FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
GOLD RESERVE CORPORATION
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(Exact name of registrant as specified in its charter)
Montana 1-8372 81-0266636
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(State of (Commission (IRS Employer
incorporation) File Number) Identification No.)
601 W. Riverside Avenue, Suite 1940
Seafirst Financial Center
Spokane, Washington 99201
(509) 623-1500
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(Address and phone number of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, no par value per share
(Title of each class)
NASDAQ Small-Cap System
The Toronto Stock Exchange
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(Name of each exchange on which registered)
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]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or other information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
(persons who are neither officers, directors nor subsidiaries) of the
registrant based on the closing price on the NASDAQ Small-Cap System
at March 13, 1998 was $59,935,632. The total number of the
registrant's shares of common stock, no par value per share ("Common
Stock"), outstanding and held by non-affiliates at such date was
21,310,447.
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DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the definitive Proxy Statement for the Registrant's Annual
Meeting to be held June 11, 1998, are incorporated by reference to Part
III of this Annual Report on Form 10-K, which Proxy Statement will be
filed within 120 days of the end of the registrant's 1997 fiscal year
pursuant to Regulation 14A.
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TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
Glossary of Significant Terms
PART I
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ITEM 1. Business Overview
Significant Developments In 1997
ITEM 2. Properties
The Brisas Property
Venezuelan Mining, Environment and Other Matters
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
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ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Summary
Liquidity and Capital Resources
Results of Operations
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks
ITEM 8. Financial Statements and Supplementary Data
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
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ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. Certain Relationships and Related Transactions
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Signatures
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FORWARD-LOOKING STATEMENTS
The information presented in or incorporated by reference in this
Annual Report on Form 10-K includes both historical information and
"forward-looking statements" (within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) relating to the future results of the Company (including
projections and business trends), which involve risks and
uncertainties. Prospective investors are cautioned not to put undue
reliance on forward-looking statements, and should not infer that
there has been no change in the affairs of the Company since the date
of this Annual Report on Form 10-K that would warrant any modification
of any forward-looking statement made in this document or other
documents filed periodically with the SEC. All subsequent written and
oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by this
notice. The Company disclaims any intent or obligation to update
publicly these forward-looking statements, whether as a result of new
information, future events or otherwise.
The Company cautions that numerous factors could cause actual results
to differ materially from those in the forward-looking statements,
including without limitation the risk that the feasibility study may
conclude that development of the Brisas property would be uneconomic,
actual reserve estimates may vary considerably from mineralized
deposit estimates presently made, exploration and development results,
the impact of metals prices and metal production volatility, the
Company's concentration of operations and assets other than cash and
investments in Venezuela, regulatory risks, the political and economic
risks associated with international operations, the anticipated future
development costs for the Company's Brisas property, the Company's
dependence upon the abilities and continued participation of certain
key employees of the Company, and the risks normally incident to the
operation and development of mining properties. (See Item 1.
Business--Risk Factors and Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations).
Glossary of Significant Terms
Certain terms used throughout this Annual Report on Form 10-K are
defined below. All currency is in U.S. Dollars unless other wise
noted:
alluvial. 1) Used to identify minerals deposited over
time by moving water, which are
unconsolidated or claylike. 2) Used to
describe a strata of material that
constitutes a concession, i.e. relating to
the Brisas alluvial concession.
andesite. A volcanic or igneous rock of intermediate
composition. It is fine grained and contains
55 to 60 percent silica.
archean. An era in geologic time 3.4 billion years
ago.
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assay. The test performed on a rock sample to
determine its mineral content
auger hole. Drilling with a bit that breaks rock into
chips rather than core. The rock chips are
forced to the surface for examination using
water or compressed air. Typically faster
and cheaper than core drilling.
ball mill. A steel cylinder partially filled with steel
balls into which crushed ore is fed. The
ball mill is rotated, causing the balls to
cascade and grind the ore.
batholith. A large intrusion of igneous rock with a
surface area greater than 100 square
kilometers.
bolivar. The basic monetary unit of the Republic of
Venezuela. As of March 1, 1998, 517
bolivares equaled approximately one U.S.
Dollar.
breccia. A rock in which angular fragments are
surrounded by a mass of fine-grained
minerals.
Brisas. Compania Aurifera Brisas del Cuyuni, C.A., a
Venezuelan corporation and the subsidiary of
the Company that owns the Brisas property.
Brisas alluvial The mining title granted to Brisas in 1988
concession. by the MEM to explore and commercially
develop gold contained in alluvial material
on property.
Brisas hardrock The mining title granted to Brisas by the MEM
concession. to explore and commercially develop and mine
gold, copper and molybdenum contained in the
veta or vein material on the Company's Brisas
property.
Brisas property. The Brisas alluvial concession, the Brisas
hardrock concession, other applications for
mineralization in the material contained in
the alluvial concession (primarily nominal
values of copper and silver) and other
mineralization (primarily gold, copper and
molybdenum) on small land parcels contiguous
to the existing alluvial and hardrock
concessions.
commercially mineable A mineral deposit that contains ore reserves
ore body. (see reserve) that can be economically mined
at current metal prices.
<PAGE>
concentrate. A finely ground product of the milling
process, containing a high percentage of
valuable metal, which is sent to a smelter
for further processing.
concession. A privilege, license or mining title granted,
in the case of the Company, by the MEM, to
explore and, if warranted, produce minerals
from a specified property.
core. The long cylindrical piece of rock, in
varying diameters, brought to surface by core
or diamond drilling.
core drilling. Drilling (also referred to as diamond
drilling) with a hollow bit which has a
diamond-cutting rim and produces a
cylindrical core used for geologic study and
assays. Such drilling is used in exploration
and development activities to determine the
location, orientation and magnitude of a
mineral deposit.
Corporaci n Venezolana A Venezuelan government-owned entity formed
de Guayana ("CVG"). to foster industrial development and to
explore and develop mineral resources in the
Guayana region of Venezuela including the
State of Bolivar.
cyanidation. A method of extracting gold or silver from a
crushed or ground ore by dissolving it in a
weak cyanide solution.
development. Work carried out for the purpose of opening
up a mineral deposit and making the actual
ore extraction possible.
development drilling. Drilling done to more accurately measure the
quantity of minerals contained in a deposit
after exploration drilling.
development stage. A period of time during the life-span of a
mine wherein activities related to the
preparation of a deposit for extraction,
prior to construction, are conducted.
diamond drill. A rotary type of rock drill that cuts a core
of rock that is recovered in long cylindrical
sections, two centimeters or more in
diameter.
dilution. Rock that is, by necessity, removed along
with the ore in the mining process,
subsequently lowering the grade of the ore.
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dip. The angle at which a vein, structure or rock
bed is inclined from the horizontal as
measured at right angles to the strike.
dore. Unparted gold and silver poured into molds
when molten to form buttons or bars. Further
refining is necessary to separate the gold
and silver.
drift. A horizontal underground opening that follows
along the length of a vein or rock formation
as opposed to a cross-cut which crosses the
rock formation.
environmental impact A report, compiled prior to a production
statement. decision that examines the effects of
proposed mining activities on the natural
surroundings.
exploration. Work involved in searching for ore, usually
by drilling or driving a drift.
exploration drilling. Drilling performed in searching for ore,
usually by drilling or driving a drift.
feasibility study. An analysis and compilation of technical and
economic data with the objective of proving
the economic and technical feasibility of the
project. Prepared to support a production
decision on a proposed mining and milling
operation.
flotation. A process for concentrating minerals based on
the selective adhesion of certain minerals to
air bubbles in a mixture of water and ground
up ore. When the right chemicals are added
to a frothy water bath of ore that has been
ground to the consistency of talcum powder,
the minerals will float to the surface. The
metal rich flotation concentrate is then
skimmed off the surface.
geophysical survey. Methods of investigating the subsurface at or
near the surface of the earth or airborne
using the applications of physics including
electric, gravimetric, magnetic,
electromagnetic, seismic, and radiometric.
gold equivalent. Gross value of copper at a stated value per
pound divided by the gross price of gold at a
stated value per ounce.
Gold Reserve de A Venezuelan corporation and an indirect
Venezuela C.A., foreign subsidiary of the Company. GLDRV was
(GLDRV). organized in September 1992 to conduct
exploration and any future development
operations on the Brisas property.
<PAGE>
grade. The relative quantity or the percentage of
ore-mineral content in an ore body, i.e.
grams of gold per tonne or percent of copper
per tonne.
gravity separation. Recovery of gold from crushed rock or gravel
using gold's high specific gravity to
separate it from the lighter material.
Guayana Shield. A large area of exposed basement rocks in
central and eastern Venezuela comprised of
Archean rocks. In the area of the Brisas
property, these rocks are schists and deeply
weathered and kaolinized rocks.
hardrock. Solid rock underlying an alluvial deposit.
Also referred to as bedrock.
hectare. A metric measurement of area equivalent to
10,000 square meters.
high grade. Rich ore. As an adverb, it refers to
selective mining of the best ore in a
deposit.
igneous. Rocks formed by the cooling and solidifying
of magma or lava.
Imataca Forest Reserve. A 3.6 million hectare area of tropical forest
located in the State of Bolivar in
southeastern Venezuela that was set aside as
an environmentally protected region by the
Venezuelan government in the 1960s. The
Company's Brisas property is located in an
area within the reserve which was previously
designated for mining activities.
intrusive. Rock which while molten penetrated into or
between other rocks, but solidified before
reaching the surface.
KM 88 mining district. An area in the State of Bolivar in
southeastern Venezuela containing significant
alluvial and hardrock mineralized deposits.
The Company's Brisas property is located in
this district.
Las Cristinas. Gold and copper properties which are north of
and contiguous to the Brisas property and are
held by MINCA, a Venezuelan company 30%
owned by CVG and 70% owned by Placer Dome,
Inc.
metamorphism. A type of rock that has been altered by high
temperature and/or pressure.
<PAGE>
mill. A processing plant where ore is crushed and
ground, usually to fine powder, and the
metals are extracted by physical and/or
chemical means.
mineral. A naturally occurring homogeneous substance
having definite physical properties and
chemical composition and, if formed under
favorable conditions, a definite crystal
form.
mineralization. The presence of minerals in a specific area
or geological formation.
mineralized deposit. Material in an area which has been
intersected by sufficient closely-spaced
drill holes or underground sampling to
support tonnage and average grade(s) of
metal(s) to warrant further exploration or
development activities. A mineralized
deposit does not qualify as a commercially
mineable ore body (reserves) under standards
promulgated by the U.S. Securities and
Exchange Commission ("SEC") until a final,
comprehensive, economic, technical and legal
feasibility study based upon unit cost,
grade, recoveries and other factors has been
concluded.
Ministry of Energy Venezuelan governmental entity, which
and Mines (MEM). exercises supervisory jurisdiction over the
Brisas property and the Company's exploration
and development efforts thereon.
molybdenum. An element (Mo), usually in the form of
molybdenite, primarily used in alloys and
lubricants.
monzonite. A medium to coarse-ground intrusive rock
containing less than 20% quartz.
open pit. A mine that is entirely on surface. Also
referred to as open-cut or open-cast mine.
Precambrian. A period in geologic time dating more than
570 million years ago.
pre-feasibility study. A preliminary analysis and compilation of
technical and economic data conducted to
determine whether the Company should proceed
with the feasibility study.
proterozoic. That part of the Precambrian time represented
by rocks in which traces of life appear or
the younger part of Precambrian time.
<PAGE>
reclamation. The restoration of a site after mining or
exploration activity is completed.
recovery. The percentage of valuable metal in the ore
that is recovered by metallurgical treatment.
reserves. That part of a mineral deposit which could be
economically and legally extracted or
produced at the time of determination.
Reserves are subcategorized as either PROVEN
(MEASURED) reserves, for which (a) quantity
is computed from dimensions revealed in
outcrops, trenches, workings or drill holes,
and grade and/or quality are computed from
the results of detailed sampling, and (b) the
sites for inspection, sampling and
measurement are spaced so closely and
geologic character is so well defined that
size, shape, depth and mineral content are
well-established; or PROBABLE (INDICATED)
reserves, for which quantity and grade and/or
quality are computed from information similar
to that used for proven (measured) reserves,
but the sites for inspection, sampling and
measurement are farther apart or are
otherwise less adequately spaced, the degree
of assurance, although lower than that for
proven (measured) reserves, is high enough to
assume continuity between points of
observation.
resource. The calculated amount of material in a
mineral deposit, based on limited drill
information.
sample. A small portion of rock or a mineral deposit,
taken so that the metal content can be
determined by assaying.
schists. A strongly foliated crystalline rock which
readily splits into sheets or slabs as a
result of the planar alignment of the
constituent crystals.
stock. An igneous body smaller than a batholith with
a subcircular section.
stratabound. Used to describe mineral deposits that are
restricted to a small stratigraphic range in
a group of strata.
strike. The direction, or bearing from true north, of
a vein or rock formation measured along a
horizontal line on the surface of the vein or
rock.
<PAGE>
strip ratio. The tonnage of non-mineralized waste material
removed to allow the mining of one tonne of
ore in an open pit.
tailings. The material removed from the milling circuit
after separation of the valuable metals.
troy ounce. Unit of weight measurement used for all
precious metals. The familiar 16-ounce
avoirdupois pound equals 14.583 Troy ounces.
vein. A sheet-like or tabular discordant
mineralized body formed by complete or
partial infilling of a fracture or fault
within a rock.
veta. 1) Used to describe veins of mineralization
and/or deeper, hardrock mineralization, 2)
used to describe a strata of material that
constitutes a concession, i.e. relating to
the Brisas hardrock concession.
Whittle Pit. Mathematical method for determining the
optimal shape for an open pit in three
dimensions utilizing a block model of an ore
body. A Whittle pit only approximates certain
aspects of open pit design and does not
include final detailed design parameters.
CONVERSION FACTORS: 1 Troy ounce = 31.1034 Grams
1 Tonne = 1.1023 Short tons
1 Tonne = 2204.6 Pounds
1 Hectare = 2.4711 Acres
1 Kilometer = 0.6214 Miles
1 Meter = 3.28084 Feet
SYMBOLS: Au = Gold
Cu = Copper
gpt = Grams per tonne
<PAGE>
PART I
ITEM 1. Business
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Overview
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Gold Reserve Corporation (the "Company") is a mining company
incorporated in the state of Montana in 1956 for the purpose of
acquiring, exploring and developing mining properties and placing them
into production. The Company's growth strategy is to develop proven
and probable reserves as well as mining and process operations by the
successful development of mineable reserves at its Brisas property and
making selective property or corporate acquisitions.
The Company's principal asset, the Brisas property, is a late
exploration-stage gold and copper mineralized deposit located in the
KM 88 mining district of the State of Bolivar in the southeastern part
of the country of Venezuela. The Company acquired its initial
interest in the Brisas property in 1992. The Company has no revenue
producing mining operations at this time, and exploration and
development of the Brisas property is currently the Company's sole
business. Unless the context indicates otherwise, the term "Brisas
property" used throughout this report includes the Brisas alluvial
concession, the Brisas hardrock concession and applications for other
mineralization in the alluvial material and areas contiguous to the
alluvial and hardrock concessions.
