FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1996
GOLD RESERVE CORPORATION
State Of Incorporation: Montana
Commission File Number: 1-8372
IRS Employer Identification No: 81-0266636
Address Of Principal Executive
Offices: 1940 Seafirst Financial Center
Spokane, Washington 99201
Registrant's Telephone Number: (509) 623-1500
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class: Common Stock
Name Of Each Exchange On
Which Registered: NASDAQ
The Toronto Stock Exchange
Securities registered pursuant
to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period as the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X
The number of shares of common stock outstanding at May 1, 1996 was
20,622,825.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(unaudited)
March 31, December 31,
1996 1995
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 9,020,598 $10,095,616
Investments:
Held-to-maturity securities, at
amortized cost 14,885,178 10,630,963
Accrued interest on investments 39,457 101,793
Deposits, advances and other 399,720 628,037
Litigation settlement held in escrow 4,500,000 4,500,000
----------- -----------
Total current assets 28,844,953 25,956,409
Property, plant and equipment, net 23,087,465 22,065,868
Investments:
Available-for-sale securities 91,754 215,364
Held-to-maturity securities, at
amortized cost - 4,000,000
Other 24,066 24,066
----------- -----------
Total assets $52,048,238 $52,261,707
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED BALANCE SHEETS, CONTINUED
March 31, 1996 and December 31, 1995
(unaudited)
March 31, December 31,
1996 1995
----------- ------------
LIABILITIES
Current Liabilities:
Litigation settlement payable $ 4,500,000 $ 4,500,000
Accounts payable and accrued expenses 329,505 262,219
Note payable - KSOP, current portion - 149,960
----------- -----------
Total current liabilities 4,829,505 4,912,179
----------- -----------
Note payable - KSOP, non-current portion 186,708 186,749
Minority interest in consolidated
subsidiaries 88,733 90,160
----------- -----------
Total liabilities 5,104,946 5,189,088
----------- -----------
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value
Authorized: 10,000,000 shares
Issued: none
Common stock, without par value
Authorized: 40,000,000 shares
Issued: 1996... 20,580,492;
1995... 20,476,688
Outstanding: 1996... 20,099,448;
1995... 19,995,644 80,517,757 80,068,854
Less, common stock held by affiliates (1,428,565) (1,428,565)
Unrealized gain on available-for-sale
securities - 85,960
Accumulated deficit (31,959,192) (31,316,921)
KSOP debt guarantee (186,708) (336,709)
----------- -----------
Total shareholders' equity 46,943,292 47,072,619
----------- -----------
Total liabilities and share-
holders' equity $52,048,238 $52,261,707
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
----------- -----------
Other Income:
Interest $ 288,230 $ 428,611
Foreign currency loss (162,640) (3,862)
Gain on sale of available-for-sale
securities 86,286 -
Miscellaneous 1,375 -
----------- -----------
213,251 424,749
----------- -----------
Expenses:
General and administrative 421,339 175,334
Directors' and officers'
compensation 305,500 68,830
Legal and accounting 119,027 75,359
Depreciation 8,366 6,601
Minority interest in net loss of
consolidated subsidiaries (1,427) (3,126)
Interest expense, net of amount
capitalized 2,717 1,422
----------- -----------
855,522 324,420
----------- -----------
Net income (loss) $ (642,271) $ 100,329
=========== ===========
Net income (loss) per share $ (0.03) $ 0.01
=========== ===========
Weighted average common shares
outstanding 20,039,296 18,605,526
=========== ===========
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
----------- -----------
Cash Flows from Operating Activities:
Net income (loss) $ (642,271) $ 100,329
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation 8,366 6,601
Amortization of discount on held-
to-maturity securities (109,655) (230,863)
Foreign currency loss 162,640 3,862
Minority interest in net loss of
consolidated subsidiaries (1,427) (3,126)
Gain on sale of available-for-sale
securities (86,286) -
Changes in current assets and
liabilities:
Net decrease (increase) in
current assets 290,653 (4,249,779)
Net increase in current
liabilities 67,286 56,593
----------- -----------
Net cash used by operating
activities (310,694) (4,316,383)
----------- -----------
Cash Flows from Investing Activities:
Proceeds from maturity of held-to-
maturity securities 8,460,000 6,022,000
Purchase of held-to-maturity
securities (8,604,560) (2,028,732)
Purchase of property, plant and
equipment (1,192,603) (866,338)
Proceeds from sale of available-for-
sale securities 123,936 -
----------- -----------
Net cash provided (used) by
investing activities (1,213,227) 3,126,930
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of common
shares 448,903 192,598
----------- -----------
Net cash provided by financing
activities 448,903 192,598
----------- -----------
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
For the Three Months Ended March 31, 1996 and 1995
(unaudited)
1996 1995
----------- -----------
Change in Cash and Cash Equivalents:
Net decrease in cash and cash
equivalents $(1,075,018) $ (996,855)
Cash and cash equivalents, beginning
of period 10,095,616 6,675,771
----------- -----------
Cash and cash equivalents, end of
period $ 9,020,598 $ 5,678,916
=========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY. The Company was incorporated in Montana in 1956 for
the purpose of acquiring, exploring and developing mining
properties and placing these properties into production. The
Company is currently involved in the exploration and development of
the Brisas alluvial gold concession (Brisas concession). A number
of significant events must occur before commercial production, if
any, on the Brisas concession can begin, these being the
establishment of proven and probable reserves, financing of
anticipated mine development costs, and the procurement of all
necessary regulatory permits and approvals. The Company has no
producing mineral properties at this time.
