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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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Commission File Number 0-12207
PEGASUS GOLD INC.
(Exact name of registrant as specified in its charter)
PROVINCE OF BRITISH COLUMBIA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. FIRST AVE., SUITE 1500, SPOKANE, WASHINGTON 99201-3832
(Address of principle executive offices) (Zip Code)
(509) 624-4653
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
COMMON SHARES WITHOUT PAR VALUE THE TORONTO STOCK EXCHANGE
MONTREAL EXCHANGE
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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 that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No 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 information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the voting stock held by non affiliates of the
registrant on April 30, 1998, based on the closing price of the shares on the
Montreal Stock Exchange was approximately C$37.7 million (US$26.3 million).
Common shares outstanding as of April 30, 1998, were 41,834,086.
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PEGASUS GOLD INC.
FORM 10-K - DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GLOSSARY OF MINING AND FINANCIAL TERMS . . . . . . . . . . . . . . . . . . . . . . .4
Item # PART I
1. & 2. BUSINESS AND PROPERTIES
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
SUMMARY OF ORE RESERVES. . . . . . . . . . . . . . . . . . . . . . . . . .8
FLORIDA CANYON MINE. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
MONTANA TUNNELS MINE . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DIAMOND HILL MINE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
MT. TODD MINE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ZORTMAN MINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
BEAL MOUNTAIN MINE . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
BLACK PINE MINE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PULLALLI PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
BASIN CREEK Mine . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ORTIZ PROJECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SALES AND MARKETING. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EXPLORATION AND EVALUATION . . . . . . . . . . . . . . . . . . . . . . . 21
PROPERTY INTERESTS AND MINING CLAIMS . . . . . . . . . . . . . . . . . . 21
ENVIRONMENTAL AND REGULATORY MATTERS . . . . . . . . . . . . . . . . . . 22
INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
COMPETITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . 24
EXECUTIVE OFFICERS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . 24
PART II
5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 26
6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . 28
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . 38
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
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PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . . . 66
11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . . . . . 77
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . . . . . 78
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K . . . . . . . 79
</TABLE>
The Registrant will furnish a copy of any exhibit filed as part of this report
to any shareholder of record upon receipt of a written request from such person
and payment of the Registrant's reasonable expenses for furnishing such exhibit.
Requests should be made to the Secretary of the Registrant at the address set
forth on the cover page of this report.
REPORTING CURRENCY AND FINANCIAL INFORMATION
All amounts in this report are expressed in United States dollars, unless
otherwise indicated. References to "C$" are to Canadian dollars and to "A$" are
to Australian dollars.
Financial information is presented in accordance with accounting principles
generally accepted in the United States. Differences between accounting
principles generally accepted in the United States and those applied in Canada,
as applicable to the Company, are explained in Note 18 to the Consolidated
Financial Statements.
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GLOSSARY OF MINING AND FINANCIAL TERMS
ADDITIONAL MINERALIZATION - includes all estimates for the quantity and quality
of mineral deposits when the specific geologic evidence is sufficient to assume
continuity of mineralization at the measured, indicated or inferred level of
confidence but when a mine plan has not been used to define the estimate. The
estimate must be supported by samples and measurements and by reasonable
geo-scientific data.
AGGLOMERATION - mixing of mined ore with lime, cyanide, and cement prior to
loading on the heap leach pad.
ASSAY - the tests performed on a sample to determine mineral content.
BACKFILL - waste material used to fill the void created by mining an ore body.
BARREN POND - a holding area containing chemical solution from which the gold
and silver have been removed.
CARBON COLUMN CIRCUIT - a process to recover soluble gold and silver values from
a sodium-cyanide leaching solution by adsorption onto activated carbon
particles.
CASH OPERATING COST PER OUNCE - includes site costs for all mining (except
deferred mining and stripping costs), processing, and administration; but does
not include royalties, resource taxes, capital, exploration, depreciation, and
financing costs. By-product revenues are deducted from total cash costs and
divided by payable gold ounces produced to arrive at net cash cost per ounce.
CIL - carbon-in-leach, a process for the recovery of gold from the ore. Ore is
ground finely and mixed with a dilute sodium-cyanide solution to dissolve the
gold which is absorbed onto carbon. The gold enriched carbon is stripped of the
gold and the gold is recovered either through electrolysis or precipitation.
CIP - carbon-in-pulp, a process similar to CIL except that the ore is leached
with cyanide prior to carbon loading.
CONCENTRATE - a product containing valuable metal from which most of the waste
material in the ore has been removed.
CONTAINED OUNCES - the estimate of the total number of ounces of gold contained
in an ore body, a portion of which are not recoverable.
CRUSHING AND GRINDING - the process by which ore is broken into small pieces to
prepare it for further processing.
DEFERRED MINING COSTS - the operating costs associated with recoverable gold yet
to be recovered from the heap leach pads.
DEFERRED STRIPPING COSTS - the mining costs associated with waste rock removal
that are capitalized and expensed on the basis of the average stripping ratio
for the ore body.
DILUTION - an estimate of the amount of waste mined with ore as part of normal
mining practices.
DORE - unrefined metal bars consisting of gold, silver, and impurities which
will be further refined.
DRILLING:
BLASTHOLE DRILLING - the drilling of holes in rock to insert an explosive
charge. The drill holes are usually 3 - 8 meters apart. The blast breaks
up the rock so it can be dug out.
DIAMOND DRILLING - drilling with a hollow bit which has a diamond cutting
rim to produce a cylindrical core that is used for geological study and
assays. Used in exploration.
INFILL DRILLING - drilling at shorter intervals between holes, used to
provide greater geological detail and to help establish reserve estimates.
ROTARY DRILLING - drilling with a bit that breaks the rock into chips
rather than core. Faster and cheaper than diamond drilling, the chips are
forced by water and air to the surface for examination.
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REVERSE CIRCULATION DRILLING - a type of rotary drilling that uses a
double-walled drill pipe. Compressed air, water or other drilling medium
is forced down the space between the two pipes to the drill bit and the
drilled chips are flushed-back up to the surface through the center tube of
the drill pipe.
ELECTROWINNING - the recovery of metal by electrolysis. An electric current is
passed through a solution containing dissolved metals, which causes the metals
to be deposited on a cathode.
EXPLORATION - can be divided into three basic categories:
GRASS ROOTS EXPLORATION - exploration for ore in an area or region that has
a permissive environment for the formation of mineral deposits. It is
possible that no economic deposits have been previously discovered in that
region.
HEADFRAME EXPLORATION - exploration for a separate ore body along trend of
existing mines or known occurrences.
DEFINITION EXPLORATION - exploration that defines an ore body, or searches
for extensions to the ore body, once it has been discovered.
FLOTATION - a concentration process selectively attaching valuable minerals to
air bubbles in a chemical solution.
GRADE - the amount of valuable mineral in each tonne of ore, expressed as grams
per tonne for precious metals and as a percentage by weight for other metals.
RESERVE GRADE - estimated metal content of an ore body, based on reserve
calculations.
CUT-OFF GRADE - the minimum content level at which an ore body can be
economically mined.
MILL HEAD GRADE - metal content of mined ore going into a mill for
processing.
RECOVERED GRADE - actual metal content of ore determined after mining.
GRAVITY CIRCUIT - a process of recovering gold from crushed rock or gravel using
gold's high specific gravity to separate it from the lighter material.
HEAP LEACHING - a process of extracting gold and silver by placing broken ore on
sloping, impermeable pads and applying a dilute cyanide solution that dissolves
a portion of the contained gold, which is then recovered in a carbon column or
Merrill-Crowe circuit.
HEAP LEACH PAD ("HEAP") - a large, impermeable foundation or pad used as a base
for ore during heap leaching. The leach solution is collected and does not
escape from the circuit.
MERRILL-CROWE PROCESS - a process utilized to recover soluble gold and silver
values from a sodium-cyanide leaching solution by precipitating with zinc dust
after the leaching solution is clarified and deoxygenated by vacuum treatment.
METRIC CONVERSION -
1 acre = 0.4047 hectare
1 foot = 0.3048 meters
1 mile = 1.6093 kilometers
1 ton = 0.9072 tonne
1 troy ounce = 31.1034 grams
1 ounce per ton = 34.2848 grams per tonne
MILL - a plant where ore is ground and the metals are extracted by physical
and/or chemical processes.
MILLING CIRCUIT - the combination of various processes and systems which
separate waste materials from the valuable minerals, producing a concentrate.
MINERAL POTENTIAL (EXPLORATION INFORMATION) - mineral potential includes all
estimates for the quantity and quality of mineral deposits within a minable
configuration but when the specific geologic evidence is not
5
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sufficient to assume continuity of mineralization. The estimate must be
supported by samples and measurements and by reasonable geo-scientific
(geological, geochemical, geophysical, or other) data.
MINERALIZED MATERIAL - includes mineralized bodies which have been physically
delineated by drilling, underground work, surface trenching, etc., and found to
contain a sufficient amount of material with an average grade of metal or metals
to warrant further exploration expenditures. Mineralized material must be
defined by a conceptual mine plan and have established geologic continuity but
does not qualify as a proven and probable reserve until final legal, technical,
and economic factors have been resolved.
MINING CLAIM - public mineral land which a party has staked or marked out in
accordance with federal, provincial, or state mining laws to acquire the right
to explore for and exploit the minerals under the surface.
NET PROFITS INTEREST - a royalty based on the profit remaining after recapture
of certain operating, capital, and other costs as determined by agreement.
NET SMELTER RETURN - a royalty based on the market value of the gold produced,
less the cost of refining and transportation.
ORE - material that can be economically mined and processed.
OUNCE - troy ounce, which is equivalent to 31.1034 grams.
OXIDE ORE - mineralized rock in which some of the original minerals have been
oxidized, making the ore more porous and permitting a more complete permeation
of cyanide solutions so that minute particles of gold in the interior of the
minerals are more readily dissolved.
PREGNANT POND - pond containing cyanide solution impregnated with gold and
silver which has percolated through the ore on the pad.
PRODUCTS - metals produced by the Company which include gold, silver, zinc, lead
and copper.
RECOVERY RATE - percentage of the valuable material recovered in the processing
of ore.
REFRACTORY MATERIAL - mineralization which cannot be recovered using
conventional means.
RESERVES:
PROVEN RESERVES - reserves for which (a) a quantity is computed from
dimensions revealed in outcrops, trenches, workings, or drill holes; grade
and/or quality are computed from the results of detailed sampling and (b)
the sites for inspection, sampling, and measurement are spaced so closely
and the geologic character is so well defined that size, shape, depth, and
mineral content of reserves are well-established. The Company's proven
reserves are within a mine plan, operating plan, and approved mine permit.
PROBABLE RESERVES - reserves for which quantity and grade and/or quality
are computed from information similar to that used for proven reserves, but
the sites for inspection, sampling, and measurement are farther apart or
otherwise less adequately spaced. The degree of assurance, although lower
than that for proven reserves, is high enough to assume continuity between
points of observation. The Company's probable reserves may not be within a
mine plan, operating plan, and approved mine permit, but there should be no
significant uncertainty concerning the issuance of these permits or
resolution of any legal or technical issues.
RUN-OF-MINE - unprocessed ore which is hauled directly to the heap leach pads
without being crushed.
STRIP (OR STRIPPING) RATIO - the tonnage of waste material removed to allow the
mining of one tonne of ore in an open-pit.
SULFIDE ORE - mineralization contained in the form of a sulfide.
TAILINGS - material removed from a milling circuit after separation of the
valuable minerals.
TOTAL CASH COST PER OUNCE - includes site costs for all mining (except deferred
mining and stripping costs), processing, administration, resource taxes and
royalties.
6
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PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
INTRODUCTION
Pegasus Gold Inc. ("Pegasus," the "Company," or the "Registrant"), which is
incorporated in British Columbia, Canada, was formed in 1984 as a result of the
amalgamation of Pegasus Gold Ltd. and Montoro Gold Inc., predecessors of which
had been in existence since as early as 1961. Unless the context otherwise
indicates, references to the Company include majority owned subsidiaries.
The Company's primary business is the mining and processing of gold, and the
exploration for and development of gold producing properties. During 1997, the
Company operated six mines: five in the western United States and one in the
Northern Territory of Australia. In 1998, the Company plans to operate three
mines in the western United States. The Company produced 470,000 ounces of gold
during 1997 and expects to produce 300,000 ounces of gold in 1998. The
Company's mines consist of open-pit and underground operations utilizing a
combination of heap leaching and conventional milling facilities to extract
gold.
The Company derives all of its revenue from the sale of gold, silver, zinc,
lead, and copper. In 1997, sales of gold and other metals were 86 percent and
14 percent of revenues, respectively.
SIGNIFICANT DEVELOPMENTS IN 1997 AND 1998
The results of the Company's operations are significantly affected by the market
price of gold. Gold prices fluctuate and are affected by numerous factors
beyond the Company's control. During 1997, spot gold prices declined steadily
from a high of $370 per ounce in January to a low of $283 per ounce in December
and continued to decline reaching an eighteen-year low of $278 per ounce in
January 1998. This steady decline, together with other operational and
regulatory developments, has substantially worsened the Company's financial
position.
In June 1997, the Interior Board of Land Appeals granted a stay of the Record of
Decision for the Zortman Extension pending its review and decision regarding
appeals filed late in 1996. At current gold prices the project is uneconomic.
In March 1998, the Company announced that it will not construct the Zortman
Extension Project and that it will proceed with the reclamation of the existing
site. (See Note 14 to the Consolidated Financial Statements)
In August 1997, the Company adopted a restructuring plan and terminated
approximately 90 employees company-wide, including 35 percent of corporate staff
and approximately 7 percent of mine site personnel.
In August 1997, the Company decided not to develop the Pullalli Project in
Chile. The decision resulted from lower gold prices and limited exploration
success. (See Note 4 to the Consolidated Financial Statements)
In November 1997, the Company suspended operations at its Mt. Todd Mine in the
Northern Territory of Australia. The decision to suspend operations and
write-down the carrying value was precipitated by results from steady state
operations that were considerably worse than feasibility study projections,
declining gold prices, and disappointing exploration results. As a result of
the write-down, the Company was not in compliance with certain of the
restrictive financial covenants under its Revolving Credit Facility (the
"Facility"). On December 12, 1997, Pegasus Gold Australia Pty. Ltd. ("PGA")
filed for voluntary administration. A voluntary administrator has been
appointed and has taken over responsibility for the day-to-day activities of
PGA. (See Notes 1, 4 and 6 to the Consolidated Financial Statements)
In December 1997, the Facility's lenders notified the Company that they
considered all amounts payable under the Facility to be accelerated, although
they did not demand repayment. In January 1998, the Trustee for the Company's 6
1/4 percent Convertible Subordinated Notes ("the Notes") notified the Company
that the schedule for payment of the Notes was also accelerated. (See Note 1 to
the Consolidated Financial Statements)
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On January 16, 1998, Pegasus Gold Inc. and most of its subsidiaries voluntarily
filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The filing
was determined by management and the Board of Directors to be the best course of
action to restructure the Company's debt and to protect the long-term needs of
the Company's employees and stakeholders. (See Note 1 to the Consolidated
Financial Statements)
GOLD PRODUCTION
The table below sets out gold production at each of the Company's mines for the
past five years:
<TABLE>
<CAPTION>
Gold Production
(ounces)
Mine 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Florida Canyon, Nevada . . . . 163,300 183,200 111,200 91,900 109,200
Montana Tunnels, Montana . . . 78,500 73,000 89,200 80,200 68,900
Diamond Hill, Montana. . . . . 41,700 8,600 --- --- ---
Mt. Todd, Australia (1)(3) . . 100,300 62,600 70,000 61,200 ---
Zortman, Montana (4) . . . . . 11,300 37,000 110,900 109,500 108,500
Beal Mountain, Montana (5) . . 30,800 45,000 59,900 61,200 59,300
Black Pine, Idaho. . . . . . . 44,100 87,900 108,500 65,700 66,100
Tanami, Australia (1)(2) . . . --- --- --- 24,700 68,800
Basin Creek, Montana . . . . . --- --- --- 700 2,800
------- ------- ------- ------- -------
TOTAL . . . . . . . . . . . 470,000 497,300 549,700 495,100 483,600
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
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(1) Total production.
(2) Operations ceased April 1994.
(3) Mine was shut down in November 1997.
(4) Mining ceased January 1996, operations ceased November 1997.
(5) Operations ceased December 1997.
SUMMARY OF ORE RESERVES
The proven and probable ore reserves set forth below, and appearing elsewhere in
this Form 10-K, reflect estimates of the quantities and grades of mineral
deposits which can be economically recovered based on a realized price for gold
of $350 per ounce and certain assumptions regarding production costs and other
metal prices. Although the Company has carefully prepared and verified these
reserves, such figures are estimates. Market price fluctuations of gold as well
as increased production costs or reduced recovery rates, may render the mining
of ore reserves containing lower grades of mineralization uneconomic. Moreover,
short-term factors such as the need for orderly development of ore bodies, or
the processing of different grades, could adversely impact operating results in
any particular accounting period.
The gold reserves set forth below represent proven and probable ore reserves at
each of the Company's properties at December 31, 1997.
<TABLE>
<CAPTION>
Tonnes Grade Contained
Mine (000's) (g/t) Ounces (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Florida Canyon. . . . . . . . 39,498 0.69 876,800
Montana Tunnels . . . . . . . 17,589 0.55 308,000
Diamond Hill. . . . . . . . . 198 8.10 51,500
----------
TOTAL. . . . . . . . . . . 1,236,300
----------
----------
</TABLE>
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If ore reserves were calculated based on a realized price for gold of $300 per
ounce, using the same assumptions regarding production costs and other metal
prices, proven and probable ore reserves at each of the Company's properties at
December 31, 1997, would be as follows:
<TABLE>
<CAPTION>
Tonnes Grade Contained
Mine (000's) (g/t) Ounces (1)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Florida Canyon. . . . . . . . 23,550 0.80 602,200
Montana Tunnels . . . . . . . 17,589 0.55 308,000
Diamond Hill. . . . . . . . . 136 9.00 39,200
----------
TOTAL. . . . . . . . . . . 949,400
----------
----------
</TABLE>
If ore reserves were calculated based on a realized price for gold of $400 per
ounce, using the same assumptions regarding production costs and other metal
prices, proven and probable ore reserves at each of the Company's properties at
December 31, 1997, would be as follows:
<TABLE>
<CAPTION>
Tonnes Grade Contained
Mine (000's) (g/t) Ounces (1)
---------------------------------------------------------------------------
<S> <C> <C> <C>
Florida Canyon . . . . . . . . . . 42,188 2.71 967,700
Montana Tunnels. . . . . . . . . . 17,589 0.55 308,000
Diamond Hill . . . . . . . . . . . 202 8.05 52,300
----------
TOTAL . . . . . . . . . . . . . 1,328,000
----------
----------
</TABLE>
- --------------------
(1) Does not reflect gold equivalent ounces in other recoverable metals.
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MAP...
THREE MAPS OF NORTH AMERICA, SOUTH AMERICA, AND AUSTRALIA SHOWING THE
LOCATION OF THE COMPANY'S CORPORATE HEADQUARTERS, EXPLORATION OFFICES AND
OPERATING MINES.
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FLORIDA CANYON MINE
The Florida Canyon Mine is an open-pit, heap leaching operation located in
Pershing County approximately 64 kilometers west of Winnemucca, Nevada. Mining
operations commenced at the Florida Canyon Mine in September 1986.
OPERATING DATA
The following table contains certain operating statistics for the Florida Canyon
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CRUSHED ORE:
Ore mined (tonnes 000's) . . . 9,540 11,440 5,320 4,990 4,990
Average gold grade (g/t) . . . 0.62 0.79 0.84 0.79 0.72
Gold recovery percentage . . . 78.0 78.0 75.0 77.8 76.5
RUN-OF-MINE ORE:
Ore mined (tonnes 000's) . . . 1,250 2,440 2,320 1,540 1,360
Average gold grade (g/t) . . . 0.38 0.35 0.37 0.34 0.38
Gold recovery percentage . . . 45.0 45.0 45.0 47.5 52.4
Stripping ratio. . . . . . . . 2.51:1 1.89:1 1.03:1 1:22:1 0.88:1
Ounces of gold recovered . . . 163,300 183,200 111,200 91,900 109,200
Ounces of silver recovered . . 146,600 104,700 62,600 25,300 37,600
COST PER OUNCE:
Cash operating cost. . . . . . $311 $250 $254 $254 $215
Royalties and taxes. . . . . . 13 16 13 16 25
Depreciation and amortization 100 77 32 27 47
------- ------- ------- ------- -------
Total production cost. . . . . $424 $343 $299 $297 $287
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
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GEOLOGY
The Florida Canyon gold/silver deposit is located on the northwestern flanks of
the Humboldt Mountain Range. Mineralization is hosted within siltstones and
argillites of the Triassic aged Grass Valley Formation. The Florida Canyon ore
zones exist within the confluence of north-south striking range from faults and
north-east trending structures associated with the Humboldt Structural Trend.
Precious metals are contained within large through-going veins and surrounding
quartz vein stockworks. Locally, there is strong lithologic control to
mineralization with siltstones providing the most favorable depositional
environments due to their favorable fracturing characteristics. In this
environment, gold bearing hydrothermal solutions ascended along steep feeder
structures with mineralization moving laterally into fractured wall rocks.
Much of the Florida Canyon area has been overprinted by late (post-mineral)
hydrothermal activity that has produced extensive argillic and alunitic
alteration. The presence of disseminated hematite gives much of the deposit
area a distinctive red coloration. In the last two years, satellite ore zones
have been discovered higher in the range, east of the current mining area.
These occur on parallel structures and are geologically similar to the ore zones
currently being mined.
Within the mining area potentially important sulfide mineralization is known to
occur beneath and proximal to oxide ore bodies. In general the gold grades of
the sulfides are similar to the oxide ores currently being mined. The known
sulfide zones are refractory and have not been systematically defined. There
are, however,
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significant tonnages of this mineralization and further work is anticipated to
better assess the economics of this resource.
ORE RESERVES
As of December 31, 1997, the Florida Canyon Mine had proven and probable ore
reserves of approximately 39.5 million tonnes, grading 0.69 grams of gold per
tonne with a stripping ratio of 1.6:1. This reserve is comprised of 26.5
million tonnes of material that will be crushed, agglomerated, and delivered to
the heap leach pads, and 13.0 million tonnes that will be delivered to the leach
pads as run-of-mine material. Ore to be crushed has an average grade of 0.85
grams of gold per tonne. The average grade of the run-of-mine material is 0.36
grams of gold per tonne. The cut-off grade for each type of material depends on
rock type and processing method. Based on current mine plans and existing
production rates, the Company expects mining operations to continue for four to
five more years. In November 1997, the Company received a favorable Record of
Decision on the Environmental Impact Statement required to construct a new leach
pad and mine certain of the ore reserves. Additional permitting is required to
mine certain portions of the ore body, however management is confident that all
necessary permits will be obtained.
MINING AND LEACHING OPERATIONS
Material is mined by conventional open-pit, truck and shovel methods. The lower
grade, run-of-mine material is delivered directly to the heap leach pad while
higher grade, crushed ore is hauled by truck to the crushing plant. Crushing
capacity through the two crushers is approximately 10.0 million tonnes per
annum.
Leaching occurs year round by percolating an alkaline solution of dilute sodium
cyanide through the heap to dissolve the gold. Gold and silver are recovered
from the solution using four carbon absorption gold recovery units, smelted
onsite into dore and shipped to an outside refinery for processing into gold and
silver bullion.
Mining is performed at a rate of nearly 35 million tonnes per annum. The
current estimate of 1998 gold production is 185,000 ounces.
OWNERSHIP ARRANGEMENTS
The Florida Canyon property is comprised of 6,303 hectares, 4,646 hectares of
which are unpatented. Approximately 35 percent of the unpatented mining claims
are subject to royalties of 2.5 to 5.0 percent of the net-smelter-return and/or
1 to 10 percent of net profits.
12
<PAGE>
MONTANA TUNNELS MINE
The Montana Tunnels Mine is located in Jefferson County, Montana, between Butte
and Helena. The mine began production in the spring of 1987.
OPERATING DATA
The following table contains certain operating statistics for the Montana
Tunnels Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
MILLED ORE:
Ore milled (tonnes 000's). . . 4,668 4,961 5,100 4,720 4,170
Stripping ratio. . . . . . . . 1.1:1 3.0:1 3.0:1 4.1:1 3.8:1
Average gold grade (g/t) . . . 0.67 0.57 0.70 0.65 0.58
Average silver grade (g/t) . . 5.89 11.57 10.76 10.97 15.08
Average percent lead . . . . . 0.16 0.23 0.20 0.24 0.20
Average percent zinc . . . . . 0.39 0.55 0.58 0.56 0.52
Gold recovery percentage . . . 86 84 85 85 84
Silver recovery percentage . . 80 76 76 76 75
Lead recovery percentage . . . 91 90 88 88 88
Zinc recovery percentage . . . 90 86 85 86 88
Ounces of gold recovered . . . 78,500 73,000 89,200 80,200 68,900
Ounces of silver recovered . . 785,400 916,400 1,073,200 1,085,700 1,401,100
Tons of lead recovered . . . . 8,500 7,000 7,400 9,400 7,000
Tons of zinc recovered . . . . 20,900 18,300 21,600 19,800 18,000
COST PER OUNCE:
Cash operating cost (1). . . . $225 $254 $148 $140 $143
Royalties and taxes. . . . . . 34 41 41 44 48
Depreciation and amortization 149 177 139 135 121
--------- --------- --------- --------- ---------
Total production cost. . . . . $408 $472 $328 $319 $312
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- --------------------
(1) Net of by-product credits
GEOLOGY
The Montana Tunnels deposit is located in the central part of a diatreme (a
volcanic vent or pipe) which has intruded older rocks. This diatreme was
emplaced along the fault contact between the Cretaceous Elkhorn Mountain
andesite and the Eocene Lowland Creek ignimbrites. The diatreme consists of
matrix-rich breccia with fragments of contiguous wall rocks and intrusive rock
from the Cretaceous Boulder batholith.
Mineralization includes pyrite, sphalerite, galena, minor chalcopyrite, and rare
electrum accompanied by a gangue of manganocalcite, siderite, and minor quartz.
The sulfides occur as disseminations in the breccia matrix and as widely spaced
multidirectional veinlets. Gold occurs as electrum and as inclusions in pyrite,
sphalerite, and galena. Silver is present mainly in galena and as silver
sulfides. Much of the mineralization has been mechanically mixed by
post-mineral diatrene activity.
ORE RESERVES
As of December 31, 1997, Montana Tunnels had proven and probable ore reserves of
approximately 17.6 million tonnes, grading 0.55 grams of gold, 10.63 grams of
silver, 0.20 percent lead and 0.60 percent zinc (average gold equivalent grade
of 1.01 grams per tonne). Ore reserves were determined using a cut-off grade of
0.62 grams of gold equivalent per tonne which results in a stripping ratio of
2.37:1. At present production rates, reserves are sufficient for a 2.5 year
mine life.
13
<PAGE>
MINING AND PROCESSING OPERATIONS
Montana Tunnels is a conventional, open-pit mining operation consisting of
drilling, blasting, loading, and truck haulage to carry ore to the crusher and
waste to the dump. Ore is treated by conventional crushing, then autogenous and
ball mill grinding followed by sequential lead-zinc flotation. Lead and zinc
concentrates are cleaned in further flotation steps and shipped by truck, rail,
or ship and sold to various smelters. A gravity circuit recovers approximately
26 percent of the recovered gold and a small percentage of the silver. This
product is smelted onsite to produce dore and shipped to an outside refinery for
processing into gold and silver bullion. The current estimate of 1998 gold
production is 75,000 ounces.
OWNERSHIP ARRANGEMENTS
The Montana Tunnels property is comprised of 3,490 hectares, 1,900 hectares of
which are unpatented.
DIAMOND HILL MINE
Diamond Hill, a satellite operation of Montana Tunnels, is an underground
operation in Broadwater County, Montana. Production from Diamond Hill began in
the third quarter of 1996.
OPERATING DATA
The following table contains certain operating statistics for the Diamond Hill
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
MILLED ORE:
Ore milled (tonnes 000's). . . . . . . . 155 46
Average gold grade (g/t) . . . . . . . . 9.07 7.28
Gold recovery percentage . . . . . . . . 90 86
Ounces of gold recovered . . . . . . . . 41,700 8,600
Ounces of silver recovered . . . . . . . 10,600 5,100
COST PER OUNCE:
Cash operating cost (1). . . . . . . . . $251 $284
Royalties and taxes. . . . . . . . . . . 10 19
Depreciation and amortization. . . . . . 47 70
-------- --------
Total production cost. . . . . . . . . . $308 $373
-------- --------
-------- --------
</TABLE>
- --------------------
(1) Net of by-product credits
GEOLOGY
Gold mineralization at Diamond Hill is hosted within a clustering of near
vertical, pipe-like skarn bodies formed in mafic volcanic rocks. Ore zones are
high grade, have sharply defined and narrow alteration envelopes and are of
great vertical extent. The known mineralized skarn zones are concentrated on
the north end of a major structural zone that has been traced for approximately
three kilometers to the south. Recent exploration has significantly expanded
the ore zones to depth and current work shows promise to significantly increase
reserves in the immediate mine area. Pegasus controls a sizable land package
and exploration is underway to explore the permissive mineralized structural
trend to the north and south of the mine area. Targets include
additional gold skarns, high-grade vein systems and porphyry related
mineralization.
ORE RESERVES
As of December 31, 1997, Diamond Hill had proven and probable ore reserves of
approximately 0.2 million tonnes, grading 8.1 grams of gold per tonne. The
majority of the gold resource at Diamond Hill is carried as mineralized material
or additional mineralization and not upgraded to reserve status until
close-spaced drilling
14
<PAGE>
is achieved and an actual stope plan is completed. For this reason only a small
portion of the gold resource that has been identified through exploration is
classified as a minable reserve at any one time.
MINING AND PROCESSING OPERATIONS
Diamond Hill is a small underground mining operation. Mining is conducted by a
contract miner using conventional equipment. Underground access is via a ramp
which spirals down in a modified figure eight configuration. Ore is mined by
sub-level stoping. The vertical distance between sub-levels is approximately 18
meters. Ore is hauled to the surface then hauled 110 kilometers by truck to the
Montana Tunnels mill for batch processing. The current estimate of 1998 gold
production is 40,000 ounces.
OWNERSHIP ARRANGEMENTS
The Diamond Hill property is composed of 1,300 hectares, 1,180 of which are
unpatented. The property is subject to a 15 percent net profits royalty
interest in favor of Broadwater Development after payback of certain development
costs. Based on current mine plans, estimates of mineralization, mining and
processing costs, and metal prices, it is not anticipated that payback, as
defined in the agreement, will occur. Some of the unpatented mining claims are
subject to royalties of 0.5 percent to 3.0 percent of the net-smelter-return.
MT. TODD MINE
The Mt. Todd Mine is located in the Northern Territory of Australia,
approximately 230 kilometers south of Darwin and 61 kilometers northwest of
Katherine.
The mine was developed in two phases. Phase I which began in March 1993,
consisted of a three-stage crushing, agglomeration, and heap leach process which
produced approximately 65,000 ounces of gold per year. Construction of the
Phase I expansion, completed in November 1994, increased the throughput capacity
from 4.0 million tonnes per year to 6.0 million tonnes per year. Ore additions
to the heap ceased in August 1996, at which time waste stripping and ore
stockpiling for Phase II operations commenced.
Construction of Phase II began in late 1995 and was completed in March 1997.
Phase II includes a mill, crushing plant expansion to four stages, flotation,
CIL, and associated infrastructure including an onsite natural gas-turbine power
generation plant. The first sustained period of steady state operations was
achieved during the third quarter of 1997. As a result of considerably worse
than feasibility performance, lower gold prices and disappointing exploration
results, operations were suspended in November 1997 and the mine placed on care
and maintenance.
15
<PAGE>
OPERATING DATA
The following table contains certain operating statistics for the Mt. Todd Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Ore mined (tonnes 000's) . . . . . . . . 2,610 4,000 5,040
Stripping ratio. . . . . . . . . . . . . 2.94:1 3.23:1 1.19:1
Average gold grade (g/t) . . . . . . . . 1.29 0.99 1.02
Gold recovery percentage (1) . . . . . . 74.4 55.0 55.0
Ounces of gold recovered (2) . . . . . . 100,300 62,600 70,000
Ounces of silver recovered . . . . . . . 12,000 --- ---
COST PER OUNCE:
Cash operating cost. . . . . . . . . . . $338 $370 $346
Royalties and taxes. . . . . . . . . . . --- 1 ---
Depreciation and amortization. . . . . . 142 182 68
-------- -------- --------
Total production cost. . . . . . . . . . $480 $553 $414
-------- -------- --------
-------- -------- --------
</TABLE>
- --------------------
(1) Recovery percentage in 1997 is from Phase II milling facilities; 1996 and
1995 recovery is from heap leach operations.
(2) Pegasus' share was 54,500 ounces in 1995.
CURRENT STATUS
The mine was shut down in November. A voluntary administrator for PGA was
appointed on December 12, 1997, and has assumed control of the day-to-day
operations of the mine. (See "Property Write-downs, Management's Discussion and
Analysis").