The Company believes, based on its exploration work, that the Brisas
property contains a mineralized deposit estimated at 7.3 million
ounces of gold and approximately 950 million pounds of copper. The
Company has commenced but not yet completed a feasibility study for
the Brisas property and, as a result, has not yet established proven
and probable ore reserves nor determined whether the deposit
represents a commercially mineable ore body. Such mineralization will
not qualify as a commercially mineable ore body under standards
promulgated by the U.S. Securities and Exchange Commission (the "SEC")
until the economic viability of the project is established by the
completion of a final, comprehensive, economic, technical and legal
feasibility study based upon unit cost, grade, recoveries and other
factors.
The first stage of the feasibility study, the pre-feasibility report,
was completed in February 1998. The report includes estimates of
potential mineralization assuming various long-term gold and copper
prices, capital costs, operating assumptions and the procurement of
various permits and regulatory authorizations. References in this
Annual Report on Form 10-K to estimates contained in the pre-
feasibility report do not represent an assertion by the Company of the
existence of commercially mineable ore reserves on the Brisas
Property. (See Risk Factors -- No Established Reserves).
In 1998, exploration and development, as well as general corporate
activities will be funded from existing cash reserves and investments.
Management anticipates that the Company's cash position of
approximately $28 million at December 31, 1997, together with
proceeds, if any, to be received from the future exercise of
<PAGE>
outstanding options, will be sufficient to cover estimated operating
and capital expenditures, primarily those associated with the
completion of the feasibility study of the Brisas property, into 1999.
The Company's cash position at December 31, 1997 excludes $4.5 million
held in escrow and payable by the Company upon the satisfaction of
certain conditions (primarily the publication of the issuance of the
Brisas hardrock concession to the Company by the MEM) in connection
with the 1994 litigation settlement related to an ownership dispute of
the Brisas property. The Brisas hardrock concession was published in
the Official Gazette of the Republic of Venezuela on March 3, 1998 and
the funds in escrow were released to the defendant in the litigation
on or around March 20, 1998. (See Risk Factors and Note No. 8 to the
consolidated financial statements for information regarding
identifiable assets attributable to the Company's operations in the
United States and Venezuela, and net losses from operations as of and
for the years ended December 31, 1997, 1996 and 1995).
The Company's operations in Venezuela are conducted through subsidiary
corporations. Unless the context indicates otherwise, references to
the Company used throughout this report refer to Gold Reserve
Corporation and the following subsidiaries: Compania Aurifera Brisas
del Cuyuni, C.A. ("Brisas"); Gold Reserve de Venezuela, C.A.
("GLDRV"); Compania Minera Unicornio, C.A. ("Unicorn"); Great Basin
Energies, Inc. ("Great Basin"); MegaGold Corporation ("MegaGold");
Gold Reserve de Aruba A.V.V. ("Gold Reserve Aruba"); G.L.D.R.V. Aruba
A.V.V. ("GLDRV Aruba"); Glandon Company A.V.V. ("Glandon"); Stanco
Investments A.V.V. ("Stanco"); GoldenLake A.V.V. ("GoldenLake"); Mont
Ventoux A.V.V. ("Mont Ventoux") and Gold Reserve Holdings A.V.V.
("Gold Reserve Holdings"). The Company wholly owns all of these
subsidiaries except Great Basin and MegaGold of which it owns 58% and
63%, respectively.
The Company's Venezuelan mining operations are subject to laws of
title that differ substantially from those of the United States, and
to various mining and environmental rules and regulations that are
similar in purpose to those in the United States, and equally
bureaucratically complex. (See Risk Factors and Item 2. Properties --
Venezuelan Mining, Environment and Other Matters).
As of February 28, 1998, the Company employed 9 people in its Spokane,
Washington office and approximately 70 people in Venezuela, of which
approximately 50 are located at the Brisas property. The day-to-day
activities of the Company's Venezuelan operations are managed from its
offices in Caracas and Puerto Ordaz.
Significant Developments in 1997
--------------------------------
HARDROCK MINING TITLE. On December 3, 1997, the Venezuelan Ministry
of Energy and Mines (the "MEM") issued a resolution ordering the
issuance of the mining title for the Brisas hardrock concession for
which the Company applied in February 1993. The Brisas hardrock
concession was subsequently published in the Official Gazette of the
Republic of Venezuela on March 3, 1998. (See Item 2. Properties --
The Brisas Property -- Ownership).
<PAGE>
EXPLORATION. During the year ended December 31, 1997, the Company
completed approximately 218 drill holes, approximating 66,000 meters
and expended approximately $9.6 million on the Brisas property. These
expenditures consisted of approximately $9.4 million in capitalized
development and exploration costs and $0.2 million for equipment.
(See Item 2. Properties -- The Brisas Property -- Exploration and Item
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations).
FEASIBILITY STUDY. In July 1997, the Company engaged JE MinCorp, a
Division of Jacobs Engineering Group Inc. and a number of other
independent consultants, to assist the Company in the preparation of a
feasibility study for the Brisas property. The initial stage of the
study, a pre-feasibility report, was completed in February of 1998 and
included tradeoff studies for plant throughput rates, as well as an
analysis of the optimum processing facilities, site and ancillary
facilities and tailings impoundment. The report includes a "Base
Case" analysis of the proposed project assuming $375 per ounce gold
and $1 per pound copper as well as further sensitivity analyses using
$350 and $300 per ounce gold and $.90 and $.80 per pound of copper,
respectively. Such estimates of mineralization will not qualify as a
commercially mineable ore body under standards promulgated by the U.S.
Securities and Exchange Commission (the "SEC") until the economic
viability of the project is established by the completion of a final,
comprehensive, economic, technical and legal feasibility study. ( See
Item 2. Properties -- The Brisas Property -- Development).
INDEPENDENT AUDIT OF DATA COLLECTION. In August 1997, Behre Dolbear &
Company, Inc. of Denver, Colorado completed an audit of the data
collection procedures used by the Company at its Brisas property. The
audit concluded that the Company's technical data collection
procedures meet or exceed accepted industry standards, assay
laboratories provided reliable and acceptable results and the drill
results database compiled by the Company at the Brisas property is of
a quality appropriate for utilization in a mineral deposit or reserve
calculation for inclusion in a feasibility study suitable for
obtaining financing from financial entities. Despite the results of
this audit, there can be no assurance that the Company will be able to
develop or maintain profitable operations at the Brisas property.
(See Item 2. Properties -- The Brisas Property -- Exploration).
INCREASE IN MINERALIZATION. In June 1997, the Company announced that
additional drilling at the Brisas property increased the mineralized
deposit by 900,000 ounces of gold and 150 million pounds of copper to
7.3 million ounces of gold and 950 million pounds of copper. The
Brisas mineralized deposit is over 1,900 meters long and 500 to 900
meters wide and is defined by 737 drill holes, primarily on a 50 by 50
meter grid, amounting to over 155,000 meters of drilling. The future
establishment of proven and probable mineral reserves is subject to
the successful completion of a positive feasibility study. Despite
the initial findings contained in the pre-feasibility report, there
can be no assurance that the feasibility study, once complete, will
prove that the mineral deposits can be economically mined at the
Brisas property. (See Risk Factors -- No Established Reserves and
Item 2. Properties -- The Brisas Property -- Planned Development).
<PAGE>
RISK FACTORS
------------
Potential investors should carefully evaluate all of the information
contained and incorporated by reference in this Annual Report on Form
10-K and, in particular, the following:
NO ESTABLISHED RESERVES. Extensive exploration work has been ongoing
on the Brisas property since 1992 and has identified a mineralized
deposit estimated at 7.3 million ounces of gold and approximately 950
million pounds of copper. The Company has commenced but not yet
completed a feasibility study for the Brisas property and, as a
result, has not yet established proven and probable ore reserves nor
determined whether the deposit represents a commercially mineable ore
body. Such mineralization will not qualify as a commercially mineable
ore body under standards promulgated by the SEC until the economic
viability of the project is established by the completion of a final,
comprehensive, economic, technical and legal feasibility study based
upon unit cost, grade, recoveries and other factors. References to
estimates contained in the pre-feasibility report do not represent an
assertion by the Company of the existence of commercially mineable ore
reserves on the Brisas property. If the feasibility study does not
conclude that the deposit on the Brisas property is economically
mineable, it would have a material adverse effect on the Company.
Reserve estimation is an interpretive process based on drilling
results and experience as well as estimates of ore characteristics and
mining dilution, metal prices, costs of mining and processing, capital
expenditures and many other factors. Actual quality and
characteristics of ore deposits cannot be fully assessed until ore is
actually mined. Reserves change over time to reflect actual
experience. Grades of ore processed at any time also may vary from
reserve estimates due to geologic variations within areas mined.
Production may vary from estimates because of changes in reserves,
variations in ore mined from estimated grade and metallurgical
characteristics, unexpected ground conditions, mining dilution, labor
actions, and government restrictions. Cash costs may differ due to
variations in reserves and production estimates, unexpected mining
conditions, and changes in estimated costs of equipment, supplies,
utilities and labor and exchange rates. Noncash estimates, based on
total capital costs and reserve estimates, change based on actual
amounts of capital incurred.
RECURRING LOSSES. The Company has no revenue from mining operations
and has experienced losses from operations for each of the last five
years. The aggregate loss for the five years ended December 31, 1997
was $29.3 million including a 1994 litigation settlement of $22.5
million, related to an ownership dispute of the Brisas property. (See
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations). The Company expects to continue to incur
losses from operations for the next several years as the result of,
among other factors, increased expenditures associated with the
management of exploration and development activities on the Brisas
property as well as other exploration expenses not associated with the
Brisas property. Management expects this trend to reverse if and when
the Brisas property is developed and gold and copper are produced in
commercial quantities, but there can be no assurances such production
will occur.
<PAGE>
PROJECT DEVELOPMENT. The Company's estimate of capital expenditures
for the project on the Brisas property is based on currently available
information as outlined in the pre-feasibility report and, as it is
not unusual in new mining operations to experience unexpected problems
during development, costs could increase depending upon a number of
factors within and beyond the Company's control. The capital cost
estimates contained in the pre-feasibility report are based on
operating experience, expected production, estimates by and contract
terms with third-party suppliers, expected legal requirements,
feasibility reports by Company personnel and independent contractors,
and other factors. Factors involved in estimated time for completion
of projects include management's experience in completing capital
projects, estimates by and contract terms with contractors, engineers,
suppliers and others involved in design and construction of projects,
and estimated time for government entities to process applications,
issue permits and take other actions. Changes in any of these factors
may cause costs and time for completion to vary significantly from
estimates.
Management could determine that it is in the best interest of the
Company and its shareholders to sell the Brisas property to another
mining company for development, or to enter into a joint development
or similar arrangement with another company to develop the Brisas
property and thereby reduce the economic risk to the Company were it
to proceed with development on its own. The Company has not entered
into discussions with any other mining company in this regard, nor has
it shared any of its exploration data. Whether the Company would
pursue any of these alternatives to commercial development of the
Brisas property cannot presently be determined.
FOREIGN OPERATIONS. The Company's mining operations are presently
concentrated in Venezuela. At December 31, 1997, approximately 55
percent of the Company's identifiable assets (90 percent of its
noncash and investment assets) were located in Venezuela. In the
past, inflation and other economic conditions in Venezuela have, on
occasion, resulted in political and social turmoil, but to date, such
conditions have not adversely affected the Company's operations.
Nonetheless, the Company's future operations and investments could be
adversely affected by exchange controls, currency fluctuations,
taxation, judicial decisions and laws or policies of Venezuela and the
United States affecting trade, investment, taxation and other
factors. The Company's development time schedule and future
reclamation and remediation cost estimates are based on existing and
expected legal requirements, past experience, cost estimates by the
Company and others, and expectations regarding government action and
time for government agencies to act, all of which change over time and
require periodic re-evaluation. Whether and to what extent current or
future economic, regulatory or political conditions may affect the
Company cannot be predicted. (See Item 2. Properties -- Venezuelan
Mining, Environment and Other Matters -- Political and Economic
Situation).
<PAGE>
RISKS INHERENT IN THE MINING INDUSTRY GENERALLY. The Company is
subject to all of the risks inherent in the mining industry, including
environmental hazards, industrial accidents, labor disputes, unusual
or unexpected geologic formations, cave-ins, flooding and periodic
interruptions due to inclement weather. Such risks could result in
damage to, or destruction of, mineral properties and production
facilities, personal injury, environmental damage, delays, monetary
losses and legal liability. The Company does not presently maintain
insurance covering environmental or other catastrophic liabilities,
and is not expected to do so unless it is economically feasible.
Insurance against environmental risks (including pollution or other
hazards resulting from the disposal of waste products generated from
exploration and production activities) is not generally available, on
an economic basis, to the Company or other companies in the mining
industry at present. Were the Company subjected to environmental or
other liabilities, the payment of such liabilities would reduce the
funds available to the Company. Were the Company unable to fund fully
the cost of remedying an environmental problem, it might be required
to suspend operations or enter interim compliance measures pending
completion of remedial activities.
ENVIRONMENTAL MATTERS. Venezuela maintains environmental laws and
regulations for the mining industry which impose significant
obligations on companies doing business in the country. Venezuela's
environmental laws and regulations are administered through the
Ministry of the Environment and Renewable Natural Resources (the
"MARNR"). Concession holders who seek to develop a mineral property
must first obtain a permit granting them the right to occupy the
territory for mining purposes and then submit a report outlining the
environmental impact of the development and the rehabilitative or
reconditioning work to be undertaken once development activities are
concluded. The Company has been issued a permit to occupy the Brisas
property for both the alluvial and hardrock concessions and has
presented a number of environmental studies and information to the
MARNR relating to the Brisas alluvial concession. The Company also
expects to submit an environmental impact statement to the MARNR and
MEM addressing development and reclamation of the entire Brisas
property. There can be no assurance, however, that the MARNR will
grant the necessary permits to the Company in a timely manner, if at
all. (See Item 2. Properties -- Venezuelan Mining, Environment and
Other Matters).
The Company's development time schedule and future reclamation and
remediation cost estimates are based on existing and expected legal
requirements, past experience, costs estimates by the Company and
others, and expectations regarding government action and time for
government agencies to act, all of which change over time and require
periodic re-evaluation.
The Brisas property is located within the Imataca Forest Reserve (the
"Imataca"), which is comprised of 3.6 million hectares in the State of
Bolivar. In 1986, Presidential Decree No. 1046 authorized an area (in
which the Brisas property is located) in the southwestern part of the
Imataca for mining exploration and exploitation activities. In May
1997, Presidential Decree No. 1850 was issued to identify the uses and
<PAGE>
activities allowed in the Imataca. Prior to the issuance of Decree
No. 1850, mining activity outside of the area authorized by Decree No.
1046 had been denied environmental authorization. Since Decree No.
1850 was issued, several motions were submitted to the Venezuelan
Supreme Court (the "Court") by different parties challenging Decree
No. 1850 as unconstitutional and in violation of certain international
agreements and other regulations and requesting a preliminary
injunction to make Decree No. 1850 unenforceable until the motions are
definitively decided by the Court. In addition, the Court was also
petitioned to declare null and void all other regulations allowing
mining activities within the Imataca, including activities pursuant to
Decrees No. 1046 and No. 845.
