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 October 31,
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: 7,269,180 as of
December 11, 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 October 31, 1998, the nine months ending October
31, 1998, and the comparable periods of the preceding fiscal year.
FINANCIAL STATEMENTS
(A Development Stage Company)
HERITAGE MINES, LTD.
Quarter ended October 31, 1998
HERITAGE MINES, LTD.
(A Development Stage Company)
Condensed Consolidated Balance Sheet
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
HERITAGE MINES, LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
as of October 31, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents 795
Other current assets 2,622
Total Current Assets 3,417
PROPERTY,
EQUIPMENT AND MINE
DEVELOPMENT COSTS,
NET OF ACCUMULATED
DEPRECIATION 2,021,117
OTHER ASSETS
Bushmaster deferred
acquisition costs 229,023
Other 62,963
Total other assets 291,986
Total Assets 2,316,520
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable 214,770
Accrued expenses and other
liabilities 448,605
Notes payable and current
maturities of long term debt 210,201
Convertible note payable 600,000
Convertible debentures (including
related parties of $368,000) 1,104,000
Total current liabilities 2,577,576
LONG TERM DEBT 18,205
Total liabilities 2,595,781
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
7,222,680 shares 18,057
Additional paid-in
capital 3,352,148
Deficit accumulated
during the
development stage (3,649,466)
TOTAL STOCKHOLDERS' EQUITY
(DEFICIT) (279,261)
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY (DEFICIT) 2,316,520
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
Ended October 31 Ended October 31
1998 1997
OPERATING REVENUES - -
OPERATING COSTS:
General and
Administrative 152,603 244,703
Depreciation 15,900 13,100
Total operating
costs 168,503 257,803
Loss from
Operations (168,503) (257,803)
OTHER INCOME (EXPENSE):
Interest expense, net (64,357) (47,210)
Other Income - -
Total Other Income
(Expense) (64,357) (47,210)
NET LOSS (232,860) (305,013)
Basic and Diluted
Net loss per share (.03) (.05)
Weighted average
common shares
outstanding 7,066,466 6,487,172
See accompanying notes to condensed consolidated financial statements.
HERITAGE MINES, LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
Inception
Nine Months Nine Months (May 14, 1992)
Ended Ended through
October 31, 1998 October 31, 1997 October 31, 1998
OPERATING REVENUES - 3,536 67,019
OPERATING COSTS:
General and
Administrative 649,095 653,985 3,335,822
Depreciation 47,700 43,524 260,869
Total operating
costs 696,795 697,509 3,596,691
Loss from
Operations (696,795) (693,973) (3,529,672)
OTHER INCOME (EXPENSE):
Interest expense, net (175,254) (82,730) (357,004)
Other Income - - 237,210
Total Other Income
(Expense) (175,254) (82,730) (119,794)
NET LOSS (872,049) (776,703) (3,649,466)
Basic and Diluted
Net loss per share (.13) (.09) (1.13)
Weighted average
common shares
outstanding 6,755,746 8,265,716 3,227,733
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
Nine Months Nine Months (May 14, 1992)
Ended Ended through
October 31 October 31 October 31
1998 1997 1998
CASH FLOW FROM OPERATING ACTIVITIES
Net Loss (872,049) (776,703) (3,649,466)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 47,700 43,524 260,869
Common stock issued
for services 70,161 - 95,206
Stockholder compensation
contributed to
capital - - 131,600
Convertible debentures
and notes payable issued
for services, including
$41,000 to related parties - 93,000 101,000
Changes in operating assets and liabilities:
Other current assets (1,122) (10,837) (2,622)
Accounts payable accrued
expenses and other
liabilities 442,760 (112,771) 963,290
Net cash used in
operating activities (312,550) (763,787) (2,100,123)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property
and equipment (4,689) (40,794) (247,333)
Mine development
costs - (61,592) (1,230,583)
Construction in
progress - (9,034) (293,006)
Bushmaster deferred
acquisition costs (93,520) - (229,023)
(Increase) decrease
in other assets 1,699 7,790 (47,963)
Net cash used in
investing activities (96,510) (103,630) (2,047,908)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of common
stock for cash 282,250 125,000 1,151,725
Proceeds from notes
payable to and
advances from
related parties 56,035 34,700 1,550,235
Proceeds from convertible
and other notes
payable 8,626 85,000 745,266
Proceeds from convertible
debentures, including
related parties of $215,000
from inception to date 35,000 645,000 796,000
Repayment of notes payable
and long term debt (4,541) (5,867) (59,200)
Repayment of notes
payable to and advances
from related parties - - (35,200)
Net cash provided from
financing activities 377,370 883,833 4,148,826
NET INCREASE
(DECREASE) IN
CASH AND CASH
EQUIVALENTS
FOR THE PERIOD (31,690) 16,416 795
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF
PERIOD 32,485 1,078 -
CASH AND CASH
EQUIVALENTS AT
END OF PERIOD 795 17,494 795
See accompanying notes to condensed consolidated financial statements.
