---------------------------------------------------------------- R.T. International Holdings LTD. 1,010 - R.T Technical Services LTD. 332,948 - R.T. Mining & Exploration LTD. 27,729 110 Riomin Iberica, S.A. 6,343 3,034 RTZ LONDON LTD 78,636 - R.T. Technical Development LTD. 233,319 - R.T. Brasil LTD 447 - ---------------------------------------------------------------- Total 680,432 3,144 ---------------------------------------------------------------- (10) LONG-TERM DEBT The "Long-Term Debt" caption in the balance sheet as of December 31, 1998, includes the draw-downs under the participating loans to the Company from RIO TINTO International Holdings Ltd., which was its sole shareholder almost throughout the whole of 1998 (see Note 1). The conditions of the participating loans are as follows:
----------------------------------------------------------------------------------- Loan 1 Loan 2 ----------------------------------------------------------------------------------- Grant date 04/30/1997 03/19/1998 Principal of the loan 2,286,206 2,413,134 Term 10 years 10 years Maturity 04/30/2007 12/31/2007 Single repayment of the principal 04/30/2007 12/31/2007 Fixed interest rate (a) 0.5% per annum 0.5% per annum Variable interest rate (b) (LIBOR + 1%) x 2 (LIBOR + 1%) x 2 -----------------------------------------------------------------------------------
(a) Payable on December 31 of each year, until variable interest starts to accrue. (b) Payable on December 31 of each year, from the date on which production on the "Las Cruces" project commences. Production will be considered to have commenced when the Company, having obtained an operating license from the mining authorities and made the projected investment for the project, has commenced production in a regular and continuous fashion. The loan agreement establishes a first period of time during which the Company may not make early repayment of the principal of the loan at its own discretion. This period covers the time from the date the participating loan contract is signed to the date on which the Company commences production, from which time the Company may repay the principal early, paying a penalty equal to the annual interest that the repaid capital would have accrued, calculated in accordance with the conditions set out above and discounted at an annual rate of 7% up to the date of the early repayment agreement. Should the early repayment take place, the Company will be obliged to undertake a capital increase of the same amount as the repayment, and this amount may not arise from revaluation of its assets. 18 RIO TINTO International Holding LTD. may ask the Company for early repayment of the principal of the loan in the following cases: a) If the Company should file for Chapter 11-type insolvency proceedings (suspension de pagos) or be declared bankrupt, or flagrantly fail to fulfil its obligations to third parties. b) Should the borrower fail to comply with any of the obligations under the participating loan contract. c) Should the RTZ Group cease to hold a majority ownership interest in the capital stock of the Company. In cases a) and b) the Company will have to pay RIO TINTO International Holding LTD. a penalty calculated in the way described above, but is not obliged to pay any penalty in case c). In terms of seniority of debt as established by the Spanish Civil Code, participating loans have lower priority than debts to general creditors. RIO TINTO International Holding LTD. may at any time request the conversion of the principal and/or the interest on the participating loans into capital of the Company. These participating loans are governed, in accordance with the stipulations of the contract, by the regulations deriving from Royal Decree Law 7/96 on urgent measures on tax and development and liberalization of economic activity, and from Law 10/96 on urgent tax measures to correct intercompany domestic double taxation and on company internationalization incentives. Pursuant to the contractual conditions, the participating loans bear interest of 0.5% per annum during the prospecting period of the "Las Cruces" project, an interest rate that is below market rates. From the date when production commences under the aforementioned project, these participating loans will also bear variable interest at a rate equal to twice the result of increasing the LIBOR by one percentage point, an interest rate above market rates. Generally accepted accounting principles in Spain envisage that the interperiod allocation of the financial costs of pluriannual transactions must, necessarily, be based on methods that conform to the revenue and expense matching principle. This principle requires that the financial costs of all the transaction be spread over the life of the transaction in proportion to the amount of net funding used in each year. In accordance with this method, the Company recorded an interest expense of Ptas. 261,277,000 and, additionally, an expense of Ptas. 53,661,000 relating to prior years. These amounts were capitalized as an addition to exploration expenses relating to the "Las Cruces" project. (11) TAX MATTERS The Company has not recorded any provision for corporate income tax, since to date it has had no taxable income. At 1997 year-end, the Company had recorded Ptas. 22,000,000 of VAT recoverable from 1993 and 1994, in regard to which there is a dispute with the State Tax Agency, which considered that the Company had not commenced its activities. As of December 31, 1998, the Company had decided to cancel the provision that had been recorded for Ptas. 22,000,000, since the acceptance of the tax assessment was signed, whereby the Tax Agency recognized the commencement of the Company's activity and proposed the settlement of the VAT refunds for 1996 and 1997, for a 19 total amount of Ptas. 203,710,000. The amounts receivable relating to 1993 and 1994 will be recovered in future returns. The Company has the last four years open for review by the tax inspection authorities, and has reported the following tax losses: ----------------------------------------- Year Thousands of Pesetas ----------------------------------------- 1995 1,291,904 1996 223,055 1997 83,568 ----------------------------------------- Total 1,598,527 ----------------------------------------- (12) REVENUES AND EXPENSES a) Net sales- The net sales mainly relate to the supply of services to other mining companies. b) Average headcount- The average number of employees in 1998 was as follows: -------------------------------------------------- 1998 -------------------------------------------------- By category- Senior technicians 5 Technicians 4 Manual workers and clerical staff 9 -------------------------------------------------- Total 18 -------------------------------------------------- c) Allowance for bad debts- The variations in the allowance for bad debts and losses on unrecoverable loans in 1998 was as follows: ---------------------------------------------------- Thousands of Pesetas ---------------------------------------------------- Balance at December 31, 1997 26,000 ---------------------------------------------------- Allowance for operating bad debts used (26,000) ---------------------------------------------------- Balance at December 31, 1998 - ---------------------------------------------------- Ptas. 22 million of the allowances used in the year relate to allowances for certain accounts receivable from the tax authorities for VAT (see Note 11). 20 d) Financial revenues and short-term financial investments- As of December 31, 1998, the Company held Ptas. 125,000,000 of short- term financial investments in eurodeposits with weekly maturity and that earn annual interest of 2.9%. e) Prior years' expenses and losses- The charge under the "Prior Years' Expenses and Losses" caption on the statement of operations relates basically to invoices received in 1998 for professional services provided by third parties in 1997, which had not been fully estimated as of December 31, 1997. (13) DIRECTORS' REMUNERATION In 1998 Riomin Exploraciones, S.A. recorded an expense of Ptas. 30 million for remuneration and per diems earned by its Board members. In addition, as of December 31, 1998, there were balances payable to members of the Board of Directors amounting to Ptas. 16,000. There were no other kinds of loans or pension or life insurance or other similar commitments, to current or former members of the Board of Directors. (14) FINANCIAL SITUATION AND EVENTS SUBSEQUENT TO YEAR-END Subsequent to 1998 year end the Group company RIO TINTO International Holding LTD., sole shareholder of the Company during almost the whole of 1998 (see Note 1), initiated a negotiation process with various companies with the aim of selling the Company. In addition, on February 25, 1999, RIO TINTO International Holding LTD transferred the loan of Ptas. 5,390,777,000 that the Company held with it to RIO TINTO Metals LTD, sole shareholder of Riomin Exploraciones, S.A. from December 31, 1998. This amount related to the principal and interest on the participating loans mentioned above (see Note 10), and to an additional Ptas. 637,409,000 received by the Company. This loan was formalized in a new participating loan contract with the following conditions: -------------------------------------------------------- Conditions -------------------------------------------------------- Contract commencement date 1/1/1999 Principal of the loan 5,390,777 Term 10 years Maturity 12/31/2008 Single repayment of principal 12/31/2008 Fixed interest rate (a) 0.5% per annum Variable interest rate (b) (EUROLIBOR + 1%) x 2 -------------------------------------------------------- 21 (a) Payable on December 31 of each year, until variable interest starts to accrue. (b) Payable on December 31 of each year, from the date on which production on the "Las Cruces" project commences. Production will be considered to have commenced when the Company, having obtained an operating license from the mining authorities and made the projected investment for the project, has commenced production in a regular and continuous fashion. The loan agreement establishes a first period of time during which the Company may not make early repayment of the principal of the loan at its own discretion. This period covers the time from the date the participating loan contract is signed to the date on which the Company commences production, from which time the Company may repay the principal early, paying a penalty equal to the annual interest that the repaid capital would have accrued, calculated in accordance with the conditions set out above and discounted at an annual rate of 7% up to the date of the early repayment agreement. Should the early repayment take place, the Company will be obliged to undertake a capital increase of the same amount as the repayment, and this amount may not arise from revaluation of its assets. RIO TINTO Metals LTD. may ask the Company for early repayment of the principal of the loan in the following cases: a) If the Company should file for Chapter 11-type insolvency proceedings (suspension de pagos) or be declared bankrupt, or flagrantly fail to fulfil its obligations to third parties. b) Should the borrower fail to comply with any of the obligations under the participating loan contract. c) Should the RIO TINTO Group cease to hold a majority ownership interest in the capital stock of the Company. In cases a) and b) the Company will have to pay RIO TINTO Metals LTD. a penalty calculated in the way described above, but is not obliged to pay any penalty in case c). In terms of seniority of debt as established by the Spanish Civil Code, participating loans have lower priority than debts to general creditors. RIO TINTO Metals LTD. may at any time request the conversion of the principal and/or the interest on the participating loans into capital of the Company. These participating loans are governed, in accordance with the stipulations of the contract, by the regulations deriving from Royal Decree Law 7/96 on urgent measures on tax and development and liberalization of economic activity, and from Law 10/96 on urgent tax measures to correct intercompany domestic double taxation and on company internationalization incentives. Additionally, on January 19, 1999, the Company collected Ptas. 203,710,000 from the Tax Agency relating to VAT from 1996 and 1997, the refund of which the Company had requested (see Note 11). 