On November 13, 1997, the Court granted temporary injunctive relief to
the original plaintiff challenging Decree No. 1850, prohibiting the
MEM from granting new concessions pursuant to Decree No. 1850. The
Court's rulings specifically related to Decree No. 1850 and excluded
other challenges to Decrees No. 1046 and No. 845. The November 13,
1997 ruling by the Court did not affect the previously issued Brisas
alluvial concession and did not prohibit the MEM from granting the
Brisas hardrock concession to the Company under current decrees and/or
regulations different from Decree No. 1850. Although the Company was
granted the Brisas hardrock concession in March 1998, there can be no
assurance that the ongoing challenges to mining activities in the
Imataca will not adversely affect the Brisas hardrock concession or
the Brisas alluvial concession. If either concession is rescinded or
limited, the Company's planned operations would be materially
adversely affected. The Company has been advised by its Venezuelan
attorneys that it is unlikely that future rulings by the Court related
to this issue will impact the Company, but there can be no assurance
that an adverse ruling that affects the Company will not occur.
FLUCTUATING PRICES OF GOLD AND COPPER. The Company, the price of its
Common Stock and its business plan, are significantly influenced by
the price of gold and copper. Gold prices often vary widely and are
affected by numerous factors beyond the Company's control, such as
inflation or lack thereof, fluctuation of the United States dollar and
foreign currencies, global and regional demand, and the political and
economic conditions of major gold producing countries throughout the
world. Copper prices also fluctuate and are generally affected by
global and regional demand and existing inventories. The volatility
of gold and copper prices is illustrated in the following table which
sets forth the average of the daily closing price for gold and copper
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
5 Yr. Avg. 1997 1996 1995 1994 1993
---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gold(1) ($ per ounce) 371.00 340.00 388.00 384.00 384.00 360.00
Copper ($ per pound) 1.05 1.03 1.04 1.33 1.05 0.81
</TABLE>
(1) On the London Bullion Market.
As of March 13, 1998, the closing price for the metals described
above were: Gold: $296 per ounce, Copper: $0.75 per pound.
<PAGE>
DEPENDENCE ON FINANCING ACTIVITIES. The Company has no revenue from
operations and has financed its mining activities in Venezuela since
1992 primarily from the sale of its Common Stock. Management
anticipates that the Company's cash position of approximately $28
million at December 31, 1997, together with proceeds, if any, to be
received from the future exercise of outstanding options, will be
sufficient to cover estimated operating and capital expenditures,
primarily those associated with the completion of the feasibility
study of the Brisas property, into 1999. The Company's cash position
at December 31, 1997 excludes $4.5 million held in escrow and payable
by the Company upon the satisfaction of certain conditions (primarily
the publication of the issuance of the Brisas hardrock concession to
the Company by the MEM) in connection with the 1994 litigation
settlement related to an ownership dispute of the Brisas property.
The Brisas hardrock concession was published in the Official Gazette
of the Republic of Venezuela on March 3, 1998 and the funds in escrow
were released to the defendant in the litigation on or around
March 20, 1998. There can be no assurance, however, that actual
operating and capital expenditures will not exceed levels currently
estimated by the Company. In addition, the Company will need to
obtain significant additional financing if and when construction on
the property commences and the Brisas property is placed into
production. There can be no assurance that the Company will be able
to obtain such financing or commercially reasonable terms, if at all.
(See Recurring Losses and Item 2. Property -- Brisas Property --
Planned Development).
KEY PERSONNEL. The Company is dependent upon the abilities and
continued participation of certain key management personnel. If the
Company were to lose the services of such employees, it could have a
material adverse effect on the Company.
ITEM 2. Properties
------------------
THE BRISAS PROPERTY
-------------------
LOCATION. The Brisas property is located in the KM 88 mining district
of southeastern Venezuela in the State of Bolivar, approximately 373
kilometers (229 miles), by paved highway, southeast of Puerto Ordaz.
The property, 3.5 kilometers (1.5 miles) west of the KM 88 marker on
Highway 10, occupies a rectangular area of 2,500 meters (1.5 miles)
north-south by 2,000 meters (1.25 miles) east-west or approximately
500 hectares (1,235 acres) and is accessible by an all-weather road.
OWNERSHIP. The Brisas property consists of the Brisas alluvial
concession, the Brisas hardrock concession beneath the alluvial
concession, other applications for mineralization (primarily nominal
values of copper and silver) in the material contained in the alluvial
concession and other mineralization (primarily gold, copper and
molybdenum) on small land parcels contiguous to the existing alluvial
and hardrock concessions.
The Company acquired Brisas in 1992 (which has held the Brisas
alluvial concession since 1988) and submitted an application for the
Brisas hardrock concession in February 1993. On December 3, 1997, the
MEM issued a resolution ordering the issuance of the mining title for
<PAGE>
the Brisas hardrock concession. The resolution, which was
subsequently published in the Official Gazette of the Republic of
Venezuela (the official government publication), approved the map of
the area under application, instructed the Company to pay nominal
taxes to the government and ordered the issuance of the hardrock
concession to Brisas. Pursuant to the terms of the resolution, the
Company completed all stipulated requirements for issuance of the
concession. The Brisas hardrock concession was published in the
Official Gazette of the Republic of Venezuela on March 3, 1998.
The Brisas alluvial concession is a production concession granted in
1988, with an original term of twenty (20) years, with two renewal
periods of 10 years each, at the discretion of MEM, and a three
percent (3%) tax on sales of gold production outside of Venezuela.
The Brisas hardrock concession is a production concession with a term
of twenty (20) years with two subsequent renewal periods of 10 years
each, at the discretion of the MEM. The hardrock concession provides
for a four percent (4%) tax on sales of gold production outside of
Venezuela and a seven percent (7%) mine mouth tax on copper
production. Gold sold directly to the Central Bank of Venezuela (the
"Central Bank") is taxed at one percent (1%). (See Venezuelan
Mining, Environment and other Matters).
REGIONAL INFRASTRUCTURE. The project site is located in the Guayana
region, which makes up approximately one-third of Venezuela's national
territory. The nearest main city is Puerto Ordaz, with 600,000
inhabitants, situated on the bank of the Orinoco River near its
confluence with the Caroni River. Puerto Ordaz has major port
facilities, accessible to ocean-going vessels from the Atlantic Ocean,
via the Orinoco, a distance of about 200 km. Puerto Ordaz is the
center of major industrial developments in the area, including iron
and steel mills, aluminum smelters, iron and bauxite mining and
forestry. These industries are supported by major dams and
hydroelectric generating plants on the Caroni River, which provide
12,900 MW of electricity. The CVG power authority, Electrificacion
del Caroni C.A. ("EDELCA"), is planning the construction of a 400 kV
power line south from Puerto Ordaz into Brazil. The route runs
through the community of Las Claritas, nearby the project, and is
expected to supply sufficient power for both Placer Dome Inc.'s Las
Cristinas and the Company's Brisas property. The Company understands
that the project is expected to be completed before the end of 1999.
There can be no assurance, however, that the power line will be
completed as planned, if ever. If the power line is not completed as
planned, the Company will be required to obtain alternative sources of
electrical power, which may significantly increase the capital costs
to the Company and have a material adverse effect on the Company.
Puerto Ordaz is a modern urban center with good road and air
connections to the rest of Venezuela. There are regularly scheduled
flights to Caracas and other major cities several times daily. There
are also port facilities 428 km northwest of Puerto Ordaz on the
Caribbean coast. Guanta, near Barcelona, would likely be the port of
entry for most construction, mining and milling equipment. The port
facilities at Puerto Ordaz are generally dedicated to serving the bulk
handling requirements of the area's basic industries. However, Puerto
Ordaz has potential for the development of facilities for the export
<PAGE>
of copper concentrates in bulk. The highway system within Venezuela
is generally good, with paved roads in good condition providing access
to within 3.5 km of the Brisas property. Four-lane highways run from
Puerto Ordaz both northwest to Barcelona and Guanta, and for 55 km
south to Upata.
GEOLOGY. The Brisas property occurs within a Proterozoic granite-
greenstone terrain of the Guayana shield. The shield covers eastern
Colombia, southeastern Venezuela, Guyana, Suriname, French Guiana and
northeastern Brazil. The terrain is a thick section of andesite to
dacite volcanics that are intruded by numerous granitic stocks and
batholiths. Several periods of deformation, metamorphism and
mineralization can be documented within the terrain. The rocks at the
Brisas property are a thick series of andesite tuffs that have been
intruded by a monzonite stock. The tuffs strike northerly and dip
uniformly to the west at about 35 degrees. The mineralization is
stratabound within a 200-meter thick series of tuffs. The local
mineralization has characteristics similar to those of other large
deposits in Precambrian rocks of volcanogenic sulfide and
structurally controlled deposits. Three styles of mineralization are
seen: (1) massive pyrite-chalcopyrite-gold mineralization and
pyrite-chalcopyrite-gold cemented breccias in the Blue Whale,
(2) stratabound, disseminated pyrite-gold+/-copper mineralization, and
(3) calcite-epidote-pyrite+/-gold+/-copper veins and veinlets, often
high grade and found both within and above the stratabound
mineralization. There are two major types of material on the
property: a saprolite clay hosted alluvial material occurring in the
top 30 to 50 meters of the property and hard rock dacitic tuffs,
basalts and andesite porphyry of the Lower Proterozoic age. Gold,
copper, silver and molybdenum mineralization are found in both zones.
There are two general categories of rock units: weathered and
unweathered rock. Weathered rock is further defined by degree of
oxidation and mineral replacement due to surficial weathering.
Unweathered rock is further defined by lithology into various
subdivisions of volcanic tuffaceous units or intrusive units. The
mineralization in the northern half of the deposit is copper-gold with
copper decreasing to the south until in the southern portion of the
deposit, the copper is a minor constituent of the mineralization.
Deep drilling along the western edge of the property has confirmed the
downward extension of the stratabound mineralization.
EXPLORATION. Historically, surface and alluvial mining by local
miners helped identify gold mineralization on the property.
Exploration by the Company at the Brisas property commenced in late
1992. Initial work by the Company included regional geophysical
surveys that identified an anomaly covering part of the Brisas
property. Exploration and development activities on the Brisas
property prior to 1997 included surface mapping and geochemical
sampling, exploration and development drilling, assaying, petrology
and mineral studies, and metallurgical sampling. Exploration and
development drilling prior to 1997 also included 92,591 meters of
drilling in 538 core and auger holes. These activities confirmed the
presence of a large deposit of stratabound gold-copper mineralization.
The mineralization defined is approximately 1.9 km (approx. 1.2 mile)
along strike and 500 to 900 meters wide. Scattered drill holes to the
<PAGE>
west of the main body of the deposit demonstrate that mineralization
continues for an unknown distance down dip to the west. This gold-
copper mineralization does not currently constitute proven or probable
reserves under standards promulgated by the SEC. (See Risk Factors --
No Established Reserves and Item 2. Properties -- Brisas Property --
Planned Development).
Activities in 1997 included significant exploration and development
drilling, sampling and assaying, third party audit of data collection
procedures, metallurgical sampling and testing, and various
engineering studies in anticipation of the final feasibility study.
These engineering studies included pit stability studies, surface and
ground water hydrological studies, a third party ore reserve
methodology audit, environmental studies and site topographical
studies. Drilling in 1997 included approximately 66,000 meters of
core from 218 holes bringing the total drilling to date to 159,000
meters in 756 core and auger holes. The drilling increased the size
of the deposit by defining mineralization down dip and southwest from
the 1996 mineralization. The Company intends to continue exploration
in the future on the Brisas property by surface mapping and sampling,
and by drilling. Some mineralized areas have been intersected below
the current mineralized deposit.
Behre, Dolbear & Company, Inc. conducted the independent audit of data
collection procedures. The purpose of the study was to review and
confirm the adequacy and acceptability of the data collection
procedures used by the Company to establish the database for
completing future ore reserve estimates at the Brisas property, if
any. Behre Dolbear & Company, Inc. concluded that: technical data
collection procedures meet or exceed accepted industry standards;
assay laboratories provide reliable and acceptable results; and the
database being compiled by the Company at the Brisas property is of a
quality appropriate for utilization in a mineral deposit or ore
reserve study suitable for obtaining financing.
PLANNED DEVELOPMENT. In July 1997, the Company engaged JE MinCorp, a
Division of Jacobs Engineering Group Inc. and a number of other
independent consultants to prepare a feasibility study on the Brisas
mineralized deposit. A feasibility study is an economic-based
analysis of a mineralized deposit that serves as the basis for a mine
plan for the extraction of gold and copper from that ore body on an
economically viable basis. The initial stage of the study, a pre-
feasibility report, was completed in February 1998. The report
included a "Base Case" analysis of the proposed project assuming $375
per ounce gold and $1 per pound copper as well as additional
sensitivity analyses using $350 and $300 per ounce gold and $.90 and
$.80 per pound of copper, respectively. The pre-feasibility is
preliminary and based on a number of assumptions which are subject to
change. Since the Company has not completed its final feasibility
study on the property, proven and probable reserves have not been
established under standards promulgated by the SEC. (See Item 1.
Business -- Risk Factors).
The pre-feasibility study concluded that, assuming a gold price of
$375 per ounce, copper price of $1.00 per pound and assuming open pit
mining methods, the Brisas property is estimated to contain a
mineralized deposit consisting of approximately 249.2 million tonnes
with an average grade of 0.70 grams of gold per tonne and 0.14%
<PAGE>
copper. The estimate of mineralization uses an internal cutoff grade
of 0.40 grams per tonne gold equivalent and assumed waste rock
material of 419.2 million tonnes, resulting in a strip ratio of 1.68:1
(waste to mineralization). Total material expected to be moved is
estimated to be 668 million tonnes. The mineralization was calculated
from 737 diamond drill holes representing 155,000 meters of drilling.
Alternatively, assuming a gold price of $350 and $300 per ounce and
copper price of $0.90 and $0.80 per pound, the Brisas property is
estimated to contain (based on a preliminary Whittle pit design)
approximately 239.3 and 177.1 million tonnes with an average grade of
0.71 and 0.80 grams per tonne gold and 0.14% and 0.12% copper,
respectively. The pre-feasibility report estimates that the Company
may achieve gold recovery at 83 percent and copper recovery at 73
percent at the Brisas property, but there can be no assurance that
such rates can be achieved or, if achieved, maintained.
The following charts represent, as determined by the pre-feasibility
report, an estimation of mineralized material assuming certain gold
and copper prices and open pit mining methods. The Company has not
completed its final feasibility study. Therefore, the Brisas
mineralized deposit does not yet qualify as a commercially mineable
ore body under standards promulgated by the SEC and may so qualify
only after a positive comprehensive economic, technical and legal
feasibility study has been completed.
