Item 3. Legal Proceedings.
Thereare currently no legal proceedings to which the Company is a party. However, litigation has been threatened . See "Items 1. and 2,." and "Items 7. and 8."
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5.

Item 5. Market For The Registrant's Common Equity And Related Stockholder Matters.
The Company's common stock trades on The Nasdaq National Market tier of The Nasdaq Stock MarketSM under the symbol "USMX" and the Toronto Stock Exchange under the symbol "USM". The Nasdaq Stock MarketSM is the principal market on which the Company's shares are traded. The following table shows the high and low prices and the volume traded of the Company's shares on The Nasdaq Stock MarketSM for 1995 and 1996. The closing price of the Company's Common Stock on January 2, 1997, the day preceding the public announcement of the Merger, was $1.75 on The Nasdaq Stock MarketSM .
At March 17, 1997, the approximate number of holders of record of the Company's Common Stock was approximately 4,000. This number does not include beneficial owners holding shares through nominee or "street" names. No cash dividends have been paid by the Company. It has been the Company's policy to use funds derived from its earnings for exploration, development and other business activities. The Company currently intends to continue this policy and does not anticipate paying cash dividends in the near future. Any determination to pay cash dividends in the future will be made by the Company's Board of Directors after consideration of the Company's financial condition, business prospects and other relevant factors. At present, the Company is precluded from paying dividends pursuant to the Rothschild Credit Agreements.
Item 6.

Item 6. Selected Financial Data
The selected financial data should be read in conjunction with the Consolidated Financial Statements and the notes thereto which appear elsewhere in this Report.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Going Concern Uncertainty
USMX has suffered recurring losses and cash flow deficits from operations and currently has no mines in operation. At December 31, 1996, USMX has an accumulated deficit of approximately $3,056,000, a working capital deficiency of approximately $27,132,000 and is not in compliance with certain covenants of its long term debt agreements. In addition, significant additional funds will be required to bring USMX's Illinois Creek Mine into production. USMX's auditors have included an explanatory paragraph in their opinion that states that these matters raise substantial doubt about USMX's ability to continue as a going concern and that the financial statements do not include any adjustment that might result from the outcome of this uncertainty.
USMX has entered into a Merger Agreement with Dakota. The Merger is subject to approval by the TSE, stockholder and creditor approval, review by other regulatory authorities, and other customary conditions. In connection with the Merger, Dakota has loaned to USMX $5 million to be used to pay for work completed and ongoing work at the Illinois Creek Mine prior to the Merger. In connection with the Merger, USMX's principal lender, agreed with Dakota not to accelerate the due date of any loans to USMX or to exercise any rights it may have to collateral security (except for payment or bankruptcy defaults) until the earlier of the consummation of the Merger, the termination of the Merger Agreement in accordance with its terms, or June 30, 1997.
Should USMX be unable to complete the Merger with Dakota, the ability of USMX to continue as a going concern is dependent on the continued forbearance of Rothschild, obtaining sufficient additional financing to complete the Illinois Creek Mine, and the commencement of profitable operations at the mine. Future profitability of the mine is dependent on USMX's ability to produce gold from the mine in quantities and at costs consistent with those projected by USMX.
Liquidity and Capital Resources
Working capital at December 31, 1996, was negative $27.1 million. Cash and cash equivalents amounted to $238,000. Cash and cash equivalents decreased during 1996 by $5 million primarily as a result of investment in property, plant and equipment of approximately $25.7 million, including deferred exploration costs of $0.5 million and development costs of $25.2 million ($23.9 million at Illinois Creek, Alaska and $1.2 million at Thunder Mountain, Idaho), investment in reclamation surety and restricted cash accounts of $2.5 million and cash used in operations of $3.9 million. These costs were partially offset by $1.3 million in proceeds from the sale of USMX's holdings in Alta Gold Co. common stock.
In addition, USMX obtained $4.5 million in loans from Pegasus Gold secured by USMX's interest in the Montana Tunnels property and a $22.0 million financing facility from Rothschild for the construction of the Illinois Creek Mine and related facilities, including working capital. At December 31, 1996, USMX had drawn approximately $21.4 million against the facility. See Items 1. And 2. for a detailed discussion of this financing.
USMX completed its feasibility study of the Illinois Creek Project in February 1996. After approval of the project by USMX's Board of Directors, clearing, site preparation, and road building activities began in March 1996. Upon receipt of a commitment for the $22 million financing facility from Rothschild, and required permits and regulatory approvals in May, construction of the mine and related facilities was begun. Construction and mine development was terminated in November 1996 due to weather, but the leach pads processing plant, rotary kiln and ancillary facilities were essentially completed at that time.
The original Illinois Creek development budget was $22.6 million, including $4.7 million in estimated working capital. In the process of obtaining bids from construction contractors, USMX determined that the forecast needed to be increased by approximately $2.8 million to $25.4 million. As a result of weather induced delays, complexities of developing a mine using only air transport and other complexities of developing a mine in a remote area, USMX had incurred costs at December 31, 1996, of approximately $30.7 million related to the development of the property, including approximately $2.8 million of working capital. At December 31, 1996, USMX had unpaid obligations to suppliers and contractors of approximately $5.7 million for work completed in 1996. It is estimated that an additional $8.8 million, including $4.9 million of working capital, will be required to bring the mine to production. Subject to receipt of additional financing as described below, gold production at Illinois Creek is scheduled for summer, 1997.
One of the construction contractors on the Illinois Creek Property in Alaska working under an approximately $3 million contract with the Company has submitted invoices and claims totaling approximately $7 million for work completed in 1996. At December 31, 1996, the Company had paid the contractor $1,772,000 and has recorded an additional liability to the contractor, based on the Company's estimate of its obligation under the contract of $2,414,000. The unpaid invoices and claims are currently being reviewed, and it is likely that a significant portion of the invoices and claims will be disputed by the Company. The contractor has threatened legal proceedings if the dispute is not informally resolved. The Company and its representatives are currently reviewing the relevant facts and until that review is complete the Company cannot estimate the magnitude of any potential liability, possible counterclaims by the Company or the outcome of arbitration or litigation if the dispute cannot be resolved by negotiation. On November 8, 1996, the construction contractor also filed a lien on the Illinois Creek Property. The lien is related to certain invoices and claims submitted through that date.
In addition to construction and working capital requirements at Illinois Creek, USMX is required by the terms of the credit agreements with Rothschild to maintain minimum balances in a Proceeds Account for use only in connection with the Project and to maintain certain financial ratios related to the Project and to USMX. Per the terms of the Rothschild Credit Agreements, USMX agreed to deposit $1.5 million in the Proceeds Account by September 30, 1996. USMX was unable to comply with this requirement and Rothschild agreed to waive this and certain financial ratio requirements until December 31, 1996, conditional upon USMX's agreements to, among other things, (A) file a prospectus with the appropriate Canadian securities regulatory authorities by November 1, 1996, and complete an offering by December 31, 1996, (B) adjust the price at which Rothschild may elect to convert the $2.5 million loan into USMX Common Stock to the price at which the shares are sold in an offering, or if no sale, at the average trading price for the last ten trading days of 1996 and (C) to pay the Lender a fee of US$100,000 which fee is payable upon the first to occur of (i) a date upon which such payment can be made without materially reducing the working capital reasonably required by USMX for continued operations or (ii) April 15, 1997. At December 31, 1996, USMX had not completed the offering and was unable to comply with the requirement that it deposit $1.5 million in the Proceeds Account. As a result of the covenant violations, at December 31, 1996, the loans from Rothschild have been classified as a current liability. USMX has determined to accept the Merger offer from Dakota Mining and not to proceed with the offering.
On January 3, 1997, USMX entered into an agreement in principle to merge with Dakota. On February 5, 1997, USMX signed a definitive Merger Agreement with Dakota whereby USMX Stockholders will receive one Dakota Common Share for every 1.1 shares of USMX Common Stock and USMX will become a wholly-owned subsidiary of Dakota. As part of the Merger Agreement, Dakota and USMX agreed that Dakota would provide a $5 million line of credit to USMX to provide interim working capital to sustain USMX operations until the Merger is consummated. The proceeds are to be used to pay certain ongoing operating expenses primarily in connection with start-up activities associated with the Illinois Creek Mine and to partially pay trade creditors.