22 (15) "YEAR 2000 ISSUE" (UNAUDITED) Throughout 1998 and in accordance with Group guidelines the Company has carried out a plan to adapt its systems to the new millennium and thus avoid any problem deriving from the "Year 2000 Issue". Since the Company is only carrying out exploration work, the action plan focused on the following aspects: a) Checking all the Company's computer systems, in addition to obtaining the relevant certificates from the various suppliers of this equipment. b) Reviewing all the software applications, and obtaining the relevant certificates from the software suppliers. c) Certification from the companies that supply services that their systems are Year 2000 compliant. Since the Company's computer systems and software applications have been reviewed, Company management considers that they will not be affected by the "Year 2000 Issue" and that the latter will not cause the Company to incur material expenses in the coming years. (16) STATEMENT OF CHANGES IN FINANCIAL POSITION The 1998 statement of changes in financial position is as follows:
- ----------------------------------------------------------------------------------------------------------------------------- Thousands of Pesetas Thousands of Pesetas ------------------------ ----------------------- 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Start-up expenses - 2,579 Funds applied in operations 162,984 72,583 Exchange gains 233 182 Fixed asset additions: Long-term debt-Group companies 3,324,645 2,286,206 Intangible assets 1,359,208 1,720,989 Fixed asset disposals 560 151 Tangible fixed assets 8,999 32,445 Early repayment or transfer to Long-term financial investments 150,000 - short term of long-term financial investments 710 15,225 - ----------------------------------------------------------------------------------------------------------------------------- Total funds applied 1,681,191 1,828,596 Total funds obtained 3,388,496 2,301,764 - ----------------------------------------------------------------------------------------------------------------------------- FUNDS OBTAINED IN EXCESS OF FUNDS APPLIED IN EXCESS OF FUNDS APPLIED (INCREASE IN FUNDS OBTAINED (DECREASE WORKING CAPITAL) 1,707,305 473,168 IN WORKING CAPITAL) - - - ----------------------------------------------------------------------------------------------------------------------------- TOTAL 3,388,496 2,301,764 TOTAL 3,388,496 2,301,764 - -----------------------------------------------------------------------------------------------------------------------------
23
--------------------------------------------------------------------------------------------------------------- Thousands of Pesetas --------------------------------------------------------------------- VARIATION IN 1998 1997 --------------------------------------------------------------------- WORKING CAPITAL Increases Decreases Increases Decreases --------------------------------------------------------------------------------------------------------------- Other Current Assets 756 - - - Accounts receivable 78,809 - 82,235 - Accounts payable 1,613,665 - 278,992 - Short-term financial investments 114,864 - 9,009 - Cash - 101,410 102,608 - Accrual accounts 621 - 324 - --------------------------------------------------------------------------------------------------------------- Total 1,808,715 101,410 473,168 - --------------------------------------------------------------------------------------------------------------- VARIATION IN WORKING CAPITAL 1,707,305 - 473,168 - ---------------------------------------------------------------------------------------------------------------
The reconciliation of the income for the year per books to the funds obtained from operations per the foregoing statement of changes in financial position is as follows:
------------------------------------------------------------------------------ (Thousands of Pesetas) ------------------------ 1998 1997 ------------------------------------------------------------------------------ Income for the year (loss) (1,076,102) (95,618) Less- Depreciation and amortization 12,367 10,723 Fixed asset retirements 901,601 12,312 Plus- Overprovision for contingencies and expenses (850) - ------------------------------------------------------------------------------ Funds applied in operations (162,984) (72,583) ------------------------------------------------------------------------------
(17) SUBSEQUENT EVENTS IN THE PERIOD FROM MARCH 11 TO SEPTEMBER 1, 1999 Following is a description of the most noteworthy events relating to the situations existing as of December 31, 1998, that have occurred since March 11, 1999, the date of preparation of the 1998 financial statements: 1. On May 12, 1999, the Company terminated the agreement with Riomin Iberica, S.A. (see Note 4-b), whereby on December 12, 1996, it granted to the latter a purchase option on certain exploration and research permits valued in the Company's balance sheet as of December 31, 1998, at Ptas. 730,092,000. On that same date, the Company transferred the mining rights under various of the aforementioned exploration and research permits. Since the transfer was made for Ptas. 24,600,000 and the projects transferred were valued at Ptas. 587,461,000 as of December 31, 1998, this transaction gave rise to a loss of Ptas. 562,861,000 for the Company, the effect of which was recorded in the present annual accounts. 2. On September 1, 1999, RIO TINTO Metals LTD., the sole shareholder of Riomin Exploraciones, S.A. since December 31, 1998, transferred all the Company's shares to MK GOLD COMPANY, whose registered office is in the U.S. Also, on that same date, RIO TINTO Metals LTD. assigned and transferred the participating loan of Ptas. 5,390,777,000 that it had granted to the Company (see Note 14) 24 to MK GOLD COMPANY, the sole shareholder of Riomin Exploraciones, S.A. since September 1, 1999, as described above. 3. Through December 31, 1998, Riomin Exploraciones, S.A. incurred losses because in recent years it has focused on performing the exploration and research work for the "Las Cruces" project, and as of December 31, 1998, it had incurred in this connection research and development expenses amounting to Ptas. 4,092 million, of which Ptas. 1,359 relate to projects capitalized in 1998. The Company's Directors consider that they have grounds for foreseeing the technical success and economic and commercial profitability of the project, as evidenced in the project's economic feasibility study prepared by the Company. The volume of investment required will give rise to losses in the coming years until the production for the project commences. In this regard, the Company has the financial support of the shareholder (MK GOLD COMPANY), which has undertaken to provide the financial support required to ensure the continuity of the Company's normal operations and to enable it to meet its commitments through December 31, 2000. 25 (18) DIFFERENCES BETWEEN SPANISH AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The financial statements of Riomin Exploraciones, S.A. were prepared in accordance with generally accepted accounting principles in Spain ("Spanish GAAP"), which differ in some respects from generally accepted accounting principles in the United States ("U.S. GAAP"). Following is a summary of the adjustments to net income and shareholder's equity that would have been required had U.S. GAAP been applied instead of Spanish GAAP. Statement of Operations Reconciliation: ------------------------------------------------------------------------- Thousands of pesetas -------------------- Year Ended December 31, 1998 ------------------------------------------------------------------------- Net income (loss) under Spanish GAAP (1.076.102) Foreign currency transaction gains and losses 11,655 Tax effects of above adjustments (a) Net income (loss) under U.S. GAAP (1.064.447) ------------------------------------------------------------------------- (a) Since the Company presents book losses under Spanish GAAP, no tax effect takes place Shareholders' equity reconciliation ------------------------------------------------------------------------- Thousands of pesetas -------------------- Year Ended December 31, 1998 ------------------------------------------------------------------------- Shareholders' equity under Spanish GAAP (771,679) Exploration costs (1,155,824) Start-up costs (4,472) Tax effects of above adjustments (a) Shareholders' equity under U.S. GAAP (1,931,975) ------------------------------------------------------------------------- (a) Since the Company presents book losses under Spanish GAAP, no tax effect takes place 1. Exploration costs. In accordance with Spanish GAAP, exploration costs are capitalized when they are incurred provided that the following conditions are met: existence of a specific project; existence of a method for allocating and recognizing the costs relating to each project; existence of sound 26 reasons to foresee the technical success of the project; existence of reasonable assurance of the economic and business profitability of the project; and existence of reasonable assurance that the project will be financed through completion. Capitalized exploration costs are amortized systematically from the date of completion of the related project over the period in which the project will generate revenues, up to a maximum of five years. Under US GAAP, exploration costs prior to the successful discovery of reserves, including interest costs, must be expensed as incurred. Specifically, capitalization of costs cannot begin until a company has discovered proven ore reserves that will be economic to produce. The assessment of whether reserves will be economic to produce is based on a feasibility study, mine plan and the development of infrastructure (e.g., roads). 2. Deferred foreign currency gains and losses. Under Spanish GAAP, foreign currency transaction gains and losses can be recorded as deferred charges or accrued liabilities, as described in Note 4-g. Under U.S. GAAP, foreign currency transaction gains and losses must be expensed as incurred. 3. Start-up expenses. Spanish GAAP permits the capitalization of start-up expenses. Under U.S. GAAP, start-up expenses must be expensed as incurred. 4. Accrual of contingencies and losses U.S. GAAP permits the accrual of contingencies and losses only when these losses are probable and reasonably estimable. Spanish GAAP requires the accrual of foreseeable contingencies and losses, including possible losses, as soon as they become known. During the year ended December 31, 1998, there were no differences between U.S. and Spanish GAAP related to the accrual of contingencies and losses. 5. Other items. 5.1 Under Spanish GAAP a cash flow statement is not required. However, a statement of changes in financial position (similar to a statement of sources and applications of funds) is required. 27 A cash flow statement is provided below in accordance with U.S. GAAP:
---------------------------------------------------------------------------------------- Thousands of pesetas ---------------------------------------------------------------------------------------- Cash flows from operating activities Cash receipts from customers 6,543 Cash paid to suppliers and employees (1,690,629) Cash generated from operations (1,684,086) Interest paid 450 Cash flow before extraordinary item (1,683,636) Proceeds from tax and deposit devolution 741 Others (2) Net cash from operating activities (1,682,897) Cash flows from investing activities Purchase of property, plant and equipment (151,231) Proceeds from sale of equipment 1,753 Interest received 8,420 Net cash use in investing activities (141,058) Cash flows from financing activities Proceeds from long-term borrowings 1,837,409 Net cash used in financing activities 1,837,409 Net increase in cash and cash equivalents 13,454 Cash and cash equivalents at beginning of period 245,864 Cash and cash equivalents at the end of period 259,318 ----------------------------------------------------------------------------------------
5.2 Extraordinary income (expense) Under Spanish GAAP the Company recorded as extraordinary results items that under U.S. GAAP should be considered as operating revenues (expenses). Under U.S. GAAP this income is defined as material, unusual and infrequent in the environment in which the entity operates. No adjustments to net income or shareholders' equity result from these types of classification differences under U.S. and Spanish GAAP. 28 RIOMIN EXPLORACIONES, S.A. FINANCIAL STATEMENTS -------------------- On September 9, 1999, the Board of Directors of RIOMIN EXPLORACIONES, S.A. prepared the Financial Statements for the year ended December 31, 1998, which are presented on the obverse of officially stamped paper series OF, class 8, numbered sequentially from OF3604138 to OF3604161 all inclusive, in compliance with current legislation. /s/ G. Frank Joklik /s/ Donald S. Babinchak - ------------------------------- --------------------------------- G. Frank Joklik Donald L. Babinchak /s/ John C. Farmer /s/ Michael G. Doyle - ------------------------------- --------------------------------- John C. Farmer Michael G. Doyle /s/ Gobain Overjero Zappino - ------------------------------- Gobain Ovejero Zappino 29 Audited financial statements of Cobre Las Cruces, S.A. (formerly Riomin Exploraciones, S.A.) for the year ended December 31, 1997 30 INDEPENDENT AUDITORS' REPORT To the Shareholder of Cobre Las Cruces, S.A., We have audited the adjusted financial statements (see Note 2d) of Cobre Las Cruces, S.A. (formerly Riomin Exploraciones, S.A., as mentioned in Note 13), consisting of the balance sheet as at 31 December 1997, the profit and loss account and the notes to the financial statements for the year then ended, all expressed in Spanish pesetas. The preparation of these financial statements is the responsibility of the Management of the Company. Our responsibility is to express an opinion on the financial statements taken as a whole, based on the work carried out in accordance with auditing standards generally accepted in Spain which require the examination, on a test basis, of evidence supporting the financial statements and an evaluation of their overall presentation, the accounting principles applied and the estimates made. 2. The adjusted financial statements include a participating loan received from the sole shareholder of Ptas 2.286 million as at 31 December 1997. As a result of this loan, the Company's net worth for the purposes of Articles 163 and 260 of the Spanish Companies Act is no longer negative in the amount of Ptas 597 million being positive in the amount of Ptas 1.689 million. As at December 31, 1997, the Company shows a negative working capital of Ptas 1.282 million basically due to debts with companies related to the RIO TINTO Group (the Company's former owner). As is mentioned in Note 2c, the Company has received confirmation from the MK Gold Company expressing its intention to maintain the financial support necessary for Cobre Las Cruces, S.A. to meet its commitments and settle its liabilities. 3. In our opinion, the accompanying adjusted financial statements for 1997 referred to above present fairly, in all material respects, the financial position of Cobre Las Cruces, S.A. at 31 December 1997 and the results of its operations and its cash flows for the year then ended and contain sufficient information for their proper interpretation and comprehension, and have been prepared in accordance with accounting principles generally accepted in Spain applied on a basis consistent with those used in the preceding year. PRICEWATERHOUSECOOPERS AUDITORES, S.L. /s/ Jorge Moya del Castillo - ------------------------------ Jorge Moya del Castillo 29 October 1999 31 Cobre Las Cruces, S.A. Abridged Balance sheet as at December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 1997 ---- ASSETS Fixed assets 2.972.422 Formation expenses 5.890 Intangible fixed assets 2.906.759 Tangible fixed assets 56.874 Deposits and guarantees 2.899 Current assets 515.940 Debtors 269.752 Refundable deposits 15.543 Cash at bank and in hand 230.321 Prepayments and accrued income 324 --------- Total 3.488.362 ========= -32- Cobre Las Cruces, S.A. Abridged balance sheet as at December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 1997 ---- LIABILITIES Capital and accumulated deficit (597.070) Share capital 623.141 Profit and loss account brought forward (223.100) Loss for the year (997.111) Deferred income 182 Provisions for liabilities and charges 850 Creditors: amounts falling due after more than one year 2.286.206 Creditors: amounts falling due in less than one year 1.798.194 --------- Total 3.488.362 ========= -33- Cobre Las Cruces, S.A. Abridged profit and loss account for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 1997 ---- EXPENSES 2.778.474 Staff costs 81.741 Wages, salaries and similar remuneration 63.682 Social security contributions 18.059 Fixed assets depreciation 10.723 Other operating expenses 1.610.190 Operating profit 34.455 Financial expense and similar costs 43.409 Amounts owed to group companies 40.554 Other debts 2.855 Losses on exchange 79.103 Net financial income - Loss on disposal of tangible and intangible fixed assets (see note 13 f) 587.223 Extraordinary expenses 1.797 Prior-year expenses (see note 13 e) 364.288 -34- Cobre Las Cruces, S.A. Abridged profit and loss account for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) Pths --------- 1997 ---- INCOME 1.781.363 Operating income 1.737.109 Other operating income (capitalisation of mine development costs) 1.737.109 Operating losses - Financial income 1.210 Other 1.210 Gains on exchange 4.034 Net financial expense 117.268 Loss from ordinary activities 82.813 Extraordinary income 2.508 Prior-year income 36.502 Net extraordinary loss 914.298 Loss before tax 997.111 --------- Loss for the year 997.111 ========= -35- Cobre Las Cruces, S.A. Statement of Stockholders' Equity (Deficit) for the year ended December 31,1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated)
Common Stock Total ------------------------- Accumulated Stockholders' Shares Amount Deficit Deficit ---------- ---------- ----------- ------------- Balance at January 1, 1997 191.500 623.141 (223.100) 400.041 Net loss for the year - - (997.111) (997.111) ---------- ---------- ----------- ------------- Balance at December 31, 1997 191.500 623.141 (1.220.211) (597.070) ========== ========== =========== =============
-36- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN SPANISH PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED PRINCIPLES IN SPAIN (see Note 2b) 1. Activities The Company primarily carries out exploration, research and mining activities throughout Spain in relation to mineral deposits and other geological resources, particularly, nickel, lead, zinc, silver, lithium, iron and diamonds. Its share capital amounts to Pths 623.141 (Note 7 - Capital and accumulated deficit) and was fully subscribed and paid in by its single shareholder, Rio Tinto International Holdings Ltd. The Company is therefore a single-shareholder company in accordance with the Spanish Private Limited Companies Act which came into force on 1 June 1995. Pursuant to this legislation, the operations and transactions carried out with group companies in 1997 are disclosed in Note 11. The name of the Company was changed to Cobre Las Cruces, S.A. from Riomin Exploraciones, S.A. on September 6, 1999 based on a resolution made by the General Shareholders Meeting. This was executed in a public deed on October 13, 1999, pending to be registered in the Mercantile Register (see Note 13). 2. Basis of presentation a) True and fair view These Spanish financial statements are presented in accordance with applicable accounting legislation so as to provide a true and fair view of the Company's net worth, financial situation and the results of its operations. They are presented in the accounting format required by the Spanish General Accounting Plan. b) Accounting principles In 1997 the Company's reported loss has been determined in accordance with generally accepted accounting principles in Spain and the accounting policies laid down in the Spanish General Accounting Plan. (see Note 2d). c) Going concern Mk Gold Company has agreed to support the Company to the extent necessary. On the basis of the support of its current shareholders, management have concluded that the company has adequate resources to continue operations for the foreseeable future and as a result have prepared the financial statements on a going concern basis. d) Financial statements preparation These financial statements differ from the 1997 Annual Accounts approved by the Board of Directors on February 18, 1998 and filed in the Mercantile Register. -37- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) The differences come from the introduction of the following adjustments to the financial statements previously filed in the Mercantile Register: Debit Credit ----- ------ Prior - year expenses (P & L) 338.632 - Intangible fixed assets (1) - 338.632 Loss on disposal of intangible fixed assets (P & L) 562.861 - Intangible fixed assets (2) - 562.861 ------- ------- 901.493 901.493 ======= ======= (1) See comments included in note 13e) (2) See comments included in note 13f). As a result of the introduction of these adjustments the captions affected have consequently changed to record the above adjustments. Additionally, this Note, and Note 13 and Note 14 have been added to these financial statements that were not included in the 1997 Annual Accounts. 