<TABLE>
<CAPTION>
Average Grade
-------------
Tonnes Gold Copper
Pre-Feasibility Estimated Mineralized Deposit assuming: (millions) gpt percent
------------------------------------------------------- ---------- ---- -------
<S> <C> <C> <C>
$375 per ounce gold and $1.00 per pound copper 249.2 0.70 0.14
$350 per ounce gold and $0.90 per pound copper 239.3 0.71 0.14
$300 per ounce gold and $0.80 per pound copper 177.1 0.80 0.12
Average Recovery 83% 73%
=== ===
</TABLE>
Based on the pre-feasibility report, and contingent on positive
completion of the final feasibility study the Company plans to develop
on the Brisas property a large scale open pit mining operation
consisting of drilling, blasting, loading, and truck haulage to carry
ore to the crusher and waste to the waste repository. The Company
estimates that the plant would process 55,000 tonnes per day, yielding
an estimated average annual production of as much as 335,000 ounces of
gold and 38.3 million pounds of copper, over a mine life of 14.2
years. There can be no assurance, however, that such production will
occur at such levels, if at all.
The processing flowsheet contained in the pre-feasibility report and
developed from metallurgical testwork completed by three independent
laboratories includes conventional crushing with a primary gyratory
<PAGE>
crusher and grinding with SAG mill and ball mills followed by gravity
separation to recover coarse gold, flotation and cyanidation of
cleaner flotation tailings. Based upon the results of the pre-
feasibility report, the Company expects the final products of the
operation on the Brisas property to be a gold copper concentrate and
gold dore. The Company expects to transport the concentrates to
Puerto Ordaz and then ship them to a smelter for final processing.
Operating supplies are expected to be imported, probably from North
America. Electrical power is expected to be available from a major
new transmission line which is planned to run south from Puerto Ordaz
into Brazil, passing within a few kilometers of the Brisas property.
There can be no assurance, however, that the power line will be
completed as planned, if ever. If the power line is not completed as
planned, the Company will be required to obtain alternative sources of
electrical power, which may significantly increase the capital and
operating costs to the Company and have a material adverse affect on
the Company. (See Regional Infrastructure). Abundant water is
available in the area, and the Company expects project requirements to
be met by water pumped from the pit de-watering system, and by
rainfall stored in the tailings water pond. On site accommodations
will be provided for employees, who will be drawn from both the local
area and from the industrialized area around Puerto Ordaz. (See
Venezuelan Mining, Environment and Other Matters--Labor).
Behre Dolbear & Company, Inc. recently completed an independent review
of the Company's mineralized deposit modeling and ore reserve
methodology utilized for the pre-feasibility report. They concluded
that estimating techniques used were an accurate representation for
the reserves; drill hole spacing was sufficient to generate future
estimates of proven and probable reserves; and the database was
correct and reliable. This recent study compliments Behre Dolbear's
audit of sampling and assaying procedures at the Brisas property,
completed in August 1997.
The pre-feasibility report estimates that base case initial capital
required to bring the Brisas property into commercial production at
the planned 55,000 tonnes per day will be approximately $293 million.
Ongoing life of mine capital requirements are estimated at $53 million
and working capital needs are estimated at $15 million. The ultimate
design of the plant is subject to the results of the final feasibility
study, and there can be no assurance that the final study will
conclude that the planned operation will be economically feasible.
Construction of the planned facility is expected to take approximately
18 months, with commissioning and achievement of commercial production
expected shortly thereafter. Under the timetable presently
contemplated by the Company, initial production would commence no
earlier than mid 1999, with full production expected to commence no
earlier than January 2001. There can be no assurance, however, that
the Company will begin or complete such construction according to this
schedule, or that, if completed, the facility will begin commercial
production as planned.
<PAGE>
Base case pre-feasibility report estimates of pre-tax operating cash
costs, including mining, processing, concentrate transportation,
smelting and refining expenses, total $222 per ounce of gold net of
copper revenues. Total pre-tax costs per ounce of gold produced
including life of mine capital are estimated at $295, excluding
previously incurred sunk cost of approximately $38 million or
approximately $8 per ounce. Exploitation taxes and royalties add
approximately $9 per ounce of gold to the total cost per ounce. The
base case pre-tax net present value of the project (assuming $375 per
ounce of gold and $1.00 per pound of copper) at zero percent is $354.9
million with an internal rate of return of 11.8%.
OUTLOOK. The major focus of the Company in the upcoming twelve to
fifteen months will be permitting, securing additional sites required
for process facility infrastructure and the completion of the final
feasibility study. A period of one year is anticipated in the overall
project schedule for permitting as well as completion of the final
feasibility study, but there can be no assurance that these items
will be completed as planned. In addition, continuation or completion
of metallurgical testing, geotechnical and hydrological
investigations, electrical power supply and concentrate sales
agreements, and development and condemnation drilling will occur prior
to completion of the final feasibility study. It is estimated that an
additional $4 million will be spent for completion of the final
feasibility study.
Venezuelan Mining, Environment and Other Matters
------------------------------------------------
The Company's Venezuelan mining operations are subject to laws of
title that differ substantially from those of the United States, and
to various mining and environmental rules and regulations that are
similar in purpose to those in the United States, but more
bureaucratically complex. The complexity of the Venezuelan mining
laws is due to the numerous changes in and interpretations of mining
statutes, some of which are generally considered outdated, and is
further complicated by the necessity to acquire a number of
concessions and/or contracts to secure all of the necessary rights to
explore and mine a particular parcel of land. The following is a
summary of the more significant Venezuelan mining and environmental
laws and other laws and regulations that may affect the Company's
operations on the Brisas property, but does not purport to be a
comprehensive review of all laws or a complete analysis of all
potential regulatory considerations related to the Brisas property.
CURRENT VENEZUELAN MINING LAW. The principal legislation governing
the exploration and development of mineral resources in Venezuela is
the Mining Law of 1945, which has been supplemented through the years
by various presidential, governmental and ministerial decrees,
resolutions and interpretations (in its current form, the "Mining
Law"). The Mining Law defines mining rights and concessions, and
establishes standards for obtaining, exploring, evaluating, producing
and extinguishing a concession. The Mining Law also requires that
each concession be specific as to the minerals covered (gold, copper,
silver, molybdenum, etc.) and area (near surface mineralization
("alluvial") or subsurface mineralization ("hardrock or veta")).
<PAGE>
Originally, the Mining Law provided for staked concessions as well as
concessions issued at the discretion of the MEM. However, in 1977, the
claim-staking provisions of the law were effectively eliminated by a
presidential decree that reserved all minerals exclusively for
Venezuela. Also, from January 1991 until July 1996, certain
legislation granted CVG and its various subsidiaries the exclusive
right in the State of Bolivar to explore, evaluate and mine diamonds
and gold not previously awarded as MEM concessions. Consistent with
this exclusive right, CVG attempted to exploit the potential resources
of the region through mining contracts granted to private investors or
joint venture arrangements with foreign and local companies. Most of
those contracts or joint venture arrangements have been recognized as
valid by the MEM and are still in force.
The Mining Law creates three types of concessions, but only two types
of concessions are common. The first, an exploration and production
concession, grants the holder up to two years to explore a property,
and an additional year (three years total) to start production on an
alluvial concession and three additional years (five years total) to
start production on a hardrock concession. The second, a production
concession, does not provide for an exploration period, but it does
have the same three and five year production requirements as stated
above. A technical and economic feasibility study must be submitted
to the MEM for approval within 18 months for alluvial concessionaires
and within 36 months for hardrock concessionaires. Holders of
concessions are required to report their activities to the MEM and
must submit to routine inspections by MEM representatives to confirm
compliance with the Mining Law.
Although the Mining Law specifies a term of 40 years for concessions
and a one-percent mining tax on all minerals except diamonds, the MEM
has enhanced the benefit to Venezuela through Resolution 115. As
outlined in this resolution, certain "special advantages" must be
offered to Venezuela for an applicant to be granted a concession.
These special advantages require that the concession applicant agree
to certain additional terms, which might include a reduction in the
life of the concession, an increase in the amount of royalties or
mining taxes to be paid and the extent to which bonds or sureties must
be posted to guarantee performance of the applicant's obligations. In
addition, applicants may also be required to make certain improvements
for the benefit of the concession property and the surrounding area,
such as constructing and maintaining access roads, airstrips, schools
and medical dispensaries, and must agree to train local employees in
modern mining exploration and production techniques.
PROPOSED MINING LAW. The Venezuelan Mining Committees in the Senate
and House of Representatives have, for a number of years, been
debating separate proposals that would either amend the existing
Mining Law or create a new mining law. Throughout most of 1997, as in
prior years, there was considerable debate, but little progress toward
passing a law that is acceptable to industry, the MEM and
Congressional Mining Committees. The Mining industry is lobbying for
its own draft of a new mining law, which would return the provisions
for claim-staking as provided in the original Mining Law. Other
<PAGE>
important changes would include all minerals in one concession,
include both alluvial and veta mineralization in one concession,
provide longer exploration periods and would require competitive
mining tax rates and royalty rates, as compared to other countries
that have an active mining industry. Because 1998 is an election year
and interested parties have not yet agreed on terms of a possible new
law, the Company believes, and has been advised, that it is unlikely
that a new mining law will be passed in 1998.
ENVIRONMENTAL LAWS AND REGULATIONS. Venezuela's environmental laws
and regulations are administered through the MARNR. The MARNR
proscribes certain mining recovery methods deemed harmful to the
environment and monitors concessionaires' activities to ensure
compliance. Before the Company can begin construction and production
at the Brisas property, it must obtain three different permits from
the MARNR: (1) Permit to Occupy the Territory ("Occupation Permit"),
(2) Permit to Affect for Exploration ("Exploration Permit") and (3)
Permit to Affect for Construction and Exploitation ("Exploitation
Permit"). Although not consistently applied in the past, regulations
state that the MEM will apply for and obtain the Occupation Permit on
behalf of those persons or entities applying for concessions before
granting the concession title. Applicants submit an environmental
questionnaire to MEM, which they in turn submit to the MARNR. The
exploration permit for which Brisas applies for annually, is an
authorization to perform only those activities relating to
exploration, such as drilling, building of camps, cutting lines and
trenching. The production permitting process is initiated by filing
the proposed terms of reference, which when approved, will serve as
the basis for an Environmental Impact Study (EIS). The format for the
EIS is stipulated in a 1996 law (decree #1257) and conforms to an
international standard. (See Item 1. Business -- Risk Factors --
Environmental Matters).
The Company holds the Occupation Permit for the Brisas alluvial and
hardrock concessions and plans to continue to apply for additional
permits as further development dictates. The Company believes that
the alluvial and hardrock concessions should be exploited as one
project. Because the law treats each concession separately, the
Company plans to initiate discussions with the MEM and MARNR to seek
alternatives to the duplication of environmental studies and
permitting. There can be no assurance, however, that the Company's
efforts to reduce such duplication will be successful.
TAXES. The Venezuelan tax law provides for a maximum corporate income
tax rate on mining companies of thirty-four percent (34%). This rate
applies to net income over approximately $32,000 depending on exchange
rates. Other Venezuelan taxes that apply or may eventually apply to
the Company's subsidiaries include a one percent (1%) tax on paid-in-
capital (equity), a sixteen and one-half percent (16.5%) luxury goods
and wholesale tax, which applies to goods and services, municipal
taxes, which vary from one tenth of one percent (.1%) percent to ten
percent (10%), import duties on mining equipment, which range from
five (5%) to twenty (20%) percent, surface taxes, which are currently
<PAGE>
set at less than $1 per hectare per concession, and exploitation
taxes, which range from one percent (1%) to seven (7%) percent
depending on the metal and whether it is sold domestically or
exported. The Company's Brisas subsidiary currently pays luxury goods
and wholesale taxes on certain purchases within Venezuela and expects
that taxes on revenue generated from the future sale, if any, of gold
to the Central Bank of Venezuela will result in a refund of these
taxes. To date, the Company has paid approximately $1 million of
luxury goods and wholesale taxes. Venezuela offers certain exemption
from the luxury goods and wholesale taxes and import duties to mining
companies. The Company will apply for these exemptions in 1998.
Certain local municipalities including the Municipality of Sifontes,
in which the Brisas property is located, have proposed plans to impose
certain taxes on mining activities. The mining industry has
challenged the municipalities' right to impose such taxes on the basis
that the nation has reserved exclusive right to tax mining activities.
In an action favorable to the mining industry, the Court has granted
an injunction, which prohibits the collection of such taxes by the
municipalities.
POLITICAL AND ECONOMIC SITUATION. Venezuela has experienced high
levels of inflation over the past decade. These high rates of
inflation led the Venezuelan government to impose currency exchange
controls in July 1994, which were lifted in April 1996, and to devalue
the bolivar in December 1995 by approximately 40%. In July 1996, two
months after lifting the exchange controls, the Central Bank announced
a "crawling band" exchange policy whereby the bolivar would be allowed
to fluctuate in a band of plus or minus 7.5 percent of its central
parity. Central parity was determined by a devaluation of 1.5 percent
per month. The Central Bank has not followed this schedule, however,
and the bolivar may be overvalued by 30 percent to 75 percent based on
various estimates. With an anticipated increase in GDP of five
percent, an inflation rate of 38 percent (compared to 103 percent in
1996), and the tremendous success of the oil opening, 1997 was a
positive year for Venezuela's economy. In spite of the successes in
1997, a number of challenges remain including reorganization of the
judicial system, signing of the Tax and Bilateral Investment Treaties
with the United States and full implementation of the government's
plan to meet IMF criteria for loan approval known as "Agenda
Venezuela."
GOLD SALES. The Central Bank allows gold mining companies to sell up
to 85 percent of their production on the international market. The
remaining 15 percent must be sold to the Central Bank at the current
market price, which is paid in Venezuelan currency. Gold sold on the
international market is typically levied a minimum mining tax of 4% of
the market price unless the Company agrees to a higher tax by special
advantages established in the concession agreement. The mining tax
<PAGE>
for gold sold to the Central Bank is 1 percent of the market price.
Gold sales to the Central Bank will be paid in bolivares that can be
converted to US dollars at the prevailing exchange rate. The US
dollars can be then transferred outside of Venezuela. Gold sales to
the Central Bank will result in a recovery of some, if not all, of the
16.5% luxury goods and wholesale tax paid as incurred. Gold contained
in the concentrate shipped outside of Venezuela for further processing
does not need to be considered for the required minimum gold sales to
the Central Bank.
LABOR. Venezuela has enacted extensive labor laws and regulations.
During 1997 Venezuela entered into major agreements with the public
and private sectors on new social security laws, which are expected to
improve benefit plans for employees. The Company plans to fill as
many positions as possible with Venezuelan nationals. It is
anticipated that, in the initial stages of the Brisas project,
approximately 95 percent of the workforce will be Venezuelan. In
order to maintain or exceed this level, the Company will implement an
extensive training program over the life of the project on the Brisas
property. The Company plans to draw on Venezuela's large industrial
base to staff many of its positions, but the experience base for
large-scale mining and milling operations in Venezuela is limited.
The Brisas project will draw on the Puerto Ordaz area to fill a
significant portion of its staffing requirements. The Company plans
to staff all management and engineering positions out of Puerto Ordaz,
and the Company believes that, of the remaining lower level positions,
only one-third will be filled from the local (Las Claritas) area.
ITEM 3. Legal Proceedings
-------------------------
The Company had no pending material litigation as of the date of this
report.