In February 1997, Dakota offered by way of private placement 25,000 Special Warrants at a price of Cdn. $1,000 per Special Warrant resulting in gross proceeds of Cdn. $25 million. Each Special Warrant entitles the holder to receive one 7.5% unsecured subordinated convertible debenture in the amount of Cdn. $1,000. Of the proceeds, U.S. $5 million have been released and the remaining proceeds have been deposited in escrow pending completion of the Merger and approval by the Dakota Shareholders of the issuance of the Common Shares underlying the Debentures. This offering was a condition of USMX's obligation to proceed with the Merger. A substantial portion of the proceeds will be used to pay suppliers and contractors for work completed at the Illinois Creek Mine and to complete construction and provide working capital at the Illinois Creek Mine.
The line of credit is evidenced by two promissory notes with similar terms but different amounts and different security. The $2 million promissory note ("Note 1") is secured by a second priority position in all of the capital stock of USMX of Alaska, Inc. owned by USMX. USMX of Alaska, Inc. holds title to the Illinois Creek Mine. The second promissory note for $3 million ("Note 2") is secured by a first position on all of the capital stock of MXUS S.A. de C.V., USMX's Mexican Subsidiary, and a first position on USMX's interest in the Thunder Mountain property in Idaho. USMX and Dakota agreed to grant Rothschild a second priority security position in the security for Note 2. (See Items 1. And 2.) Funding for the line of credit was provided from a portion of the proceeds of a Special Warrant offering by Dakota described above.
USMX has filed a Notice of Intent to Operate with the Idaho Department of Lands describing USMX's proposed gold and silver mining activities in the Thunder Mountain Project. Management estimates that the project would require substantial capital to place it into production, including working capital. If the project is sufficiently attractive to warrant continued development and the necessary permits are obtained, construction could begin in 1998. Production could begin in 1998 or 1999 depending on the construction schedule. Management believes that USMX will need to obtain additional capital to put Thunder Mountain into production.
USMX's balance sheet at December 31, 1996 reflects a total of $0.8 million in accrued reclamation liabilities associated with its acquisition and operation of the Goldstrike Mine. Reclamation activities in 1996 have focused primarily on recontouring, topsoiling and planting heap number one and completion of rinsing of heap number two. Commencement of recontouring and topsoiling of heap number two as well as the dismantling of the process plant and reclamation of the plant site will begin once USMX has obtained acceptance by the State of Utah of USMX's final closure. The goal is to achieve closure by the end of 1997. This reclamation is expected to be financed with internally available cash balances, cash generated from the sale of gold produced as a by product of heap rinsing and approximately $1.6 million cash previously provided to the State of Utah as reclamation surety.
Results of Operations
USMX realized a net loss for the year ended December 31, 1996, of $3,302,000 compared with a $6,906,000 loss for 1995 and net income of $204,000 for 1994. The loss for 1996 includes mineral property abandonments and impairments of $1,416,000 compared to $4,431,000 for 1995 and $261,000 for 1994. General and administrative costs increased to $3,621,000 in 1996 from $2,548,000 in 1995 and $2,185,000 in 1994, as the result of added office space and related expenses arising from increased staffing requirements to develop the Illinois Creek and Thunder Mountain properties. The 1996 results include a gain of approximately $936,000 from the sale of common stock held for investment purposes and an unrealized gain of $884,000 resulting from the roll forward of four gold forward sales contracts and the sale of various silver call options. The 1994 results include a $497,000 income tax credit resulting from the difference between the estimated 1993 federal income tax provision and the actual liability reflected on the 1993 income tax returns.
Fluctuations in USMX's results of operations from year to year arise primarily from four factors: (1) changes in the volume of gold sold and the selling price of gold, (2) changes in the cost of gold sold, (3) the cost of mineral properties abandoned during any given period, and (4) asset dispositions.
Change in the Volume of Gold Sold and Selling Price of Gold
The following table analyzes the variance in gold sales revenue for the years ended December 31, 1996, 1995, and 1994:
Change in Costs Applicable to Sales
Cost of Gold Sold
No gold was sold in 1996 compared to the cost of gold sold of $2,890,000 or approximately $419 per ounce in 1995, and $11,203,000 or approximately $315 per ounce in 1994. The fluctuation in the cost of gold sold is a result of the change in the cost of production throughout the life of each mine as illustrated in the table below.
Cash production costs per ounce of gold produced at USMX's Goldstrike Mine increased to $233 for 1995 from $229 for 1994 despite the fact that no mining, crushing or pad loading costs were incurred after October 1994 because a significant portion of processing costs are fixed and, therefore, do not decrease as production decreases. As the result of a reduction of the estimated remaining recoverable ounces of gold at the Goldstrike Mine, change in inventories and deferred production costs increased to $207 per ounce sold for 1995 from $46 in 1994.
Mining Taxes and Royalties
During 1995, USMX incurred $14,000 in mining taxes compared to $106,000 in 1994. The decrease in mining taxes in 1995 and 1994 is attributable to the decrease in ounces sold compared to the previous year as a result of declining production at the Goldstrike Mine. Also, USMX incurred $379,000 in royalty expense for 1995 compared to $665,000 in 1994. The increase in production royalties per ounce of gold sold is attributable to the monthly minimum royalty paid at Goldstrike through January of 1996.
Cost of Mineral Properties Abandoned and Provisions for Impairments of Investments in Mineral Properties
USMX periodically reviews the carrying values of its properties. In 1996, management determined that properties with an aggregate historical cost of $674,000 no longer held sufficient promise to justify the cost of maintenance. The properties abandoned in 1996 were Goldstrike ($345,000), Elk Creek ($93,000), Baggs Creek ($69,000), Putu Chile ($61,000), two other properties in the United States ($17,000) and six small properties in Mexico ($89,000). Property abandonments were $758,000 and $261,000 in 1995 and 1994, respectively. The properties abandoned in 1995 were Tule Canyon ($65,000), Divide ($63,000) and three other properties in the United States ($202,000) and La Cienega ($111,000), Jalisco Copper ($164,000) and four other properties in Mexico ($153,000). The properties abandoned in 1994 were the Ancho Canyon, New Mexico ($221,000) and the South Pass, Wyoming placer properties ($40,000), both of which were acquired during that year.
During 1996 USMX wrote down the carrying value of the Nambija property in Ecuador and the Amargosa and La Reserva properties in Mexico by $335,000, $326,000 and $81,000 respectively. The carrying value of each of the properties was reduced to zero. Although the three properties appear to have geological potential, to date, no significant economic mineralization has been encountered. The La Reserva property is currently being explored in joint venture with another mining company. The Nambija and Amargosa properties are being held for possible future joint venture exploration. In the fourth quarter of 1995, the carrying value of the Amargosa polymetallic prospect in Chihuahua, Mexico was reduced by $1.0 million.
In 1995, the Commonwealth of Puerto Rico adopted legislation which amended the mining law to prohibit future mining of metallic deposits by open pit methods. Although USMX is considering various strategies and responses, the effect of the mining law, as currently amended, is to render USMX's plan for development of the Cala Abajo deposit uneconomic. As a result, in 1995 USMX reduced the carrying value of this property to zero and recorded an impairment loss of $1.1 million.
Gold production at USMX's Goldstrike Mine in Utah declined sharply in August and September of 1995. This decline in gold recovery triggered a reevaluation of the estimated remaining recoverable gold ounces in the heaps. As a result, the carrying value of deferred mining and processing costs was reduced to the fair market value of the remaining gold bullion and dore at the refinery and USMX recorded an impairment loss of $1.6 million.
Asset Dispositions and Gain on Sale of Common Stock
In April 1994, USMX sold its interest in the Kinsley Mountain Project in Elko County, Nevada to Alta Gold Co. ("Alta"). In addition to the $20,000 previously received, USMX received $380,000 in cash and Alta restricted common stock with a then market value of $200,000. In April 1995, USMX received a final cash payment of $400,000 and additional Alta restricted common stock with a then market value of $200,000. USMX received, and retained at December 31, 1995, a total of 352,711 shares of Alta restricted common stock. The cash proceeds and discounted value of the stock received were recorded as a reduction to the carrying value of the property on USMX's books. In 1995, USMX recorded a loss on this transaction of $1,000. During 1996 USMX sold all of the outstanding shares of Alta common stock for $1,281,000 and recorded a gain on the sale of $936,000.
