+0893270931 $T-175$ $P.001$ $F - 698$ ET HALLMARK

FACSIMILE

TO:	Australian Stock Exchange Company Announcements	FAX NO.	1300 300 021
FROM:	Chris Bath	DATE:	11 October 2002
SUBJECT:	Menzies Creditors Support Proposed Deed of Company Arrangement	PAGES:	68 (including cover sheet)

MESSAGE

ABN 12 000 817 023 Level 3, 30 Richardson St West Perth Western Australia 6005 PO Box 1176 West Perth WA 6872 Telephone: +61 8 9327 0900 Facsimile: +61 8 9327 0901

MENZIES CREDITORS SUPPORT PROPOSED DEED OF COMPANY ARRANGEMENT

14 April 2003

Further to the Company's announcement dated 4 April 2003, Hallmark now advises that the creditors of Menzies Gold Limited (In Administration) (Menzies) voted in favour of the proposed Deed of Company Arrangement (DOCA) at a creditors meeting held on 11 April 2003.

The creditors of wholly owned subsidiary King Solomon Mines Limited (In Administration) voted to place it into liquidation.

A copy of the Administrator's Report Concerning the Affairs of the Company for both Menzies and KSM is attached to this announcement.

It is now proposed to attend to all the matters necessary to satisfy the conditions precedents of the DOCA which will include calling a shareholder's meeting of Menzies to seek approval of a number of matters.

A shareholder's meeting of Hallmark will also be called to seek approval for a return of capital by the in specie distribution of shares in Menzies post DOCA.

Yours faithfully HALLMARK CONSOLIDATED LIMITED

LØHN W BARR Chairman

Page 1

$\hat{\mathbf{L}}{\text{c}}$ , $\hat{\mathbf{L}}{\text{c}}$ , and

FERRIER HODGSON

CHARTERED ACCOUNTANTS

KING SOLOMON MINES LIMITED ACN 094 006 069 (Administrators Appointed)

ADMINISTRATORS' REPORT CONCERNING THE AFFAIRS OF THE COMPANY

PURSUANT TO SECTION 439A OF THE CORPORATIONS ACT

2 APRIL 2003

FERRIER HODGSON (WA) LEVEL 14 26 ST GEORGE'S TERRACE PERTH WA 6000 AUSTRALIA
TELEPHONE 089221 2460 PACSIMILE 08 9221 2282 EMAIL: [email protected] GPÓ BÓX W2037 PÉRTH WA 6001 DX 60208 VICTORIA AVENUE

FARTNERS GARRY TREVOR MARTIN JONES ANDREW SAKER CONSULTANT ALDEN HALSE DIRECTORS PHILIP RUNDELL ROBERT JACOBS CROUP OFFICES ADEADE NEWCASTLE ARISBANE PERTH DANDENONG SYDNEY MELBOURNE WOLLONGONG INTERNATIONAL OFFICES AUCKLAND JAKARTA
BANGKOK KUALA LUMPUR HONG KONG SINGAPORE INTERNATIONAL AFFILIATES UNITED KINGDOM

$\overline{\mathcal{L}}$

$\sim$ $\sigma$

FERRIER HODGSON

Page No.

	GLOSSARY OF TERMS
2	EXECUTIVE SUMMARY
3	INTRODUCTION
4	BACKGROUND AND HISTORY OF THE COMPANY
5	STATEMENT OF POSITION
6	RECEIPTS AND PAYMENTS
7	INVESTIGATIONS AND POTENTIAL VOIDABLE TRANSACTIONS RECOVERABLE BY A LIQUIDATOR
R	DEED OF COMPANY ARRANGEMENT PROPOSAL FOR MENZIES 26
9	OPTIONS AVAILABLE TO CREDITORS
10	ADMINISTRATORS' RECOMMENDED COURSE OF ACTION

Ŷ.

$\bullet$

FERRIER HODGSON

$\mathbf{1}$ GLOSSARY OF TERMS

$1.1$ Throughout this report I have made the following abbreviations:
$(a)$ "KSM" – King Solomon Mines Ltd.
(b) "Menzies" – Menzies Gold Ltd;
$\left( c\right)$ "Gullewa" – Gullewa Ltd
$(d)$ "Eaglemist" - Eaglemist Pty Ltd
$(e)$ "SMM" - South Murchison Mines Pty Ltd;
$\Omega$ "ATO" - Australian Taxation Office;
"DOIR" Department of Industry and Resources; $\circled{a}$
"DOCA" Deed of Company Arrangement; $(h)$
$(i)$ "the Court" – The Supreme Court of Western Australia; and
$(j)$ "the Act" - the Corporations Act.

2. EXECUTIVE SUMMARY

$2.1$ KSM was incorporated in August 2000 as King Solomon Mines Pty Ltd and subsequently changed its name to KSM on 10 May 2001.
$2.2$ KSM operated a gold mine approximately 360km north, north-east of Perth, Western Australia. KSM's gold treatment plant has a capacity of 300,000 tonnes per annum.
$2.3$ KSM purchased three tenements, plant and equipment and mining information from Gullewa in November 2000. The remaining Gullewa tenements were purchased in December 2001. The total purchase price paid was \$1 million (part of this amount was structured as a royalty payment) plus a second royalty of 1% of gross revenue.
$2.4$ In March 2002, the shareholders of Menzies resolved to purchase all of the shares of KSM for an amount of approximately \$3.28 million. This amount was to be paid by cash/deferred shares (\$1.8 million), acquisition costs of \$250,000 and the issue of 61.664 million shares in Menzies at 2 cents per share (\$1.23 million). Menzies also assumed liabilities of approximately \$4.98 million. I am reviewing the purchase of KSM by Menzies as part of my investigations in the Menzies administration.

$\bar{\mathbf{z}}$

$\bar{\Sigma}$

$\overline{4}$

FERRIER HODGSON
Just prior to my appointment, the company ceased operations for approximately two weeks due to problems encountered in its mill. A large quantity of high-grade copper ore was accidentally processed through the plant which $2.5$ making the plant inoperable.
The financial position of KSM as at 30 January 2003 can be summarised as follows: $2.6$

	ERV
Assets Subject to Floating Charge
Cash on Hand	355
Cash at Bank	663
Inventory	68,445
Less: Retention of Title Claims	(68, 445)
Diesel Fuel Rebate	61,030
GST Refund	22,648
GST – AGR	59,961
Trade Debtors	3,218
Metals Account (AGR)	77,384
Gold in Circuit	263,814
Gold on Carbon - Como Engineers (Net)	39,664
Ore Stockpiles (net)	205,157
Gold Clean Up	100,000
Direct Shipping Ore Less: Costs to Process Ore on ROM & GIC	40,000
Less: Royalty on GIC/Carbon/Ore Stockpiles	(300, 050)
Total Floating Charge Assets	(19, 376)
Shut Down Costs	554,465
Administrators' Fees and Costs (estimate)	(66, 322)
Funds Available for Employee Entitlements	(100,000) 388,143
Less: Employse Entitlements
Annual Leave
Superannuation	(41, 706)
Notice	(85, 613)
Total Employee Entitlements	(36, 581)
Floating Charge Assets Available to Secured Creditors	(163, 900)
	224,243
Assets Subject to Fixed Charge
Tenements	Nil
Plant & Equipment/MV/Office Equipment	813,871
Total Assets Subject to Fixed Charge	813,871
Total Assets Available to Secured Creditors	1,038,114
Amount Due to 1st Ranking Secured Creditor
Gullewa Ltd (Royalty - January 2003)	(18,063)
Amount Available to 2nd Ranking Secured Creditor	1,020,051
Eaglemist Pty Ltd (estimate)	(1,060,000)
Amount Available to 3rd Ranking Secured Creditor	Nil
Menzies Gold Ltd	(800, 000)
Shortfall to 2 ^nd and 3 ^rd Ranking Secured Creditor	(839, 949)
Amount available to Unsecured Creditors	Nil

	FRV
Unsecured Creditors' Claim
Shortfall to Eaglemist Pty Ltd	(39, 949)
Shortfall to Menzies Gold Ltd	(800,000)
Trade Creditors	(3,666,599)
Shortfall to Director	(21, 763)
Shortfall on Leases	(215, 156)
Payroll Tax	(4,518)
DOIR Royalty	(71,909)
Menzies Gold Ltd	(549, 779)
Minepro	(1,318,723)
RG Anderson	(413,000)
Outstanding Rates	(31,000)
DOIR Environmental Shortfall	(223,000)
Total Unsecured Creditors' Claim	(7, 355, 396)
Net Surplus/(Deficiency)	(7,355,396)
Estimated Return to Unsecured Creditors*	NШ

2.7 Based on the above summary, unless the assets are realised for an amount in excess of approximately \$2.05 million to pay out secured and priority creditors, or a DOCA is proposed which contemplates a return to creditors, there is unlikely to be a return to unsecured creditors.
$2,8$ However, a DOCA proposal has been put forward in the Menzies administration which may result in the creditors of KSM receiving a dividend distribution of 5 cents in the dollar if the DOCA is accepted by the creditors of Menzies. As part of the DOCA, the tenements and plant and equipment in KSM will be transferred to Menzies in satisfaction of its secured and unsecured claims in KSM and in return, KSM will release Menzies from all claims it has against it. Eaglemist will also release its claim against KSM.
2,9 Any return to creditors will also be subject to the recovery of any claims specifically available to a Liquidator of KSM. In this regard, I am required by the Act to enquire into the affairs of the company and to report to creditors on likely recoveries in a liquidation scenario. I believe there are potential claims against the directors and the holding company in relation to the insolvent trading provisions of the Act and possible breaches of certain other aspects of the Act. These matters require further investigation and legal opinion.
2.10 A meeting of the creditors of KSM is to be held on 11 April 2003 for the creditors to decide between:
$\left( a\right)$ Accepting a DOCA; or
Ending the administration and returning control of KSM to its directors; or $(b)$
$\left( \circ \right)$ Placing the company into liquidation.

6

2.11 The creditors may also resolve to adjourn this meeting for a period of up to sixty (60) days.

FERRIER HODGSON

It is my opinion that it is in the best interest of creditors to resolve to place the $2.12$ company into liquidation.

$\overline{\mathbf{3}}$ INTRODUCTION

General

$3.1$ On 30 January 2003, Garry Trevor and I were appointed Joint and Several Administrators of KSM by resolution of the directors of the company pursuant to Section 436A of the Act. Prior to our appointment, Garry Trevor and I had no involvement with the company or its directors or officers.
$3.2$ The first meeting of creditors was held on 6 February 2003 at the Kings Perth Hotel, 517 Hay Street, Perth, Western Australia. At that meeting, a committee of creditors was formed consisting of the following:

Creditor	Represented by
Tronte Holdings Pty Ltd (Subject to DOCA)	Tony Douglas-Brown
BP Australia	Mr F Egglezos
ADD Contracting	Kurt Mauritz
Allens Services	Greg Price
Cercare & Associates	Simon Coxhell
T & T Freeman	Tom Freeman
Comdek Satellite Systems	Richard Wolanski
Menzies Gold Limited (Administration)	Mr Paul Ingram
Hallmark Consolidated Limited	Mr John Barr

$3.3$ The committee met subsequent to the creditors meeting and resolved that the Administrators apply to the Court to extend the convening period established by section 439A(5)(b).
On 18 February 2003, I made an application to the Court for an extension of the $3.4$ convening period for a period up to 45 days. The application was granted and the convening period was extended to 7 April 2003.
In accordance with Section 439A of the Act the second meeting of creditors will be $3.5$ held on 11 April 2003. With regard to the second meeting of creditors I am required by the Act to provide the following:
$(a)$ a report on the company's business, property, affairs and financial circumstances; and
$(b)$ my opinion as to the course of action that is in the best interests of all creditors.
Notwithstanding the extension of the convening period for an extra 45 days, the 3.6 administration process provides a relatively short period of time within which the Administrator is able to complete investigations in respect of potential recoveries as set out in section 7 of this report. At this stage, it is difficult to definitively identify the likely causes of action and/or recoveries that may be available. Such conclusions would usually only be made after more detailed investigations had been undertaken. which may include:
the public examination, under oath, of relevant officers of the company and the $\left( a\right)$ entities with which it has had commercial involvement; and
detailed review of documentation produced by relevant persons upon enquiry $(b)$ by a Liquidator/Administrator or following examinations referred to in (a) above.
3.7 Accordingly, whilst I have conducted the necessary enquiries required of an Administrator, the conclusions drawn herein with respect to my investigation into the company's affairs should be viewed as preliminary and they will be confirmed, or otherwise, by way of other sources of enquiry including those noted above.

The Administration Process

$3.8$ The voluntary administration process is governed by Part 5.3A of the Act. The object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
maximises the chances of the company, or as much as possible of its business, $(a)$ continuing in existence; or
$(b)$ if it is not possible for the company or its business to continue in existence results in a better return for the company's creditors and members that would result from an immediate winding up of the company. $\overline{a}$
3.9 Part 5.3A also sets out a time frame (usually 28 days) within which the voluntary administration must be undertaken unless varied by the Court. As stated above, on 18 February 2003, I made an application to the Court for an extension of the convening period for a period up to 45 days. The application was granted and the convening period was extended to 7 April 2003.
3.10 The extension was required because of the size and complexities of the administration of KSM's activities and the necessity to focus on the retention of KSM's business. At the time of making the application, the work undertaken had been primarily in preserving and controlling the business which had not allowed sufficient time to:
$\left( \mathbf{z}\right)$ establish an accurate financial position of KSM;
(b) obtain commissioned valuations of the mining asset and plant and equipment to establish realisable values and identify idle assets:

FERRIER HODGSON

$\mathbf{c}$ call for expressions of interest in the business or assets of the company; and
$(d)$ commence investigations into the company's affairs and the conduct of its directors for the purpose of meeting the reporting requirements under the Act.

4 BACKGROUND AND HISTORY OF THE COMPANY

Statutory Information

The company was incorporated in Western Australia on 2 August 2000 as King $4.1$ Solomon Mines Pty Ltd and subsequently changed its name to King Solomon Mines Ltd on 10 May 2001. The current officers of the company are as follows:

Name	Address	Position	Commenced	Status
Robert Graham Anderson	15 Roberts Road	Director/Secretary	02.08.00	Continuing
	Kelmscott WA 6111
Steven Bradley Bremen	48 Richon Heights	Director	25.05.01	Continuing
	Wungong WA 6112
Paul Anthony Ingram	Unit 8, 20 Garden Street	Director	09.04.02	Continuing
	South Perth WA 6151

$4.2$ KSM's issued and paid up capital comprises of the following:

Share Class Title	Number of Shares Issued	Amount Paid	Amount Due and Payable
Ordinary	36,000,000	1,800,000	NI
Subscriber			NI
Subscriber - Shares			NЦ

KSM's shareholder as at the date of the administration was Menzies who acquired $4.3$ 100% of the share capital of KSM on 20 March 2002.
Menzies is a public listed company on the Australian Stock Exchange. Garry Trevor 4.4 and I were appointed Joint and Several Administrators of Menzies on 30 January 2003 by resolution of the directors of the company pursuant to Section 436A of the Act.
The charges registered against the assets of KSM according to the Australian $4.5$ Securities and Investments Commission records are as follows:

Chargee	ASIC Charge No.	Date Registered	Charge Type
Menzies Gold Ltd	837975	21 December 2001	Fixed & Floating
Gullewa Ltd	907728	4 December 2002	Fixed & Floating
Eaglemist Pty Ltd	911695	23 December 2002	Fixed & Floating

Pursuant to a Deed of Priority, Gullewa has first ranking security out of the KSM 4.6 assets, Eaglemist has second ranking security and Menzies' security ranks third.

