U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
X : Quarterly report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended April 30, 1998.
__: Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from _________ to _________.
Commission File No: 0-25798
HERITAGE MINES, LTD.
(Name of small business in its charter)
Colorado 84-1293168
(State or other (IRS Employer ID. No.)
jurisdiction of Incorporation)
1199 Main Avenue, Ste. 221
Durango, Colorado
81301
(Address of Principal Office) Zip Code
Issuer's telephone number: (970) 385-0374
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes _X__ No ____
Applicable only to issuers involved in bankruptcy proceedings during
the past five years
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes ____
No ____
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 6,487,172 as of
June 12, 1998.
Transitional Small Business Disclosure
Format (Check one):
Yes ____ No X
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND EXHIBITS
(b) Financial statements for Heritage Mines, Ltd. as and for
the quarter ending April 30, 1998, and the comparable period of the
preceding fiscal year.
FINANCIAL STATEMENTS
(A Development Stage Company)
HERITAGE MINES, LTD.
Quarter ended April 30, 1998
HERITAGE MINES, LTD.
(A Development Stage Company)
Condensed Consolidated Balance Sheet
Condensed Consolidated Statement of Operations
Condensed Consolidated Statement of Cash Flows
Notes to Condensed Consolidated Financial Statements
HERITAGE MINES, LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
as of April 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents 10,528
Other current assets 1,500
Total Current Assets 12,028
PROPERTY, PLANT,
EQUIPMENT AND MINE
DEVELOPMENT COSTS,
NET OF ACCUMULATED
DEPRECIATION 2,049,516
OTHER ASSETS
Bushmaster deferred
acquisition costs 152,377
Other 52,880
Total other assets 205,257
Total Assets 2,266,801
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable 242,786
Accrued expenses and other
liabilities 369,802
Notes payable and current
maturities of long term debt 176,279
Convertible note payable 600,000
Convertible debentures (including
related parties of $320,000) 960,000
Total current liabilities 2,348,867
LONG TERM DEBT 18,205
Total liabilities 2,367,072
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value:
authorized 10,000,000 shares,
no shares issued and
outstanding -
Common stock, $.0025 stated
value: authorized 100,000,000
shares, issued and outstanding
6,487,172 shares 16,218
Additional paid-in
capital 2,973,169
Deficit accumulated
during the
development stage (3,089,658)
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) (100,271)
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY (DEFICIT) 2,266,801
See accompanying notes to condensed consolidated financial statements.
HERITAGE MINES, LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Period from
Ended Ended Inception (May 14,
April 30 April 30 1992) thru April
1998 1997 30, 1998
OPERATING REVENUES - 3,536 67,019
OPERATING COSTS:
General and
Administrative 242,427 205,367 2,929,154
Depreciation 15,900 17,327 229,069
Total operating
costs 258,327 222,694 3,158,223
Loss from
Operations (258,327) (219,158) (3,091,204)
OTHER INCOME (EXPENSE)
Interest expense, net (53,914) (17,445) (235,664)
Other Expense - - 237,210
Total Other Income
(Expense) (53,914) (17,445) 1,546
NET LOSS (312,241) (236,603) (3,089,658)
Basic and Diluted
Net loss per share (.05) (.02) (1.05)
Weighted average
common shares 6,487,172 10,483,167 2,934,149
See accompanying notes to condensed consolidated financial statements.
HERITAGE MINES, LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period
from Inception
Three Months Three Months (May 14, 1992)
Ended Ended through
April 30 April 30 April 30
1998 1997 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss (312,241) (236,603) (3,089,658)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 15,900 17,327 229,069
Common stock issued
for services - - 25,045
Stockholder compensation
contributed to
capital - - 131,600
Convertible debentures
and notes payable issued
for services, including
$41,000 to related parties - - 101,000
Changes in operating assets and liabilities:
Other current assets - 4,734 (1,500)
Accounts payable accrued
expenses and other
liabilities 222,473 61,656 743,003
Net cash used in
operating activities (73,868) (152,886) (1,861,441)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property
and equipment (1,288) (7,000) (243,932)
Mine development
costs - (18,365) (1,230,583)
Construction in
progress - (13,747) (293,006)
Bushmaster deferred
acquisition costs (16,874) - (152,377)
(Increase) decrease
in other assets 1,638 4,510 (37,880)
Net cash used in
investing activities (16,524) (43,622) (1,957,778)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common
stock for cash - 50,000 869,475
Proceeds from notes
payable to related
parties 20,000 - 1,514,200
Proceeds from convertible
and other notes
payable 5,000 150,000 741,640
Proceeds from convertible
debentures, including
related parties of $215,000
from inception to date 35,000 - 796,000
Repayment of notes payable
and long term debt (1,709) (1,291) (56,368)
Repayment of notes
payable to and advances
from related parties - - (35,200)
Net cash provided from
financing activities 58,291 198,709 3,829,747
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS (32,101) 2,201 10,528
CASH AND CASH
EQUIVALENTS,
BEGINNING OF
PERIOD 42,629 1,078 -
CASH AND CASH
EQUIVALENTS,
END OF PERIOD 10,528 3,279 10,528
See accompanying notes to condensed consolidated financial statements.