Other Costs and Expenses
General and administrative costs increased to $3,621,000 in 1996 from $2,548,000 in 1995, as the result of added office space and related expenses arising from increased staffing requirements to develop the Illinois Creek and Thunder Mountain properties. General and administrative expenses were higher in 1995 than 1994 principally due to legal and other professional fees paid relative to the Cala Abajo project and to salaries and related expenses of additional corporate staff. Legal and professional consultants were engaged to evaluate the impact of a change in Puerto Rican mining law and USMX's alternatives concerning the Cala Abajo Project.
Prospecting costs in 1996 were comparable to Prospecting costs in 1995. Prospecting costs in 1995 were lower than 1994 as a result of the concentrated effort by USMX's exploration staff to complete development drilling at the Illinois Creek, Alaska property.
Interest income decreased to $275,000 in 1996 compared to $525,000 in 1995, as the result of decreasing cash balances during 1996. Interest income for 1995 was comparable to 1994.
Interest expense increased to $511,000 in 1996 compared to $14,000 in 1995, as the result of long term debt incurred during 1996 related to development of the Illinois Creek property and a $4.5 million loan received from Pegasus Gold, a stockholder of USMX. Interest expense for 1995 was comparable to 1994.
Income tax expense primarily represents current and deferred federal income taxes. The entire income tax benefits for 1996 and 1995 are related primarily to net operating losses carried back to prior years. The 1994 benefit results primarily from the difference between the estimated 1993 federal income tax provision and the actual liability reflected on the 1993 income tax returns. See Note 10 to the Consolidated Financial Statements for a reconciliation of the provision for income taxes for 1996, 1995 and 1994 to the statutory federal income tax rate.
Trends Which May Affect Future Results of Operations
As previously stated, fluctuations in USMX's results of operations arise primarily from four factors: (1) changes in the volume and cost of gold sold, (2) changes in the selling price of gold, (3) the cost of mineral properties abandoned during any given period and (4) asset dispositions. The following is management's view of trends in these factors.
Changes in the Volume and Cost of Gold Sold
USMX's ability to achieve forecasted gold production will be dependent upon many factors, some of which, such as the price of gold and climate conditions, are beyond the control of USMX.
Estimates of mineralization, metallurgical recovery, and cash operating costs are to a large extent based on the interpretation of geologic data obtained from drill holes and other sampling techniques and feasibility reviews which derive estimates of cash operating costs based on anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. Accordingly, actual volumes of gold produced and actual cash operating costs may differ from the volumes and costs initially estimated.
USMX's operations will be subject to all of the operating hazards and risks normally incident to operation of mineral properties, such as unusual or unexpected geological formations, environmental hazards, industrial accidents, labor disputes, equipment incapability or failures, and inclement weather conditions. Such occurrences could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. Moreover, USMX's mining operations will be subject to extensive federal, state and local laws and regulations governing production, taxes, labor standards, occupational health, waste disposal, protection and remediation of the environment, reclamation, mine safety, toxic substances and other matters.
Compliance with such laws and regulations has increased the cost of planning, designing, drilling, developing, constructing, operating and closing other mines and facilities previously operated by USMX. In addition, USMX has expended significant resources, both financial and managerial, to comply with environmental protection regulations and permitting requirements and anticipates that it will continue to do so in the future. Although USMX believes that it has made adequate provision to comply with such regulations, there can be no assurance that additional significant costs and liabilities will not be incurred to comply with current and future environmental protection regulations. Moreover, it is possible that future developments, such as increasingly strict environmental protection laws, regulations and enforcement policies, and claims for damages to property and persons resulting from USMX's operations, could result in substantial costs and liabilities in the future.
Changes in the Selling Price of Gold
Another significant uncertainty facing USMX which could potentially impact its financial position, profitability and liquidity in the short term is the price of gold. The gold price is a function of a number of factors including investors' expectations with respect to inflation, the strength of world currencies, decisions by central banks regarding their gold reserves, and supply and demand factors, none of which is under the control of USMX's management. During 1996 gold reached a six year high of $415 per ounce early in the year and a three year low of $369 per ounce late in the year. The average market price of gold was $388 an ounce during 1996 compared to $384 per ounce during 1995 and 1994.
In order to protect itself from possible declining gold prices, USMX, from time to time, enters into hedging agreements with major financial institutions. As of December 31, 1996, USMX had entered into forward sales contracts for 140,900 ounces of gold deliverable at various dates through December 31, 1999 at an average selling price of $409 per ounce. Delivery under these spot deferred contracts can be deferred at USMX's option up to forty months depending on the individual contract. The aggregate unrealized excess of the net market value of USMX's forward sales contracts over the spot gold price of $368 per ounce as of December 31, 1996, is approximately $5,875,000.
USMX has also written silver call options expiring at various dates over the next forty months, which if exercised, would become spot deferred contracts with delivery deferred as previously described. At December 31, 1996, USMX had sold 825,300 ounces of silver call option contracts all at a strike price of $5.50 per ounce expiring on dates ranging from September 28, 1997 through December 29, 1999. Call options premiums received amounted to approximately $424,000.
Cost of Mineral Properties Abandoned
The cost of mineral properties abandoned in any period is a function of the results of USMX's exploration efforts and economic considerations. USMX makes every effort to maximize the results of its exploration efforts. However, exploration for economically recoverable metals involves significant risk. Accordingly, while it is probable there will be abandonment losses in the future, it is not possible to predict either the timing or amount.
Item 8.

Item 8. Financial Statements and Supplementary Data.
USMX, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1996 and 1995, For the years ended December 31, 1996, 1995 and 1994
Page
--------------- Independent Auditors' Reports 44
Consolidated Financial Statements:
Consolidated Statements of Financial Position 45 - 46 Consolidated Statements of Operations 47 Consolidated Statements of Stockholders' Equity 48 Consolidated Statements of Cash Flows 59 - 50 Notes to Consolidated Financial Statements 51 - 67
Independent Auditors' Report
The Board of Directors and Stockholders USMX, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of financial position of USMX, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of USMX, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred cost overruns associated with the construction of the Illinois Creek Mine, has cash flow deficits from operations and currently has no mines in operation. At December 31, 1996, the Company has an accumulated deficit of $3,056,000, a working capital deficiency of approximately $27,132,000 and is not in compliance with certain covenants of its long term debt agreements. In addition, significant additional funds will be required to bring the Company's Illinois Creek Mine into production. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
March 11, 1997
USMX, INC. and Subsidiaries Consolidated Statements of Financial Position
USMX, INC. and Subsidiaries Consolidated Statements of Financial Position (Concluded)
The accompanying notes are a part of these consolidated financial statements.
USMX, INC. and Subsidiaries Consolidated Statements of Operations
The accompanying notes are a part of these consolidated financial statements.
USMX, INC. and Subsidiaries Consolidated Statements of Stockholders' Equity
The accompanying notes are a part of these consolidated financial statements.
USMX, INC. and Subsidiaries Consolidated Statements of Cash Flows
The accompanying notes are a part of these consolidated financial statements.
USMX, INC. and Subsidiaries Consolidated Statements of Cash Flows (Concluded)
The accompanying notes are a part of these consolidated financial statements.
USMX, INC. and Subsidiaries Notes to Consolidated Financial Statements
Note 1. - The Company
USMX, INC. (the "Company") is a Delaware corporation which engages in the exploration for, and development and operation of precious metal properties. The Company also evaluates base metal and non-metallic situations. The Company conducts its operations directly and through various operating subsidiaries. All references herein to the Company include all subsidiaries of USMX, INC.
Note 2. - Summary of Significant Accounting Policies
Basis of presentation
The financial statements have been prepared assuming the company will continue as a going concern. Certain factors, discussed below, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company has incurred cost overruns associated with the construction of the Illinois Creek Mine, has cash flow deficits from operations and currently has no mines in operation. At December 31, 1996, the Company has an accumulated deficit of $3,056,000, a working capital deficiency of approximately $27,132,000 and is not in compliance with certain covenants of its long term debt agreements (see Note 8). In addition, significant additional funds will be required to bring the Company's Illinois Creek Mine into production.
The Company has entered into a definitive Merger Agreement with Dakota Mining Corporation ("Dakota") (see Note 16). The Merger is subject to the approval of the Toronto Stock Exchange, stockholder and creditor approval, review by other regulatory authorities, and other customary conditions. In connection with the Merger, Dakota has agreed to loan the Company US $5.0 million to be used to pay for work completed and ongoing work at the Illinois Creek Mine prior to the Merger. Concurrent with the Merger Agreement, Dakota entered into an intercreditor agreement with the Company's principal lender, N M Rothschild & Sons Limited ("Rothschild"), whereby Rothschild agreed not to accelerate the due date of any loans to USMX or to exercise any rights it may have to collateral security until the earlier of the consummation of the Merger, the termination of the Merger agreement in accordance with its terms, or June 30,1997.