Nature of Business

$\mathbf{r}^{\prime}$

KSM negotiated an agreement with Gullewa to purchase 100% of the King Solomon 4.7 Mines Project ("the Project"), including tenements, plant, buildings and infrastructure. The Project is an underground and open pit development with plant capacity of 300,000 tonne per annum. The Project is located in Gullewa in the South Murchison Province, 74km north-east of Perth, Western Australia. KSM holds a number of tenements, many of which have not yet been either explored or developed.
KSM paid Gullewa \$20,000 in September 2000 for the option to purchase the plant $4.8$ and equipment, mining information and three tenements for \$300,000 plus a quarterly royalty of 1% of the gross revenue derived from the tenernents. KSM exercised the option in November 2000.
4.9 Pursuant to a Second Sale Agreement, KSM purchased the remaining Gullewa tenements for the following consideration:
$(a)$ cash consideration of \$117,000;
$(b)$ a first royalty of \$583,000; and
$(c)$ a second royalty of 1% of the gross revenue.
The first royalty was to be calculated on a quarterly basis commencing from the 4.10 quarter in which gross revenue is first received and payable within 30 days of the end of each quarter.
The second royalty was to be 1% of gross revenue however if the first royalty was not 4.11 paid in full by 31 December 2002, the second royalty would increase to 2.5% with effect from 1 January 2003.
In addition, if the first royalty was not paid in full by 30 June 2003 then Gullewa had 4.12 the right to buy-back one of KSM's mining tenements known as 'Deflector' for \$25,000.
KSM failed to make the first and second royalty payments totalling approximately 4.13 \$260,000 for the September 2002 quarter by 30 October 2002. As a consequence, a Deed of Extension, Variation and Guarantee was entered into on 28 November 2002. The Deed provided for:
An extension of time to 20 December 2002 to pay the outstanding royalties; $(a)$
$(b)$ If the royalties were not paid by 20 December 2002 then Gullewa had the right to buy-back the Deflector lease for \$25,000;
$\rm(c)$ In consideration for the extension, KSM granted Gullewa a second ranking fixed and floating charge over its assets which was to have priority to the Menzies charge; and

$\mathbf{d}$ Menzies gave a guarantee and indemnity in consideration for Gullewa entering into the Deed.
$4.14$ KSM paid out the first royalty in full in December 2002 using the proceeds from the sale of Deflector to Eaglemist. Deflector was sold for \$629,000 and KSM retained the right to mine the Deflector lease. I have reviewed the sale of Deflector to Eaglemist in light of the uncommercial transaction provisions of the Act. I have determined that the transaction was not uncommercial and have legal advice to support this conclusion. This matter is discussed further at section 7 of this report.
$4.15$ At the date of my appointment, KSM employed up to 22 employees and utilised the services of a number of regular sub-contractors. The employees' services were terminated on 5 February 2003.

Events Leading to the Appointment of the Administrators

4.16 I am advised that the appointment of the Administrators was as a consequence of a cash flow shortage caused by the mill ceasing operations for a two week period. From my investigations, it appears that the company's cash flow problems existed prior to this event.
The directors explain the reason for the company's current financial predicament as: 4.17

"A recent two week stoppage of the Gold Mill meant that the companies expected cash flow was interrupted and it would be doubtful we could extract the ore from Deflector and deliver it to the smelters overseas. Particularly if the mill failed again for some reason in the next few months."

"A 3 week total loss of gold production caused by copper potsoning of the Mill created an unacceptable cash flow shortage whereby preventing us completing the 21/2 month mining and milling program scheduled from Deflector to provide sufficient free milling and direct shipping ore which would have generated sufficient funds over that period to cover outstanding creditors".

"In mid January 2003, the inadvertent mixing of high grade copper ore on the ROM and subsequent processing through the plant, caused severe blockage of the CIP circuit. The resulting loss of cash flow (2-3 weeks) of over 1,000 oz $\tilde{A}U$ , caused the failure of the company. The schedule for mining at Deflector relied on gold produced through the mill to fund the successful extraction of Direct Shipping Ore (DSO) which would have secured the company's future."

Historical Financial Position

$4.18$ The balance sheets for KSM as at 30 June 2001 (audited), 30 June 2002 (unaudited) and monthly management accounts for the period July 2002 to January 2003 is attached as Annexure A.

I note that the working capital position has deteriorated significantly from 30 June 419 2001.

Trading Performance - Pre-Appointment

Attached as Annexure B is a summary of the profit and loss statements for the period 4.20 ended 30 June 2001 (audited), year ended 30 June 2002 (unaudited) and monthly management accounts for the period July 2003 to the period ended 30 January 2003.
The company recorded trading losses for the 12 months ended 30 June 2001 and 30 $4.21$ June 2002 and for the seven month period ended 31 January 2003 of \$203,662, \$1,177,783 and \$1,549,098 respectively.
From my preliminary review of the company's records, it is my opinion that the 4.22 company's books and records have been maintained in accordance with Section 286 of the Act.

Trading Performance - Post-Appointment

Apart from processing the ore on the ROM at the date of my appointment, I have not 4.23 traded KSM. After the ore was processed, which took approximately one week, the mill was cleaned and then the mine was put on care and maintenance.

5 STATEMENT OF POSITION

I have detailed the statement of position as at 30 January 2003 which has been $5.1$ compiled by me from information collated since the date of my appointment.

		Estimated
Assets Subject to Floating Charge	Ref.	Realisable Value
Cash on Hand	5.2
Cash at Bank	5,2	355 663
Inventory	5.3	68,445
Less: Retention of Title Claims	5.3
Diesel Fuel Robate	5,4	(68, 445) 61,030
GST Refund	5.5	22,648
$OST - AGR$	5.6	59,961
Trade Debtors	5.7	3,218
Metals Account (AGR)	5.8	77,384
Gold in Circuit	5.9	263,814
Gold on Carbon - Como Engineers (Net)	5.10	39,664
Ore Stockpiles (net)	5.11	205,157
Gold Clean Up	5.12	100,000
Direct Shipping Ore	5 13	40,000
Less: Costs to Process Ore on ROM & GIC	514	(300,050)
Less: Royalty on GIC/Carbon/Ore Stockpiles	5.15	(19,376)
Total Floating Charge Assets		554,465
Shut Down Costs	5.16	(66, 322)
Administrators' Fees and Costs (estimate)	5.17	(100,000)

$\sim$ 100

$\overline{\mathbf{r}}$

FERRIER HODGSON

	Ref.	Estimated Realisable Value
Amount Available for Employee Entitlements		388,143
Less: Employee Entitlements
Annual Leave	5.18	(41, 706)
Superannuation		(85, 613)
Notice		(36, 581)
Total Employee Entitlements		(163,900)
Floating Charge Assets Available to Secured Creditors		224,243
Assets Subject to Fixed Charge
Tenements	5.22	Nil
Plant & Equipment/MV/Office Equipment	5.24	813,871
Total Assets Subject to Fixed Charge		813,871
Total Assets Available to Secured Creditors		1,038,114
Amount Due to 1st Ranking Secured Creditor
Gullewa Ltd (Royalty - January 2003)	5,25	(18,063)
Amount Available to 2nd Ranking Secured Creditor		1,020,051
Eaglemist Pty Ltd (estimate)	5,29	(1,060,000)
Amount Available to 3rd Ranking Secured Creditor		Nil
Menzies Gold Ltd	5.37	(800,000)
Shortfall to 2 ^nd and 3 ^rd Ranking Secured Creditors		(839, 949)
Amount Available to Unsecured Creditors		Nil
Unsecured Creditors' Claim
Shortfall to Eaglemist Pty Ltd	5.29	(39,949)
Shortfall to Menzies Gold Ltd	5.37	(800, 000)
Trade Creditors	5.38	(3,666,599)
Shortfall to Director	5.15	(21, 763)
Shortfall on Leases	5,39	(215, 156)
Payroll Tax	5.40	(4, 518)
DOIR Royalty	5.41	(71,909)
Menzies Gold Ltd	5.43	(549, 779)
Minepro	5.44	(1,318,723)
RG Anderson	5.45	(413,000)
Outstanding Rates	5.46	(31,000)
DOIR Environmental Shortfall (estimate)	5.47	(223,000)
Total Unsecured Creditors' Claim		(7,355,396)
Net Surplus/(Deficiency)		(7,355,396)
Estimated Return to Unsecured Creditors *Note		NIL

The above shortfall and estimated return to creditors is based on the recovery values for assets existing at the time of my appointment but without any realisations from any potential recoveries under the Act as set
out in Section 7 of this report.

Cash on Hand/Cash at Bank

à,

The petty cash on hand at the date of my appointment totalled \$355. In addition, the $5.2$ company had \$663 (net of bank charges) with BankWest, which has now been closed and the funds transferred to my trading account.

+0893270931

FERRIER HODGSON

Inventory

5.3 There was a minimal amount of consumable stock on hand at the date of my appointment which, according to the company's records, totalled \$68,445. This amount has been adjusted to take into account retention of title ("ROT") claims from various suppliers in respect of the stock on hand at my appointment. I have received valid ROT claims in respect of all of the consumable stock on hand and therefore the realisable value of the inventory is nil.

Diesel Fuel Rebate

I advise that an amount of \$61,030 was outstanding for the month of January 2003. $5.4$ This amount has now been received.

GST Refund/AGR

I have received payment of the sum of \$22,648 from the ATO in respect of the GST $5.5$ refund for the month of January 2003.
5.6 In addition, an amount of \$59,961 was received from AGR in respect of GST on gold sales for the month of January 2003. I am not required to remit this amount to the ATO. However, the ATO will rank as an unsecured creditor for the amount of GST that I received from AGR.

Trade Debtors

5.7 At the date of my appointment, the company's accounts recorded \$91,947 in trade debtors. Of this amount, I have estimated that approximately \$3,218 is likely to be recovered and the remaining \$88,729 will be written off as bad debts or offset against creditor claims.

Metals Account (AGR)

At the date of my appointment, the company sold 127 ounces of gold at an average $5,8$ price of \$609.32 (net, after refining fees) per ounce and an amount of \$77,384 was received on 30 January 2003.

Gold in Circuit

5.9 Gold in circuit is estimated at 490 ounces. After taking into account recovery and refining costs and assuming a spot price of \$594 per ounce as at 30 January 2003, gold in circuit is estimated to be valued at \$263,814.

+0893270931

FERRIER HODGSON

Gold on Carbon

5.10 During January 2003, KSM engaged Como Engineers Pty Ltd ("Como") to treat the carbon in the processing plant and recover any gold. 98.94 ounces of gold was recovered and sold at a price of \$597 per ounce on 14 February 2003. I received the amount of \$39,664 on 20 February 2003, which is \$59,067 less \$19,403 for processing costs incurred by Como.

Ore Stockpile

The ore stockpile on hand at the date of my appointment was approximately 4,373 5.11 tonnes. This converts to approximately 337 ounces after taking into account recovery and refinement. At a spot price of \$608 per ounce. I have estimated the value of the ore stockpile at approximately \$205,157.

Gold Clean Up

During February 2003 I called for tenders from interested parties to clean up the mill 5.12 and surrounding area. The successful tenderer paid \$100,000 to conduct the gold clean up.

Direct Shipping Ore ("DSO")

5.13 The DSO on site at the date of my appointment has been realised for \$40,000 as part of the Menzies DOCA (discussed further below).

Costs to Process Ore

I have budgeted that I will incur costs of approximately \$300,050 to process the ore 5.14 stockpile and the gold in circuit from the date of my appointment.

Royalty

The estimated royalties payable to DOIR and Gullewa on the gold in circuit, gold on 5.15 carbon and the ore stockpile on hand at the date of my appointment total \$19,376.

Shut Down Costs

I advise that I have budgeted that I will incur costs of approximately \$66,322 to shut 5.16 down the plant and place the mine on care and maintenance. Please note that this cost is estimated to the end of February 2003. Any ongoing holding costs will be recovered from Eaglemist, now SMM, pursuant to the DOCA in Menzies (discussed further below).

Ą.

Administrators' Fees and Costs

I advise that I have budgeted that I will incur costs of approximately \$100,000 in fees 5.17 and disbursements during the period 30 January 2003 to 11 April 2003. Please note that pursuant to Section 443E of the Act, as Administrator, I have a right of indemnity out of the floating charge assets of the company in respect of any trading liabilities and my fees and costs. Pursuant to Section 443F of the Act, this right of indemnity is secured by way of a lien over the company's floating charge assets.

FERRIER HODGSON

Employee Entitlements

5.18 The employee entitlements are summarised as follows:

Annual Leave	41.706
Superannuation	85,613
Notice
Total	i3.900

Pursuant to Section 561 of the Act, the floating charge assets are available to priority 5.19 creditors ahead of the secured creditors. Due to the floating charge assets as set out in the statement of position being more than the amount of employee entitlements outstanding, employees will be paid out in full. I anticipate that employees will be paid their entitlements by 30 April 2003.
$5.20$ I advise that some employees have worked out their notice period during the administration. Therefore, the notice amount has been reduced from \$36,581 to \$26,138.
5.21 Pursuant to the Act, the directors' entitlement to employee entitlements is limited to a maximum \$2,000 for wages/superannuation and \$1,500 for annual leave/long service leave. The balance of \$21,763 owing to director, Brad Bremen, ranks as an unsecured claim against KSM.

Tenements

I commissioned Ray Cary of Northwind Resources Pty Ltd to conduct a valuation of 5.22 the company's tenements. The valuation was based primarily on the basis of an analysis of prior transactions elsewhere involving assets comparable to the KSM tenements. The residual resources and the prospectivity of the tenements were also considered. In addition, Eaglemist has a first right of refusal in respect of the tenements (discussed below). Based on the valuation, the tenements are estimated to be valued at between zero and \$100,000.

$\gamma$

+0893270931

The tenements comprise the following (excludes E59/988 which is registered in the $5.23$ name of Gullewa but needs to be transferred to KSM):

Tenement
E59/877
E59/1124
L59/0035
L59/0049
L59/0050
M59/0049
M59/0068
M59/0132
M59/0294
M59/0335
M59/0336
M59/0356
M59/0391
M59/0392
M59/0394
M59/0507
M59/0522
M59/0530
M59/0531
P59/1640
P59/1641

Plant and Equipment/Motor Vehicles/Office Equipment

Beevis & Co Auctioneers valued the plant and equipment. On an auction basis the 5.24 plant and equipment is valued at \$813,871.