MINING AND MINERAL PROCESSING OPERATIONS
Mining at Mt. Todd was carried out by open-pit methods using conventional
equipment. During Phase I, heap leach ore was crushed, agglomerated, and
stacked on a leach pad. Although pad loading ceased in August 1996, residual
production continued during 1997. Gold was extracted from the ore by
percolating a weak cyanide solution through the ore on the heap. Solution was
pumped to a recovery plant where the gold was adsorbed onto activated carbon and
then precipitated onto steel wool cathodes. The cathodes were smelted onsite
into dore, which was shipped offsite for refinement into gold bullion.
Phase II expanded the existing crushing plant at Mt. Todd by adding a parallel
circuit enabling the mine to crush 8.0 million tonnes per year. A fourth stage
of crushing was added to further reduce ore size. Crushed ore was fed to
grinding mills and ground to 150 microns. Material was then leached in a
standard carbon-in-pulp circuit. Carbon stripping, electrowinning, and dore
refining were done in a common facility onsite. Dore was shipped to a
commercial refiner for refinement into gold bullion. Gold recovery after
leaching has averaged 74 percent. A mining contractor was used at Mt. Todd.
OWNERSHIP ARRANGEMENTS
The Mt. Todd property consists of 132,850 hectares of mineral leases including
127,460 hectares which are held under various exploration licenses and mineral
claims. The leases are subject to a royalty of 18 percent of the gross profit
from operations, less substantial adjustments for exploration and capital
expenditures.
ZORTMAN MINE
The Zortman Mine is located in Phillips County in north central Montana,
approximately 80 kilometers southwest of Malta. Mine operations commenced in
1979 and mining ceased in January 1996.
16
<PAGE>
The Final Environmental Impact Statement ("EIS") for an extension of mining to
the Zortman deposit was issued in March 1996. A favorable Record of Decision
("ROD") and operating permits were granted in October 1996. The ROD was
subsequently appealed by local Indian tribal groups and the National Wildlife
Federation to both the Interior Board of Land Appeals ("IBLA") and the Montana
State Court. In June 1997, the IBLA granted a stay pending its review and
decision regarding the appeal.
OPERATING DATA
The following table contains certain operating statistics for the Zortman Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Run-of-Mine Ore:
Ore mined (tonnes 000's) . . . --- 130 9,090 13,430 11,340
Stripping ratio. . . . . . . . --- 1.50:1 0.77:1 0.74:1 0.67:1
Average gold grade (g/t) . . . --- 0.52 0.72 0.58 0.58
Gold recovery percentage . . . --- 55.0 55.0 55.0 55.0
Ounces of gold recovered . . . 11,300 37,000 110,900 109,500 108,500
Ounces of silver recovered . . 19,500 129,800 500,500 461,200 535,700
COST PER OUNCE:
Cash operating cost. . . . . . $328 $304 $262 $304 $257
Royalties and taxes. . . . . . 15 18 21 29 18
Depreciation and amortization 160 122 101 55 50
-------- -------- -------- -------- ---------
Total production cost. . . . . $503 $444 $384 $388 $325
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------
</TABLE>
- --------------------
CURRENT STATUS
In March 1998, the Company decided not to construct the Zortman Extension
Project. At current gold prices, the project is not economic. The Company will
proceed with all planned reclamation work at the existing site. (See "Property
Write-downs Management's Discussion and Analysis").
GEOLOGY
Disseminated gold mineralization is hosted in breccia veins, dikes, and
associated stockworks that cut Tertiary aged alkaline syenite and quartz
monzonite. Mineralization occurs where the emplacement of these breccia veins
and dikes has produced increased porosity in the intrusive rocks, allowing
hydrothermal solutions to intrude. The bulk of the gold and silver is present
as electrum, but a substantial fraction of the gold occurs as tellurides. The
deposit is oxidized to depths of up to 244 meters, and the ore mined to-date has
come from the oxidized zones.
OWNERSHIP ARRANGEMENTS
The Zortman property is comprised of 6,630 hectares, 5,940 hectares of which are
unpatented. Some of the unpatented mining claims are subject to royalties of 2
to 3 percent of the net-smelter-return.
17
<PAGE>
BEAL MOUNTAIN MINE
The Beal Mountain Mine ("Beal") is located in Silver Bow County, approximately
26 kilometers west of Butte, Montana. Gold production commenced at the Beal in
May 1989.
OPERATING DATA
The following table contains certain operating statistics for the Beal Mountain
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Run-of-Mine Ore:
Ore mined (tonnes 000's) . . . 670 1,720 1,490 1,630 1,540
Stripping ratio. . . . . . . . 5.47:1 1.20:1 0.79:1 0.81:1 0.89:1
Average gold grade (g/t) . . . 1.91 1.45 1.72 1.68 1.78
Gold recovery percentage . . . 69.0 66.0 70.0 70.0 70.0
Ounces of gold recovered . . . 30,800 45,000 59,900 61,200 59,300
Ounces of silver recovered . . 4,900 7,800 10,200 8,700 8,600
COST PER OUNCE:
Cash operating cost. . . . . . $289 $339 $262 $236 $193
Royalties and taxes. . . . . . 31 26 34 30 28
Depreciation and amortization 87 159 87 106 93
------ ------ ------ ------ ------
Total production cost. . . . . $407 $524 $383 $372 $314
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
- --------------------
CURRENT STATUS
Ore reserves were depleted and mining operations were completed at Beal in the
fourth quarter of 1997. Reclamation and closure activities have commenced.
OWNERSHIP ARRANGEMENTS
The Beal Mountain Mine is located on a leasehold interest of approximately 2,160
hectares. Under the terms of the lease, which may be extended for the life of
mining operations on the property, the lessor is entitled to receive a royalty
of 6 percent of the net proceeds until all capital costs and other expenses of
placing the property into production have been recovered. After payback, the
royalty increases to 30 percent. Payback is not expected to occur during the
projected life of the mine. In addition, the Company is subject to a royalty of
4.5 percent of the net smelter return on the South Beal property.
18
<PAGE>
BLACK PINE MINE
The Black Pine Mine is located 109 kilometers southeast of Burley, Idaho, in
Cassia County. Mining and processing operations began in December 1991.
OPERATING DATA
The following table contains certain operating statistics for the Black Pine
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Run-of-Mine Ore:
Ore mined (tonnes 000's) . . . 2,650 8,730 7,050 5,810 3,270
Stripping ratio. . . . . . . . 2.43:1 0.98:1 1.16:1 1.16:1 1.30:1
Average gold grade (g/t) . . . 0.55 0.52 0.72 0.69 0.82
Gold recovery percentage . . . 61.0 60.0 59.0 54.0 80.0
Ounces of gold recovered . . . 44,100 87,900 108,500 65,700 66,100
Ounces of silver recovered . . 16,200 31,000 59,300 39,100 28,600
COST PER OUNCE:
Cash operating cost. . . . . . $276 $258 $248 $300 $235
Royalties and taxes. . . . . . 20 27 25 18 29
Depreciation and amortization 12 35 40 53 83
-------- -------- -------- -------- --------
Total production cost. . . . . $308 $320 $313 $371 $347
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
- --------------------
CURRENT STATUS
Ore reserves at Black Pine were depleted in the fourth quarter of 1997.
Residual production from the heap leach pad will continue into 1998, and
reclamation and closure activities will commence in 1998.
OWNERSHIP ARRANGEMENTS
The Black Pine property consists of approximately 6,280 hectares, which includes
1,660 hectares of land held under state and federal leases. All land in the
proximity of mining areas is subject to a variable royalty which is
approximately 6 percent of revenue when gold is $400 per ounce.
PULLALLI PROJECT
The Pullalli Project is situated 160 kilometers northwest of Santiago, Chile, at
a relatively low elevation, close to the Pan-American Highway and other
infrastructure.
CURRENT STATUS
The Company completed a final feasibility study for the development of the
Pullalli open-pit gold mine in 1995. Detailed engineering was completed in
1996. However, due to limited exploration success and the current weak gold
market, the Company has decided not to develop the project. The Company is
evaluating alternatives to dispose of the project, including conducting an
auction scheduled for May 22, 1998.
GEOLOGY
The Pullalli area consists of gold mineralization mostly controlled by a series
of northeast-striking structures in a complex of rhyolite, meta-sedimentary and
meta-volcanic rocks along the flanks of a rhyolite intrusive complex. The gold
mineralization is enhanced by north-trending dikes and structural intersections.
The higher-grade gold mineralization is associated with large quartz lenses and
veins locally surrounded by strong quartz-sericite alteration.
19
<PAGE>
OWNERSHIP ARRANGEMENTS
The Company controls approximately 8,000 hectares, 5,600 hectares of which
contain the reserve area. The Company acquired the mineral rights under four
primary option agreements. The surface rights for the project belong to the
Cooperative of Pullalli, owned by more than 100 holders. An agreement for
leasing the surface rights for the mine operation is in place.
BASIN CREEK MINE
The Basin Creek Mine is located in Lewis and Clark and Jefferson counties in
southwestern Montana, approximately 29 kilometers southwest of Helena. The mine
began production in June 1988 and was acquired by the Company in June 1989.
CURRENT STATUS
The Basin Creek Mine was shut down in early 1991 and placed on care and
maintenance status.
Full closure of the mine commenced in 1995. During 1997, the Company spent $0.1
million on reclamation at Basin Creek. Reclamation expenditures for 1998 are
estimated at $0.9 million and final closure is expected to occur in 1999.
OWNERSHIP ARRANGEMENTS
The Basin Creek property is comprised of approximately 2,130 hectares, of which
490 hectares are patented.
ORTIZ PROJECT
The Ortiz Project is located in the historical Ortiz Mine Grant, approximately
25 miles northeast of Albuquerque, New Mexico.
CURRENT STATUS
The Ortiz Project is a joint venture between the Company and LAC Minerals (USA),
Inc., ("LAC"). LAC is overseeing the final closure of the Project. Under an
agreement reached with LAC in 1995, the Company has agreed to share equally in
all reclamation costs in excess of $12.0 million. In February 1997, the Company
was informed that the reclamation costs would exceed $12.0 million. During
1997, the Company paid $1.0 million for its share of reclamation costs at the
Ortiz Project.
SALES AND MARKETING
REFINING AND MARKETING
The Company's mines produce dore which is processed by Handy and Harman in South
Windsor, Connecticut. Gold and silver can be sold on numerous markets
throughout the world, and the market price is readily ascertainable. Lead
concentrate produced at Montana Tunnels is shipped to ASARCO in East Helena,
Montana. Zinc concentrate produced at Montana Tunnels is shipped to Cominco
Ltd. in Trail, British Columbia, and to Dowa Mining Co., Ltd. in Akita, Japan.
The pyrite concentrate produced at Diamond Hill and processed at Montana Tunnels
is currently being marketed.
The majority of the Company's sales are delivered against contracts with a small
number of metals brokers, refiners, and smelters. Due to the nature of the
precious metals market, the Company is not dependent on its significant
customers to provide a market for its refined gold and silver. However, if the
Company had to replace the smelters to which zinc, lead, and pyrite concentrates
are shipped, the additional transportation costs could be considerable.
20
<PAGE>
HEDGING PROGRAM
The Company traditionally has used a variety of techniques to manage exposures
to price fluctuations, and movements in interest and foreign currency exchange
rates. The Company reduced its exposure by creating offsetting positions
through the use of derivative financial instruments and established a control
environment which includes policies and procedures for risk assessment and the
approval, reporting, and monitoring of derivative instrument activities.
All of the Company's gold and other hedge contracts, including foreign exchange
contracts, were closed out during December 1997 and January 1998, in response to
a demand by certain of the Company's lenders. The termination of the Australian
dollar hedges generated a loss during the fourth quarter. Certain lenders
notified the Company that they have exercised their right to set-off proceeds
from the termination of gold contracts against a portion of the foreign currency
losses and balances owing under the Facility. The remaining foreign currency
losses have not been settled with the financial institutions.
For more information about the Company's financial instruments and hedging
programs see Note 13 to the Consolidated Financial Statements.
EXPLORATION AND EVALUATION
The Company currently conducts a limited generative exploration program in
Central and South America and Mexico. The focus is on gold properties and
polymetallic deposits with a majority gold component. A strong exploration
emphasis is being given to the mine sites where there is excellent potential to
increase the reserve base over the short term. In addition, the Company pursues
aggressive exploration programs at its operating mines.
Exploration activities are headquartered in Spokane, Washington, with work
currently focused in Mexico, Central America and Southern Argentina. As
necessary, temporary field offices are maintained to support reconnaissance
activities and detailed field programs. To better assure maximum budget
efficiency, the department emphasis is on quality control and a phased
exploration approach. The Company has exploration properties in Argentina,
Brazil, and Guyana that are under joint venture with other companies. In all
cases, these companies are earning in through cash payments and work commitments
as operators of the properties.
The Company spent $10.1 million on exploration and evaluation activities in
1997, including $6.5 million which was expensed and $3.6 million of development
costs capitalized to mine site operations. International exploration totaled
$6.6 million, including $1.8 million in Panama, $1.6 million in Australia, $1.2
million in Chile, $1.2 million in Brazil, $0.6 million in Argentina and $0.2
million on other international projects. United States exploration totaled $3.5
million, including $2.3 million around U.S. mines. Expenditures for evaluation
of business opportunities globally totaled $2.3 million. For 1998, the
exploration, development and evaluation budget is $4.3 million, $3.9 million of
which is expected to be expensed. Actual expenditures will vary depending on
the results of exploration activities at exploration properties and operating
mines and because of the anticipated acquisition of new properties.
PROPERTY INTERESTS AND MINING CLAIMS
The Company has acquired and maintained mining claims in a manner consistent
with common mining industry practice and believes its titles are satisfactory.
However, mining claims are subject to the same risk of defective title that is
common to all real property interests. Additionally, mining claims are
self-initiated and self-maintained and therefore, possess some unique
vulnerabilities not associated with other types of property interests.
It is impossible to ascertain the validity of unpatented United States mining
claims from public real estate records and, therefore, it can be difficult or
impossible to confirm that all of the requisite steps have been followed for
location and maintenance of a claim. If the validity of an unpatented mining
claim is challenged by the Bureau of Land Management or the Forest Service on
the grounds that mineralization has not been demonstrated, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Such a challenge might be raised upon submittal of a patent
application or if the government seeks to include the land in an area to be
dedicated to another use.
21
<PAGE>
Unpatented U.S. mining claims are located upon public land and are subject to
procedures established by the General Mining Law of 1872. Legislation has been
introduced in prior sessions of Congress to make significant revisions to the
Mining Law, including the imposition of a royalty on the net value of minerals
mined on public lands, stricter environmental standards and conditions,
additional reclamation requirements, and new procedural steps which would likely
result in delays in permitting. Although legislation has not been enacted,
attempts to amend the Mining Law can be expected to continue. The extent of any
changes that actually will be enacted and the potential impact on the Company
cannot be predicted.
The acquisition of interests in foreign jurisdictions may involve unique
circumstances.
ENVIRONMENTAL AND REGULATORY MATTERS
REGULATION, RECLAMATION AND REMEDIATION
The Company's activities are subject to extensive domestic and foreign federal,
state, and local laws and regulations controlling not only the mining of,
exploration for, and development of mineral properties, but also the possible
effects of such activities upon the environment. These laws are continually
changing and, as a general matter, are becoming more restrictive. The Company's
policy is to conduct business in a way that safeguards public health and the
environment. The Company believes operations are conducted in material
compliance with applicable laws and regulations. However, existing and possible
future legislation and regulations, and third party lawsuits, could cause
additional expense, capital expenditures, operating, remediation and/or
reclamation costs (including closure), in addition to restrictions and delays in
the development of the Company's properties, the extent of which cannot be
predicted but could have a material adverse effect on the Company's business or
financial condition.
The Company is required to mitigate long-term environmental impacts by
stabilizing, contouring, resloping, and revegetating various portions of a site.
While the Company performs a portion of the required work concurrently with
mining and processing operations, the majority occurs once such operations are
completed. These reclamation efforts are conducted in accordance with detailed
plans which have been reviewed and approved by the appropriate regulatory
agencies. The Company ratably accrues and expenses the total estimated cost to
complete reclamation over the remaining life of each mine. In Montana, Idaho,
and Nevada, the Company posts reclamation bonds as security to cover the
estimated costs of such reclamation as required by permit. To the extent the
Company is unable to provide adequate bonding or other financial security, its
ability to maintain its permits at operating sites may be jeopardized. Because
of the Company's financial situation, there can be no assurance that bonding
will continue to be available at a reasonable cost.
A total of $6.5 million was spent during 1997 for capital improvements
associated with environmental projects, an additional $1.7 million was spent to
manage and operate environmental programs for the protection of water, air, and
wildlife resources, and $11.7 million to perform reclamation and closure
activities.
For more information regarding the Company's reclamation programs, see Note 14
to the Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations, Environmental
Protection."
PERMITTING
Permitting is a continuing process, and as the Company expands operations at
existing mine sites, it regularly amends its existing permits and obtains new
permits. The Company believes it has obtained all permits necessary for its
current operations. The Florida Canyon Mine requires additional permits before
all probable reserves can be mined. Although management is confident that these
permits will be obtained, the inability to obtain permits in the future could
reduce the mine life.
INSURANCE
The business of gold mining is subject to certain types of risks, including
environmental hazards, industrial accidents, and theft. The Company carries
insurance against certain property damage and loss (including business
interruption), comprehensive general liability, and losses from theft of gold
and goods in transit. While the Company maintains insurance consistent with
industry practice, it is not possible to insure against
22
<PAGE>
all risks associated with the mining business, or prudent to assume that
insurance will continue to be available at a reasonable cost.
COMPETITION
The Company competes with other mining companies in connection with the
acquisition of gold and other precious metals properties. There is significant
and increasing competition for the limited number of gold acquisition
opportunities, some with other companies having substantially greater financial
resources than the Company. The Company believes no single company has
sufficient market power to affect the price or supply of gold in the world
market.
EMPLOYEES
As of December 31, 1997, the Company employed 606 persons. At some mines, the
Company engages mining contractors in addition to its own employees.
23
<PAGE>
LEGAL PROCEEDINGS
See Note 14 to the Consolidated Financial Statements.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of 1997.
EXECUTIVE OFFICERS OF THE COMPANY
Listed below are the names and ages, as of April 30, 1998, of each of the
present executive officers of the Company together with the principal positions
and offices with the Company held by each. Executive officers are appointed
annually by the Board of Directors to serve for the ensuing year or until their
successors have been appointed. No officer is related to any other by blood,
marriage, or adoption.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Werner G. Nennecker. . . . . . . . . 44 ... President, Chief Executive Officer and Director
Michael L. Clark . . . . . . . . . . 53 ... Senior Vice President, Chief Operating Officer
Robert A. Lonergan . . . . . . . . . 53 ... Senior Vice President, General Counsel and Corporate
Secretary
Michelle G. Viau . . . . . . . . . . 41 ... Vice President, Finance and Chief Financial Officer
Thomas H. Burkhart . . . . . . . . . 48 ... Vice President, Exploration
John W. Pearson. . . . . . . . . . . 39 ... Vice President, Investor and Public Relations
</TABLE>
24
<PAGE>
WERNER G. NENNECKER joined the Company in September 1992, as Senior Vice
President and Chief Operating Officer. In November 1992, Mr. Nennecker assumed
the position of President and Chief Executive Officer and became a Director of
the Company. Prior to joining Pegasus, Mr. Nennecker worked 18 years in the
mining industry with Ranchers Exploration and Santa Fe Pacific Gold Corporation.
Most recently, he held the position of President of Santa Fe Pacific Gold
Corporation.
MICHAEL L. CLARK joined the Company in April 1997 as Senior Vice President and
Chief Operating Officer. Mr. Clark has over 30 years of experience and
previously held the position of Executive Vice President and Chief Operating
Officer with Pegasus from August 1986 to April 1992. Mr. Clark is a seasoned
international mining executive with senior management, mine development and
hands-on operating experience with both open pit and underground mines. Mr.
Clark oversaw the Company's operations during its significant growth years in
the late 1980's and early 1990's. Most recently he was Chief Operating Officer
and Senior Vice President of Coeur D'Alene Mines.
ROBERT A. LONERGAN joined the Company in June 1995, as Vice President, General
Counsel and Corporate Secretary. He was appointed Senior Vice President in
November 1997. Mr. Lonergan has more than 22 years experience in the legal
field, primarily working on issues relating to environmental compliance, mergers
and acquisitions, and business litigation. He began his career at Cadwalader,
Wickersham & Taft in New York; from 1990 to 1993, Mr. Lonergan was Vice
President, General Counsel, Secretary and a member of the Board of Directors of
Kennecott Corporation of Salt Lake City, Utah. From 1994 until June 1995, Mr.
Lonergan was an adjunct faculty member of the University of Utah and affiliated
with the firm of Woodbury and Kesler.
MICHELLE G. VIAU joined the Company in October 1984 and was appointed Vice
President, Finance and Chief Financial Officer in February 1998. From February
1996 to February 1998, Mrs. Viau was the Company's Treasurer; from December 1992
to December 1996, she was the Controller, from November 1987 to December 1992,
she was the Assistant Controller, and from October 1984 to October 1987, she
held the position of Tax Manager. Mrs. Viau has been a Certified Public
Accountant since 1980. Prior to her employment with the Company, Mrs. Viau
worked as a public accountant for Coopers & Lybrand.
THOMAS H. BURKHART joined the Company in May 1983, as Project Manager at Florida
Canyon Mine. Subsequently, Mr. Burkhart held the positions of Senior Geologist
- - Western U.S., District Geologist - Pacific Northwest, Regional Manager - Great
Basin District, General Manager - Argentina, and Director of Exploration.
Beginning in August 1997, Mr. Burkhart has held the position of Vice President,
Exploration. Prior to joining Pegasus, Mr. Burkhart worked as an exploration
geologist in the Western U.S. for Homestake Mining, Cyprus Minerals and Gulf
Mineral Resources.
JOHN W. PEARSON joined the Company in October 1994 as Director, Investor
Relations. He was appointed Vice President of Investor and Public Relations in
October 1997. Mr. Pearson has in excess of 17 years of experience in the mining
industry which includes extensive experience in the field of investor relations
complemented by his geological expertise and six years of field experience in
exploration. Prior to joining Pegasus, Mr. Pearson held positions in both
Investor and Public Relations with a number of multi-national resource companies
including LAC Minerals Ltd.
25
<PAGE>
PART II
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common shares are traded on the Montreal Exchange under the symbol
"PGU." As of April 30, 1998, the common shares were held by approximately 3,184
registered shareholders. On January 16, 1998, the Company was informed that its
shares would be delisted from the American Stock Exchange. On January 22, 1998,
the Toronto Stock Exchange suspended trading in the Company's common shares.
As the Company's earnings are derived almost entirely from the mining and sale
of gold, the market price of the Company's common shares is strongly influenced
by prevailing gold bullion prices. The following table sets forth for the
indicated periods, the high and low sales prices of the common shares as
reported by the American Stock Exchange and The Toronto Stock Exchange, and the
high and low gold prices per ounce on the London Bullion Market.
<TABLE>
<CAPTION>
American Stock Toronto Stock
Exchange Exchange Gold Prices (1)
(U.S. Dollars) (Canadian Dollars) (U.S. Dollars)
------------------ ------------------- -------------------
High Low High Low High Low
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1997 First Quarter $8.88 $6.88 $11.95 $9.40 $366.65 $337.70
Second Quarter 8.13 6.06 11.15 8.30 351.05 334.55
Third Quarter 6.25 4.19 8.50 5.85 333.70 317.30
Fourth Quarter 6.13 0.38 8.20 0.50 337.15 283.00
1996 First Quarter $17.88 $13.50 $24.30 $18.38 $414.80 $389.15
Second Quarter 16.63 12.00 22.45 16.20 396.30 382.00
Third Quarter 13.13 9.75 17.90 13.45 389.75 379.00
Fourth Quarter 11.38 7.50 15.30 10.30 383.60 367.40
</TABLE>
- ---------------------------------------
(1) London PM Fixing
Because of cash flow requirements for major project development, the Company did
not declare a dividend in 1997, 1996, or 1995.
26
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
respective periods presented and should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
(In Thousands, Except Per Share)
Income Statement Data:
Sales . . . . . . . . . . . . . . . $226,463 $239,720 $255,579 $233,648 $215,187
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) before income
taxes . . . . . . . . . . . . . . . ($557,434) ($ 21,413) ($ 3,532) ($ 61,318) $ 11,757
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . ($512,832) ($ 21,603) ($ 2,953) ($ 58,735) $ 9,993
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common
share. . . . . . . . . . . . . . . . . . ($ 12.04) ($ 0.53) ($ 0.08) ($ 1.69) $ 0.30
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash dividends per common share. . . . . $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.10
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and short-term
investments . . . . . . . . . . . . $ 22,638 $ 8,566 $ 52,990 $ 89,316 $149,313
Total assets. . . . . . . . . . . . $201,722 $754,208 $580,241 $453,279 $495,233
Long-term debt (1). . . . . . . . . $225,831 $241,178 $159,625 $ 58,189 $ 66,735
Shareholder's equity (deficit) . . . . . ($155,777) $363,277 $288,704 $292,342 $341,997
</TABLE>
- ------------------------------
(1) Includes short-term portion, capital lease obligations, and convertible
debt (see Notes 8 and 9 to the Consolidated Financial Statements).
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCING, CAPITAL INVESTMENT AND LIQUIDITY
OVERVIEW
On January 16, 1998, the Company and most of its subsidiaries voluntarily filed
in Reno, Nevada to reorganize under Chapter 11 of the U.S. Bankruptcy Code in
order to facilitate the reorganization of the Company's businesses and the
restructuring of its debt. A number of factors led to that decision.
After an internal review of the Mt. Todd Mine, the Company determined in
November 1997 that continued mining of the Mt. Todd ore reserve (the primary
asset of the Company's Australian subsidiary, Pegasus Gold Australia Pty. Ltd.
("PGA")), was uneconomic at then-current metal prices and operating costs. As a
result, the Company suspended operations at Mt. Todd and placed the mine on care
and maintenance.
In December, the Company determined that it was not in the best interest of all
stakeholders to fund significant operating losses at Mt. Todd and a voluntary
administrator ("VA") was appointed to manage the restructuring of the debts of
PGA, resulting in the VA assuming day-to-day control of the operations of PGA.
The Company has excluded PGA's results from the Consolidated Statements of
Operations and Cash Flows since December 12, 1997. The assets and liabilities
of PGA are similarly excluded from the Consolidated Balance Sheet.
After the large write-down at Mt. Todd in the third quarter of 1997, the Company
was in default under certain restrictive covenants of its $150 million
Multi-currency Reducing Revolving Credit Facility (the "Facility") and
negotiations were commenced with the lenders to restructure the Facility. In
late December 1997 and early January 1998, members of the bank group exercised
their rights to monetize hedge contracts held by bank group counterparties and
set-off proceeds of $55.8 million against outstanding fees, advances, and
guarantees under the Facility. At the same time, the lenders notified the
Company that they considered all amounts payable under the Facility to be
accelerated, although they did not demand repayment. Also in January 1998, the
Trustee for the Company's 6 1/4 percent Convertible Subordinated Notes ("the
Notes") notified the Company that the schedule for payment of the Notes was also
accelerated. With the closure of the Mt. Todd Mine and the decline in the gold
price to 18-year lows, the Company determined that sufficient cash flows could
not be generated to service its debt, and voluntary bankruptcy petitions were
filed for the Company and most of its subsidiaries.
OPERATING ACTIVITIES
In 1997, operating activities generated cash flow of $25.8 million compared to
$19.7 million during 1996 ($43.2 million in 1995). Increased cash flow is
attributable to favorable changes in working capital accounts, primarily
inventory and accounts receivable, partially offset by a reduction in accounts
payable. The decrease in accounts receivable is attributable to decreased
production, the deconsolidation of the accounts of PGA, and quicker turnover of
accounts receivable compared to 1996. Cash flow from operations before working
capital changes for 1997 was $7.9 million, compared to $38.0 million a year ago,
due to lower production, lower realized prices, and higher cash costs.
INVESTING ACTIVITIES
During 1997, the Company invested $65.1 million in capital additions and
received $1.5 million from the disposition of investments. In 1996, the
Company invested $233.9 million in capital additions and $8.6 million on
investments and received $28.7 million from the sale of short-term and other
investments and $3.9 million from the sale of exploration leases in Australia.
In 1995, the Company invested $105.3 million to acquire the minority interest in
PGA, $51.9 million on capital additions, and $22.1 million on short-term and
other investments.
The Company spent $211.1 million in capital additions at Mt. Todd over the last
two years in order to complete the Phase II facilities at the site. Included in
the total is $17.0 million of interest on the Company's long-term borrowings
that has been capitalized to the project.
28
<PAGE>
The Company expects to spend $4.4 million in 1998 on capital additions at
operating mines and development projects, including approximately $3.9 million
on mine site operations.
FINANCING ACTIVITIES
In 1997, the Company borrowed $39.4 million under its Facility, received $0.9
million from common shares issued to the Company's Employee Savings Plan and for
stock option exercises, and made payments of $3.5 million on capital lease
obligations. The Company also received $48.4 million in proceeds from forward
contract closeouts and paid $2.4 million against foreign currency contract
losses. The $29.4 million in repayments of long-term debt was generated by the
closeout of hedge contracts, which were then set-off against advances owing
under the Facility. During 1996, the Company raised $91.2 million from the
offering of 6.0 million common shares in Canada and the United States, shares
issued to the Company's Employees Savings Plan, and for stock option exercises;
borrowed $97.0 million under the Facility, and made payments on outstanding
long-term debt and capital leases amounting to $22.3 million. In 1995, the
Company raised $2.1 million from the issuance of common shares, received
proceeds of $117.2 million (net of costs) on long-term debt issuance and made
payments on outstanding long-term debt amounting to $44.5 million.
LIQUIDITY
Subject to the outcome of the bankruptcy proceedings, the Company believes that
the $22.6 million of cash and cash equivalents on hand at December 31, 1997,
together with $9.3 million received from hedge closeouts in January 1998, will
be adequate to meet its cash requirements through 1998. In addition, the
Company believes that it could obtain a Debtor-In-Possession financing facility
if necessary. However, operating activities are subject to certain risks that
could materially impact available cash.
As of December 31, 1997, the Company has a shareholder's deficit of $155.8
million and negative working capital of $136.8 million. Further, the Company
has limited access to additional sources of financing as a result of filing for
protection under Chapter 11. The ability of the Company to continue as a going
concern is dependent upon the successful restructuring of the Company's
obligations and the redeployment of existing assets, neither of which can be
guaranteed.
The Company expects to continue operating its three producing mines while
various alternatives are evaluated. These alternatives could include the sale
or refinancing of the Company's existing investments in producing mines.
External advisers have been retained by the Company to assist in the preparation
of a Plan of Reorganization which the Company expects to submit to the
Bankruptcy Court during the second half of 1998. There can be no assurance that
the Company will be successful in formulating a plan which will be accepted by
the Bankruptcy Court or the Company's creditors.
RESULTS OF OPERATIONS
OVERVIEW
For the year ended December 31, 1997, the Company recorded a net loss of $512.8
million, or $12.40 per share, compared to a net loss of $21.6 million, or $0.53
per share, in 1996 and a net loss of $3.0 million, or $0.08 per share, in 1995.
The net loss for 1997 includes $482.1 million, or $11.66 per share, for the
effects of property write-downs (net of the deferred tax benefit of $44.3
million), restructuring charges, increased estimates of future closure and
reclamation costs, the write-down of available-for-sale securities, losses on
foreign exchange contracts and gains from the closeout of the hedge portfolio.
The net loss for 1996 includes the effects of accelerated depreciation and
amortization, increased estimates of future closure and reclamation costs and
property write-downs totaling $19.4 million, or $0.48 per share. Excluding the
effects of the above, the net losses for 1997 and 1996 would have been $30.7
million and $2.2 million, or $0.74 per share and $0.05 per share, respectively.