Should the Company be unable to complete the Merger with Dakota, the ability of the Company to continue as a going concern is dependent on the continued forbearance of Rothschild, obtaining sufficient additional financing to complete the Illinois Creek Mine, and the commencement of profitable operations at the mine. Future profitability of the mine is dependent the Company's ability to produce gold from the mine in quantities and at costs consistent with those projected by the Company.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned and majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
Management makes various estimates and assumptions in determining the reported amounts of assets, liabilities revenues and expenses, and in the disclosure of commitments and contingencies. These estimates and assumptions will change with the passage of time and the occurrence of future events, and actual results will differ from the estimates.
Note 2. - Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers cash in banks and all highly liquid investments, purchased with a maturity of three months or less, to be cash equivalents.
Production Costs
Production costs incurred are charged to Deferred mining and processing costs as incurred. Cost of gold sold is based on the currently estimated life of mine average cost. The amount carried in the Company's balance sheet for Deferred mining and processing costs is the lower of the difference between production costs incurred to date and the amount charged to Cost of gold sold to date or net realizable value.
Mineral Properties
The Company's policy is to charge to operations, costs associated with identifying prospective mineral properties and to capitalize the costs of acquiring, exploring and developing unproven mineral properties. For properties subsequently placed into production, the applicable capitalized costs are amortized using the units-of-production method, based on the ratio of tons of ore mined or processed during the year to the estimated total proven and probable ore reserves of the project.
Capitalized costs related to sold or abandoned properties are charged against operations at the time the property is sold or abandoned. Proceeds from rentals and option fees relating to undeveloped mineral properties in which the Company has an economic interest are credited against capitalized property costs and no gain is recognized until all costs have been fully recovered.
Construction in Progress
Pre-production, development and asset construction costs related to new mines and major programs at existing mines are capitalized to Construction in progress during the construction phase. Upon completion of construction, the costs are transferred to the appropriate asset accounts.
Interest Capitalized
Interest costs incurred during the construction of qualifying assets are capitalized as part of the asset cost.
Depreciation and Amortization
Mine buildings and equipment are depreciated using the units-of-production method based on the ratio of tons of ore mined or ounces of gold produced during the period to the estimated total proven and probable reserves of the related property. Vehicles, furniture and office equipment are depreciated using the straight-line and the declining balance methods over estimated useful lives of two to five years. The cost of normal repairs and maintenance is charged to operations as incurred. Significant expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. Upon retirement or disposition of property and equipment, related gains or losses are recorded in operations.
Note 2. - Summary of Significant Accounting Policies (continued)
Impairment of Assets
In 1996 the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, ("SFAS 121"). Under SFAS 121, the Company periodically reviews the carrying value of its assets by comparing the net book value of each asset to the estimated undiscounted future cash flows from the asset. If the net book value exceeds the undiscounted future cash flow, an impairment is recorded. Changes in estimates and assumptions that underlie management's estimate of future cash flow from the Company's assets can materially impact future carrying values and operating results. The adoption of SFAS 121 had no effect on the Company's financial statements.
Reclamation Costs
The Company records a liability for the estimated cost to reclaim mined land by recording charges to production costs for each ton of ore mined. The amount charged is based on management's estimate of reclamation costs to be incurred. The estimate is based on the work which is to be performed as set forth in the reclamation plan approved by the agencies responsible for granting the related mining permits. The accrued reclamation liability is reduced as reclamation expenditures are made. Certain reclamation work is performed concurrently with mining. However, the majority of reclamation expenditures is made after mining operations cease.
Revenue Recognition
The Company recognizes revenue as precious metals are delivered to the purchaser.
Commodity Futures Contracts
In order to protect against the impact of falling gold prices, the Company enters into hedging transactions, the goal of which is to provide a minimum price for future production, and allow the Company to take advantage of short term increases in the gold price. Hedging transactions include spot deferred and forward sales contracts and option contracts. Contracted prices on spot deferred and forward sales and options are recognized in gold sales as gold produced is delivered to meet the commitment. The results of hedging activities are included in revenue when gold is delivered against the contract or, if delivery under the contract is deferred, the contract is marked to market and the Company recognizes an unrealized gain or loss in operations. Spot deferred and forward contracts that are not identified as hedges of specific anticipated future production are recorded at market, with unrealized gains or losses recorded in operations.
The Company also has written silver call option contracts. Premiums received are deferred and recognized in income as the options expire or are exercised. The open contracts are marked to market and the deferred premiums adjusted accordingly, with changes in the market value of the contracts reflected in unrealized gains or losses on commodity future and option contracts in the consolidated statement of operations.
By-product Revenues
Revenues from sales of by-products (principally silver) are treated as a reduction of the cost of sales.
Stock Options
The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly no compensation costs are recognized for stock options granted at fair market value.
Note 2. - Summary of Significant Accounting Policies (concluded)
Income Taxes
The Company follows Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS 109"). Under the asset and liability method of SFAS 109, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
Net Income (Loss) per Common Share
Net income (loss) per common share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year, unless they are anti-dilutive.
Reclassifications
Certain amounts in the accompanying consolidated financial statements for the years ended December 31, 1994 and 1995, have been reclassified to conform to the classifications used in 1996.
Note 3. - Deferred Mining and Processing Costs
Deferred mining and processing costs in the accompanying consolidated statements of financial position represent mining, pad loading and processing costs associated with gold in various stages of production. Approximately $200,000 of costs were capitalized as of December 31, 1996 associated with ore stockpiled and ore placed on the leech pad at the Illinois Greek Mine.
During 1995 the Company recorded an impairment of deferred mining and processing costs of $1,620,000 relating to the Goldstrike Mine (see Note 7).
Note 4. - Undeveloped Mineral Properties
Capitalized costs at December 31, 1996 and 1995 associated with undeveloped mineral properties were as follows:
Note 5. - Mineral Properties Under Development
At December 31, 1996 and 1995, the Company had two mineral properties in various stages of feasibility and development as follows:
Illinois Creek, Alaska
The Illinois Creek Project is a moderate grade, near surface gold-silver deposit. It consists of two State of Alaska Mining Leases, covering 62,480 acres. The project is located in the western interior of Alaska approximately 57 miles southwest of Galena and 320 miles northwest of Anchorage. The exploration and feasibility phases were completed in 1995. Site development and construction commenced in May 1996, with anticipated completion scheduled for June 1997.
Pursuant to an agreement (the "Agreement") with North Pacific Mining Corporation ("NPMC"), the owner of the underlying leases, the Company made initial payments to NPMC of $100,000 in 1994 to evaluate the Illinois Creek property. The Company was required to make an additional payment to NPMC of $4 million in cash or common stock of the Company in exchange for title to the underlying leases. The Company chose to make the payment in stock and effective July 11, 1996, 1,540,663 shares of the Company's common stock were issued to NPMC. The number of shares of common stock issued to NPMC was equal to $4 million divided by the 30-day average of the price of the Company's stock on the Nasdaq Stock Market. In addition to these payments, NPMC will receive a 5% net return royalty.
Pursuant to the Agreement, the Company has until December 16, 1997, to achieve Commercial Production (as defined) from the property. This period may be extended at the option of the Company for two additional one year periods upon payment by the Company of additional advance royalties of approximately $300,000 for each one year extension. The Agreement terminates on December 16, 1999, if the Company has not achieved Commercial Production from the property by that date.
The obligations of the Company to NPMC are secured by a subordinated security interest in all of the Illinois Creek Project assets. The security interest terminates at Commercial Production.
Thunder Mountain, Idaho
The Company proposes to conduct gold and silver mining activities at the Dewey Mine in the Thunder Mountain Mining District in eastern Valley County, Idaho, approximately 100 miles northeast of Boise, Idaho. The proposed Dewey mining operations are part of the Thunder Mountain Project and consist of the development of a gold and silver ore deposit located on patented mining claims administered by the Idaho Department of Lands.
Effective July 9, 1993, the Company entered into an Exploration and Option to Purchase Agreement ("Agreement") with Dewey Mining Company, Thunder Mountain Gold, Inc. and two individuals (the foregoing companies and individuals described below are collectively referred to as the "Owners"). The Owners control approximately 5,500 acres in the Thunder Mountain Mining District consisting of both patented and unpatented mining claims. Pursuant to the terms of the Agreement, the Company was granted the sole and exclusive right to explore for and develop minerals on the property in exchange for advance royalty payments totaling $100,000. In addition, the Company committed to spend, and did spend, a minimum of $500,000 evaluating the property prior to April 1, 1995.