HERITAGE MINES, LTD.
(A Development Stage Company)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Period
from Inception
Three Months Three Months (May 14, 1992)
Ended Ended through
April 30 April 30 April 30
1998 1997 1998
Stock issued for services - - 25,045
Stockholders' compensation
contributed to capital - - 131,600
Equipment exchanged for
mining claims - - 15,000
Notes payable issued to
related party for property,
equipment and mine
development costs - - 327,000
Notes payable issued for
property and equipment - - 106,094
Notes payable converted
to common stock - - 141,885
Stock issued for
subscriptions
receivable - - 127,500
Stock issued for
equipment - - 92,969
Notes payable exchanged for
convertible debentures,
all involving related
parties - - 89,000
Accrued interest capitalized
on notes payable - - 33,119
Issuance of stock in connection
with the reorganization - - 1,713,413
Common stock exchanged for
contingent notes payable - - -
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS:
(April 30, 1998 - Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have
been prepared in accordance with Securities and Exchange
Commission requirements for interim financial statements. Therefore,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The accompanying financial statements should be read in
conjunction with the Company's Form 10-KSB for the year ended
January 31, 1998.
The results of operations for the interim periods shown in this report
are not necessarily indicative of the results to be expected for the full
year. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations for
the interim periods a fair statement of such operations. All such
adjustments are of a normal recurring nature.
DEVELOPMENT STAGE
From its inception (considered to be May 14, 1992 for the purpose of
these condensed consolidated financial statements), to April 30, 1998,
the Company has been in the development stage. The Company has
concentrated its activities to acquire, explore, claim and permit
mineral properties, to develop the mineral properties to get them
ready for operations and to raise capital to finance these activities.
From inception through April 30, 1998, there have been no active
mining operations, although small test runs have generated minimal
revenues.
GOING CONCERN
The Company has incurred operating losses from inception through
April 30, 1998, has an accumulated deficit of $3,089,658, negative
working capital of $2,336,839, and is in default of its debenture
agreement (See Note 2). Management expects that the Company's
cash expenditures for the fiscal year ended January 31, 1999, will not
be less than $600,000. Larger expenditures may be incurred based on
the Company's development projects, and available cash resources
from operating cash flow and/or from additional financing.
As discussed in Note 2, the Company recently signed a letter of intent
that involves a business arrangement providing for investment of
working capital and development funding. Additional financing will
be required for the Company to meet current obligations. The
Company continues to be in discussions with several different parties
to obtain additional debt and/or equity financing.
There can be no assurance that the proposed business arrangement
discussed in Note 2 will be consummated or that additional funds can
be raised from other sources. Failure to consummate the proposed
business arrangement and to obtain other financing would raise
substantial doubts about the Company's ability to continue as a going
concern. No adjustments have been made to the accompanying
condensed financial statements to provide for this uncertainty.
2. PROPOSED BUSINESS ARRANGEMENT
Effective June 1, 1998 (the Effective Date), the Company and
Ausdrill, an Australian construction mining company, signed a letter
of intent which sets forth a business arrangement between the
companies that provides for capital investment by Ausdrill in
exchange for common equity in the Company, a cash flow interest in
Bushmaster Mines, Inc. (Bushmaster), Million Mountain mining
project and optional joint venture participation in the Company's
Bowerman project. Bushmaster is one-third owned by the Company's
President. It is anticipated that a definitive agreement will be
executed within 30 days following the Effective Date.