The net loss in 1997, before the charges discussed above, worsened compared to
1996 because of a 3 percent decrease in realized gold prices, a 6 percent
decrease in gold production, a $7.0 million increase in interest expense, a
$10.4 million increase in care and maintenance expense, and a 2 percent increase
in the total cash cost per ounce. These factors were partially offset by a $3.5
million decrease in general and
29
<PAGE>
administrative expenses, a $1.2 million decrease in exploration and evaluation
expenses, and higher by-product revenues, primarily zinc.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gold sales (ounces). . . . . . . . . . . . . 470,000 497,300 549,700
Gold revenue realized per ounce. . . . . . . $415 $426 $406
Average COMEX price per ounce. . . . . . . . $331 $388 $384
Cash operating cost per ounce, net (1) . . . $292 $280 $250
Total production cost per ounce (1). . . . . $413 $409 $347
</TABLE>
STATISTICAL INFORMATION BY MINE
The following chart details gold production, cash production costs and total
operating costs per ounce by location.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
FLORIDA CANYON MINE:
Ounces of gold . . . . . . . . . . . . . . . 163,300 183,200 111,200
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $310 $250 $256
Total cash cost. . . . . . . . . . . . . . . $323 $266 $443
Total production cost. . . . . . . . . . . . $424 $343 $299
MONTANA TUNNELS MINE:
Ounces of gold . . . . . . . . . . . . . . . 78,500 73,000 89,200
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $225 $254 $179
Total cash cost. . . . . . . . . . . . . . . $250 $296 $149
Total production cost. . . . . . . . . . . . $408 $472 $328
DIAMOND HILL MINE:
Ounces of gold . . . . . . . . . . . . . . . 41,700 8,600 ---
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $251 $284 ---
Total cash cost. . . . . . . . . . . . . . . $261 $302 ---
Total production cost. . . . . . . . . . . . $308 $373 ---
MT. TODD MINE:
Ounces of gold . . . . . . . . . . . . . . . 100,300 62,600 70,000
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $338 $370 $346
Total cash cost. . . . . . . . . . . . . . . $338 $371 $68
Total production cost. . . . . . . . . . . . $480 $553 $414
ZORTMAN MINE:
Ounces of gold . . . . . . . . . . . . . . . 11,300 37,000 110,900
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $327 $309 $279
Total cash cost. . . . . . . . . . . . . . . $343 $322 $105
Total production cost. . . . . . . . . . . . $503 $444 $384
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BEAL MOUNTAIN MINE:
Ounces of gold . . . . . . . . . . . . . . . 30,800 45,000 59,900
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $289 $339 $286
Total cash cost. . . . . . . . . . . . . . . $320 $365 $97
Total production cost. . . . . . . . . . . . $407 $524 $383
BLACK PINE MINE:
Ounces of gold . . . . . . . . . . . . . . . 44,100 87,900 108,500
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $276 $258 $251
Total cash cost. . . . . . . . . . . . . . . $296 $284 $62
Total production cost. . . . . . . . . . . . $307 $320 $313
CONSOLIDATED TOTALS
Ounces of gold . . . . . . . . . . . . . . . 470,000 497,300 549,700
Average cost per ounce:(1)
Cash operating cost. . . . . . . . . . . . . $292 $280 $250
Total cash cost. . . . . . . . . . . . . . . $308 $301 $272
Total production cost. . . . . . . . . . . . $413 $409 $347
</TABLE>
- ------------------------------
(1) Effective January 1, 1997, the Company adopted the gold production cost
standard developed by the Gold Institute in order to facilitate comparisons
among companies in the gold industry. Cash production costs reported in
prior periods have been restated as cash operating costs and total cash
costs in accordance with the new standard. Cash operating costs calculated
under the new standard include all operating costs (including overhead) at
the mine sites, but exclude royalties, production taxes and reclamation and
are reported net of by-product credits. Total cash costs include royalties
and production taxes, but exclude reclamation. Total production costs
remain unchanged and include reclamation in addition to depreciation,
depletion and amortization.
REVENUES
GOLD. The Company's primary source of revenue is the sale of gold. Revenue
from the sale of gold decreased 8 percent in 1997 to $194.9 million, from $211.8
million in 1996 ($223 million in 1995). Lower revenue is attributable to a 6
percent decline in production combined with a 3 percent decrease in realized
prices. Lower production in 1997 compared to 1996 is primarily attributable to
fewer ore tonnes mined and lower ore grade at Florida Canyon, completion of
mining operations at Beal Mountain and Black Pine, and lower residual production
at Zortman, offset by the addition of ounces from the milling facility at Mt.
Todd and higher tonnage and grade from Diamond Hill. Total gold production
decreased to 470,000 ounces from 497,300 ounces in 1996 (549,700 ounces in
1995).
The average realized gold price was $415 per ounce, compared to $426 per ounce
in 1996, and $406 per ounce in 1995. The average COMEX gold price per ounce was
$331 in 1997 compared to $388 in 1996 and $384 in 1995. The use of forward
sales and other hedging programs added $43.9 million to revenue in 1997
(excluding the $88.7 million gain on the closeout of the hedge portfolio), $20.0
million in 1996, and $12.3 million in 1995.
OTHER METALS. In 1997, the sale of other metals contributed 14 percent of total
revenue, compared to 12 percent in 1996 and 13 percent in 1995. Compared to
1996, sales of other metals increased 14 percent to $31.7 million, up from $27.9
million ($32.6 million in 1995). Higher revenue reflects higher production of
zinc and lead resulting from higher mill feed grades at Montana Tunnels,
combined with increased realized prices for zinc. This was offset slightly by
lower production of silver and lower realized prices for silver and lead.
Average realized prices for 1997 were $4.60 per ounce, $0.54 per pound, and
$0.26 per pound, for silver, zinc, and lead, respectively; compared to $5.05 per
ounce, $0.49 per pound, and $0.28 per pound, respectively, in 1996 ($4.96 per
ounce, $0.46 per pound, and $0.29 per pound, respectively, in 1995).
31
<PAGE>
OPERATING COSTS
Consolidated cost of sales for the year decreased slightly to $176.3 million in
1997 from $177.5 million in 1996 ($182.4 million in 1995). The average total
cash costs of production increased 2 percent to $308 per ounce of gold in 1997
from $301 per ounce in 1996 ($272 in 1995). Higher total cash costs are
primarily attributable to lower gold production and ore grade, offset by higher
by-product credits. Depreciation and amortization charges were $105 per ounce
in 1997, compared to $108 per ounce in 1996 ($75 per ounce in 1995). Decreased
charges on a per ounce basis are attributable to the reduction of fixed asset
balances resulting from property write-downs offset by decreased production.
Total cash costs per ounce increased 21 percent at Florida Canyon as the result
of lower tonnage mined and lower ore grade. Increased depreciation and
amortization charges reflect higher property, plant, and equipment balances from
the addition of mine equipment, and the facility expansion, lower production,
and increased estimates of reclamation and closure costs.
At Montana Tunnels, lower total cash costs reflect higher ore grade and
by-product credits per ounce. Also, the site incurred significant costs to
maintain open-pit wall stability resulting in higher costs in 1996. Lower
depreciation and amortization costs are the result of higher production.
At Mt. Todd, total cash costs decreased as a result of the completion of the
milling facility combined with higher ore grades mined and higher recovery from
the mill compared to recoveries from the heap leach pad in the previous year.
Despite the lower costs, the total cash costs were considerably in excess of the
feasibility study expectations and exceeded the spot price of gold by a
considerable margin. The mine was placed on care and maintenance in the fourth
quarter. The increase in depreciation and amortization costs is the result of
higher asset balances upon completion of the milling facility.
Higher costs per ounce at Zortman reflect lower production from residual
leaching of ore placed on the heap leach pad in prior years. Costs of $5.9
million incurred at Zortman as a result of delays in obtaining permits required
for construction and operation of the Extension Project have been classified as
care and maintenance in the Consolidated Statements of Operations and are
therefore excluded from cash costs. Increased depreciation and amortization
charges reflect lower production.
At Beal Mountain, higher ore grades have resulted in decreased total cash costs.
Decreased depreciation and amortization charges are the result of prior year
accrual of increased estimates of reclamation and mine closure costs. At Black
Pine, higher mining costs per tonne have resulted in increased total cash costs.
On a consolidated basis, the total cash cost per ounce in 1996 was higher than
1995 as a result of decreased production primarily from U.S. operations.
EXPLORATION AND EVALUATION
Due largely to an emphasis on mine site activities, other exploration and
evaluation expenses decreased to $6.5 million in 1997 from $7.7 million in 1996
($18.6 million in 1995). Total exploration, including amounts capitalized to
development, decreased to $10.1 million in 1997 from $19.0 million in 1996
($26.4 million in 1995). Reduced exploration and evaluation expenses result
from scaled down exploration activities during the year in an effort to conserve
cash. Amounts capitalized in connection with further development around the
Company's mine sites and development projects totaled $3.6 million during 1997.
In 1998, the Company expects to spend $4.3 million on exploration, evaluation,
and development, $3.9 million of which is expected to be expensed. The
Company's exploration program for 1998 will be directed toward addition of new
minable reserves and resources through exploration around existing operations
and the maintenance of existing land positions. The Company will also continue
to evaluate new opportunities. Actual exploration and evaluation expenditures
will vary as a result of the acquisition of new properties and the success of
exploration activities on existing properties. Spending on advanced projects
and acquisitions, which depends on opportunities and discoveries, cannot be
projected.
32
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 27 percent to $9.7 million from
$13.2 million in 1996 ($13.2 million in 1995), primarily because of decreased
travel and outside service costs and an effort to conserve cash, partially
offset by increased costs for severance.
During August the Company adopted a restructuring plan in an effort to reduce
costs and conserve cash. The plan resulted in a Company-wide reduction-in-force
of approximately 90 employees. Termination benefits were paid to corporate and
mine site employees, and a restructuring charge of $1.6 million was recorded.
PROPERTY WRITE-DOWNS
The Company, in accordance with its accounting policy, reviews the carrying
value of its investment in each operating mine and development property at least
annually, or more frequently if circumstances indicate a potential impairment
exists. Recoverability of the carrying value of the Company's investments is
evaluated based on estimated future net cash flows derived from estimates of
current and future production, future prices, operating and capital costs, and
reclamation costs. In practice, this review has been performed during the
fourth quarter as part of the Company's budget and long-range planning process.
However, operating and exploration results from Mt. Todd during the third
quarter, together with significant declines in the spot price of gold, indicated
the potential impairment of certain of the Company's properties and led to
acceleration of the impairment reviews for these properties.
For the third quarter, the Company assessed the recoverability of the carrying
value of these investments using a long-term realized gold price of $385 per
ounce, based on its then-current hedge position and policy. Reductions in the
carrying value of the Company's investments were recorded to the extent the net
book value of the investment exceeded the estimate of future discounted net cash
flows. Upon completion of this review the Company recorded non-cash property
write-downs totaling $441.1 million, including $397.6 million at Mt. Todd, $26.8
million at Zortman, $13.9 million at Pullalli and $2.7 million at Beal Mountain.
The Company reassessed the recoverability of these investments during the fourth
quarter of 1997, in light of the closeout of the Company's entire hedge
portfolio in December 1997 and January 1998. With no price protection for
current or future gold production, the Company has adjusted the gold price used
in the impairment test to the estimated future spot prices, based on a spot
price of $305 per ounce for 1998 plus the forward curve in future years. As a
result of this reassessment, additional property write-downs were recorded at
Florida Canyon and Montana Tunnels of $25.6 million and $24.4 million,
respectively, in the fourth quarter.
In addition, other property write-downs totaling $40.3 million were taken in the
fourth quarter at Mt. Todd, Zortman, Pullalli, and Beal Mountain, as described
below.
MT. TODD
Upon completion of a feasibility study in August 1995, the Company announced its
intention to construct a milling facility at Mt. Todd. The total construction
cost was estimated to be $155 million and production start-up was expected to
commence in early 1997. The project was projected to have a minimum eight-year
mine life, with annual gold production of 260,000 ounces, at an estimated total
cash cost of $265 per ounce (using a U.S.$ to A$ exchange rate of 0.72:1),
generating more than $35 million in annual cash flow.
Site preparation commenced in late 1995, with construction beginning in 1996.
As a condition precedent to the closing of the Facility used to finance the
construction of the project, an independent third party review of the
feasibility study was completed in early 1996.
In April 1996, the Company received the definitive capital cost estimate of $169
million from the engineering, procurement, and construction management (EPCM)
contractor. The major variances to the original feasibility capital cost
estimate included additional capital to replace the existing secondary crushing
circuit and other permanent facilities.
Commissioning of the facility began in late November 1996, and the first gold
pour was announced January 6, 1997. During the second quarter of 1997,
commissioning and start-up activities were hampered by the
33
<PAGE>
failure of the gas turbine in the power station, poor performance of the
crushing circuit and lower recoveries because of copper dissolution in the
flotation circuit. Crushing costs significantly exceeded feasibility as a
result of lower throughput, increased maintenance costs and higher power costs
and consumption. The EPCM contractor and the crushing equipment manufacturer
attempted to optimize the circuit to achieve design throughput and operating
costs. The commissioning of the flotation circuit commenced in late May 1997.
Copper loading in the circuit resulted in higher consumption of cyanide and
reduced gold recovery. As a result, the Company shut down the flotation circuit
in mid-June.
In order to mitigate operating problems identified above, the Company
commissioned the EPCM contractor to evaluate opportunities in the plant
configuration to improve design criteria for gold recovery, to manage
copper/cyanide levels, and to reduce processing costs. In August 1997, a
feasibility level design was completed, with engineering evaluations and cost
estimates for three recommended process improvements: production of a copper
concentrate; construction of screen before quaternary crushing; and
implementation of a coarse ore reject system.
The first sustained period of steady state operations was achieved during the
third quarter of 1997 when the mill achieved only 84 percent of the designed
capacity throughput. During this period, gold production and operating costs
continued to fall short of feasibility study expectations. Production was
reduced by lower gold recovery, crusher throughput and ore grade. Because the
flotation circuit, which was expected to contribute 8 percent of the total gold
recovery, was not operated due to copper loading in the circuit, gold recovery
averaged 74 percent versus the feasibility study estimate of 84 percent.
Gold recovery was also negatively impacted by delivery of a larger than design
product from the crushing circuit (3.1 millimeters (mm) vs. feasibility of 2.6
mm). Crusher throughput averaged 1,065 tonnes per hour (tph) compared to the
design level of 1,220 tph. Although a portion of the crushing throughput
shortfall was made-up by higher crusher utilization (80 percent vs. feasibility
of 75 percent), the incremental equipment usage resulted in higher costs,
primarily for power and wear parts, to achieve daily design throughput.
Operating costs exceeded feasibility levels due to increased costs for power,
cyanide and contract mining. Higher power costs reflect the combination of
higher consumption, primarily in the crushing circuit, and increased gas supply
costs for interruptible supply. Power costs averaged over A$0.075 per kilowatt
hour (kWhr) compared to the feasibility of A$0.058 per kWhr with consumption
averaging 39 kWhr per ore tonne compared to the feasibility estimate of 34 kWhr
per ore tonne. Cyanide costs were higher because consumption averaged 0.86 Kg
per ore tonne versus 0.68 Kg per ore tonne in the feasibility. Contract mining
costs of over A$1.15 per tonne exceeded the feasibility cost of approximately
A$1.00 per tonne as a result of lower required volume to feed the crushing
circuit, increased drill and blast costs associated with excess water in the ore
and other cost increases.
In October 1997 the Company completed an evaluation of the three process circuit
improvements recommended by the EPCM contractor. The production of a copper
concentrate was designed to increase recovery and reduce cyanide costs.
However, reduced cyanide prices offset the expected decline in consumption. The
Company began construction of the screen before quaternary crushing project.
While this project was expected to improve throughput and lower costs, the net
effect would not offset the cost increases described above. With the
significant decline in the price of gold, the coarse ore reject system was not
implemented.
Finally, an updated ore reserve model, completed during the fourth quarter of
1997, indicated a reduction of 7 to 10 percent in the average grade compared to
the original feasibility reserve model.
The cumulative effect of the above discussed factors was reflected in estimated
life-of-mine unit costs of A$13.53 per ore tonne processed compared to the
feasibility estimate of A$11.86 per ore tonne, a decrease of 30,000 ounces in
average annual gold production and an increase in the total cash costs of more
than US$65 per ounce produced, all of which result in a smaller economic ore
reserve and shorter mine life. In addition, estimated cash flow in the first
two years was expected to be minimal or negative because of waste stripping
requirements. Substantially all of the cash flow was expected to be generated
in the last several years of the mine life. While the Company expected to
achieve slightly better recovery and to realize further cost reductions, actual
results were determined to be indicative of the cost and production profile
going forward.
34
<PAGE>
In addition, the Company received negative exploration results on a number of
the most prospective exploration targets in the Mt. Todd Mine vicinity during
the third quarter of 1997. Interpretation of these results significantly
reduced the Company's expectation of identifying further large scale gold
deposits in close proximity to the mine.
Based on available cost and reserve data, current and estimated future metal
prices, and an internal review of the project, the Company determined in
November 1997 that mining the Mt. Todd reserve was uneconomic at current metal
prices and operating costs. As a result, the Company suspended operations at
the Mt. Todd Mine in November 1997. In connection with this decision, the
Company recorded a non-cash charge of $397.6 million to reduce the carrying
value of the mine to its estimated fair value. The write-down was comprised of
property acquisition costs of $166.9 million, deferred pre-production and
development costs of $49.4 million, and property and equipment of $181.3
million. The property acquisition costs included $44.3 million for a deferred
tax liability which had been established for the deferred tax consequences of
the difference between the assigned value of the assets acquired and the tax
basis of those assets when the Company acquired PGA (formerly Zapopan N.L.) in
1995. The Company also recorded a provision of $9.0 million to accrue for
future closure and reclamation costs.
Subsequently, the Company received an updated estimate of the fair value of PGA
assets through an external appraisal prepared for PGA's voluntary
administrators. The revised estimate resulted in an additional asset write-down
of $25.3 million.
ZORTMAN
During the third quarter of 1997, initial results of ongoing feasibility work
indicated that gold recovery from the sulfide and transitional portions of the
ore reserve would be lower than previously estimated and that recovery was not
as sensitive to product crush size as previously believed. Based on these
initial results, the Company estimated that a reduction in total recoverable
gold would be only partially offset by lower capital and operating costs
required for the crushing circuit. Future net cash flows (based on a $385 per
ounce gold price assumption) were estimated to be inadequate to recover the
remaining carrying value of the property and pay for reclamation and closure of
the mine. Accordingly, the Company recorded a write-down of $22.4 million.
In addition, the Company determined that production from the existing heap leach
pads would not be economically feasible after 1997. As a result, the Company
reduced deferred mining inventory, accelerated depreciation on certain related
assets, and recorded an additional write-down of $4.5 million.
In March 1998, the Company announced that it will not construct the Zortman
Extension Project and that it will proceed with the reclamation of the existing
site. Factors contributing to this decision included the Interior Board of Land
Appeals' inaction on the appeal of the Record of Decision and the recalculation
of the ore reserves at $350 per ounce of gold which shows that the project
cannot support the capital investment necessary to construct the expansion. The
Company determined that at current gold prices, and with a reduced reserve base,
the project was uneconomic, and therefore the Company wrote down the remaining
development costs and equipment totaling $9.1 million. The Company also
recorded a provision for $41.8 million to accrue the remaining reclamation
liabilities at the site.
PULLALLI
During the third quarter of 1997, the Company decided not to develop the
Pullalli Project in Chile and reduced the carrying value of its investment to
its estimated fair value by a total of $18.9 million during the third and fourth
quarters of 1997. The decision was precipitated by lower gold prices and
limited exploration success. The write-down is comprised primarily of costs
deferred in connection with development of the reserves, permitting, and
property and mineral rights.
BEAL MOUNTAIN
At Beal Mountain, the Company's current cost estimates indicate that residual
gold recovery beyond 1997 will be uneconomic and as a result, the Company has
recorded a write-down of $3.6 million to reduce deferred mining costs and the
carrying value of certain equipment. Beal is in closure effective January 1,
1998.
35
<PAGE>
RESTRUCTURING COSTS
Restructuring charges include the cost of involuntary employee termination
benefits, facility closures, asset dispositions and related costs associated
with restructuring activities. Employee termination benefits include severance
and outplacement assistance. Asset dispositions include lease terminations and
sales costs. Facility closures and related costs include write-downs of property
and equipment. Restructuring also includes the costs of professional fees
associated with financial advisors, legal counsel, and other consultants
retained to assist the Company in the reorganization process.
During August 1997 the Company adopted a restructuring plan and recorded a
charge of $2.2 million. The restructuring plan resulted in the termination of
approximately 90 employees Company-wide, including 35 percent of corporate staff
and approximately 7 percent of mine site personnel. Termination benefits
totaling $1.6 million have been included in restructuring charges. Most
termination benefits were paid in the form of Company common stock. The
restructuring charge also includes $0.6 million for lease termination costs,
sales tax, and commissions related to the sale of the Company's plane.
Professional fees and other expenses associated with the reorganization process
totaled $1.9 million.
OTHER INCOME (EXPENSE) AND TAXES
INTEREST INCOME AND EXPENSE
Interest expense, net of amounts capitalized, increased $7.0 million to $9.4
million in 1997 from $2.4 million in 1996 ($6.0 million in 1995) because less
interest associated with the Facility and the Notes was capitalized during the
year and the Company had higher outstanding balances under the Facility.
Interest of $7.7 million was capitalized during 1997, primarily to the Mt. Todd
facilities. In 1996 and 1995, interest costs of $10.0 million and $2.3 million,
respectively, were capitalized.
The Company invests its excess cash in low-risk, short-term investments.
Interest and other income of $3.5 million in 1997 decreased $0.2 million from
$3.7 million in 1996 ($5.5 million in 1995) because of lower average cash and
short-term investment balances throughout the year. Most of the interest income
recorded in 1997 is the result of interest received on various tax refunds
collected during the year. Cash and short-term investments at the end of 1997
include the proceeds to the Company from the closeout of the hedge portfolio.
Cash and short-term investments during 1996 included the proceeds from issuance
of common shares and long-term debt. Cash and short-term investments during
much of 1995 included the proceeds of the Notes which were used to acquire the
minority interest in PGA late in the third quarter of 1995.
GAIN ON FORWARD CONTRACT CLOSEOUTS
In December 1997 and January 1998, the Company closed out all its forward sales
contracts. This was in response to a demand by certain of the Company's lenders
who, upon default on any of the debt covenants under the Facility, have the
right to set-off any proceeds received from the closeout of forward sales
contracts against the balances owing to the lender.
Contracts closed out in December 1997 and January 1998 have been accounted for
as speculative transactions because of the uncertainty related to delivery
against production from sites in voluntary administration or operating in
Chapter 11. January contract closeouts have been marked-to-market at December
31, 1997, with the fair value recorded in the Consolidated Balance Sheet and
Statement of Operations. In total, the Company has recorded an $88.7 million
gain on closeout of these contracts, comprised of $53.0 million relating to
contracts closed out in 1997 and $35.7 million for mark-to-market adjustments
for closeouts in January 1998.
OTHER
Losses on disposition of assets and investments in 1997 of $28.1 million
includes $18.4 million of losses on foreign currency contracts, $10.4 million of
losses on the disposition of investments and mark-to-market adjustments of
investment securities, and $0.7 million of gains on the disposal of fixed
assets. The equity in net income of affiliates in 1997 comprises the Company's
proportionate share of earnings from the Emerging
36
<PAGE>
Markets Gold Fund ("EMGF") and USMX, compared to earnings from EMGF and losses
from USMX in 1996, and losses from both in 1995.
TAXES
The $44.6 million tax benefit in 1997 results from the reversal of the deferred
tax liability established at PGA upon the acquisition by the Company of the
remaining assets of PGA in 1995.
ENVIRONMENTAL PROTECTION AND PERMITTING
Environmental protection is a primary consideration in the design, development
and operation of the Company's current and future mines, worldwide. A total of
$6.5 million and $2.6 million ($4.4 million in 1995) was spent during 1997 and
1996, respectively, for capital improvements associated with environmental
projects. In addition, $13.4 million and $6.6 million was spent during 1997 and
1996 ($7.7 million in 1995) to manage and operate environmental programs
including concurrent reclamation.
No major spills, releases, or other significant environmental incidents occurred
at the Company's mines during 1997. All minor incidents were promptly addressed
and remedied, as appropriate.
At December 31, 1997, the Company estimates the future costs to close and
reclaim all of its current mines to be $99.7 million. During 1997, as a result
of the decision not to proceed with the Zortman Extension Project, the Company
accrued its remaining estimated reclamation costs of $41.8 million. During
1997, the Company increased its estimate of the future costs to close and
reclaim the Basin Creek Mine. In addition, the Company accrued an additional
$0.5 million for its share of estimated future costs to close and reclaim the
Ortiz Project. The increases in estimated costs result primarily from periodic
updates to final reclamation estimates at the Company's operations. The Company
also recorded a provision of $9.0 million for closure and reclamation of the Mt.
Todd Mine upon shutdown of operations at that site in November 1997. Although
these estimates are considered adequate to fund aggregate reclamation and
closure work, future changes in environmental laws and regulations could
significantly change program costs. As the Company's mining operations revise
and update their closure plans, and as environmental protection laws and
administrative policies evolve, the Company will revise the estimate of its
aggregate reclamation liability. (See Note 14 to the Consolidated Financial
Statements).
YEAR 2000
The Company has not yet completed a review of its computer-based operations and
financial systems for the purpose of developing a plan that will ensure that all
of these systems will be Year 2000 compliant, nor has management determined what
the potential cost of compliance might be. The Company expects to begin
implementation of any necessary corrective measures in the fourth quarter of
1998.
SAFE HARBOR
Some of the statements contained in this report are forward-looking statements,
such as estimates and statements that describe the Company's future plans,
objectives or goals, including words to the effect that the Company or
management expects a stated condition or result to occur. Since forward-looking
statements address future events and conditions, by their very nature, they
involve inherent risks and uncertainties. Actual results in each case could
differ materially from those currently anticipated in such statements by reason
of factors such as production at the Company's mines, changes in operating
costs, changes in general economic conditions and conditions in the financial
markets, changes in demand and prices for the products the Company produces,
litigation, legislative, environmental and other judicial, regulatory, political
and competitive developments in areas in which the Company operates, and
technological and operational difficulties encountered in connection with mining
activities.
37
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . 39
Report on Management's Responsibility for Financial Reporting. . . . . . . 40
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . 41
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . 43
Consolidated Statements of Changes in Shareholders' Equity (Deficit) . . . 44
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 45
Quarterly Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Pegasus Gold Inc.
We have audited the consolidated balance sheets of Pegasus Gold Inc., (the
"Company") as at December 31, 1997 and 1996, and the consolidated statements of
operations, cash flows and changes in shareholders' equity (deficit) for the
years ended December 31, 1997, 1996 and 1995. 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 United States 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 Pegasus Gold
Inc. as at December 31, 1997 and 1996, and the results of its operations and
its cash flows for the years ended December 31, 1997, 1996 and 1995, in
accordance with United States generally accepted accounting principles. As
required by the British Columbia Company Act, we report that, in our opinion,
these principles have been applied on a consistent basis.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
Consolidated Financial Statements, the Company has experienced significant
operating problems during the year ended December 31, 1997, and filed a
voluntary petition for reorganization under Chapter 11 of the Federal
Bankruptcy Code in the United States Bankruptcy Court on January 16, 1998, which
raises substantial doubt about its ability to continue as a going concern.
Management's plans with regards to these matters are discussed in Note 1 to the
Consolidated Financial Statements. The Consolidated Financial Statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Coopers & Lybrand
- ---------------------
Chartered Accountants
Vancouver, B.C., Canada
March 27, 1998
39
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Pegasus Gold Inc. have
been prepared by and are the responsibility of the management of the Company.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and reflect
management's best estimates and judgements based on currently available
information. Systems of internal control have been designed and maintained by
management to provide reasonable assurance, on a cost-effective basis, that
assets are safeguarded from loss or unauthorized use and to produce reliable
accounting records for financial reporting purposes.
The external auditors conduct an independent audit of the consolidated financial
statements in accordance with generally accepted auditing standards in order to
express their opinion on these financial statements. Those standards require
that the external auditors plan and perform the audit to obtain reasonable
assurance that the financial statements are free of material misstatement.
On behalf of the Board of Directors, the Audit Committee provides oversight of
management's performance in fulfilling its responsibilities for financial
reporting and internal control. The Audit Committee is composed entirely of
outside directors. This Committee meets regularly with management and the
external auditors to satisfy itself that management's responsibilities are
properly discharged and to review the financial statements.
/s/ Werner G. Nennecker
- -----------------------
Werner G. Nennecker
President and Chief Executive Officer
/s/ Michelle G. Viau
- --------------------
Michelle G. Viau
Vice President, Finance and Chief Financial Officer
40
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $22,638 $8,566
Forward contracts. . . . . . . . . . . . . . . . . . . . . 35,665 ---
Due from sales of products . . . . . . . . . . . . . . . . 18,766 36,748
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 25,086 51,997
Other current assets . . . . . . . . . . . . . . . . . . . 6,036 10,164
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . 108,191 107,475
Investments. . . . . . . . . . . . . . . . . . . . . . . . . 1,795 20,987
Property, plant, and equipment, net. . . . . . . . . . . . . 84,700 618,940
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 7,036 6,806
------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . $201,722 $754,208
------------ ------------
------------ ------------
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities . . . . . . $10,632 $23,641
Accrued salaries, wages, and benefits. . . . . . . . . . . 3,061 10,350
Mining taxes payable . . . . . . . . . . . . . . . . . . . 3,737 4,610
Accrued losses on foreign currency contracts . . . . . . . 15,975 ---
Accrued care and maintenance . . . . . . . . . . . . . . . 4,413 ---
Current portion of obligations under capital lease . . . . 3,872 3,626
Current portion of long-term debt. . . . . . . . . . . . . 203,266 ---
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . 244,956 42,227
Capital lease obligations. . . . . . . . . . . . . . . . . . 18,693 22,466
Deferred site closure and reclamation. . . . . . . . . . . . 87,697 50,878
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . --- 215,086
Deferred income taxes. . . . . . . . . . . . . . . . . . . . --- 44,602
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . --- 8,074
Other deferred liabilities . . . . . . . . . . . . . . . . . 6,153 7,598
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . 357,499 390,931
------------ ------------
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY (DEFICIT)
Class A preferred shares, Series 1, C$10 par value:
Authorized - 20,000,000 shares; none issued
Common shares, no par value:
Authorized - 200,000,000 shares; issued
and outstanding, 1997 - 41,833,751 shares
and 1996 - 41,092,342 shares . . . . . . . . . . . . . . . 428,810 425,382
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . (583,566) (70,734)
Foreign currency translation adjustment. . . . . . . . . . . (1,021) 8,629
------------ ------------
Total shareholders' equity (deficit) . . . . . . . . . (155,777) 363,277
------------ ------------
Total liabilities and shareholders' equity (deficit) . $201,722 $754,208
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
41
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996, and 1995
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . $226,463 $239,720 $255,579
------------ ------------ ------------
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 176,324 177,520 182,396
Depreciation and amortization. . . . . . . . . . . . . . . . 49,414 53,792 41,591
------------ ------------ ------------
225,738 231,312 223,987
------------ ------------ ------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 725 8,408 31,592
------------ ------------ ------------
Operating expenses:
General and administrative . . . . . . . . . . . . . . . . 9,672 13,202 13,161
Exploration and evaluation . . . . . . . . . . . . . . . . 6,480 7,728 18,637
Closure and reclamation costs. . . . . . . . . . . . . . . 51,820 10,742 754
Care and maintenance . . . . . . . . . . . . . . . . . . . 11,350 963 1,075
Property write-downs . . . . . . . . . . . . . . . . . . . 531,359 1,029 ---
Restructuring charges. . . . . . . . . . . . . . . . . . . 4,125 --- ---
------------ ------------ ------------
614,806 33,664 33,627
------------ ------------ ------------
Loss from operations . . . . . . . . . . . . . . . . . . . . (614,081) (25,256) (2,035)
------------ ------------ ------------
Other income (expense):
Interest and other income. . . . . . . . . . . . . . . . . 3,474 3,696 5,509
Interest expense, net of amounts capitalized . . . . . . . (9,410) (2,421) (6,030)
Loss on disposition of assets and investments. . . . . . . (28,097) (19) (43)
Gain on forward contract closeouts . . . . . . . . . . . . 88,668 --- ---
Equity in net income (loss) of affiliates. . . . . . . . . 2,012 2,587 (1,881)
------------ ------------ ------------
56,647 3,843 (2,445)
------------ ------------ ------------
Minority interest in loss of subsidiary. . . . . . . . . . . --- --- 948
------------ ------------ ------------
Loss before income taxes . . . . . . . . . . . . . . . . . . (557,434) (21,413) (3,532)
Income tax provision (benefit) . . . . . . . . . . . . . . . (44,602) 190 (579)
------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . ($512,832) ($21,603) ($2,953)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share - basic . . . . . . . . . . . . . . . . . ($12.40) ($0.53) ($0.08)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share - diluted . . . . . . . . . . . . . . . . ($12.40) ($0.53) ($0.08)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding . . . . . . . . . 41,345 40,757 34,817
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
42
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996, and 1995
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . ($512,832) ($21,603) ($2,953)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 44,801 54,499 42,188
Property write-downs . . . . . . . . . . . . . . . . . . . 531,359 1,029 ---
Loss on disposition of assets and investments. . . . . . . 28,097 --- ---
Gain on forward contract closeouts . . . . . . . . . . . . (88,668) --- ---
Provision for closure and reclamation. . . . . . . . . . . 51,820 10,742 754
Payments for closure and reclamation . . . . . . . . . . . (16,429) (9,750) (6,029)
Deferred amounts . . . . . . . . . . . . . . . . . . . . . (45,360) 1,571 1,743
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 15,069 1,515 1,557
Change in due from sale of products. . . . . . . . . . . . . 17,899 (8,116) 4,617
Change in inventories. . . . . . . . . . . . . . . . . . . . 2,923 (12,845) (1,682)
Change in other current assets . . . . . . . . . . . . . . . 3,610 (519) 441
Change in accounts payable and accrued liabilities . . . . . (6,514) 3,207 2,516
------------ ------------ ------------
Net cash provided by operating activities. . . . . . . . . . 25,775 19,730 43,152
------------ ------------ ------------
Investing activities:
Additions to property, plant, and equipment. . . . . . . . (65,054) (233,861) (51,866)
Proceeds from sale of other investments. . . . . . . . . . 1,460 8,614 ---
Proceeds from sale of property, plant, and equipment . . . --- 3,881 5,380
Sale (purchase) of short-term investments. . . . . . . . . --- 20,083 (20,083)
Purchase of other investments. . . . . . . . . . . . . . . --- (8,551) (2,000)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . --- (793) ---
Acquisition of additional investment in subsidiary . . . . --- --- (105,309)
------------ ------------ ------------
Net cash used in investing activities. . . . . . . . . . . . (63,594) (210,627) (173,878)
------------ ------------ ------------
Financing activities:
Proceeds from issuance of long-term debt, net. . . . . . . 39,446 97,017 117,209
Proceeds from issuance of common shares. . . . . . . . . . 907 91,168 2,104
Proceeds from forward contract closeouts . . . . . . . . . 48,410 --- ---
Payments of long-term debt . . . . . . . . . . . . . . . . (29,434) (19,189) (44,483)
Payments made on foreign currency contracts. . . . . . . . (2,400) --- ---
Payments of obligations under capital lease. . . . . . . . (3,527) (3,139) ---
------------ ------------ ------------
Net cash provided by financing activities. . . . . . . . . . 53,402 165,857 74,830
------------ ------------ ------------
Effect of exchange rate changes on cash and
cash equivalents . . . . . . . . . . . . . . . . . . . . . (1,511) 699 (513)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents . . . . 14,072 (24,341) (56,409)
Cash and cash equivalents, beginning of year . . . . . . . . 8,566 32,907 89,316
------------ ------------ ------------
Cash and cash equivalents, end of year . . . . . . . . . . . $22,638 $8,566 $32,907
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Supplemental disclosure (Note 16)
The accompanying notes are an integral part of the consolidated financial
statements.