FINANCIAL INFORMATION. The December 31, 1995 financial information
has been derived from the Company's 1995 audited financial
statements. The notes to the financial statements as of
December 31, 1995 as set forth in the Company's 1995 Form 10-K,
substantially apply to these interim financial statements at
March 31, 1996 and are not repeated here. The financial
information given in the accompanying unaudited financial
statements reflects all normal, recurring adjustments, which, in
the opinion of management, are necessary for a fair presentation
for the periods reported.
CONSOLIDATED FINANCIAL STATEMENTS. The consolidated financial
statements include the accounts of the Company, three Venezuelan
subsidiaries, Gold Reserve de Venezuela, C.A. (GLDRV), Compania
Aurifera Brisas del Cuyuni, C.A. (Brisas), Compania Minera
Unicornio, C.A. (Unicorn), two domestic majority-owned
subsidiaries, Great Basin Energies, Inc. (Great Basin) and MegaGold
Corporation (MegaGold) and seven Aruban subsidiaries which were
formed to hold the Company's interest in its foreign subsidiaries
or for future transactions. All significant intercompany accounts
and transactions have been eliminated in consolidation. The
Company's policy is to consolidate those subsidiaries were majority
control exists and is other than temporary.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE BRISAS CONCESSION. The Company's sole mining asset is the
Brisas concession, located in the Kilometer 88 mining region of
Bolivar State in southeastern Venezuela. The concession is an
exploitation concession granted by the Venezuelan Ministry of
Energy and Mines ("MEM") covering near-surface alluvial deposits.
An application was submitted to the MEM in February of 1993 to
obtain an exploration and exploitation concession to the hardrock
(veta) mineralization (gold and copper) which is beneath the Brisas
alluvial concession. The MEM informed the Company the application
was approved on March 3, 1995, but the MEM has not yet submitted
the application, as of May 1, 1996, to the Official Gazette for
public comment. The Company is not aware of any fact or
circumstance which would prevent the MEM from submitting the
application for public comment and ultimately granting the hardrock
(veta) concession to the Company. The Company continues to await
formal issuance of the veta rights to the Brisas concession.
<PAGE>
SIGNIFICANT ZONES OR AREAS OF INTEREST. The Company is currently
working in four significant areas or zones contained within the
main trend in efforts to define the mineralization of the
concession. The four significant areas or zones of interest within
this trend are the Pozo Azul zone located in the northern half of
the concession; the high-grade Blue Whale hardrock structure which
is contained within the Pozo Azul zone; the southern part of the
concession where visible gold has been observed in drill core; and
the deeper material below 210 meters.
GEOLOGIC RESOURCE. The Company has to-date announced a geologic
resource of 6.7 million ounces of gold and gold equivalent,
consisting of 4.9 million ounces of gold and 720 million pounds of
copper (or approximately 1.8 million ounces of gold equivalent).
The resource now approximates 177 million tonnes grading 0.85 grams
(0.027 ounces) per tonne gold and 0.18% copper. This resource is
expected to increase as additional results from the current in-fill
drilling program are obtained, as the Blue Whale structure is
delineated further, and as the southern part of the concession and
deeper zones are explored. The mineability of the deeper resource
will ultimately be determined by several factors, including the
price of gold and an economic feasibility study. However, it is
clear that mineralization continues at depth and should be further
evaluated. Mineralization related to the alluvial concession is
less than 15% of the deposit; the remainder of the deposit is
related to the hardrock (veta) concession for which the Company has
applied to the MEM but has not been formally granted as of the date
of this report.
VENEZUELA. The Venezuelan government, amid economic uncertainties
and a bank crisis, suspended certain constitutional rights and
implemented certain currency exchange and price controls on
June 27, 1994. Subsequently, substantially all constitutional
rights were re-established. On April 15, 1996, Venezuelan
President Rafael Caldera announced a series of free-market measures
that included, among other actions, removal of all exchange and
price controls, floating interest rates, gasoline price increases
and increases in certain taxes. As part of these fiscal measures,
the Venezuelan government is negotiating with the International
Monetary Fund for a $1.4 billion, twelve month standby loan in
addition to approximately $2 billion from certain multilateral
lending agencies to help in restructuring the Venezuelan economy.