3. Distribution of results It will be proposed to shareholders that the losses generated in the year be transferred to "Prior- year losses" so that they may be offset against future profits. 4. Accounting policies a) Intangible fixed assets This heading records: - Computer applications which are stated at cost. They are amortized on a straight-line basis at a rate of 25% each year. - Mine development expenses are capitalized at an amount equivalent to the cost of each project which the Company considers will be a technical success and financially and commercially profitable. When there are doubts as to a project's feasibility, the project is amortized in the year. In any event, projects must be written off within five years as from the date of completion. b) Tangible fixed assets Tangible fixed assets are stated at cost. Repair and maintenance costs are charged directly to expense in the year in which they are incurred provided that they do not represent an improvement or increase in the assets' useful lives. -38- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) Depreciation is calculated systematically using the straight-line method on the basis of cost using the following rates: Machinery 8% Furniture 10% Vehicles 14% Data-processing equipment 14% Fixtures and fittings 8% c) Trade debtors and creditors Accounts receivable and payable in less than one year which relate to debits and credits resulting from the Company's transactions are recorded at their face value. When the collectibility of balances receivable is considered doubtful, the relevant appropriations are made to the provision for bad debts using financial criteria. d) Exchange differences Accounts receivable and payable denominated in foreign currency are converted to pesetas at the exchange rate on the date of the related transaction. At the year end, they are stated at the year-end exchange rate. Unrealized exchange gains are recorded as deferred income in the balance sheet and are generally not taken to income. Conversely, exchange losses are taken directly to profit and loss. e) Recognizing income and expenses Purchases of goods and materials are recorded, including purchase expenses, direct transport expenses and any taxes levied on the acquisitions, excluding VAT. All discounts included in the invoice, other than cash discounts, which are regarded as financial income, are regarded as a decrease in the amount of the transaction. Other income and costs are recognized on an accruals basis, irrespective of the date on which the related collection or payment is made. f) Corporate income tax The profit and loss account records the corporate income tax expense which is calculated taking into account the tax accrued in the year, the effect of the deferral of the differences between the tax base and reported results which reverse in subsequent periods and any tax credits and deductions to which the Company is entitled. -39- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 5. Fixed assets Intangible fixed assets are comprised of the following:
Property, plant and mine Assets being development acquired expenses Computer under finance COST capitalised applications leases Total ----------- ------------ ------ ----- Balance at 1/1/96 1.088.150 11.264 - 1.099.414 Increases 1.113.069 8.879 - 1.121.948 Write-offs (107.240) (11.013) - (118.253) ----------- -------- - --------- Balance at 31/12/96 2.093.979 9.130 - 2.103.109 ----------- -------- ------ --------- Increases 1.720.090 395 504 1.720.989 Write-offs (913.550) - - (913.550) ----------- -------- ------ --------- Balance at 31/12/97 2.900.519 9.525 504 2.910.548 ----------- -------- ------ --------- AMORTISATION Balance at 1/1/96 - 7.850 - 7.850 Increases - 640 - 640 Write-offs - (7.850) - 7.850 ----------- -------- ------ --------- Balance at 31/12/96 - 640 - 640 ----------- -------- ------ --------- Increases - 3.110 39 3.149 Write-offs - - - - ----------- -------- ------ --------- Balance at 31/12/97 - 3.750 39 3.789 ----------- -------- ------ --------- NET BOOK VALUE Balance at 1/1/96 1.088.150 3.414 - 1.091.564 =========== ======== ====== ========= Balance at 31/12/96 2.093.979 8.490 - 2.102.469 =========== ======== ====== ========= Balance at 31/12/97 2.900.519 5.775 465 2.906.759 =========== ======== ====== =========
The most important project which makes up the balance of Property, Plant and Mine development expenses capitalized at 31 December 1997 are as follows: Project name Commencement date Amount (Ptas'000) - ------------ ----------------- ----------------- Las Cruces 1990 2.733.283 --------- 2.733.283 ========= -40- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) Tangible fixed assets consist of the following:
Fixtures Data- Plant and and processing Other fixed COST machinery Tooling fittings Furniture equipment Vehicles assets Total Balance at 1/1/96 9.252 - 1.714 10.746 28.940 22.415 - 73.067 Increases 5.739 - 1.330 1.504 6.928 7.557 75 23.133 Write-offs (7.130) - (991) (6.727) (20.761) (17.325) - (52.934) ------ ----- ----- ------ ------- ------- --- -------- Balance at 31/12/96 7.861 - 2.053 5.523 15.107 12.647 75 43.266 ------ ----- ----- ------ ------- ------- --- -------- Increases 12.939 2.330 2.147 1.560 5.013 8.085 371 32.445 Write-offs - - - - (497) (928) - (1.425) ------ ----- ----- ------ ------- ------- --- -------- Balance at 31/12/97 20.800 2.330 4.200 7.083 19.623 19.804 446 74.286 ====== ===== ===== ====== ======= ======= === ======== DEPRECIATION Balance at 1/1/96 3.827 - 50 4.389 9.195 12.176 - 29.637 Increases 1.889 - 956 1.315 3.831 2.786 - 10.777 Write-offs (2.813) - (605) (4.043) (10.128) (11.088) - (28.677) ------ ----- ----- ------ ------- ------- --- -------- Balance at 31/12/96 2.903 - 401 1.661 2.898 3.874 - 11.737 ------ ----- ----- ------ ------- ------- --- -------- Increases 279 19 910 606 2.533 2.325 22 6.694 Write-offs - - - - (250) (769) - (1.019) ------ ----- ----- ------ ------- ------- --- -------- Balance at 31/12/97 3.182 19 1.311 2.267 5.181 5.430 22 17.412 ====== ===== ===== ====== ======= ======= === ======== NET BOOK VALUE Balance at 31/1/96 5.425 - 1.664 6.357 19.745 10.239 - 43.430 ====== ===== ===== ====== ======= ======= === ======== Balance at 31/12/96 4.958 - 1.652 3.862 12.209 8.773 75 31.529 ====== ===== ===== ====== ======= ======= === ======== Balance at 31/12/97 17.618 2.311 2.889 4.816 14.442 14.374 424 56.874 ====== ===== ===== ====== ======= ======= === ========
Deposits and guarantees Balance at 1/ 1/96 14.933 Increases 13.862 Decreases (10.671) -------- Balance at 31/12/96 18.124 -------- Increases 1.490 Decreases (16.715) -------- Balance at 31/12/97 2.899 ========
-41- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 6. Debtors Debtors at December 31, 1997 can be broken down as follows: Trade debtors 175 Trade debtors 175 Sundry debtors 2.132 Advances to suppliers 947 Other debtors 1.185 ------- Amounts receivable from group companies 2.932 Riomin Iberica 897 ATD-CRA Advanced Technical 1.513 Sdad. Espanola de Talcos 522 ------- Loans to employees 635 Taxes refundable 289.878 VAT refundable 289.471 Interim payments refundable 407 Provisions ------- (26.000) ======= 269.752 ======= 7. Capital and accumulated deficit Share capital at the year end amounts to Pths. 623.141 and is made up of 191.500 shares with a par value of Ptas 3.254 each, fully subscribed and paid in. Movements in the accounts under this heading in 1997 are as follows:
Losses Profit /(loss) Share capital Brought forward for Total --------------- the year ----- -------- Balance at 1/1/96 1.915.000 - (1.291.904) 623.096 Increases - - (223.055) (223.055) Decreases (1.291.859) (45) 1.291.904 - ----------- -------- ---------- - Balance at 31/12/96 623.141 (45) (223.055) 400.041 ----------- -------- ---------- ---------- Increases - - (997.111) (997.111) Decreases - (223.055) 223.055 - ----------- -------- --------- ---------- Balance at 31/12/97 623.141 (223.100) (997.111) (597.070) =========== ======== ========= ==========
-42- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) Pursuant to the Resolution of 20 December 1996 of the Spanish Institute of Auditors which lays down general criteria for determining net worth for the purposes of reducing capital and dissolving companies, the figure for capital and reserves indicated above should be increased by the participating loans which are included in the balance sheet under Amounts owed to group companies falling due after more than one year totaling Pths. 2.286.206. For purposes of this calculation the resulting figure for net worth at 31 December 1997 is therefore as follows: Pths --------------- Capital and accumulated deficit (597.070) Participating loans 2.286.206 --------- 1.689.136 ========= 8. Creditors: amounts falling due after more than one year This heading records the participating loan arranged with RTZ International Holdings Ltd amounting to Pths 2.286.206. This loan matures on 30 April 2007 and currently bears interest at the rate of 0.5% per annum (see Note 13). 9. Creditors: amounts falling due in less than one year Set out below is an analysis of this heading at 31 December 1997:
Pths ---------------------------------- Trade creditor 378.623 Amounts owed to Group companies 1.403.144 RTZ Minerals Development 48.498 RTZ Technical Services 34.483 RTZ Mining and Exploration 56.202 RTZ International Holdings 1.231.200 RTZ Limited London 32.761 ---------- Wages and salaries 879 Taxes and social security contributions 6.791 Taxes payable 5.146 Social security contributions payable 1.645 ---------- Interest payable 8.757 --------- 1.798.194 =========
-43- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 10. Tax situation Given that the Company has significant tax losses carried forward, there is no need to record a provision for corporate income tax. At 31 December 1997, the Company's returns for the following taxes are open to tax inspection: Corporate income tax 1992 - 1997 VAT 1992 - 1997 Personal income tax 1992 - 1997 Tax on business and professional activities 1992 - 1997 11. Transactions and balances with related companies The Company maintains accounts with a number of group companies, the balances of which are as follows. These balances are included as part of debtors and creditors in the balance sheet.