43
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 1997, 1996, and 1995
(In Thousands)
<TABLE>
<CAPTION>
Common Shares Foreign
--------------------------- Currency
Number Accumulated Translation
of Shares Amount Deficit Adjustment
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 . . . . . . . . . . . . . . . . . 34,629,523 $332,110 ($46,178) $6,410
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (2,953)
Common shares issued for:
Stock option plan . . . . . . . . . . . . . . . . . . . . 157,925 1,686
Employee savings plan and other . . . . . . . . . . . . . 37,755 418
Foreign currency translation adjustment. . . . . . . . . . . (2,789)
------------ ------------ ------------ ------------
Balance, December 31, 1995 . . . . . . . . . . . . . . . . . 34,825,203 $334,214 ($49,131) $3,621
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (21,603)
Common shares issued for:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000,000 88,175
Stock option plan . . . . . . . . . . . . . . . . . . . . 234,217 2,612
Employee savings plan and other . . . . . . . . . . . . . 32,922 381
Foreign currency translation adjustment. . . . . . . . . . . 5,008
------------ ------------ ------------ ------------
Balance, December 31, 1996 . . . . . . . . . . . . . . . . . 41,092,342 $425,382 ($70,734) $8,629
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (512,832)
Common shares issued for:
Employee severance. . . . . . . . . . . . . . . . . . . . 579,304 2,541
Stock option plan . . . . . . . . . . . . . . . . . . . . 41,100 311
Employee savings plan and other . . . . . . . . . . . . . 121,005 576
Foreign currency translation adjustment. . . . . . . . . . . (9,650)
------------ ------------ ------------ ------------
Balance, December 31, 1997 . . . . . . . . . . . . . . . . . 41,833,751 $428,810 ($583,566) ($1,021)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GOING CONCERN AND BASIS OF PRESENTATION
For the year ended December 31, 1997, Pegasus Gold Inc. (the "Company")
incurred a net loss of $512,832,000. During the fourth quarter, the Company
suspended operations at the Mt. Todd Mine and placed the mine on care and
maintenance which led to Pegasus Gold Australia Pty. Ltd. ("PGA," formerly
Zapopan N.L.) filing for voluntary administration on December 12, 1997, and a
voluntary administrator being appointed to manage the restructuring of the
debts and the day-to-day affairs of PGA. The Company defaulted under certain
restrictive covenants of the $150,000,000 Multi-currency Revolving Credit
Facility (the "Facility") and in January 1998, the lenders under the Facility
and the Trustee for the Company's Convertible Subordinated Notes ("the
Notes") notified the Company that all amounts outstanding under the Facility
and the Notes became due and payable. On January 16, 1998, the Company and
most of its subsidiaries voluntarily filed to reorganize under Chapter 11 of
the U.S. Bankruptcy Code in order to facilitate the reorganization of the
Company's business and the restructuring of its debt. As of December 31,
1997, the Company has a shareholder's deficit of $155,777,000 and net current
liabilities of $136,765,000. These events combined with the decline in the
gold price to eighteen-year lows, raise substantial doubt about the ability
of the Company to continue as a going concern.
The Company expects to continue operating its three producing mines while
various alternatives are evaluated. These alternatives could include the
sale or refinancing of the Company's existing investments in producing mines.
External advisers have been retained by the Company to assist in the
preparation of a Plan of Reorganization which the Company expects to submit
to the Bankruptcy Court during the second half of 1998. There can be no
assurance that the Company will be successful in formulating a plan which
will be accepted by the Bankruptcy Court or the creditors. These financial
statements have been prepared on the basis that the Company is a going
concern and will be successful in its reorganization proceedings and do not
include any adjustments that might result if the effort to reorganize is
unsuccessful.
The Consolidated Financial Statements of the Company include the accounts of
the parent company, incorporated in British Columbia, and its wholly-owned
subsidiaries. During 1995, the Company acquired the minority interest in its
previously majority-owned subsidiary, PGA. All significant intercompany
accounts and transactions have been eliminated. The Consolidated Balance
Sheet at December 31, 1997, excludes the assets and liabilities of PGA.
Beginning on December 12, 1997, the transactions of PGA have been excluded
from the consolidated financial results.
The Consolidated Financial Statements are presented in U.S. dollars and
prepared in accordance with accounting principles generally accepted in the
United States, which, as applied in the Consolidated Financial Statements,
are consistent in all material respects with accounting principles generally
accepted in Canada, except as described in Note 18.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged in gold mining and related activities, including
extraction, processing, refining and reclamation. Gold bullion, the
Company's principal product, is produced and sold in the United States and
Australia. The Company is also involved in gold and other mineral
exploration, principally in North and South America.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amount of revenues and expenses
during the reporting period. It is reasonably possible that actual results
could differ from those estimates.
45
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid debt instruments such as
certificates of deposit, commercial paper, and money market accounts
purchased with an original maturity date of three months or less. Short-term
investments consist of similar instruments which mature more than three
months from purchase. The Company's policy is to invest cash in
conservative, highly-rated instruments and to limit the amount of credit
exposure to any one institution.
INVENTORIES
Inventories are recorded at the lower of average cost or estimated net
realizable value.
PROPERTY, PLANT, AND EQUIPMENT
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is stated at
the lower of cost or estimated net realizable value. Mining properties and
development costs and certain plant and equipment are depreciated using the
units of production method based upon proven and probable reserves. Other
assets are depreciated using the straight-line method over estimated useful
lives of five to ten years. Depreciation and amortization expense includes
the amortization of assets acquired under capital leases. Replacements and
major improvements are capitalized. Maintenance and repairs are charged to
expense based on average estimated equipment usage. Interest costs incurred
in the construction or acquisition of property, plant, and equipment are
capitalized and amortized over the useful lives of the related assets.
MINERAL EXPLORATION AND DEVELOPMENT COSTS. Significant property acquisition
payments for active exploration properties are capitalized. If no minable
ore body is discovered, previously capitalized costs are expensed in the
period the property is abandoned. Expenditures for the development of new
mines, to define further mineralization at and adjacent to existing ore
bodies, and to expand the capacity of operating mines, are capitalized and
amortized on a units of production basis over proven and probable reserves.
All other exploration expenditures are expensed as incurred.
DEFERRED STRIPPING COSTS. Mining costs associated with waste rock removal
are deferred and charged to operating expenses on the basis of the average
stripping ratio for each mine. The average stripping ratio is calculated as
a ratio of the estimated tonnes of waste material to be mined to the
estimated tonnes of ore to be mined.
ASSET IMPAIRMENT. In accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," management of the Company reviews
the net carrying value of each mine and development property at least
annually, or more frequently if circumstances change indicating a potential
impairment may exist. Estimated future net cash flows from each mine are
calculated using estimated future prices, operating, capital, and reclamation
costs on an undiscounted basis. Reductions in the carrying value of each
mine are recorded to the extent the net book value of the investment exceeds
the estimate of future discounted net cash flows.
Management's estimates of gold and other metal prices, recoverable proven and
probable reserves, operating, capital, and reclamation costs are subject to
certain risks and uncertainties which may affect the recoverability of the
Company's investment in property, plant, and equipment. Although management
has made its best estimate of these factors based on current conditions, it
is reasonably possible that changes could occur in the near-term which could
adversely affect management's estimate of the net cash flows expected to be
generated from its operating properties.
46
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS
The Company uses the equity method of accounting for investments in the
common stock of companies in which it owns a 20 to 50 percent interest.
Investments in the common stock of companies in which the Company owns less
than a 20 percent interest are accounted for as available-for-sale and are
stated at fair market value at each balance sheet date, with unrealized
holding gains and losses, net of tax, reported as a component of
shareholders' equity. Realized gains and losses from investments classified
as available-for-sale are included in the results of operations and are
determined using the specific identification method for ascertaining the cost
of investments sold. Permanent impairments in investment value are recognized
in the results of operations.
REVENUE RECOGNITION
Sales are recorded when products are shipped. Sales of zinc, lead, and
pyrite concentrates are provisionally priced and later adjusted in the month
the sales prices are contractually finalized.
HEDGING TRANSACTIONS
In the normal course of its business, the Company uses derivative and
financial instruments to reduce commodity price, foreign currency, interest
rate, and other business and financial risks. The Company does not hold or
issue derivative instruments for trading purposes.
COMMODITY HEDGING CONTRACTS. Option premiums, swap payments, and gains and
losses on hedging arrangements are recognized in sales when the related
production is delivered.
FOREIGN EXCHANGE CONTRACTS. Gains and losses on contracts designated as
hedges of identifiable foreign currency firm commitments are deferred and
included in the measurement of the related foreign currency transaction.
As of December 31, 1997, all of the Company's gold and other hedge contracts,
including foreign exchange contracts were closed out or reclassified as
trading instruments. Contracts reclassified as trading instruments were
marked-to-market and gains on those contracts were recorded in the
Consolidated Statement of Operations.
RECLAMATION, SITE CLOSURE, AND REMEDIATION COSTS
Minimum standards for mine reclamation have been established by various
governmental agencies. Estimated reclamation, site restoration, and closure
costs for each producing mine are charged to operations over the expected
life of the mine using the units of production method. Ongoing reclamation
activities are expensed in the period incurred. Remediation liabilities are
expensed upon determination that a liability has been incurred and where a
minimum cost or reasonable estimate of the cost can be determined.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at the year-end exchange rates, and revenue and expenses
are translated at the average exchange rates during the period.
Exchange differences arising on translation are disclosed as a separate
component of shareholders' equity. Realized gains and losses from foreign
currency transactions are reflected in the results of operations.
47
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET LOSS PER SHARE
In February 1997, Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", was issued. SFAS No. 128 established standards
for computing and presenting earnings per share ("EPS"). It requires dual
presentation and reconciliation of basic and diluted EPS. The Company
adopted the provisions of SFAS No. 128 in 1997, which had no effect on EPS
as previously reported.
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted net income per share is computed by increasing the weighted- average
number of common shares outstanding by additional common shares that would
have been outstanding if the dilutive potential common shares had been issued.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
STOCK BASED COMPENSATION
SFAS No.123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
accounting for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," (APB Opinion 25) and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No.130 establishes standards
for the reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses). The purpose of reporting
comprehensive income is to present a measure of all changes in shareholders'
equity that result from recognized transactions and other economic events of
the period, other than transactions with owners in their capacity as owners.
SFAS No.130 is effective for financial statements issued for periods
beginning after December 15, 1997. Adoption of SFAS No.130 may result in
additional disclosures in the Company's financial statements but will not
impact the Company's reported net income or net income per share.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No.131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. SFAS No.131 is effective for
fiscal years beginning after December 15, 1997. Adoption of SFAS No.131 will
not have a material impact on the Company's current geographic and segment
disclosures.
48
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
<TABLE>
<CAPTION>
<S> <C> <C>
(In Thousands) 1997 1996
---- ----
Deferred mining costs . . . . . . . . $16,262 $34,134
Materials and supplies . . . . . . . 5,631 11,294
Stockpiled ore . . . . . . . . . . . 2,761 6,317
Processed metal . . . . . . . . . . . 432 252
------- -------
$25,086 $51,997
------- -------
------- -------
</TABLE>
Direct production costs associated with ore on the heap leach pads are
deferred and amortized as the contained gold is recovered. Gold is recovered
over a six to twelve-month period. Based upon actual metal recoveries, the
Company periodically evaluates and refines estimates used in determining the
amortization and carrying value of deferred mining costs associated with ore
under leach. Approximately 72 percent of the unrecovered gold on all leach
pads at December 31, 1997, is expected to be recovered in the next year.
4. PROPERTY, PLANT, AND EQUIPMENT
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
---- ----
<S> <C> <C>
Mining properties and development costs . . . . . $167,221 $414,892
Plant and equipment . . . . . . . . . . . . . . . 173,069 504,116
---------- ----------
340,290 919,008
Less accumulated depreciation, depletion, and
amortization . . . . . . . . . . . . . . . . . (255,590) (300,068)
---------- ----------
$84,700 $618,940
---------- ----------
---------- ----------
</TABLE>
The following is a summary of the net book value of plant and equipment, and
of mining properties and development costs by property:
<TABLE>
<CAPTION>
Mining
Properties
and
Plant and Development TOTAL Total
(In Thousands) Equipment Costs 1997 1996
--------- ----------- ------- --------
<S> <C> <C> <C> <C>
Zortman Mine --- $2,319 $2,319 $27,650
Montana Tunnels Mine (1) $15,788 17,381 33,169 66,927
Florida Canyon Mine 42,305 299 42,604 69,528
Mt. Todd Mine --- --- --- 418,152
Beal Mountain Mine 731 1,457 2,188 6,232
Black Pine Mine 550 --- 550 1,143
Corporate and other 3,198 672 3,870 29,308
--------- ----------- ------- --------
$62,572 $22,128 $84,700 $618,940
--------- ----------- ------- --------
--------- ----------- ------- --------
</TABLE>
- -------------------
(1) Includes Diamond Hill Mine
Capitalized interest for properties under development was $7,735,000 and
$9,995,000 in 1997 and 1996, respectively.
PROPERTY WRITE-DOWNS
In the third quarter of 1997, the Company assessed the recoverability of the
carrying value of its investments in mining properties using a long-term
realized gold price of $385 per ounce, based on its then-current hedge
49
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT, AND EQUIPMENT, CONTINUED:
position and policy. Reductions in the carrying value of certain of the
Company's investments were recorded to the extent the net book value of the
investment exceeds the estimate of future discounted net cash flows. Upon
completion of this review, the Company recorded property write-downs in the
third quarter of 1997, totaling $441,074,000, including $397,603,000 at Mt.
Todd, $26,836,000 at Zortman, $13,925,000 at Pullalli and $2,710,000 at Beal
Mountain. At Mt. Todd, the review resulted in a decision to suspend
operations and place the mine in care and maintenance in the fourth quarter
of 1997.
During the fourth quarter of 1997, the Company reassessed the recoverability
of these investments in light of the closeout of the Company's entire hedge
portfolio (see Note 13). With no price protection for current or future gold
production, the Company has adjusted the gold price used in the impairment
test to $305 per ounce for 1998 plus the forward curve in future years. As a
result of this reassessment, additional property write-downs were recorded at
Florida Canyon and Montana Tunnels in the amount of $25,589,000 and
$24,380,000, respectively. Other property write-downs totaling $40,316,000
were taken in the fourth quarter of 1997 at Mt. Todd, Zortman, Pullalli, and
Beal Mountain. Should the gold price remain at current levels, additional
write-downs could be required.
MT. TODD
The Company determined in November 1997 that mining the Mt. Todd reserve was
uneconomic at current and projected metal prices and operating costs. As a
result, the Company decided to suspend operations, and recorded a charge of
$397,603,000. The write-down is comprised of property acquisition costs of
$166,877,000, deferred pre-production and development costs of $49,426,000,
property and equipment of $181,300,000. The property acquisition costs
written off include a deferred tax liability of $44,265,000 which had been
established for the deferred tax consequences of the difference between the
assigned value of the assets acquired and the tax basis of those assets when
the Company acquired PGA in 1995. In addition, the Company recorded a
provision of $9,000,000 to accrue for future closure and reclamation costs.
Subsequently, the Company received an estimate of the fair value of PGA
assets through an external appraisal prepared for PGA's voluntary
administrators. The revised estimate resulted in an additional property
write-down of $25,316,000.
In 1996, the Company determined that estimated future cash flows associated
with certain Phase I assets at Mt. Todd were not adequate to recover the
carrying value of those assets. As a result, the Company reduced the
carrying value of those assets by $1,029,000. In addition, the Company
changed the estimated useful lives used to calculate depreciation for certain
assets which increased the net loss in 1996 by $5.0 million.
ZORTMAN
During the third quarter of 1997, metallurgical test work indicated gold
recovery from the sulfide and transitional portions of the ore reserve would
be lower than previously estimated and that recovery was not as sensitive to
product crush size as previously believed, resulting in a reduction in ore
reserves. Accordingly, the Company reassessed the estimated future cash
flows to be generated from the property resulting in a third quarter 1997
write-down of $22,380,000.
In March 1998, the Company announced that it will not construct with the
Zortman Extension Project and that it will proceed with the reclamation of
the existing site. Factors contributing to this decision included the
Interior Board of Land Appeals ("IBLA") inaction on the appeal of the Record
of Decision ("ROD") (see Note 14) and the recalculation of the ore reserves
at $350 per ounce gold which shows that the project cannot support the
capital investment necessary to construct the expansion. The Company
determined that at current gold prices and with a reduced reserve base, the
project was uneconomic and as a result, an additional write-down of
$9,125,000 has been recorded to write-off remaining development costs and
50
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY, PLANT, AND EQUIPMENT, CONTINUED:
equipment. The Company also accrued the remaining reclamation liabilities at
the site totaling $41,820,000 (see Note 5).
The cost of residual gold production from existing heap leach pads at Zortman
has been steadily increasing in 1997 and the Company now estimates production
from the heaps after 1997 will no longer be economically feasible. As a
result, the Company has reduced deferred mining inventory, accelerated
depreciation on certain related assets, and recorded an additional write-down
of $4,456,000.
PULLALLI
During 1997, the Company decided not to develop the Pullalli Project in Chile
and reduced the carrying value of its investment by $13,925,000. The
decision was precipitated by lower gold prices and limited exploration
success. The write-down is comprised primarily of costs deferred in
connection with development of the reserves, permitting and property and
mineral rights.
BEAL MOUNTAIN
At Beal Mountain, the Company's cost estimates indicated that residual gold
recovery would be uneconomic beyond 1997 and as a result, the Company
recorded a write-down of $3,586,000 to reduce deferred mining costs and the
carrying value of certain equipment.
5. PROVISION FOR CLOSURE AND RECLAMATION COSTS
During 1997, the Company recorded provisions for closure and reclamation
costs totaling $51,820,000.
The Company accrued the remaining $41,820,000 of anticipated costs to close
and reclaim the existing mine at Zortman after reaching the decision in the
fourth quarter of 1997 not to proceed with the Zortman Extension Project (see
Note 4). The current Zortman reclamation estimate of $51,932,000, as filed
with the Bureau of Land Management, may change as a result of the closure of
the mine and the decision not to proceed with the Zortman Extension Project.
The Company will adjust this estimate as a new closure and reclamation plan
is developed in 1998.
Also during 1997, provisions for future reclamation and closure costs of
$9,000,000 were recorded at Mt. Todd in conjunction with the shut down of
operations at that site (see Note 4), and at Basin Creek ($500,000) and the
Ortiz Project ($500,000) as a result of changes in the estimated final costs
of closure.
During the third quarter of 1996, the Company increased its estimate of the
future costs to reclaim and close the Beal Mountain Mine from $7,800,000 to
$16,210,000 and recorded a $6,500,000 provision for final reclamation. All
expected reclamation expenditures at Beal Mountain are now accrued.
In 1996, the Company recorded a $3,000,000 provision for closure and
reclamation of the Ortiz Project in New Mexico. The additional accrual
reflects the Company's estimate of its share of the future costs required to
bring the site to final closure (see Note 14).
In 1996, the Company also recorded additional legal reserves of $1,242,000,
primarily to accrue settlement costs associated with water quality litigation
at the Zortman Mine (see Note 14).
During 1995, the Company acquired all outstanding common shares of PGA it did
not already own for $105,309,000.
51
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENT IN PEGASUS GOLD AUSTRALIA ("PGA")
After cessation of mining activities at Mt. Todd in November 1997, PGA filed
for voluntary administration on December 12, 1997, and was placed under the
Administrator's control. As of the date of the voluntary administration
filing, PGA has not been included in the Consolidated Financial Statements of
the Company (see Note 1).
The Company has recorded non-cash charges totaling $422,919,000 million to
write-down the balance of the Company's investment in PGA as a result of the
decision to suspend operations (see Note 4). The effect of the write-downs
has been to reduce the carrying value of the Company's investment in PGA to
zero and to adjust the carrying value of the intercompany receivable to its
estimated liquidation value of $1,754,000. The write-down of the Company's
intercompany receivable has been calculated using an estimated liquidation
value of A$40,063,000 based on a third party appraisal prepared for the
Administrator and other expected recoveries.
The Company has guaranteed borrowings advanced to PGA under the Facility. As
of December 12, 1997, PGA had borrowed $87,435,000, under this Facility which
represents the maximum exposure that the Company has under the guarantee.
Upon deconsolidation, the Company has estimated and recorded in its
Consolidated Balance Sheet a liability of $79,700,000 relating to the balance
of advances under the Facility which are not expected to be recovered from
the liquidation of PGA's assets. This liability has been calculated based on
a preliminary estimate of the liquidation dividend which could differ
materially from actual proceeds received on liquidation. Should the actual
liquidation dividend be less than the estimate, the Company may be obligated
to record additional losses of up to approximately $9,489,000, consisting of
$7,735,000 relating to the guaranteed borrowings and $1,754,000 relating to
the receivable from PGA.
7. INVESTMENTS
<TABLE>
<CAPTION>
Carrying
Cost Value
---------- ----------
(In Thousands)
<S> <C> <C>
December 31, 1997
Available-for-sale:
Equity securities. . . . . . . . . . . . . $1,756 $1,756
Other investments:
Notes receivable . . . . . . . . . . . . . 39
----------
$1,795
----------
----------
December 31, 1996
Available-for-sale:
Equity securities. . . . . . . . . . . . . $4,323 $4,323
Equity investments:. . . . . . . . . . . . .
USMX, Inc. (30%) . . . . . . . . . . . . . 8,349
The Emerging Markets Gold Fund (21%) . . . 3,026
----------
Other investments:
Notes receivable . . . . . . . . . . . . . 5,289
----------
$20,987
----------
----------
</TABLE>
52
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS, CONTINUED:
USMX, INC.
On May 30, 1997, USMX, Inc. ("USMX") and Dakota Mining Corporation ("Dakota")
completed a merger whereby the Company received one common share of Dakota
stock for each 1.1 common shares of USMX it owned. The Company recorded the
exchange, (in which it received 4,387,273 Dakota shares) at the then fair
value of $1 per Dakota share, resulting in a loss of $3,642,000. As a result
of ongoing difficulties with Dakota's various debt agreements and subsequent
debt restructuring, the Company considers the decline in the market value of
Dakota's shares during the third quarter of 1997 to be other than temporary.
Accordingly, the Company has written down the value of its investment in
Dakota by $2,694,000. These write-downs are included in the loss on
disposition of assets and investments in the Consolidated Statements of
Operations. The remaining investment in Dakota is classified as
available-for-sale.
THE EMERGING MARKETS GOLD FUND LIMITED
In June 1997, the shareholders of The Emerging Markets Gold Fund Limited
("EMGF") agreed to liquidate EMGF. Upon liquidation, the Company received
$1,460,000 in cash and a distribution of certain securities owned by EMGF
with an aggregate fair market value of $1,931,000 at the time of
distribution. The transaction resulted in a loss of $1,320,000 which is
included in the loss on disposition of assets and other in the Consolidated
Statements of Operations. The securities received have been classified as
available-for-sale and are included in equity securities above.
NOTES RECEIVABLE
USMX
In June 1996, the Company entered into an agreement with USMX to purchase its
net profits royalty in the Montana Tunnels Mine for $4,500,000 and advanced
USMX that amount in the form of a term loan pending USMX shareholder approval
of the transaction. On May 30, 1997, the USMX shareholders approved the
royalty sale. The unamortized balance of the loan of $4,144,000 has been
recorded in property and mineral rights (included in property, plant, and
equipment) of the Montana Tunnels Mine and will be amortized over the
remaining life of the mine on a unit-of-production basis.
GOLDBELT
The Company has a $1,000,000 note from Goldbelt Resources Ltd. which is
convertible into 920,000 common shares of Goldbelt. The Company has written
down the carrying value of the loan to the estimated market value of the
shares and has recorded a loss of $961,000 during 1997. In addition, the
Company wrote down the carrying value of 2,102,874 common shares of Goldbelt
to market value, resulting in a loss of $220,000. The write-down of the note
and the Goldbelt shares were recorded because the Company believes the
decline in value of the shares is other than temporary. The write-downs are
included in the loss on disposition of assets and investments in the
Consolidated Statements of Operations. The Goldbelt common shares are
classified as available-for-sale.
At December 31, 1997, the fair value of notes receivable approximates
carrying value.
53
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
---- ----
<S> <C> <C>
Convertible Subordinated Notes due 2002 . . . . $115,000 $115,000
Revolving Credit Facility. . . . . . . . . . . . 88,266 100,086
-------- --------
203,266 215,086
Less current portion . . . . . . . . . . . . . . 203,266 ---
-------- --------
$ --- $215,086
-------- --------
-------- --------
</TABLE>
In April 1995, the Company completed a public offering of $115 million
principal amount of 6.25 percent Convertible Subordinated Notes (the "Notes")
due April 30, 2002. Interest on the Notes is payable semiannually on April
30 and October 31 of each year, commencing on October 31, 1995. The Notes
are convertible into 7,709,067 common shares of the Company at a conversion
price of $14.92 per common share at any time after June 18, 1995. There is
no sinking fund requirement on the Notes, and they may not be redeemed until
April 30, 1998. After such date, the Notes are redeemable at 100 percent plus
accrued interest to the redemption date. The proceeds were used to finance
the cost of the acquisition of the minority interest in PGA (see Note 6).
In January 1998, the Trustee for the Notes notified the Company that the
Notes were accelerated and, as a result, are classified as a current
liability as of December 31, 1997.
On April 19, 1996, the Company entered into the Facility with a syndicate of
banks which provides for borrowings of up to $150,000,000. Borrowing under
the Facility could occur in the U.S., Canada and Australia, and in U.S.,
Canadian or Australian dollars with certain restrictions. Amounts borrowed
under the Facility bear interest at various rates (depending on the location
and currency of the borrowing) plus a spread tied to certain financial
ratios. The annual spread over these rates ranged from 0.65 percent to 1.75
percent. In addition, the Company is obligated to pay letter of credit fees
which range from 0.65 percent per annum to 1.75 percent per annum on the
aggregate amount of outstanding letters of credit, and commitment fees which
ranged from 0.20 percent per annum to 0.50 percent per annum on the unused
amount of the Facility. The amount available under the Facility reduces
annually, commencing in 1999, by the following amounts:
<TABLE>
(In Thousands)
<S> <C>
1999 . . . . . . . . . . . $20,000
2000 . . . . . . . . . . . 35,000
2001 . . . . . . . . . . . 45,000
2002 . . . . . . . . . . . 50,000
----------
$150,000
----------
----------
</TABLE>
Indebtedness under the Facility is collateralized by a pledge of the shares
of the Company's significant subsidiaries. The Facility includes restrictive
covenants with respect to leverage ratios, interest coverage, tangible net
worth, ore reserve adequacy, and gold hedging.
As a result of significant property write-downs (see Note 4) and other losses
recorded, the Company is in default under all of the covenants of the
Facility. In December 1997, the lenders exercised their right to set-off the
proceeds from the closeout of gold forward contracts against the outstanding
balances owing under the Facility. A total of $29,434,000 was set-off
against the outstanding balance in December 1997 and an additional
$26,336,000 was set-off in January 1998 when the remaining proceeds were
received. At the same time, the lenders informed the Company that they
considered all amounts payable under the Facility to be accelerated.
Accordingly, the entire remaining balance owing under the Facility at
December 31, 1997, is classified as a current liability.
54
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LONG-TERM DEBT, CONTINUED:
In 1993, PGA entered into a five-year term loan with an original face value
of A$36,000,000. During 1995, PGA entered into an Overdraft Agreement with
the same institution under the terms of which an additional A$8,000,000
(US$5,950,000) was borrowed to fund working capital requirements. During the
first quarter of 1996, PGA elected to prepay the entire A$25,300,000
(US$19,189,000) outstanding under its bank term loan and overdraft facility.
No gain or loss resulted from the prepayment.
The weighted average interest rate on long-term debt was 7.2 percent, 6.5
percent, and 7.0 percent, in 1997, 1996, and 1995, respectively.
9. COMMITMENTS UNDER LONG-TERM LEASES
CAPITAL LEASES
The Company has entered into capital leases for certain equipment. Leased
equipment included in plant and equipment at December 31, 1997, and 1996,
totaled $29,339,000. Accumulated amortization of assets under capital leases
was $8,265,000 and $4,074,000 at December 31, 1997, and 1996, respectively.
OPERATING LEASES
The Company leases office space, certain vehicles, and machinery and
equipment under operating leases which expire over the next four years. All
of the Company's equipment lease agreements contain provisions which provide
the Company with the option, after the initial lease term, either to purchase
the property at fair value or to renew the lease at fair rental value. The
Company is required to pay all taxes, insurance and maintenance on leased
equipment.
Future minimum payments, by year and in the aggregate, under capital and
operating leases with initial or remaining terms of one year or more, consist
of the following at December 31, 1997:
<TABLE>
<CAPTION>
(In Thousands) Capitalized Operating
Year Ending December 31, Leases Leases
--------- --------
<S> <C> <C>
1998 . . . . . . . . . . . . . . . . . . $5,287 $2,554
1999 . . . . . . . . . . . . . . . . . . 5,287 910
2000 . . . . . . . . . . . . . . . . . . 5,287 587
2001 . . . . . . . . . . . . . . . . . . 5,287 27
2002 . . . . . . . . . . . . . . . . . . 5,287 ---
Thereafter . . . . . . . . . . . . . . . 310 ---
--------- --------
Total minimum lease payments . . . . . . $26,745 $4,078
--------- --------
--------
Less amount representing interest. . . . (4,180)
---------
Total present value of minimum payments. 22,565
Less current portion . . . . . . . . . . (3,872)
---------
Long-term capital lease obligations. . . . $18,693
---------
---------
</TABLE>
Total rent expense under operating leases amounted to $7,424,000, $7,727,000,
and $7,334,000 in 1997, 1996, and 1995, respectively.
55
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
United States. . . . . . . . . . . $ --- ($1,065) ($400)
Foreign. . . . . . . . . . . . . . --- 44 ---
---------- ---------- ----------
--- (1,021) (400)
---------- ---------- ----------
Deferred
United States. . . . . . . . . . . --- 1,491 (1,431)
Foreign. . . . . . . . . . . . . . (44,602) (280) 1,252
---------- ---------- ----------
(44,602) 1,211 (179)
---------- ---------- ----------
($44,602) $190 ($579)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The components of the net deferred tax liability as of December 31, 1997, and
1996, were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards . $61,069 $48,327
Net capital loss carryforwards . . 9,659 5,406
Deferred revenue . . . . . . . . . (12,126) 3,645
Accrued expenses . . . . . . . . . 2,937 2,067
Deferred reclamation . . . . . . . 29,066 16,967
Other. . . . . . . . . . . . . . . 1,365 3,691
Valuation allowance. . . . . . . . (89,582) (70,552)
---------- ----------
$2,388 $9,551
Deferred tax liabilities: . . . . . .
Property, plant, and equipment . . (2,388) (9,551)
Excess purchase price allocation . --- (44,602)
---------- ----------
$ --- ($44,602)
---------- ----------
---------- ----------
</TABLE>
As of December 31, 1997, and 1996, valuation allowances of $89,582,000 and
$70,552,000, respectively, have been recognized to offset certain related
deferred tax assets due to uncertainty of realizing the benefits of these
items. The net change of $43,282,000 for the year relates primarily to
increased net operating loss carryforwards ("NOL's") and miscellaneous
foreign deductions.
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
United States . . . . . . . . . . . . . ($116,427) ($23,659) $3,107
Foreign . . . . . . . . . . . . . . . . (441,007) 2,246 (6,639)
---------- ---------- ----------
($557,434) ($21,413) ($3,532)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
56
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES, CONTINUED:
The consolidated income tax provision (benefit) differs from the amount
computed using the United States statutory income tax rate of 34 percent, for
the reasons set forth below:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected benefit . . . . . . . . . . . . . . . . . ($174,363) ($7,280) ($1,200)
Foreign tax rate differential. . . . . . . . . . . (1,977) 120 (915)
Non-deductible items . . . . . . . . . . . . . . . 26,727 (1,868) (3,643)
NOL's not expected to be utilized. . . . . . . . . 149,613 10,628 5,257
NOL's utilized . . . . . . . . . . . . . . . . . . --- (1,599) ---
Reversal of deferred tax liability . . . . . . . . (44,602) 1,491 ---
Income taxes refundable. . . . . . . . . . . . . . --- (1,065) ---
Other, net . . . . . . . . . . . . . . . . . . . . --- (237) (78)
-------- ------ -----
($44,602) $190 ($579)
-------- ------ ------
-------- ------ ------
</TABLE>
As of December 31, 1997, the Company's U.S. subsidiaries have regular tax
basis NOL's totaling $144,734,000 and alternative minimum tax NOL's of
$72,802,000 that expire in 1999 and later years. The regular tax loss
carryforwards of the U.S. subsidiaries are not available to offset future
alternative minimum taxable income. Included in the net operating loss
carryforward not expected to be utilized is $124,078,000 of PGA's net
operating losses which is not expected to be utilized following the filing
for voluntary administration by PGA. The Company has Canadian NOL's of
$27,725,500 that will expire in 2002 and later years and capital loss
carryforwards of $22,084,000 which may be carried forward indefinitely.
