ITEM 1. BUSINESS
Golden Cycle Gold Corporation was incorporated under the laws of the State of Colorado on May 19, 1972 for the purpose of acquiring and developing the mining properties (the "Mining Properties") of the Golden Cycle Corporation, located in the Cripple Creek Mining District of Colorado. Unless the context otherwise requires, the terms "Registrant" and "Company" mean Golden Cycle Gold Corporation.
The primary business of the Company has been its participation in the Cripple Creek & Victor Gold Mining Company, a joint venture (the "Joint Venture") with Pikes Peak Mining Company ("Pikes Peak"), a wholly-owned subsidiary of Independence Mining Company Inc. ("IMC"). IMC is a wholly owned subsidiary of Minoroco (U.S.A.) Inc. The Joint Venture engages in gold mining activity in the Cripple Creek area of Colorado.
In addition to its Joint Venture activities, the Company is seeking to participate in gold and copper mining activities in the Republic of the Philippines. The Company incorporated Golden Cycle Philippines, Inc. ("GCPI"), a wholly-owned subsidiary, under the laws of the Philippines on November 12, 1996, and GCPI has entered into an agreement with Benguet Corporation, a Philippine mining company, providing for their joint participation in the exploration, development and production of mining properties in certain areas of the Philippines. See "Description of Philippine Activities" for further information regarding the proposed activities of GCPI in the Philippines.
As of December 31, 1997, the Company had a total of 6 employees.
Description of Mining Joint Venture
The Company's interest in the Joint Venture was received in exchange for the Company's rights to gold mining properties in the Cripple Creek Mining District of Colorado. The rights and obligations of the parties are covered by an Amended and Restated Joint Venture Agreement (the "Joint Venture Agreement") dated and effective January 1, 1991, between Pikes Peak and the Company. The Joint Venture engages in gold mining activity in the Cripple Creek area of Colorado and the Company's participation in the Joint Venture constitutes the primary business activity of the Registrant. Pikes Peak serves as the manager (the "Manager") of the Joint Venture. The Joint Venture's principal mining operations are conducted at the Cresson mine, where commercial production was commenced in the first half of 1995.
The Joint Venture Agreement defines an Initial Phase that will end when (i) the Initial Loans (defined below) have been repaid and (ii) Net Proceeds (defined in the Joint Venture Agreement generally as gross revenues less costs) in the amount of $58 million have been distributed to the joint venturers in the proportion of 80% to Pikes Peak and 20% to the Company. After the Initial Phase, the Joint Venture will distribute metal in kind in the proportion of 67% to Pikes Peak and 33% to the Company. Notwithstanding the foregoing, the Company will generally be entitled to receive, in each year during the Initial Phase or until the mining of ore by the Joint Venture ceases due to the exhaustion of economically recoverable reserves (if that occurs prior to the end of the Initial Phase), a minimum annual distribution of $250,000 (each, a "Minimum Annual Distribution"). The first three Minimum Annual Distributions were not deemed to be a distribution of Net Proceeds to the Company and will not be applied against the Company's share of any Net Proceeds. The Minimum Annual Distributions received on January 15, 1994 and after constitute an advance on Net Proceeds and will be recouped against future distributions allocable to the Company.
The Joint Venture Agreement provides that, during the period from January 1, 1991 until the end of the Initial Phase, all funds required for operations and mine development by the Joint Venture will be loaned (the "Initial Loans") to the Joint Venture by either Pikes Peak or, if such loans are available at a lower cost than from Pikes Peak, financial institutions. Except for the Minimum Annual Distributions, the Initial Loans and interest thereon must be repaid prior to distributions of Net Proceeds to the Joint Venturers. The audited Joint Venture financial statements reported that as of December 31, 1997, the Joint Venture had $150.1 million in Initial Loans payable to Pikes Peak. After the Initial Phase, the Joint Venturers will contribute funds in proportion to their respective distributive shares.
The Joint Venture recorded net loss of $10.8 million for the year ended December 31, 1997 compared with net income of $1.93 million for the year ended December 31, 1996. Prior to 1996, the Joint Venture incurred substantial losses during each year of operation, including net losses of $3.65 million for the year ended December 31, 1995 and $9.35 million for the year ended December 31, 1994. There is no assurance that the Joint Venture will be able to achieve profitability in any subsequent period or to sustain profitability for an extended period. The ability of the Joint Venture to sustain profitability is dependent upon a number of factors, including without limitation, the market price of gold, which is volatile and subject to speculative movement, and the efficiency of the Cresson mining operation.
Whether future gold prices and the results of the Joint Venture's operations will reach and maintain a level necessary to repay the Initial Loans, complete the Initial Phase, and thereafter generate net income cannot be assured. Based on the amount of Initial Loans payable to the Manager and the uncertainty of future operating revenues, management of the Company believes that, without a significant and sustained increase in the prevailing market price for gold, it is unlikely that the Company will receive more than the Minimum Annual Distribution from the Joint Venture in the foreseeable future.
The Joint Venture completed construction of the required infrastructure for the Cresson mine and began mining operations in 1995, with the first Cresson gold pour occurring on February 14, 1995. In 1996, the Joint Venture completed its first full year of Cresson operations, and Phase 2 of the Cresson leach pad was completed.