Pths ------------------------------- Debtor Creditor --------- --------- Riomin Iberica S.A. 897 ATD-CRA Advanced Technical 1.513 Sdad. Espanola de Talcos 522 RT Minerals Development Ltd - 48.498 RTZ International Holding (participating loan) - 2.286.206 RTZ Technical Services Ltd - 34.483 RTZ Mining & Exploration - 56.202 RTZ International Holding - 1.231.200 RTZ Limited London - 32.761 - --------- --------- 2.932 3.689.350 ========= =========
-44- Cobre Las Cruces, S.A. Notes to the financial statements for the year Ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) The transactions made during the year with related companies are as follows: Pths ---- RTZ Technical Services Ltd Provision of services 470.839 US Borax Inc Payments on its behalf 995 RTZ Mining & Exploration Provision of services 79.871 RTZ International Holdings Loans 2.606.006 RTZ Consultants for America Provision of services 139 RTZ Limited London Provision of services 74.437 Riomin Iberica Payments on its behalf 8.070 ATD CRA Advanced Technical Dev. Provision of services 85.270 Sociedad Espanola de Talcos Provision of services 522 12. Other information The members of the Board of Directors have received PThs 16.638 in respect of salaries and PThs 2.686 in respect of remuneration in kind. No advances or loans have been granted to the members of the Board of Directors. No pension commitments have been entered into with the members of the Board of Directors. -45- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) 13. Subsequent events The most significant events since December 31, 1997 up to the issuance of these financial statements are summarized as follows: a) Transfer of the ownership of the Company's shares On December 31, 1998, Rio Tinto International Holdings Ltd., the Company's Single Shareholder transferred its entire shares to another company belonging to the Rio Tinto Group, Rio Tinto Metals Ltd. Subsequently, on September 1, 1999, the Company executed the sale of the shares to the new Single Shareholder, MK Gold Company. On September 6, 1999, the Single Shareholder resolved to change the name of the Company (formerly Riomin Exploraciones, S.A.) to Cobre Las Cruces, S.A. This was executed in a public deed on October 13, 1999, pending to be registered in the Mercantile Register. b) Participating loans On March 19, 1998, the Company's shareholder at the time, Rio Tinto International Holdings, Ltd. entered into an additional participating loan agreement with the Company for Pths 2.412.194 which will be repaid upon maturity on December 31, 2007. In the following year, on February 25, 1999, the Company assigned the above participating loan and the one recorded as such by the Company at the end of 1997 to its new shareholder, Rio Tinto Metals Ltd. At the same time, it was agreed that the outstanding amount, together with other amounts contributed by the former shareholder of the Company and not formalized in a participating loan, would be repaid under a single participating loan. The conditions of the new loan agreement being as follows: Principal: Ptas. 5.390.777.000. Maturing on : 31 December 2008, the date on which the outstanding principal will be repaid in a single payment. Interest: Fixed interest of 0.5% per annum until the commencement of the mining of the "Las Cruces" mineral deposit. Henceforth and until the maturity date of the loan, variable interest of (EUROLIBOR+1)x2. In accordance with the estimated financing for the investments envisaged by the Company stated in the Feasibility Study prepared to this end, if the relevant authorization is finally granted to mine the Las Cruces mineral deposit, and depending on the cost of the financing taking into account the above financial conditions, the Company has estimated a market rate of interest for the entire envisaged operation and recorded financial expenses totaling Pths 309.771 in the year ended December 31, 1998 as Mine Development expenses relating to the project, "Las Cruces". -46- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) On September 1, 1999, simultaneously with the signing of the sale of the Company's shares, the assignment of the above participating loan to MK Gold Company was formalized. c) Relations with the Tax Authorities On October 30, 1998, the assessment relating to the VAT inspection carried out for the years 1996 and 1997 was signed in agreement. Therefore, VAT for these two years are closed to tax inspection. The assessment established a refund of input VAT relating to said years, totaling Pths 203.711 and the payment of Pths 665 in respect of late-payment interest which was received by the Company in 1999. Simultaneously, the Company cancelled a provision of Pths 22.000 for VAT relating to 1993, recorded in relation to disputes with the tax authorities and abandoned the claims filed with the National Tax and Treasury Court in relation to the refund of VAT relating to 1993 and 1995, totaling Pths 21.552 and Pths 64.082, respectively. d) Purchase option agreement with respect to shares in Seroncillo, S.L. On November 6, 1998, the Company entered into a purchase option agreement with respect to all the shares in Seroncillo, S.L., a company owning property with a surface area of 593 hectares, approximately, located in the province of Seville, where the "Las Cruces" mineral deposit is located. The agreement laid down as a premium for the option, Pths 150.000, to be deducted from the purchase price of the shares if the option is exercised. The exercising of the option is related to the surface area of land to be acquired from the Company. A minimum surface area of 150 hectares is established with a price per hectare of Pths 4.000. The option may be exercised over a period of four years, i.e. until 6 November 2002. Additional annual extensions to said period may be requested, increasing the cost of exercising the option by Pths 10.000 per year. e) Write-off of Mine development costs capitalized The company has written-off mine development costs capitalized as at December 31, 1997 totaling Pths 338.632 during 1998 as these costs were not individually identified with the projects in process (See Note 2d). These costs were expensed in these adjusted 1997 financial statements. -47- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) f) Transfer of mining rights to Riomin Iberica, S.A On May 12, 1999, the Company and Riomin Iberica, S.A. entered into an agreement for the transfer of mining rights for a price of Pths 24.600, in accordance with an independent expert's appraisal, with respect to drilling and research in the Spanish pyretic belt owned by Riomin Exploraciones, S.A. (currently named Cobre Las Cruces, S.A.). The book value at the time of concluding the agreement amounted to Pths 587.461. As a result, the Company charged the loss totaling Pths 562.861 to the profit and loss account for 1999 in its official books (see Note 2d) but are expensed in these adjusted 1997 financial statements. Simultaneously, the parties agreed to terminate the agreement for the purchase option in respect of the mining rights, concluded on December 12, 1996 stating a purchase price for the rights covered by the agreement of Pths. 730.505, the majority of these rights were included in the agreement explained in the above paragraph. Any rights and obligations deriving from the above purchase option agreement were declared as no longer applicable. g) Year 2000 The Company is year 2000 compliant, in accordance with the policy established by the Rio Tinto Group and considers that its computer systems and equipment are adequately adapted to the year 2000. The cost incurred in this respect is insignificant. 14. Summary of certain differences between Spanish GAAP and US GAAP for the year ended December 31, 1997 The financial statements of the Company have been prepared in accordance with Spanish GAAP which in certain areas differ significantly from U.S. GAAP. The Company's accounting policies are set out in Note 4 of the "Notes to the Financial Statements" for the year ended December 31, 1997. The following paragraphs summarize the areas in which differences between Spanish GAAP and US GAAP could be significant to the Company's financial position and result of operations. The Company has quantified these differences in section a) of this note and estimates the net effect that applying U.S. GAAP would have on its financial position on results of operations, or any component thereof, in any of the presentation of financial information included in these financial statements. No attempt has been made to identify future differences between Spanish GAAP and US GAAP as the result of prescribed changes on accounting standards. Regulatory bodies that promulgate Spanish GAAP and US GAAP have significant projects ongoing that could affect future comparisons such as this one. Finally, no attempt has been made to identify all future differences between Spanish GAAP and US GAAP that may affect the financial statements as a result of transaction or events that may occur in the future. -48- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) Exploration costs Spanish GAAP Under Spanish GAAP, mineral exploration costs relating to feasible projects are capitalized and charged to the Profit and Loss account during the estimated production period of the project. US GAAP Mineral exploration costs are expensed as incurred. When it has been determined that a mineral property has proven and probable reserves, the cost of subsequent reserve definition and expansion and the costs incurred to develop such property are capitalized as mine development costs and charged to operations based on proven and probable reserves. Start up