11. STOCK OPTIONS
SFAS No. 123 requires that companies either recognize compensation expense
for grants of stock, stock options, and other equity instruments based on
fair value, or provide pro forma disclosure of net income and earnings per
share in the notes to the financial statements. The Company adopted the
disclosure provisions of SFAS No. 123 in 1996 and has applied APB Opinion 25
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option plans. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates, as calculated in
accordance with SFAS No. 123, the Company's net loss and loss per share for
the years ended December 31, 1997, 1996, and 1995 would have been increased
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ------
<S> <C> <C> <C>
Net loss As reported ($512,832) ($21,603) ($2,953)
Pro forma ($515,764) ($26,683) ($5,990)
Net loss per share As reported ($12.40) ($0.53) ($0.08)
Pro forma ($12.47) ($0.65) ($0.17)
</TABLE>
In April 1997, shareholders approved the 1997 Stock Option Plan ("1997
Plan"). Under the 1997 Plan, a maximum of 4,000,000 shares may be granted to
directors and employees at not less than 100 percent of the fair market value
at the date of grant. Options are fully vested after three years from the
date of grant and expire seven years from the date of grant. At December 31,
1997, options to purchase 3,118,722 shares were available for future grants.
Under the Company's 1987 Stock Option Plan ("1987 Plan") for officers and
employees, options to purchase 4,775,000 common shares of the Company may be
granted for terms up to seven years. On April 24, 1996, the number of shares
authorized under the 1987 Plan was increased from 4,275,000 to 4,775,000.
The exercise price of incentive stock options must equal the market value of
the stock on the date of grant, or at
57
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK OPTIONS, CONTINUED:
least 90 percent of the market value of the stock for non-qualified stock
options. Options granted generally become exercisable over the four-year
period beginning on the date of grant. At December 31, 1996, options to
purchase 45,683 common shares were available for future grants. The 1987
Plan was terminated in April 1997.
The 1989 Non-Employee Directors' Stock Option Plan ("1989 Plan") provides
that options to purchase up to 297,000 common shares of the Company may be
granted to members of the Board of Directors who are not full-time employees
of the Company, at an exercise price equal to the market value of the stock
on the date of grant. On April 24, 1996, the number of shares authorized
under the 1989 Plan was increased from 225,000 to 297,000. The options are
exercisable immediately and generally expire ten years after the date of
grant. At December 31, 1996, options to purchase 85,100 shares, were
available for future grants. The 1989 Plan was terminated in April 1997.
Information regarding the Company's stock option plans as of December 31,
1997, 1996, and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- --------- ---------
Weighted-
Average
Exercise
Options Shares Price Shares Shares
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding at beginning of year . . . 3,360,033 $13.08 2,721,917 1,405,534
Granted. . . . . . . . . . . . . . . . 1,046,678 $7.69 1,176,333 1,607,133
Exercised. . . . . . . . . . . . . . . (41,100) $7.56 (234,217) (157,925)
Canceled . . . . . . . . . . . . . . . (1,152,874) $12.20 (304,000) (132,825)
--------- ------ --------- ---------
Outstanding at end of year . . . . . . 3,212,737 $11.71 3,360,033 2,721,917
--------- --------- ---------
--------- --------- ---------
Options exercisable at year-end . . . 2,329,830 2,144,804 1,322,267
Weighted-average fair value
of options granted during the year. $3.95 $3.64 $3.52
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.2 percent, expected life of 2.6
years, expected volatility of 50 percent, and no dividend yield.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Life Price 12/31/97 Price
------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$4.81 - $7.56 699,178 7.2 yrs. $7.13 599,203 $7.29
$7.87 - $10.63 1,015,600 5.1 yrs. $9.45 492,575 $9.93
$10.88 - $12.75 386,093 4.2 yrs. $11.47 325,268 $11.58
$12.88 - $16.00 560,466 4.8 yrs. $15.53 361,384 $15.30
$16.13 - $22.88 551,400 3.2 yrs. $17.96 551,400 $17.96
------------ -----------
$4.81 - $22.88 3,212,737 5.1 yrs. $11.71 2,329,830 $12.22
------------ -----------
------------ -----------
</TABLE>
58
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLANS
The Company has a savings plan (which qualifies under Section 401(K) of the
U.S. Internal Revenue Code) covering all full-time U.S. employees. Under the
plan, employees may elect to contribute up to 15 percent of their cash
compensation, (12 percent in 1996 and prior years) subject to ERISA
limitations. Since January 1, 1997, the Company is required to make a
matching cash contribution equal to 70 percent of the employee's contribution
up to 4.5 percent of the employee's compensation. In 1996 and prior years,
the Company's matching contribution amounted to 75 percent of the employee's
contribution up to a maximum of 3 percent. The Company's contributions vest
over a three-year period. The Company may, at its discretion, make
additional contributions to the plan. During the years ended December 31,
1997, 1996, and 1995, the Company contributed $1,433,000, $924,000, and
$875,000, respectively, to the plan.
The Company had a defined contribution pension plan covering all of its
employees who have completed one year of service. The contribution was based
upon a percentage of average annual compensation multiplied by the years of
service with the Company. Contributions were 100 percent vested after five
years of service, and prior service with the Company was considered for
vesting purposes. Contributions to the plan totaled $218,000 and $342,000 in
1996 and 1995, respectively. On December 31, 1996, the defined contribution
pension plan was terminated and combined with the Company's savings plan.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
RISK MANAGEMENT
In the normal course of its business, the Company reduces its exposure to
fluctuations in interest rates, commodity prices, and foreign exchange rates
by creating offsetting positions through the use of derivative financial
instruments and has established a control environment which includes policies
and procedures for risk assessment and the approval, reporting, and
monitoring of derivative instrument activities. The Company does not use
derivative financial instruments for trading or speculative purposes.
COMMODITY HEDGING CONTRACTS
Commodity hedging contracts include forward sales, swaps, and put and call
option contracts which hedge the effect of price changes on the underlying
value of the Company's reserves.
Previously, the Company entered into forward sales contracts to hedge the
price risk associated with its gold sales and to assure itself of a fixed
future income stream over the lives of its operating mines. These forward
sales contracts had been accounted for as hedge transactions. In December
1997 and January 1998, the Company closed out all its forward sales
contracts. This was in response to a demand by certain of the Company's
lenders who, upon default on any of the debt covenants under the Facility,
have the right to set-off any proceeds received from the close-out of forward
sales contracts against the balances owing to the lenders.
Contracts closed out in December 1997 and January 1998 have been accounted
for as speculative transactions because of the uncertainty related to the
delivery against production from sites in voluntary administration or
operating in Chapter 11. Contracts closed out in January have been
marked-to-market at December 31, 1997, with the fair value recorded in the
Consolidated Balance Sheet and Statement of Operations. In total, the
Company has recorded an $88,668,000 gain on closeout of these contracts,
comprised of $53,003,000 relating to contracts closed out in 1997 and
$35,665,000 for mark-to-market adjustments for closeouts in January 1998.
This gain has been shown net of any administration costs incurred in closing
out the contracts. Proceeds of $30,498,000 were received in cash, with the
balance of $58,170,000 used to offset a portion of the foreign currency
losses, as discussed below, and the balances owing to the lenders under the
Facility (see Note 8).
59
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT, CONTINUED:
FOREIGN CURRENCIES
Previously, the Company entered into foreign exchange contracts to hedge
transactions related to firm commitments and contractual obligations
denominated in foreign currencies, including debt.
In conjunction with the decision to suspend operations at Mt. Todd in
November 1997 (see Note 4), the Company was required by its bank group
counterparties to close out contracts with notional amounts totaling
$142,198,000, which were scheduled to mature in 1997 and 1998, and recorded a
loss of $18,379,000 (which is included in disposition of assets and
investments line in the Consolidated Statement of Operations). In December,
one of the lenders under the Facility (see Note 8), exercised its right to
set-off proceeds from gold forward contract closeouts against amounts owed
from the foreign currency contract closeouts. A total of $2,400,000 was
set-off against amounts owed to counterparts for foreign contract losses.
The remaining foreign currency losses have not been settled and are included
in current liabilities in the Consolidated Balance Sheet.
MARKET RISK
Due to the nature of the precious metals market, the Company is not dependent
on its significant customers to provide a market for its refined gold and
silver. However, if the Company had to find other smelters to replace those
to which zinc, lead, and pyrite concentrates are shipped, the additional
transportation costs could be significant. Although it is possible that the
Company could be directly affected by weakness in the metals processing
business, the Company monitors the financial condition of its customers and
considers the risk of loss to be remote.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair value of financial instruments is required
under SFAS No. 107, "Disclosure About Fair Value of Financial Instruments."
The fair value estimates are made at discrete points in time based on
relevant market information and information about the financial instruments.
These estimates may be subjective in nature and involve uncertainties and
significant judgment and therefore cannot be determined with precision.
Cash and cash equivalents are valued at cost plus accrued interest, which
approximates market value. Short-term investments are valued based on quoted
market prices for the same or similar instruments with similar maturities.
Fair value of long-term debt is estimated based on quoted market prices for
the same or similar issues with similar maturities.
Gold forward contracts which were closed out in January 1998 are valued at
the amount received, which approximates the market value of the contracts as
of December 31, 1997.
As a result of the Company's Chapter 11 filing subsequent to year-end the
Notes and the Facility are subject to compromise, and their fair value cannot
be determined. At December 31, 1996, the fair value of these liabilities
approximated their carrying value.
60
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
COMMON SHARES ISSUABLE
At December 31, 1997, a total of 14,731,763 authorized common shares were
reserved for the following:
<TABLE>
<S> <C>
Convertible Subordinated Notes. . . . . . . 7,709,067
Stock Option Plans. . . . . . . . . . . . . 6,708,834
Employee Savings Plan . . . . . . . . . . . 313,862
----------
14,731,763
----------
----------
</TABLE>
ZORTMAN EXTENSION PROJECT
A favorable ROD and operating permits for the Zortman Extension Project were
granted by the Bureau of Land Management and the Montana Department of
Environmental Quality Project in October 1996. Local Indian tribes and the
National Wildlife Federation have appealed the governments' actions to the
IBLA and Montana State Court. In June 1997, the IBLA granted a stay of the
ROD pending review and decision regarding the appeal. With the decision to
not proceed with the Zortman Extension Project, the Company believes that the
appeals and related legal proceedings have become moot, and will not respond
further to the appeals.
LEGAL PROCEEDINGS
QUI TAM LITIGATION
An organization calling itself the North Santiam Watershed Council instituted
a lawsuit in Federal District Court in San Francisco against foreign
companies with United States operations. The lawsuit alleged that these
companies, including Pegasus, had failed to register as foreign agents under
the Foreign Agent Registration Act, and that all mining claims and rights
received from the federal government by these companies were therefore in
violation of the False Claims Act and invalid. The lawsuit was dismissed on
March 9, 1998, and the time for appeal has passed.
RECLAMATION, SITE CLOSURE AND REMEDIATION COSTS
All of the Company's operations are subject to reclamation and closure
requirements. The Company monitors these requirements and evaluates its
accruals for reclamation and closure regularly.
Although the ultimate amount of reclamation and closure costs to be incurred
in the future is uncertain, the Company has estimated the aggregate amount of
these future costs to be $99,694,000, of which $87,697,000 had been accrued
at December 31, 1997. The accrued liability is included in deferred site
closure and reclamation on the Consolidated Balance Sheet. The remaining
$11,997,000 will be charged to operations over the remaining lives of its
mines, on a units of production basis.
In conjunction with the decision not to construct the Zortman Extension
Project, the Company accrued the remaining estimated $41,820,000 of closure
and reclamation costs at Zortman during 1997. The Company also accrued
$9,000,000 for the closure and reclamation of the Mt. Todd Mine after
operations were shut down in November 1997 (see Note 4).
In September 1995, outstanding litigation between the Company and LAC
Minerals USA, Inc. ("LAC"), was settled. Under the settlement, the Company
paid LAC $3,750,000 to be used for reclamation of the Ortiz Project and
agreed to equally share all reclamation costs to the extent the total costs
exceed $12,000,000. In February 1997, the Company determined that the total
reclamation costs are likely to exceed $12,000,000. Accordingly, the Company
recorded an accrual of $3,000,000 at December 31, 1996, which reflected
61
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES, CONTINUED:
management's then current estimate of the Company's share of future costs
required to close and reclaim the project. In 1997, the Company accrued an
additional $500,000 for future costs at Ortiz.
During 1997, the Company increased its estimates of the future costs to close
and reclaim the Basin Creek Mine by $500,000. The increase in estimated
costs results primarily from updates to final reclamation estimates at the
site.
The Company is required to provide collateral for its reclamation program,
which is primarily done through a bonding program collateralized by letters
of credit. At December 31, 1997, the Company had outstanding bonds and other
financial security totaling $98,100,000. To the extent the Company is unable
to provide bonding or other financial security, its ability to maintain its
permits at operating sites may be jeopardized. Because of the Company's
financial situation, there can be no assurance that bonding will continue to
be available at a reasonable cost. As of December 31, 1997, and 1996, the
Company had outstanding letters of credit under the Facility, totaling
$12,688,000 and $16,625,000, respectively.
Several of the Company's operating mines and exploration projects are located
in historic mining districts in the United States, and the Company controls
land in many areas where previous mining has taken place. Although no
systematic inventory has been performed, mining products (such as tailings)
located at these sites may present a future material liability to the Company
as state and federal regulatory agencies search for ways to enforce the
cleanup of pollutants left by previous operators. As of December 31, 1997,
the Company was not aware of any material remedial liabilities which have not
been accrued.
Based on current environmental regulations and known reclamation
requirements, management has included the best estimate of these obligations
in its reclamation accruals. However, it is reasonably possible that the
Company's estimate of its ultimate reclamation liability could increase in
the near term as a result of prospective changes in laws and regulations and
changes in cost estimates.
GENERAL
In addition to the above, various lawsuits, claims, and proceedings have been
or may be instituted or asserted against the Company. Management believes
the disposition of other matters that are pending or asserted will not have a
material adverse effect on the financial position of the Company or its
results of operations.
15. SHAREHOLDERS' EQUITY
SHARE OFFERING
In January 1996, the Company completed a public offering in the United States
and Canada for 6,000,000 common shares at a price of C$21.00 per share
(US$15.38). The net proceeds to the Company, after deducting expenses, were
$88,175,000. The proceeds were used to fund portions of the Mt. Todd Phase
II, Pullalli and Zortman Extension capital projects, and for other general
corporate purposes.
SHAREHOLDER PROTECTION RIGHTS PLAN
On December 1, 1988, the Board of Directors adopted a Shareholder Protection
Rights Plan ("Plan") and declared a dividend of one preferred share purchase
right ("Right") for each outstanding common share. The Rights only become
exercisable, or transferable apart from the common shares, on the eighth
trading day after a person or group ("Acquiring Person") acquires beneficial
ownership of, or commences a tender or exchange offer for, 10 percent or more
of the Company's common shares, other than pursuant to a permitted bid, as
defined in the Plan.
62
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SHAREHOLDERS' EQUITY, CONTINUED:
Among other provisions, each Right entitles the holder to purchase
one-hundredth of a Class A preferred share, Series 1, at an exercise price of
$55, subject to adjustment. Thereafter, upon the occurrence of certain
events (for example, if the Company is the surviving corporation of a merger
with an Acquiring Person), each Right will entitle its holder to purchase
common shares with a market value of twice the Right's exercise price.
Alternatively, upon the occurrence of certain other events (for example, if
the Company is acquired in a merger in which the Company is not the surviving
corporation), each Right will entitle its holder to purchase common stock of
the Acquiring Person with a market value of twice the Right's exercise price.
The Rights are subject to redemption by the Board of Directors for $0.01 per
Right at any time prior to becoming exercisable. The Rights will expire in
December 1998.
16. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December
31, 1997, 1996, and 1995, is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized). . . . $1,858 $ 593 $ 4,293
Income taxes, net of refunds . . . . . . . . --- (143) (999)
Non-cash financing activities:
Equipment capital leases . . . . . . . . . . --- 3,424 25,914
</TABLE>
The Consolidated Statement of Cash Flows for December 31, 1995, excludes the
effects of certain non-cash investing activities relating to the acquisition
of a majority interest in PGA (see Note 6). The following is a summary of
the non-cash effects of this transaction:
<TABLE>
<CAPTION>
(In Thousands) 1995
----
<S> <C>
Increase in:
Property, plant, and equipment . . . . . . .$ 126,985
--------
--------
(Increase) decrease in:
Deferred income taxes. . . . . . . . . . . . ($45,060)
Minority interest. . . . . . . . . . . . . . 23,384
--------
(21,676)
--------
Net decrease in cash and
cash equivalents . . . . . . . . . . . . . .($105,309)
--------
--------
</TABLE>
63
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by geographic area for
the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
United Canada
1997 States Australia and Other Total
- ---- -------- --------- --------- --------
<S> <C> <C> <C> <C>
IDENTIFIABLE ASSETS. . . . $197,037 $ --- $4,685 $201,722
REVENUE. . . . . . . . . . 179,798 46,665 --- 226,463
NET LOSS . . . . . . . . . (100,467) (377,937) (34,428) (512,832)
1996
- ----
Identifiable assets. . . . $241,748 $441,905 $70,555 $754,208
Revenue. . . . . . . . . . 206,522 32,181 1,017 239,720
Net income (loss). . . . . (21,028) (2,931) 2,356 (21,603)
1995
- ----
Identifiable assets. . . . $224,635 $259,758 $95,848 $580,241
Revenue. . . . . . . . . . 224,911 29,261 1,407 255,579
Net income (loss). . . . . 4,936 (4,846) (3,043) (2,953)
</TABLE>
18. DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The Company prepares its consolidated financial statements in accordance with
Generally Accepted Accounting Principles ("GAAP") in the United States.
Significant differences between U.S. GAAP and Canadian GAAP and their effects
on net income (loss) and per share amounts are described below:
Under Canadian GAAP, cash flows are not required to be discounted in
measuring asset impairments. The net loss under Canadian GAAP would not be
materially different to that reported under U.S. GAAP.
Under Canadian GAAP, the Company would not have recorded the deferred tax
consequences associated with the acquisition of the minority interest in PGA
(see Note 6). Under Canadian GAAP, loss before income taxes and income tax
benefits for the year ended December 31, 1997, would be reduced by
$44,602,000, resulting in no impact on net loss after income taxes. Under
Canadian GAAP, property, plant, and equipment would have been $574,338,000
and deferred income taxes would have been $0 as of December 31, 1996.
Under Canadian GAAP, the non-cash financing and investing activities
discussed in Note 16 would be included in the Consolidated Statement of Cash
Flows. Accordingly, under Canadian GAAP, net cash used in investing
activities would be $214,051,000 and $199,792,000 and net cash provided by
financing activities would be $169,280,000 and $100,744,000 in the 1996 and
1995 Consolidated Statements of Cash Flows, respectively.
64
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. QUARTERLY DATA (UNAUDITED)
Selected unaudited quarterly data for the years ended December 31, 1997, and
1996, are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(In Thousands except per share amounts) Quarter Quarter Quarter Quarter Total
------- ------- -------- --------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
SALE OF GOLD AND OTHER METALS $48,603 $50,603 $77,941 $49,316 $226,463
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
GROSS PROFIT (LOSS) $4,987 $4,269 ($2,557) ($5,974) $725
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
LOSS FROM OPERATIONS ($1,247) ($854) ($460,148) ($151,832) ($614,081)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
NET INCOME (LOSS) ($15) ($3,150) ($432,786) ($76,881) ($512,832)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
NET INCOME (LOSS) PER SHARE ($0.00) ($0.08) ($10.47) ($1.85) ($12.40)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
(In Thousands except per share amounts)
Year ended December 31, 1996:
Sales of gold and other metals $48,790 $56,958 $66,441 $67,531 $239,720
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
Gross profit (loss) $3,878 $4,538 $2,353 ($2,361) $8,408
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
Loss from operations ($1,485) ($1,830) ($10,026) ($11,915) ($25,256)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
Net income (loss) $13 ($1,713) ($7,792) ($12,111) ($21,603)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
Net income (loss) per share $0.00 ($0.04) ($0.19) ($0.30) ($0.53)
------- ------- -------- --------- ---------
------- ------- -------- --------- ---------
</TABLE>
Results for the first quarter of 1997 include a $0.5 million provision for
closure and reclamation costs at Basin Creek.
Results for the third quarter of 1997 include property write-downs of $441.1
million (see Note 4), a $9.0 million provision for closure and reclamation of
Mt. Todd (see Note 5), $6.2 million in losses on foreign currency contracts
(see Note 13), $2.2 million of restructuring charges, and a deferred tax
benefit of $44.3 million (see Note 10).
Results for the fourth quarter of 1997 include gains on forward contract
closeouts of $88.7 million, property write-downs of $90.3 million (see Note
4), $12.2 million in losses on foreign currency contracts, restructuring
charges of $1.9 million, and a $42.3 million provision for closure and
reclamation costs at Zortman and the Ortiz Project (see Note 5).
Results for the fourth quarter of 1996 include a $5.0 million charge for a
change in the estimated useful lives of certain assets at Mt. Todd, a $3.0
million provision for closure and reclamation cost related to the Ortiz
Project, and a $1.0 million impairment loss related to certain Phase I assets
at Mt. Todd (see Notes 4 and 5).
Results for the third quarter of 1996 include a $6.5 million provision for
closure and reclamation costs at Beal Mountain (see Note 5).
65
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following table sets forth information regarding persons serving on the
Company's Board of Directors, and persons nominated to serve on the Company's
Board of Directors. Each Director serves a three-year term. Pursuant to the
Company's Articles, the election of directors is on a rotational basis so that,
as nearly as possible, the terms of the office of one-third of the directors
expire at each annual general meeting. Under the British Columbia Company Act,
a majority of the Directors must be Canadian residents.
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION, DIRECTOR TERM
RECENT BUSINESS EXPERIENCE AGE SINCE EXPIRES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
LAWRENCE I. BELL (1)(5) 60 1995 1998
Resident of Vancouver, British Columbia, Canada.
Since 1993, Mr. Bell has been the President and
Chief Executive Officer of Shato Holdings Ltd., a
holding company for food (manufacture and retail)
and real estate interests. Prior to joining
Shato, Mr. Bell held numerous key management and
executive positions including Chairman and
President of the Westar Group Ltd., a diversified
holding company (1991 to 1992), and Chairman and
CEO of B.C. Hydro, a British Columbia government-
owned utility (1987 to 1991). Mr. Bell also has
held positions as Deputy Minister in various
departments of the British Columbia Government.
WERNER G. NENNECKER (4) 44 1992 1998
Resident of Spokane, Washington, U.S.A. Mr.
Nennecker joined the Company in September 1992,
as Senior Vice President and Chief Operating
Officer. In November 1992, Mr. Nennecker assumed
the position of President and Chief Executive
Officer and became a Director of the Company.
Prior to joining the Company, Mr. Nennecker
worked 18 years in the mining industry with
Ranchers Exploration and Santa Fe Pacific Gold
Corporation. Most recently, he held the
positions of Executive Vice President of Santa Fe
Pacific Minerals Corporation and President of
Santa Fe Pacific Gold Corporation.
ANTHONY J. PETRINA (3)(4)(5) 62 1994 1998
Resident of Vancouver, British Columbia, Canada.
Mr. Petrina is a registered Professional
Engineer, and was CEO until October 1992 of
Placer Dome Inc., an international gold mining
company. Prior to serving as CEO, Mr. Petrina
was Executive Vice President and prior to that,
Senior Vice President and Chief Operating Officer
of Placer Dome. Mr. Petrina is also a Director
of Inmet Mining Corporation, Miramar Mining
Corporation, Pacific Rim Mining Corporation,
WAJAX Limited, and TimberWest Timber Trust.
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION, DIRECTOR TERM
RECENT BUSINESS EXPERIENCE AGE SINCE EXPIRES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PETER M.D. BRADSHAW (1)(3) 59 1997 2000
Resident of Vancouver, British Columbia,
Canada. Mr. Bradshaw has been Chairman,
President and Chief Executive Officer of First
Point Minerals Corporation, an international
minerals exploration company, since June 1996.
He was Senior Vice President from August 1995
to June 1996, and Vice President from August
1986 until August 1995 of Orvana Minerals
Corp., a gold mining company. From 1977 to
August 1986, Mr. Bradshaw held various
management positions with Placer Dome Limited,
an international gold mining company. Prior to
that, he held management positions at Barringer
Research Limited, a mineral exploration service
company. Mr. Bradshaw holds a Doctorate of
Economic Geology from Durham University in the
United Kingdom.
DOUGLAS R. COOK (2)(3)(5) 72 1991 2000
Resident of Reno, Nevada, U.S.A. Since 1986,
Mr. Cook has been President of Cook Ventures,
Inc., a geological consulting company. From
1985 to 1986, he was Senior Vice President and
a director of Freeport McMoRan Gold Company and
from 1974 to 1986, Mr. Cook was President of
Freeport Exploration Company. Mr. Cook is
Chairman of Atlas Corporation, Denver, Colorado
and a director of Archangel Diamond
Corporation, Vancouver, British Columbia,
Canada. Mr. Cook holds a Doctorate of Science
in Mining Geology from Colorado School of Mines
and a Masters of Applied Science degree from
the University of Toronto.
PETER R. KUTNEY (2)(3)(4) 64 1984 2000
Resident of Calgary, Alberta, Canada. Mr.
Kutney has been self-employed as an oil and gas
consultant since March 1984. From April 1984
to December 1986, he was Chairman of Canu
Resources, Ltd., a precious metals mining
company. From January 1981 to November 1983,
Mr. Kutney was President and from December 1983
until March 1984, Chairman and Chief Executive
Officer, of Wharf Resources Ltd., a gold mining
company. From 1978 to October 1983, he was
Chairman and Chief Executive Officer of Coseka
Resources Ltd., an oil and gas company. Mr.
Kutney is a director of Vintage Resources Inc.
and Shamrock Resources Inc.
LINDSAY D. NORMAN (1)(2)(4) 60 1987 1999
Resident of Butte, Montana, U.S.A. Dr. Norman
has been President of Montana Tech since July
1, 1986. Prior to that, Dr. Norman was Vice
President and Technical Director of the Chase
Manhattan Bank in New York (1984-1986), a Vice
President of Jones & Laughlin (LTV) Steel Corp.
(1981-1984), and Director of the U.S. Bureau of
Mines (1979-1981). Prior to that, he held
management, planning and research positions
with the Bureau of Mines and E.I. duPont
DeNemours & Co.
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION, DIRECTOR TERM
RECENT BUSINESS EXPERIENCE AGE SINCE EXPIRES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FRED C. SCHULTE (4)(5) 51 1993 1999
Resident of Chicago, Illinois, U.S.A. Mr.
Schulte has been the President and Chief
Executive Officer of Elgin National Industries,
Inc. since 1988. Prior to joining Elgin, Mr.
Schulte held a number of key management and
executive positions with Santa Fe Southern
Pacific Corporation, most recently as Vice
President, Executive Department.
MICHAEL A. GRANDIN(1)(2) 53 1996 1999
Resident of Calgary, Alberta, Canada, Mr.
Grandin has been Executive Vice President and
Chief Financial Officer of Canadian Pacific
Limited, an operating company concentrated in
three core areas: energy, transportation and
hotels, since December 1997. Prior to that, Mr.
Grandin was Vice Chairman and Director of
Midland Walwyn Capital Inc. since 1996. Prior
to that, Mr. Grandin was a Director and the
President and Chief Executive Officer of Sceptre
Resources (1994 to 1996), Senior Vice President
and Chief Financial Officer of PanCanadian
Petroleum Ltd. (1990 to 1994), and a Managing
Director of ScotiaMcLeod Inc. (1986 to 1990).
Prior to that, Mr. Grandin held a number of key
management and executive positions at Dome
Petroleum Ltd. and other companies.
</TABLE>
- --------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of Environmental Committee.
(4) Member of Executive Committee.
(5) Member of Corporate Governance and Nominating Committee.
EXECUTIVE OFFICERS
The Company's executive officers are appointed annually by the Board of
Directors to serve for the ensuing year or until the successors have been
appointed. Information regarding the Company's executive officers, as of April
30, 1998, is included under the caption "Executive Officers of the Company"
appearing in Part I of this Annual Report on Form 10-K. The following former
executive officers served the Company during some or all of fiscal year 1997
that have since left:
<TABLE>
<CAPTION>
NAME AGE FORMER POSITION
<S> <C> <C>
Phillips S. Baker Jr. 38 Vice President, Finance and Chief Financial Officer
Terry D. Bauer 49 Vice President, Environmental and Governmental Affairs
Eric B. Ovlen 54 Vice President, Administration
James P. Geyer 44 Vice President, Operations
</TABLE>
PHILLIPS S. BAKER, JR. joined the Company in January 1994, as Vice President,
Finance and Chief Financial Officer. Prior to joining Pegasus, Mr. Baker worked
seven years for Battle Mountain Gold Company, most recently as Treasurer. He
also worked as a public accountant for Arthur Andersen & Company. He is an
Attorney and Certified Public Accountant. Mr. Baker left the Company in March
1998.
TERRY D. BAUER joined the Company in October 1990 and was appointed Vice
President, Environmental and Governmental Affairs in April 1994. Prior to
joining Pegasus, he served one year as Manager of Reclamation Services for
Morrison-Knudsen, Inc. and eight years as Vice President of Sunbelt Mining
Company, a mineral resource subsidiary of Public Service Company of New Mexico,
with responsibility for engineering and environmental management. Mr. Bauer
left the Company in October 1997.
68
<PAGE>
ERIC B. OVLEN joined the Company in October 1994 as Vice President,
Administration. Mr. Ovlen brought 20 years of general management,
administration, and human resources experience with multinational companies to
Pegasus. Mr. Ovlen spent the last five years before he joined the Company, as
Vice President of Administration at Oki Semiconductor of Sunnyvale, California.
Mr. Ovlen left the Company in October 1997.
JAMES P. GEYER joined the Company in 1987 and was appointed Vice President,
Operations in October 1995. Prior to joining the Company, Mr. Geyer worked 13
years for ASARCO and AMAX in various operating and engineering positions. Mr.
Geyer is a mining engineer from the Colorado School of Mines. Mr. Geyer left
the Company in February 1997.
FAMILY RELATIONSHIPS
There are no family relationships between any of the nominees, directors or
executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE
Under the securities laws of the United States, the Company's directors and
executive officers, and any persons holding more than 10 percent of the
Company's Common Shares, are required to report their initial ownership of the
Company's Common Shares and any subsequent changes in that ownership to the
Securities and Exchange Commission (the "Commission") and the U.S. Stock
Exchange upon which the Company's Common Shares are listed for trading.
Throughout 1997 and until they were delisted on January 16, 1998, the Company's
Common Shares traded in the U.S. on the American Stock Exchange. Specific due
dates for these reports have been established and the Company is required to
disclose in this Proxy Statement and Information Circular any failure to file by
these dates. No Company officer or director has failed to timely file any such
reports in 1997. In making these disclosures, the Company has relied solely on
written representations of its directors and executive officers and copies of
the reports that they have filed with the Commission.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Under the Securities Exchange Act of 1934, as amended, and certain rules
promulgated thereunder, the Company is required to disclose in this Annual
Report the involvement of the Company's directors, director nominees and
executive officers in certain legal proceedings, including bankruptcy
proceedings under U.S. bankruptcy laws affecting the Company. On January 16,
1998, the Company filed a Voluntary Petition for Relief under the provisions of
Chapter 11 of the U.S. Bankruptcy Code before the U.S. Bankruptcy Court in Reno,
Nevada. The circumstances surrounding that filing are discussed in "Items 1 and
2 - Business and Properties."