ITEM 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
No matters were submitted to a vote of the Company's shareholders
during the fourth quarter of 1997.
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
---------------------------------------------------------------------
MARKET INFORMATION. The common stock of the Company is traded on The
Toronto Stock Exchange ("TSE"), under the symbol "GLR" and on the
NASDAQ SmallCap Market under the symbol "GLDR". The following table
sets out the high and low prices per share for the common stock for
1997 and 1996, as reported by the TSE and NASDAQ.
<TABLE>
<CAPTION>
TSE NASDAQ
------------------------------ ------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
High Low High Low High Low High Low
------ ------ ------ ------ ------ ------ ------ ------
Canadian Dollars U.S. Dollars
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $15.60 $ 9.65 $14.25 $ 7.38 $11.50 $ 7.38 $10.25 $ 5.75
Second Quarter 14.00 9.80 14.50 9.50 9.63 7.00 10.38 7.00
Third Quarter 11.80 7.80 21.70 10.00 8.50 5.50 15.75 7.38
Fourth Quarter 11.15 2.35 20.00 12.40 8.00 1.75 14.63 9.25
</TABLE>
On March 13, 1998, the closing price for the Common Stock was $2.81
per share on NASDAQ and $4.15 per share (Canadian Dollars) on the TSE.
HOLDERS. The number of holders of Common Stock of record on March 13,
1998 was approximately 1,300. Based on recent mailings to its
shareholders, the Company believes its Common Stock is owned
beneficially by approximately 10,000 persons.
DIVIDENDS. The Company has declared no cash or stock dividends on its
Common Stock since 1984. The Company has no present plans to pay any
cash dividends on its Common Stock, and the Company will declare cash
dividends in the future only if the earnings and capital of the
Company are sufficient to justify the payment of such dividends.
<PAGE>
ITEM 6. Selected Financial Data
-------------------------------
The selected financial data set forth below for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 are derived from the
Company's audited financial statements and should be read in
conjunction with the Company's consolidated financial statements and
notes thereto appearing elsewhere herein and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(in thousands of dollars, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Other income $ 1,737 $ 1,489 $ 1,407 $ 1,396 $ 516
Net loss (1,533) (830) (337) (23,740) (2,844)
Loss per share of
common stock (1) (0.07) (0.04) (0.02) (1.68) (0.28)
Total assets 73,293 73,772 52,262 43,263 13,907
Contract payable -- -- 187 124 825
Shareholders' equity 66,549 67,193 47,073 37,900 11,792
Common stock:
Issued 22,918,143 22,703,811 20,476,688 18,929,668 11,723,451
Outstanding(2) 22,437,099 22,222,767 19,995,644 18,577,175 11,429,291
</TABLE>
(1) Basic and diluted
(2) Great Basin, MegaGold and Stanco, each consolidated subsidiaries
of the Company, own shares of the Company's common stock,
representing an indirect investment in itself. The Company's
proportionate ownership interest in the Common Stock held by
these entities represents the difference between issued and
outstanding shares.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
--------------------------------------------------------------------
Summary
-------
Since 1992, the Company's primary focus has been the exploration of
its Brisas property in Venezuela. The Company has no revenue from
mining operations and has experienced losses from operations for each
of the last five years. The Company expects to continue to incur
losses from operations for the next several years as the result of,
among other factors, increased expenditures associated with the
corporate management of exploration and development activities on the
Brisas property as well as other exploration expenses not associated
with the Brisas property. Management expects this trend to reverse if
and when the Brisas property is developed and gold and copper are
produced in commercial quantities, but there can be no assurances
such production will occur. Other significant events must occur
before commercial production on the Brisas property can begin. These
<PAGE>
include the completion of the final feasibility study, the
establishment of proven and probable reserves, the procurement of all
necessary regulatory permits and approvals and the procurement of
adequate funding. (See Item 1. Business -- Risk Factors and Item 2.
Properties -- Venezuelan Mining, Environment and Other Matters).
All expenditures relating to exploration and development activities on
the Brisas property have been capitalized and recorded on the
Company's balance sheet as property, plant and equipment (capitalized
exploration and development costs). As a consequence, the
consolidated results of operations for the years presented consist of
expenses related to activities other than the exploration and
development of the Brisas property partially offset by interest income
from invested funds.
Liquidity and Capital Resources
-------------------------------
INVESTING. During the year ended December 31, 1997, the Company
completed 218 drill holes totaling approximately 66,000 meters on the
Brisas property. On a cumulative basis, the Company has drilled 756
holes of approximately 159,000 meters. The cost of the 1997
exploration and development program on the Brisas property, including
the drilling noted above, approximated $9.6 million and consisted of
approximately $9.4 million in capitalized development and exploration
costs and $0.2 million for equipment. On a cumulative basis since
inception, the Company has expended approximately $60.9 million on the
Brisas property. These costs include property acquisition costs of $2
million, capitalized exploration and development costs and equipment
expenditures of $36.4 million and prior litigation settlement costs of
$22.5 million (which were expensed in 1994). Amounts recorded as
property, plant and equipment (capitalized exploration and development
costs) include all costs associated with the Brisas property,
including personnel and related administrative expenditures incurred
in Venezuela, drilling and related exploration costs, capitalized
interest expenses, legal costs associated with the Brisas ownership
dispute settled in 1994 and general support costs related to the
Brisas property.
The overall corporate budget for 1998, excluding any future
construction costs related to the mining facilities at the Brisas
property, amounts to $6 million. Approximately $4 million is
allocated to further exploration and future development drilling,
permitting, administration and the necessary work required to complete
the Brisas feasibility study, which is expected to be finalized during
1998. The amounts above exclude $4.5 million held in escrow pursuant
to a 1994 litigation settlement related to a dispute of the ownership
of the Brisas property. The funds held in escrow are payable by the
Company upon the satisfaction of certain conditions (primarily the
publication of the issuance of the Brisas hardrock concession to the
Company by the MEM) in connection with the 1994 litigation settlement.
The Brisas hardrock concession was published in the Official Gazette
of the Republic of Venezuela on March 3, 1998 and the funds in escrow
were released to the defendant in the litigation on or around
March 20, 1998.
<PAGE>
The recovery plant, as presently proposed in the Brisas pre-
feasibility report, is expected to consist of a conventional 55,000
tonne per day, gravity/flotation/cyanidation process and cost an
estimated $293 million. Ongoing life of mine capital requirements are
estimated at $53 million and working capital needs are estimated at
$15 million. The ultimate design of the plant is subject to the
results of the final feasibility study, and there can be no assurance
that the final study will conclude that the planned operation will be
economically feasible. Various permitting required for the Brisas
property (primarily the EIS) is ongoing and approvals from the MEM and
the MARNR are expected during 1998 and 1999, although there can be no
assurances such permits will be issued. Detailed engineering work
will commence after the receipt of the necessary operating and
environmental permits and as gold and copper prices warrant. Under
the timetable presently contemplated by the Company, initial
production would commence no earlier than January 2001, with full
production planned during the second quarter thereafter. Final
development of the Brisas property is dependent upon the future price
of gold and copper, completion of a bankable feasibility study
including the establishment of proven and probable reserves, obtaining
adequate financing, and obtaining the appropriate environmental and
operating permits. (See Item 2. Properties -- Planned Development).
FINANCING. The Company has financed its general business and
exploration and development activities in Venezuela principally from
the sale of Common Stock and has raised, since 1992, approximately $68
million in equity financing to support its overall business
activities. These transactions consisted of the sale of additional
shares of Common Stock, or warrants to purchase Common Stock, and the
exercise of previously issued warrants and options to purchase Common
Stock. The Company will require additional financing in order to
place the Brisas property into production, which is estimated to be as
much as $293 million for the construction of the recovery plant,
ancillary facilities and equipment, related development costs and $15
million for working capital. Future construction costs and
development expenses, and the cost of placing the Brisas property or
additional future properties into production, if warranted, are
expected to be financed by a combination of the sale of additional
Common Stock, bank borrowings or other means. Whether and to what
extent additional or alternative financing options are pursued by the
Company depends on a number of important factors, including if and
when mine development activities are commenced on the Brisas property,
management's assessment of the financial markets, the current price of
gold, the acquisition of additional properties or projects and the
overall capital requirements of the consolidated corporate group.
Management could determine that it is in the best interest of the
Company and its shareholders to sell the Brisas property to another
mining company for development, or to enter into a joint development
or similar arrangement with another company to develop the Brisas
property and thereby reduce the economic risk to the Company were it
to proceed with development on its own. The Company has not entered
<PAGE>
into discussions with any other mining company in this regard, nor has
it shared any of its exploration data. Whether the Company would
pursue any of these alternatives to commercial development of the
Brisas property cannot presently be determined. (See Item 1. Business
-- Risk Factors).
As of February 28, 1998, the Company held approximately $27.5 million
in cash and investments. At this time, management anticipates that
its current cash and investment position are adequate to cover
estimated operational and capital expenditures (excluding estimated
mine construction costs) associated with the 1998 exploration and
development program on the Brisas property.
Results of Operations
---------------------
1997 COMPARED TO 1996. The consolidated net loss for the year ended
December 31, 1997 was $1,532,801 or $0.07 per share, an increase of
approximately $703,000 from the prior year. Other income for 1997
amounted to $1,737,916, which is an increase of approximately $249,000
over the previous year. The increase in other income is principally
due to higher returns on invested cash. Operating expenses for the
year amounted to $3,270,717, which is an increase from the prior year
of approximately $952,000. The major components of the increase in
operating expenses are increases in general and administrative
expenses of approximately $317,000 and directors' and officers'
compensation of approximately $511,000. The increase in general and
administrative expense was primarily related to costs associated with
the addition of new employees. Directors' and officers' compensation
increased as a result of increases in compensation and the addition of
several new executives during the first quarter of 1997.
1996 COMPARED TO 1995. The consolidated net loss for the year ended
December 31, 1996 was $829,938 or $0.04 per share, an increase of
approximately $493,000 from the prior year. Other income for 1996
amounted to $1,488,857, which is an increase of approximately $82,000
over the previous year and principally due to gains on the sale of
investments partially offset by a decrease in interest income due to
lower returns on invested cash. Operating expenses for the year
amounted to $2,318,795, which is an increase from the prior year of
approximately $575,000. The major components of the increase in
operating expenses are increases in general and administrative
expenses of approximately $209,000, legal and accounting expenses of
approximately $211,000 and directors' and officers' compensation of
approximately $172,000. The increase in general and administrative
expenses was primarily due to increases in compensation and related
expenses. Legal and accounting expense increased due to the Company's
ongoing securities compliance and reporting in the United States and
Canada and compliance and permitting activities in Venezuela.
Directors' and officers' compensation increased as a result of salary
increases for officers and first time compensation paid to the
directors.
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, SFAS No. 130, "Reporting
Comprehensive Income", was issued. This Statement requires that
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This Statement does not require a specific format for the financial
statement, but requires that an enterprise display net income as a
component of comprehensive income in the financial statement.
Comprehensive income is defined as the change in equity of a business
enterprise arising from non-owner sources. The classifications of
comprehensive income under current accounting standards include
foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and equity
securities. This Statement is effective for fiscal years beginning
after December 15, 1997. Management does not believe that the
implementation of SFAS No. 130 will have a material impact on the
presentation of its consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments for an Enterprise and Related Information". This Statement
will change the way public companies report information about segments
of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports
issued to shareholders commencing with the first quarter of 1999. It
also requires entity-wide disclosures about the products and services
an entity provides, the material countries in which it holds assets
and reports revenues, and its major customers. The Statement is
effective for fiscal years beginning after December 15, 1997. The
Company does not believe the application of this standard will have a
material impact on the presentation of its financial statements.
The Company adopted the provisions of SFAS No. 128 "Earnings Per
Share" in 1997. Due to the net losses incurred in all periods
presented, stock options were not included in the calculations as they
are anti-dilutive. As a result, the adoption of SFAS No. 128 had no
impact on prior year net loss per share disclosure.
ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks
--------------------------------------------------------------------
Not Applicable
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
---------------------------------------------------
Index to Consolidated Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets
December 31, 1997 and 1996
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
-------------------------------------------------------------------
There were no changes in or disagreements with accountants on
accounting or financial disclosures during the year ended December 31,
1997.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Gold Reserve Corporation
We have audited the accompanying consolidated balance sheets of Gold
Reserve Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Gold Reserve Corporation and subsidiaries as of December 31, 1997
and 1996, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Company changed its method of accounting
for the impairment of long-lived assets in 1996.
/s/ Coopers & Lybrand L.L.P.