Gullewa Ltd

As set out above at 4.13, in consideration for the extension of time to pay the 5.25 September 2002 royalties, Gullewa took a fixed and floating charge over the assets of KSM dated 28 November 2002. The following amount is currently owed to Gullewa in respect of unpaid royalties:

December 2002 Royalty	14,617
January 2003 Royalty	3.446
Total ----

Gullewa had the ability to appoint a Receiver and Manager to the company within ten 5.26 business days of my appointment. Given the quantum of its debt, Gullewa chose not to appoint a Receiver and Manager.

$17$
$5.27$ Pursuant to Section 588FJ of the Act a charge is void as against the company's liquidator if the company is being wound up in insolvency and the charge was created within six months prior to the relation back day which in this case is 30 January 2003. Gullewa's charge is within the six month period however Section 588FJ(2) of the Act states that charge is still valid if it secures the amount of a liability under a guarantee or other obligation undertaken at or after that time on behalf of, or the benefit of, the company.
It is arguable that the charge is void however given the quantum of debt owed to $5.28$ Gullewa, I have not pursued this matter any further.

Eaglemist Pty Ltd

Eaglemist has a fixed and floating charge over the assets of KSM dated 20 December $5,29$ 2002. The charge was taken in respect of the sum of \$871,000 lent to KSM when Eaglemist purchased the Deflector tenement for \$629,000. The sum of \$871,000 was used by KSM to:
pay out the National Australia Bank Limited equipment loan (\$348,579) who $\left( \mathbf{z}\right)$ had a fixed and floating charge over the assets;
repayment of the Gullewa royalties of \$653,264 which was predominantly $(b)$ paid for from the sale proceeds of Deflector (\$629,000);
increase the deposits pledged with respect to the performance bonds as $\rm (c)$ required by DOIR (\$136,943); and
$(d)$ working capital requirements (\$361,214).
5.30 In accordance with Eaglemist's proof of debt, Eaglemist is owed approximately \$1,060,000. I have calculated the debt owing as follows:

Facility Agreement	871,000
December 2002 Royalty	1.969
January 2003 Royalty	6.438
January 2003 Royalty (Gullewa Ltd)	2.541
Interest and Other Costs	178,052
Total	51.060.000

Pursuant to the Facility Agreement between KSM and Eaglemist, KSM is required to 5.31 pay a royalty to Eaglemist for the amount of gold produced from the Deflector tenement which was sold to Eaglemist in December 2002.
$5.32$ In addition to the charge, Eaglemist also has a right of first refusal over the remaining Gullewa tenements.

$5.33$ As a secured creditor, Eaglemist had the ability to appoint a Receiver and Manager to the company within ten business days of my appointment. Eaglemist has agreed to not appoint a Receiver and Manager at this stage. I have however entered into a Deed with Eaglemist which allows it to appoint a Receiver and Manager at any time in the future should it decide to do so to protect its position.
Pursuant to Section 588FJ of the Act, a charge is void as against the company's $5.34$ liquidator if the company is being wound up in insolvency and the charge was created within six months prior to the relation back day, being 30 January 2003. Eaglemist's charge is within the six month period but Section 588FJ(2) of the Act states that charge is still valid if it secures an advance paid to the company, or at its direction, at or after that time and as consideration for the charge.
535 The charge appears valid as consideration was provided by way of a loan of \$871,000 from Eaglemist to KSM. As mentioned above, I have also determined that the sale of Deflector to KSM was not in breach of the uncommercial transaction provisions of the Act (see also Section 7 below).
There are insufficient funds available to pay Eaglemist's debt in full, therefore the 5.36 shortfall of \$28,526 will rank as an unsecured claim.

Menzies Gold Ltd

Menzies has a fixed and floating charge over the assets of KSM dated 21 December 5.37 2001 in respect of a loan for \$800,000. There are insufficient funds available to pay Menzies secured debt in full, therefore the shortfall of \$800,000 will rank as an unsecured claim.

Trade Creditors

At the date of my appointment, the company had unsecured creditors totalling 5.38 approximately \$3,673,419. This amount is subject to proofs of debt being lodged by all creditors and my adjudication of those claims.

This space has been left blank intentionally

+0893270931

T-175 P.021/024 F-698

Shortfall on Leases/Hire Purchases

The estimated shortfall on the lease and hire purchase contracts at the date of my 5.39 appointment is as follows:

Lessor	Equipment	Payout Figure	Auction Value	Equity/ Shortfall
				S
Challenge Bank	Toyota Landcruiser	27,980	19,000	(8,980)
Challenge Bank	Toyota Hilux	21.743	18,000	(3,745)
Challenge Bank	Toyota Landeruiser	17,185	12,000	(5,185)
Challenge Bank	Ford Truck & Hyster Forklift	20,204	11.000	(9, 204)
Esanda	Cat 966F Loader	124,324	50,000	(74,324)
Esanda	Transportable Buildings	28,090	22.000	(6,090)
Esanda	Backhoe & Agitator	35,730	12.000	(23, 730)
Ford Credit	Ford Fairlane	29,346	25,000	(4, 346)
Ricoh	Ricoh Photocopier	4,407	1,600	(2,807)
Westpac	Plough & Equipment	80,785	18,000	(62, 785)
Flexirent	Computers	17,160	3.200	(13,960)
Total		\$406,956	\$191,800	\$(215, 156)

Payroli Tax

At the date of my appointment, KSM had an outstanding liability to the State Revenue 5.40 Department for an amount of \$4,518 for payroll tax for the month of January 2003.

DOIR Royalty

5.41 DOIR is owed \$71,909 by KSM for unpaid royalties and is made up of the following:

.	.
--
December 2002	63,381
Jamuary 2003	528 . .
Total	909ء

5.42 Please note that the above royalties will be required to be paid in full to allow any sale of the tenements to proceed.

Menzies Gold Ltd

Menzies has an unsecured claim of \$549,779 in respect of funds advanced by it to $5,43$ KSM.

+0893270931

FERRIER HODGSON

Tronte Holdings Pty Ltd

5.44 An unsecured loan exists between Tronte Holdings Pty Ltd and KSM for an amount of \$1,318,723. Tronte Holdings Pty Ltd is subject to a deed of company arrangement and formerly traded as Minepro. The debt owed to Tronte Holdings Pty Ltd is not due and payable until two years after the third advance from Menzies which was made on 20 March 2002. Therefore, this debt is not due and payable until 20 March 2004. Despite the repayment date, given the insolvency of KSM, this amount will not be paid and therefore it will be deemed to be due and payable for dividend purposes in the liquidation of KSM.

Robert G Anderson

5.45 An unsecured loan exists between Mr Robert Anderson, a director of KSM, and KSM for an amount of \$413,000. The loan has been assigned to Mrs Angela Anderson and further assigned to Tronte Holdings Pty Ltd. The debt owed to Robert Anderson is not due and payable until two years after the third advance from Menzies which was made on 20 March 2002. Therefore, this debt is not due and payable until 20 March 2004. Despite the repayment date, given the insolvency of KSM, this amount will not be paid and therefore it will be deemed to be due and payable for dividend purposes in the liquidation of KSM.

Outstanding Rates

At the date of my appointment, there were outstanding shire rates on the tenements 5.46 totalling approximately \$31,000. The Shire of Yalgoo has lodged a caveat over the tenements in respect of its debt.

DOIR Environmental Shortfall

5.47 During February 2003, I arranged for an environmental appraisal to be conducted on the KSM tenements. Based on that report, the estimated environmental liability is as follows:

Rehabilitation Costs	ستنت 380,000
Management and Other Costs	72,000
Less: Performance Bonds	(229,000)
Estimated Shortfall	\$223,000

$\mathbb{R}^3$

+0893270931

FERRIER HODGSON

21
5.48 Eaglemist, as secured creditor, has consented to the Administrators having access to both the fixed and floating charge assets of the company subject to certain conditions. In addition, in return for the secured creditor not appointing a Receiver and Manager, any fees and costs associated with carrying out any statutory duties required to be performed by an Administrator but not by a Receiver and Manager and paid for out of KSM's assets will be reimbursed to the secured creditor as a first ranking priority out of any funds recovered that would not normally be available pursuant to the charge (ie. from insolvent trading claims). This is not expected to materially impact upon any return to creditors.
Further, the statement of position does not take into account any potential recoveries 5.49 in respect of voidable transactions, goodwill (if any) and realisation costs.

6 RECEIPTS AND PAYMENTS

$6.1$ I have attached as Annexure C, a summary of the receipts and payments of the administration from 30 January 2003 to 2 April 2003.

$\tau$ INVESTIGATIONS AND POTENTIAL VOIDABLE TRANSACTIONS RECOVERABLE BY A LIQUIDATOR

$7.1$ I have conducted preliminary investigations into the affairs of the company to enable me to prepare this report and to state an opinion on which option available is in the creditors' best interests. My investigations have been based on information provided to me by creditors, the company and its directors which has included:
$(a)$ KSM's books and records; and
$(b)$ discussions with the company's directors and employees.
Notwithstanding the extension of the convening period for an extra 45 days, the $7.2$ administration process provides a relatively short period of time within which the Administrator is able to complete his preliminary investigations. This means that it is difficult to definitively identify the likely causes of action and/or available recoveries. Such conclusions would usually only be made after more detailed investigations had been undertaken which would include:
the public examination, under oath, of relevant officers of the company and the $(a)$ entities with which it has had commercial involvement; and
detailed review of documentation produced by relevant persons upon enquiry $(b)$ by a Liquidator/Administrator or following examinations referred to in (a) above,
$7.3$ Accordingly, the conclusions drawn herein with respect to my investigation of the company's affairs should be viewed as preliminary and they will be confirmed, or otherwise, by way of other appropriate enquiry.

FERRIER HODGSON

In the course of my investigations, I have endeavoured to ascertain whether there are $7.4$ any transactions that appear to be voidable in respect of which money, property or other benefits might be recoverable by a liquidator under Part 5.7B of the Act. Part 5.7B of the Act deals with, amongst other things:
$(a)$ unfair preferences to creditors;
$(b)$ uncommercial transactions to creditors/third parties; and
insolvent trading claims both against a company's directors and its holding $(c)$ company.

Unfair Preferences

I have conducted a preliminary review of the company's records and I have identified 7.5 a number of payments to creditors which may constitute unfair preferences recoverable by a liquidator. The preferences which may be recoverable total \$450,000. I have only conducted preliminary investigations into these transactions and a liquidator would need to conduct further investigations. These further investigations would include continued assessment of the strengths and weaknesses of claims identified, defences available to the third parties, financial capacity of the defendants to meet such claims or in fact whether claims exist given the nature and history of the dealings between the parties.

Uncommercial Transactions

Based upon my preliminary review of the company's records it appears that there are 7.6 no transactions which may constitute uncommercial transactions. In this regard, I have reviewed the sale of KSM's mining lease Deflector to Eaglemist.
As set out above, pursuant to the various agreements between Gullewa and KSM, 7.7 Gullewa had the right to purchase the Deflector tenement for \$25,000 if KSM had not paid the outstanding September 2002 royalties by 20 December 2002.
Given that KSM valued Deflector as significantly more than \$25,000, it agreed to sell 7.8 Deflector to Eaglemist for \$629,000 in December 2002. The funds received were used to pay the Gullewa first royalty in full. As part of the sale transaction, KSM retained the right to mine the tenement in return for paying a royalty to Eaglemist of \$10 per ounce produced in excess of 6,000 ounces.
I am not aware of any valuation being conducted on the tenement to confirm the 7.9 purchase price however, taking into account:
Gullewa had the right to purchase the tenement for \$25,000 upon a default by $(a)$ KSM;
KSM retained the right to mine the tenement albeit that it had to pay a royalty $(b)$ to Eaglemist in return for this right; and
23
(c) At the time the company entered into the transaction it may have been insolvent and it was therefore unlikely to be able to meet the payment to Gullewa of \$583,000,

I do not believe that the transaction was uncommercial and therefore is not voidable against a Liquidator. I have taken legal advice in respect of this matter which supports my conclusion that the sale of Deflector to Eaglemist was not an uncommercial transaction.

Trading Whilst Insolvent

é.

I have conducted an investigation into whether the directors of the company have $7.10\,$ allowed the company to incur credit whilst there were reasonable grounds for suspecting that the company was insolvent as detailed in the provisions of Section 588G of the Act.
7.11 As stated above, the directors at the date of my appointment were as follows:

Robert Anderson Steven (Brad) Bremen Paul Ingram

7.12 Section 588G(1) applies if:
a person is a director at the time the debt is incurred; and $(a)$
the company is insolvent at that time; and (b)
at that time, there are reasonable grounds for suspecting that the company is $\circ$ insolvent
$7.13$ The above provision is breached if:
the person is aware at that time that there are grounds for suspecting $(a)$ insolvency; or
a reasonable person in a like position in a company in the company's $(b)$ circumstances would be so aware, section 588G(2).
For there to be a breach, the company had to be insolvent at the time the debt was 7.14 incurred. The Courts have held that insolvency is the inability to pay the company's debts as and when they fall due. The Courts have also held that "mere illiquidity" is not evidence of the inability to pay debts as and when they fall due.
The directors have several defences available to them as detailed in Section 588H of 7.15 the Act. Briefly, these defences are:
$(a)$ if it is proved that, at the time the credit was incurred, the person had reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent.

FERRIER HODGSON

$(b)$ if the person relied on another person to provide the financial information so that if the information was relied upon, the company was solvent and would remain so.
$\rm (c)$ the director was ill and did not take part in the management of the company.
$(d)$ the director took reasonable steps to prevent the company from incurring the debt.
7.16 In addition to a claim against the directors, there may also be a claim against the ultimate holding company, Menzies, pursuant to Sections 588V and 588W of the Act. In this regard, Menzies provided financial support to KSM.
7.17 I advise that the directors and/or Menzies cannot be pursued by the Deed Administrator or individual creditors under the insolvent trading provisions in the event that a DOCA is accepted by creditors. The provisions are only available if the company is in liquidation.
Based upon my preliminary investigations, it appears that the company may have 7.18 been insolvent at 30 November 2002. I base my opinion on the following factors:

$(a)$ Ageing of Creditors

I have conducted a preliminary ageing of creditors' debts outstanding as at 30 January 2003. The ageing is as follows:

Month Incurred
January 2003	533,935	14.54
December 2002	586,511	15.97
November 2002	1,328,701	36.17
October 2002	742,515	20.21
Pre-October 2002	481.757	13.11
Total	\$3.673.419 ---	100.00

The above shows that credit of \$1,120,446 was incurred after 30 November 2002.

$(b)$ Writs and Summonses

There were no writs and summonses issued against the company. However, this is correspondence from various creditors demanding payment in January 2003.

$\left( c\right)$ Statutory Payments

Payroll tax, GST and PAYG for the month of January 2003 were outstanding at the date of my appointment. However, these liabilities did not fall due until after my appointment. Superannuation has not been paid since July 2002. This indicates that the company was up to date with its statutory payments with the exception of superannuation which isn't technically due until July 2003.

$(d)$ Balance Sheet Insolvency

Whilst not on its own conclusive grounds to demonstrate insolvency, KSM had an asset deficiency and was "balance sheet" insolvent as at 30 June 2001. It also operated with a working capital deficiency from some time during the financial year ended 30 June 2001 and as at 30 June 2002 and 30 January 2003.