69
<PAGE>
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table provides certain summary information concerning compensation
paid or accrued by the Company and its subsidiaries for the fiscal year ended
December 31, 1997, to or on behalf of the Company's Chief Executive Officer and
each of the six other most highly compensated executive officers of the Company
(four of which remained executive officers at the end of the Company's fiscal
year and all of which are hereafter referred to as the "Named Executive
Officers"). The table also discloses their compensation for the years 1995 and
1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------------------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME, AGE AND PRINCIPAL SALARY BONUS OTHER OPTIONS COMPENSATION
POSITION YEAR ($)(1) ($)(1) ($)(2) (#) ($)(3)
- ----------------------------- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Werner G. Nennecker, 44 1997 350,000 280,000 --- 136,600 11,613
President, Chief Executive 1996 350,000 158,620 499 172,400 8,029
Officer 1995 353,719 300,000 --- 154,300 7,240
Michael L. Clark, 53 1997 163,125 --- --- 75,000 1,461
Senior Vice President, 1996 N/A N/A N/A N/A N/A
Chief Operating Officer 1995 N/A N/A N/A N/A N/A
Phillips S. Baker, Jr.(4), 38 1997 180,000 --- --- 40,900 7,534
Vice President, Finance 1996 175,233 45,873 --- 72,700 6,185
and Chief Financial Officer 1995 165,700 87,302 3,578 76,600 6,171
Robert A. Lonergan, 53 1997 186,000 --- --- 41,300 8,818
Senior Vice President, 1996 164,667 45,915 22,216 67,800 8,062
General Counsel and 1995 75,602 43,450 8,570 42,100 720
Corporate Secretary
Terry D. Bauer (5), 49 1997 120,746 33,484 --- 36,200 418,901
Vice President, 1996 144,067 40,295 --- 61,600 7,427
Environmental and 1995 138,300 68,854 --- 53,100 6,376
Governmental Affairs
Thomas H. Burkhart, 48 1997 122,800 --- --- 44,600 7,536
Vice President, Exploration 1996 9,823 28,849 --- 4,800 487
1995 101,397 23,933 --- 12,700 455
Eric B. Ovlen (6), 54 1997 112,663 31,548 --- 34,800 409,070
Vice President, 1996 132,200 37,649 --- 58,800 8,872
Administration 1995 139,667 71,422 1,343 49,800 8,270
</TABLE>
- --------------------
(1) Amounts shown are U.S. dollars and include cash and non-cash compensation
paid to or accrued on behalf of the Named Executive Officers, as well as
amounts earned but deferred at the election of those officers.
(2) Amounts shown include tax reimbursement payments and, to the extent such
payments exceeded the lesser of $50,000 or 10 percent of such Named
Executive Officer's total annual salary and bonus, perquisites and other
personal benefits or property received from the Company by any Named
Executive Officer for the last fiscal year.
(3) Amounts shown in this column for the last fiscal year are derived from the
following: Mr. Nennecker: annual Company payment to defined contribution
plans ("DCP") of $7,125 and Company paid life insurance premiums of $4,488;
(ii) Mr. Baker: annual
70
<PAGE>
Company payment to the DCP of $7,125 and Company paid life insurance
premiums of $409; (iii) Mr. Lonergan: annual Company payment to the DCP of
$7,125 and Company paid life insurance premiums of $1,693; (iv) Mr. Bauer:
annual Company payments to the DCP of $7,125, severance and outplacement
payment of $410,770, and Company paid life insurance premiums of $1,006;
(v) Mr. Clark: annual Company payments to the DCP of $1,041 and Company
paid life insurance premiums of $420; (vi) Mr. Burkhart: annual payments
to the DCP of $6,948 and Company paid life insurance premiums of $588;
(vii) Mr. Ovlen: annual Company payments to the DCP of $7,125, severance
and outplacement payment of $399,030, and Company paid life insurance
premiums of $3,921.
(4) Mr. Baker left the Company in March 1998.
(5) Mr. Bauer left the Company in October 1997.
(6) Mr. Ovlen left the Company in October 1997.
STOCK OPTIONS, STOCK APPRECIATION RIGHTS, STOCK AWARDS, AND UNIT AWARDS
The following table contains information concerning the grant of stock options
under the Company's 1997 Stock Plan to the Named Executive Officers. During
1997, the Company did not grant any stock appreciation rights, or award stock or
units, to the Named Executive Officers.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO POTENTIAL REALIZABLE
UNDERLYING EMPLOYEES VALUE AT ASSUMED
OPTIONS & DIRECTORS EXERCISE RATES OF STOCK PRICE
GRANTED IN FISCAL PRICE EXPIRATION APPRECIATION FOR
NAME (#)(1) YEAR ($/SH) DATE OPTION TERM
- ------------------------- ---------------------------------------------------------------------------------------
5%($) 10%($)
--------------------------
<S> <C> <C> <C> <C> <C> <C>
Werner G. Nennecker 136,600 13.1% 8.375 4/30/2004 $465,733 $1,084,356
Michael L. Clark 75,000 7.2% 6.875 5/1/2004 209,911 489,182
Phillips S. Baker, Jr. 40,900 3.9% 8.375 4/30/2004 139,447 324,971
Robert A. Lonergan 41,300 3.9% 8.375 4/30/2004 140,811 328,149
Terry D. Bauer 36,200 3.5% 8.375 4/30/2004 123,423 287,627
Thomas H. Burkhart 17,482 1.7% 8.375 2/24/2004 59,604 138,903
1,918 0.2% 8.375 2/24/2004 6,539 15,239
200 0.0% 6.875 5/1/2004 560 1,304
25,000 2.4% 4.813 7/29/2004 48,984 114,154
Eric B. Ovlen 34,800 3.3% 8.375 4/30/2004 118,649 276,504
Total Grants in 1997 1,046,678
</TABLE>
- --------------------
(1) The 1997 Stock Plan (the "1997 Plan"), which became effective on January 8,
1997, provides for the granting of stock options, stock awards, stock
appreciation rights and unit awards to officers and employees of the
Company and its subsidiaries. The 1997 Plan is administered by the
Compensation Committee of the Board.
Under the terms of the 1997 Plan, stock options may be granted in the form
of incentive stock options (as defined in Section 422 of the Internal
Revenue Code) or non-qualified-qualified stock options. Options granted
are generally exercisable for up to ten (10) years following the date of
grant at exercise prices equal to the fair market value of the Common
Shares, as determined by reference to the closing price on a recognized
stock exchange, on the date of the grant.
Payment of the exercise price of an option may be made in cash or, with the
consent of the Compensation Committee, in Common Shares or a combination
thereof. Options may be subject to such additional or different terms and
conditions not inconsistent with the 1997 Plan as are prescribed by the
Compensation Committee. The Compensation Committee has the power to permit
an acceleration of the exercise terms of an option granted pursuant to the
1997 Plan upon such circumstances, and subject to such terms and
conditions, as the Committee deems appropriate, including a change in
control of the Company.
71
<PAGE>
Options granted in 1997 were granted for a term of seven years with 25
percent of the option shares covered thereby becoming exercisable on the
grant date (subject to insider trading rules) and with an additional 25
percent of the option shares becoming exercisable on each anniversary date,
with full vesting occurring on the third anniversary date. Under the terms
of the Company's 1997 Plan, the Compensation Committee retains discretion,
subject to plan limits (and with the approval of The Toronto Stock Exchange
and the Montreal Exchange), to modify the terms of outstanding options, and
to reprice the options.
The 1997 Stock Plan also permits the Compensation Committee to authorize
the issuance of stock appreciation rights, stock awards and unit awards.
No stock appreciation rights were granted and no stock awards or unit
awards were made in 1997.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides information, with respect to the Named Executive
Officers, concerning the exercise of options during the year ended December 31,
1997, and unexercised options held as of the end of 1997:
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
SHARES UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE YEAR-END (#) YEAR-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/UNEXERCISABLE
NAME (#) ($) UNEXERCISABLE (1)
- ---------------------------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Werner G. Nennecker --- --- 516,275/78,625 --/--
Michael L. Clark --- --- 18,750/56,250 --/--
Phillips S. Baker, Jr. --- --- 224,825/28,175
Robert A. Lonergan --- --- 103,750/36,925 --/--
Terry D. Bauer --- --- ---/--- --/--
Thomas H. Burkhart --- --- 42,275/31,125 --/--
Eric B. Ovlen --- --- ---/--- --/--
</TABLE>
- --------------------
(1) Market value of underlying securities at December 31, 1997, minus the
exercise price of "in-the-money" options.
REPRICING, REPLACEMENT OR CANCELLATION AND REGRANT OF OPTIONS
The Company did not adjust or amend the exercise price of stock options
previously awarded to any of the Named Executive Officers during 1997.
LONG-TERM INCENTIVE PLANS
The Company did not grant any long-term incentive compensation to any of the
Named Executive Officers during 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Lindsay D. Norman (Chairman),
Douglas R. Cook, Peter R. Kutney, and Michael A. Grandin. None of the
Compensation Committee members serve or have served as officers or employees of
the Company or its subsidiaries.
DIRECTORS' FEES AND OPTIONS
Each Director who is not an employee of the Company receives an annual
Director's fee of $15,000 and an annual meeting fee of $20,000 regardless of the
number of Board or committee meetings scheduled. Mr. Schulte, the Chairman of
the Board, receives an additional annual fee of $21,000. Committee chairmen of
the Audit, Compensation, Environmental and Corporate Governance and Nominating
Committees (other than
72
<PAGE>
Mr. Schulte) are paid an additional $5,000 annually. Directors are reimbursed
for their travel and other expenses incurred in attending Board and committee
meetings.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with each of the Named
Executive Officers and certain other executive officers. The agreements, except
as discussed below, provide for an immediate benefit to the employee upon
termination by the Company without cause, by the employee for good reason, upon
the death or disability of the employee or upon termination after a Change of
Control, as defined in the agreements. The agreements provide that the employee
will receive a lump sum amount equal to twice his current salary and employment
search assistance upon termination for other than cause. The employee will
receive a lump sum amount equal to two and one-half times his current annual
salary if termination other than for cause occurs following a Change of Control,
except for Mr. Nennecker, who will receive a lump sum amount equal to three
times his current annual compensation, which includes bonus. If the employee
dies or is disabled, compensation equal to six months' salary will be paid. The
agreements also provide that after a Change in Control, all options will become
immediately vested and require that other benefits, such as life and health
insurance, be continued for a period of 12 months (24 months on termination
other than for cause following a Change of Control). In addition, upon
termination following a Change of Control, the Company will provide relocation
benefits and price protection equal to the original purchase price plus
improvements on the sale of the employee's residence. The term "Change of
Control" is defined, for purposes of the agreements, as an event whereby any
person, corporation, or other entity or group acquires, directly or indirectly,
securities of the Company representing 20 percent of the combined voting power
of the Company's then outstanding voting securities, or two incumbent directors
are replaced by individuals who are not supported by management. These
employment agreements are executory contracts, and under the Bankruptcy Laws may
be assumed, rejected, or renegotiated. The contracts are currently being
renegotiated.
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE
OVERVIEW OF COMPENSATION POLICY AND COMPONENTS
The Company's compensation policy as established by its Board is intended to
provide competitive compensation to all employees, giving consideration to the
relative contribution and performance of each individual employee. It is the
Company's policy to compensate its executive officers at levels consistent with
industry norms, primarily in the form of base salary, together with incentive
compensation at targeted percentages of base salary. In addition, it is the
Company's policy to grant stock options annually to each of its executive
officers in amounts based upon the officer's responsibility and accountability
so as to align their interests with the creation of shareholder value and to
encourage their continuation with the Company. The precious metals mining
industry is competitive with respect to recruitment and retention of qualified
personnel; accordingly, during 1997 the Company's management acted to ensure
that the Company's compensation practices were competitive with other producers
of precious metals, thereby enabling it to attract and retain key employees.
For 1997, executive compensation consisted of three components: base salary,
annual incentive opportunity, and long-term incentives (including stock
options). Determining the compensation levels of the Company's executive
officers is the responsibility of the Board, through its Compensation Committee
(the "Committee"), which has overall responsibility for the Company's
compensation policies to senior management. The Committee makes recommendations
to the Board as to the salaries, incentive opportunities, and stock options
awarded to the Company's Chief Executive Officer (the "CEO") and other executive
officers.
In 1996, the Committee retained the services of an independent consultant to
assist the Committee in setting base salary and incentive awards for the CEO and
the executive officers by providing advice and survey information with respect
to compensation paid by 13 medium-to-large-sized mining companies, which
generally produce in excess of 200,000 ounces of gold annually (the "Comparison
Group"). The Committee believes that the Comparison Group provides a more
meaningful comparison than the broad-based peer group used in the performance
graph because the Comparison Group companies are similar in size to the Company
and compete directly with the Company for qualified personnel.
73
<PAGE>
BASE SALARIES
For 1997, base salary ranges for the CEO and the other executive officers were
established based upon surveys of similar positions in the Comparison Group.
Placement within the range reflects the Committee's evaluation and assessment of
the individual performance of each executive officer, time in position, and the
overall financial condition of the Company. Base salaries are generally set at
a level which is approximately equal to the 50th percentile of the comparable
position in the Comparison Group.
INCENTIVE COMPENSATION
The Committee determined that the goals of the Company's compensation policies
would be achieved if the Company's executive officers were given the opportunity
to earn, when performance warranted, cash compensation at levels that would
place them at or about the 75th percentile with respect to overall compensation
received by executive officers holding comparable positions with companies in
the Comparison Group. Accordingly, the Committee determined that the CEO should
be eligible for an incentive opportunity target of 80 percent of base salary,
each Senior Vice President eligible for an incentive opportunity of 50 percent
of base salary, each Vice President eligible for an incentive opportunity target
of 44 percent of base salary, and the other officers were eligible for an
incentive opportunity target of 30 percent of base salary.
In late 1995, the Committee adopted new annual and long-term incentive plans for
executives designed to motivate executives to focus on and successfully manage
those activities which have the greatest impact on the creation of shareholder
value. These plans, which were effective for 1997, are driven by three
fundamental performance measures ("value drivers") which the Committee believes
have a direct impact on the creation of shareholder value: increased
production, increased ore reserves, and increased cash available from growth.
The Annual Incentive Plan provides executives the opportunity to earn annual
performance units, which are redeemed at the end of each year. One-half of the
executives' target unit award is fixed at the beginning of the plan year, based
on predetermined Company performance levels associated with each value driver:
cash flow for growth, production, and net reserve increases.
In addition, variable units may be earned by an executive by meeting certain
individual objectives in support of the three value drivers. An executive may
earn up to two times his or her fixed unit award, depending on the level of
accomplishment of his or her individual objectives.
The Value Creation Incentive Plan provides a long-term award opportunity for
sustained performance by meeting three-year performance objectives tied to the
three value drivers. The Plan creates a weighted market capitalization value
for the Company based on its current levels of cash flow, production, and
reserves. Participants receive value units commensurate with their
accountability and responsibility for long-term value creation. The value units
will increase or decrease in value over the three-year term of the grant,
depending on whether cash flow, production, and reserves are increased or
eroded. Participants will receive any increase in value of the units in cash,
stock, stock options, or a combination of these.
Because of the financial condition of the Company, the Committee determined that
no incentive compensation would be paid to the executive officers employed at
year-end. In the fourth quarter, Mr. Nennecker received an amount equal to his
target bonus as a measure to secure his retention through the Company's
financial difficulties. Bonuses were paid to Messrs. Bauer and Ovlen as part of
their respective severance packages.
STOCK OPTIONS, STOCK APPRECIATION RIGHTS, STOCK GRANTS AND UNIT GRANTS
Stock options are granted each year to the Company's employees, including the
CEO and the Named Executive Officers, to encourage management of the Company
from the perspective of an owner with an equity interest in the business, and to
encourage the employees to continue as employees of the Company. Stock options
granted to all employees eligible to receive awards, including the CEO and each
Named Executive Officer, are based on the employee's overall position of
responsibility and accountability, taking into account the participant's recent
performance and ability to effect long-term value creation. In addition, each
time an employee changes positions and assumes increased responsibilities, the
Committee awards the
74
<PAGE>
employee options based on the Committee's subjective assessment of the nature
and importance of the increased responsibilities assumed.
On February 18, 1997, the Committee elected to award Mr. Nennecker options to
purchase 136,600 Common Shares, under the 1997 Stock Plan, providing that the
Plan was approved by the shareholders at the Company's Annual General Meeting on
April 30, 1997. At this time, other Named Executive Officers, except Mr. Clark,
received annual grants to purchase from 34,800 to 41,300 Common Shares, under
the 1997 Stock Plan, providing that the Plan was approved by the shareholders at
the Company's Annual General Meeting on April 30, 1997. The exercise price of
such options was $8.375 per share, the fair market value of the underlying
Common Shares on the date the options were granted, based on the closing price
of the Common Shares on the American Stock Exchange on such date. On May 1,
1997, the Committee elected to award Mr. Clark options to purchase 75,000 Common
Shares. The exercise price of such option was $6.875 per share, the fair market
value of the underlying Common Shares on the date the options were granted,
based on the closing price of the Common Shares on the American Stock Exchange
on such date.
POLICY WITH RESPECT TO THE DEDUCTIBILITY OF COMPENSATION
To qualify the deductibility of compensation for Untied States federal income
tax purposes, it is the Company's policy to meet the requirements for exclusion
from the limit on deductibility imposed by Section 162(m) of the Internal
Revenue Code by paying performance-based compensation, if possible. With
respect to cases in which it is not possible to meet the requirements for
exclusion from Section 162(m) of the Code, the Company intends to minimize any
award of compensation in excess of the limit.
COMPENSATION COMMITTEE
Lindsay D. Norman, Chairman
Douglas R. Cook
Peter R. Kutney
Michael A. Grandin
75
<PAGE>
FIVE YEAR TOTAL RETURN GRAPH
The following chart compares total cumulative shareholder return for $100
invested in Common Shares of the Company on December 31, 1992 with the
cumulative total return of the S&P 500 Index and the TSE Gold & Silver Index for
the five most recently completed fiscal years.
[GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pegasus Gold Inc. 100 148 76 93 51 4
S&P 500 Index 100 107 105 141 170 223
TSE Gold & Silver Index 100 204 183 198 215 122
</TABLE>
76
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the outstanding Common Shares of the Company, as of April 30, 1998,
by each person known to the Company to own beneficially more than 5 percent of
such Common Shares, and by each Director, each nominee for Director, and each
officer named in the summary compensation table set out under the heading
"Compensation Summary" below. Except as otherwise indicated, each named
beneficial owner has voting and investment power with respect to the shares set
forth opposite the owner's name.
<TABLE>
<CAPTION>
Number of Percent of
Common Common
Shares (1) Shares (2)
------------------------
<S> <C> <C>
Alleghany Corporation (3). . . . . . . . . . . . . 3,000,000 7.17%
Lawrence I. Bell . . . . . . . . . . . . . . . . . 25,533 *
Peter M.D. Bradshaw. . . . . . . . . . . . . . . . 20,278 *
Douglas R. Cook. . . . . . . . . . . . . . . . . . 57,233 *
Michael A. Grandin . . . . . . . . . . . . . . . . 23,933 *
Peter R. Kutney. . . . . . . . . . . . . . . . . . 101,900 *
Werner G. Nennecker. . . . . . . . . . . . . . . . 516,275 1.23%
Lindsay D. Norman. . . . . . . . . . . . . . . . . 57,800 *
Anthony J. Petrina . . . . . . . . . . . . . . . . 33,600 *
Fred C. Schulte. . . . . . . . . . . . . . . . . . 43,300 *
Michael L. Clark . . . . . . . . . . . . . . . . . 20,000 *
Phillips S. Baker, Jr. . . . . . . . . . . . . . . 226,225 *
Terry D. Bauer . . . . . . . . . . . . . . . . . . --- ---
Robert A. Lonergan . . . . . . . . . . . . . . . . 103,750 *
Thomas H. Burkhart . . . . . . . . . . . . . . . . 42,960 *
Eric B. Ovlen. . . . . . . . . . . . . . . . . . . --- ---
Directors and Executive Officers as a Group (4). . 1,425,933 3.41%
</TABLE>
- --------------------
(*) Less than 1 percent.
(1) Includes Common Shares subject to options exercisable within 60 days of May
1, 1998 as follows: Mr. Bell: 24,533 shares; Mr. Bradshaw: 17,278 shares;
Mr. Cook: 55,233 shares; Mr. Grandin 22,933 shares; Mr. Kutney: 99,900
shares; Mr. Nennecker: 516,275 shares; Dr. Norman 56,800 shares; Mr.
Petrina: 32,600 shares; Mr. Schulte: 42,300 shares; Mr. Clark: 18,750
shares; Mr. Baker: 224,825 shares; Mr. Bauer: -0- shares; Mr. Lonergan:
103,750 shares; Mr. Burkhart: 42,275 shares; Mr. Ovlen:-0- shares.
(2) Based on 41,834,086 Common Shares outstanding as of May 1, 1998.
(3) The business address of Alleghany Corporation is 375 Park Avenue, New York,
NY 10152.
(4) Includes the Named Executive Officers and two other executive officers.
77
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 1997, Mr. Nennecker was indebted to
the Company under a non-interest bearing loan made to him in connection with his
employment. The largest amount of debt outstanding in this regard during such
year was $458,481, and the amount outstanding as of May 7, 1998, was $30,126.
78
<PAGE>
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data. Consolidated Financial
Statements of the Company and its subsidiaries are incorporated under
Item 8 of this Form 10-K.
(a)(2) No financial statement schedules are required
(a)(3) Exhibits
The exhibit numbers in the following list correspond to the numbers assigned to
such exhibits in Item 601 of Regulation S-K. The exhibit numbers noted by an
asterisk (*) indicate exhibits actually filed with this Annual Report on Form
10-K. All other exhibits are incorporated by reference into this Annual Report
on Form 10-K.
<TABLE>
<C> <S>
3.1 Memorandum of Registrant as Amended May 31, 1985, and May
22, 1987, (incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement No. 33-14910).
3.2 Articles of Registrant as Amended May 31, 1985, and May
22, 1987, (incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement No. 33-14910).
3.3 Amendment to the Company Memorandum dated December 1,
1988, regarding terms and conditions of preferred shares,
Series 1 (incorporated by reference to Exhibit 3.3 to the
Registrant's Form 10-K for the year ended December 31,
1988).
4.1 Amended and Restated Shareholder Protection Rights Plan
Agreement dated as of December 5, 1988, including
Amendment No. 1 dated as of February 5, 1989, between
Pegasus Gold Inc. and Central Guaranty Trust Company as
Rights Agent (incorporated by reference to Exhibit 4.1 to
the Registrant's Form 10-K for the year ended December
31, 1988).
4.2 Amendment to the Shareholder Protection Rights Plan
Agreement dated December 28, 1990, between Pegasus Gold
Inc. and Central Guaranty Trust Company as Rights Agent
(incorporated by reference to Exhibit 4.2 to the
Registrant's Form 10-K for the year ended December 31,
1990).
4.3 Indenture dated as of April 15, 1995, between Pegasus
Gold Inc. And the Bank of New York respecting U.S.
$115,000,000 6.25% Convertible Subordinated Notes Due
2002 (incorporated by reference to Exhibit 4.3 to the
Registrant's Form 10-K for the year ended December 31,
1995).
10.0 Multi-currency Reducing Revolving Credit Facility dated
April 19, 1996 (incorporated by reference to
</TABLE>
79
<PAGE>
<TABLE>
<C> <S>
Exhibit 10.0 of the Registrant's Form 10-Q for the quarterly
period ended March 31, 1996).
10.1 Description of Employee Savings Plan of Registrant
Effective July 1, 1984, as amended May 22, 1987,
(incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement No. 33-00290).
10.2 Amended and Restated Employee Savings Plan of Pegasus
Gold Corporation as amended October 1, 1988, and October
25, 1996, (incorporated by reference to Exhibit 10.25 of
the Registrant's Form 10-K for the year ended December
31, 1988).
10.3 1987 Incentive Stock Option Plan dated May 22, 1987, as
amended June 16, 1989, and May 29, 1992, and April 27,
1995 (incorporated by reference to Exhibit 10.0 to the
Registrant's Form 10-Q for the quarterly period ended
March 31, 1995).
10.4 1989 Non-Employee Directors' Stock Option Plan, dated
June 16, 1989 (incorporated by reference to Exhibit 10.22
of the Registrant's Form 10-K for the year ended December
31, 1989).
10.5* 1997 Stock Plan, dated January 8, 1997.
10.6* Employment Agreement dated November 15, 1997, between
Robert A. Lonergan, Pegasus Gold Inc., and Pegasus Gold
Corporation.
10.7* Employment Agreement dated November 15, 1997, between
Werner G. Nennecker, Pegasus Gold Inc. and Pegasus Gold
Corporation.
10.8* Employment Agreement dated November 15, 1997, between
Michael L. Clark, Pegasus Gold Inc. and Pegasus Gold
Corporation.
10.9* Employment Agreement dated November 26, 1997, between
Michelle G. Viau, Pegasus Gold Inc. and Pegasus Gold
Corporation.
10.10 Lease Agreement between Caterpillar Financial Services
Corporation and Pegasus Gold Corporation, dated June 15,
1991; Lease Supplement No. 1 between Caterpillar
Financial Services Corporation and Pegasus Gold
Corporation, dated June 19, 1991; Bill of Sale from
Pegasus Gold Corporation; Tax Indemnity Agreement between
Caterpillar Financial Services Corporation and Pegasus
Gold Corporation, dated June 15, 1991; Guaranty Agreement
of Pegasus Gold Inc., dated June 15, 1991; Letter
Agreement between Caterpillar Financial Services
Corporation
</TABLE>
80
<PAGE>
<TABLE>
<C> <S>
and Pegasus Gold Corporation, dated July 17, 1991; First
Amendment and Agreement between Caterpillar Financial Services
Corporation and Pegasus Gold Corporation, dated July 17, 1991;
Lease Supplement No. 4 between Caterpillar Financial Services
Corporation and Pegasus Gold Corporation, dated October 31,
1991; Bill of Sale from Pegasus Gold Corporation, dated October
31, 1991 (incorporated by reference to Exhibit 10.16 of the
year ended December 31, 1991); Lease Supplement No. 5 between
Caterpillar Financial Services Corporation and Pegasus Gold
Corporation, dated December 28, 1995; and Bill of Sale from
Pegasus Gold Corporation, dated December 28, 1995 (incorporated
by reference to Exhibit 10.13 of the year ended December 31,
1991).
11.1* A Statement of Computation of Earnings Per Share.
21.1* Subsidiaries of Registrant.
23.1* Consent of Independent Auditors of Registrant.
28.1* Form 11-K - Annual Report of the Pegasus Gold Employee
Savings Plan. (1)
(1) To be filed by amendment.
(b) Reports on Form 8-K
December 17, 1997
Item 5 - News release announcing Pegasus Gold Australia
Pty. Ltd. voluntarily appointed administrators of that
company in Australia.
January 9, 1998
Item 5 - News Release announcing that the lenders under
the Company's Revolving Credit Facility have notified
the Company that the indebtedness thereunder has been
accelerated and that such lenders off-set amounts they
owe the Company under various hedging contracts.
January 30, 1998
Item 3 - News release announcing that the Company and
certain of its subsidiaries had filed voluntarily to
reorganize under Chapter 11 of the Bankruptcy Code.
Item 5 - News releases announcing the delisting of the
Company's Common Stock from the American Stock Exchange,
notification of the suspension of trading of Common Stock
of the Company on the Toronto Stock Exchange, and the
reopening for trading of the Company's Common Stock on
the Montreal Exchange.
April 6, 1998
Item 5 - News releases announcing the promotion of
Michelle G. Viau to Vice President, Chief Financial
Officer, replacing Phillips S. Baker, Jr., and ore
reserves and resources as of December 31, 1997, combined
with a 1997 production and exploration update. Also, the
filing of the first monthly report with
</TABLE>
81
<PAGE>
<TABLE>
<C> <S>
the U.S. Bankruptcy Court in Reno, Nevada, for the period
January 16, 1998 through February 28, 1998.
April 21, 1998
Item 5 - News release announcing the Company's 1997
year-end results. Also, the filing of the Company's
second monthly report with the U.S. Bankruptcy Court in
Reno, Nevada, for the period March 1, 1998 through March
31, 1998.
</TABLE>
82
<PAGE>
PEGASUS GOLD INC.
FORM 10-K
DECEMBER 31, 1997
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) and the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned thereunto duly authorized.
PEGASUS GOLD INC.
Date: May 15, 1998 By: /s/ Werner G. Nennecker
------------- ------------------------------------------
Werner G. Nennecker, President and
Chief Executive Officer
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 date indicated.
Date: May 15, 1998 By: /s/ Michelle G. Viau
------------- ----------------------------------------
Michelle G. Viau, Vice President,
Finance and Chief Financial Officer
83
<PAGE>
PEGASUS GOLD INC.
FORM 10-K
DECEMBER 31, 1997
PART IV
SIGNATURES
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.
Date: May 15, 1998 By: /s/ Lawrence I. Bell
------------ -----------------------------------------------
Lawrence I. Bell
Date: May 15, 1998 By: /s/ Peter M.D. Bradshaw
------------ -----------------------------------------------
Peter M.D. Bradshaw
Date: May 15, 1998 By: /s/ Douglas R. Cook
------------ -----------------------------------------------
Douglas R. Cook
Date: May 15, 1998 By: /s/ Michael A. Grandin
------------ -----------------------------------------------
Michael A. Grandin
Date: May 15, 1998 By: /s/ Peter R. Kutney
------------ -----------------------------------------------
Peter R. Kutney
Date: May 15, 1998 By: /s/ Werner G. Nennecker
------------ -----------------------------------------------
Werner G. Nennecker
Date: May 15, 1998 By: /s/ Dr. Lindsay D. Norman
------------ -----------------------------------------------
Dr. Lindsay D. Norman
Date: May 15, 1998 By: /s/ Anthony J. Petrina
------------ -----------------------------------------------
Anthony J. Petrina
Date: May 15, 1998 By: /s/ Fred C. Schulte
------------ -----------------------------------------------
Fred C. Schulte
84
<PAGE>
PEGASUS GOLD INC.
1997 STOCK PLAN
EFFECTIVE JANUARY 8, 1997
1. ESTABLISHMENT, DURATION AND PURPOSE.
(a) Pegasus Gold Inc., a British Columbia company, (the "Corporation"),
hereby adopts the Pegasus Gold Inc. 1997 Stock Plan (the "Plan"),
effective January 8, 1997 ("Effective Date").
(b) No Award granted to an employee or a director shall become exercisable
until the Plan is approved by shareholders at a shareholders' meeting
held within twelve months of the Effective Date. Any Awards granted
under the Plan prior to such approval shall be contingent upon such
approval.
(c) The purpose of the Plan is to promote the long-term success of the
Corporation by encouraging directors and employees of the Corporation
and its Subsidiaries to focus on long-range objectives, by attracting
and retaining employees and by aligning the financial interests of
directors and employees with the interests of shareholders. The Plan
provides a means whereby:
(1) employees of the Corporation and its Subsidiaries may be given an
opportunity to purchase Stock pursuant to options which may
qualify as incentive stock options under Section 422 of the Code
(referred to as "incentive stock options");
(2) directors and employees of the Corporation and its Subsidiaries
may be given an opportunity to purchase Stock pursuant to options
which do not qualify as incentive stock options (referred to as
"nonqualified stock options");
(3) directors and employees of the Corporation and its Subsidiaries
may acquire Stock for such consideration and subject to such
restrictions (if any) as the Committee determines appropriate,
provided, however, that prior to the issuance of such Stock, the
Corporation will have received from the director or employee the
consideration established for the Stock issued to him;
(4) directors and employees of the Corporation and its Subsidiaries
may be awarded Stock pursuant to the terms of incentive plans
established from time to time by such entities, provided,
however, that prior to the issuance of such Stock, the
Corporation will have
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -1- January 8, 1997
1997 STOCK PLAN
<PAGE>
received from the director or employee the consideration
established for the Stock issued to him; and
(5) directors and employees of the Corporation and its Subsidiaries
may be granted rights or units the value of which is based on the
value of the Stock.
2. DEFINITIONS. The following terms when capitalized in this Plan have the
following meanings:
(a) "Awards" refers collectively to Stock Awards (see para. 8, INFRA),
stock appreciation rights (see para. 7, INFRA), Stock Options (see
para. 6, INFRA), and Unit Awards (see para. 9, INFRA) made pursuant
to this Plan.
(b) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(c) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(d) "Non-Employee Director" means a director who (1) is not currently an
officer (as defined in 17 CFR 260.16a-1(f)) of the Corporation or a
Subsidiary, or otherwise currently employed by the Corporation or a
Subsidiary; (2) is not a former employee of the Corporation who
receives compensation during the taxable year for prior services, (3)
does not receive compensation, either directly or indirectly, from the
Corporation or a Subsidiary, for services rendered as a consultant or
in any other capacity except as a director, except for services that
do not require, or in such amount that does not require, disclosure
under Item 404(a) of Regulation S-K issued by the Securities and
Exchange Commission; (4) does not possess an interest in any other
transaction for which disclosure would be required pursuant to Item
404(a) of such Regulation; (5) is not engaged in a business
relationship for which disclosure would be required pursuant to Item
404(b) of such Regulation; and (6) is an outside director within the
meaning of Treasury Regulation 1.162-27(e)(3).
(e) "Participant" refers to the recipient of an Award.
(f) "Stock" means the Corporation's Common Shares without par value.
Shares under the Plan may be authorized and unissued shares or
reacquired shares.
(g) "Stock Award" means Stock issued to eligible persons pursuant to
paragraph 8 of this Plan.
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -2- January 8, 1997
1997 STOCK PLAN
<PAGE>
(h) "Stock Option" means options to purchase Stock granted to eligible
persons pursuant to paragraph 6 of this Plan.
(i) "Subsidiaries" refers to subsidiary corporations, as defined in
Section 424(f) of the Code (but substituting "the Corporation" for
"employer corporation") and as defined in the Securities Act (of
British Columbia), including entities which become Subsidiaries after
adoption of the Plan.
(j) "Unit Awards" means the units issued to eligible persons pursuant to
paragraph 9 of this Plan as compensation for services rendered or to
be rendered to the Corporation or its Subsidiaries.
3. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Corporation (the
"Board").
(b) The Committee shall consist solely of two or more Non-Employee
Directors.
(c) The Committee shall determine which employees and directors of the
Corporation or its Subsidiaries shall be granted (subject to Board
approval for Awards to CEO) Awards under the Plan, the timing of such
Awards, the terms thereof, and the number of shares of Stock subject
to each Award.