HERITAGE MINES, LTD.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
Period
from Inception
Nine Months Nine Months (May 14, 1992)
Ended Ended through
October 31 October 31 October 31
1998 1997 1998
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Stock issued for services 70,161 - 90,830
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 5,000 - 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 - 35,000 89,000
Interest capitalized
on convertible debentures
and notes payable 146,093 - 179,212
Accounts payable converted
to common stock 23,407 - 23,407
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
(October 31, 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 October 31,
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 October 31, 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
October 31, 1998, has an accumulated deficit of $3,649,466 and nega-
tive working capital of $2,574,159. The Company is in default of its
debenture agreement and certain notes payable and a convertible note
payable are past due and the lenders have demanded payment (see
Note 3). Also, certain lenders have initiated legal action against the
Company as disclosed elsewhere herein. 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.
Additional financing will be required for the Company to meet current
obligations and to begin mine development. The Company continues
to be in discussions with several different parties to obtain additional
debt and/or equity financing, including the proposed business
arrangement discussed in Note 2 below.
There can be no assurance that additional funds can be raised from the
business arrangement discussed in Note 2 below, or from other
sources. Failure to obtain additional financing would also 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 ARRANGEMENTS
A. AGREEMENT WITH AUSDRILL. As discussed in the
Company's Form 10-QSB for the quarter ended July 31, 1998, the
Company had reached an agreement in principle with Ausdrill, an
Australian construction mining company, subject to certain conditions,
that provided for investment of working capital and development
funding in connection with a contemplated joint venture for
development of the Million Mountain Project, a gold mining property
in Guyana, SA.
Subsequent to this, the Company was presented with an opportunity
to acquire the subject property outright. The Company has now
reached verbal agreement with the owner for the purchase of the
property, and expects to execute a binding letter of intent shortly.
Upon signing a binding letter of intent to purchase the property, it is
anticipated that the Company and Ausdrill will revisit the joint venture
business arrangement in the context of the property acquisition by the
Company.
B. HERITAGE ACQUISITION OF THE MILLION MOUNTAIN
PROJECT. As noted above, the Company has negotiated to purchase
the Million Mountain Property from the current licensee in exchange
for a series of quarterly payments linked to production of gold from
the property with a minimum payment of $5 million to be made over
the first three years of the term of the agreement. Under the
contemplated agreement, the Company can limit the maximum
purchase price to $23 million if full payment is delivered on or before
sixty days after the fifth anniversary of the agreement.
C. ACQUISITION OF BUSHMASTER MINING, INC. Bushmaster
Mining, Inc. (Bushmaster) is a Guyana joint stock company which
owns certain equipment used in the exploration of the Million
Mountain Project, and which held exploration and mining rights to the
Million Mountain Project subject to an agreement with the licensee.
Included with the proposed Million Mountain Project acquisition is the
acquisition of one-third of the shares of Bushmaster now held by the
property licensee. The Company has also accepted an offer to sell an
additional one-third of Bushmaster from the President and CEO of the
Company in exchange for issuance of 500,000 fully paid and non-
assessable shares of the Company and 8% of net cash flow from
production of the first 200,000 ounces of gold from the Million
Mountain Project. Though discussions to date have not been
productive, the Company expects to continue its attempts to acquire
the final one-third of Bushmaster from a third party.