Spokane, Washington
February 23, 1998, except for Note 9 as to which
the date is March 3, 1998
<PAGE>
GOLD RESERVE CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,524,125 $ 30,329,024
Investments:
Held-to-maturity securities, at amortized cost 4,054,494 8,442,492
Accrued interest on investments 240,757 143,580
Deposits, advances and other 411,725 528,458
Litigation settlement held in escrow 4,500,000 4,500,000
------------ ------------
Total current assets 21,731,101 43,943,554
Property, plant and equipment, net 38,446,169 29,097,305
Investments:
Available-for-sale securities 127,754 119,504
Held-to-maturity securities, at amortized cost 11,521,973 --
Other 1,465,997 611,204
------------ ------------
Total assets $ 73,292,994 $ 73,771,567
============ ============
LIABILITIES
Accounts payable and accrued expenses $ 646,203 $ 938,892
Note payable-KSOP, current portion 188,470 186,708
Litigation settlement payable 4,500,000 4,500,000
------------ ------------
Total current liabilities 5,334,673 5,625,600
Note payable-KSOP, non-current portion 434,390 --
Minority interest in consolidated subsidiaries 974,522 952,571
------------ ------------
Total liabilities 6,743,585 6,578,171
------------ ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Serial preferred stock, without par value
Authorized: 1997... 20,000,000; 1996... 10,000,000 shares
Issued: None
Common stock, without par value
Authorized: 1997...480,000,000; 1996... 40,000,000 shares
Issued: 1997... 22,918,143; 1996... 22,703,811
Outstanding:1997... 22,437,099; 1996... 22,222,767 102,269,494 100,952,778
Less, common stock held by affiliates (1,428,565) (1,428,565)
Unrealized gain on available-for-sale securities 11,000 2,750
Accumulated deficit (33,679,660) (32,146,859)
KSOP debt guarantee (622,860) (186,708)
------------ ------------
Total shareholders' equity 66,549,409 67,193,396
------------ ------------
Total liabilities and shareholders' equity $ 73,292,994 $ 73,771,567
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Other Income:
Interest income $ 1,806,309 $ 1,477,955 $ 1,548,998
Foreign currency loss (68,393) (135,509) (130,244)
Net gain (loss) on investments -- 111,286 (11,770)
Miscellaneous -- 35,125 --
----------- ----------- -----------
1,737,916 1,488,857 1,406,984
----------- ----------- -----------
Expenses:
General and administrative 1,486,948 1,170,329 961,829
Directors' and officers' compensation 1,148,621 637,825 465,684
Legal and accounting 540,464 499,700 288,371
Depreciation 47,042 38,831 28,549
Interest, net of amount capitalized 25,691 11,841 8,214
Minority interest in consolidated
subsidiaries 21,951 (39,731) (8,360)
----------- ----------- -----------
3,270,717 2,318,795 1,744,287
----------- ----------- -----------
Net loss $(1,532,801) $ (829,938) $ (337,303)
=========== =========== ===========
Net loss per share - basic and diluted $ (0.07) $ (0.04) $ (0.02)
=========== =========== ===========
Weighted average common shares outstanding 22,347,163 20,841,025 19,415,805
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Unrealized
Stock Gain on
Common Stock Issued Accumulated Issued to Available-for-
Shares Amount Deficit Affiliates Sale Securities
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 18,929,668 $ 69,453,393 $(30,979,618) $ (504,276) $ 79,017
Net loss (337,303)
Common stock issued:
Cash 50,000 280,195
Options 167,835 460,162
Exchange for minority interest of
subsidiaries 1,329,185 9,882,028
Increase in common stock held by
consolidated subsidiaries (924,289)
Increase in unrealized gain on
available-for-sale securities 6,943
Reduction of shareholders' equity
associated with change in subsidiaries'
minority interest (6,924)
------------ ------------ ------------ ------------ ---------------
Balance, December 31, 1995 20,476,688 80,068,854 (31,316,921) (1,428,565) 85,960
Net loss (829,938)
Common stock issued:
Cash 1,729,500 18,202,500
Options 497,623 2,673,988
Decrease in unrealized gain on
available-for-sale securities (83,210)
Addition to shareholders' equity
associated with change in subsidiaries'
minority interest 7,436
------------ ------------ ------------ ------------ ---------------
Balance, December 31, 1996 22,703,811 100,952,778 (32,146,859) (1,428,565) 2,750
Net loss (1,532,801)
Common stock issued:
Cash 89,683 600,000
Options 124,649 716,716
Increase in unrealized gain on
available-for-sale securities 8,250
------------ ------------ ------------ ------------ ---------------
Balance, December 31, 1997 22,918,143 $102,269,494 $(33,679,660) $ (1,428,565) $ 11,000
============ ============ ============ ============ ===============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net loss $(1,532,801) $ (829,938) $ (337,303)
Adjustments to reconcile net loss to net cash used by
operating activities:Depreciation 47,042 38,831 28,549
Accretion of discount on held-to-maturity securities (170,199) (339,581) (765,451)
Foreign currency loss 68,393 135,509 130,244
Minority interest in consolidated subsidiaries 21,951 (39,731) (8,360)
Net loss (gain) on disposition and revaluation of equity securities -- (111,286) 11,770
Changes in current assets and liabilities:
Net decrease (increase) in current assets 19,556 (49,646) (4,368,656)
Net (decrease) increase in current liabilities (292,689) 676,673 (310,494)
------------ ------------ ------------
Net cash used by operating activities (1,838,747) (519,169) (5,619,701)
------------ ------------ ------------
Cash Flow from Investing Activities:
Purchase of held-to-maturity securities (23,603,702) (17,396,948) (20,609,690)
Purchase of property, plant and equipment (9,464,299) (7,205,777) (3,807,683)
Proceeds from maturities of held-to-maturity securities 16,639,926 23,925,000 32,824,000
Net cash acquired from increased investment in majority owned,
consolidated subsidiaries -- 909,578 --
Proceeds from sale of available-for-sale securities -- 123,936 --
Other (854,793) (479,700) (107,438)
------------ ------------ ------------
Net cash provided (used) by investing activities (17,282,868) (123,911) 8,299,189
------------ ------------ ------------
Cash Flow from Financing Activities:
Proceeds from issuance of common shares 1,316,716 20,876,488 740,357
------------ ------------ ------------
Net cash provided by financing activities 1,316,716 20,876,488 740,357
------------ ------------ ------------
Change in Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents (17,804,899) 20,233,408 3,419,845
Cash and cash equivalents - beginning of year 30,329,024 10,095,616 6,675,771
------------ ------------ ------------
Cash and cash equivalents - end of year $ 12,524,125 $ 30,329,024 $ 10,095,616
============ ============ ============
Supplemental Cash Flow Information
Cash paid during the year for:
Interest, net of amount capitalized $ 25,691 $ 11,841 $ 10,202
Other non-cash activities:
Issuance of common shares for minority interest in subsidiaries -- -- 9,882,028
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
<PAGE>
GOLD RESERVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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's principal activity is the exploration and development
of the Brisas property in Venezuela.
CONSOLIDATION. 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 where majority control exists and
control is other than temporary.
CASH AND CASH EQUIVALENTS. The Company considers short-term,
highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents for purposes of
reporting cash equivalents and cash flows. At December 31, 1997,
the Company had certificates of deposits totaling $622,860
pledged as security for bank loans related to the Gold Reserve
KSOP Plan (see Note 4). At December 31, 1997, the Company had
approximately $220,000 in U.S. banks in excess of federally
insured limits and had approximately $148,000 in Venezuelan and
Aruban banks.
INVESTMENTS. Investments classified as available-for-sale are
carried at quoted market value. Unrealized gains and losses are
recorded as a component of shareholders' equity. Investments
classified as held-to-maturity are carried at amortized cost.
Realized gains and losses on the sale of investments are recorded
based upon specific identification.
EXPLORATION AND DEVELOPMENT COSTS. Exploration costs incurred in
locating areas of potential mineralization are expensed as
incurred. Exploration costs of properties or working interests
with specific areas of potential mineralization are capitalized
pending the determination of a property's economic viability.
Development costs of proven mining properties not yet producing
are capitalized and classified as property, plant and equipment.
Upon commencement of production, capitalized exploration and
development costs will be amortized based on the estimated proven
and probable ore reserves benefited. Deferred exploration and
development costs of unsuccessful projects are expensed.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are
recorded at the lower of cost or estimated net realizable value.
Replacements and major improvements are capitalized. Maintenance
and repairs are charged to expense as incurred. The cost and
accumulated depreciation of assets retired or sold are removed
from the accounts and any resulting gain or loss is reflected in
operations. Depreciation is provided using straight-line and
accelerated methods over the lesser of the useful life or lease
term of the related asset. During the exploration and
development phase, depreciation of mining assets is capitalized.
Interest costs incurred during the construction and development
of qualifying assets are capitalized.
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 accounting treatment for the
recognition and measurement of impaired long-lived assets. The
Statement requires a review for impairment of long-lived assets
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. If the sum
of the expected future net cash flows to be generated from the
use or disposition of a long-lived asset (undiscounted and
without interest charges) is less than the carrying amount of the
asset, an impairment loss should be recognized. There was no
financial statement impact as a result of adopting the provisions
of SFAS No. 121 as required on January 1, 1996.
FOREIGN CURRENCY. The Company's Venezuelan subsidiaries operate
in a highly inflationary economy. As a result, non-monetary
assets and liabilities are translated at historical rates, while
monetary assets and liabilities are translated at current rates,
with the resulting foreign currency translation gains and losses
included in operations. Gains and losses from foreign currency
transactions are also included in the results of operations.
ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Substantially all of the Company's investment in property, plant
and equipment represents amounts invested in the Brisas property.
Management's capitalization of exploration and development costs
and assumptions regarding the future recoverability of such costs
is subject to the risks and uncertainties of developing a
mineable ore reserve on the Brisas property which is based on
engineering and geological estimates, future gold and copper
prices, estimated plant construction and operating costs and the
procurement of all necessary regulatory permits and approvals.
These estimates could change in the future and this could affect
the carrying value and the ultimate recoverability of the amounts
recorded as property, mineral rights and capitalized exploration
and development costs.
Inflation and other economic conditions in Venezuela have
resulted in political and social turmoil on occasion, which can
be expected to continue. Such conditions have not materially
adversely affected the Company's operations in Venezuela to date.
Whether and to what extent current or future economic, regulatory
or political conditions may materially adversely affect the
Company's financial position, results of operations or cash flows
in the future cannot be predicted.
COMPREHENSIVE INCOME. Effective for fiscal years beginning after
December 15, 1997, the preparation of financial statements in
conformity with generally accepted accounting principles requires
management to report net income as a component of comprehensive
income in the financial statements. Comprehensive income is
defined as the change in equity of a business enterprise arising
from non-owner sources. The classifications of comprehensive
income under current accounting standards include foreign
currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investments in debt and
equity securities. Management does not expect that the
implementation of this new reporting standard will have a
material impact on the presentation of its consolidated financial
statements.
DISCLOSURES ABOUT SEGMENTS FOR AN ENTERPRISE AND RELATED
INFORMATION. Commencing with the first quarter of 1998, the
preparation of financial statements in conformity with generally
accepted accounting principles requires management to report
selected segment information in the Company's quarterly report
issued to shareholders. It also requires Company-wide
disclosures about the products and services provided by the
Company, the countries in which it holds material assets and
reports revenues, and its major customers. Management does not
expect the application of this reporting standard will have a
material impact on the presentation of its consolidated financial
statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET LOSS PER SHARE. The Company adopted the provisions of SFAS
No. 128 "Earnings Per Share" in 1997. Net loss per share (basic
and diluted) is based on the weighted average number of common
shares outstanding during each year, which has been reduced by
the Company's proportionate ownership of common shares owned by
Great Basin, MegaGold and Stanco Investments, A.V.V. (Stanco).
As of December 31, 1997, 1996 and 1995, there were 2,908,075,
1,962,092 and 1,636,793 shares available for issuance pursuant to
the exercise of previously granted stock options, respectively.
These options were not included in the computation of diluted
loss per share as a loss was incurred in each of these years, and
their inclusion would be anti-dilutive. As a result, the
adoption of SFAS No. 128 had no impact on prior year net loss per
share disclosure.
RECLASSIFICATIONS. Certain reclassifications of the 1996 and
1995 consolidated financial statement balances have been made to
conform with the 1997 presentation. These reclassifications had
no effect on the net loss or accumulated deficit as previously
reported.
2. INVESTMENTS:
The Company accounts for its investments in equity securities as
available-for-sale securities, and its investments in government-
backed bonds as held-to-maturity securities according to the
provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." Held-to-maturity securities consist primarily of
U.S. Treasury bonds which are recorded at amortized cost. The
bonds outstanding at December 31, 1997 mature as follows:
$4,054,494 in 1998, $7,001,366 in 1999, $2,013,174 in 2001,
$1,003,078 in 2004 and $1,504,355 in 2007. All of the bonds
mature or are callable in or before the year 2000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------------------
Amortized Cost/ Unrealized Unrealized Quoted
Carrying Value Gain Loss Market Value
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1997:
Government backed bonds $ 15,576,467 $ 8,606 $ (15,814) $ 15,569,259
============ ============ ============ ============
Amortized Cost/ Unrealized Unrealized Quoted
Carrying Value Gain Loss Market Value
--------------- ------------ ------------ ------------
December 31, 1996:
Government backed bonds $ 8,442,492 $ 2,629 $ (5,686) $ 8,439,435
============ ============ ============ ============
Available-for-Sale Securities
------------------------------------------------------------
Carrying/
Unrealized Unrealized Quoted
Cost Gain Loss Market Value
--------------- ------------ ------------ ------------
December 31, 1997:
Gold Reserve Corporation $ 220,318 $ 2,293,119 $ -- $ 2,513,437
Less, ownership by the Company (1) (128,564) (2,293,119) -- (2,421,683)
------------- ------------ ------------ ------------
91,754 -- -- 91,754
Other equity securities 25,000 11,000 -- 36,000
------------- ------------ ------------ ------------
$ 116,754 $ 11,000 $ -- $ 127,754
============= ============ ============ ============
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENTS, CONTINUED:
<TABLE>
<CAPTION>
Available-for-Sale Securities
------------------------------------------------------------
Carrying/
Unrealized Unrealized Quoted
Cost Gain Loss Market Value
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1996:
Gold Reserve Corporation $ 220,318 $ 6,409,956 $ -- $ 6,630,274
Less, ownership by the Company (1) (128,564) (6,409,956) -- (6,538,520)
------------ ------------ ------------ ------------
91,754 -- -- 91,754
Other equity securities 25,000 2,750 -- 27,750
------------ ------------ ------------ ------------
$ 116,754 $ 2,750 $ -- $ 119,504
============ ============ ============ ============
</TABLE>
(1) The Gold Reserve Corporation shares above are owned by the
Company's subsidiaries, Great Basin, MegaGold and Stanco.
The Company's effective ownership of its own stock through
its subsidiaries is deducted from the above number of
shares held and recorded as a reduction of common stock
outstanding on the balance sheets. These shares are carried
at cost.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment as of December 31, 1997 and 1996
consisted of the following:
1997 1996
----------- -----------
Domestic:
Furniture and office equipment $ 289,633 $ 217,860
Transportation equipment -- 162,000
Leasehold improvements 11,174 11,174
----------- -----------
300,807 391,034
Less accumulated depreciation (155,024) (137,719)
----------- -----------
145,783 253,315
----------- -----------
Foreign:
Property and mineral rights 11,002,335 11,002,335
Capitalized exploration and
development costs 26,712,061 17,326,751
Buildings 262,208 86,989
Furniture and fixtures 384,409 346,996
Transportation equipment 288,231 255,119
Machinery and equipment 308,552 289,874
----------- -----------
38,957,796 29,308,064
Less accumulated depreciation (657,410) (464,074)
----------- -----------
38,300,386 28,843,990
----------- -----------
Total $38,446,169 $29,097,305
=========== ===========
In June 1995, the Company issued 1,329,185 common shares valued
at $9.8 million in exchange for all outstanding shares, other
than shares already held by the Company, of Gold Reserve Aruba
and Glandon Company which hold the Company's interest in its
Venezuelan subsidiaries. The fair value of the common shares
issued to acquire the minority interests was recorded as
additional property and mineral rights costs associated with the
Brisas property.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. EMPLOYEE BENEFIT KSOP PLAN:
The Company's KSOP Plan, adopted in 1990 for the benefit of its
employees, is comprised of two parts, (1) a salary reduction
component, or 401(k), and (2) an employee stock ownership
component, or ESOP. The salary reduction component has not, to
date, been utilized by any participant. Common stock purchases
by the KSOP Plan are financed by bank loans at between 7 and 8
percent interest and presently due in 1998. The amount shown on
the balance sheet as non-current will be re-financed prior to its
due date for at least one year. The loans are guaranteed by the
Company and accordingly are recorded as a reduction to
shareholders' equity. Allocation of common shares to
participants' accounts is based on contributions by the Company,
up to a maximum of 25 percent of the participants' annual
compensation or $30,000, whichever is less, divided by the
original purchase price of the common shares. The Company
recorded expense related to KSOP plan contributions of $167,473,
$150,000, and $92,247 in 1997, 1996, and 1995, respectively. As
of December 31, 1997, 93,937 common shares remain unallocated to
plan participants.
5. STOCK OPTION PLANS:
The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123) on
January 1, 1996. Pursuant to the provisions of SFAS No. 123, the
Company continues to measure compensation cost for stock-based
employee compensation plans using the intrinsic value method of
accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" and provides pro forma disclosure of
compensation expense related to stock-based plans using the fair
value based method of accounting as shown below.