Key elements of the business arrangement are as follows:
(A) PURCHASE OF COMMON STOCK BY AUSDRILL. With
the signing of the letter of intent, the Company by letter of instruction
authorized its transfer agent to issue 200,000 restricted common
shares to Ausdrill in exchange for $100,000 in cash to be used for
general corporate purposes.
Assuming the fulfillment of certain conditions and closing, the
Company will within 5 business days following 30 days after the
Effective Date issue an additional 400,000 restricted common shares
to Ausdrill in exchange for $200,000 in cash to be used for general
corporate purposes. If closing of the definitive agreement does not
occur for any reason within 30 or 60 days after the Effective Date,
other than failure of the Company to satisfy conditions it is
responsible for, Ausdrill will subscribe to an additional 200,000
restricted common shares at the end of each 30 day period and pay
$100,000 for each subscription.
(B) DEVELOPMENT FUNDING BY AUSDRILL. The letter of
intent contemplates that following closing, the Company will issue
additional securities to Ausdrill, which may include up to 2,500,000
additional shares of common stock and 2,500,000 warrants. In
exchange, Ausdrill will provide the funding of certain corporate costs
and development funds for the Million Mountain project totalling
$2,500,000, less the amount paid for common shares specified in the
equity purchase described in (A) above. Ausdrill will also make
available certain specified mining equipment for Million Mountain
production on a rental basis at Ausdrill's cost, plus 15%. It is
contemplated that each Warrant would entitle Ausdrill to subscribe for
one additional common share of Heritage at a price of $1.50 per share
any time prior to the first anniversary of closing and at a price of
$2.50 per share at any time up to the second anniversary of closing.
The letter of intent also contemplates that as an alternative to fulfilling
its commitment through spending the specified amount, Ausdrill's
obligation may be deemed to be met upon the achievement of certain
commercial production from the Million Mountain project or upon the
Company achieving a specified market capitalization.
In addition to the issuance of an equity interest to Ausdrill, the letter
of intent contemplates that the Company will pay to Ausdrill a 30%
net cash flow interest from the first 250,000 ounces produced from
Million Mountain, after payment of royalties.
(C) BOWERMAN JOINT VENTURE. The proposed business
arrangement also gives Ausdrill a two-year exclusive option to enter
into a 50:50 joint venture on the Bowerman project by spending the
first $500,000 for its development. If the Company elects to proceed
with this project within the two-year option period, Ausdrill must fund
50% of cash calls or lose its participation rights. Using its funds, the
Company must complete a re-sampling program for an amount not to
exceed $30,000 by year-end 1998.
The definitive agreement is subject to certain conditions, including the
satisfactory completion of due diligence procedures by Ausdrill, the
preparation of an initial operating plan and budget for the Million
Mountain project and successful completion of an acquisition
agreement for 100% of the share capital of Bushmaster. Ausdrill has
the right to cease funding of the Million Mountain project with sixty
days advance notice. The proposed arrangement contains an anti-
dilution provision intended to maintain Ausdrill's ownership
percentage in the Company for a two-year period. The final terms of
the definitive agreement may vary from those described herein.
There is also no assurance that the conditions for closing under the
definitive agreement will be satisfied.
3. NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes Payable
Notes payable include demand notes at 10% interest to four
individuals with an aggregate principal balance of $119,758 at April
30, 1998 (including $69,513 to a related party). After making
demand for payment during fiscal 1998, the note terms were
renegotiated whereby the notes, including accrued interest, were due
October 31, 1997, and existing unpaid interest was added to the note
balances. The notes are secured by certain mining assets of the
Company and are guaranteed by a principal stockholder and former
director of the Company. The notes were not paid on October 31,
1997 because of law of funding and are currently past due. The
Company issued the borrowers 59,879 of its Class A warrants to
delay any legal action for non-payment on or before January 31,
1998. In March, 1998, a court judgment was entered in favor of the
borrowers for the amounts due, plus attorney fees and costs. No
steps have been taken to enforce the judgment. The Company intends
to satisfy the obligation when additional financing is obtained.
Convertible Debentures
Since January 31, 1998, the Company has been in technical default of
paragraph 4(F) of its debenture agreement that required the Company
to obtain additional working capital (exclusive of working capital
obtained through the sale of the debentures) of not less than
$2,000,000 by January 31, 1998. This additional working capital has
not been obtained. If any events of default occur as specified in the
debenture agreement, debenture holders may, so long as the condition
exists, declare the entire principal and accrued interest on the
debentures immediately due and payable, by notice to the Company.