$(e)$ Monthly Cash Costs to Produce Gold

During the period June 2002 to October 2002, KSM's cash cost to produce one ounce of gold compared to its average gold price was as follows:

Month	Average Gold	Average Cash
	Price	Cost

June 2002	555.14	798.57
July 2002	558.05	907.59
August 2002	566.55	512.85
September 2002	570.96	1,241.36
October 2002	563.96	812.12

The above shows that August 2002 was the only month where the average cash cost to produce one ounce of gold was less than the sale price for one ounce of gold. This would have had a detrimental effect on cash flow.

$7.19$ The estimated credit incurred after 30 November 2002 was approximately \$1.1 million.
Subject to further investigations, a claim for this amount may be made against the $7.20$ directors and/or Menzies for insolvent trading. However, the ability of the directors and/or Menzies to satisfy any judgement and the likely costs and timing to pursue such a claim would also be required to be considered before making an insolvent trading claim.
Whilst the directors may claim that they relied on Menzies to fund KSM, I note that in $7.21$ Menzies' 2002 annual report, the independent audit report provided by Ernst & Young advised of an inherent uncertainty regarding going concern for Menzies and the consolidated entity.
Further investigation of the potential claims against and Menzies for insolvent trading $7.22$ the directors and any possible defence is required.
I have attached as Annexure D, a timetable of significant events collated during my $7.23$ investigations.

$\cdot$

FERRIER HODGSON

8 DEED OF COMPANY ARRANGEMENT PROPOSAL FOR MENZIES

$3.1$ Eaglemist (now SMM) has submitted a DOCA proposal in Menzies which will have the following impact on KSM:
$₍₂₎$ SMM will provide an absolute release of its claims against KSM.
$(b)$ KSM's plant and equipment, DSO and tenements will be transferred to Menzies with a sale value of \$980,000 in full and final satisfaction of Menzies' secured and unsecured debts of \$800,000 and \$550,000.
$\circ$ KSM will be required to pay in full the outstanding rates on the tenements and the DOIR and Gullewa royalties to enable the tenements to be transferred to Menzies.
$\mathbf{d}$ Menzies (via payment from SMM) will replace KSM's performance bonds (cash backed total \$191,000) and inject funds of \$39,000. The payment will be allocated as follows:

Replacement of Bonds	191,000
Cash Payment	39,000
Total Cash available	230,000
Allocated as follows: "
DSO	40,000
Insolvent Trading Claim	69,000
Payment of Royalties/Rates	121,000
Total	230,000

$(e)$ KSM will release all claims it has against Menzies in return for the above payment (including its insolvent trading claim).
$\Omega$ The release given to Menzies will not preclude KSM from pursuing the directors of KSM for insolvent trading.
In considering the impact of the DOCA proposal on the creditors of KSM, I $(g)$ have reviewed the estimated recovery from Menzies if it was placed into liquidation and KSM's insolvent trading claim of \$1.1 million was admitted for dividend purposes. Based on the liquidation scenario in Menzies, and depending upon the amount realised for the KSM assets given Menzies' security position, an estimated dividend of between zero cents and 4.6 cents in the dollar is likely. On a best case basis, this would result in a return to KSM of approximately \$50,000 which is less than the amount of \$69,000 allocated above for the insolvent trading recovery from Menzies in the DOCA proposal.
The Menzies DOCA will result in the KSM creditors receiving a dividend $(h)$ calculated as follows:

$\mathcal{C}^{\star}$

FERRIER HODGSON

	Liquidate ERV	SMM proposal ERV
Floating Charge Assets Avaliable to Secured Creditors	224,243	224,243
Assets Subject to Fixed Charge
Plant & Equipment/MV/Office Equipment	813,871	800,000
Tenements (net of rehab of \$340,000)		140,000
Bonds	0	191,000
Less: DOIR Royalty	ο	(71, 909)
Less: Rates	Ō	(31,000)
Total Assets Subject to Fixed Charge	813,871	1,028,091
Total Assets Available to Secured Creditors	1,038,114	1,252,334
Less Gullewa Ltd (Royalty - January 2003)	(18,063)	(18,063)
Amount Available for Eaglemist	1,020,051	1,234,271
Less Eaglemist Pty Ltd	(1,060,000)	Ω
Shortfall to Eaglemist	(39, 949)	1,234,271
Menzies Gold Ltd	(800,000)	(940,000)
Shortfall to Menzies	(839, 949)	294,271
Funds Available for Unsecured Creditors	NI	294,271
Unsecured Creditors' Claim
Eaglemist Pty Ltd Secure Shortfall	(39, 949)	0
Menzies Secured Shortfall	(800,000)	0
Menzies Unsecured	(549, 779)	0
Trade Creditors	(3,666,599)	(3,666,599)
Shortfall to Director	(21, 763)	(21,763)
Shortfall on Leases	(215, 156)	(215, 156)
Payroll Tax	(4, 518)	(4, 518)
DOIR Royalty	(71,909)
Minepro	(1,318,723)	(1, 318, 723)
RG Anderson	(413,000)	(413,000)
Outstanding Rates	(31,000)
DOIR environmental shortfall	(223,000)
Total Unsecured Creditors' Claim	(7, 355, 396)	(3,639,759)
Net Surplus/(Deficiency)
Estimated Return to Unsecured Creditors	(7,355,396)	(5,345,488)
	Nil	0.052

The proposed DOCA will have the following impact on Menzies: 8.2

The Deed Administrators will retain the floating charges assets of Menzies $(a)$ (cash and proceeds from sale of shares in Marketboomer Pty Ltd) which will be transferred to a Trust ("Menzies Creditors Trust") for distribution to creditors.
SMM will pay an amount of \$120,000 to the Menzies Creditors Trust. $(b)$
The payment by SMM to KSM will be made in full and final settlement of any $(c)$ claims either party has against the other.
The transfer of KSM's fixed assets to Menzies is in full and final satisfaction $(d)$ of Menzies' secured and unsecured claim against KSM.
28
KSM will release Menzies from any claims (including insolvent trading $(e)$ claims) it may have against it.
$\Omega$ SMM's charge over the assets of Menzies will not be released.
$(2)$ The Deed Administrator ("Trustee") will distribute the funds in the Menzies Creditors Trust in accordance with section 556 of the Act. Therefore, the Administrators will be paid their fees in full and the employee entitlements should also be paid in full (dependant on the completion of the sale of the Marketboomer shares), The balance of the funds will be available to unsecured creditors (excluding inter-company loan accounts) resulting in a dividend to the unsecured creditors of Menzies of approximately 6 cents in the dollar. In a liquidation scenario, the Menzies creditors would not receive a dividend.
The DOCA is subject to numerous conditions precedent including: 8.3
$(a)$ KSM being in liquidation;
$(b)$ the mutual releases;
$(c)$ the settlement of the sale of KSM's fixed assets to Menzies;
$(d)$ Menzies' shareholder approval;
$(e)$ the resignation of the current directors of Menzies;
$(f)$ the payment of \$120,000 by SMM;
the creation of the Menzies Creditors Trust. $\mathbf{g}$
$8,4$ Based on the valuations I have received for KSM's assets, under the above proposal, I believe that KSM's assets will be realised for fair value and that the DOCA proposal will result in a better return for the creditors of KSM. I have therefore agreed to transfer the fixed assets to Menzies provided the DOCA is approved by its creditors and subject to finalising formal documentation to effect the transfer.
$8.5$ As the Menzies DOCA provides for a return to KSM's creditors that would not otherwise by available, I believe that it is in the best interests of KSM's creditors. Therefore, at the meeting of creditors to be held on 11 April 2003, I will be seeking a resolution from creditors to authorise me, as Liquidator of KSM, to release Menzies from all claims, including the insolvent trading claim, as required by the Menzies DOCA.
8.6 Please note that the Menzies' DOCA and its impact on KSM's creditors has been discussed with the committee of creditors at a meeting held on 31 March 2003. The committee resolved that they supported my recommendation that KSM be liquidated and agreed that the Liquidator of KSM should provide the releases required in the Menzies DOCA, subject to the DOCA being approved by Menzies' creditors.

FERRIER HODGSON

8.7 Of the seven committee members in attendance, six approved the resolution and one member abstained from voting. However, ultimately, the resolution can only be passed by the general meeting of creditors of KSM on 11 April 2003.

$\ddot{\mathbf{9}}$ OPTIONS AVAILABLE TO CREDITORS

9.1 The options available to creditors at the second meeting of creditors of KSM are to resolve that:
$\left( a\right)$ the company executes a DOCA with its creditors; or
the company be wound up; or $(b)$
the administration be terminated. $\circ$
$9.2$ The creditors may also resolve to adjourn the meeting for a period of up to sixty (60) days.
9.3 The effect of each of the implementation of each of these options is as follows:

Deed of Company Arrangement

9.4 At this stage I advise that no DOCA has been proposed and therefore this option is not available for creditors at the second creditors meeting.

Winding Up of the Company.

$9.5$ Should creditors resolve that the company be wound up, the company will be placed into liquidation. The liquidator is required to realise and distribute the assets in accordance with the Act and will also be required to complete a thorough investigation into the company's past dealings and affairs and the past actions of the directors.
$9.6$ At paragraph 2.3 I have estimated the return to unsecured creditors from going concern realisations at nil cents in the dollar. This assessment does not take into account any recoveries from insolvent trading. I believe that any return to unsecured creditors in a liquidation scenario will be limited to any recoveries from an insolvent trading claim which are costly actions to run and may take some time to resolve. Therefore, under normal circumstances, if creditors receive a dividend in the liquidation of the company, it may take at least 18 to 24 months until any dividend is distributed. However, if the DOCA in Menzies is accepted by its creditors, KSM's creditors may receive approximately 5 cents in the dollar within a 6 month time frame.
$9.7$ It is my opinion that it is in the best interests of the creditors to resolve to wind up the company for unsecured creditors to receive any return from a possible insolvent trading claim,

Termination of the Administration

9.8 Should creditors resolve that this administration be terminated, the company will be placed into a similar position to that existing prior to the appointment of the administrator. Creditors would have the option of petitioning the Court to have the company would up at their own expense. It is likely that a resolution to merely terminate the administration will result in either the secured creditor appointing a Receiver or alternatively the Court appointing a Liquidator. As the company is clearly insolvent in its current form, I do not consider that creditors would obtain any benefit from the administration coming to an end.
$9.9$ Accordingly, it is my opinion that the creditors should not resolve to end the administration.

Adjournment

$9.10 -$ Adjournment of a meeting, for a maximum of 60 days, would normally occur where the company, its directors and the Administrators wanted more time to prepare a DOCA or where creditors wished to have further enquiry made in relation to the affairs of the company. As no DOCA proposal is available for creditors to consider in KSM, this option will provide no benefit to creditors.

10 ADMINISTRATORS' RECOMMENDED COURSE OF ACTION

Based upon the current indicative valuations, it does not appear as though the 10.1 unsecured creditors will receive a dividend distribution from a sale of the company's assets. However, there may be a return to creditors if the Menzies DOCA is accepted by its creditors. Please note that the acceptance of the DOCA by Menzies' creditors does not in any way limit the recoveries available to a liquidator of KSM other than claims against Menzies. In this regard, the estimated return to KSM's creditors of 5 cents in the dollar may increase if I am successful in recovering any further funds from an insolvent trading claim against the directors, if this is deemed appropriate, and any preference recoveries.
Having considered all of the issues surrounding this administration, and given that no $10.2$ DOCA has been proposed and the considerable deficiency currently facing creditors, it is my recommendation that creditors resolve to place the company into liquidation.

If you have any queries in relation to this matter, please do not hesitate to contact Ben Cohen or Tristan Cromarty at this office.

MARTIN JONES Joint & Several Administrator of King Solomon Mines Limited

+0893270931

$\bar{1}$

$\mathcal{L}_{\mathbf{a}}$

Annexare A

KING SOLOMON MINES LTD

BALANCE SHEET ANALYSIS

$\sim$

$\bar{z}$

$\sim 10$

$\bar{z}$

$\bar{\mathbf{r}}$

	30 June 2001	30 June 2002	31 July 2002	31 August 2002	30 Sept 2002	31 Oct 2002	30 Nov 2,002	31 D _ic 2,002	29 January 2,003
CURRENT ASSETS:
Cash Assets	177,807	154,517	74,929	183,132	144,406	39,597
Receivables		564,018	899,363	718,046	834,226	720,794	(44, 303) 906,743	386,433 1,000,753	271,028
Inventories	o	\$98,017	734, 595	903,197	718,931	1,002,683			931,944
Other Assets	3,264				٥		890,224	686,276	819,453
Unexpired Interest			85.291	85.291	94,569	89,274
TOTAL CURRENT ASSETS:	181,071	1,316,552	1,844,278	1,889,666	1,792,132	1,852,348	83,979 1,836,143	45,668 2,119,130	42,692 2,065,117
LESS CURRENT LIABILITIES
Trade Creditors	28,155	1,722,435	2,113,453	2,227,411	2,446,689
Creditor - Menzies Gold		496,876	502,020	477, 352	638,483	3.302.732	3,752,24)	3.423.986	3,941,342
Creditor - Gullewa						682,339	721,087	782,748	543,580
Interest bearing Liabilities	141,263	253,115				608,000	608,000
Non Interest bearing Liabilities**	1,039,430
Provisions/Acoruals		104,965	159,620	177,202	199,080	270,368
GST Outputs			341.982	177,803	294,514	65,128	296,307	277,109	320,449
	1,208,848	2.577,391	3,117,075	3,059,968	3,578,766	4,928,567	151.182 5,528,817	333,282 4,817,125	399,441
									3,204,812
WORKING CAPITAL POSITION	(1,027,777)	(1, 260, 839)	(1, 272, 797)	(1, 170, 302)	(1,786,634)	(3,076,219)	(3,692,674)	(2,697.995)	(3, 139, 695)
NON CURRENT ASSETS
Froperty, Plant & Equipment	2,052,378	2.494,911	2,539,492	2,520,543	2,629,174	2,702,221	2,716,153
Mineral Exploration & Evaluation cost	1,510,143	3,004,297	3,024,318	3,021,574	3,173,066			2,688,967	2,672,396
Other Assets	25,732	35,000	33,000	35,000	33,000	1,791,168 35,000	3,788,113	3,844,617	3,880,714
							35,000	35,000	35,000
	3,588,303	5,534,208	5,598,810	5,577,117	5,837,240	6,528,389	6,539,266	6,568,584	6,588,110
NON CURRENT LIABILITIES
Interest Bearing Liabilities	422,230	464,384	823 367	796,104	908,306	878,045	850,782	439,134	428,378
Non Interest bearing Liabilities**	٥	1,704,165	1,704,165	1,704,165	1,704,165	1,704,165	1,704,165	1,704,165	1,704,165
Eaglemist	٥							870,263	870,263
Payables - Menzies Gold		800,000	800,000	800,000	800,000	800,000	800,000	800,000	800,000
	422,230	2.968.549	3,327,532	3,300,269	3,412,471	3,382,210	3,354,947	3,813,562	3,802,806
NET ASSET POSITION	2,138,296	1,304,820	998.481	1,106,546	638,135	69,960	(508, 355)	57,027	(354, 391)
EQUITY POSITION
Contributed Equity	602,401	752,401	752 401	752,401	752,401	752,401	752,401	752,401	752,401
Asset Revaluation Reserve	1,739,557	1,739,557	1,739,557	1,739.337	1,739,557	1,739,557	1,739,557	1,739,557
Acoumulated Losses	(203, 662)	(1,187,138)	(1,493,476)	(1, 385, 412)	(1,853,821)	(2,421,998)	(3,000,313)	(2,434,931)	1.739,557 (2, 846, 349)
NET EQUITY POSITION	2,138,296	1,304,820	998.482	1,106,546	638,137	69,960	(508, 355)	57,027
									(354, 391)

NB. For the period July 2002 to 29 January 2003, the above figures are from management accounts only. There were also emmission of figures and some sub-totals.
were incorrect.