Note 5. - Mineral Properties Under Development (Concluded)
The Agreement requires that, before the Company can put the property into commercial production, it must prepare and deliver to the Owners a feasibility study regarding the project. In 1995 and 1996, the Company extended the term of the agreement through April 30, 1997, by making additional advance royalty payments in the aggregate amount of $350,000. The Agreement further provides the Company with the option for a final extension until April 30, 1998, in exchange for an additional advance royalty payment of $250,000. The advance royalty payments made may be recovered by the Company for seven years after payment should the Owners elect to receive royalties under options (a) or (c) described below. The Agreement terminates if the Company fails to deliver a feasibility study to the Owners by the end of the last year's extension under the Agreement or if the Company exercises its right to terminate the Agreement at any time.
Within 90 days after the Company provides the Owners with a feasibility study, the Owners may elect to (a) participate in subsequent efforts to the extent of a 30% working interest, plus receive a 1.5% royalty, or (b) receive a 30% net profits interest, or (c) receive a 5% net return royalty from production. If the Owners elect to receive a 5% net return royalty, the Company will be obligated to make advance royalty payments of $200,000 within thirty days after commencement of Commercial Production (as defined in the Agreement), and $250,000 each year thereafter.
The Agreement provides that, once the Owners have made their election, the Company shall have one year within which to achieve Commercial Production. If the Company fails to achieve Commercial Production within one year, the Company must either re-convey the property to the Owners or extend by one year the time period within which Commercial Production must commence by paying an advance royalty of $200,000 to the Owners. If Commercial Production has not commenced by the end of the extension period, the Company may obtain one final extension of one year within which to achieve Commercial Production by paying the Owners an additional advance royalty of $250,000. In addition to the advance royalty payments and the work commitments outlined above, the Company is obligated to pay all fees necessary to maintain the unpatented mining claims through August 31 of the calendar year in which the extension year expires.
Note 6. - Developed Mineral Properties
The Company's investment in developed mining properties at December 31, 1996 and 1995 is as follows:
Goldstrike Mine
Note 5. - Mineral Properties Under Development (Concluded
Effective November 1, 1992, the Company acquired from Tenneco Corporation, the stock of Tenneco Minerals Company-Utah, owner and operator of the Goldstrike Mine located approximately 35 miles northwest of St. George, Utah. Soon after the acquisition, the name of this wholly owned subsidiary was changed to USMX of Utah, Inc. Gold production from the Goldstrike Mine since November 1, 1992, has been 77,182 ounces, including 6,266 ounces of gold produced in 1995.
Mining operations at the Goldstrike Mine were completed in October 1994. Leaching was completed in December 1995. All disturbed areas at the Goldstrike Mine were reclaimed during 1995 except for the heaps and the plant site. Reclamation of these areas will continue into 1997.
Montana Tunnels
The Company owns a net profits royalty interest in this property and, accordingly, the carrying value has been classified as a producing mineral property in the Company's consolidated statements of financial position (see Note 1212.). In June 1996, the Company and Pegasus Gold Inc. ("Pegasus"), an affiliate, agreed to the sale of the Company's net profits royalty interest in the Montana Tunnels property to Pegasus for $4,500,000. The sale is pending definitive documentation and approval of the Company's stockholders (see Note 8).
Note 7. - Asset abandonments and Write-downs
Mineral Property Abandonments
Mineral properties that management determined no longer hold sufficient promise to justify the cost required to maintain them and which had historical costs of $674,000 were written off in 1996. The write-offs include several exploration targets near the Goldstrike Mine in Utah with historical costs totaling $345,000 and various other properties throughout the western United States with total historical costs of $179,000. Six small properties in Mexico with historical costs of $89,000 and one property in Chile with historical costs of $61,000 were also written off in 1996.
Mineral Property Write-downs
During 1996 the Company wrote down the carrying value of the Nambija property in Ecuador and the Amargosa and La Reserva properties in Mexico by $335,000, $326,000 and $81,000 respectively. The carrying value of each of the properties was reduced to zero. To date, no significant economic mineralization has been encountered on the properties. The La Reserva property is currently being explored in joint venture with another mining company. The Nambija and Amargosa properties are being held for possible future joint venture exploration.
Note 8. - Long Term Debt and Note Payable to Related Party
Long Term Debt
On July 11, 1996 the Company closed a $22 million financing facility with Rothschild. The facility consists of a $19.5 million project loan and a $2.5 million convertible loan. Proceeds of the loans have been used to partially fund the development of the Company's Illinois Creek Mine in Alaska. At December 31, 1996, the Company has drawn approximately $21,355,000 against the facility.
Note 8. - Long Term Debt and Note Payable to Related Party (Continued)
The $19.5 million project loan bears interest, payable quarterly, at 2.25% above LIBOR until certain tests related to project operations have been completed to the satisfaction of the lender and 1.875% above LIBOR thereafter. Principal payments are due in seven installments on September 30 and December 31 of each year, commencing September 30, 1997. The loan is payable by the Company's operating subsidiary that owns the Illinois Creek property and is secured by a first priority interest in the Illinois Creek Mine assets. The Company has agreed to guarantee the $19.5 million project loan until it has been demonstrated that the Illinois Creek Project is operating in a manner satisfactory to Rothschild and that no defaults are outstanding. In addition, the Company is a continuing guarantor of the covenant to comply with environmental laws.
The Company's obligations under its guarantee and the $2.5 million convertible loan are secured by subordinated security interests in the Illinois Creek Mine assets and the outstanding shares of the operating subsidiary formed to own and develop the mine.
Amounts drawn pursuant to the financing facility are deposited in the Illinois Creek project proceeds account and may be used only for the benefit of the project. Such amounts are reflected in the accompanying condensed consolidated statements of financial position as Restricted cash. At December 31, 1996, approximately $108,000 remained in the account.
The $2.5 million convertible loan bears interest at 2% above LIBOR, payable semi-annually. The note may be converted into Common Stock at a conversion price of $1.74 per share at the option of the lender at any time during the term of the note. The Company may also require conversion of the note if the note is not in default and the daily closing price of the Common Stock exceeds $4.75 for 30 consecutive trading days. The convertible loan is due September 30, 2000.
Assuming the $2.5 million convertible loan is not converted, aggregate maturites of the notes payable under the Rothschild's financing facility are as follows:
Year ended December 31, ---------------- -------------------- 1997 $ 6,000,000 1998 6,000,000 1999 6,000,000 2000 3,355,000 ==================== $ 21,355,000 ====================
The loan agreements include financial, operating and other covenants, including covenants regarding the maintenance of certain operating and financial ratios, limitations on or prohibitions of dividends, indebtedness, liens, investments, Mergers, changes in capital structure and certain other items. At December 31, 1996 the Company was not in compliance with certain of the loan covenants.
Note 8. - Long Term Debt and Note Payable to Related Party (Concluded)
Under the terms of the $22.0 million Rothschild financing facility, the Company agreed to deposit $1.5 million in an escrow account by September 30, 1996. The Company was unable to comply with this requirement and Rothschild agreed to waive this and certain financial ratio covenant requirements until December 31, 1996, conditional upon the Company's agreements to, among other things, (A) file a prospectus with the appropriate Canadian securities regulatory authorities by November 1, 1996, and complete an offering by December 31, 1996, (B) adjust the price at which Rothschild may elect to convert the $2.5 million loan into the Company common shares to the price at which the shares offered are sold, or if no sale, at the average trading price for the last ten trading days of 1996 and (C) to pay Rothschild a fee of $100,000 which fee is payable upon the first to occur of (i) a date upon which such payment can be made without materially reducing the working capital reasonably required by the Company for continued operations or (ii) April 15, 1997. At December 31, 1996, the Company had not completed the offering and was unable to comply with the requirement to deposit $1.5 million in an escrow account.
As a result of the covenant violations, Rothschild has the ability to declare an event of default and require that the be paid currently. Accordingly, the loans have been classified as a current liability. As discussed in notes 2 and 16, subsequent to December 31, 1996, Rothschild has entered into an intercreditor agreement, whereby Rothschild agreed not to accelerate the due date of any loans to USMX or to exercise any rights it may have to collateral security until the earlier of the consummation of the Merger with Dakota, the termination of the Merger agreement in accordance with its terms, or June 30, 1997.