The Company's Equity Incentive Plan allows for the granting of up
to 2,000,000 common share purchase options, in addition to any
options issued pursuant to previous plans, to officers,
directors, and key individuals for terms of up to ten years. The
vesting period of options ranges from immediately to up to three
years. Stock option transactions for the last three years are as
follows:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. STOCK OPTION PLANS, CONTINUED:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 1,962,092 $ 6.62 1,636,793 $ 5.31 964,628 $ 3.91
Options exercised (124,649) 5.72 (496,623) 5.44 (167,835) 2.78
Options canceled (209,368) 7.92 (136,178) 7.51 (118,334) 7.07
Options granted 1,280,000 6.67 958,100 8.41 958,334 6.50
--------- -------- --------- -------- --------- --------
Options outstanding, end of year 2,908,075 $ 6.60 1,962,092 $ 6.64 1,636,793 $ 5.31
========= ======== ========= ======== ========= ========
Options exercisable at end of year 2,185,392 1,460,406 1,044,053
========= ========= =========
Price Price Price
Range Range Range
-------------------- -------------------- --------------------
Option exercise price at end of year $1.09-$14.69 $1.09-$14.69 $1.09-$8.19
Option exercise price for exercisable
shares $1.09-$14.69 $1.09-$13.51 $1.09-$7.06
Weighted-average fair value of options
granted during the year $4.40 $3.45 $2.61
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. STOCK OPTION PLANS, CONTINUED:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Price Exercisable Exercise Price
Exercise Prices at 12/31/97 Life at 12/31/97 at 12/31/97 at 12/31/97
---------------- ----------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.09 to 1.24 222,852 4.66 years $ 1.14 222,852 $1.14
1.97 to 5.50 262,316 7.84 years 5.01 253,982 5.06
5.63 to 5.63 435,000 8.01 years 5.63 435,000 5.63
6.00 to 6.00 522,400 8.68 years 6.00 298,400 6.00
7.06 to 7.38 470,540 7.35 years 7.10 418,873 7.07
7.56 to 7.56 490,000 9.08 years 7.56 328,371 7.56
7.75 to 9.88 291,167 8.99 years 8.71 107,831 8.79
10.00 to 14.69 213,800 8.76 years 11.44 120,083 12.39
--------------- ----------- ----------- ------ ----------- ------
$ 1.09 to 14.69 2,908,075 8.09 years $ 6.60 2,185,392 $ 6.25
=============== =========== =========== ====== =========== ======
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. STOCK OPTION PLANS, CONTINUED:
As of December 31, 1997, the average exercise price of
outstanding options was $6.60, the Company's closing share price
on NASDAQ was $3.63 and 92% of the outstanding options were
exercisable at prices above market value. Had compensation cost
for the Company's option plan been determined based on the fair
value at the grant date for awards in 1997, 1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net
loss and loss per share would have been increased to the pro
forma amounts indicated below:
1997 1996 1995
----------- ----------- -----------
Net loss - as reported $(1,532,801) $ (829,938) $ (337,303)
Net loss - pro forma $(6,146,126) $(3,421,234) $(1,766,405)
Net loss per share -
as reported $ (0.07) $ (0.04) $ (0.02)
Net loss per share -
pro forma $ (0.28) $ (0.16) $ (0.09)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997,
1996 and 1995: expected volatility of 90% for 1997 and 40% for
1996 and 1995; risk-free interest rates of 5.92% to 6.16%; no
dividends, and expected option lives of 2.5 to 7 years.
6. RELATED PARTY TRANSACTIONS:
MEGAGOLD. The President, Executive Vice President, Vice
President-Finance and Vice President-Administration of the
Company are also officers, directors and/or shareholders of
MegaGold. At December 31, 1997 and 1996, the Company owned
23,304,174 common shares of MegaGold and MegaGold owned 125,083
common shares of the Company. In addition, MegaGold owned
280,000 common shares of Great Basin at December 31, 1997 and
1996. The Company performs various administrative functions and
sublets a portion of its office space to MegaGold for $1,200 per
year.
GREAT BASIN. The President, Executive Vice President and Vice
President-Finance and Vice President-Administration of the
Company are also officers, directors and/or shareholders of Great
Basin. At December 31, 1997 and 1996, the Company owned
24,210,636 common shares of Great Basin and Great Basin owned
391,161 common shares of the Company. Great Basin also owned
170,800 common shares of MegaGold at December 31, 1997 and 1996.
The Company performs various administrative functions and sublets
a portion of its office space to Great Basin for $1,200 per year.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. RELATED PARTY TRANSACTIONS, CONTINUED:
LEGAL FEES PAID TO DIRECTOR. One of the Company's directors also
serves as Canadian legal counsel for the Company. During 1997,
1996 and 1995, the Company incurred expenses of approximately
$292,000, $149,000, and $60,000 respectively, for services
performed by the director and his firm, in which he is Chairman
and a partner. At December 31, 1997, approximately $112,000 of
these fees are included in accounts payable and accrued expenses.
NOTE RECEIVABLE FROM AN OFFICER. As of December 31, 1997 and
1996, the Company had a $50,000 note receivable due from an
officer. The note bears interest at 5.2% and is due in one year.
7. INCOME TAX:
The Company accounts for income taxes according to the provisions
of SFAS No. 109, "Accounting for Income Taxes." No income tax
benefit has been recorded for the three years ended December 31,
1997 due to the uncertainty of recoverability of the benefit
associated with the net operating loss carryforwards.
The Company's Venezuelan subsidiaries are subject to Venezuelan
income tax. All costs related to the Company's Brisas property
have been recorded as capitalized exploration and development
costs for tax purposes, and therefore the Company has not
recorded any foreign tax attributes. No income tax has been paid
or accrued by the Company's subsidiaries during 1997, 1996 and
1995. The Company has recorded a valuation allowance to reflect
the estimated amount of the deferred tax asset which may not be
realized, principally due to the uncertainty of utilization of
net operating losses and other carryforwards prior to expiration.
The valuation allowance for deferred tax assets may be reduced in
the near term if the Company's estimate of future taxable income
changes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAX, CONTINUED:
The components of the deferred tax assets and liabilities as of
December 31, 1997 and 1996 were as follows:
Deferred Tax Asset
(Liability)
---------------------------
1997 1996
------------ ------------
Accounts payable and accrued
expenses $ 66,910 $ 34,736
Investment income (165,533) (105,037)
Property, plant and equipment 8,497,773 8,497,728
------------ ------------
Total temporary differences 8,399,150 8,427,427
Net operating loss carryforward 2,383,006 1,797,395
Investment tax credit 5,967 5,967
Alternative minimum tax credit 19,871 19,871
------------ ------------
Total temporary differences,
operating losses and tax credit
carryforwards 10,807,994 10,250,660
Valuation allowance (10,807,994) (10,250,660)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
The changes in the valuation allowance for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Balance, beginning of year $10,250,660 $10,217,583 $ 10,348,600
Change in valuation allowance
due to change in deferred tax
asset subject to uncertainty
of recovery 557,334 33,077 (131,017)
----------- ----------- ------------
Balance, end of year $10,807,994 $10,250,660 $ 10,217,583
=========== =========== ============
</TABLE>
At December 31, 1997, the Company had the following U.S. federal
tax basis loss carryforwards and tax credits:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAX, CONTINUED:
Amount Expires
---------- -------
Regular tax net operating loss: $ 272,248 2006
1,650,395 2007
1,244,312 2008
700,536 2009
609,833 2010
808,573 2011
1,722,385 2012
----------
$7,008,282
==========
Alternative minimum tax net
operating loss: $ 289,523 2006
1,624,454 2007
1,218,023 2008
671,999 2009
572,555 2010
781,796 2011
1,700,000 2012
----------
$6,858,350
==========
Investment tax credit $ 5,967 2001
Alternative minimum tax credit $ 9,871 --
8. GEOGRAPHIC SEGMENTS:
<TABLE>
<CAPTION>
United States Venezuela Consolidated
------------- ----------- ------------
<S> <C> <C> <C>
December 31, 1997:
Depreciation $ 47,042 $ -- $ 47,042
Net loss $ 1,455,169 $ 77,632 $ 1,532,801
Identifiable assets:(1)
Property, plant and equip-
ment, net $ 145,783 $38,300,386 $38,446,169
General corporate assets 32,996,934 1,849,891 34,846,825
----------- ----------- -----------
Identifiable assets at
December 31, 1997 $33,142,717 $40,150,277 $73,292,994
=========== =========== ===========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. GEOGRAPHIC SEGMENTS, CONTINUED:
<TABLE>
<CAPTION>
United States Venezuela Consolidated
------------- ----------- ------------
<S> <C> <C> <C>
December 31, 1996:
Depreciation $ 38,831 $ -- $ 38,831
Net loss $ 656,435 $ 173,503 $ 829,938
Identifiable assets: (1)
Property, plant and equip-
ment, net $ 253,315 $28,843,990 $29,097,305
General corporate assets 43,479,713 1,194,549 44,674,262
----------- ----------- -----------
Identifiable assets at
December 31, 1996 $43,733,028 $30,038,539 $73,771,567
=========== =========== ===========
December 31, 1995:
Depreciation $ 28,549 -- $ 28,549
Net loss $ 182,216 $ 155,087 $ 337,303
Identifiable assets: (1)
Property, plant and equip-
ment, net $ 247,383 $21,818,485 $22,065,868
General corporate assets 29,473,430 722,409 30,195,839
----------- ----------- -----------
Identifiable assets at
December 31, 1995 $29,720,813 $22,540,894 $52,261,707
=========== =========== ===========
</TABLE>
(1) Identifiable assets of each segment are those that are
directly identified with those operations. General
corporate assets consist primarily of cash, cash
equivalents and investment securities.
9. LITIGATION SETTLEMENT:
Pursuant to a December 1994 litigation settlement agreement
related to an ownership dispute of the Brisas property, the
Company placed $4.5 million in escrow to be released to one of
the defendants at such time as the Company receives the mining
title to the hardrock concession for the Brisas property on or
before January 1, 2000. The Company paid $22,512,500 in common
shares and cash, including funds held in escrow and recorded the
litigation settlement as an expense in 1994. The Brisas hardrock
concession was published in the Official Gazette of the Republic
of Venezuela on March 3, 1998 and the funds in escrow were
released to the defendant in the litigation on or around
March 20, 1998.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. SHAREHOLDER RIGHTS PLAN:
At the 1997 annual meeting of shareholders a "Shareholder Rights
Plan" was voted upon and approved. The Rights Plan is intended
to give adequate time for shareholders of the Company to properly
assess the merits of a take-over bid without pressure and to
allow competing bids to emerge. The Rights Plan is designed to
give the board of directors time to consider alternatives to
allow shareholders to receive full and fair value for their
common shares. One right is issued in respect to each
outstanding share. The rights become exercisable only when a
person, including any party related to it or acting jointly with
it, acquires or announces its intention to acquire 20 percent or
more of the Company's outstanding shares without complying with
the "permitted bid" provisions of the Rights Plan. Each right
would, on exercise, entitle the holder, other than the acquiring
person and related persons, to purchase common shares of the
Company at a 50% discount to the market price at the time.
11. DIFFERENCES BETWEEN U.S. AND CANADIAN GAAP:
The Company prepares its consolidated financial statements in
accordance with generally accepted accounting principles (GAAP)
in the United States. The differences between U.S. GAAP and
Canadian GAAP had no effect on total shareholders' equity as of
December 31, 1997 and 1996 nor net loss for the years ended
December 31, 1997, 1996 and 1995.
Under Canadian GAAP, the other non-cash activities noted in the
supplemental cash flow information would be included in the
Statement of Cash Flows. Accordingly, under Canadian GAAP, net
cash used by investing activities would have been $1,582,839 and
net cash provided by financing activities would have been
$10,622,385 in the 1995 Statement of Cash Flows.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------
The information requested by this item is contained in the
registrant's 1998 Proxy Statement and is incorporated by reference
herein.
ITEM 11. Executive Compensation
-------------------------------
The information requested by this item is contained in the
registrant's 1998 Proxy Statement and is incorporated by reference
herein.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
------------------------------------------------------------
The information requested by this item is contained in the
registrant's 1998 Proxy Statement and is incorporated by reference
herein.
ITEM 13. Certain Relationships and Related Transactions
-------------------------------------------------------
The information requested by this item is contained in the
registrant's 1998 Proxy Statement and is incorporated by reference
herein.
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
----------------------------------------------------------------
EXHIBITS. The following exhibits are filed as part of this report.
Exhibits previously filed are incorporated by reference, as noted.
Exhibits filed herewith appear beginning at page 36.
Exhibit
Number Exhibit
------- -----------------------------------------------------------
3.1 Articles of Incorporation of Registrant, as amended. Filed
as Exhibit C to the Registrant's Registration Statement on
Form 10 dated July 12, 1982 and incorporated by reference
herein.
3.2 Bylaws of Registrant, as amended March 4, 1993. Filed as
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated by
reference herein.
10.1 Mining Operations Agreement dated July 1, 1992 between
Compania Minera Bajo Caroni - Caromin, C.A. and Compania
Minera Unicornio, C.A. Filed as Exhibit 10.29 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992 and incorporated by reference herein.
10.2 Stock Purchase Agreement dated August 1992 between Antonio
Sosa Aviles and Servicios Escriber S.R.L., and Stock
Purchase Agreement dated November 26, 1992 between
Servicios Escriber S.R.L. and Gold Reserve de Venezuela.
Filed as Exhibit 10.30 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992 and
incorporated by reference herein.
10.3 License and Technical Assistance Agreement dated
September 1, 1992 between Registrant and Compania Minera
Unicornio, C.A. Filed as Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1992 and incorporated by reference herein.
10.4 Credit Agreement dated October 13, 1992 between Registrant
and Compania Aurifera Brisas del Cuyuni, C.A. Filed as
Exhibit 10.32 to the Registrant's Annual Report on Form 10-
K for the year ended December 31, 1992 and incorporated by
reference herein.
10.5 Services Agreement dated November 6, 1992 between
Registrant and A. Douglas Belanger. Filed as Exhibit 10.33
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992 and incorporated by reference
herein.
<PAGE>
Exhibit
Number Exhibit
------- -----------------------------------------------------------
10.6 Settlement Agreement dated December 21, 1994 among the
Registrant, Brisas, GLDR, Marwood International Ltd., TVX
Gold, Inc., BlueGrotto Trading Limited and Inversiones
871010, C.A. Filed as an exhibit to the Registrant's
current report on Form 8-K dated December 21, 1994 and
incorporated by reference herein.
10.7 Services Agreement dated February 4, 1997 between
Registrant and James P. Geyer. Filed as Exhibit 10.7 to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
13*
16.1*
18*
19*
21.1 Subsidiaries of Registrant.
23.1 Consent of Coopers & Lybrand L.L.P.
24*
25*
27.1 Financial Data Schedule
28*
29*
* Items denoted by an asterisk have either been omitted or are not
applicable.
FINANCIAL STATEMENTS. An index to the financial statements included
in this report appears at page 18. The financial statements
themselves appear at pages 20 through 32 of this report.