Expenses Spanish GAAP Such costs are generally capitalized and amortized to income over the period estimated to be benefited. US GAAP Such costs are generally expensed as incurred. Deferred tax assets Spanish GAAP Under Spanish GAAP, deferred tax assets are only recorded for ten years and where realization is considered highly probable. US GAAP Under US GAAP, deferred tax assets are recognized in the balance sheet at full value, but reduced by a valuation allowance based on the likelihood of realization of these benefits in future periods. Extraordinary income and expenses and prior year income and expenses Spanish GAAP The Company has recorded certain income and expenses as extraordinary in the profit and loss account. -49- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) US GAAP These extraordinary income and expense and prior year income and expense items would not have been classified as extraordinary items but would have been included in the determination of operating results or, in the case of the transfer of assets between parties under common control, such as the sale of shares, no profit and loss would be recorded on such transactions. Any amount received in excess of or below costs would be recorded in shareholders' equity. Under US GAAP only extraordinary items, defined as those material items which derive from events or transactions that are both unusual and infrequent would be included. These are limited, for example to losses arising from natural disasters, expropriations of assets and gain/losses on the early extinguishment of debt, and are presented separately on the face of the income statement net of taxes. Earnings Per Share Spanish GAAP This is not required under Spanish GAAP. US GAAP It is required to present basic and diluted earnings per share for listed companies. Statement of Comprehensive Income Spanish GAAP A statement of comprehensive income is not required. US GAAP SFAS 130 defines comprehensive income as a measure of all changes in equity of an enterprise during a period that result from transactions and other economic events of the period other than transaction with owners. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income: i.e. foreign currency items, minimum pension liabilities adjustments and unrealized gains or losses on certain investments in debt and equity securities. -50- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) Statement of Cash Flow Spanish GAAP Spanish GAAP does not require a statement of cash flow. US GAAP US GAAP requires the presentation of a statement of cash flow as one of the primary financial statements. We have included a cash flow statement in section b) of this note. Accounting for Leases Spanish GAAP Capital leases are shown as intangible assets, and are shown therein when the economic terms of the contract leave no doubt that the option will be exercised. Related interest costs are recorded as deferred expenses. Spanish GAAP defines operating leases as those where the right of use is transferred for a specific with no purchase option threshold. US GAAP Under US GAAP, leases qualifying for capitalization under prescriptive criteria are reported as tangible fixed assets at their fair value. Interest cost are recorded as incurred. Recently Issued US GAAP Accounting Standard In June 1998, the Financial Accounting Standards Board issued Financial "Accounting Standard No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) which will now be effective for fiscal years beginning after June 15, 2000. This is not presently required for Spanish GAAP and management believes the impact of this rule is not expected to be material. -51- Cobre Las Cruces, S.A. Notes to the financial statements for the year ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) a) Reconciliation of net loss and accumulated deficit between Spanish GAAP and US GAAP.
1997 Prior year Accumulated Net loss net losses deficit --------- ---------- ------- As reported in the accompanying financial statements at December 31, 1997 (997.111) (223.100) (1.220.211) --------- ---------- ---------- Adjustments for US GAAP purposes: 1. Exploration costs (1.155.824) (1.155.824) 2. Tax effect ( 35%) - 404.538 404.538 3. Recognition of tax loss carry-forwards 348.989 78.085 427.074 4. Tax deferred asset, valuation allowance (348.989) (78.085) (427.074) 5. Start-up costs - (5.890) (5.890) 6. Tax effect ( 35%) - 2.061 2.061 7. Tax deferred asset relating to points 1 and 5 valuation allowance - (406.599) (406.599) --------- ---------- ---------- Total adjustments net of taxes - (1.161.714) (1.161.714) --------- ---------- ---------- Net loss and accumulated deficit in accordance with US GAAP at December 31, 1997 ( Pths) (997.111) (1.384.814) (2.381.925) ========= ========== ==========
The above adjustments are explained as follows: 1. According to Spanish GAAP, mineral exploration costs relating to specific projects considered feasible are capitalized and charged to the Profit and Loss account within five years from the date of completion of the project. In accordance with US GAAP, these costs should be expensed as incurred. The breakdown of this adjustment is as follows: - As explained in Note 5, the total costs incurred and capitalized relating to "Las Cruces" project were Pths 2.733.283. The Company estimates that costs incurred totaling Pths 1.013.188 could be considered as mineral exploration costs and, therefore should be expensed as incurred under US GAAP. -52- Cobre Las Cruces, S.A. Notes to the financial statements for the year Ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) - The company has capitalized costs relating to certain projects as the company considers them feasible at present. . "Faralaes I" project totaling Pths 55.476. . "Faralaes III" project totaling Pths 56.219. . "Viar" project totaling Pths 16.812. . "Olivares" project totaling Pths 14.129. ------------ Pths 142.636 ------------ In addition under US GAAP, these costs could be assimilated to mineral exploration costs as there is no proven existence of mineral reserves and, therefore should be expensed as incurred through the Profit and Loss Account. 2. Recognition of the deferred tax asset resulted from the adjustment explained in Paragraph 1. Deferred tax is calculated at the current statutory rate of 35%. 3. Recognition of the Deferred tax asset in the balance sheet at full value for tax loss carry-forwards and loss for the year ended December 31,1997. Deferred tax is calculated at the current statutory rate of 35%. 4. A 100% valuation allowance for gross deferred taxes has been established from tax loss carryforwards and book tax timing differences since realization of those benefits cannot be reasonably assured. These net operating loss carryforwards expire at various future dates through 2007. While the need for the valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefit of the carryforwards will be recorded in future operations as a reduction of the Company's income tax expense. 5. Start-up expenses capitalized that should be written-off as incurred under US GAAP. 6. Recognition of the deferred tax asset resulted from the adjustment explained in Paragraph 5. Deferred tax is calculated at the current statutory rate of 35%. -53- Cobre Las Cruces, S.A. Notes to the financial statements for the year Ended December 31, 1997 (Expressed in thousands of pesetas - Pths; unless otherwise indicated) b) Statement of stockholders' equity (deficit) for the year ended December 31, 1997(share amounts expressed in pesetas):
Common Stock Total --------------------- Accumulated Stockholders' Shares Amount Deficit Deficit -------- ---------- --------------- ---------------- Balance at January 1, 1997 191 500 623 141 (223 100) 400 041 Net loss for the year - - (997 111) (997 111) -------- ---------- --------------- ---------------- Balance at December 31, 1997 191 500 623 141 ( 1 220 211) (597 070) ======== ========== =============== ================
c) Statement of cash flows
For the year ended December 31,1997 ------------------------ Net cash flows from operating activities: Net loss (997.111) Adjustments to reconcile net loss to net cash used in operating activities: (787.744) ----------- Depreciation 10.723 Positive exchange differences (182) Own work capitalized (1.720.090) Write-offs of R&D expenses 913.550 Donations 8.000 Profit/loss on fixed assets 255 Changes in operating assets and liabilities: (370.560) ----------- Increase in accounts receivable 82.235 Increase in prepaid expenses and other 324 Increase in current assets and intangibles and other assets 9.009 Decrease in accounts payable and accrued liabilities (278.992) ----------- Net cash used for operating activities (2.155.415) ----------- Net cash flows used for investing activities: (28.183) ----------- Acquisition of equipment and furniture (43.972) Sale of fixed assets 564 Decrease in cash used in investing activities 15.225 Cash flows from financing activities: 2.286.206 ----------- Proceeds from participating loans payable to stockholders 2.286.206 Net increase in cash and cash equivalents: 102.608 Cash and cash equivalents, beginning of period 127.713 ----------- Cash and cash equivalents, end of period 230.321 ===========
Supplemental disclosures of cash flow information: Cash paid during the year for: Interest - d) Adjusted 1997 Balance Sheet