Note Payable to Related Party
During the second quarter of 1996 the Company arranged for a $4.5 million, 8.75% fixed rate loan from Pegasus, a shareholder of the Company. The loan is repayable over a 50 month period beginning June 1, 1996. The loan is collateralized by the Company's net profits royalty interest in the Montana Tunnels property. In lieu of loan payments by the Company, Pegasus has agreed to offset the $60,000 per month Montana Tunnels minimum advance royalty payments that are otherwise payable to the Company (see Note 12) against the payments due under the loan.
During the second quarter of 1996 the Company also agreed with Pegasus to sell its net profits royalty interest in the Montana Tunnels property to Pegasus for $4,500,000. Pegasus is the owner and operator of the Montana Tunnels Mine. The net profits royalty interest entitles the Company to the greater of a 5% net profits royalty interest or minimum advance royalties of $60,000 per month until certain construction, land acquisition, associated financing and other costs have been recovered by Pegasus ("Payback"), and a 50% net profits royalty interest thereafter. Payback is dependent upon several factors, including future metal prices, production rates, and the life of the Montana Tunnels Mine. It is unclear whether Payback will ever be achieved. Since inception of the contract, the Company has only received the monthly minimum advance royalties.
Loan proceeds received by the Company from Pegasus will be credited against the sales price at closing and the loan will be extinguished. Closing of the transaction is subject to completion of definitive documentation and approval of the Company's stockholders.
Note 9. - Gain on Sale of Common Stock
In April 1994, the Company sold its interest in the Kinsley Mountain Project in Elko County Nevada to Alta Gold Co. ("Alta"). In April 1995, the Company received a final cash payment of $400,000 and Alta restricted common stock with a market value of $200,000 based on the average closing price of the stock over the 30 trading days prior to issuance. The payment was in addition to cash of $400,000 and Alta restricted common stock with a market value of $200,000 previously received. The cash proceeds and discounted value of the stock received were recorded as a reduction of the carrying value of the property. During 1995, the carrying value of the property was reduced to zero and a $1,000 loss was recorded. During 1996 all of the Alta common stock was sold for $1,281,000, resulting in a gain of $936,000.
Note 10. - Stock Options
The Company has two stock option plans, the ("1987 Plan") and the Non-discretionary Plan for Non-Employee Directors ("Directors' Plan"), which cover a total of 1,700,000 shares of common stock available for grant to employees and directors of the Company.
Under the 1987 Plan, the Company may grant incentive stock options as well as non-incentive stock options. Incentive stock options granted under the 1987 Plan are exercisable at prices equal to the market value of the common stock at the date of grant. The option prices of non-incentive stock options granted under the 1987 Plan may be less than the market value of the common shares as of the grant date. Options expire at such time as the Option Committee of the Board of Directors determines, but no later than ten years from the grant date.
The Directors' Plan was established in 1992 to afford non-employee directors an opportunity for investment in the Company and the incentive advantages inherent in stock ownership of the Company. Options granted under the Directors' Plan are exercisable at prices equal to the market value of the common stock at the date of grant and are exercisable in full on the date of grant.
Shares acquired pursuant to the Directors' Plan may not be sold, transferred or otherwise disposed of for a period of at least six months following the date of grant. Under the terms of the Directors' Plan, the directors who elected to participate were each issued options to purchase 10,000 shares of the Company's common stock upon adoption of the plan. Thereafter, each non-employee director who elects to participate is automatically granted an option to purchase 10,000 shares of the Company's common stock upon joining the Board. In addition, on October 1 of each year each participant is automatically granted an option to purchase an additional 5,000 shares. Options granted under the Directors' Plan expire ten years from the date of grant except that an option will expire, if not exercised, ninety days after the optionee ceases to be a director of the Company.
The Company applies APB Opinion No. 25 and related interpretations in accounting for its option plans. Accordingly, no compensation cost has been recognized for options granted at fair market value under the plans. Had compensation cost for the Company's stock option plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1996 1995 ---- ----
Net (loss) As reported $ (3,302,000) $ (6,906,000) Pro forma $ (3,493,000) $ (6,954,000)
Net (loss) per common share As reported $ (0.22) $ (0.47) Pro forma $ (0.23) $ (0.47)
Note 10. - Stock Options (Concluded)
Changes in stock options for the years ended December 31, 1994, 1995 and 1996, are as follows:
During 1995, the terms of options to acquire 724,750 shares were extended to ten years from the original date of grant. For accounting purposes the extension was treated as the cancellation of the existing options and the granting of new options.
At December 31, 1996, 1995 and 1994, the number of options exercisable was 707,096, 826,250 and 573,250 respectively, the weighted average exercise price of those options was $3.14, $3.18 and $3.50 respectively, and the weighted average remaining contractual life was 8.2, 7.8 and 2.2 years respectively. The remaining 660,664 options at December 31, 1996, are exercisable at various dates through August 1999.
The weighted average fair value of options granted during the years ending December 31, 1996 and 1995 were $1.38 and $0.97 respectively, assuming a risk free rate of 6%, an expected volatility of 50%, and a weighted average expected life of 9 years.
Note 11. - Employees' Benefit Plans and Incentive Bonus Arrangements
Effective July 1, 1987, the Company adopted an Employee Savings and Investment Plan under section 401(k) of the Internal Revenue Code, which covers all full-time employees. The plan is a defined contribution plan and allows employee contributions of up to ten percent of pre-tax compensation, limited to the maximum deferral allowed by the Internal Revenue Service.
The Company may contribute at least ten percent and not more than one hundred percent of the amount contributed by the employees, up to a maximum of six percent of pre-tax compensation. For 1996, 1995 and 1994, the Board of Directors has set the Company's contribution at fifty percent of the first six percent of employee contributions. For 1996, 1995 and 1994, the Company's contributions were approximately $53,000, $57,000, and $59,000, respectively. Participants vest in the Company's contributions based upon years of service, and are fully vested after four years of service.
Note 11 - Employees' Benefit Plans and Incentive Bonus Arrangements (Concluded)
The Company has an Exploration Discovery Bonus Plan under which bonuses are paid in cash or in shares of the Company's common stock to certain employees for discoveries of ore deposits that the Company's Board of Directors determines can be operated at a profit. The bonus is based on the net present value of the deposit and is calculated using a sliding scale ranging from 2% for deposits with a net present value of up to $10 million, to 0.85% of the first $100 million of net present value plus 0.25% of that portion of the net present value of the deposit that exceeds $100 million. Under the terms of the plan, 70% of each discovery bonus is divided equally among the Company's explorationists and the remainder is to be shared among those individuals designated by the Company's President as playing an especially important role in the discovery. No bonuses were paid in 1996, 1995 or 1994 under the plan.
Note 12. - Transactions With Affiliates
As of December 31, 1996, Pegasus owned 4,826,000 shares (29.9%) of the Company's outstanding common stock. In January 1986, the Company entered into a revised agreement with Centennial Minerals Ltd., a subsidiary of Pegasus for the development of the Montana Tunnels property. Pursuant to the agreement, Pegasus developed the property, acquired a 100 percent working interest in the project, and commenced mine and mill operations in March 1987. The operations at Montana Tunnels achieved defined operating status on October 1, 1987. Under the agreement, the Company will receive the greater of a minimum advance royalty of $60,000 per month or a five percent net profits interest until Pegasus recovers payout of capital and other defined costs.
During the second quarter of 1996 the Company agreed with Pegasus to sell its net profits royalty interest in the Montana Tunnels Mine to Pegasus for $4,500,000. Closing of the transaction is subject to completion of definitive documentation and approval of the Company's stockholders. Loan proceeds in the amount of $4,500,000 previously received by the Company from Pegasus will be credited against the sales price at closing and the loan will be extinguished (see Note 7).
For each of the years ended December 31, 1996, 1995, and 1994, the Company received $720,000 in royalty income from the Montana Tunnels property.
In March 1995, the Company acquired all of the outstanding capital stock of Mega Minerals S.A., an Ecuadorian company. The Company assumed obligations of approximately $120,000, and agreed to pay the seller a 10% net proceeds royalty on any production from the concessions after recovery of all capital expenditures. A director and principal shareholder of the seller is also a director of the Company. The assets of Mega Minerals S.A. consist of eight exploration concessions and the rights to acquire four additional exploration concessions, all located in the Nambija-Zamora gold belt of southern Ecuador.