REPORTS ON FORM 8-K. No report on Form 8-K was issued during the
quarter ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GOLD RESERVE CORPORATION
By: s/ Rockne J. Timm
------------------------------------
Rockne J. Timm, its Chairman of the
Board, President and Chief
Executive Officer
March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
By: s/ Robert A. McGuinness
----------------------------------------------------
Robert A. McGuinness, Vice President of Finance
and Chief Financial Officer, its Principal Financial
and Accounting Officer
March 18, 1998
By: s/ James P. Geyer
-------------------------------------------------------
James P. Geyer, Senior Vice President, Director
March 18, 1998
By: s/ A. Douglas Belanger
-------------------------------------------------------
A. Douglas Belanger, Executive Vice President, Director
March 18, 1998
By: s/ Jean Charles Potvin
-------------------------------------------------------
Jean Charles Potvin, Director
March 18, 1998
By: s/ James H. Coleman
-------------------------------------------------------
James H. Coleman, Director
March 18, 1998
By: s/ Patrick D. McChesney
-------------------------------------------------------
Patrick D. McChesney, Director
March 18, 1998
By: s/ Chris D. Mikkelsen
-------------------------------------------------------
Chris D. Mikkelsen, Director
March 18, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12524
<SECURITIES> 15945
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 21731
<PP&E> 39258
<DEPRECIATION> 812
<TOTAL-ASSETS> 73293
<CURRENT-LIABILITIES> 5335
<BONDS> 0
0
0
<COMMON> 102269
<OTHER-SE> (35720)
<TOTAL-LIABILITY-AND-EQUITY> 73293
<SALES> 0
<TOTAL-REVENUES> 1738
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> (1533)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1533)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1533)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Subsidiary % Ownership
Compania Aurifera Brisas del Cuyuni, C.A. ("Brisas") 100
Gold Reserve de Venezuela, C.A. ("GLDRV"); 100
Compania Minera Unicornio, C.A. ("Unicorn") 100
Great Basin Energies, Inc. ("Great Basin") 58
MegaGold Corporation ("MegaGold") 63
Gold Reserve de Aruba A.V.V. ("Gold Reserve Aruba") 100
G.L.D.R.V. Aruba A.V.V. ("GLDRV Aruba") 100
Glandon Company A.V.V. ("Glandon") 100
Stanco Investments A.V.V. ("Stanco") 100
GoldenLake A.V.V. ("GoldenLake") 100
Mont Ventoux A.V.V. ("Mont Ventoux") 100
Gold Reserve Holdings A.V.V. ("Gold Reserve Holdings") 100
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Gold Reserve Corporation on Form S-3 (File
No. 33-62804) and Form S-8 (File No. 33-61113) of our report,
which includes an explanatory paragraph concerning changes in
accounting for long-lived assets in 1996, dated February 23,
1998, except for Note 9 as to which the date is March 3, 1998, on
our audits of the consolidated financial statements of Gold
Reserve Corporation and subsidiaries as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995,
which report is included in this Annual Report on
Form 10-K.
s/ Coopers & Lybrand L.L.P.
Spokane, Washington
March 18, 1998
<PAGE>
EXHIBIT 10.7
SERVICES AGREEMENT
THIS AGREEMENT, is made effective this 4th day of February, 1997,
between GOLD RESERVE CORPORATION , a Montana Corporation, with its
principal office in Spokane, Washington, herein referred to as
"Corporation", and James P. Geyer, of Spokane, Washington, herein
referred to as the "Executive".
In consideration of the mutual covenants and benefits as herein set
forth, the parties hereto agree as follows:
SECTION ONE
-----------
EMPLOYMENT
1. The Corporation hereby employs the Executive as its Senior Vice
President, with the primary duty to oversee all mining and
technically related activities, and the Executive hereby accepts
such employment and agrees to devote all of his efforts for the
benefit of the Corporation and to faithfully, industriously, and
to the best of his ability, experience and talents, perform all of
his required and assigned duties. Executive shall perform the
duties of the Senior Vice President subject to the general
supervision and pursuant to the orders, advice and direction of
the President of the Corporation.
Executive shall also render such other reasonable and unrelated
services and duties as may be assigned to him from time to time by
the President of the Corporation.
SECTION TWO
-----------
TERM OF EMPLOYMENT
2. The primary term of this Agreement shall be for a period of two
(2) years commencing February 4, 1997 and will continue under the
provisions of this Agreement until terminated as provided in
Section 5.
SECTION THREE
-------------
COMPENSATION
3. The Corporation shall pay Executive, and the Executive shall
accept from the Corporation, compensation at the minimum rate of
U.S. $175,000 per year, prorated and payable bi-monthly or on such
other basis as the parties may hereafter agree. Such minimum
compensation may be adjudged for merit or other raises as from
time to time determined by the Board of Directors or any Committee
thereof having such authority. The Executive shall be
<PAGE>
entitled to a minimum paid vacation of four (4) weeks in any
calendar year. If the Executive shall not use all vacation days in
any calendar year, Executive shall be permitted to carry over those
vacation days into the subsequent calendar year up to a maximum of
50% of the Executive's annual paid vacation days in any one calendar
year. Unused vacation days in excess of the number of days allowed
to be carried over to the subsequent year will be monetized in
accordance with the Executive's compensation. Such monies shall be
applied by the Executive against the exercise price of the
Executive's stock options that approximate such monies.
SECTION FOUR
------------
OTHER BENEFITS
4. In addition to the compensation as provided above, Corporation
shall provide for Executive the following additional benefits:
(1) Term insurance on the life of the Executive, when put into
effect, equal to at least U.S. $350,000, with proceeds
thereof upon Executive's death to be payable to Executive's
named beneficiary;
(2) Participation in all the Corporation's benefits, including
medical, dental, vision, stock option and KSOP plans,
retirement plan, bonus, holiday and any and all other plans
(including disability insurance) that may be made available
to employees;
(3) Upon the one year anniversary (February 5, 1998), the
Company shall grant a bonus of U.S. $44,062.50 which funds
will be used to exercise 5,000 shares pursuant to
Executive's stock options;
(4) Indoor parking near Corporation's offices;
(5) Payment of dues in professional associations as may be
required to maintain the Executive's membership in such
associations;
(6) Attendance at appropriate conferences, seminars and
educational programs as may be necessary with the approval
of the President;
(7) Reimbursement for all expenses incurred in connection with
the performance of services to the Corporation, including
entertainment, travel and other expenses incidental to the
duties undertaken hereunder, provided that such expenses
shall be reasonable and necessary and that Executive shall
submit bills and vouchers, when possible, supporting all
requests for reimbursement in accordance with Corporation's
policies;
<PAGE>
(8) An appropriate office, which office will be located in
Spokane, Washington, which shall be the principal place of
employment during the term of the Agreement. The Executive
hereby acknowledges that the current business of the
Corporation requires its senior executives to be absent,
from time to time, from the principal place of employment to
other locations; and
(9) Such directors and officers liability insurance coverage as
may be available from time to time to all directors and
officers.
SECTION FIVE
------------
TERMINATION
5. This agreement will terminate or may be terminated by any one of
the following:
(1) By mutual agreement.
(2) Voluntarily and without cause, upon at least 3 months prior
written notice of termination by Corporation to the
Executive or by the Executive to the Corporation;
(3) By the Corporation for cause as hereinafter defined in
Section 10;
(4) Upon the death or disability of Executive subject to the
provisions in Section 6 (D); or
(5) Constructive termination by third parties subject to the
provisions in Section 6 (E).
SECTION SIX
-----------
SEVERANCE COMPENSATION
6 (A). Termination by Executive or by Corporation With Cause:
(1) If Executive shall voluntarily terminate his employment
under this Agreement pursuant to Section 5 (2) or if the
employment of the Executive is terminated by the Corporation
for cause pursuant to Section 5 (3), then all compensation
and benefits as heretofore provided in Section 3 shall
terminate immediately upon the effective date of termination
(accrued vacation not taken will be paid to Executive at his
then daily or weekly pay rate pursuant to the provision in
Section 3 at time of termination).
<PAGE>
6 (B). Termination by Corporation Without Cause
(1) If Corporation shall terminate this Agreement for any reason
except cause pursuant to Section 5 (3) and as defined in
Section 10, then upon the termination of the Executive's
employment under this Agreement, the Corporation shall pay
an amount equal to 24 months' salary. The amount shall be
paid in one lump sum no later than the fifth (5th) day
following the date of termination of the Executive's
employment. All employee benefits provided to the Executive
shall be continued as if the Executive was still an employee
of the Corporation, for a period of one year from the date
of termination or until replacement of benefits of a
similar nature from a new employer. In the event Executive
has existing stock options, such options will be governed in
accordance with the terms of the respective option
agreement(s).
6 (C ). Termination for Good Reason (includes Change In Control)
(1) Executive shall be entitled to terminate his employment for
Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without Executive's express written consent, any
of the following:
i. the assignment to Executive of any duties
inconsistent with Executive's responsibilities from
those in effect immediately prior to a Change in
Control;
ii. a reduction by the Corporation in Executive's annual
base salary as in effect on the date hereof or as the
same may be increased from time to time or a failure
by the Corporation to increase Executive's salary at
a rate commensurate with that of other senior
executives of the Corporation;
iii. the relocation of the office of the Corporation where
Executive is employed at the time of a Change in
Control ("the CIC Location") to a location more than
fifty (50) miles away from the CIC Location or the
Corporation's requiring Executive to be based more
than fifty (50) miles away from the CIC Location
(except for required travel on the Corporation's
business to an extent substantially consistent with
Executive's business travel obligations just prior to
the Change in Control);
<PAGE>
iv. the failure by the Corporation to continue to provide
Executive with benefits at least as favorable to
those enjoyed by Executive under any of the
Corporation's other benefits (Section 4) in which
Executive was participating at the time of the Change
in Control, the taking of any action by the
Corporation which would directly or indirectly
materially reduce any of such benefits or deprive
Executive of any material fringe benefit enjoyed by
Executive at the time of the Change in Control, or
the failure by the Corporation to provide Executive
with the number of paid vacation days to which
Executive is entitled to at the time of the Change in
Control; and, if the business of the Corporation for
which Executive's services are principally performed
is sold at any time after a Change in Control and the
purchaser of such business fails to agree to provide
Executive with the same or a comparable position,
duties, salary and benefits as provided to Executive
by the Corporation immediately prior to the Change in
Control.
6 (D). Termination By Death or Disability
(1) If Executive dies or becomes disabled before his employment
is otherwise terminated, in addition to payments otherwise
provided through insurance under Section 4 (1) and (2), the
Corporation will immediately pay an amount of compensation
equal to three month's annual salary as if Executive had
been terminated without cause and all employee benefits
theretofore provided to Executive will be continued for a
period of one year from the date of death or disability as
if the Executive was still an employee of the Corporation.
If such termination is due to Executive's death, payment
will be made in one lump sum to his beneficiary, to be named
in writing by Executive upon signing this Agreement, which
designation may be changed at any time by written notice
signed by Executive and delivered to the Secretary of
Corporation; if no beneficiary survives Executive, the
entire amount will be paid to his estate. If such
termination is due to Executive's disability, payment will
be made in one lump sum to Executive.
6 (E). Constructive Termination by Third Parties
(1) In the event Executive is taken hostage or otherwise
wrongfully imprisoned or restrained, against his will and
beyond his control, by a third party, all salary and
benefits under this Agreement shall continue until such time
as the Corporation may reasonably make determination that
Executive is unlikely to return to his position. At that
time, the Corporation may elect to make payment to
Executive's designated beneficiary in accordance with
Section 6 (D).
<PAGE>
SECTION SEVEN
-------------
NON-TRANSFERABILITY
7. This is a personal agreement. No Executive's rights, benefits or
interests hereunder may be subject to sale, anticipation,
alienation, assignment, encumbrance, charge, pledge
hypothecation, transfer, or set-off in respect of any claim,
debt, or obligation or to execution, attachment, levy or similar
process, or assignment by operation of law. Any attempt,
voluntary or involuntary, to effect any such action shall be
null, void and of no effect.
SECTION EIGHT
-------------
DIRECTORSHIPS
8. The Executive shall be entitled to accept a position as a
director of other corporations, whether such corporation is
engaged in the mining industry or not, provided such directorship
is first approved by the Board of Directors.
SECTION NINE
------------
REPRESENTATIONS
9. The Corporation represents to the Executive and the Executive may
rely on such representations and warranties in entering into this
Agreement as follows:
(1) The common shares of Gold Reserve Corporation are listed for
trading on NASDAQ and The Toronto Stock Exchange.
(2) The financial statements, reports, and other information
provided by the Corporation and its respective officers
constitute complete and accurate disclosure of the status of
the affairs of Gold Reserve Corporation and do not know of
any other information, which if disclosed to the Executive,
might reasonably be expected to cause the Executive to
refrain from accepting employment with the Corporation or
affect the value of Gold Reserve Corporation shares.
SECTION TEN
-----------
DEFINITION OF CAUSE
10. Cause to terminate the Executive's employment shall mean (a) the
wilful and continued failure by the Executive to perform his
duties in breach of a fiduciary duty imposed by his current
position with the Corporation, (b) the wilful engaging by the
Executive of misconduct which is materially injurious to the
Corporation, monetarily or otherwise, or (c) the wilful violation
by the Executive of the provisions of this Agreement, or (d) for
any other "Cause" as determined in accordance with the laws of
the State of Washington.
<PAGE>
SECTION ELEVEN
--------------
CHOICE OF LAW
11. The parties hereto agree that this Agreement and the performance
hereunder and all suits and special proceedings hereunder be
construed in accordance with and under and pursuant to the laws
of the State of Washington, and that in any action, special
proceedings or other proceeding that may be brought arising out
of, in connection with, or by reason of this Agreement, the laws
of the State of Washington shall be applicable and shall govern
to the exclusion of the law under any other forum, without regard
to the jurisdiction in which any action or special proceeding may
be instituted.
SECTION TWELVE
--------------
BINDING EFFECT
12. This Agreement shall be binding upon and shall inure to the
benefit of the Corporation, its successors or assigns and the
personal representative, heirs, executors and administrators of
the Executive.
SECTION THIRTEEN
----------------
CONFIDENTIALITY
13. Executive agrees that except as required for the performance of
his duties, obligations and responsibilities hereunder, he will
not at any time during the term of this Agreement or thereafter
divulge to any person, firm or corporation any confidential
information received by him during the course of his employment
and all such confidential information shall be kept confidential
and deemed the property of Corporation. For the purpose of this
provision, confidential information means, information known to
the Executive as a consequence of his employment by Corporation
and not generally known in the industry in which the Corporation
is engaged or otherwise available to third parties from sources
unrelated to or controlled by Corporation.
SECTION FOURTEEN
----------------
OTHER
14. In the event that the Company does not have sufficient assets to
complete the terms of this Agreement, this contract will be null
and void.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at
Spokane, Washington on the day and year first above written.
GOLD RESERVE CORPORATION
--------------------------------
By: Rockne J. Timm, President
and CEO
EXECUTIVE
-------------------------------- ---------------------------------
By: James P. Geyer Witness
Named beneficiary of the Executive is ,
wife of the Executive. ------------------------------
<PAGE>