(d) The Committee shall have the sole authority, in its absolute
discretion, to adopt, amend, and rescind such rules and regulations
as, in its opinion, may be advisable in the administration of the
Plan, to construe and interpret the Plan, the rules and regulations,
and the instruments evidencing Awards granted under the Plan and to
make all other determinations deemed necessary or advisable for the
administration of the Plan. All decisions, determinations, and
interpretations of the Committee shall be binding on all Participants.
(e) During periods of time and in amounts approved by the Committee,
eligible persons may elect to swap compensation for Stock, Stock
Options, stock appreciation rights or Unit Awards. Such elections,
once made, will be irrevocable.
(f) The Plan is intended to meet the requirements of Rule 16b-3
promulgated by the Securities and Exchange Commission under Section
16(b) of the Exchange Act and the requirements of Section 162(m)(4)(C)
of the Code and shall be administered and construed accordingly.
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -3- January 8, 1997
1997 STOCK PLAN
<PAGE>
4. STOCK SUBJECT TO THE PLAN; LIMITATIONS ON AWARDS.
(a) Awards containing rights to acquire Stock may be granted under the
Plan to eligible persons (as set forth in para. 5, INFRA) for an
aggregate of not more than four (4) million (4,000,000) shares of
Stock, plus any shares that (i) are available for grant under the
Corporation's 1987 Stock Option Plan or 1989 Non-Employee Directors'
Stock Option Plan on the date the shareholders approve this Plan, or
(ii) may subsequently become available for grant under such plans
through the expiration, termination, forfeiture or cancellation of
awards under such plans. If an Award granted under this Plan expires,
terminates, or is forfeited or canceled, the unissued shares of Stock
subject to such Award shall again be available for Awards under this
Plan.
(b) If there is any change in the Stock subject to the Plan or the Stock
subject to any Award granted under the Plan (through merger,
amalgamation, arrangement, consolidation, reorganization, spin-off,
recapitalization, reincorporation, stock split, dividend issued in
stock or other change in the corporate structure of the Corporation),
appropriate adjustments may be made by the Committee in order to
preserve but not to increase the benefits to the Participants. These
adjustments may include adjustments to the aggregate number of shares
of Stock subject to the Plan, the number of shares of Stock and the
price per share subject to outstanding Awards and the limitations in
subparagraph (c) below.
(c) The Corporation shall not grant, issue or sell to any employee in any
calendar year:
(1) Stock Options pursuant to paragraph 6 to purchase more than two
hundred fifty thousand (250,000) shares of Stock, or
(2) stock appreciation rights pursuant to paragraph 7 with respect to
more than two hundred fifty thousand (250,000) shares of Stock.
(d) Notwithstanding anything to the contrary in this Plan, the Company
will not, at any time while the Stock is listed on The Toronto Stock
Exchange or the Montreal Exchange (i) grant Stock Options to insiders
in respect of Stock exceeding an aggregate at any time of 10 percent
of the outstanding issue, (ii) issue to insiders, within a one (1)
year period, a number of shares of Stock exceeding 10 percent of the
Company's outstanding issue, (iii) issue to any one insider and his
associates, within a one (1) year period, a number of shares of Stock
exceeding 5 percent of the Company's outstanding issue, or (iv) grant
Stock Options to any one person in respect of shares of Stock
exceeding 5 percent of the Company's outstanding issue, other than (in
any such case) as may be
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -4- January 8, 1997
1997 STOCK PLAN
<PAGE>
permitted by the rules of The Toronto Stock Exchange and/or the
Montreal Exchange, as the case may be. For the purposes of this
subsection (d), the terms "insiders," "outstanding issue" and
"associates" shall have the meanings ascribed to them under the rules
of The Toronto Stock Exchange.
5. ELIGIBILITY.
Persons who shall be eligible to have Awards granted to them shall be such
employees or directors of the Corporation or its Subsidiaries as the
Committee, in its discretion, shall designate from time to time.
6. TERMS AND CONDITIONS OF STOCK OPTIONS.
(a) The exercise price of the Stock covered by each Stock Option granted
under the Plan shall be not less than the per share fair market value,
as determined by reference to the closing share price on a recognized
stock exchange, of such Stock on the date the option is granted.
Notwithstanding the foregoing, in the case of an incentive stock
option granted to a person possessing more than ten percent (10%) of
the combined voting power of the Corporation or any Subsidiary, the
exercise price shall be not less than one hundred ten percent (110%)
of the fair market value of the Stock on the date the option is
granted. The exercise price of an outstanding Stock Option shall be
subject to adjustment to the extent provided in paragraph 4, above.
(b) Notwithstanding anything in the Plan to the contrary, the aggregate
fair market value (determined at the time of grant of an incentive
stock option) of Stock with respect to which incentive stock options
are exercisable for the first time by any Participant during any
calendar year (under all plans of the Corporation and its
Subsidiaries) shall not exceed $100,000.
(c) Each Stock Option granted pursuant to the Plan shall be evidenced by a
written stock option agreement executed by the Corporation and the
person to whom such option is granted.
(d) The Committee shall determine the term of each Stock Option granted
under the Plan, but the term of each Stock Option shall be for no more
than ten (10) years provided, however, that in the case of an
incentive stock option granted to a person possessing more than ten
percent (10%) of the combined voting power, of the Corporation or any
Subsidiary, the term shall be for no more than five (5) years.
(e) The stock option agreement may contain such other terms, provisions,
and conditions as may be determined by the Committee (not inconsistent
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -5- January 8, 1997
1997 STOCK PLAN
<PAGE>
with this Plan) including, without limitation, stock appreciation
rights with respect to Stock Options granted under this Plan. If a
Stock Option, or any part thereof, is intended to qualify as an
incentive stock option, the stock option agreement shall contain those
terms and conditions which are necessary to so qualify it.
7. STOCK APPRECIATION RIGHTS.
The Committee may, under such terms and conditions as it deems appropriate,
authorize the surrender by an optionee of all or part of an unexercised
Stock Option and authorize a payment in consideration therefor in an amount
equal to the difference obtained by subtracting the option price of the
shares then subject to exercise under such option from the fair market
value of the Stock represented by such shares on the date of surrender,
provided that the Committee determines that such settlement is consistent
with the purpose of the Plan. Such payment may be made in shares of Stock
valued at their fair market value on the date of surrender of such option
or in cash, or partly in shares and partly in cash. Acceptance of
surrender and the manner of payment shall be in the discretion of the
Committee. Any payments of cash under this paragraph shall be from the
general assets of the Corporation.
8. STOCK AWARDS
The Committee may, in its discretion, issue Stock to eligible persons on
whatever basis and subject to such performance requirements, terms and
conditions as the Committee determines, subject to compliance with the
applicable provisions of the Company Act (of British Columbia). The terms
and conditions of such Stock Award shall be evidenced by a written
agreement executed by the Corporation and the Participant.
9. UNIT AWARDS
The Committee may, in its discretion, issue units to eligible persons as
compensation for services rendered or to be rendered to the Corporation or
its Subsidiaries, the value of such units to be measured by increases or
decreases (during all or a portion of the term of the Unit Award) in the
Corporation's value, including, but not limited to, a formula based on
operating cash flow, production and reserves, fair market value per share
of Stock, or such other measure specified by the Committee prior to grant
of the applicable Unit Award. Unit Awards shall be subject to whatever
performance requirements, terms and conditions the Committee determines
appropriate. The terms of a Unit Award, shall be evidenced by a written
agreement executed by the Corporation and the Participant.
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -6- January 8, 1997
1997 STOCK PLAN
<PAGE>
10. (a) GENERAL PROHIBITION ON TRANSFERS. Unless otherwise expressly provided
in this paragraph 10 or by the Award Agreement, as either may be
amended, or by applicable law or the rules of the stock exchanges on
which the Stock is listed, (i) a Participant may not transfer
(including assign, pledge, or encumber) any of Participant's interest
in an Award; (ii) only a Participant may exercise an Award; and (iii)
the Corporation may deliver amounts payable or shares issuable
pursuant to Awards only to (or for the account of) the Participant.
(b) COMMITTEE-APPROVED TRANSFERS. Subject to applicable law, the
Committee may permit Awards to be exercised by and paid to such
persons or entities as The Committee may approve, pursuant to such
conditions and procedures as the Committee may establish, and subject
to the condition that the Committee receive evidence satisfactory to
it that the transfer is being made for estate and/or tax planning
purposes on a gratuitous or donative basis and without consideration
(other than nominal consideration). Notwithstanding the foregoing,
incentive stock options shall be subject to any additional transfer
restrictions as required for such options under the Internal Revenue
Code.
(c) PERMITTED TRANSFERS. The following transactions are permitted under
this Plan without the restrictions imposed by this paragraph 10,
subject to the rules of the stock exchanges on which the Stock is
listed:
For all Awards:
(1) transfers to the Corporation;
(2) the designation of a beneficiary to receive benefits in the event
of the Participant's death or, if the Participant has died,
transfers to or exercise by the Participant's beneficiary, or, in
the absence of a validly designated beneficiary, transfers by
will or the laws of decent and distribution; and
For all Awards except incentive stock options:
(3) transfers pursuant to a domestic relations order;
(4) if the Participant has suffered a disability, permitted transfers
or exercises on behalf of the Participant by his or her legal
representative; or
(5) the authorization by the Committee of "cashless exercise"
procedures with third parties who provide financing for the
purpose of (or who otherwise facilitate) the exercise of Awards
consistent
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -7- January 8, 1997
1997 STOCK PLAN
<PAGE>
with applicable laws and stock exchange rules and the express
authorization of the Committee.
(d) Awards granted or Stock acquired under the Plan shall be subject to
such restrictions and agreements regarding performance, vesting, sale,
assignment, encumbrance, or other transfer as the Committee deems
appropriate at the time of making an Award.
11. USE OF PROCEEDS.
Any cash proceeds realized from the sale of Stock pursuant to the Plan or
from the exercise of options granted under the Plan shall constitute
general funds of the Corporation.
12. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
(a) The Board may at any time amend, suspend or terminate the Plan as it
deems advisable; provided, however, except as set forth in paragraph
4, above, the Board shall not amend the Plan in the following respects
without the consent of the shareholders of the Corporation then
sufficient to approve the Plan in the first instance and the approval
of all stock exchanges on which the Stock is then listed, if, and to
the extent required, by such exchanges:
(1) to increase the maximum number of shares of Stock subject to the
Plan; or
(2) to change the designation or class of persons eligible to receive
Awards under the Plan.
(b) No Award may be granted during any suspension or after the termination
of the Plan, and no amendment, suspension or termination of the Plan
shall, without the Participant's consent, alter or impair any rights
or obligations under any Award previously made under the Plan,
(c) This Plan shall terminate 10 years from the date of adoption of the
plan, unless previously terminated by the Board pursuant to this
paragraph 12.
13. CONSIDERATION.
Payment of the exercise price of a Stock Option or payment of any
consideration required for a Stock Award granted under this Plan shall be
made in cash or check; or with the consent of the Committee, in shares of
Stock already owned by the Participant; or with the Committee's consent
partly in cash and partly in Stock provided, however, that the Committee,
in its sole discretion, may establish
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -8- January 8, 1997
1997 STOCK PLAN
<PAGE>
procedures which permit a Participant to pay the exercise or purchase price
in whole or in part by delivery (on a form prescribed by the Committee) of
an irrevocable direction to a securities broker approved by the Committee
to sell shares and deliver all or a portion of the proceeds to the
Corporation for and on behalf of a participant in payment for the Stock.
The Committee may also establish procedures for the sale of shares of Stock
to cover withholding taxes or the withholding of shares of Stock issuable
upon exercise of an option to satisfy applicable withholding taxes to the
extent permitted by applicable law. Notwithstanding any provision in this
paragraph 13 to the contrary, no share of Stock shall be issued by the
Corporation until the Corporation has received the full consideration for
it as required by the Company Act (of British Columbia).
Date Adopted By Corporation:
Date Approved By Shareholders:
- --------------------------------------------------------------------------------
PEGASUS GOLD INC. -9- January 8, 1997
1997 STOCK PLAN
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 15th day of November, 1997, effective the first
day of the term hereof, between PEGASUS GOLD CORPORATION, a Nevada corporation
with its principal office in Spokane, Washington, herein referred to as the
"Corporation", PEGASUS GOLD INC., a British Columbia corporation with its
principal in office Spokane, Washington, herein referred to as "Pegasus," and
ROBERT A. LONERGAN of Veradale, Washington, herein referred to as the
"Employee."
In consideration of the mutual covenants and benefits as herein set forth, the
parties hereto agree as follows:
SECTION ONE
EMPLOYMENT
The Corporation hereby employs the Employee as its Senior Vice President,
General Counsel and Secretary and the Employee 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. Employee shall
perform the duties of Senior Vice President, General Counsel and Secretary
subject to the general supervision of and pursuant to the orders, advice and
direction of the President and Chief Executive Officer of the Corporation.
Employee shall also render such other reasonable and unrelated services and
duties as may be assigned to him from time to time by the President and Chief
Executive of the Corporation and accepted by the Employee.
Employee further agrees to remain in the employ of the Corporation for a period
of twenty-four months from the date hereof.
Employee further agrees to relocate, as necessary and at the Corporation's
expense, to any new corporate headquarters location, regardless of where
situated.
- 1 -
<PAGE>
SECTION TWO
TERM OF EMPLOYMENT
The term of employment under this Agreement shall commence November 15, 1997 and
shall continue thereafter until terminated as hereinafter provided.
SECTION THREE
COMPENSATION
The Corporation shall pay Employee, and the Employee shall accept from the
Corporation, compensation at the minimum rate of U.S.$240,000.00 per year,
prorated and payable semi-monthly or on such other basis as the parties may
hereafter agree. Such minimum compensation may be adjusted for merit or other
raises as from time to time determined by the President or the Board of
Directors or any Committee thereof having such authority. Employee shall be
entitled to vacation periods in line with the policies of the Corporation
applicable to exempt employees; provided, however, that the Employee shall be
entitled to a minimum paid vacation of four (4) weeks in any calendar year.
SECTION FOUR
OTHER BENEFITS
In addition to the compensation as provided in the previous Section Three
hereof, Corporation shall at its expense provide for Employee the following
additional benefits:
1. An allowance of not to exceed Five Hundred Fifty Dollars ($550.00) per
month to acquire and operate a current model automobile for business and
personal use. Said allowance may be adjusted if the cost to acquire and
operate increases.
2. Insurance on the life of Employee in an amount not less than two (2) times
his annual salary compensation, with proceeds thereof upon Employee's death
to be payable to Employee's named beneficiary less the amount of the last
annual premium paid therefor.
- --------------------------------------------------------------------------------
Employment Agreement - 2 -
Robert A. Lonergan
<PAGE>
3. Participation in all of Corporation's benefit plans, including medical,
dental, vision, 401(k), pension, disability, bonuses (current target amount
is 50 percent of annual base salary) and any and all other plans that may
be made available to employees; medical, dental and vision insurance shall
be effective on the first day of the term hereof.
4. Monthly parking allowance in accordance with corporate policy.
5. Assistance in annual tax preparation and estate planning.
6. Payment of dues in professional associations as may be required to maintain
Employee's membership in those associations and the privilege of attending
appropriate seminars, conferences and educational programs as may be
necessary.
7. Family membership in a local country club and payment of dues for such
membership.
8. Reimbursement for all expenses incurred in connection with the performance
of services to the Corporation, including entertainment and travel and
other expenses incidental to the duties undertaken hereunder; provided,
however, that such expenses shall be reasonable and necessary and that
Employee shall submit bills and vouchers supporting requests for
reimbursements in accord with Corporation's policies.
9. Appropriate office and staff assistance in Spokane, Washington which it is
agreed shall be the place of principal employment during the term of this
Agreement.
10. Such directors and officers liability insurance as may be available to
adequately provide both insurance coverage and reimbursement of legal costs
for any actions brought against the Employee for any of his activities in
the employment of the Corporation.
SECTION FIVE
TERMINATION
This Agreement will terminate or may be terminated for any one of the following
reasons:
1. Voluntarily and without cause, subject to Sections Two and Six (2), upon at
least three (3) month's prior written notice of termination by Corporation
to the
- --------------------------------------------------------------------------------
Employment Agreement - 3 -
Robert A. Lonergan
<PAGE>
Employee, or by three (3) week's prior written notice by the Employee to
the Corporation; or
2. By the Corporation for cause as hereinafter defined in Section Ten; or
3. Upon the death or disability of Employee; or
4. Upon a Change of Control; or
5. Upon retirement.
SECTION SIX
SEVERANCE COMPENSATION
1. TERMINATION BY EMPLOYEE OR BY CORPORATION WITH CAUSE. If Employee shall
voluntarily terminate his employment under this Agreement pursuant to
Section 5(1) or if the employment of the Employee is terminated by the
Corporation for cause, then all compensation and benefits as heretofore
provided in Sections 3 and 4 shall terminate immediately upon the effective
date of termination and no special severance compensation will be paid.
2. TERMINATION BY CORPORATION WITHOUT CAUSE. If, on or after the effective
date of this Agreement, the Corporation shall terminate this Agreement for
any reason except cause as defined in Section Ten, then upon the effective
date of termination the Corporation shall pay to Employee an amount equal
to twenty-four (24) months' salary. The amount shall be paid in one lump
sum on the date the Employee's services terminate. All Employee benefits
provided to the Employee shall be continued as if the Employee were still
an employee of the Corporation for a period of one (1) year from the date
of termination, or, when equal or better benefits are provided by a new
employer, whichever shall first occur. In the event Employee has existing
stock options on the date of termination, they will be honored in
accordance with the terms of said options. Corporation shall also provide
to Employee the cost of a one time move to a new location (within the 48
contiguous states) in the event such a move becomes necessary in order for
Employee to seek new employment.
3. TERMINATION BY DEATH OR DISABILITY. If Employee dies or becomes disabled
before his employment is otherwise terminated, the Corporation shall
immediately pay an amount of compensation equal to six (6) months' salary
as if Employee had been terminated without cause and all employee benefits
theretofore provided to Employee shall be continued for a period of one (1)
year
- --------------------------------------------------------------------------------
Employment Agreement - 4 -
Robert A. Lonergan
<PAGE>
from the date of death or disability as if Employee was still an employee
of the Corporation. If such termination is due to Employee's death,
payment shall be made in one lump sum to his beneficiary, to be named in
writing by Employee on signing this Agreement, which designation may be
changed at any time by written notice signed by Employee and delivered to
the Secretary of the Corporation; if no named beneficiary survives
Employee, the entire amount shall be paid to his estate. If such
termination is due to Employee's disability, payment shall be made in one
lump sum to Employee. Said compensation shall be in addition to that
payable from any insurance coverage providing compensation upon Death or
Disability. "Disability" in this Agreement shall mean a condition of
physical or mental illness causing Employee to be totally incapable of
performing full-time duties.
4. TERMINATION FOLLOWING CHANGE OF CONTROL
(a) For purposes of this Agreement, a Change in Control shall be deemed to
have occurred if (A) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, or
any syndicate or group deemed to be a person under Section 14(d)(2) of
the Exchange Act, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the
Corporation's then outstanding securities entitled to vote in the
election of directors of the Corporation; or (B) during any period of
two (2) consecutive years (not including any period prior to the
effective date of this Agreement), individuals who at the beginning of
such period constituted the Board and any new directors, whose
election by the Board or nomination for election by the Corporation's
stockholders was approved by a vote of at least three quarters (3/4)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority thereof; or (C) upon a sale of all or substantially all of
the assets of the Corporation.
(b) Irrespective of any other provisions in this Agreement regarding
termination, if either of the events described above constituting a
Change in Control shall have occurred, upon the subsequent termination
of Employee's employment (unless such termination is because of
Employee's death or disability, by the Corporation for cause or by
Employee other than for "Good Reason") Employee shall be entitled to
and will receive no later than the fifth (5th) day following the date
of termination a lump sum severance payment equal to two and one half
(2-1/2) times Employee's
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Employment Agreement - 5 -
Robert A. Lonergan
<PAGE>
then current annual base salary. In addition, all benefits then
applicable to Employee shall be continued for a period of twenty-four
(24) months.
(c) Employee shall be entitled to terminate his employment for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean,
without Employee's express written consent, any of the following:
(i) the assignment to Employee of any duties inconsistent with
Employee's status as Senior Vice President, General Counsel
and Secretary of the Corporation, or Employee's removal from
such position, or a substantial alteration in the nature or
status of Employee's responsibilities from those in effect
immediately prior to the Change in Control;
(ii) a reduction by the Corporation in Employee's annual base
salary as in effect on the date hereof or as the same may have
been increased from time to time or a failure by the
Corporation to increase Employee's salary at a rate
commensurate with that of other key executives of the
Corporation;
(iii) the relocation of the office of the Corporation where Employee
is employed at the time of the Change in Control (the "CIC
Location") to a location more than fifty (50) miles away from
the CIC Location or the Corporation's requiring Employee 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 Employee's business
travel obligations just prior to the Change in Control);
(iv) the failure by the Corporation to continue to provide Employee
with benefits at least as favorable as those enjoyed by
Employee under any of the Corporation's life insurance,
medical, health and accident, disability, deferred
compensation, pension, or savings plans in which Employee 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
Employee of any material fringe benefit enjoyed by Employee at
the time of the Change in Control, or the failure by the
Corporation to provide Employee with the number of paid
vacation days to which Employee is entitled on the basis of
years of service with the Corporation in accordance with the
Corporation's normal vacation policy in effect at the time of
the Change in Control; or
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Employment Agreement - 6 -
Robert A. Lonergan
<PAGE>
(v) the failure of the Corporation to obtain a satisfactory
agreement from any successor to assume and agree to perform
this Agreement or, if the business of the Corporation for
which Employee's services are principally performed is sold at
any time after a Change in Control, the purchaser of such
business shall fail to agree to provide Employee with the same
or a comparable position, duties, salary and benefits as
provided to Employee by the Corporation immediately prior to
the Change in Control.
(d) In the event of termination of Employee by reason of either a Change
in Control or for "Good Reason" as herein defined then, in addition to
the severance payment as provided in paragraph 4(b) hereof, Employee
shall be entitled to the following:
(i) Employment search assistance to secure other comparable
employment for a period not to exceed one (1) year or until
such comparable employment is found, whichever is the sooner,
with the fees for such assistance paid by the Corporation;
(ii) Protection for the sale of Employee's residence in the amount
of the original purchase price, plus major improvements, or
the net realized therefrom; and
(iii) Payment of the cost of a one time move to a new location in
the event such a move becomes necessary in order for Employee
to accept new employment.
5. LIMITATION ON PAYMENTS. Payments under this Section Six shall not exceed
2.99 times "base amount" of salary as defined in Section 280 (G) of the
Internal Revenue Code of 1986, as amended.
SECTION SEVEN
NON-TRANSFERABILITY
This is a personal agreement. None of Employee'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 to assignment by operation of law. Any attempt, voluntary or
involuntary, to effect any such action shall be null, void and of no effect.
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Robert A. Lonergan
<PAGE>
SECTION EIGHT
CHOICE OF LAW
It is the intention of the parties hereto 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 proceeding 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 of any other forum, without regard to the
jurisdiction in which any action or special proceeding may be instituted.
SECTION NINE
BINDING EFFECT
This Agreement shall be binding upon and shall inure to the benefit of the
Corporation, its successors or assigns, and to Employee, and his personal
representatives, heirs, executors and administrators.
SECTION TEN
DEFINITION OF CAUSE
Cause to terminate the Employee's employment shall mean (a) the willful and
continued failure by the Employee to substantially perform his duties, after
demand for substantial performance is delivered by the Corporation that
specifically identifies the manner in which the Corporation believes the
Employee has not substantially performed his duties, or (b) the willful
engagement by the Employee in misconduct which is materially injurious to the
Corporation, monetarily or otherwise, or (c) the willful violation by the
Employee of the provisions of this Employment Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless there shall have been delivered to the Employee a
copy of a notice of termination from the Corporation and, after reasonable
written notice, Employee and his counsel have been given an opportunity to be
heard by the Board of Directors of the Corporation and thereafter a resolution
has been duly adopted by the Directors of the Corporation then in office to the
effect that, in the good faith opinion of such Directors, the Employee was
guilty of conduct set forth above, which resolution shall set forth in
particular detail the facts and circumstances claimed to provide a basis for
termination of employment under the provisions so indicated.
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Employment Agreement - 8 -
Robert A. Lonergan
<PAGE>
SECTION ELEVEN
DIRECTORSHIPS
The Employee shall be entitled to accept positions as director of other
corporations, whether such corporations are engaged in the mining industry or
not, provided any such directorship is first approved by the Corporation, which
approval shall not be unreasonably withheld.
SECTION TWELVE
REPRESENTATIONS
The Corporation and Pegasus jointly and severally represent and warrant to the
Employee, with the intent that Employee shall rely on such representations and
warranties in entering into this Agreement, as follows:
1. The common shares of Pegasus are listed for trading on the Toronto Stock
Exchange, Montreal Exchange and American Stock Exchange.
2. The financial statements, reports, and other information provided by the
Corporation, Pegasus and their respective officers and employees, both
orally and in writing, constitute complete and accurate disclosures of the
status of the affairs of Pegasus and the Corporation and the Corporation
and Pegasus do not know of any other information which, if disclosed to the
Employee, might reasonably be expected to cause the Employee to refrain
from accepting employment with the Corporation or affect the value of
Pegasus' shares.
SECTION THIRTEEN
CONFIDENTIALITY
Employee 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 to
be the property of Corporation. For the purpose of this provision,
"Confidential Information" means information known to the Employee as a
consequence of his employment by Corporation and not generally known in the
industry in which the Corporation is engaged or not otherwise available to third
parties from sources unrelated to or controlled by Corporation.
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Robert A. Lonergan
<PAGE>
SECTION FOURTEEN
SUPERSEDING EFFECT
This Agreement replaces and supersedes the Employment Agreement dated as of June
30, 1995 and the Amendment to that Agreement dated October 15, 1997 among the
parties relating to Employee's employment.
IN WITNESS WHEREOF, the parties have executed this Agreement at Spokane,
Washington as of the day and year first above written.
PEGASUS GOLD CORPORATION
By
------------------------------------------------
Its PRESIDENT AND CHIEF EXECUTIVE OFFICER
-----------------------------------------------
PEGASUS GOLD INC.
By
------------------------------------------------
Its President and Chief Executive Officer
-----------------------------------------------
EMPLOYEE:
By
------------------------------------------------
Name: Robert A. Lonergan
---------------------------------------------
Address: 14712 East 48TH Lane
------------------------------------------
City, State: Veradale, WA
--------------------------------------
Zip Code: 99037
-----------------------------------------
Telephone Number: 509.927.7772
---------------------------------
SS#: ###-##-####
----------------------------------------------
DESIGNATION OF BENEFICIARY
On this 15th day of November, 1997, Employee hereby designates Marsha Lonergan,
his wife, as his beneficiary for purposes of receiving, upon his death,
compensation and benefits under Section Six, Paragraph 3, hereof.
By
------------------------------------------------
Robert A. Lonergan
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Employment Agreement - 10 -
Robert A. Lonergan
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is dated as of November 15, 1997, ("Effective Date"). The
parties to this Agreement ("Parties") are PEGASUS GOLD INC., a British Columbia
company with its principal office in Spokane, Washington ("Pegasus"), PEGASUS
GOLD CORPORATION, a Nevada corporation with its principal office in Spokane,
Washington (the "Corporation") (collectively "Company"), and WERNER G. NENNECKER
of Spokane, Washington ("Executive").
RECITALS
A. Executive is presently the President and Chief Executive Officer of Pegasus
and the Corporation. The Parties desire to define and set forth the
current duties and responsibilities of Executive in all his capacities with
Company;
B. In consideration of Executive's agreement to remain in the employ of
Company for a period of twenty-four (24) months from the date hereof, and
further, in consideration of Executive's agreement to relocate, as
necessary and at the Company's expense, to any new Corporate headquarters
location regardless of where situated, and further, in consideration of
Company's desire to further induce Executive to continue active
participation in the business of Company; and
C. In consideration of the mutual promises, covenants, agreements and
undertakings contained in this Agreement, the Parties hereby contract and
agree as follows:
AGREEMENT
SECTION 1. EMPLOYMENT
1.1 SPECIFIC SERVICES. Company employs Executive as its President and Chief
Executive Officer and Executive hereby accepts such employment and agrees
to devote all of his efforts for the benefit of Company 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 President and Chief Executive Officer subject to the general
supervision of and pursuant to the orders, advice and direction of Pegasus'
Board of Directors (the "Board").
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Werner G. Nennecker
<PAGE>
1.2 ADDITIONAL SERVICES. Executive shall also render such other reasonable and
unrelated services and duties as may be assigned to him from time to time
by the Board and accepted by Executive.
SECTION 2. TERM OF EMPLOYMENT
The term of employment of Executive commenced December 1, 1992 pursuant to an
Employment Agreement dated as of January 29, 1993 and will continue under the
provisions of this Agreement as of the Effective Date until terminated as
provided in SECTION 5.
SECTION 3. COMPENSATION
3.1. SALARY. Unless and until Executive's employment with Company is terminated
pursuant to SECTION 5, Company will pay Executive, and Executive will
accept from Company, compensation at a minimum annual base salary, before
all customary and proper payroll deductions, of (currently) US$350,000.00,
prorated and payable semi-monthly or on such other basis as Parties may
hereafter agree. Such minimum compensation may be adjusted for merit or
other reasons as determined by the Board, or any Committee thereof having
such authority.
3.2 VACATION. Executive will be entitled to vacation periods in line with the
policies of Company applicable to exempt employees; PROVIDED, HOWEVER, that
Executive shall be entitled to a minimum paid vacation of five (5) weeks in
any calendar year. If Executive does not use all vacation days in any
calendar year, Executive will be permitted to carry over those vacation
days into subsequent years, consistent with Company policy.
3.3 DEFINITION OF ANNUAL SALARY. For purposes of this Agreement, the term
Annual Salary for any year means Executive's annual base salary, before all
customary and proper payroll deductions, plus 100 percent of his target
bonus (currently 80 percent of annual base salary) for such year, as such
amounts are established by resolution of the Board, or any Committee
thereof having such authority.
SECTION 4. OTHER BENEFITS
4.1 GENERAL. In addition to the compensation as provided in SECTION 3 hereof
and unless and until Executive's employment with Company is terminated
pursuant to SECTION 5, Company will at its expense provide Executive with
the following additional benefits:
(i) Availability and use of a Company automobile of a value of
approximately US$30,000.00;
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Werner G. Nennecker
<PAGE>
(ii) Disability Insurance sufficient to provide disability benefits in
an amount commensurate with Executive's salary and position, and
not materially inconsistent with other Company disability plans,
premiums for which are paid by the Company. For purposes of this
Agreement, "disability" means a condition of physical or mental
illness or impairment that renders Executive to be totally
incapable of performing full-time duties, which condition, as
diagnosed by a licensed medical doctor, is expected to continue
rendering Executive so incapable for the reasonably foreseeable
future.
(iii) Participation in all other of Company's benefit plans, including
medical, dental, vision, 401(k), pension, bonuses and any and all
other plans that may be made available to employees;
(iv) Parking in the building where Company's offices are located or, if
such parking is not available, near Company's offices;
(v) Assistance in annual tax preparation and estate planning;
(vi) Payment of dues in professional associations as may be required to
maintain Executive's membership in those associations and the
privilege of attending appropriate seminars, conferences and
educational programs as may be necessary;
(vii) Membership in one (1) country club and one (1) athletic club and
payment of dues for such memberships;
(viii) Reimbursement for all expenses incurred in connection with the
performance of services to Company, including entertainment and
travel and other expenses incidental to the duties undertaken
hereunder; PROVIDED, HOWEVER, that such expenses will be reasonable
and necessary and that Executive shall submit bills and vouchers
supporting requests for reimbursements in accordance with Company's
policies;
(ix) Appropriate office and staff assistance in Spokane, Washington,
which it is agreed shall be the place of principal employment
during the term of this Agreement;
(x) Such directors and officers liability insurance as may be available
to adequately provide both insurance coverage and reimbursement of
legal cost for any actions brought against Executive for any of his
activities for and on behalf of and while in the employment of,
Company; and
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Werner G. Nennecker
<PAGE>
(xi) An option to acquire 40,000 shares of Pegasus' common stock (which
option has already been granted) and any additional options which
from time to time may be granted.
4.2 LIFE INSURANCE. The Company shall purchase an insurance policy on the life
of Executive in an amount not less than three (3) times his Annual Salary
(as this term is defined in Section 3.3), with the beneficiary to be
designated by Executive. In the event Employee terminates his employment
with the Company for any reason other than death, the policy (along with
all obligations for subsequent premium payments, notifications and the
like) shall be assigned to Executive at the time of his termination at no
cost to Executive, but with no further obligation on the Company with
respect to the policy. To the extent such policy premium payments are
considered compensation to Executive, his salary shall be "grossed up" to
reimburse him for such personal income taxes as may be due on the value of
such premium payments.
SECTION 5. TERMINATION
Executive's employment with Company may be terminated as follows:
(i) By mutual agreement of the Parties;
(ii) Voluntarily by Executive (including retirement and including Good
Reason outside of a Change of Control, but other than for Good
Reason pursuant to a Change of Control, as those terms are defined
in SECTION 6.4), subject to the provisions of SECTION 6.1 and upon
at least three (3) months prior written notice of termination by
Executive to Company;
(iii) By Company without cause, subject to the provisions of SECTIONS 6.2
and 6.4 and upon at least three (3) months prior written notice of
termination by Company to Executive;
(iv) By Company for cause as that term is defined in SECTION 10, subject
to the provisions of SECTION 6.1;
(v) Immediately upon the death or disability of Executive, subject to
the provisions of SECTION 6.3; or
(vi) Immediately for Good Reason upon a Change of Control, subject to
the provisions of SECTION 6.4.