1997 Operational Highlights (The Manager provides the Company with detailed information on the activities and operations of the Joint Venture. The following description of the Joint Venture's operations is derived from information made available by the Manager, upon whom reliance is placed, together with information independently developed by the Company.)
Production
Gold production for the Joint Venture increased for the third year in a row in 1997, to 228,162 troy ounces, a 32% increase from 1996 production of 174,708 troy ounces, and a 198% increase from 1995 production of 76,589 troy ounces. The Cresson mine also produced 48,067 troy ounces of silver. On a daily basis, approximately 28,625 tons of ore and 42,536 tons of "overburden," or waste, were mined.
Revenue and Costs
Although gold closed at an historic low in 1997, the Cresson Mine's low cash production costs of $196 per ounce enabled the joint venture to reduce the impact of lower gold revenue this past year. Production costs have declined annually since 1995 and were at their lowest level in 1997. Gold production was sold at an average price of approximately $332 per ounce, resulting in revenue of approximately $75.7 million.
The Joint Venture's operating costs were approximately $70.9 million. Additionally, interest expense on the pre-production debt was $15.6 million, resulting in a loss of $10.8 million. The Joint Venture showed positive cash flow of approximately $1.5 million after deducting capital expenditures and adding non-cash depreciation, depletion, amortization, and reclamation expenses. No profit was distributed to Golden Cycle Gold Corp., although the Company did receive the Minimum Annual Distribution of $250,000.
Exploration Results and Costs
Exploration in 1997 was focused on locating and delimiting extensions of the existing ore deposit below and to the east of the Cresson open pit. Ongoing exploration found areas of higher grade gold ore which is necessary for continuing an economic operation. The decrease in the 1997 year end ore reserve estimate (net of production) vs. the 1996 estimate for the tonnage (-23.9%), contained ounces (-10.4%) and recoverable ounces (-8.2%), was due to the lowering of the gold price used in the ore reserve calculation from $400 to $335 per troy ounce. Had the exploration campaign not been successful, the revaluation of the ore reserve would have been much more severe. The most critical exploration, for new high grade gold deposition, will be continued in 1998. Given the promising targets now being probed, it is expected that exploration will replace the ounces of gold mined and produced in 1998. The Joint Venture's Exploration drilling costs were $3.51 million, twenty percent less than 1996 costs of $4.39 million.
Gold Reserves
During 1997, as part of its determination of the Joint Venture reserves, the Joint Venture re-evaluated the district ore deposit reserves. The ore reserves are shown in the table below. The geostatistical modeling procedures used by the Manager in computing the ore reserves have been reviewed by independent consultants (Independent Mining Consultants Inc., Mine Reserve Associates Inc., Mineral Resource Development Inc., and Mine Development Associates, Inc.) and conform to accepted industry standards.
* These gold reserve figures were estimated based on a $335 per troy ounce gold price for all district deposits, and are subject to various royalties. There can be no assurance, however, that the Joint Venture can earn a profit when the market price of gold equals or exceeds the gold price used in estimating those reserves. During 1997, the average price of gold sold by the Joint Venture was approximately $332 per troy ounce.
** Recoverability of contained ounces is based on heap leaching and metallurgical testing. Recoverability rates vary by ore type. The recoverable ounces shown are based on weight proportion metallurgical averages for all deposits.
The above estimates are based upon drill inferred data and are a combination of "proven" and "probable" reserves. The classifications of proven and probable are taken from the Securities and Exchange Commission's Guide 7. Proven (Measured) Reserves. Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that the size, shape, depth and mineral content of reserves are well established. Probable (Indicated) Reserves. Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation. The ore reserve figures set forth above are estimates and no assurance can be given that any particular level of recovery of gold from ore reserves will in fact be realized.
Construction/Historic Rehabilitation
Historic Post Office Block, Victor, Colo.
As part of its commitment to the community and as a way to help preserve the areas mining history, the joint venture purchased the historic post office block in Victor, Colo., and renovated it for use as administrative headquarters by the Joint Venture at a cost of $1.3 million. This 10,000-square foot building, dedicated at a public open house in August, preserves many of the architectural features of the original post office, including the main staircase. A custom skylight, in the center of the building was built to duplicate the original.
Carol E. Roberts Technical Laboratory, Cresson Mine
This state of the art Assay, Metallurgical Research and Environmental analysis Laboratory, built in 1997 at a cost of $2.6 million, is used to process exploration and production samples from the Cresson Mine and conducts all of the "in house" metallurgical testing and all of the analyses required for on-site Environmental control. This Laboratory replaces the antiquated lab which was located in the Carlton mill building.
Completion of Phase II, Cresson Leach Pad
The Cresson mine extracts gold using a modified heap leaching process involving a closed system and multiple liners. The design incorporates a closed circuit "valley-fill" in pad pond, leach pad with multiple, engineered, protective membranes between the ore being leached and the environment. This is a "state of the art" leach pad, classified as a zero discharge facility, which is continuously monitored via electronic leak detection equipment located between the sealing membranes and in "monitor" wells located on the margin of the leach pad. To date, the complete leaching system has operated as designed and has also met all of the original government criteria. The Permitted Phase 2 expansion of the original leach pad was completed in March 1997 at a cost of $26.5 million. The Project was on time and on budget. The Phase 2 expansion will increase the total leach pad capacity by 27 million tons, allowing a further extension of the leach pad into the area formerly occupied by the Carlton Mill. This will increase the pad capacity to approximately 65 million tons.