Note 13. - Income Taxes
Total income tax benefit for the years ended December 31, 1996, 1995 and 1994, was $55,000, $118,000 and $497,000 respectively. The entire income tax benefit of $55,000 for the year ended December 31, 1996, is the result of an adjustment to federal income taxes receivable related to net operating losses carried back to prior years. Income tax expense (benefit) consists of the following:
The Company's effective tax rate for the years ended December 31, 1996, 1995 and 1994, differs from the federal statutory tax rate for the following reasons:
Note 13. - Income Taxes (Concluded)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
The change in the valuation allowance for the years ending December 31, 1996 and 1995 was $226,000 and $3,247,000, respectively.
As of December 31, 1996, the Company has net operating loss carryforwards for federal income tax purposes of approximately $9,799,000 which are available to offset future federal taxable income, if any, through 2011. As the result of an audit by the Internal Revenue Service ("IRS") during 1996, an additional $3,151,000 of net operating loss carryforwards were disallowed by the IRS. The Company is currently protesting the IRS findings. In addition, the Company has net operating loss carryforwards for alternative minimum tax purposes of approximately $8,640,000 which are available to offset future alternative minimum taxable income, if any, through 2011.
Note 14. - Foreign Operations
In 1995 the Company held significant identifiable assets in foreign jurisdictions, predominantly in Mexico. No revenue was derived from these foreign assets.
Note 15. - Commitments and Contingencies
Reclamation Surety
Pursuant to the mining reclamation and bonding regulations of the State of Utah, Department of Natural Resources and the Bureau of Land Management, in 1993 the Company provided reclamation surety for the Goldstrike Mine in the amount of $2,251,000. In October 1995, the Company was advised that, as a result of the reclamation work accomplished by the Company at the Goldstrike Mine, the required surety had been reduced by approximately $514,000 to $1,737,000. The required surety is in the form of a certificate of deposit in the amount of $800,000 and letters of credit in the amount of $937,000. The certificate of deposit and restricted cash account supporting the letter of credit are reflected in Reclamation surety and other assets in the accompanying Consolidated Statements of Financial Position.
Pursuant to the mining reclamation and bonding regulations of the State of Alaska, Department of Natural Resources, the Company provided reclamation surety for the Illinois Creek Mine in the amount of $1,575,000 in 1996. The required surety is in the form of certificates of deposit totaling $1,575,000 and is reflected in Reclamation surety and other assets in the accompanying Consolidated Statements of Financial Position.
Hedging
As part of its gold hedging program the Company has entered into agreements with a major financial institution to deliver gold. Realization under these agreements is dependent upon the ability of the counterparties to perform in accordance with the terms of the agreement. As of December 31, 1996, the Company had entered into forward sales contracts for 140,900 ounces of gold for delivery at various dates through December 31, 1999 at an average selling price of $409 per ounce. Delivery under these spot deferred contracts can be deferred at the Company's option up to forty months depending on the individual contract. The aggregate unrealized excess of the net market value of the Company's forward sales contracts over the spot gold price of $368 per ounce as of December 31, 1996, is approximately $5,875,000. The aggregate unrealized gain on the Company's forward sales contracts accounted for as hedges of future production were approximately $5,033,000 at December 31, 1996.
The Company has also written silver call options, which if exercised, would become spot deferred contracts with delivery deferred as previously described. At December 31, 1996 the Company had sold 825,300 ounces of silver call option contracts all at a strike price of $5.50 per ounce expiring on dates ranging from September 28, 1997 through December 29, 1999. Call options premiums received amounted to approximately $424,000.
Operating Leases
The Company leases office space, office equipment and vehicles under operating leases which expire through 2001.
Effective as of June 15, 1992, the Company entered into a new lease for its corporate offices in Lakewood, Colorado. The lease was amended effective June 1, 1996, to provide for additional office space and to extend the initial term of the lease to May 31, 2001. The lease contains an option to renew for an additional five year period at the market rate in effect at the time of renewal. The lease provides for base rent of $12,917 per month with annual increases each year beginning June 14, 1997. In addition, the Company is obligated to reimburse the landlord for the Company's proportionate share of increases in real estate taxes and operating expenses.
Effective as of July 1, 1996, the Company entered into a new lease for its Alaska district offices in Anchorage, Alaska. The term of the lease is three years, commencing July 1, 1996, and ending June 30, 1999. The lease provides for aggregate rent of $121,284 payable in equal monthly installments of $3,369.
Note 15. - Commitments and Contingencies (Concluded)
The following table sets forth the future minimum lease payment obligations as of December 31, 1996:
Minimum Year Lease Payments --------------- --------------------- 1997 $298,000 1998 $249,000 1999 $191,000 2000 $173,000 2001 $76,000 --------------- ---------------------
Rent expense was $154,000, $113,000 and $139,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Contractor Claim
One of the construction contractors on the Illinois Creek Property in Alaska working under an approximately $3 million contract with the Company has submitted invoices and claims totaling approximately $7 million for work completed in 1996. At December 31, 1996, the Company had paid the contractor $1,772,000 and has recorded an additional liability to the contractor, based on the Company's estimate of its obligation under the contract of $2,414,000. The unpaid invoices and claims are currently being reviewed, and it is likely that a significant portion of the invoices and claims will be disputed by the Company. The contractor has threatened legal proceedings if the dispute is not informally resolved. The Company and its representatives are currently reviewing the relevant facts and until that review is complete the Company cannot estimate the magnitude of any potential liability, possible counterclaims by the Company or the outcome of arbitration or litigation if the dispute cannot be resolved by negotiation. On November 8, 1996, the construction contractor also filed a lien on the Illinois Creek Property for certain unpaid invoices and claims submitted through that date.
Note 16 - Subsequent Events
Definitive Merger Agreement
On February 5, 1997, the Company signed a definitive Merger agreement with Dakota Mining Corporation ("Dakota") whereby the shareholders of the Company will receive one share of Dakota common stock for every 1.1 shares of the Company's common stock and the Company will become a wholly owned subsidiary of Dakota (the "Merger"). The Merger is subject to the approval of the Toronto Stock Exchange, stockholder and creditor approval, review by other regulatory authorities, and other customary conditions.
As part of the Merger Agreement, Dakota and the Company agreed that Dakota would provide a $5 million line of credit to the Company to provide interim working capital to sustain the Company's operations until the Merger is consummated. The line of credit bears interest at the rate of one per cent above a quoted prime rate and is due August 31, 1997 or earlier if the Merger agreement is terminated before such date. The proceeds are to be used to pay certain ongoing operating expenses of the Company, primarily in connection with start-up activities associated with the Illinois Creek Mine and to partially pay trade creditors of the Company and its subsidiaries.
Note 16 - Subsequent Events (Continued)
The line of credit is evidenced by two notes with similar terms but different amounts and different security. A $2 million note ("the first note") is secured by a second priority position in the shares of USMX of Alaska and ranks pari passu with the $22 million loan of Rothschild (which holds the first priority position in such collateral). USMX of Alaska is the subsidiary holding title to the Illinois Creek Mine. A second note for $ 3 million ("the second note") is secured by a first position on all of the shares of USMX's Mexican subsidiary and a first position on USMX's Thunder Mountain property in Idaho. Rothschild was granted a second priority security position in the second note security. Funding for the line of credit is being provided from the proceeds of a Special Warrant offering by Dakota described below.
In February 1997, Dakota offered by way of private placement 25,000 Special Warrants at a price of Cdn. $1,000 per Special Warrant resulting in gross proceeds of Cdn. $25 million. Each Special Warrant entitles the holder to receive one 7.5% unsecured subordinated convertible debenture in the amount of Cdn. $1,000. Of the proceeds, US $5.0 million have been released immediately and the remaining proceeds have been deposited in escrow pending completion of the Merger and approval by the Dakota shareholders of the issuance of the common shares underlying the debentures. Completion of this offering was a condition of the Company's obligation to proceed with the Merger.