Inflation is expected to increase over the next six to twelve
months as a result of the elimination of restrictions on the
Venezuelan currency. Subsequent to the announcement the Venezuelan
bolivar exchange rate increased from 290 bolivars per U.S. dollar
to a high of 500 bolivars per U.S. dollar. On May 1, 1996, the
exchange rate was 464 bolivars per U.S. dollar.
Venezuela has generally encouraged foreign investment in the past,
and the Company believes there presently exist no significant
policies, legal requirements or other regulations which might
present barriers to its continued investment in the country.
Inflation and other economic conditions have resulted in political
and social turmoil on occasion and this can be expected to
continue. Such conditions have not materially adversely affected
the Company's operations in Venezuela to-date as substantially all
<PAGE>
of the Company's sources of funding for its Venezuelan operations
are denominated in U.S. dollars and the Company does not currently
repatriate funds from Venezuela. Whether and to what extent
current or future economic, regulatory or political conditions may
affect the Company in the future cannot be predicted.
RESULTS OF OPERATIONS
MARCH 31, 1996 COMPARED TO MARCH 31, 1995. Consolidated net loss
for the three months ended March 31, 1996 amounted to $642,271 or
$0.03 per share, compared to consolidated net income of $100,329 or
$0.01 per share for the same three month period in 1995. The net
decrease in other income is due to a decrease in interest income as
a result of both lower levels of, and returns on, invested cash and
increases in foreign exchange loss due to depreciation of the
Venezuelan currency, offset by an increase in income from sales of
available-for-sale securities. Operating expenses increased by
approximately $532,000. This increase is primarily attributable to
a $246,000 increase in general and administrative expense and a
$236,000 increase in officers and directors compensation. General
and administrative expense increased primarily as a result of
increased KSOP contributions to a larger pool of eligible employees
over the previous year. Directors' and officers' compensation
increased as a result of general salary increases for officers as
well as first-time compensation for services paid to directors.
All expenditures related to exploration activities on the Brisas
concession have been recorded as capitalized exploration and
development costs.
LIQUIDITY AND CAPITAL RESOURCES
INVESTING. During the three months ended March 31, 1996, the
Company expended approximately $1.2 million in the exploration and
development of the Brisas concession. During this same period
eighty-five diamond drill holes were completed for a total of
13,350 meters. On a cumulative basis since inception, the Company
has expended approximately $46 million on the Brisas concession.
These costs include acquisition costs of $2 million, capitalized
exploration and development costs and equipment of $21.5 million
(including Company stock valued at $9.8 million issued to purchase
the minority interest in subsidiaries which owned the Brisas
concession) and litigation settlement costs of $22.5 million
(including $17.5 million of Company stock and warrants).
Presently, the Company is primarily engaged in development drilling
of the Pozo Azul zone and, to a lesser extent, exploration drilling
in certain areas outside the Pozo Azul zone. The current drilling
program for the remainder of the year, which is subject to change
based on actual drilling results, includes a more than 100 diamond
drill-hole program primarily targeted in the Pozo Azul zone based
on 25 x 25 meter spacing, totaling approximately 15,000 meters.
This program is designed to delineate further the resource within
the Pozo Azul zone, including the "Blue Whale" horizon and
mineralization below 210 meters, and to support a feasibility
study. A number of additional drill-holes are planned immediately
to and farther south of the Pozo Azul zone, several holes are
<PAGE>
planned to identify tailings and waste disposal sites, and a number
of large-diameter holes are planned for pilot-scale metallurgical
testing to substantiate initial research work and provide pilot
test data to generate engineering design criteria. The presently
estimated development budget for the remainder of 1996 is
approximately $4 to $6 million.
In 1995 the Company engaged an independent consultant to provide
advice on preliminary mill design and production plans. This
information is being utilized by the Company to develop a
feasibility study for the concession and is preparatory in nature
and therefore not definitive. Currently, the mill is expected to
be a conventional, gravity/flotation/ cyanidation process yielding
estimated recoveries of gold and copper of approximately of 90%.