Technical Revision of the Mining Permit
In 1997, the Joint Venture received approval of a technical revision of its mining permit that will ultimately add approximately 12 million tons of capacity to the Cresson leach pad. Work on this project is expected to begin in the spring of 1999.
Employment
Pikes Peak provides the work force required by the Joint Venture, which has no employees. Employment for the Joint Venture increased to 286 at December 31, 1997, up from 271 at December 31, 1996. The additional staff was required primarily by increased mine production levels.
Environment
The Joint Venture's balance sheet at December 31, 1997 reflects a total of $9.4 million in accrued reclamation liabilities. The Joint Venture has 840 acres under financial warranty as of March 1998 within its mining permit of 2,027 acres. IMC has posted a $20.91 million bond on behalf of the Joint Venture with the Colorado Mined Land Reclamation Board to ensure the reclamation of mining disturbances.
As a pioneer in high-altitude, closed circuit, semi-arid, cold-weather, year-round leaching, the Joint Venture has developed an aggressive posture toward environmental protection and reclamation. Ongoing compliance with federal and state regulations includes seismic and noise monitoring for each production blast; permanent quality standards for ground and surface water including tunnel discharge; rain and snow fall monitoring; air emission and dust guidelines; and process solution containment systems at leach pads.
In keeping with its active program to reclaim mined land for beneficial use as grazing and wildlife habitat, in 1997 the Joint Venture demolished the Carlton Mill, began removal of the Cameron leach pad and Pad #3, and started work on the detoxification and eventual closure of the Victor leach pad. This pad still yields 10-20 ounces of gold per day.
Since 1992, the Joint Venture has reclaimed approximately 90 acres that now supplement the habitat used by many wildlife species including elk. This year, it planted over 2,055 trees and shrubs on several overburden stock piles in addition to planting wild grasses and wildflowers. Perhaps the most successful example of reclamation was the 10-acre Rubie Pad, purchased from the American Rare Minerals Company, and seeded with native grasses and wildflowers. Today, the casual observer cannot distinguish the reclaimed areas from undisturbed ground.
Current reclamation projects include: reclamation of selected exploration drill sites; continued de-toxification and reclamation of the Victor leach pad; continued reclamation of the Ironclad and Globe Hill waste rock side walls; continued stockpiling of topsoil for future reclamation; and continued removal of the detoxified "Cameron" and "School" leach pads.
Governmental Regulation
Like all mining operations in the U.S., the Joint Venture is subject to a multitude of environmental laws and regulations promulgated by federal, state and local governments including, but not limited to the National Environmental Policy Act ("NEPA"); the Comprehensive Environmental, Response, Compensation and Liability Act ("CERCLA"); the Clean Air Act, ("CAA"); the Clean Water Act, ("CWA"); the Hazardous Materials Transportation Act, ("HMTA"); and the Toxic Substances Control Act, ("TSCA"). The Joint Venture's operations are subject to comprehensive regulation by the U.S. Department of the Interior (Bureau of Land Management), the U.S. Environmental Protection Agency ("EPA"), the U.S. Mine Safety and Health Administration ("MSHA") and similar state and local agencies. Failure to comply with applicable laws, regulations and permits can result in injunctive action, damages and civil and criminal penalties. If the Joint Venture expands or changes its existing operations or proposes any new operations, it may be required to obtain additional or amended permits or authorizations. In particular, CERCLA, commonly called the "Superfund Act", contains stringent reporting requirements for the release or disposal of hazardous substances, with substantial fines for noncompliance. In addition, under CERCLA, any party responsible for the release or threatened release of a hazardous substance into the environment is liable for all clean-up costs. These regulations apply throughout the U.S. mining industry and generally should not have a material adverse effect on the Joint Venture's competitive position.
Hazardous wastes from certain mining and mineral processing operations are temporarily exempt from regulation under the federal Resource Conservation and Recovery Act ("RCRA"). The EPA is currently considering the promulgation of a special set of rules to regulate mining wastes under RCRA, but those may be delayed pending anticipated Congressional re-authorization and revision of RCRA. The effect of any future regulation on the Joint Venture's operations cannot be determined until the legislative process is completed and new rules are issued; but it is assumed that they will have a significant impact on operations of all mining companies and increase the costs of those operations.
Although the Manager expects that compliance with federal, state and local environmental regulations will continue to require significant future outlays, it is not possible to say with any certainty what impact such compliance may have on the Joint Venture's future capital expenditures or earnings.
Distribution of Proceeds and Other Financial Aspects
The Joint Venture made payments of the Minimum Annual Distribution of $250,000 to the Company on June 13, 1991, January 15, 1992, and January 15 of each subsequent year, to and including January 15, 1998. Subsequent payments of the same amount will be made on January 15th of each year until the conclusion of the Initial Phase, as defined in the Joint Venture Agreement, or until the completion of mining. The payments made on January 15, 1994, 1995, 1996, 1997, and 1998 and subsequent annual payments constitute an advance on Net Proceeds and will be recouped by the Manager against future distributions of net proceeds. After recovery by the Manager of these advances, if the Company's share (20% in the Initial Phase) of Net Proceeds exceeds the Minimum Annual Distribution, the larger amount will be distributed to the Company. The Joint Venture recorded a net loss of $10.8 million for the year ended December 31, 1997.