N. M. Rothschild & Sons Limited financing facility.
Rothschild's consent is required for the extension of the $5 million line of credit and consummation of the Merger. Further, Dakota, as the potential owner of the Company, desired certain changes to the Rothschild loan facility in order to avoid immediate defaults under such facility after closing of the Merger. Accordingly, the Rothschild and Dakota negotiated an Intercreditor Agreement which provided, among other things:
i) The consent of Rothschild to the Merger and the extension of the $5 million line of credit from Dakota to the Company on the terms described above.
ii) Rothschild's agreement to share, pari passu with Dakota, in any proceeds from foreclosure of the Company's share security in the ratio of the amount outstanding under the first note to $22 million, but with Rothschild retaining the right to deal with such security.
iii) Dakota's agreement to fund at least $2 million of its line of credit for costs and expenses at the Illinois Creek Mine according to a plan prepared by the Company and approved by Rothschild and Dakota.
iv) The agreement of Dakota to guarantee the Company's obligations under the Rothschild Credit Agreements until "commercial completion" of the Illinois Creek Mine.
v) The agreement of Rothschild to forebear from exercising its rights to declare and enforce defaults (except payment or bankruptcy defaults) of the Company under the Rothschild Credit Agreements until consummation of the Merger, termination of the $5 million line of credit or June 30, 1997.
vi) Rothschild and Dakota agreed to amend certain terms and covenants in the Rothschild Credit Agreements, to be effective upon closing of the Merger. These include revisions to the definition of "commercial completion", and amendments to certain financial covenants.
vii) Both parties' rights to share in collateral terminate if the Merger is consummated or the $5 million line of credit is extinguished.
Note 16 - Subsequent Events (Concluded)
viii)At the closing of the Merger, a $2.5 million convertible loan under the Rothschild Credit Agreements will be extinguished by payment of $1.5 million by Dakota and adding the balance to the outstanding amounts under the project financing portion of the such Agreements.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
There were no disagreements with the Company's principal independent accountants on any matter of accounting principles or practices, financial statement disclosures, or auditing scope or procedure.
PART III
Items 10, 11, 12 and 13 constituting Part III of this Form 10-K have been omitted from this Annual Report pursuant to the provisions of Instruction G(3) to Form 10-K, as the Company intends to file a definitive proxy statement pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120 days after the close of its last fiscal year.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements.
See Item 8.
(2) Consolidated Financial Statement Schedules.
See Item 8.
(3) Exhibits.
The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K on November 21, 1996, regarding its Illinois Creek Project and amendments to the Rothschild Credit Agreements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
USMX, INC. (Registrant) Date: 3/31/97 By: /s/ Donald P. Bellum ---------------------------------- Donald P. Bellum, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K
(Mark One) y Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year December 31, Error! Reference source not found. or X Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from ______________________ to ______________________
Commission File Number 0-9370 ------------------- USMX, INC. (Exact name of registrant as specified in its charter) ------------------- Delaware 84-1076625 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
141 Union Boulevard, Suite 100 Lakewood, Colorado 80228 (Address of principal executive offices) (Zip Code)
(303) 985-4665 Registrant's telephone number, including area code
EXHIBITS
INDEX TO EXHIBITS
NUMBER DESCRIPTION
Exhibit 2 Agreement and Plan of Merger, dated February 4, 1997, among the Company, Dakota Mining Corporation and Dakota Merger Corporation, filed as an Exhibit to the Company's Report on Form 8-K filed on or about February 5, 1997, is incorporated herein by this reference.
Exhibit 3.1 Certificate of Incorporation of the Company, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by this reference.
Exhibit 3.2 Bylaws of the Company, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by this reference.
Exhibit 4 Specimen Certificate of the $.001 par value common stock, previously filed as an Exhibit to the Company's registration statement on Form S-3 (No. 33-19699), is incorporated herein by this reference.
Exhibit 10.2 The Company's 1987 Stock Option Plan, as amended, previously filed as an Exhibit to the Company's registration statement on Form S-8 (No. 33-49392), is incorporated herein by this reference.
Exhibit 10.3 The Company's Savings and Investment Plan, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1987, is incorporated herein by this reference.
Exhibit 10.7 Agreement, dated January 1, 1986, between the Company and Centennial Minerals Ltd., previously filed as Exhibit 10.17 to the Company's Report on Form 10-K for the year ended May 31, 1986, is incorporated herein by this reference.
Exhibit 10.7A Amendment of Agreement and Deed dated July 15, 1991, by and between Montana Tunnels Mining, Inc., USMX, INC. and USMX of Montana, Inc., previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by this reference.
Exhibit 10.33 Non-Discretionary Stock Option Plan, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by this reference.
Exhibit 10.40 Asset Purchase Agreement, dated June 11, 1993, between the Company and Placer Dome U.S. Inc., as amended, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by this reference.
Exhibit 10.42 Employment Agreement, dated July 16, 1993, between the Company and James A. Knox, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by this reference.
Exhibit 10.44 Exploration and Option to Purchase Agreement, dated effective July 9, 1993, between the Company and Dewey Mining Company and Thunder Mountain Gold, Inc., Ronald C. Yanke and Donald J. Nelson, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by this reference.
Exhibit 10.45 Purchase and Sale Agreement, dated April 14, 1994, among the Company, Cominco American Resources Incorporated and Alta Gold Co., previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by this reference.
Exhibit 10.46 Agreement, dated effective December 16, 1994, between the Company and North Pacific Mining Corporation, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by this reference.
Exhibit 10.46a Letter dated February 5, 1996, amending the Agreement, dated effective December 16, 1994, between the Company and North Pacific Mining Corporation, previously filed as an Exhibit to the Company's Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by this reference.
Exhibit 10.47 Post-Termination Agreement, dated February 16, 1996, between the Company and Bull Valley L.L.C.
Exhibit 10.48 Exploration Discovery Bonus Plan, dated effective September 1, 1989.
Exhibit 10.49 Mine Services and Earthworks Contract, dated January 19, 1996, between the Company and D.H. Blattner & Sons, Inc.
Exhibit 10.50 Purchase and Sale Agreement, dated March 20, 1995, among the Company, Mega Metals, Inc.; Mega Minerals S.A.; Greg Pusey; John Dreier and Gary McAdam.
Exhibit 10.51 Option agreement, dated February 4, 1997, between the Company and Dakota Mining Corporation, previously filed as an Exhibit to the Company's Report on Form 8-K filed on or about February 5, 1997, is incorporated herein by this reference.
Exhibit 10.52 Support Agreement, dated February 4, 1997, among the Company, Pegasus Gold Inc. and Dakota Mining Corporation, previously filed as an Exhibit to the Company's Report on Form 8-K filed on or about February 5, 1997, is incorporated herein by this reference.
Exhibit 10.53 Loan Agreement dated March 11, 1997, among the Company, USMX of Alaska, inc. and Dakota Mining Corporation, filed as an Exhibit to the Registration Statement on Form S-4 of Dakota mining Corporation (File No. 333-23453), is incorporated herein by this reference.
Exhibit 10.54 Credit Agreement between USMX of Alaska, inc. and N M Rothschild & Sons Limited, dated July 11, 1996, filed as an Exhibit to the Company's Report on Form 8-K, filed on or about July 24, 1996, and First Amendment to Credit Agreement, dated as of November 15, 1996, filed as an Exhibit to the Company's Report on Form 8-K, filed on or about November 21, 1996, are incorporated herein by this reference.
Exhibit 10.55 Credit Agreement between the Company and N M Rothschild & Sons Limited, dated July 11, 1996, previously filed as an Exhibit to the Company's Report on Form 8-K on or about July 24, 1996, and the First Amendment to the USMX, Inc. Credit Agreement, dated as of November 15, 1996, previously filed as an Exhibit to the Company's Report on Form 8-K, filed on or about November 21, 1996, are incorporated herein by this reference.
Exhibit 10.56 Guaranty of the Company to N M Rothschild & Sons Limited, dated July 11, 1996, previously filed as an Exhibit to the Company's Report on Form 8-K filed on or about July 24, 1996, and the Guarantor's Acknowledgment of First Amendment to USMX of Alaska, Inc. Credit Agreement dated November 15, 1996, previously filed as an Exhibit to the Company's Report on Form 8-K, filed on or about November 21, 1996, are incorporated herein by this reference.
Exhibit 10.57 Hedging Agreement between USMX of Alaska, Inc. and N M Rothschild & Sons Limited, dated July 11, 1996, previously filed as an Exhibit to the Company's Report on Form 8-K filed on or about July 24, 1996, is incorporated herein by this reference.
Exhibit 10.58 Registration Rights Agreement between the Company and N M Rothschild & Sons Limited, dated July 11, 1996, previously filed as an Exhibit to the Company's Report on Form 8-K filed on or about July 24, 1996, is incorporated herein by this reference.
Exhibit 22 Subsidiaries of the Company
Exhibit 24.1 Consent of KPMG Peat Marwick LLP