Assuming final agreement is reached on the Million Mountain Project
as discussed in B. above, the Company expects to reenter discussions
with Ausdrill to conclude a joint venture agreement for development
and production of the Million Mountain Project, under terms similar
to those originally contemplated as disclosed in the Company's Form
10-QSB for the quarter ending July 31, 1998, adjusted as appropriate
for the acquisition of the Million Mountain Project by the Company.
A definitive agreement with Ausdrill is subject to certain conditions,
including the completion of the Million Mountain Project acquisition.
There can be no assurance that the proposed business arrangements to
acquire the Million Mountain Property and the joint venture
arrangement with Ausdrill will be consummated.
3. NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes Payable and Convertible Note Payable
Notes payable in the accompanying condensed consolidated balance
sheet include demand notes at 10% interest to four individuals with an
aggregate principal balance of $119,758 at October 31, 1998
(including $69,513 to a related party). After making demand for
payment during fiscal 1998, the note terms were renegotiated whereby
the notes, including accrued interest, were due October 31, 1997, and
existing unpaid interest was added to the note balances. The notes are
secured by certain mining assets of the Company and are guaranteed
by a principal stockholder and former director of the Company. The
notes were not paid on October 31, 1997 because of the lack of
funding and are currently past due. The Company issued the note
holders 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
judgement was entered in favor of the lenders for the amounts due,
plus attorney fees and costs. The Company and the note holders
entered into a second standstill agreement effective October 8, 1998,
whereby the note holders agreed to refrain from any action to collect
until October 31, 1998. In consideration, the Company issued 61,379
of its Class A Warrants to the note holders. Subsequently, no steps
have been taken to enforce the judgement. The Company intends to
satisfy the obligation when additional financing is obtained.
As of October 31, 1998, the accompanying condensed consolidated
balance sheet includes a convertible note payable with a principal
balance of $600,000 that was due and payable on June 1, 1998. The
note payable and related accrued interest have not been paid because
of the lack of funds. The lender has demanded payment of this
obligation. As disclosed herein under Part II, Item. 1 Legal
Proceedings, subsequent to the end of the quarter, the lender initiated
legal action against the Company, four of its directors, and certain
other parties.
Convertible Debentures
In accordance with the Debenture Agreement, the Company has added
to debenture principal all accrued but unpaid interest through the first
anniversary date of the Debentures. Such capitalized interest amounts
to $144,000.
Since January 31, 1998, the Company has been in technical default of
paragraph 4(F) of its debenture agreement because of its failure 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. In addition, the Company has not
made the first quarterly interest payment to debenture holders of
approximately $27,600, that was payable by October 10, 1998. 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 and the Escrow Agent.
As discussed further herein under Part II, Item 1, Legal Proceedings,
in September, 1998, one debenture holder with debentures aggregating
$50,000 filed a legal action against the Company seeking to obtain
payment under the Debenture Agreement.
Under the terms of the debenture agreement and related Escrow
Agreement, once the Company receives notice from the Escrow Agent
that a majority of debenture holders have given notice of the
occurrence of an event of default, the Company has sixty days to cure
the default to avoid initiation of an enforcement action by the Escrow
Agent on behalf of the debenture holders. No notice of default has
been received from the Escrow Agent.
During the quarter ended July 31, 1998, the Company's Board of
Directors approved a special conversion offering to holders of
convertible debentures which, if elected, would result in conversion of
principal and interest of debentures into restricted Heritage common
shares at the rate of $.75 per share. This compares to a conversion
price of $2.50 per share in the debenture agreement. This special
conversion is contingent upon consummation of a definitive agreement
with Ausdrill that provides for Bushmaster development funding. In
the event that the agreement with Ausdrill is not consummated, all
elections to accept the special conversion offer will be cancelled and
the existing terms of the outstanding debentures will continue without
modification. In the event the Ausdrill transaction is consummated,
the debentures of all debenture holders who have elected to accept the
special conversion offer will be cancelled. The debentures held by
any debenture holders who elect not to accept the special conversion
offer will remain outstanding without any modification in terms.