The Company accounts for its investment in the Joint Venture on the equity method. Joint Venture distributions in excess of the investment carrying value are recorded as income. During 1992, the Company's share of Joint Venture losses exceeded the remaining carrying value of the investment and, accordingly, the investment was reduced to zero. The Company does not record its share of Joint Venture losses incurred subsequent to the reduction of its investment balance to zero. To the extent the Joint Venture is subsequently profitable, the Company may not record its share of equity income until the cumulative amount of previously unrecorded Joint Venture losses has been recouped.
As a result of the reduction of the Joint Venture investment carrying value to zero during 1992, the Company did not record its share of the Joint Venture's loss in 1997, net income in 1996, or loss in 1995. The Company's share of the 1997 Joint Venture net loss was $2,168,800. The Company's share of Joint Venture net income in 1996 was $386,000 and its share of Joint Venture net loss in 1995 was $730,800. As of December 31, 1997, the Company's accumulated unrecorded losses from the Joint Venture were $6,196,658.
Description of Philippine Activities
During 1996, the Company formed a wholly owned Philippine subsidiary, Golden Cycle Philippines, Inc. (GCPI), for the purpose of exploring for gold and gold/copper deposits in the Republic of the Philippines. This subsidiary has entered into a comprehensive exploration and operating agreement with Benguet Corporation (the "BGA Agreement") covering mineral property acquisition, exploration, development, permitting, and mining in the eastern Mindanao gold belt. The cost of activities undertaken under the BGA Agreement will be shared by GCPI and Benguet on a 50-50 basis, with all interests acquired owned equally. GCPI, as stipulated in the BGA Agreement, will purchase and operate all interests acquired under the BGA Agreement.
In October 1997, the two companies signed the First Supplemental Agreement to the BGA Agreement, which added 1,050 acres of mineral claims held by Benguet to the BGA. Under the terms of this supplemental agreement, Golden Cycle Philippines will earn a 50% interest in these claims in exchange for funding the first $250,000 (about 10 million Philippine pesos) of exploration work. The claim area lies immediately south of the historic Masara and Hijo gold mines and just north of the Kingking copper/gold deposit. The surrounding area has produced more than 3 million troy ounces of gold and has drill indicated ore reserves in excess of 8 million troy ounces of gold.
Phase I Exploration
Work on the Golden Cycle Philippines claims will be conducted in a phased exploration program designed to detail the previously identified gold deposition. The first exploration phase is scheduled for completion in January 1998. This initial exploration phase will establish boundaries for the claims, involve soil sample gathering for geochemical analysis, plus detailed geological mapping and sampling of identified surface gold mineralization. All samples will be prepared and assayed by major internationally recognized contract laboratories. Management believes that it is possible to find, delineate and profitably mine gold ore from this claim area even at today's relatively low price.
Additional prospects
GCPI is in the process of negotiating for the acquisition of high potential mineral properties in the areas of interest, subject to the approval of the Boards of Directors of Benguet and the Company. Although Benguet and GCPI have identified certain properties, including properties owned or controlled by Benguet, which are believed to be appropriate for inclusion within the BGA Agreement, there is no assurance that such properties, or any other properties which GCPI or Benguet believe are appropriate for inclusion within the BGA Agreement, will be available on terms acceptable to the Company.
GCPI is also conducting negotiations with other parties for mineral property acquisition in other portions of the Philippines for its own account, subject to approval of the Company's Board of Directors.
There is no assurance that any properties or interests therein acquired pursuant to the BGA Agreement, or which GCPI acquires for its own account, will contain mineral deposits which can be commercially exploited, or that permits for mining such deposits can be secured.
ITEM 2.
ITEM 2. PROPERTIES: MINING, OIL AND GAS, AND WATER RIGHTS
Mining Properties The Joint Venture mining properties consist of owned, leased and optioned mining claims and other land covering more than 4,800 acres of patented mining claims in and around the Cripple Creek Mining District of Teller County, Colorado and include most of the principal formerly-producing mines of the Cripple Creek district. The majority of the above acreage was contributed by the Company to the Joint Venture. Subsequently, the Joint Venture has purchased, leased and optioned additional acreage.
The Joint Venture mining properties are situated on the west flank of Pikes Peak, about 20 air miles west of Colorado Springs and 65 air miles south of Denver. The area is accessible by paved highway and supplied by requisite utilities. The elevation of the properties averages slightly over 10,000 feet above sea level. Snow accumulations are generally light and do not materially interfere with access to the property. However, cold weather conditions in the winter months hamper surface leaching operations.
To a great extent, the Joint Venture mining properties lie within the boundary of a geological entity known as a caldera or "volcanic subsidence basin" (the "Basin"). The Basin is of rudimentary elliptical outline, with its long axis trending in a northwesterly direction. It has a length of about 4-1/2 miles and a width of about 2-1/2 miles, covering some 5,000 acres at the ground surface. The area of the Basin gradually narrows with depth. The bulk of the historical Cripple Creek gold production was from the underground mines within the Basin, with the major mines located in the southern portion of the Basin.