$\hat{\mathbf{r}}$

ĺ








ÿ
i

PROFIT AND LOSS ANALYSIS

$\omega$ is a constant of $\omega$ in $\omega$

							29 January
	i I	31 August	30 September	$-31$ October	30 November	31 December
	20OZ	n S	g B	ă	2,002	2,002	2,003

Revenue from ordinary activities	2479 Ş	167,591	984,101	162,808	EFROKE	DC ROAL	595,60
Expenses from ordinary activities	S.	949,123)	1,468,635)	(1,312,665)	1,356,435)	1,129,188)	887,020)
Profit/(Loss) from ordinary activities	Ã ž.	18,768	484.534)	(549.857)	[565,592]	565,382	288,013

Profil/(Loss) from ordinary activities Less Income tax capares	ž,	18.768	484,534)	(549.857)	[365.592]	565.362	288,013)

$\omega_{\rm{max}}$

$\frac{1}{2}$

ksm financkal statement analysis - P & L

ł, $\bar{1}$

Annexure

$\mathbf 8$

$\sim$ $\alpha$

$\alpha$

$\overline{a}$

$\blacksquare$

$\bar{a}$

$\hat{\boldsymbol{\beta}}$

$\mathbf{r}_\mathrm{a}$

$\bar{1}$

Annexare C

King Solomon Mines Limited
(Administrator Appointed)

Joint Administrator's Abstract Of Receipts And Payments
To 02/04/2003

	Total
RECEIPTS	AUD
Gold Clean Up Rafunds Gold Sales Petty Cash Sundry Debtors (B) Cash at Bank Gold Clean Up - Security Bond Bank Interest ATO Refund Diesel Fuel Rebate GST Gold Sales (Pre Appointment) GST Payable $\blacksquare$	101,000.00 245.52 631,353.94 55.30 698.45 663.15 20,000.00 2.024.08 22.647.65 73,880,32 59,960.70 46,882.12
	959.511.23
PAYMENTS ٠

Professional Pees - Menzies	4,660,00
Contractors - Menzies Employees	10,948,59
Payroll Tax	2,620.00
Contractors	14,245.90
Tenement Rental	7,180,50
Bank Fees	1,536.60
Electricity	703.54
Gea	1,288.06
Hire of Equipment	3,317.14
Casuai Labour	1,400.00
Lease payments	5,583.71
PAYG	24,112.00
Postage	9.10
Professional Fees	33,742.00
Rent Pald (Commercial)	5,000.00
Repairs & Maintenance	ř. 75.00
Stationery & Printing	177.64
Sundry Expenses	58.51
Telephone & Fax	8,117,48
Vehicle Running Costs	266.27
Wages & Salarles	61,370.93
Sub-Contractors	12,560.00
Gold Refining Expense	42.385.84
Fuel	72.524.54
Wages - Menzies	10,893.13
Computer Expense	301.77
Accomodation Expense	22,622.55
Cleaning Expense	358.00
Security	55.15
Consumables	601.73
Food Supiplies - Rubbish Removal	249.89
Agents/Valuers Fees (1)	24.77
Valuers Security Costs	18,890.00
	4.850,73
Hire of Meeting Room Legal Feea (1)	363.64
Computer Backup	16,329.95
Re-Direction of Mail	545.00
	90.00

$\ddot{\phantom{a}}$

$\omega_{\rm{max}}=0$

$\mathcal{L}$

PAYMENTS
GST Receivable	27,755.70 .
Balances in Hand	418,316.38 541,195.87
	- . 959,611.23

$\cdot$

$\varphi_{\rm{max}}=0.5$

Annexure D

$\sim$ $\epsilon$

MENZIES GOLD LIMITED/KING SOLOMON MINES LIMITED

TIMETABLE OF SIGNIFICANT EVENTS

Date	Event
16 August 1983	Menzies was incorporated
2 August 2000	KSM was incorporated
November 2000	KSM purchased Gullewa's plant and equipment and some mining tenements
December 2001	Head of Agreement to acquire 51% of KSM by Menzies
21 December 2001	Remaining Gullewa tenements were purchased
21 December 2001	Menzies provided funding to KSM to purchase Gullewa tenements and took security over the assets of KSM
31 December 2001	Option to acquire the remainder of Gullewa leases expired
19 March 2002	Menzies shareholders ratified 100% purchase of KSM
20 March 2002	Acquisition of KSM - issue of shares
31 March 2002	Commissioning of plant completed
April 2002	Menzies commenced operations of KSM
30 June 2002	Net profit of \$295,997 Cash cost per ounce recovered $= $798.57$
31 July 2002	Net loss of \$345,252 Cash cost per ounce recovered $= $907.59$
31 August 2002	Net profit \$68,065 Cash cost per ounce recovered = \$512.85
13 September 2002	Trading halt of Menzies shares to allow renegotiation of purchase price with KSM shareholders
16 September 2002	Balance of purchase price for acquisition of KSM of \$1.8 million due
16 September 2002	Renegotiation of timing of payment of purchase price to KSM shareholders completed.

$\ddot{\phantom{a}}$

$\star$

$\mathcal{L}$

$\sim$

30 September 2002	Net loss \$479,117
	Cash cost per ounce recovered $= $1,241.36$
31 October 2002	Net loss \$524,621
	Cash cost per ounce recovered $= $812.12$
30 November 2002	Net loss of \$726,748
4 December 2002	Gullewa took security over the assets of KSM
20 December 2002	Payment of outstanding royalties due to Gullewa. Eaglemist purchased KSM's Deflector mining lease and provided funding to KSM to pay the Gullewa debt and other debts of KSM
20 December 2002	Eaglemist took a fixed and floating charge over the assets of KSM and Menzies
31 December 2002	Net profit of \$282,870
30 January 2003	Garry Trevor and Martin Jones appointed as Joint and Several Administrators of Menzies and KSM

$\Delta \phi$

$\ddot{\phantom{a}}$

+0893270931

FERRIER HODGSON

CHARTERED ACCOUNTANTS

MENZIES GOLD LIMITED ACN 009 075 861 (Administrators Appointed)

ADMINISTRATORS' REPORT CONCERNING THE AFFAIRS OF THE COMPANY $\sim$ . .

PURSUANT TO SECTION 439A OF THE CORPORATIONS ACT

2 APRIL 2003

FERRIER HODGSON (WA) LEVEL 14 16 ST GRORGE'S TERRACE PERTH WA 6000 AUSTRALIA TELEPHONE 089321 2460 FACSIMILE 08 9221 2202 EMAIL: [email protected] OPO BOX W2057 FERTH WA 6001 DX 60201 VICTORIA AVENUE

PARTNERS GARRY TREVOR MARTIN JONES ANDREW SAKER CONSULTANT ALDEN HALSE DIRECTORS PHILIPRUNDELL ROBERT JACC85 GROUP OFFICES NEWCASTLE ADLAIDE BRISBANE PERTH DANDENONG SYDNEY MELBOURNE WOLLONGONG

INTERNATIONAL OFFICES AUCKLAND JAKARTA
BANGKOK KUALA LUMPUR HONG KONG SINGAPORE INTERNATIONAL AFFILIATES UNITED KINGDOM

Page No.

	GLOSSARY OF TERMS
2	EXECUTIVE SUMMARY
3	INTRODUCTION
	BACKGROUND AND HISTORY OF THE COMPANY
5	STATEMENT OF POSITION
ĥ	RECEPTS AND PAYMENTS
	INVESTIGATIONS AND POTENTIAL VOIDABLE TRANSACTIONS RECOVERABLE BY AT . LIQUIDATOR
	DEED OF COMPANY ARRANGEMENT PROPOSAL
9	OPTIONS AVAILABLE TO CREDITORS
10	ADMINISTRATORS' RECOMMENDED COURSE OF ACTION

FERRIER HODGSON

1 GLOSSARY OF TERMS

Throughout this report I have made the following abbreviations: $1.1$
"Menzies" Menzies Gold Limited; $(a)$
"KSM" King Solomon Mines Limited; $(b)$
"Gullewa" Gullewa Ltd $\sigma$
$\mathbf{d}$ "Eaglemist" - Eaglemist Pty Ltd
"SMM" South Murchison Mines Pty Ltd; $(e)$
"ATO" Australian Taxation Office; $\Phi$
"DOIR" Department of Industry and Resources; (g)
"DOCA" Deed of Company Arrangement; (h)
"the Court" the Supreme Court of Western Australia; and $(i)$
Ü) "the Act" - the Corporations Act.

$\overline{\mathbf{z}}$ EXECUTIVE SUMMARY

Menzies was incorporated in September 1983 as Menzies Gold NL and subsequently $2.1$ changed its name to Menzies on 19 November 1999. Menzies is a holding company and did not trade in its own right at the date of my appointment.
In March 2002, the shareholders of Menzies resolved to purchase all of the shares of $2.2$ KSM for an amount of approximately \$3.28 million. This amount was to be paid by cash/deferred shares (\$1.8 million), acquisition costs of \$250,000 and the issue of 61.664 million shares in Menzies at 2 cents per share (\$1.23 million). Menzies also assumed liabilities of approximately \$4.98 million. The acquisition of KSM by Menzies is discussed further below.
KSM operated a gold mine approximately 360km north, north-east of Perth, Western 2.3 Australia. KSM's gold treatment plant has a capacity of 300,000 tonnes per annum.
Garry Trevor and I were appointed Administrators of KSM on 30 January 2003. Just $2.4$ prior to our appointment, KSM ceased operations for approximately two weeks due to problems encountered in its mill. A large quantity of high-grade copper ore was accidentally processed through the plant which blocked all of the carbon, making the plant inoperable.

$\mathbf{f}$

FERRIER HODGSON

The financial position of Menzies as at 30 January 2003 can be summarised as $2.5$

Assets Subject to Floating Charge	ERV
Cash at Bank
Sundry Debtors	10,316
King Solomon Mines Ltd - Secured Debtor	0
King Solomon Mines Ltd - Unsecured Debtor	0
Menzies International Ltd	0
Total Floating Charge Assets	75,000
Less: Administrators Fees and Costs (estimate)	85,316
Assets Available for Employee Entitlements	75,000
	10,316
Less: Employee Entitlements
Wages
Notice	(16, 333)
Superannuation	(32, 333)
Annual Leave	(13,065)
Total Employee Entitlements	(13, 563)
Total Floating Charge Assets to Secured Creditor	(75, 294)
	(64.978)
Assets Subject to Fixed Charge
Plant and Equipment
Rothsay Project - Joint Venture	ō Ò
Total Assets Subject to Fixed Charge	0
Total Assets Available to Secured Creditors
	Û
Amount Due to Secured Creditor
Eaglemist Pty Ltd
Shortfall to Secured Creditor	1.060,000
Amount Available to Unsecured Creditors	(1,060,000) Nü

Unsecured Creditors' Claim
Trade Creditors	(81, 563)
Stamp Duty Assessment (estimate)	(250,000)
Amount due to KSM shareholders	(315, 646)
Loan from Menzies Switzerland PAYG	(572, 127)
Lease Liability	(53,052)
Shortfall in Employee Claims	(41,907)
Payroll Tax	(126, 092)
Total Unsecured Creditors' Claim	(1, 461)
	(1, 442, 848)
Net Surplus/(Deficiency) Subject to Costs *	(2,567,826)
Estimated Return to Unsecured Creditors subject to Section 588 recoveries	NΠ

Based on the above summary, unless the assets are realised for an amount in excess of approximately \$1.15 million to pay out secured and priority creditors, or a DOCA is proposed which contemplates a return to creditors, t $2.6$

$\pmb{\mathfrak{c}}$

However, a DOCA proposal has been put forward in the Menzies administration $2.7$ which will result in a return to creditors of approximately 6 cents in the dollar. As part of the DOCA, the tenements and plant and equipment in KSM will be transferred to Menzies in satisfaction of its secured and unsecured claims in KSM and in return, KSM will release Menzies from all claims it has against it. Eaglemist, now SMM, will also release its claim against KSM and contribute S120,000 to the Menzies DOCA.
Any return to creditors in a liquidation scenario will also be subject to the recovery of 2,8 any claims specifically available to a Liquidator of Menzies. In this regard, I am required by the Act to enquire into the affairs of the company and to report to creditors on likely recoveries in a liquidation scenario. I believe there are potential claims against the directors of Menzies in relation to the insolvent trading provisions of the Act and possible breaches of certain other aspects of the Act. These matters require further investigation and legal opinion.
A meeting of the creditors of Menzies is to be held on 11 April 2003 for the creditors 2.9 to decide between:
$(a)$ Accepting a DOCA: or
Ending the administration and returning control of Menzies to its directors; or $(b)$
(c) Placing the company into liquidation.
The creditors may also resolve to adjourn this meeting for a period of up to sixty (60) 2.10 days.
It is my opinion that it is in the best interest of creditors to accept the DOCA. $2.11$

$\overline{\mathbf{3}}$ INTRODUCTION

General

On 30 January 2003, Garry Trevor and I were appointed Joint and Several $3.1$ Administrators of Menzies by resolution of the directors of the company pursuant to Section 436A of the Act. Prior to our appointment, Garry Trevor and I had no involvement with the company or its directors or officers.
The first meeting of creditors was held on 6 February 2003 at the Kings Perth Hotel, $3.2$ 517 Hay Street, Perth, Western Australia at 1.00pm.
6
At the first meeting of creditors held for KSM, a committee of creditors was formed $3.3$ consisting of the following:

Creditor
Represented by Tronte Holdings Pty Ltd (Subject to DOCA)
Tony Douglas-Brown BP Australia
Mr F Egglezos
ADD Contracting Kurt Mauritz
Allens Sarvices
Greg Price Corcare & Associates
Simon Coxhell
T& T Freeman Tom Freeman
Comdek Satellite Systems
Richard Wolanski Menzies Gold Limited (Administration)
Mr Paul Ingram
Hallmark Consolidated Limited Mr John Barr

The committee met subsequent to the creditors meeting and resolved that the $3.4$ Administrators of both Menzies and KSM apply to the Court to extend the convening period established by Section 439A(5)(b).
As a consequence of the resolution passed in KSM, I thought that it was necessary to $3,5$ extend the convening period for Menzies to keep both administrations in line with each other. This was discussed at the meeting of Menzies' creditors on 6 February 2003, and there were no objections from creditors to making the application to the Court to extend the convening period.
On 18 February 2003, I made an application to the Court for an extension of the 3.6 convening period for a period up to 45 days. The application was granted and the convening period was extended to 7 April 2003.
In accordance with Section 439A of the Act the second meeting of creditors will be $3.7$ held on 11 April 2003. With regard to the second meeting of creditors I am required by the Act to provide the following:
a report on the company's business, property, affairs and financial $(a)$ circumstances; and
my opinion as to the course of action that is in the best interests of all ው) creditors.
Notwithstanding the extension of the convening period for an extra 45 days, the $3.8$ administration process provides a relatively short period of time within which the Administrator is able to complete investigations in respect of potential recoveries as set out in section 7 of this report. At this stage, it is difficult to definitively identify the likely causes of action and/or recoveries that may be available. Such conclusions would usually only be made after more detailed investigations had been undertaken, which may include:
the public examination, under oath, of relevant officers of the company and the $(a)$ entities with which it has had commercial involvement; and

FERRIER HODGSON

detailed review of documentation produced by relevant persons upon enquiry (b) by a Liquidator/Administrator or following examinations referred to in (a) above.
Accordingly, whilst I have conducted the necessary enquiries required of an 3.9 Administrator, the conclusions drawn herein with respect to my investigation into the company's affairs should be viewed as preliminary and they will be confirmed, or otherwise, by way of other sources of enquiry including those noted above.