As of December 11, 1998, debenture holders with debentures
aggregating $315,000 have notified the Company of their intent to
elect the special conversion if the Ausdrill transaction is
consummated.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION
Overview
The Company's condensed consolidated balance sheet as of October
31, 1998, reflects total assets of $2,316,520, the most significant
component of which is property, equipment and mine development
costs of $2,021,117. The balance sheet as of October 31, 1998 also
reflects negative working capital of $2,574,159, a deficit accumulated
during the development stage of $3,649,466, and a total stockholders'
deficit of $279,261.
For the quarter ended October 31, 1998, the Company had a net loss
of $232,860 compared to a net loss of $305,013 for the same period
last year. General and administrative expenses, including but not
limited to payroll costs, the cost of maintaining the corporate
headquarters, travel expense and professional fees, totaled $152,603
for the quarter ended October 31, 1998 compared to $244,703 for the
same period last year.
For the nine month period ended October 31, 1998, the Company had
a net loss of $872,049 compared to a net loss of $776,703 for the
same period last year. Interest expense increased to $175,254 for the
current nine month period compared to $82,730 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 expenses, including but not limited to
payroll costs, the cost of maintaining the corporate headquarters,
travel expense and professional fees, totaled $649,095 for the nine
month period ended October 31, 1998 compared to $653,985 for the
same period last year.
The Company raised a total of $377,370 from financing activities
during the first nine months of the current year, including proceeds
from the issuance of common stock (including $125,000 from
Ausdrill), notes and convertible debentures payable to related parties
and others. Net cash to fund operating activities totaled $312,550 for
the nine months ended October 31, 1998 and $96,510 of cash was
used to fund investing activities.
Liquidity and Capital Resources
As of October 31, 1998, the Company had a working capital deficit of
$2,574,159. Included in current liabilities in the accompanying
condensed consolidated balance sheet are convertible debentures
aggregating $1,104,000. 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, and its
failure to make the first quarterly interest payment on the debentures
of approximately $27,600, that was payable by October 10, 1998. As
long as the defaults exist, the debenture holders have the right to
declare the entire principal and accrued interest on the debentures
immediately due and payable. One debenture holder with debentures
aggregating $50,000 filed a legal action against the Company in
September, 1998, seeking to obtain payment of amounts owed under
the Debenture Agreement. Currently, the Company does not have the
funds to satisfy this obligation or to pay the accrued but unpaid
interest on debentures for the quarter ending September 30, 1998. As
discussed further under Note 3 of Notes to Condensed Consolidated
Financial Statements included elsewhere herein, no notice of default
has been received from the Escrow Agent.
As of October 31, 1998, the Company's current liabilities include
notes payable of $119,758 and a convertible note payable of $600,000
that are past due and the lenders have demanded payment. The
holders of the notes payable have obtained a judgment against the
Company for the full amount owed to them. On November 20, 1998,
the holder of the convertible note payable initiated legal action against
the Company, four of its directors, and certain other parties. The
Company does not currently have the funds to satisfy these
obligations.
As discussed in Note 2 of Notes to the Condensed Consolidated
Financial Statements included elsewhere herein, the Company has an
agreement in principle 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.
As discussed further in Note 3 of Notes to the Condensed
Consolidated Financial Statements included elsewhere herein, the
Company's Board of Directors has approved a special conversion
offering to holders of its convertible debentures aggregating
$1,104,000 which, if elected, would result in conversion of principal
and interest of debentures into restricted Company common shares at
the price of $.75 per share. This conversion offering is contingent
upon consummation of the pending agreement with Ausdrill. Also, in
view of the Company's working capital deficit and the pending
agreement with Ausdrill, during the quarter ended July 31, 1998, the
Board of Directors authorized the issuance of up to an additional
1,000,000 shares of restricted common stock at a price of $.50 per
share. As of December 11, 1998, 352,000 common shares have been
issued in connection with this offering, resulting in net proceeds to the
Company of $172,250.