From the inception of production in 1891 until the suspension of operations in 1960, the Cripple Creek Mining District was the major gold mining district in the United States. It is estimated that approximately 21 million ounces of gold were produced in this period, principally from mines later contributed to the Joint Venture by Golden Cycle Gold Corporation. The Joint Venture has added about 735,000 troy ounces of gold to this total during the period 1985 through 1997. The Joint Venture mining properties include most of the principal formerly producing mines in the Cripple Creek district, including the Ajax, Cresson, Portland, Independence, Vindicator and Golden Cycle. Because of the age of many of the mines and the fact that mining operations throughout the Basin declined and were suspended more than thirty years ago, the existing mine shafts and workings are unsuitable for current operation without substantial rehabilitation. The Joint Venture is not currently operating underground.
Oil and Gas Properties
The oil and gas properties of the Company are comprised of approximately 7,300 acres of mineral rights in the Penrose Area of Fremont County, Colorado. There is no evidence of successful oil and gas development nearby, with the exception of the Florence, Colorado area. Florence was the site of the first producing wells in Colorado in the 1860's and the area is still producing on a limited scale today. Several years ago, interest was shown in leasing very large acreages of state land about 50 to70 miles east of the Company's land. No development of that area is visible at this time. The oil and gas properties have no carrying value for balance sheet purposes.
Water Rights
The Company is a party to a water purchase agreement signed in February 1992 with the City of Cripple Creek, Colorado. The agreement calls for the sale by the Company of up to 1.097 Cubic Feet Per Second (about 794 acre feet) of a water right owned by the Company. The agreement calls for a minimum price of $312,500, based upon a price for the first 125 acre feet transferred at $2,500 per acre foot, and includes a commitment by the City to buy all additional acre feet transferred at $1,500 per acre foot. In accordance with the agreement, the City initiated the request for transfer in the Water Court on October 29, 1992.
Objections to the transfer were filed by the cities of Victor and Colorado Springs, the Mountain Mutual Water Company, Landau/Lichtenberg and the Joint Venture. The City of Cripple Creek has submitted the required well permits, published a First Amendment to Application for Change of Point of Diversion, laid the water lines, and has drilled the required wells.
In December 1996, the sale of the first 125 acre feet of water for the minimum price of $312,500 was completed. Approximately 75% of the purchase price was paid by the City of Cripple Creek through delivery of a promissory note bearing interest at the rate of 8%, interest and principal payable in annual installments through 2001 with the installment calculated on the basis of a 15 year term, with the balance of the principal payable at the end of 2001. The sale of all or a portion of the remaining acre feet subject to the agreement will be completed if, and when the Water Court approves such transfer.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings to which the Company is a party are pending. The Joint Venture is involved in certain litigation in the normal course of business. The Manager believes these matters will be resolved without a material adverse effect on the Joint Venture.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS
Market Information
The Company's Common Stock has been listed and traded on the Pacific Exchange since 1987 (except during the period from July 6, 1994 to August 30, 1994), and from July 1, 1983 until June 30, 1992 was quoted on NASDAQ. The Company's trading symbol is GCC on the Pacific Exchange. The following table shows the high and low bid price per share on the Pacific Exchange for each calendar quarter since January 1, 1996.
Bid prices are between dealers and do not include mark-ups, mark-downs, or commissions, nor do they necessarily represent actual transactions.
During the three years ended December 31, 1997, the Company sold a total of 270,000 shares of Common Stock in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"). Information relating to each of these transactions is set forth below:
Number of Shares Name of Shares Consi deration Date of Sale Purchaser Purchased Paid ____________ ______________ _______________ ____________
May 16, 1996 Midas Fund, Inc. 150,000 $ 900,000
May 16, 1996 Bull & Bear 20,000 120,000 Investors, Ltd.
Dec. 6, 1996 Midas Fund, Inc. 100,000 1,000,000
In each of the transactions listed above, the consideration paid for the shares consisted entirely of cash. Each of the transactions was effected pursuant to the exemption provided by Section 4 (2) under the Act based on written representations made to the Company by the respective purchasers, each of which is registered as an investment company under the Investment Company Act of 1940.
Holders of the Company's Common Stock The number of holders of record of the Company's Common Stock as of March 26, 1998 was 1125. The number of holders beneficial owners for whom shares are held in "street name" as of March 26, 1998 is believed to be more than 750.
Dividends The Company has not paid any dividends. The Company does not anticipate the payment of any dividends in the near future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Revenues include the Minimum Annual Distribution. See Management's Discussion and Analysis below, and Notes 1 and 4 to the financial statements for a description of the accounting for the Minimum Annual Distribution.
(2) The Joint Venture recorded net loss of $10.8 million for the year ended December 31, 1997. The Company has not recorded its share of the Joint Venture net loss for the 1997 period ($2,168,800) nor its share of the Joint Venture's net income for the 1996 period ($386,000), and did not record its share of the Joint Venture's losses in 1995, 1994 and 1993 ($730,800, $1,870,000 and $1,707,600 respectively) because its Joint Venture investment balance was reduced to zero in 1992. The Company will not record its share of any future Joint Venture net income until and unless the balance of the Company's accumulated unrecorded losses from the Joint Venture ($6,169,658 as of December 31, 1997) are recovered. See Management's Discussion and Analysis below, and Notes 1 and 4 to the financial statements.