Although no debenture holders have notified the Company of their
intent to demand payment of principal and interest, the debentures
have been classified as a current liability in the accompanying
condensed consolidated balance sheet because of the default.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION
Overview
The Company's condensed consolidated balance sheet as of April 30,
1998, reflects total assets of $2,266,801, the most significant
component of which is property, equipment and mine development
costs of $2,049,516. The balance sheet as of April 30, 1998 also
reflects negative working capital of $2,336,839, a deficit accumulated
during the development stage of $3,089,658, and a total stockholders'
deficit of $100,271.
For the quarter ended April 30, 1998, the company had a net loss of
$312,241 compared to a net loss of $236,603 for the same period last
year. Interest expense increased to $53,914 for the current quarter
compared to $17,445 for the same period last year primarily because
of interest expense on the convertible debentures issued subsequent to
the first quarter of fiscal 1998. General and administrative expense,
including but not limited to payroll costs, the cost of maintaining the
corporate headquarters, travel expense and professional fees, totaled
$242,427 for the quarter ended April 30, 1998, compared to $205,367
for the same period last year.
The Company raised a total of $58,291 from financing activities
during the first quarter of the current year, including proceeds from
the issuance of notes and convertible debentures payable to related
parties and others. Net cash to fund operating activities totaled
$73,868 for the quarter and $16,524 of cash was used to fund
investing activities.
Liquidity and Capital Resources
As of April 30, 1998, the Company has a working capital deficit of
$2,336,839. This includes classifying $960,000 of convertible
debentures as a current liability because the Company is in technical
default of its debenture agreement as a result of its failure to raise
additional working capital of at least $2,000,000 by January 31, 1998,
as required by the terms of that agreement. As long as the default
exists, the debenture holders have the right to declare the entire
principal and accrued interest on the debentures immediately due and
payable.
As discussed in Note 2 of Notes to the Condensed Consolidated
Financial Statements included elsewhere herein, the Company recently
signed a letter of intent that involves a business arrangement providing
for an investment of working capital and development funding.
Additional financing will be required for the Company to meet current
obligations and to continue operating. The Company continues to be
in discussions with several different parties to obtain additional debt
and/or equity financing.
There can be no assurances that the proposed business arrangement
will be consummated or that additional funds can be raised from other
sources. Failure to consummate the proposed business arrangement
and to obtain other financing would raise substantial doubts about the
Company's ability to continue as a going concern.
Plan of Operations
The long-term goal of the Company is to become a self-sustaining
medium sized precious metals exploration and mining Company that
has a solid foundation of credible reserves which can be developed
and produced at a low cost. The plan of operations of the Company
for the next twelve months is to obtain additional financing in order to
operate and to provide funds necessary for the exploration and
development of its Bowerman and Bushmaster projects. There can be
no assurance that the Company will be able to obtain additional
financing that will enable it to complete its plan of operations.
This report contains various forward-looking statements that are based
on the Company's beliefs, as well as assumptions made by and
information currently available to the Company. When used in this
report, the words "believe," "expect," "anticipate," "estimate" and
similar expressions are intended to identify forward-looking
statements. Such statements may include statements regarding
reserves, resources, mineralized material or deposits, mining methods,
political and related matters, planned levels of exploration, and the
like, and are subject to certain risks, uncertainties and assumptions
which could cause actual results to differ material from projections or
estimates contained herein. Factors which could cause actual results
to differ materially include, among others, unanticipated grade,
geological, metallurgical, processing or other problems, conclusions
of feasibility studies, changes in project parameters as plans continue
to be refined, the timing of receipt of governmental permits, results of
current or planned exploration activities, environmental costs and
risks, changes in the gold price, and the like. Should one or more of
these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. The Company cautions
against placing undue reliance on forward-looking statements all of
which speak only as of the date made.
ITEM 6 (a) - Exhibit 27: Financial Data Schedule
(b) - There have been no reports on Form 8-K for the quarter
ending April 30, 1998.
Signatures
In accordance with the requirements of the Exchange Act, the regis-
trant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Heritage Mines, Ltd.
(Registrant)
By:/s/ ____________________________________
Gregory B. Sparks
President, CEO and Director
Date: June 12, 1998