Initial cost estimates of a 15,000 tonnes per day mill (with an
error factor of -5% to +25%) are approximately $90 million. The
Brisas concession is expected to be mined by open pit methods
commencing in the Pozo Azul pit. The gold and copper appear at
surface and mining is expected to be relatively simple and low
cost, characterized by a low waste to ore strip ratio (estimated to
be 1 to 1). The Pozo Azul pit could ultimately be longer than 1.6
kilometers and up to 800 meters wide. It is currently contemplated
that a 20,000 or more tonnes per day milling facility will be
constructed, and that open pit mining will generate at least 40,000
tonnes per day, including waste rock. By mining the Blue Whale
material in the early years, annual production could be in excess
of 400,000 ounces of gold and 45 million pounds of copper. It is
anticipated that the average gold production would be between
200,000 and 300,000 ounces of gold per year over a 12-14 year mine
life. Studies to be conducted in late 1996 will focus on the final
recovery process to be applied to this deposit. There are two main
types of material to be mined, a soft clay-like material called
saprolite, which constitutes about 15 percent of the deposit, and
bedrock which represents the other 85 percent. Mining will be
conventional blast, shovel and haul open pit mining which would
then be fed to a central crusher.
Significant additional drilling activities remain to be undertaken
on the concession. Management has not determined when commercial
development of the concession, if warranted, might begin.
Development of the Brisas concession is contingent on the results
of future drilling, obtaining the veta rights to the property and
other Venezuelan regulatory issues.
FINANCING. Cash used by operating activities during the three
months ended March 31, 1996 decreased by approximately $4.0 million
from the same period in 1995. This decreased use of cash is
primarily due to the January 1995 transfer of $4.5 million into
escrow, pursuant to the Brisas litigation settlement agreement, an
increase in foreign exchange loss due to depreciation of the
Venezuelan currency and a decrease in the amortization of discount
on held-to-maturity securities offset by a $0.7 million decrease in
net income. Cashflow from investing activities decreased from a
$3.1 million source of funds during the three months ended
March 31, 1995 to a $1.2 million use of funds for the same period
in 1996. The decrease was due to a $4.1 million decrease in net
purchases (maturities) of held-to-maturity securities and an
<PAGE>
increase in purchases of property, plant and equipment of $0.2
million. Cashflow from financing activities increased in 1996 by
approximately $0.25 million as a result of an increase in the
issuance of common stock.
As of May 1, 1996 the Company held approximately $24 million in
cash and held-to-maturity securities. In addition, the Company has
750,000 common share purchase warrants outstanding, exercisable at
$7.33 for a total of approximately $5.5 million, expiring in June
1996 and 1,000,000 common share purchase warrants, exercisable at
$13 for a total of $13 million, expiring in September 1996.
Whether and to what extent additional or alternative financing
options are pursued by the Company will depend on a number of
important factors, including the results of exploration and
development activities on the Brisas concession, whether the
Company is successful in obtaining the rights to the veta
mineralization believed to underlie the Brisas alluvial concession,
management's assessment of the financial markets, the successful
acquisition of additional properties or projects, if any, and the
overall capital requirements of the consolidated group. At this
time management anticipates that its current cash and investment
position, together with the proceeds expected to be received from
any future exercise of outstanding warrants ($18.5 million if fully
exercised), will be sufficient to cover estimated operational and
capital expenditures associated with the exploration and
development of the Brisas concession through 1997.
NEW ACCOUNTING STANDARDS. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). The Statement establishes financial accounting and
reporting standards for stock-based employee compensation plans.
The Statement requires adoption on January 1, 1996 and allows a
reporting entity to continue to measure compensation cost for those
plans using the intrinsic value method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" as
long as the entity provides pro-forma disclosure of stock-based
employee compensation plans using the fair value based method of
accounting in its annual financial statements. Management does not
plan to adopt the measurement provisions of SFAS No. 123 although
the Company will comply with the pro forma disclosure requirements
of the statement in its 1996 annual statements. The Company's
adoption of SFAS No. 123 on January 1, 1996 had no effect on the
financial statements as of, and for the three months ended
March 31, 1996.
In March 1995, Statement of Financial Accounting Standards No. 121
(SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" was issued. The
Statement prescribes the recognition and measurement of impaired
assets, including long-lived assets. It requires that the carrying
amount of impaired assets be reduced to fair value. The Statement
requires a review for impairment of long-lived assets and
identifiable intangibles to be held and used by an entity whenever
events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable. In performing the
<PAGE>
review for recoverability, the entity should estimate the future
cash flows expected to result from the use of the asset and its
eventual disposition. If the sum of the expected future net cash
flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss should be
recognized. However, the amount of the impairment loss to be
recognized is based on discounted cash flows. There was no
financial statement impact as a result of adopting the provisions
of SFAS No. 121 on January 1, 1996.
SIGNATURE. Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on
its behalf by the duly authorized undersigned.
GOLD RESERVE CORPORATION
By: /s/ Robert A. McGuinness
------------------------
Robert A. McGuinness
Vice President - Finance
Chief Financial Officer
May 13, 1996
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