(3) Less than $.01 per share.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's principal mining investment and source of cash flows is its interest in the Joint Venture. The Joint Venture engages in gold mining activity in the Cripple Creek area of Colorado. The Company's Joint Venture co-venturer is Pikes Peak, a wholly-owned subsidiary of Independence Mining Company Inc. Independence Mining Company Inc. is a wholly owned subsidiary of Minoroco (U.S.A.) Inc.
The Company's rights and obligations relating to its Joint Venture interest are governed by the Joint Venture Agreement. The Joint Venture is currently operating in the Initial Phase, as defined. In accordance with the Joint Venture Agreement, Pikes Peak manages the Joint Venture and is required to finance all operations and capital expenditures during the Initial Phase. See "Description of Mining Joint Venture" above.
During 1997, the Company began exploration activities in the Philippines through GCPI. During 1997 the Company expended approximately $77,000 to support GCPI operations, and incurred a foreign currency translation loss of approximately $29,000. GCPI expended an additional $134,000 in searching for promising mineral properties and in evaluating and negotiating for certain properties in the Republic of the Philippines. Further, GCPI expended approximately $58,000 conducting initial exploration of the SAR 1-5 claims under Amendment 2 to the BGA.
The Company's working capital was $1,942,165 at December 31, 1997 compared to $2,333,300 at December 31, 1996. Cash used in operations was $281,688 in 1997 compared to cash used by operations of $124,971 during 1996. The increase in cash used in operations during 1997 was primarily due to the commencement of exploration operations in the Philippines.
Working capital decreased by approximately $391,000 at December 31, compared to December 31, 1996. The decrease resulted primarily from Philippine exploration operations, $298,000, and increased general and administrative expenses.
Management believes that the Company's working capital, augmented by the Minimum Annual Distribution, is adequate to support operations at the current level for several years, barring unforeseen events. The Company anticipates that its Philippine subsidiary will continue exploration and development activities in the Philippines in 1998. The Board of Directors has authorized the funding of the next phase of the SAR 1-5 claim exploration, to be completed in March 1999. During 1998, the Company has budgeted approximately $203,000 to support GCPI in its search for gold and copper mining opportunities in the Philippines. If opportunities to economically expand the Philippine operations are available and the Company elects to pursue them, additional working capital may also be required. There is no assurance that the Company will be able to obtain such additional capital, if required, or on terms that would be acceptable. Furthermore, if such operations are commenced, it is unlikely they would generate positive cash flow and/or profit for several years.
Results of Operations
The Company reported a net loss of $293,000 for the year ended December 31, 1997 as compared to a net income of approximately $144,000 for 1996 and a net income of approximately $2,000 for 1995.
The change to net loss in 1997 compared to net income in 1996 was due to expenditure of approximately $134,000 for Philippine operations and higher general and administrative costs of approximately $82,000. The general and administrative costs were higher primarily due to the hiring of a geological consultant ($23,000), increased liability insurance expense ($14,500), and increased public relations expense ($45,000).
The increase in net income in 1996 compared to 1995 was due to a gain of $268,000 from the sale of certain water rights to the City of Cripple Creek, higher investment income of approximately $25,000 and other operating revenue of approximately $28,000 from a consulting engagement in the Philippines. The additional revenue generated was partially offset by increased general and administrative costs incurred in connection with the Company's Philippine initiative of $91,000, hiring additional personnel in the Colorado Springs office and providing salary increases for the Company's executive officers totaling approximately $10,000.
The Company accounts for its investment in the Joint Venture on the equity method. Joint Venture distributions in excess of the investment carrying value are recorded as revenue, as the Company is not required to finance the Joint Venture's operating losses or capital expenditures. Correspondingly, the Company has not recorded its share of Joint Venture income or losses incurred subsequent to the reduction of its investment balance to zero in 1992. The Company will not record its share of equity income until the cumulative amount of previously unrecorded Joint Venture losses has been recouped. As of December 31, 1997, the Company's accumulated unrecorded losses from the Joint Venture are $6,169,658.
The Joint Venture recorded net loss of $10.8 million for the year ended December 31, 1997 compared to net income of $1.93 million for the year ended December 31, 1996. The Joint Venture incurred net loss of $3,654,000 in 1995.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this item are included herein beginning on page 21.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
*Information regarding items 10 through 13 has been omitted from this report because the Company intends to file, on or before April 30, 1998, a definitive Proxy Statement pursuant to Regulation 14A, containing the information required by those items, which information is incorporated herein by reference.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
Financial Statements Pag e ____________________ ____
Financial Statements of the Registrant:
Independent Auditors' Report, KPMG Peat Marwick LLP 21
Consolidated Balance Sheets, December 31, 1997 and 1996 22
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 23
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 24
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 25
Notes to Consolidated Financial Statements
Exhibit Index _____________ 3.1. Articles of Incorporation and By-laws (incorporated by reference to Exhibit 2 to the Company's Form 10 dated May 19, 1983).
10.1. Amended and Restated Joint Venture Agreement between Pikes Peak Mining Company and the Company dated as of January 1, 1991 (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated June 17, 1991).