Balance sheet as Balance sheet as per per 1997 Annual 1997 adjusted Accounts Adjustments financial statements --------- ----------- -------------------- ASSETS Fixed assets 3.873.915 (901.493) 2.972.422 Formation expenses 5.890 - 5.890 Intangible fixed assets 3.808.252 (901.493) 2.906.759 Tangible fixed assets 56.874 - 56.874 Investments 2.899 - 2.899 Current assets 515.940 - 515.940 Debtors 269.752 - 269.752 Investments 15.543 - 15.543 Cash at bank and in hand 230.321 - 230.321 Prepayments and accrued income 324 - 324 --------- ----------- -------------------- Total 4.389.855 (901.493) 3.488.362 ========= =========== ==================== LIABILITIES Capital and reserves 304.423 (901.493) (597.070) Share capital 623.141 - 623.141 Profit and loss account brought forward (223.100) - (223.100) Profit/(loss) for the year (95.618) (901.493) (997.111) Deferred income 182 - 182 Provisions for liabilities and charges 850 - 850 Creditors: amounts falling due after more than one year 2.286.206 - 2.286.206 Creditors: amount falling due in less than one year 1.798.194 - 1.798.194 --------- ----------- -------------------- Total 4.389.855 (901.493) 3.488.362 ========= =========== ====================
e) Adjusted 1997 Profit and Loss Account
P&L as per P&L as per1997 1997 Annual adjusted financial Accounts Adjustments statements ----------- ----------- ------------------ EXPENSES 1.876.981 901.493 2.778.474 Staff costs 81.741 - 81.741 Wages, salaries and similar remuneration 63.682 - 63.682 Social security contributions 18.059 - 18.059 Fixes assets depreciation 10.723 - 10.723 Other operating expenses 1.610.190 - 1.610.190 Operating profit 34.455 - 34.455 Financial expense and similar costs 43.409 - 43.409 Amounts owed to group companies 40.554 - 40.554 Other debts 2.855 - 2.855 Losses on exchange 79.103 - 79.103 Net financial income - - - Loss on disposal of tangible and intangible fixed assets 24.362 562.861 587.223 Extraordinary expenses 1.797 - 1.797 Prior-year expenses 25.656 338.632 364.288 INCOME 1.781.363 - 1.781.363 Operating income 1.737.109 - 1.737.109 Other operating income 1.737.109 - 1.737.109 Operating losses - - - Financial income 1.210 - 1.210 Other 1.210 - 1.210 Gains on exchange 4.034 - 4.034 Net financial expense 117.268 - 117.268 Loss from ordinary activities 82.813 - 82.813 Extraordinary income 2.508 - 2.508 Prior-year income 36.502 - 36.502 Net extraordinary loss 12.805 901.493 914.298 Loss before tax 95.618 901.493 997.111 ----------- ----------- ------------------ Loss for the year 95.618 901.493 997.111 =========== =========== ==================
-54- Unaudited financial statements of Cobre Las Cruces, S.A. (formerly Riomin Exploraciones, S.A.) for the nine months ended September 30, 1999 -55- COBRE LAS CRUCES, S.A. Balance Sheets (Thousands of Pesetas)
September 30, 1999 December 31, 1998 (Unaudited) (Audited) ------------------- ----------------- Assets Fixed assets 4,443,646 4,476,884 Formation expenses 3,407 4,472 Intangible fixed assets 4,236,099 4,262,420 Tangible fixed assets 51,951 57,803 Deposits and guarantees 152,189 152,189 Current Assets 320,166 609,580 Debtors 84,903 349,506 Refundable deposits 2,234 130,407 Cash and bank and in hand 232,546 128,911 Prepayments and accrued income 483 756 -------------- ----------------- Total 4,763,812 5,086,464 LIABILITIES Capital and accumulated deficit 4,647,570 4,901,520 Share Capital 623,141 623,141 Long term debt payable to Group C. 5,673,199 5,673,199 Profit and loss account brought forward -1,394,820 -318,718 Loss for the year -253,950 -1,076,102 Deferred income 0 415 Provisions for liabilities and charges 0 0 Creditors: amounts falling due in less than one year 116,242 184,529 -------------- ------------- Total 4,763,812 5,086,464
-56- COBRE LAS CRUCES, S.A. Statement of Operations (Thousands of Pesetas)
Nine Months Ended September 30 (Unaudited) 1999 1998 ------------ ---------------- EXPENSES Staff costs Wages, salaries and similar remuneration 72,569 55,210 Social security contributions 15,745 15,497 Fixed assets depreciation 9,514 8,974 Other operating expenses 145,604 898,042 Operating profit 0 0 Financial expense and similar costs Amounts owed to group companies 0 0 Other debts 9 423 Losses on exchange 7,084 9,508 Net financial income 0 33,407 Loss on disposal of tangible and intangible fixed assets 0 0 Extraordinary expenses 759 6,552 Prior-year expenses 16,597 106,374 INCOME Operating income 7,457 3,405 Other operating income 2,193 1,243 Operating Losses 233,782 973,075 Financial income 3,263 0 Other 0 5,857 Gains of exchange 252 37,482 Net Financial Expense 3,578 0 Loss from ordinary activities 237,360 939,668 Extraordinary income 537 928 Prior-year income 229 178 Net Extraordinary loss 16,590 111,820 Loss before tax 253,950 1,051,488 ------------ ------------- Net loss 253,950 1,051,488
-57- COBRE LAS CRUCES, S.A. Statements of cash flows (Thousands of Pesetas)
Nine Months Ended September 30 1999 1998 (Unaudited) (Unaudited) --------------- ------------------ Net cash flows from operating activities: Net loss (253,950) (1,051,488) --------------- ----------------- Adjustments to reconcile net loss to net cash 7,567 8,974 --------------- ----------------- provided (used) by operating activities: Depreciation 9,514 8,974 Negative exchange differences (1,947) - Changes in assets and liabilities: 328,637 1,078,933 --------------- ----------------- Decrease in accounts receivable 263,657 (945,677) Decrease in prepaid expenses and other 1,222 (3,286) Decrease in current assets and intangibles and other assets 129,874 (32,036) Increase in accounts payable an accrued liabilities (66,116) 2,059,932 --------------- ----------------- Net cash provided by operating activities 82,254 36,419 Net cash flows provided (used) used for investing activities: 21,796 (6,666) --------------- ----------------- Acquisition of equipment and furniture (640) (6,666) Sale of fixed assets 22,436 - Cash flows from financing activities: (415) (178) Deferred Income (415) (178) --------------- ----------------- Net increase in cash and cash equivalents 103,635 29,575 Cash and cash equivalents, beginning of period 129,911 230,321 --------------- ----------------- Cash and cash equivalents, end of period 232,546 259,896 =============== =================
RIOMIN EXPLORACIONES, S.A. FINANCIAL STATEMENTS On October 29, 1999, the Board of Directors of Cobre Las Cruces, S.A. (formerly Riomin Exploraciones, S.A.) prepared the notes 2, 13 and 14 to the Financial Statements for the year ended December 31, 1997, in compliance with current legislation. /s/ G. Frank Joklik /s/ Donald L. Babinchak - ------------------------------ ------------------------------ G. Frank Joklik Donald L. Babinchak /s/ Michael G. Doyle /s/ Michael G. Doyle - ------------------------------ ------------------------------ John C. Farmer Michael G. Doyle /s/ Gobain Overjero Zappino - ------------------------------ Gobain Overjero Zappino -58- Unaudited Pro Forma Consolidated Financial Statements of MK Gold Company -59- MK Gold Company Introduction to Unaudited Pro Forma Consolidated Financial Statements The accompanying unaudited pro forma consolidated balance sheet as of September 30, 1999 and unaudited pro forma statements of operations for the year ended December 31, 1998 and the nine month period ended September 30, 1999 are presented to reflect the acquisition by MK Gold Company (the "Company") of the entire share capital and subordinated debt of Cobre Las Cruces, S.A. (formerly Riomin Exploraciones, S.A.) ("Las Cruces") (the "Acquisition") from Rio Tinto plc for a purchase price of $42 million in cash. The Acquisition was accounted for under the purchase method of accounting. The accompanying unaudited pro forma consolidated financial statements reflect the effects of a preliminary allocation of the purchase price. The accompanying unaudited pro forma consolidated financial statements should be read in conjunction with the respective company's historical consolidated financial statements and notes thereto. The unaudited pro forma consolidated financial statements are presented for informational purposes only and are not necessarily indicative of actual results had the foregoing transaction occurred as described in the preceding paragraph, nor do they purport to represent results of future operations of the merged companies . The pro forma consolidated balance sheet assumes the Acquisition occurred on September 30, 1999. The pro forma consolidated statements of operations present the Company's historical consolidated statements of operations for the fiscal year ended December 31, 1998 and the nine months ended September 30, 1999, along with Las Cruces' statements of operations for the same periods adjusted to give effect to the Acquisition as if the Acquisition had occurred on January 1, 1998. -60- Unaudited Pro Forma Condensed Consolidated Balance Sheet As of September 30, 1999 (Thousands of dollars)
Pro forma ASSETS Historical Pro forma as -------------------------------- Company (a) Riomin (b) adjustments (c) adjusted (d) -------------------------------- --------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 13,804 $ 1,508 $ (6,193) (e) $ 9,119 Gold bullion held for sale 1,210 - - 1,210 Receivables 1,969 546 - 2,515 Inventories 1,630 - - 1,630 Deferred income taxes 123 - - 123 Other 234 3 - 237 ---------- ---------- ----------- ----------- Total current assets 18,970 2,057 (6,193) 14,834 ---------- ---------- ----------- ----------- Mining rights, property, plant and mine development net 1,203 28,551 16,388 (f) 46,142 Deferred Income taxes 304 - - 304 Subordinated debt receivable - - - - Restricted cash 1,053 - - 1,053 ---------- ---------- =========== =========== TOTAL ASSETS $ 21,531 $ 30,608 $ 10,195 $ 62,333 ========== ========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,606 $ 747 $ - $ 2,353 Current portion of mine closure liabilities 454 - - 454 Short-term note payable - Leucadia National Corporation - - 15,807 (k) 15,807 Other accrued liabilities 380 - - 380 ---------- ----------- ----------- ----------- Total current liabilities 2,441 747 15,807 18,994 ---------- ----------- ----------- ----------- Mine closure and reclamation liabilities 743 743 Subordinated debt - 36,451 (36,451) (g) - Line of credit - Leucadia National Corporation - - 20,000 (h) 20,000 Long term deferred taxes - - 4,249 (i) 4,249 Deferred revenue 1,970 - - 1,970 ---------- ----------- ----------- ----------- Total liabilities 5,153 37,198 (3,605) 45,956 STOCKHOLDERS' EQUITY: Common Stock 193 4,004 (4,004) (j) 193 Capital in excess of par value 67,146 - - (k) 67,146 Accumulated deficit (50,962) (10,594) 10,594 (l) (50,962) Translation adjustment - - - - ---------- ----------- ----------- ----------- Total stockholders' equity 16,377 (6,590) 6,590 16,377 ---------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 21,530 $ 30,608 $ 10,195 $ 62,333 ========== =========== =========== ===========