The Administration Process

The voluntary administration process is governed by Part 5.3A of the Act. The object $3.10$ of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
maximises the chances of the company, or as much as possible of its business, (a) continuing in existence; or
if it is not possible for the company or its business to continue in existence -(b) results in a better return for the company's creditors and members that would result from an immediate winding up of the company.
Part 5.3A also sets out a time frame (usually 28 days) within which the voluntary $3.11$ administration must be undertaken unless varied by the Court. As stated above, on 18 February 2003, I made an application to the Court for an extension of the convening period for a period up to 45 days. The application was granted and the convening period was extended to 7 April 2003.
The extension was required because an extension had been applied for in the KSM $3.12$ administration due to the size and complexities of that administration. It was necessary to keep the administration process of the two entities in line so as to enable the potential for parties to formulate a DOCA proposal encompassing both entities.

BACKGROUND AND HISTORY OF THE COMPANY 4

Statutory Information

The company is a publicly listed company on the Australian Stock Exchange which $4.1$ was incorporated in Western Australia on 16 August 1983 as Menzies Gold NL and subsequently changed its name to Menzies Gold Limited on 19 November 1999. The current officers of the company are as follows:

Name Robert Graham Anderson	Address	Position	Commenced	Status
	15 Roberts Road Kelmscott WA 6111	Director	20.03.02	Continuing
Steven Bradley Breman	48 Richon Heights . Wungong WA 6112	Dircctor	20.03.02	Continuing
Paul Anthony Ingram	Unit 8, 20 Garden Street South Perth WA 6151	Director	28.11.86	$\overline{\text{Continuing}}$

नियम स्थित भ

тедки опсп	Alderstrasse 21 Basle CH-4052 Switzerland	Director	30.01.92	Continuing
Jan Blosmraad	401 Queens Quay West Suite 306 Toronto Ontario MSV2Y2 Canada	Director	27.05.97	Continuing
Susmit Shah	33 Carlow Cirole Watersford WA 6152	Secretary	24.03.00	Continuing
Lisa Sharon Rowe Gerda Rieni Bloemmand	23 Hope Crescent Lesmurdie WA 6076	Secretary	23,08.94	Continuing
	401 Queens Quay West Suite 306 Toronto Ontario MSV2Y2 Canada	Alternate Director	05.07.01	Continuing

FERRIER HODGSON

Menzies' issued and paid up capital according to the Australian Securities and $4.2$ Investments Commission records are as follows:

Share Class Title Ordinarv	Number of Shares Issued 238,699,960	Amount Paid f an 56,493,765	Amount Due and Payable Œ)
			Nij

The charges registered against the assets of Menzies according to the Australian 4.3 Securities and Investments Commission records are as follows:

Chargee	ASIC Charge No.	-------- Date Registered	Charge Type
Eaglemist Pty Ltd	911696	23 December 2002	Fixed & Floating

Nature of Business

Up until mid 2001, Menzies' primary focus as a gold explorer was in the South East 4.4 Asia region for over ten years. The directors of Menzies took the view that the company required a stable cash flow base to allow growth through exploration. Menzies then reassessed its position and focussed on a region in Western Australia which they believed offered the most potential.
Menzies acquired 100% of KSM in March 2002 which owned the King Solomon $4.5$ Mines Project ("the Project"), including tenements, plant, buildings and infrastructure, which it purchased in November 2000.
The Project is an underground and open pit development with plant capacity of 46 300,000 tonne per annum. The Project is located in Guilewa in the South Murchison Province, 74km north-east of Perth, Western Australia. KSM holds a number of tenements, many of which have not yet been either explored or developed.
At the date of my appointment, Menzies employed 3 employees and their services 4.7 were terminated on 5 February 2003.

Events Leading to the Appointment of the Administrators

I am advised that the appointment of the Administrators was as a consequence of the 4.8 administration of KSM which the directors believe was caused by a cash flow shortage caused by the mill ceasing operations for a two week period.
The directors explain the reason for the company's current financial predicament as: 4.9

"In mid January 2003, the inadvertent mixing of high grade copper ore on the ROM and processing through the plant, caused severe blockage of the CIP circuit. The resulting loss of cash flow (2-3 weeks) of over 1,000 oz $\overline{AU}$ , caused the failure of the company. The schedule for mining at Deflector relied on gold produced through the mill to fund the successful extraction of Direct Shipping Ore (DSO) which would have secured the company's future."

"On January 25, 2003 I received an email from Paul Ingram, the Managing Director, informing the Board of a major cashflow problem, mostly due to a copper contamination of the Deflector plant. I then realised that raising additional cash (at least in Europe) would become close to impossible".

"Why? When KSM went into administration, Menzies followed. When, once the cash flow impact of the plant closure was analysed."

"Menzies was reliant on the cashflow from King Solomon Mines Ltd. When KSM experienced production problems Menzies was affected by the lack of cashflow from KSM."

Historical Financial Position

The balance sheets for Menzies as at 30 June 2001 (audited), 30 June 2002 (audited) 4.10 and 30 January 2003 (unaudited) are attached as Annexure A.
I note that the working capital position has deteriorated significantly from 30 June $4.11$

Trading Performance

Attached as Annexure B is a summary of the profit and loss statements for the period 4.12 ended 30 June 2001 (audited) and year ended 30 June 2002 (audited).
The company recorded trading losses for the 12 months ended 30 June 2001 and 30 4.13 June 2002,
From my preliminary review of the company's records, it is my opinion that the 4.14 company's books and records have been maintained in accordance with Section 286 of the Act.

$\ddot{\phantom{a}}$

FERRIER HODGSON

STATEMENT OF POSITION

I have detailed the statement of position as at 30 January 2003 which has been compiled by me from information collated since the date of my appointment. $5.1$

Assets Subject to Floating Charge	Ref	ERV
Cash at Bank
Sundry Debtors	5.2	10,316
King Solomon Mines Ltd - Secured Debtor	5.3
King Solomon Mines Ltd - Unsecured Debtor	5.4	0
Menzies International Ltd	5,4	Ō
Total Floating Charge Assets	5.6	75,000
Less: Administrators Fees and Costs (estimate)		85,316
Amount Available for Employees	5.8	75,000
		10.316
Less: Employee Entitlements
Wages	5,9
Notice		(16, 333)
Superannuation		(32, 333)
Annual Leave		(13,065)
Total Employee Entitlements		(13, 563)
Total Floating Charge Assets to Secured Creditor		(75, 294)
		(64, 978)
Assets Subject to Fixed Charge
Plant and Equipment
Rothsay Project - Joint Venture	5.13 5.14	٥
Total Assets Subject to Fixed Charge		0
Total Assets Available to Secured Creditors		$\overline{0}$
		O
Ameunt Due to Secured Creditor
Baglemist Pty Ltd	5.20
Shortfall to Secured Creditor		I,060,000
Amount Available to Unsecured Creditors		(1,060,000)
Unsecured Creditors' Claim		Nн
Trade Creditors
Stamp Duty Assessment (estimate)	5,27	(81, 563)
Amount due to KSM shareholders	5.28	(250,000)
Loan to Menzies Switzerland	5.29	(316, 646)
PAYG	5,30	(572, 127)
Lease Liability	5.31	(53,052)
Payroll Tax	5,32	(41,907)
Shortfall in Employee Claims	5,33	(1,461)
Total Unsecured Creditors' Claim	5,12	(126,092)
		(1, 442, 848)
Net Surplus/(Deficiency)
Estimated Return to Unsecured Creditors		(2,567,826)
		NT.

*Note

Cash on Hand/Cash at Bank

$5.2$ The company had \$10,316 in various bank accounts at the date of my appointment which have now been closed and the funds transferred to my trading account.

Sundry Debtors

At the date of my appointment, the company had sundry debtors of \$5,754 owed by 5.3 employees of Menzies. This amount has been offset against the outstanding employee entitiements.

King Solomon Mines Ltd

Menzies lent an amount of \$1,349,779 to KSM. Of this amount, \$800,000 is secured $5.4$ by a fixed and floating charge over the assets of KSM and the remaining \$549,779 is an unsecured claim against KSM.
$5.5$ It is unlikely that there will be any return to Menzies in respect of its unsecured claim given that KSM is in administration and likely to go into liquidation on 11 April 2003. Further, based on the asset values of KSM, it is unlikely that KSM will receive a return on its secured debt given that it has third ranking security.

Menzies International Ltd

Menzies International Ltd, a wholly owed subsidiary of Menzies, owns one asset 5.6 being 1,040,928 (15%) shares in Marketboomer Pty Ltd. This asset is in the process of being realised and Menzies will receive the sale proceeds in partial settlement of a \$2.5 million loan from Menzies to Menzies International Ltd.
I advise that the shares have been sold, pending settlement, to a third party for an 5.7 amount of \$90,000 (inclusive of costs and GST, if applicable). Hence a net return of \$75,000 is estimated.

Administrators' Fees and Costs

I advise that I have budgeted that I will incur costs of approximately \$75,000 in fees $5.8$ and disbursements during the period 30 January 2003 to the conclusion of the Please note that pursuant to Section 443E of the Act, as administration. Administrator, I have a right of indemnity out of the floating charge assets of the company in respect of any trading liabilities and my fees and costs. Pursuant to Section 443F of the Act, this right of indemnity is secured by way of a lien over the company's floating charge assets.

FRREIRE HODGSON

Employee Entitlements

5.9 The employee entitlements are summarised as follows:

Wages	16,333
Annual Leave	13,563
Superannuation	13,065
Nodce	32,333
Total	\$75,294

5.10 Pursuant to Section 561 of the Act, the floating charge assets are available to priority creditors ahead of the secured creditors. In a liquidation scenario, due to the floating charge assets as set out in the statement of position being less than the amount of employee entitlements outstanding, employees will not be paid out in full.
I advise that employees have been paid out their wages in full and that some $5,11$ employees have worked out their notice period during the administration. Therefore, the notice amount has been reduced from \$32,333 to \$15,570.
5.12 Pursuant to the Act, the directors' entitlement to employee entitlements is limited to a maximum \$2,000 for wages/superarmuation and \$1,500 for annual leave/long service leave. The balance of \$126,092 owing to director, Paul Ingram, ranks as an unsecured claim against Menzies.

Plant and Equipment/Motor Vehicles/Office Equipment

5.13 Beevis & Co Auctioneers has valued the plant and equipment for Menzies and KSM. Menzies does not trade and holds a minimal amount of plant and equipment, therefore I have assumed all plant and equipment is owned by KSM for the purpose of this analysis.

Rothsay Project - Joint Venture

5.14 Central West Gold ("CWG") is the registered and beneficial holder of mineral licences L39/24, M59/39 and M59/40 ("Rothsay Licences or "Project").
Thurdelarra Exploration Ltd ("THX") and CWG entered into the Rothsay Farmin and 5.15 Joint Venture Heads of Agreement on or around 21 March 2000. THX had the right to earn 70% interest in the Rothsay Licences by spending \$350,000 by March 2003.
On 28 May 2002, Menzies signed a Letter of Agreement with THX for Menzies to 5.16 earn an interest in THX's interest in each of the Rothsay Licences.

FERRIER HODGSON

The main terms of the agreement are as follows: 5.17
Stage 1 Menzies and THX to jointly fund an exploration program on the $(a)$ Rothsay Licences for a total cost of approximately \$150,000 to be funded equally between Menzies and THX. At completion of Stage 1, Menzies is required to give notice to THX of its decision to commence Stage 2 within 30 days. Stage 1 was completed on 10 October 2002.
Stage 2 Menzies must fund the Project to completion of 'Final Feasibility $(b)$ Study" within 12 months of the execution of the Letter of Agreement.
Stage 3 The parties must decide whether to commence production of the (၀) Project no later than 18 months from the execution of the Letter of Agreement. If a decision to mine is made then THX's contribution to project expenditure shall be funded by Menzies, to be recouped from THX's share of cash inflows from the Project's revenues.
On 5 February 2003 I was advised by THX that Menzies had withdrawn from the 5.18 Agreement because Menzies failed to give notice of its intention with respect to Stage 2. I have disputed this claim on the basis that the directors of Menzies were already in discussions with THX regarding Stage 2 at the date of my appointment. THX has agreed to allow the Administrators to introduce a third party to the Rothsay Project to complete the "Final Feasibility Study" by 28 May 2003.
To determine whether Menzies' right to earn an interest in the Rothsay Project had 5.19 any value, I commissioned Ray Cary of Northwind Resources Pty Ltd to conduct a valuation of the Project's tenements. The valuation was based on Menzies currently having no interest in Rothsay, and the prospect of meeting its obligations to earn an interest. Based on the valuation, the tenements are estimated to have no value to Menzies at present and there is no potential to create value by renegotiating the agreement.