There can be no assurances that the proposed business arrangement
will be consummated or that sufficient, 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 infor-
mation currently available to the Company. When used in this report,
the words "believe," "expect", "anticipate", estimate and similar
expressions are intended to identify forward-looking statements. Such
statements may include statements regarding reserves, resources,
mineralized material or deposits, mining methods, political and related
matters, planned levels of exploration, and the like, and are subject to
certain risks, uncertainties and assumptions which could cause actual
results to differ materially from projections or estimates contained
herein. Factors which could cause actual results to differ materially
include, among others, unanticipated grade, geological, metallurgical,
processing or other problems, conclusions of feasibility studies,
changes in project parameters as plans continue to be refined, the
timing of receipt of governmental permits, results of current or
planned exploration activities, environmental costs and risks, changes
in the gold price, and the like. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated,
estimated or projected. The Company cautions against placing undue
reliance on forward-looking statements all of which speak only as of
the date made.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On or about July 9, 1998, the Company received notice that it had
been named as a defendant in a personal injury lawsuit brought by an
individual in Humboldt Superior and Municipal Court, Humboldt
County, Eureka, California. Subsequently, the Company obtained a
change in venue to the Superior Court in the County of Siskiyou,
California. The plaintiff alleges that on March 8, 1997, she was
attacked by a dog on the Company's Bowerman mining project
located in Siskiyou County, California, and suffered severe injuries.
The lawsuit claims that the Company, and other named defendants,
were negligent and careless in failing to exercise reasonable care in
controlling and containing the dog. The suit seeks recovery of
medical expenses in excess of $35,000, loss of earning capacity of
$36,000 and exemplary damages of $500,000. The lawsuit also
names the dog's owner, the Company's subsidiaries and a principal
shareholder, as codefendants. Although the Company believes the
claims against it and its subsidiaries are without merit and intends to
defend itself vigorously, an adverse result in the litigation could have
a negative impact on the financial position and operating results of the
Company.
On or about September 15, 1998, a convertible debenture holder who
owns a debenture in the face amount of $50,000 filed a complaint
against the Company in the District Court, La Plata County,
Colorado. Currently, the Company is in default under terms of the
Debenture Agreement. The plaintiff is requesting a judgment against
the Company for payment of the principal amount of the debenture,
plus interest thereon, attorney's fees, and liquidated damages. The
Company does not dispute the amount of principal and interest
claimed by the plaintiff, but currently does not have the funds to
satisfy the demand for payment.
On or about November 20, 1998, the holder of a convertible note
payable in the principal amount of $600,000, filed a complaint against
the Company, its wholly owned subsidiary, Heritage Gold Mines,
Inc., four of the Company's directors, Peter Wilson, Greg Sparks,
Douglas Drumwright, and Gary Joiner, and Burns National Bank (the
Escrow Agent for the holders of convertible debentures), seeking
recovery of the amount due. The suit was filed in Superior Court,
Orange County, California, and includes claims based upon fraud,
breach of contract, conversion, and negligent misrepresentation, as
well as claims seeking foreclosure of the security interest held by the
note holder. The Company does not dispute the amount of principal
and interest claimed by the plaintiff but currently does not have the
funds to pay the amounts due. The Company, and its individual
officers and directors deny the claims based upon fraud, negligent
misrepresentation, conversion, and the like, and plan to vigorously
defend against such claims.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During the quarter ended October 31, 1998, the Company
issued a total of 283,252 shares of common stock without registration.
A total of 272,000 of such shares were sold for cash to accredited
investors pursuant to the private offering authorized by the Board of
Directors, as described previously. A total of 11,252 shares were
issued in settlement of a short-term note payable with a principal
balance of $5,000.
The Company received cash proceeds of $132,250 from the
sales of its unregistered securities during the quarter, and the funds
were used in part to pay current and past due obligations and in part
to pay expenses associated with the in-fill drilling program at the
Bushmaster project.
All of the unregistered shares issued during the quarter were
issued in reliance upon exemptions from registration provided by
Section 3(b) and/or Section 4(2) of the Securities Act of 1933,
Regulation D and Rule 505 thereunder.
ITEM 6 (a) - Exhibit 27: Financial Data Schedule
(b) - There have been no reports on Form 8-K for the
quarter ending October 31, 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: December 21, 1998