10.2. Directors' Stock Option Plan (incorporated by reference to Appendix B of the Company's Definitive Proxy Statement dated April 13, 1992).*
10.3 1992 Stock Option Plan (incorporated by reference to Appendix D of the Company's Definitive Proxy Statement dated April 13, 1992).*
10.4 1997 Officer's & Director's Stock Option Plan (incorporated by reference to Appendix A of the Company's Definitive Proxy Statement dated April 30, 1997).*
23.1 Consent of KPMG Peat Marwick LLP, page 32.
* Constitutes a "management contract or compensatory plan or arrangement" required to be filed as an exhibit to this Form 10-K pursuant to Item 14 (c).
Reports on Form 8-K ___________________ No reports on Form 8-K were filed during the fourth quarter of 1997.
SIGNATURES
Pursuant to the requirements of Section 12 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, thereto duly authorized.
GOLDEN CYCLE GOLD CORPORATION
By: /s/ Birl W. Worley Jr.
_________________________________ Birl W. Worley Jr., Director, President, Chief Executive Officer
By: /s/ R. Herbert Hampton _________________________________ R. Herbert Hampton Chief Accounting and Financial Officer
Date: March 27, 1998
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 in the capacities and on the dates indicated:
/s/ Orville E. Anderson ___________________________________ March 27, 1998 Orville E. Anderson, Director Date
/s/ Melvin L. Cooper ___________________________________ March 27, 1998 Melvin L. Cooper, Director Date
/s/ Rex H. Hampton ___________________________________ March 27, 1998 Rex H. Hampton, Director Date
/s/ Joseph M. Keane ___________________________________ March 27, 1998 Joseph M. Keane, Director Date
/s/ Frank M. Orrell ___________________________________ March 27, 1998 Frank M. Orrell, Director Date
/s/ Alan P. Ploesser ___________________________________ March 27, 1998 Alan P. Ploesser, Director Date
Independent Auditors' Report
The Shareholders and Board of Directors Golden Cycle Gold Corporation:
We have audited the accompanying consolidated balance sheets of Golden Cycle Gold Corporation and subsidiary as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. 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 Golden Cycle Gold Corporation and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado March 18, 1998
GOLDEN CYCLE GOLD CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995 ________________________________________________________________________
(1) Summary of Significant Accounting Policies Golden Cycle Gold Corporation (the Company) acquires and develops mining properties. The Company's principal investment consists of its joint venture participation in the Cripple Creek and Victor Gold Mining Company (the Joint Venture), a precious metals mining company in the Cripple Creek Mining District of Teller County, Colorado. In addition, during 1997, the Company established Golden Cycle Philippines, Inc. (GCPI), a wholly-owned subsidiary of the Company, in the Republic of the Philippines in order to participate in potential mining opportunities.
Use of Estimates
Management makes various estimates and assumptions in determining the reported amounts of assets, liabilities, revenues and expenses for each period presented, and in the disclosure of commitments and contingencies. Changes in these estimates and assumptions will occur based on the passage of time and the occurrence of future events.
Principals of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated on consolidation.
Short-Term Investments
Short-term investments consist of U.S. Treasury Bills and certificates of deposit. Debt securities that the Company has both the intent and ability to hold to maturity are carried at amortized cost.
Investment in Mining Joint Venture
The Company accounts for its investment in the Joint Venture on the equity method. In prior years, the Company's share of Joint Venture losses exceeded the remaining carrying value of the investment and, accordingly, the investment was reduced to zero. Joint Venture distributions in excess of the investment carrying value are recorded as income. The Company does not record its share of Joint Venture losses incurred subsequent to the reduction of its investment balance to zero, as the Company has no obligation to fund operating losses. To the extent the Joint Venture is profitable, the Company does not record its share of equity income until the cumulative amount of previously unrecorded Joint Venture losses have been recouped.
GOLDEN CYCLE GOLD CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
Mineral Exploration and Development Costs
Mineral exploration costs are expensed as incurred. Development costs associated with mineralized properties are capitalized until commercial production commences. Depletion of development costs is provided on a units of production basis over the estimated proven and probable recoverable reserves.
Periodically, the Company assesses the carrying value of its development costs, property and equipment and when necessary, writes down the asset to net recoverable value.
Property and Equipment
Office furniture, fixtures and equipment are stated at cost and are depreciated using the straight-line method over estimated useful lives ranging from three to ten years.
Foreign Currency Translation
The Company uses the method of foreign currency translation whereby the assets and liabilities of its self-sustaining Philippines operations are translated into their United States dollar equivalent at rates of exchange prevailing at each balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during the periods in which such items are recognized in operations. Transaction amounts denominated in foreign currencies are translated into their United States dollar equivalents at exchange rates prevailing at the transaction dates.
Gains and losses arising from translation of the consolidated financial statements of Philippine operations are included in the foreign currency translation adjustment account in shareholders' equity. Amounts in this account are recognized in the consolidated statement of operations when the related net foreign investment is reduced.
Stock Options
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost is recognized for stock options granted with exercise prices equal to the fair market value.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using enacted tax rates expected to apply in the years in which such temporary differences are expected to be recovered or settled. Changes in tax rates are recognized in the period of the enactment date.
GOLDEN CYCLE GOLD CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
Earnings (Loss) Per Share
In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128), which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 is effective for periods ending after December 15, 1997 and requires retroactive restatement of earnings per share in prior periods. The statement replaces the calculation of "primary earnings per share" with "basic earnings per share" and redefines the "dilutive earnings per share" computation. Adoption of SFAS 128 did not effect the reported income (loss) per common share for the years ended December 31, 1997, 1996 and 1995.