Eaglemist Pty Ltd

Eaglemist has a fixed and floating charge over the assets of Menzies and KSM dated 5.20 20 December 2002. Menzies granted the charge over its assets as collateral security for funds lent to KSM of \$871,000. Menzies also gave Eaglemist priority ahead of its security in KSM. The sum of \$871,000 was used by KSM to:
pay out the National Australia Bank Limited equipment loan (\$348,579) who $\omega$ had a fixed and floating charge over the assets;
repayment of the Gullewa royalties of \$653,264 which was predominantly ው) paid for from the sale proceeds of Deflector \$629,000);
increase the deposits pledged with respect to the performance bonds as (c) required by DOIR (\$136,943); and
working capital requirements (\$361,214). $\mathbf{d}$
In accordance with Eaglemist's proof of debt, Eaglemist is owed approximately $5.21$ \$1,060,000. I have calculated the debt owing as follows:

Facility Agreement	871,000
December 2002 Royalty	1,969
January 2003 Royalty	6,438
January 2003 Royalty (Gullewa Ltd)	2,541
Interest and Other Costs	178,052
Total	\$1,060,000

Pursuant to the Facility Agreement between KSM and Eaglemist, KSM is required to $5.22$ pay a royalty to Eaglemist for the amount of gold produced from the Deflector tenement which was sold to Eaglemist in December 2002.
In addition to the charge, Baglemist also has a right of first refusal over the remaining $5.23$ Gullewa tenements.
As the secured creditor, Eaglemist had the ability to appoint a Receiver and Manager 5.24 to the company within ten business days of my appointment. Eaglemist has agreed to not appoint a Receiver and Manager at this stage. I have however entered into a Deed with Eaglemist which allows it to appoint a Receiver and Manager at any time in the future should it decide to do so to protect its position.
Pursuant to Section 588FJ of the Act, a charge is void as against the company's $5.25$ liquidator if the company is being wound up in insolvency and the charge was created within six months prior to the relation back day, being 30 January 2003. Eaglemist's charge is within the six month period but Section 588FJ(2) of the Act states that charge is still valid if it secures an advance paid to the company, or at its direction, at or after that time and as consideration for the charge.
The charge appears valid as consideration was provided by way of a loan of \$871,000 $5.26$ from Eaglemist to KSM, which enabled KSM to continue trading and thereby protecting Menzies' investment in KSM.

Trade Creditors

At the date of my appointment, the company had unsecured creditors totalling $5.27$ approximately \$81,563. This amount is subject to proofs of debt being lodged by all creditors and my adjudication of those claims.

$15₁$

Office of State Revenue - Stamp Duty Assessment

There is an outstanding liability to the Office of State Revenue for stamp duty for the $5.28$ purchase of KSM by Menzies in March 2002. It is not certain on which basis the Office of State Revenue will calculate the stamp duty owing but estimates range from \$15,000 to \$250,000. I have assumed the worst case scenario in the statement of position.

King Solomon Mines Shareholders

At the date of my appointment, there was an outstanding liability to two KSM 5.29 shareholders for an amount of \$316,646. The shareholders are Jevport Pty Ltd, a related party to director Bob Anderson, and director Steve Bremen. The liability was incurred when Menzies purchased KSM in March 2002 and agreed to pay KSM shareholders in either cash or Menzies shares over a period of time in consideration for their shares.

Menzies Switzerland - Loan

Menzies Switzerland, a wholly owned subsidiary of Menzies, lent \$572,127 to 5.30 Menzies. This amount is an unsecured loan. However, I understand that Menzies Switzerland has no creditors and therefore if Menzies Switzerland is wound up, the surplus funds would flow to Menzies. Therefore, this debt may be able to be forgiven.

PAYG

At the date of my appointment, Menzies had an outstanding liability to the ATO for 5.31 an amount of \$53,052 for PAYG tax for the period October 2002 to January 2003.

Shortfall on Leases/Hire Purchases

The estimated shortfall on the lease and hire purchase contracts at the date of my 5.32 appointment is as follows:

Lessor	Equipment	Payout Figure	Auction Value	Equity/ (Shortfall)
Esanda Esanda Esenda Total	Toyota Landeruissr Toyota Landeruiser Toyota Coaster Bus	47,365 48,425 46,118 \$141,908	36,000 36,000 28,000 \$100,000	(11, 365) (12.425) (18,118) \$(41,908)

Payroll Tax

At the date of my appointment, Menzies had an outstanding liability to the Office of 5.33 . State Revenue for an amount of \$1,461 for payroll tax for the month of January 2003.
Eaglemist, as secured creditor, has consented to the Administrators having access to 5.34 both the fixed and floating charge assets of the company subject to certain conditions.

In addition, in return for the secured creditor not appointing a Receiver and Manager, any fees and costs associated with carrying out any statutory duties required to be performed by an Administrator but not by a Receiver and Manager and paid for out of Menzies assets will be reimbursed to the secured creditor as a first ranking priority out of any funds recovered that would not normally be available pursuant to the charge (ie. from insolvent trading claims). This is not expected to materially impact upon any return to creditors.

Further, the statement of position does not take into account any potential recoveries 5.35 in respect of voidable transactions, goodwill (if any) and realisation costs.

6 RECEIPTS AND PAYMENTS

I have attached as Annexure C, a summary of the receipts and payments of the $6.1$ administration from 30 January 2003 to 2 April 2003.

INVESTIGATIONS AND POTENTIAL VOIDABLE TRANSACTIONS RECOVERABLE BY A $\overline{7}$ LIQUIDATOR

I have conducted preliminary investigations into the affairs of the company to enable 7.1 me to prepare this report and to state an opinion on which option available is in the creditors' best interests. My investigations have been based on information provided to me by creditors, the company and its directors which has included:
Menzies books and records; and $(a)$
discussions with the company's directors and employees. $\mathbf{b}$
Notwithstanding the extension of the convening period for an extra 45 days, the $7.2$ administration process provides a relatively short period of time within which the Administrator is able to complete his preliminary investigations. This means that it is difficult to definitively identify the likely causes of action and/or available recoveries. Such conclusions would usually only be made after more detailed investigations had been undertaken which would include:
the public examination, under oath, of relevant officers of the company and the $\left( 1\right)$ entities with which it has had commercial involvement; and
detailed review of documentation produced by relevant persons upon enquiry (b) by a Liquidator/Administrator or following examinations referred to in (a) above.
Accordingly, the conclusions drawn herein with respect to my investigation of the $7.3$ company's affairs should be viewed as preliminary and they will be confirmed, or otherwise, by way of other appropriate enquiry.

FERRIER HODGSON

$7.4$ In the course of my investigations, I have endeavoured to ascertain whether there are any transactions that appear to be voidable in respect of which money, property or other benefits might be recoverable by a liquidator under Part 5.7B of the Act. Part 5.7B of the Act deals with, amongst other things:
unfair preferences to creditors; $(a)$
uncommercial transactions to creditors/third parties; and (b) $\overline{\text{(c)}}$
insolvent trading claims against a company's directors.

Unfair Preferences

I have conducted a preliminary review of the company's records and I have not $7.5$ identified any payments to trade creditors which may constitute unfair preferences recoverable by a liquidator. I have only conducted preliminary investigations into these transactions and a liquidator would need to conduct further investigations. These further investigations would include continued assessment of the strengths and weaknesses of claims identified, defences available to the third parties, financial capacity of the defendants to meet such claims or in fact whether claims exist given the nature and history of the dealings between the parties.
However, there may be a preference to KSM's shareholders for consideration of their $7.6$ shares when Menzies acquired KSM in March 2002. As part of the consideration, Menzies proposed to pay KSM shareholders \$1.8 million. \$900,000 would be allocated in Menzies shares and the other \$900,000 would be a combination of cash and/or shares to the KSM shareholders.
At Menzies' General Meeting of Shareholders held on 8 November 2002, a resolution $7.7$ was passed to issue \$900,000 of shares to KSM's shareholders.
The remaining \$900,000 was negotiated to be paid in three (3) instalments. The first $7.8$ instalment of \$272,323 was paid on 16 September 2002, the second instalment of \$317,999 was paid on 16 December 2002 and the remaining \$309,678 was due to be paid on 16 March 2003.
The cash payments made to the directors of Menzies or related entities of the directors 7.9 were as follows:

	10/9/02	16/12/02
Angela Anderson	46,452
Barbara Anderson Robert Anderson		23.226
Barbara Bremen	٠	154.838
Total		23,226
	46,452	201 290

Therefore there may be possible preference claims of approximately \$201,000 in 7.10 respect of cash payments made to the KSM shareholders who where either a related entity or a director of Menzies and may have had reasonable grounds to presume that the company was insolvent when the payments were made. I refer you to paragraph 7.25 where the estimated date of insolvency is deemed to be 30 November 2002.

manales admin report 27.03.03.54

The likelihood of the KSM's shareholders ability to repay any claims made against $7.11$ them is not known however, I am aware that Mr Anderson is a director of another failed entity (in addition to KSM and Menzies) which may be liquidated shortly and therefore he will be able to be pursued by creditors with personal guarantees.
As previously advised, I have only conducted preliminary investigations into these $7.12$ transactions and a liquidator will need to conduct further investigations.

Uncommercial Transactions

Based upon my preliminary review of the company's records it appears that there are $7.13$ no transactions which may constitute uncommercial transactions. In this regard, I have reviewed the purchase of KSM by Menzies in March 2002.
Menzies acquired 100% of KSM's shares in March 2002 for an amount of $7.14$ approximately \$3.28 million, which was comprised as follows:

Consideration	Amount
61.664 million shares in Menzies (2c each) Cash / Deferred Shares Acquisition Costs	1,230,000 1,800,000 250,000
Total	\$3,280,000

7.15 In addition, Menzies assumed the liabilities of KSM which totalled approximately \$4.98 million.
7.16 The above purchase is compared to the purchase by KSM of the tenements and plant and equipment from Gullewa in November 2000 for \$1 million plus a 1% royalty on gross revenue derived from the tenements.
I advise that my preliminary investigations into this transaction reveal that the $7.17$ directors of Menzies did not appear to act negligently in the purchase of KSM based on the following observations:
Menzies engaged an independent expert consultant, Richard Flanagan Mining $(a)$ Consultancy Pty Ltd, to undertake an initial fatal flaw and due diligence study prior to Menzies' decision to continue with the acquisition of KSM;
the project was, or near, a positive cash flow position when acquired; $(b)$
an extensive cash flow model was prepared on the project and it was expected $(c)$ to generate approximately \$24 million in free cash flow after four years which included the \$4.98 million of KSM liabilities that Menzies had acquired. Menzies were therefore paying \$3 million to acquire a project that would generate \$24 million in free cash flow; and

FERRIER HODGSON

a detailed due diligence report was prepared for the directors of Menzies (d) supporting the company's views that it had undertaken all steps required in the viability of the project and its view to proceed with the acquisition.
After preliminary investigations, I do not believe that the transaction was 7.18 uncommercial and therefore is not voidable against a Liquidator.

Trading Whilst Insolvent

I have conducted an investigation into whether the directors of the company have 7.19 allowed the company to incur credit whilst there were reasonable grounds for suspecting that the company was insolvent as detailed in the provisions of Section 588G of the Act.
As stated above, the directors at the date of my appointment were as follows: 7.20

Robert Anderson Steven (Brad) Bremen Paul Ingram Werner Ulrich Jan Bloemraad Gerda Bloemraad (Alternate Director)

Section 588G(1) applies if: 7.21
a person is a director at the time the debt is incurred; and $\circ$
the company is insolvent at that time; and ው)
at that time, there are reasonable grounds for suspecting that the company is $\circ$ insolvent
$7.22$ The above provision is breached if:
the person is aware at that time that there are grounds for suspecting $(a)$ insolvency; or
a reasonable person in a like position in a company in the company's $\left( b\right)$ circumstances would be so aware, section 588G(2).
For there to be a breach, the company had to be insolvent at the time the debt was 7.23 incurred. The Courts have held that insolvency is the inability to pay the company's debts as and when they fall due. The Courts have also held that "mere illiquidity" is not evidence of the inability to pay debts as and when they fall due.
7.24 The directors have several defences available to them as detailed in Section 588H of the Act. Briefly, these defences are:

FERRIER HODGSON

if it is proved that, at the time the credit was incurred, the person had $(a)$ reasonable grounds to expect, and did expect, that the company was solvent at that time and would remain solvent.
if the person relied on another person to provide the financial information so $(b)$ that if the information was relied upon, the company was solvent and would remain so.
the director was ill and did not take part in the management of the company. $(c)$
the director took reasonable steps to prevent the company from incurring the $(d)$ debt.
Based upon my preliminary investigations, it appears that the company may have $7.25$ been insolvent at 30 November 2002. I base my opinion on the following factors:

$(a)$ Ageing of Creditors

I have conducted a preliminary ageing of creditors' debts outstanding as at 30 January 2003. The ageing is as follows:

Month Incurred		76
January 2003	24,829	30.4
December 2002	17,172	21.1
November 2002	11,226	13.8
October 2002	28.336	34.7
Total	\$81,563	100.0

The above shows that credit of \$42,001 was incurred after 30 November 2002.

(b) Writs and Summonses

There were no writs and summonses issued against the company.

$\mathbf{(c)}$ Statutory Payments

Payroll tax for the month of January 2003 and PAYG for the period October 2002 to January 2003 were outstanding at the date of my appointment. These liabilities were not due and payable until after my appointment.

Superannuation has not been paid since July 2002, however superannuation isn't technically due until July 2003.

The above indicates that the company was up to date with its statutory payments.

Balance Sheet and Cash Flow Insolvency (d)

Whilst not on its own conclusive grounds to demonstrate insolvency, Menzies had a working capital deficiency as at 30 June 2002 and January 2003.

Audit Report for 30 June 2002 (e)

I note that in Menzies' 2002 Annual Report, the independent audit report provided by Ernst & Young advised of inherent uncertainty regarding going concern for Menzies and the consolidated entity.

The estimated credit incurred after 30 November 2002 was approximately \$42,000. 7.26. Given the quantum of the potential claim, it is unlikely that a liquidator would pursue the claim taking into account the costs and risks in pursuing such a claim.
Further investigation of the potential claims against the directors for insolvent trading $7.27$ and any possible defence is required.
I advise that the directors cannot be pursued by the Deed Administrator or individual 7,28 creditors under the insolvent trading provisions in the event that a DOCA is accepted by creditors. The provisions are only available if the company is in liquidation.
I have attached as Annexure D, a timetable of significant events collated during my $7.29$ investigations.