-61- Unaudited Pro Forma Condensed Consolidated Statement of Operations For the year ended December 31, 1998 (Thousands of dollars except per share data)
Historical Pro forma Pro forma -------------------------- Company (m) Riomin (n) adjustments (o) as adjusted (p) ----------- ---------- --------------- --------------- REVENUE: Product sales $ 9,017 $ 598 $ - $ 9,615 Mining services 11,065 - - 11,065 ----------- ---------- --------------- --------------- Total revenue 20,082 598 - 20,680 ----------- ---------- --------------- --------------- COSTS AND OPERATING EXPENSES: Product sales 8,617 17 - 8,634 Mining services 9,335 - - 9,335 ----------- ---------- --------------- --------------- Total costs and operating expenses 17,952 17 - 17,969 ----------- ---------- --------------- --------------- GROSS PROFIT 2,130 581 - 2,711 EXPLORATION COSTS (3,068) - - (3,068) GENERAL AND ADMINISTRATIVE EXPENSES (1,661) - - (1,661) ----------- ---------- --------------- --------------- LOSS FROM OPERATIONS (2,599) 581 - (2,018) Gain (loss) on sale of assets 455 (6,034) - (5,579) Investment income and dividends, net 1,104 - - 1,104 Interest expense (81) (1,749) (1,830) ----------- ---------- --------------- --------------- Loss before income taxes (1,121) (7,202) - (8,323) Income tax provision (160) - - (160) ----------- ---------- --------------- --------------- Net loss $ (1,281) $ (7,202) $ - $ (8,483) =========== ========== =============== =============== Basic and diluted loss per share (0.07) (0.44) Basic and diluted weighted average shares used to compute loss per share 19,406,679 19,406,679
-62- Unaudited Pro Forma Condensed Consolidated Statement of Operations For the nine months ended September 30, 1999 (Thousands of dollars except per share data)
Historical Pro forma Pro forma ---------------------------- Company (q) Riomin (r) adjustments (s) as adjusted (t) ---------------------------- --------------------------------- REVENUE: Product sales $ 6,007 $ 90 $ - $ 6,097 Mining services 8,324 - - 8,324 ----------- ----------- ------------ ----------- Total revenue 14,331 90 - 14,421 ----------- ----------- ------------ ----------- COSTS AND OPERATING EXPENSES: Product sales 7,024 1,733 8,757 Mining services 6,564 - - 6,564 ----------- ------------ ------------ ----------- Total costs and operating expenses 13,588 1,733 - 15,321 ----------- ----------- ------------ ----------- GROSS PROFIT 743 (1,643) - (900) EXPLORATION COSTS (1,717) - - (1,717) GENERAL AND ADMINISTRATIVE EXPENSES (1,269) - - (1,269) ---------- ----------- ------------ ----------- LOSS FROM OPERATIONS (2,243) (1,643) - (3,886) Gain on sale of assets 92 - - 92 Investment income and dividends, net 513 - - 513 Interest expense (156) - - (156) ---------- ----------- ------------ ----------- Loss before income taxes (1,794) (1,643) - (3,437) Income tax provision - - - - ---------- ----------- ------------ ----------- Net loss $ (1,794) $ (1,643) $ - $ (3,437) ========== =========== ============ =========== Basic and diluted loss per share (0.09) (0.18) Basic and diluted weighted average shares used to compute loss per share 19,261,365 19,261,365
-63- NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The unaudited pro forma consolidated balance sheet as of September 30, 1999 reflects the adjustments necessary to record the acquisition as though it had occurred on September 30, 1999. The unaudited pro forma consolidated statements of operations for the year ended December 31, 1998 and the unaudited pro forma consolidated statements of operations for the nine months ended September 30, 1999 have been prepared assuming the acquisition occurred on January 1, 1998 and reflect the effects of certain adjustments to the historical consolidated financial statements that result from the acquisition. The method of accounting for the acquisition is the purchase method. The acquisition was funded through (i) borrowings of $20,000,000 pursuant to the Company's existing credit agreement with Leucadia National Corporation ("Leucadia"), (ii) the sale of 18,058,635 shares of the Company's authorized but unissued shares of Common Stock to Leucadia for $15,806,723 and (iii) $6,193,277 from the Company's working capital. The purchase price of Cobre Las Cruces was $42,000,000. The excess purchase price over net asset value of Riomin was recorded as an increase in mining rights. As a result of the acquisition the company also recorded a deferred income tax liability that was also recorded as an increase in mining rights. The following notes pertain to the unaudited pro forma consolidated balance sheet as of September 30, 1999: (a) Represents the consolidated balance sheet of the Company as of September 30, 1999. (b) Represents the balance sheet of Riomin as of September 30, 1999. (c) Includes proforma adjustments for the Riomin acquisition relating to the financing and sale of common stock to Leucadia and the entries needed for consolidation. (d) Represents the Company's pro forma as adjusted balance sheet as if the Riomin acquisition, related financing and sale of common stock to Leucadia had occurred on September 30, 1999. (e) Represents the portion of the purchase price funded through the Company's working capital. (f) Represents the allocation to mining rights of the excess purchase price over fair value of net assets acquired and the deferred income tax liability. (g) Represents the elimination of intercompany subordinated debt needed for consolidation. (h) Represents borrowings under the line-of-credit facility used to finance part of the Riomin acquisition. (i) Represents the adjustments to the deferred income tax balances for the tax effects of the pro forma adjustments. (j) Represents the elimination of Riomin's common stock needed for consolidation. -64- (k) Represents a promissory note payable to Leucadia National Corporation. Pending regulatory approval of the sale of all authorized but unissued shares of MK Gold common stock to Leucadia, Leucadia loaned the Company approximately $15,807,000. (l) Represents the elimination of Riomin's accumulated deficit for consolidation purposes. The following notes pertain to the unaudited pro forma consolidated statements of operations for the year ended December 31, 1998 and the nine months ended September 30, 1999. There are no material pro forma adjustments. No mining rights were amortized because the Las Cruces Project is still in the feasibility and development stage: (m) Represents the consolidated statement of operations of the Company for the year ended December 31, 1998. (n) Represents the statement of operations of Riomin for the year ended December 31, 1998. (o) Includes any proforma adjustments necessary for consolidation. (p) Represents the Company's pro forma as adjusted consolidated statement of operations as if the Riomin acquisition had occurred on January 1, 1998. (q) Represents the consolidated statement of operations of the Company for the nine months ended September 30, 1999. (r) Represents the statement of operations of Riomin for the nine months ended September 30, 1999. (s) Includes any proforma adjustments necessary for consolidation. (t) Represents the Company's pro forma as adjusted consolidated statement of operations as if the Riomin acquisition had occurred on January 1, 1998. -65- SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MK GOLD COMPANY /s/ John C. Farmer -------------------------------------- John C. Farmer Chief Financial Officer Date: November 15, 1999 -66- INDEX TO EXHIBITS Exhibits 2.1 Sale and Purchase Agreement dated September 1, 1999 between MK Gold Company and Rio Tinto Metals Limited.* 10.1 Stock Purchase Agreement dated September 1, 1999 between MK Gold Company and Leucadia National Corporation.* 10.2 Promissory Note dated September 1, 1999.* 10.3 Option Agreement dated August 26, 1999 between MK Gold Company and Straits Resources Ltd.* 23.1 Consent of Arthur Andersen 23.2 Consent of PricewaterhouseCoopers Auditores, S.L. _______________________ * previously filed -67- EX-23.1 2 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT As independent public accountants, we hereby consent to the incorporation by reference in this Form 8-K of MK Gold Company of our report dated September 9, 1999 included in Registration Statement Nos. 33-84754 and 333-16765. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN Jorge Segura Rodriguez November 11, 1999 EX-23.2 3 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-84754 and 333-16765 on Form S-8 of MK Gold Company of our report dated October 29, 1999, appearing in this Amendment No. 1 to MK Gold Company's Current Report on Form 8-K. PRICEWATERHOUSECOOPERS AUDITORES, S.L. November 15, 1999 -----END PRIVACY-ENHANCED MESSAGE-----