(2) Short-Term Investments
The amortized cost of debt securities, which approximates fair value, at December 31, 1997 and 1996 was $1,221,119 and $1,926,261, respectively. All debt securities held at December 31, 1997 mature within one year. The Company held certificates of deposit of $656,161 and $205,659 at December 31, 1997 and 1996, respectively.
(3) Notes Receivable and Assets Held for Sale
The Company owns certain water rights in Fremont County, Colorado, which it is actively attempting to sell. A sale of a portion of the water rights to the city of Cripple Creek for $312,500 closed on December 31, 1996. The Company received cash of $70,000, $20,000 of which was received in 1994 and a promissory note in the amount of $242,500. The promissory note is payable in equal payments of $28,331 annually, including interest commencing on December 19, 1997 until December 19, 2001, at which time the entire principal balance, together with accrued interest is due and payable.
(4) Investment in Mining Joint Venture
The Company owns an interest in the Joint Venture with Pikes Peak Mining Company (PPMC). PPMC manages the Joint Venture. The Joint Venture conducts exploration, development, and mining of certain properties in the Cripple Creek Mining District, Teller County, Colorado. The Joint Venture owns or controls surface and/or mineral rights in the Cripple Creek Mining District, certain portions of which are being actively explored and developed.
The Joint Venture Agreement, as amended, generally requires PPMC to finance operations and capital expenditures of the Joint Venture. The Joint Venture is currently operating in an Initial Phase, as defined, that will terminate when Initial Loans, as defined, have been repaid and when $58 million of Net Proceeds, as defined, has been distributed 80% to PPMC and 20% to the Company. As of December 31, 1996, Initial Loans were approximately $150 million and no Net Proceeds have been distributed. Initial Loans must be repaid prior to Net Proceeds being distributed to the venturers. After the Initial Phase,
GOLDEN CYCLE GOLD CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(4) Investment in Mining Joint Venture (continued)
the Joint Venture will distribute metal in kind, 67% to PPMC and 33% to the Company. The Agreement also provides for the Company to receive a minimum annual distribution of $250,000 during the Initial Phase. Beginning in 1994, such minimum annual distributions are recoupable against the Company's future share of Net Proceeds, if any.
The Company's share of Joint Venture losses which have not been recorded in its consolidated financial statements is $2,168,800 in 1997. The Company's share of the Joint Venture income (losses), which have not been recorded in its consolidated financial statements, is $386,000 (net income) and $731,000 (net loss) in 1996 and 1995, respectively. As of December 31, 1997, the Company's accumulated unrecorded losses from the Joint Venture are $6,196,658.
The condensed balance sheets of the Joint Venture as of December 31, 1997 and 1996 are summarized as follows:
The condensed statements of operations of the Joint Venture for each of the three years ended December 31, 1997 are summarized as follows:
GOLDEN CYCLE GOLD CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statement, Continued ________________________________________________________________________
(5) Income Taxes
The tax effects of temporary differences that give ries to significant portions of the deferred tax assets at December 31, 1997 and 1996 are presented below:
At December 31, 1997, the Company has net operating loss carryforwards for income tax purposes of approximately $1,176,000 which expire beginning in 1998 through 2016.
The Company has not recorded an income tax benefit in 1997, 1996 or 1995 as it does not believe it is more likely than not that the benefit of the deferred tax assets will be realized in the future.
(6) Common Stock Options
Prior to 1992, certain officers, directors and employees were granted options to acquire 6,000 shares of common stock, at the discretion of the Company's Board of Directors. The exercise price of the options was based upon the market value of the common stock on the date of the grant. Such options expire ten years from the date of the grant.
GOLDEN CYCLE GOLD CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statement, Continued ________________________________________________________________________
(6) Common Stock Options (continued)
During 1992, the Company's Board of Directors adopted a Directors' Stock Option Plan (the Directors' Plan) and a 1992 Stock Option Plan (the 1992 Plan). All options available under the Directors' Plan were granted prior to December 31, 1994. The 1992 Plan provides for the grant of options on a discretionary basis to certain employees and consultants. Under each plan, the exercise price cannot be less than the fair market value of the common stock on the date of the grant. The expiration of these 170,000 options is ten years from the date of the grant.
Changes in stock options for each of the years in the three-year period ended December 31, 1997 are as follows:
=======
The weighted average remaining term of options outstanding was 5.7 and 5 years at December 31, 1997 and 1996, respectively.
No options were granted during 1997 and 1996. Accordingly, no disclosures regarding compensation cost for the Company's stock based compensation plans in accordance with the provisions of Statement of Financial Accounting Standards No. 123 have been presented.
Consent of Independent Auditors
The Board of Directors Golden Cycle Gold Corporation
We consent to incorporation by reference in the registration statements (Nos. 33-47877 and 333 12245) on Form S-3 and (Nos. 33-62952 and 33-26975 on Form S-8 of Golden Cycle Gold Corporation of our report dated March 18, 1998, relating to the consolidated balance sheets of Golden Cycle Gold Corporation and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, which report appears in the December 31, 1997 annual report on Form 10-K of Golden Cycle Gold Corporation.
KPMG Peat Marwick LLP
Denver, Colorado March 26, 1997