DEED OF COMPANY ARRANGEMENT PROPOSAL 8

Eaglemist (now SMM) has submitted a DOCA proposal in Menzies which provides 8.1 for the following:
The Deed Administrators will retain the floating charges assets of Menzies $(a)$ (cash and proceeds from sale of shares in Marketboomer Pty Ltd) which will be transferred to a Trust ("Menzies Creditors Trust") for distribution to creditors.
SMM will pay an amount of \$120,000 to the Menzies Creditors Trust. $(b)$
The Menzies Creditors Trust will be distributed to creditors in accordance with $(c)$ the provisions of the Act relating to calling for proofs of debt and admission of claims. [Please note that under these provisions, if a creditor is not satisfied with a Liquidator's determination on the admissibility of their claim, they have a right to appeal the adjudication of their claim to the Court. However, there is no authority which suggests that this right is preserved where the distribution is made from a Trust as opposed to a corporation].
SMM will pay \$39,000 to KSM in full and final settlement of any claims $(d)$ either party has against the other.
KSM will transfer its tenements, direct shipping ore and plant and equipment $\circ$ to Menzies for \$980,000 in full and final satisfaction of Menzies' secured and unsecured claim against KSM. In addition, KSM will release Menzies from any claims (including insolvent trading claims) it may have against it.
SMM's charge over the assets of Menzies will not be released. $(f)$
(g) The Deed Administrator ("Trustee") will distribute the funds in the Menzies Creditors Trust in accordance with section 556 of the Act. Therefore, the Administrators will be paid their fees in full and the employee entitlements should also be paid in full (dependant on the completion of the sale of the Marketboomer shares). The balance of the funds will be available to unsecured creditors (excluding inter-company loan accounts).
$8.2$ Under the DOCA, the dividend to the unsecured creditors of Menzies is approximately 6 cents in the dollar. In a liquidation scenario, the Menzies oreditors would not receive a dividend. This is calculated as follows:

	Liquidate	DOCA
	ERV	ERV
Total Floating Charge Assets after Administrators Fees	10,316	10,316
Placement in Menzies		120,000
Amount Available	10,316	130,316
Total Employee Entitlements	(75, 294)	(75,294)
Surplus Available for Unsecured Creditors	(64,978)	35,022
Unsecured Creditors' Claim
Insolvent Trading Settlement with KSM Liquidator	(1,100,000)	o
Trade Creditors	(81, 563)	(81, 563)
Stamp Duty Assessment (est - worst case)	(250,000)	(250,000)
Amount due to KSM shareholders (purchass price)	(316, 646)	(316, 646)
Loan to Menzies Switzerland	(572,127)
FAYG/Payroll	(54, 513)	(54, 513)
Laase Liability	(41,907)	(41,907)
Shortfall in Employee Claims (director - Ingram)	(126,092)	(126,092)
Total Unsecured Creditors' Claim	(2, 542, 848)	(870, 721)
Net Surplus/(Deficiency) Subject to Costs	(2,607,827)	(815,700)
Estimated Return to Unsecured Creditors	NII	0.063

8.3 The DOCA is subject to numerous conditions precedent including:
$\left( n\right)$ KSM being in liquidation;
$(b)$ the mutual releases;
the settlement of the sale of KSM's fixed assets to Menzies; $\circ$
$\omega$ Menzies' shareholder approval;
the resignation of the current directors of Menzies; $\circ$
$\circ$ the payment of \$120,000 by SMM;
$\left( \mathbf{g} \right)$ the creation of the Menzies Creditors Trust.

Based on the valuations I have received for KSM's assets, under the above proposal, I 8.4 believe that KSM's assets will be purchased by Menzies for fair value.
The Menzies DOCA will result in the KSM creditors receiving a dividend of 8.5 approximately 5 cents in the dollar as opposed to a likely return of nil in a liquidation scenario.
As the DOCA provides for a return to Menzies creditors that would not otherwise be 8.6 available, I believe that it is in the best interests of Menzies's creditors. Please note that even if a Liquidator was successful in pursuing the preferences from the KSM shareholders at paragraph 7.9 above, taking into account costs and the ability of the shareholders to repay the debts, I do not believe that the liquidation scenario will result in a better return to creditors.
Please note that the Menzies' DOCA and its impact on KSM's creditors has been $8.7$ discussed with KSM's committee of creditors at a meeting held on 31 March 2003. The committee resolved that they supported the liquidation of KSM and agreed that the Liquidator of KSM should provide the releases required in the Menzies DOCA, subject to the DOCA being approved by Menzies' creditors.

9 OPTIONS AVAILABLE TO CREDITORS

The options available to creditors at the second meeting of creditors of Menzies are to $9.1$ resolve that:
the company executes a DOCA with its creditors; or $\mathbf{(a)}$
the company be wound up; or $(b)$
the administration be terminated. $\mathbf{(c)}$
The creditors may also resolve to adjourn the meeting for a period of up sixty (60) $9.2$ days.
The effect of each of the implementation of each of these options is as follows: 9.3

Deed of Company Arrangement

Section 8 of this report discusses the DOCA proposal by SMM. 9.4
Should creditors resolve that the company accepts the DOCA proposal, the realisation $9.5^{\circ}$ of the floating charge assets and funds received from SMM will enable the Administrators' fees and employee entitlements be paid in full and the balance resulting in a dividend of approximately 6 cents in the dollar to unsecured creditors of Menzies. Under a liquidation scenario creditors will not receive a dividend from the realisation of assets and any return will be limited to any recoveries from preference recoveries or an insolvent trading claim which are costly actions to run and may take some time to resolve.

$24$

It is my opinion that it is the best interests of the creditors to accept the DOCA $9.6$ proposal as it will provide a greater return to unsecured creditors than they would receive if the company was placed into liquidation.

Winding Up of the Company

Should creditors resolve that the company be wound up, the company will be placed $9.7$ into liquidation. The liquidator is required to realise and distribute the assets in accordance with the Act and will also be required to complete a thorough investigation into the company's past dealings and affairs and the past actions of the directors.
At paragraph 2.5 I have estimated the return to unsecured creditors from going 9.8 concern realisations at nil cents in the dollar. This assessment does not take into account any recoveries from insolvent trading or preference recoveries. I believe that any return to unsecured creditors in a liquidation scenario will be limited to any recoveries from uncommercial transactions, preference claims or an insolvent trading claim which is approximately \$42,000. These are costly actions to run and may take some time to resolve. Given the estimated quantum of the claims, the risks and costs associated with the claims and the ability of the directors to pay any judgement, it does not appear to be feasible or commercial to pursue these actions.
$9,9$ Accordingly, it is my opinion that the creditors should not resolve to wind up the company as they will receive a greater return from accepting the DOCA proposal.

Termination of the Administration

Should creditors resolve that this administration be terminated, the company will be $9.10$ placed into a similar position to that existing prior to the appointment of the administrator. Creditors would have the option of petitioning the Court to have the company would up at their own expense. It is likely that a resolution to merely terminate the administration will result in either the secured creditor appointing a Receiver or alternatively the Court appointing a Liquidator. As the company is clearly insolvent in its current form, I do not consider that creditors would obtain any benefit from the administration coming to an end.
9.11 Accordingly, it is my opinion that the creditors should not resolve to end the administration.

Adjournment

Adjournment of a meeting, for a maximum of 60 days, would normally occur where 9.12 the company, its directors and the Administrators wanted more time to prepare a DOCA or where creditors wished to have further enquiry made in relation to the affairs of the company. As a DOCA has been proposed, this option will provide no benefit to creditors.

$25$

ADMINISTRATORS' RECOMMENDED COURSE OF ACTION 10

Based on the Statement of Position, it does not appear as though the unsecured $10.1$ creditors will receive a dividend distribution from a sale of the company's assets. However, there may be a return to creditors if the Menzies' DOCA is accepted by its creditors. The estimated return to Menzies creditors of 6 cents in the dollar will be paid within a 6 month time frame.
10.2 Having considered all of the issues surrounding this administration, it is my recommendation that creditors resolve to accept the DOCA proposal by SMM which will enable unsecured creditors to receive a dividend which they would be unlikely to receive if the company was placed into liquidation

If you have any queries in relation to this matter, please do not hesitate to contact Ben Cohen or Tristan Cromarty at this office.

Joint and Several Administrator of Menzies Gold-Limited

Annexure A

MENZIES GOLD LTD

BALANCE SHEET ANALYSIS

	30 June	30 June	30 Janaury
	2001	2002	2003
CURRENT ASSETS:
Cash Assets	1,043,308
Receivables		51,193	68,195
Other Assets	130,343	513,326	555,533
Unexpired Interest	O		1,729
TOTAL CURRENT ASSETS:	1,173,651	564,519	27,062
			652,519
LESS CURRENT LIABILITIES
Trade Creditors	126,507	343,235	170,412
KSM Shareholders	0	1,800,000	316,644
Interest bearing Liabilities		20,177
Provisions/Accruals	250,000		404,307
GST Outputs			53,052
TOTAL CURRENT LIABILITIES	376,507	2,163,412	944,415
WORKING CAPITAL POSITION	797,144	(1, 598, 893)	(291, 896)
NON CURRENT ASSETS
Receivables (KSM)	1,250,000	1,050,000	800,000
Property, Plant & Equipment	2,565	144,114	120,995
Investments	546,227	3,828,318	4,096,516
Other Assets			(11, 367)
TOTAL NON CURRENT ASSETS	1,798,792	5,022,432	5,006,144
NON CURRENT LIABILITIES
Interest Bearing Liabilities
Payables - Menzies SA	0 0	134,943 496,827
TOTAL NON CURRENT LIABILITIES	0		572,127
		631,770	572,127
NET ASSET POSITION	2,595,936	2,791,769	4,142,121
EQUITY POSITION

Contributed Equity Accumulated Losses	53,476,096	55,034,388	56,741,915
	(50, 880, 160)		$(52, 242, 619)$ (52,599,796)
NET EQUITY POSITION	2,595,936	2,791,769	4,142,119

I:\King Solomon Minas Limitad[KSM - F!NACIAL ANALYS'S - BALANCE SHEETS.xis]Menzies

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MENZIES GOLD LTD

PROFIT AND LOSS ANALYSIS

		ş
		in 1921 Sin 1921

devenue from ordinary activities	高部
inpenses from ordinary activities	原理	西方原理
rofil (Loss) from ordinary activities
ess income tax expense
mfit(Los) from ordinary activities	取得延長期	植钓的植物

FAXing Solumeon Mines Limited(Isen financial stetcment aredysis - P & Latiplearates P&L

Annexare B

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+0893270931

America C.

Menzies Gold Limited
(Administrator Appointed)

Joint Administrator's Abstract Of Receipts And Payments
To 02/04/2003

	Total
RECEIPTS	AUD
Cash at Bank Plant & Equipment Refunds Contractors Income - KSM GST Payable	3,438.87 1,950,00 1,862.34 11.725.11 246.57
	19,022.89 ٠
k. PAYMENTS
Bank Charges Electricity Lease payments Sundry Expenses Telephone & Fax Vehinle Dunnieg Ceata	2.10 354.95 1.022.56 5,45 300.14

Telephone & Fax Vehicle Running Costs Wages & Balaries Fuel Meal Reimbursement Employees (E) GST Receivable		フィマ 300.14 37.05 11,182.39 120.71 60.73 4.146.00 189,67
$\blacksquare$ Balances in Hand	$\blacksquare$	17,410.75 1,512,14
		19,022,89

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Annexure D

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MENZIES GOLD LIMITED/KING SOLOMON MINES LIMITED

TIMETABLE OF SIGNIFICANT EVENTS

Date	Event
16 August 1983	Menzies was incorporated
2 August 2000	KSM was incorporated
November 2000	KSM purchased Gullewa's plant and equipment and some mining tenements
December 2001	Head of Agreement to acquire 51% of KSM by Menzies
21 December 2001	Remaining Gullewa tenements were purchased
21 December 2001	Menzies provided funding to KSM to purchase Gullewa tenements and took security over the assets of KSM
31 December 2001	Option to acquire the remainder of Gullewa leases expired
19 March 2002	Menzies shareholders ratified 100% purchase of KSM
20 March 2002	Acquisition of KSM - issue of shares
31 March 2002	Commissioning of plant completed
April 2002	Menzies commenced operations of KSM
30 June 2002	Net profit of \$295,997 Cash cost per ounce recovered $=$ \$798.57
31 July 2002	Net loss of \$345,252 Cash cost per ounce recovered = \$907.59
31 August 2002	Net profit \$68,065 Cash cost per ounce recovered = \$512.85
13 September 2002	Trading halt of Menzies shares to allow renegotiation of purchase price with KSM shareholders
16 September 2002	Balance of purchase price for acquisition of KSM of \$1.8 million due
16 September 2002	Renegotiation of timing of payment of purchase price to KSM shareholders completed.

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30 September 2002	Net loss \$479,117 Cash cost per ounce recovered = \$1,241.36
31 October 2002 ⁶	Net loss \$524,621 Cash cost per ounce recovered = \$812.12
30 November 2002	Net loss of \$726,748
4 December 2002	Gullewa took security over the assets of KSM
$20$ December 2002	Payment of outstanding royalties due to Gullewa. Eaglemist purchased KSM's Deflector mining lease and provided funding to KSM to pay the Gullewa debt and other debts of KSM
20 December 2002	Eaglemist took a fixed and floating charge over the assets of KSM and Menzies
31 December 2002	Net profit of \$282,870
30 January 2003	Garry Trevor and Martin Jones appointed as Joint and Several Administrators of Menzies and KSM

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AI assistant

TIVAN LIMITED — Audit Report / Information 2003

65967_rns_2003-04-13_8d162d81-2acd-41fe-86a6-fd70e565f8ca.pdf

FACSIMILE

MESSAGE

MENZIES CREDITORS SUPPORT PROPOSED DEED OF COMPANY ARRANGEMENT

KING SOLOMON MINES LIMITED ACN 094 006 069 (Administrators Appointed)

ADMINISTRATORS' REPORT CONCERNING THE AFFAIRS OF THE COMPANY

PURSUANT TO SECTION 439A OF THE CORPORATIONS ACT

2 APRIL 2003

FERRIER HODGSON

TABLE OF CONTENTS

Page No.

FERRIER HODGSON

$\mathbf{1}$ GLOSSARY OF TERMS

2. EXECUTIVE SUMMARY

6

$\overline{\mathbf{3}}$ INTRODUCTION

General

The Administration Process

FERRIER HODGSON

4 BACKGROUND AND HISTORY OF THE COMPANY

Statutory Information

Nature of Business

Events Leading to the Appointment of the Administrators

Historical Financial Position

Trading Performance - Pre-Appointment

Trading Performance - Post-Appointment

5 STATEMENT OF POSITION

FERRIER HODGSON

Cash on Hand/Cash at Bank

FERRIER HODGSON

Inventory

Diesel Fuel Rebate

GST Refund/AGR

Trade Debtors

Metals Account (AGR)

Gold in Circuit

FERRIER HODGSON

Gold on Carbon

Ore Stockpile

Gold Clean Up

Direct Shipping Ore ("DSO")

Costs to Process Ore

Royalty

Shut Down Costs

Administrators' Fees and Costs

Employee Entitlements

Tenements

Plant and Equipment/Motor Vehicles/Office Equipment

Gullewa Ltd

Eaglemist Pty Ltd

Menzies Gold Ltd

Trade Creditors

Shortfall on Leases/Hire Purchases

Payroli Tax

DOIR Royalty

Menzies Gold Ltd

FERRIER HODGSON

Tronte Holdings Pty Ltd

Robert G Anderson

Outstanding Rates

DOIR Environmental Shortfall

FERRIER HODGSON

6 RECEIPTS AND PAYMENTS

$\tau$ INVESTIGATIONS AND POTENTIAL VOIDABLE TRANSACTIONS RECOVERABLE BY A LIQUIDATOR

FERRIER HODGSON

Unfair Preferences

Uncommercial Transactions

Trading Whilst Insolvent

FERRIER HODGSON

$(a)$ Ageing of Creditors

$(b)$ Writs and Summonses

$\left( c\right)$ Statutory Payments

$(d)$ Balance Sheet Insolvency

$(e)$ Monthly Cash Costs to Produce Gold

FERRIER HODGSON

8 DEED OF COMPANY ARRANGEMENT PROPOSAL FOR MENZIES

FERRIER HODGSON

The proposed DOCA will have the following impact on Menzies: 8.2

TIVAN LIMITED Audit Report / Information 2003

King Solomon Mines Limited
(Administrator Appointed)

Joint Administrator's Abstract Of Receipts And Payments
To 02/04/2003