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Employment Agreement - 4 -
Werner G. Nennecker
<PAGE>
SECTION 6. SEVERANCE COMPENSATION
6.1. TERMINATION OF EXECUTIVE OR BY COMPANY FOR CAUSE. If Executive shall
voluntarily terminate his employment under this Agreement pursuant to
clause (i) of SECTION 5.1, or if the employment of Executive is
terminated by Company for cause (as defined in SECTION 10), then all
compensation and benefits as heretofore provided in SECTIONS 3 AND 4
will terminate immediately upon the effective date of such termination
and Executive will not be entitled to, and will not receive, any special
severance compensation from Company.
6.2. TERMINATION BY COMPANY WITHOUT CAUSE. If Company shall terminate
Executive's employment for any reason except cause (as defined in
SECTION 10) then, on the effective date for such termination, Company
will pay Executive, in one lump sum cash payment, an amount equal to
three (3) times Executive's Annual Salary (as defined in SECTION 3.3).
Additionally, Company will continue to provide Executive with the same
level of employee benefits, as if Executive were still an employee of
Company, for a period of two (2) years from the effective date of
Executive's employment termination or until better benefits are provided
to Executive by a new employer, whichever occurs first. All outstanding
stock options respecting Company stock held by Executive at the
effective date of termination will become immediately exercisable at
such time, regardless of any other vesting provision, and may continue
to be held and exercised by Executive in accordance with the remaining
terms of such options. Company also will provide Executive with
employment search assistance, by a firm mutually acceptable to Company
and the Executive, to secure comparable employment, and will pay the
cost of such assistance in an amount not to exceed US$25,000.00.
6.3 TERMINATION BY DEATH OR DISABILITY. If Executive dies or becomes
disabled before his employment is otherwise terminated, in addition to
payments otherwise provided through insurances under Section 4.1 (ii)
and 4.2, Company will immediately pay an amount of compensation equal to
six (6) months' Annual Salary (as defined in SECTION 3.3) as if
Executive had been terminated without cause and all employee benefits
theretofore provided to Executive will be continued for a period of one
(1) year from the date of death or disability as if Executive was still
an employee of Company. 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 Company; if no named
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.
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Employment Agreement - 5 -
Werner G. Nennecker
<PAGE>
6.3.1. CONSTRUCTIVE TERMINATION BY THIRD PARTIES 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 Company
may reasonably make the determination that Executive is unlikely to
return to his position. At that time, Company may elect to make payment
to Executive's designated beneficiary in accordance with SECTION 6.3
hereof.
6.4 TERMINATION FOLLOWING CHANGE OF CONTROL.
6.4.1. "CHANGE OF CONTROL." For purposes of this Agreement, a Change in
Control will be deemed to have occurred if:
(i) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity, or any
syndicate or group deemed to be a person under Section 14(d)(2)
of the Exchange Act of 1934 (the "Exchange Act"), other than
Pegasus is or becomes the "beneficial owner" (as defined in Rule
13d-3 of the General Rules and Regulations under the Exchange
Act), directly or indirectly, of securities of the Pegasus, or of
the Corporation, representing 25 percent or more of the combined
voting power of the then outstanding securities entitled to vote
in the election of directors of Pegasus, or of the Corporation,
as the case may be; or
(ii) during any period of two (2) consecutive years (not including any
period prior to the Effective Date of this Agreement),
individuals who at the beginning of such period constituted the
Board and any new directors, whose election by the Board or
nomination for election by the shareholders of Pegasus, or of the
Corporation, as the case may be, was approved by a vote of at
least three quarters (3/4) of the directors then still in office
who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof; or
(iii) upon a sale of all or substantially all of the assets of the
Company.
6.4.2. SEVERANCE PAYMENT. Irrespective of any other provisions in this
Agreement regarding termination, if either of the events described above
constituting a Change in Control shall have occurred, upon the subsequent
termination of Executive's employment (unless such termination is because of
Executive's death or disability, by the Company for cause or by Executive other
than for Good Reason (as that term is defined in SECTION 6.4.3 below)) Executive
will be entitled to and will receive no later than the fifth (5th) day following
the date of termination a lump sum severance payment
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Employment Agreement - 6 -
Werner G. Nennecker
<PAGE>
equal to three (3) times Executive's then current Annual Salary (as defined in
SECTION 3.3). In addition, all benefits then applicable to Executive shall be
continued for a period of thirty-six (36) months.
6.4.3. "GOOD REASON." For purposes of this Agreement, the term "Good Reason"
means, without Executive's express written consent, any of the following:
(i) the assignment to Executive of any duties inconsistent with
Executive's status as President and Chief Executive Officer of
Company, or Executive's removal from such position, or a
substantial alteration in the nature or status of Executive's
responsibilities from those in effect immediately prior to the
Change in Control;
(ii) a reduction by Company in Executive's Annual Salary as in effect
on the date hereof or as the same may have been increased from
time to time or a failure by Company to increase Executive's
salary at a rate commensurate with that of other key executives
of Company;
(iii) the relocation of the office of Company where Executive is
employed at the time of the Change in Control (the "CIC
Location") to a location more than fifty (50) miles away from the
CIC Location or the Company's requiring Executive to be based
more than fifty (50) miles away from the CIC Location (except for
required travel on the Company's business to an extent
substantially consistent with Executive's business travel
obligations just prior to the Change in Control);
(iv) the failure by Company to continue to provide Executive with
benefits at least as favorable as those enjoyed by Executive
under any of Company's life insurance, medical, health and
accident, disability, deferred compensation, pension, or savings
plans in which Executive was participating at the time of the
Change in Control, the taking of any action by Company 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 Company to provide Executive with the number of paid
vacation days to which Executive has been entitled at the time of
the Change in Control; or
(v) the failure of Company to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement or,
if the business of Company for which Executive's services are
principally performed is sold at any time after a Change in
Control, the purchaser of such business shall fail to agree to
provide Executive with the same or a
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Employment Agreement - 7 -
Werner G. Nennecker
<PAGE>
comparable position, duties, salary and benefits as provided to
Executive by Company immediately prior to the Change in Control.
6.4.4. ADDITIONAL BENEFITS. In the event of termination of Executive's
employment upon a Change in Control (as defined in SECTION 6.4.1), either by
Company without cause or by Executive for Good Reason (as defined in SECTION
6.4.3), and in addition to the severance payment provided in SECTION 6.4.2.,
Executive shall be entitled to the following:
(i) Employment search assistance to secure other comparable
employment, for a period not to exceed one (1) year or until such
comparable employment is found, whichever is the sooner, with the
fees for such assistance paid by the Corporation;
(ii) Protection for the sale of Executive's residence in an amount
equal to the difference between (A) the sales price net of all
selling expenses and (B) the sum of the original purchase price,
plus major improvements; and
(iii) Payment of the cost of a one time move to a new location in the
event such a move becomes necessary in order for Executive to
accept new employment.
6.4.5. ADDITIONAL PAYMENTS. If as a result of the payment to Executive of any
benefit under SECTION 6.4, Executive shall be obligated to pay any excise tax
under Section 4999 of the Internal Revenue Code, or any successor provision or
similar provision of federal, state or local tax law relating to changes in
control, Company will pay to Executive within ten (10) days after a written
demand therefor, the amount of such excise tax, plus the amount of all federal,
state and local income taxes payable on such excise tax and on such income tax,
applying Executive's marginal income tax rates. If Company has made such
payments and subsequently Executive shall become entitled to a refund of any
excise tax, or income tax payable with respect to such excise tax (or income tax
on such income tax), Executive will pay, within ten (10) days after receipt of
such refund, the amount of such refund to Company, together with interest at six
percent (6%) per annum from the date of receipt of such refund.
SECTION 7. NON-TRANSFERABILITY
This is a personal agreement. None of 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 to assignment by operation of law. Any attempt, voluntary or
involuntary, to effect any such action shall be null, void and of no effect.
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<PAGE>
SECTION 8. CHOICE OF LAW
It is the intention of the parties hereto 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 proceeding 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 of any other forum, without regard to the
jurisdiction in which any action or special proceeding may be instituted.
SECTION 9. BINDING EFFECT
This Agreement shall be binding upon and shall inure to the benefit of Company,
its successors or assigns, and to Executive, and his personal representatives,
heirs, executors and administrators.
SECTION 10. DEFINITION OF CAUSE.
10.1. DEFINITION OF CAUSE. For purposes of this Agreement, the term "cause,"
when used as a basis for Company to terminate the Executive's employment
means (i) the willful and continued failure by Executive to
substantially perform his duties, after demand for substantial
performance is delivered by Company that specifically identifies the
manner in which the Company believes Executive has not substantially
performed his duties, (ii) the willful engagement by Executive in
misconduct that is materially injurious to Company, monetarily or
otherwise, or (iii) the willful violation by Executive of the provisions
of this Agreement.
10.2 NOTICE OF TERMINATION. Notwithstanding the foregoing, Executive will
not be deemed to have been terminated for cause unless there shall have
been delivered to Executive a copy of a notice of termination from
Company and, after reasonable written notice, Executive and his counsel
have been given an opportunity to be heard by the Board and thereafter a
resolution is duly adopted by the directors of Pegasus then in office to
the effect that, in the good faith opinion of such directors, the
Executive was guilty of conduct set forth above, which resolution shall
set forth in detail the facts and circumstances claimed to provide a
basis for termination of employment under the provisions so indicated.
SECTION 11. DIRECTORSHIPS
Executive shall be entitled to accept positions as director of other
corporations, whether such corporations are engaged in the mining industry or
not, provided Executive's
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Employment Agreement - 9 -
Werner G. Nennecker
<PAGE>
proposed service as such director is first approved by Company, which approval
shall not be unreasonably withheld.
SECTION 12. REPRESENTATIONS
Pegasus and the Corporation jointly and severally represent and warrant to the
Executive, with the intent that Executive shall rely on such representations and
warranties in entering into this Agreement, as follows:
(i) The common shares of Pegasus are listed for trading on the
Toronto Stock Exchange, Montreal Exchange and American Stock
Exchange; and
(ii) The financial statements, reports, and other information provided
by Company and their respective officers and employees, both
orally and in writing, constitute fair and accurate disclosures
of the status of the affairs of Company, and Company do not know
of any other information which, if disclosed to the Executive,
might reasonably be expected to cause Executive to refrain from
accepting employment with Company or affect the value of Pegasus'
shares.
SECTION 13. CONFIDENTIALITY
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 to
be the property of Company. For the purpose of this provision, the term
"Confidential Information" means information known to Executive as a consequence
of his employment by Company and not generally known in the industry in which
Company is engaged or not otherwise available to third parties from sources
unrelated to or controlled by Company.
SECTION 14. SUPERSEDING EFFECT
This Agreement replaces and supersedes the Employment Agreement dated as of
January 29, 1993 and the Executive Employment Agreement dated July 29, 1996
among the parties relating to Executive's employment.
- --------------------------------------------------------------------------------
Employment Agreement - 10 -
Werner G. Nennecker
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Spokane,
Washington as of the day and year first above written.
PEGASUS GOLD INC.
By
-------------------------------------------
Fred C. Schulte, Chairman of the Board
By
-------------------------------------------
Robert A. Lonergan, Senior Vice President,
General Counsel and Secretary
PEGASUS GOLD CORPORATION
By
-------------------------------------------
Robert A. Lonergan, Senior Vice President,
General Counsel and Secretary
EXECUTIVE:
By
-------------------------------------------
Name: WERNER G. NENNECKER
----------------------------------------
Address: 601 WEST FIRST AVENUE, SUITE 1500
-------------------------------------
City, State: SPOKANE, WASHINGTON 99204
---------------------------------
Telephone Number: 509/625-3521
----------------------------
SS#: ###-##-####
-----------------------------------------
DESIGNATION OF BENEFICIARY
On this 15th day of November, 1997, Executive hereby designates Karen Nennecker,
his wife, as his beneficiary for purposes of receiving, upon his death,
compensation and benefits under SECTION 6.3, hereof.
By
--------------------------------------
Werner G. Nennecker
- --------------------------------------------------------------------------------
Employment Agreement - 11 -
Werner G. Nennecker
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 15th day of November, 1997, effective the first
day of the term hereof, between PEGASUS GOLD CORPORATION, a Nevada corporation
with its principal office in Spokane, Washington, herein referred to as the
"Corporation", PEGASUS GOLD INC., a British Columbia corporation with its
principal in office Spokane, Washington, herein referred to as "Pegasus," and
MICHAEL L. CLARK of Hayden Lake, Idaho, herein referred to as the "Employee."
In consideration of the mutual covenants and benefits as herein set forth, the
parties hereto agree as follows:
SECTION ONE
EMPLOYMENT
The Corporation hereby employs the Employee as its Senior Vice President and
Chief Operating Officer and the Employee 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. Employee shall
perform the duties of Senior Vice President and Chief Operating Officer subject
to the general supervision of and pursuant to the orders, advice and direction
of the President and Chief Executive Officer of the Corporation.
Employee shall also render such other reasonable and unrelated services and
duties as may be assigned to him from time to time by the President and Chief
Executive of the Corporation and accepted by the Employee.
Employee further agrees to remain in the employ of the Corporation for a period
of twenty-four months from the date hereof.
Employee further agrees to relocate, as necessary and at the Corporation's
expense, to any new corporate headquarters location, regardless of where
situated.
-1-
<PAGE>
SECTION TWO
TERM OF EMPLOYMENT
The term of employment under this Agreement shall commence November 15, 1997 and
shall continue thereafter until terminated as hereinafter provided.
SECTION THREE
COMPENSATION
The Corporation shall pay Employee, and the Employee shall accept from the
Corporation, compensation at the minimum rate of U.S.$265,000.00 per year,
prorated and payable semi-monthly or on such other basis as the parties may
hereafter agree. Such minimum compensation may be adjusted for merit or other
raises as from time to time determined by the President or the Board of
Directors or any Committee thereof having such authority. Employee shall be
entitled to vacation periods in line with the policies of the Corporation
applicable to exempt employees; provided, however, that the Employee shall be
entitled to a minimum paid vacation of four (4) weeks in any calendar year.
SECTION FOUR
OTHER BENEFITS
In addition to the compensation as provided in the previous Section Three
hereof, Corporation shall at its expense provide for Employee the following
additional benefits:
1. An allowance of not to exceed Five Hundred Fifty Dollars ($550.00) per
month to acquire and operate a current model automobile for business and
personal use. Said allowance may be adjusted if the cost to acquire and
operate increases.
2. Insurance on the life of Employee in an amount not less than two (2) times
his annual salary compensation, with proceeds thereof upon Employee's death
to be payable to Employee's named beneficiary less the amount of the last
annual premium paid therefor.
- --------------------------------------------------------------------------------
Employment Agreement -2-
Michael L. Clark
<PAGE>
3. Participation in all of Corporation's benefit plans, including medical,
dental, vision, 401(k), pension, disability, bonuses (current target amount
is 50 percent of annual base salary) and any and all other plans that may
be made available to employees; medical, dental and vision insurance shall
be effective on the first day of the term hereof.
4. Monthly parking allowance in accordance with corporate policy.
5. Assistance in annual tax preparation and estate planning.
6. Payment of dues in professional associations as may be required to maintain
Employee's membership in those associations and the privilege of attending
appropriate seminars, conferences and educational programs as may be
necessary.
7. Family membership in an athletic club and payment of dues for such
membership.
8. Reimbursement for all expenses incurred in connection with the performance
of services to the Corporation, including entertainment and travel and
other expenses incidental to the duties undertaken hereunder; provided,
however, that such expenses shall be reasonable and necessary and that
Employee shall submit bills and vouchers supporting requests for
reimbursements in accord with Corporation's policies.
9. Appropriate office and staff assistance in Spokane, Washington which it is
agreed shall be the place of principal employment during the term of this
Agreement.
10. Such directors and officers liability insurance as may be available to
adequately provide both insurance coverage and reimbursement of legal costs
for any actions brought against the Employee for any of his activities in
the employment of the Corporation.
- --------------------------------------------------------------------------------
Employment Agreement -3-
Michael L. Clark
<PAGE>
SECTION FIVE
TERMINATION
This Agreement will terminate or may be terminated for any one of the following
reasons:
1. Voluntarily and without cause, subject to Sections Two and Six (2), upon at
least three (3) months prior written notice of termination by Corporation
to the Employee or by the Employee to the Corporation; or
2. By the Corporation for cause as hereinafter defined in Section Ten; or
3. Upon the death or disability of Employee; or
4. Upon a Change of Control; or
5. Upon retirement.
SECTION SIX
SEVERANCE COMPENSATION
1. TERMINATION BY EMPLOYEE OR BY CORPORATION WITH CAUSE. If Employee shall
voluntarily terminate his employment under this Agreement pursuant to
Section 5(1) or if the employment of the Employee is terminated by the
Corporation for cause, then all compensation and benefits as heretofore
provided in Sections 3 and 4 shall terminate immediately upon the effective
date of termination and no special severance compensation will be paid.
2. TERMINATION BY CORPORATION WITHOUT CAUSE. If, on or after the effective
date of this Agreement, but prior to May 1, 1998, the Corporation shall
terminate this Agreement for any reason except cause as defined in Section
Ten, then upon the effective date of termination the Corporation shall pay
Employee an amount equal to twelve (12) months' salary; after April 30,
1998, if the Corporation shall terminate this Agreement for any reason
except cause as defined in Section Ten, then upon the effective date of
termination the Corporation shall pay to Employee an amount equal to
twenty-four (24) months' salary. The amount shall be paid in one lump sum
on the date the Employee's services terminate. All Employee benefits
provided to the Employee shall be continued as if the Employee were still
an employee of the Corporation for a period of one (1) year
- --------------------------------------------------------------------------------
Employment Agreement -4-
Michael L. Clark
<PAGE>
from the date of termination, or, when equal or better benefits are
provided by a new employer, whichever shall first occur. In the event
Employee has existing stock options on the date of termination, they will
be honored in accordance with the terms of said options.
3. TERMINATION BY DEATH OR DISABILITY. If Employee dies or becomes disabled
before his employment is otherwise terminated, the Corporation shall
immediately pay an amount of compensation equal to six (6) months' salary
as if Employee had been terminated without cause and all employee benefits
theretofore provided to Employee shall be continued for a period of one (1)
year from the date of death or disability as if Employee was still an
employee of the Corporation. If such termination is due to Employee's
death, payment shall be made in one lump sum to his beneficiary, to be
named in writing by Employee on signing this Agreement, which designation
may be changed at any time by written notice signed by Employee and
delivered to the Secretary of the Corporation; if no named beneficiary
survives Employee, the entire amount shall be paid to his estate. If such
termination is due to Employee's disability, payment shall be made in one
lump sum to Employee. Said compensation shall be in addition to that
payable from any insurance coverage providing compensation upon Death or
Disability. "Disability" in this Agreement shall mean a condition of
physical or mental illness causing Employee to be totally incapable of
performing full-time duties.
4. TERMINATION FOLLOWING CHANGE OF CONTROL
(a) For purposes of this Agreement, a Change in Control shall be deemed to
have occurred if (A) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, or
any syndicate or group deemed to be a person under Section 14(d)(2) of
the Exchange Act, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the
Corporation's then outstanding securities entitled to vote in the
election of directors of the Corporation; or (B) during any period of
two (2) consecutive years (not including any period prior to the
effective date of this Agreement), individuals who at the beginning of
such period constituted the Board and any new directors, whose
election by the Board or nomination for election by the Corporation's
stockholders was approved by a vote of at least three quarters (3/4)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a
majority
- --------------------------------------------------------------------------------
Employment Agreement -5-
Michael L. Clark
<PAGE>
thereof; or (C), upon a sale of all or substantially all of the assets of
the Corporation.
(b) Irrespective of any other provisions in this Agreement regarding
termination, if either of the events described above constituting a
Change in Control shall have occurred, upon the subsequent termination
of Employee's employment (unless such termination is because of
Employee's death or disability, by the Corporation for cause or by
Employee other than for "Good Reason") Employee shall be entitled to
and will receive no later than the fifth (5th) day following the date
of termination a lump sum severance payment equal to two and one half
(2-1/2) times Employee's then current annual base salary. In
addition, all benefits then applicable to Employee shall be continued
for a period of twenty-four (24) months.
(c) Employee shall be entitled to terminate his employment for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean,
without Employee's express written consent, any of the following:
(i) the assignment to Employee of any duties inconsistent with
Employee's status as Senior Vice President and Chief Operating
Officer of the Corporation, or Employee's removal from such
position, or a substantial alteration in the nature or status
of Employee's responsibilities from those in effect immediately
prior to the Change in Control;
(ii) a reduction by the Corporation in Employee's annual base salary
as in effect on the date hereof or as the same may have been
increased from time to time or a failure by the Corporation to
increase Employee's salary at a rate commensurate with that of
other key executives of the Corporation;
(iii) the relocation of the office of the Corporation where Employee
is employed at the time of the Change in Control (the "CIC
Location") to a location more than fifty (50) miles away from
the CIC Location or the Corporation's requiring Employee 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 Employee's business travel
obligations just prior to the Change in Control);
(iv) the failure by the Corporation to continue to provide Employee
with benefits at least as favorable as those enjoyed by
Employee under
- --------------------------------------------------------------------------------
Employment Agreement -6-
Michael L. Clark
<PAGE>
any of the Corporation's life insurance, medical, health and
accident, disability, deferred compensation, pension, or
savings plans in which Employee 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 Employee of any material
fringe benefit enjoyed by Employee at the time of the Change in
Control, or the failure by the Corporation to provide Employee
with the number of paid vacation days to which Employee is
entitled on the basis of years of service with the Corporation
in accordance with the Corporation's normal vacation policy in
effect at the time of the Change in Control; or
(v) the failure of the Corporation to obtain a satisfactory
agreement from any successor to assume and agree to perform
this Agreement or, if the business of the Corporation for which
Employee's services are principally performed is sold at any
time after a Change in Control, the purchaser of such business
shall fail to agree to provide Employee with the same or a
comparable position, duties, salary and benefits as provided to
Employee by the Corporation immediately prior to the Change in
Control.
(d) In the event of termination of Employee by reason of either a Change
in Control or for "Good Reason" as herein defined then, in addition to
the severance payment as provided in paragraph 4(b) hereof, Employee
shall be entitled to the following:
(i) Employment search assistance to secure other comparable
employment for a period not to exceed one (1) year or until
such comparable employment is found, whichever is the sooner,
with the fees for such assistance paid by the Corporation;
(ii) Protection for the sale of Employee's residence in the amount
of the original purchase price, plus major improvements, or the
net realized therefrom; and
(iii) Payment of the cost of a one time move to a new location in the
event such a move becomes necessary in order for Employee to
accept new employment.
- --------------------------------------------------------------------------------
Employment Agreement -7-
Michael L. Clark
<PAGE>
5. LIMITATION ON PAYMENTS. Payments under this Section Six shall not exceed
2.99 times "base amount" of salary as defined in Section 280 (G) of the
Internal Revenue Code of 1986, as amended.
SECTION SEVEN
NON-TRANSFERABILITY
This is a personal agreement. None of Employee'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 to 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
CHOICE OF LAW
It is the intention of the parties hereto 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 arbitration, action, special proceeding 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 of any other forum, without regard to
the jurisdiction in which any action or special proceeding may be instituted.
SECTION NINE
ARBITRATION
In the event of any dispute between the parties relating to or arising out of
this Agreement, the parties shall first attempt to resolve the dispute by
negotiating in good faith. If the dispute is not resolved within 60 days after
the commencement of negotiations in accordance with the immediately preceding
sentence, then either party shall have the right to submit the dispute to
binding arbitration administered in accordance with the Rules of the American
Arbitration Association. Any arbitrator shall be required to follow Washington
State law and precedent and shall be required to
- --------------------------------------------------------------------------------
Employment Agreement -8-
Michael L. Clark
<PAGE>
issue detailed findings of fact and conclusions of law. The arbitrator shall
award reasonable attorney's fees and costs to the prevailing party. Judgment on
the arbitration award may be entered in any court having jurisdiction in the
United States. If the arbitration award is challenged in a court of law, the
court shall apply the same standard of review that a Washington State appellate
court applies to the review of a decision by a Washington State trial court.
SECTION TEN
BINDING EFFECT
This Agreement shall be binding upon and shall inure to the benefit of the
Corporation, its successors or assigns, and to Employee, and his personal
representatives, heirs, executors and administrators.
SECTION ELEVEN
DEFINITION OF CAUSE
Cause to terminate the Employee's employment shall mean (a) the willful and
continued failure by the Employee to substantially perform his duties, after
demand for substantial performance is delivered by the Corporation that
specifically identifies the manner in which the Corporation believes the
Employee has not substantially performed his duties, or (b) the willful
engagement by the Employee in misconduct which is materially injurious to the
Corporation, monetarily or otherwise, or (c) the willful violation by the
Employee of the provisions of this Employment Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless there shall have been delivered to the Employee a
copy of a notice of termination from the Corporation and, after reasonable
written notice, Employee and his counsel have been given an opportunity to be
heard by the Board of Directors of the Corporation and thereafter a resolution
has been duly adopted by the Directors of the Corporation then in office to the
effect that, in the good faith opinion of such Directors, the Employee was
guilty of conduct set forth above, which resolution shall set forth in
particular detail the facts and circumstances claimed to provide a basis for
termination of employment under the provisions so indicated.
- --------------------------------------------------------------------------------
Employment Agreement -9-
Michael L. Clark
<PAGE>
SECTION TWELVE
DIRECTORSHIPS
The Employee shall be entitled to accept positions as director of other
corporations, whether such corporations are engaged in the mining industry or
not, provided any such directorship is first approved by the Corporation, which
approval shall not be unreasonably withheld.
SECTION THIRTEEN
REPRESENTATIONS
The Corporation and Pegasus jointly and severally represent and warrant to the
Employee, with the intent that Employee shall rely on such representations and
warranties in entering into this Agreement, as follows:
1. The common shares of Pegasus are listed for trading on the Toronto Stock
Exchange, Montreal Exchange and American Stock Exchange.
2. The financial statements, reports, and other information provided by the
Corporation, Pegasus and their respective officers and employees, both
orally and in writing, constitute complete and accurate disclosures of the
status of the affairs of Pegasus and the Corporation and the Corporation
and Pegasus do not know of any other information which, if disclosed to the
Employee, might reasonably be expected to cause the Employee to refrain
from accepting employment with the Corporation or affect the value of
Pegasus' shares.
SECTION FOURTEEN
CONFIDENTIALITY
Employee 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 to
be the property of Corporation. For the purpose of this provision,
"Confidential Information" means information known to the Employee as a
consequence of his employment by Corporation and not generally known in the
industry in which the Corporation is engaged or not otherwise available to third
parties from sources unrelated to or controlled by Corporation.
- --------------------------------------------------------------------------------
Employment Agreement -10-
Michael L. Clark
<PAGE>
SECTION FIFTEEN
SUPERSEDING EFFECT
This Agreement replaces and supersedes the Employment Agreement dated as of the
1st of May, 1997 among the parties relating to Employee's employment.
IN WITNESS WHEREOF, the parties have executed this Agreement at Spokane,
Washington as of the day and year first above written.
PEGASUS GOLD CORPORATION
By
-------------------------------------------
Its President and Chief Executive Officer
------------------------------------------
PEGASUS GOLD INC.
By
-------------------------------------------
Its President and Chief Executive Officer
------------------------------------------
EMPLOYEE:
By
-------------------------------------------
Name: Michael L. Clark
----------------------------------------
Address: 4439 Lower Hayden Lake Road
-------------------------------------
City, State: Hayden Lake, ID
---------------------------------
Zip Code: 83835
------------------------------------
Telephone Number: 208/772-4145
----------------------------
SS#: ###-##-####
-----------------------------------------
DESIGNATION OF BENEFICIARY
On this 15th day of November, 1997, Employee hereby designates Helena B. Clark,
his wife, as his beneficiary for purposes of receiving, upon his death,
compensation and benefits under Section Six, Paragraph 3, hereof.
By
-------------------------------------------
Michael L. Clark
- --------------------------------------------------------------------------------
Employment Agreement -11-
Michael L. Clark
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 26th day of November, 1997, effective the first
day of the term hereof, among PEGASUS GOLD CORPORATION, a Nevada corporation
with its principal office in Spokane, Washington, herein referred to as the
"Corporation," PEGASUS GOLD INC., a British Columbia corporation with its
principal office in Spokane, Washington, herein referred to as "Pegasus," and
MICHELLE G. VIAU of Spokane, Washington, herein referred to as the "Employee."
In consideration of the mutual covenants and benefits as herein set forth, the
parties hereto agree as follows:
SECTION ONE
EMPLOYMENT
The Corporation hereby employs the Employee as its Treasurer and the Employee
hereby agrees to continue to devote all of her efforts for the benefit of the
Corporation and to faithfully, industriously and, to the best of her ability,
experience and talents, perform all of her required and assigned duties.
Employee shall perform the duties of Treasurer subject to the general
supervision of and pursuant to the orders, advice and direction of the Chief
Financial Officer of the Corporation.
Employee shall also render such other reasonable and unrelated services and
duties as may be assigned to her from time to time by the Chief Financial
Officer of the Corporation and accepted by the Employee.
SECTION TWO
TERM OF EMPLOYMENT
The term of employment under this Agreement shall commence November 26, 1997 and
shall continue thereafter until terminated as hereinafter provided.
-1-
<PAGE>
SECTION THREE
COMPENSATION
The Corporation shall pay Employee, and the Employee shall accept from the
Corporation, compensation at the minimum rate of U.S.$150,000.00 per year,
prorated and payable semi-monthly or on such other basis as the parties may
hereafter agree. Such minimum compensation may be adjusted for merit or other
raises as from time to time determined by the President or the Board of
Directors or any Committee thereof having such authority. Employee shall be
entitled to vacation periods in line with the policies of the Corporation
applicable to exempt employees; provided, however, that the Employee shall be
entitled to a minimum paid vacation of four (4) weeks in any calendar year.
SECTION FOUR
OTHER BENEFITS
In addition to the compensation as provided in the previous Section Three
hereof, Corporation shall at its expense provide for Employee the following
additional benefits:
1. Participation in all of Corporation's benefit plans, including medical,
dental, vision, disability and any and all other similar plans that may be
made available to employees; medical, dental and vision insurance shall be
effective on the first day of the term hereof.
2. An allowance of not to exceed Four Hundred Twenty-Five Dollars ($425.00)
per month to acquire and operate a current model automobile for business
and personal use. Said allowance may be adjusted if the cost to acquire
and operate increases.
3. Monthly parking allowance in accordance with corporate policy.
4. Family membership at the Spokane Club and payment of dues for such
membership.
5. Reimbursement for all expenses incurred in connection with the performance
of services to the Corporation, including entertainment and travel and
other expenses incidental to the duties undertaken hereunder; provided,
however, that such expenses shall be reasonable and necessary and that
Employee shall
-2-
<PAGE>
submit bills and vouchers supporting requests for reimbursements in
accordance with the Corporation's policies.
6. Appropriate office and staff assistance in Spokane, Washington, which it is
agreed shall be the place of principal employment during the term of this
Agreement.
7. Such directors and officers liability insurance as may be available to
adequately provide both insurance coverage and reimbursement of legal costs
for any actions brought against the Employee for any of her activities in
the employment of the Corporation.
8. Participation in the Corporation's bonus plan and 401(k) plan.
SECTION FIVE
TERMINATION
This Agreement will terminate or may be terminated for any one of the following
reasons:
1. Voluntarily and without cause, subject to Sections Two and Six (2), upon at
least three (3) months prior written notice of termination by Corporation
to the Employee or by the Employee to the Corporation; or
2. By the Corporation for cause as hereinafter defined in Section Ten; or
3. Upon the death or disability of Employee; or
4. Upon a Change of Control; or
5. Upon retirement.
SECTION SIX
SEVERANCE COMPENSATION
1. TERMINATION BY EMPLOYEE OR BY CORPORATION WITH CAUSE. If Employee shall
voluntarily terminate her employment under this Agreement pursuant to
Section 5(1) or if the employment of the Employee is terminated by the
Corporation for
-3-
<PAGE>
cause, then all compensation and benefits as heretofore provided in
Sections 3 and 4 shall terminate immediately upon the effective date of
termination and no special severance compensation will be paid.
2. TERMINATION BY CORPORATION WITHOUT CAUSE. If, on or after the effective
date of this Agreement, the Corporation should terminate this Agreement for
any reason except cause as defined in Section Ten, then upon the effective
date of termination the Corporation shall pay to Employee an amount equal
to twenty-four (24) months' salary. The amount shall be paid in one lump
sum on the date the Employee's services terminate, and shall be secured by
an irrevocable letter of credit issued by a United States banking
institution, such letter of credit to be issued on or before the expiry of
thirty (30) days from the date hereof. Employee benefits provided to the
Employee under Section Four, paragraph 1 shall be continued as if the
Employee were still an employee of the Corporation for a period of one (1)
year from the date of termination or until equal or better benefits are
provided by a new employer, whichever shall first occur. In the event
Employee has existing stock options, they will be honored in accordance
with the terms of said options. Corporation shall also provide to Employee
employment search assistance by a firm mutually acceptable to Corporation
and Employee, to secure comparable employment, the cost of which shall not
exceed $25,000.00.
3. TERMINATION BY DEATH OR DISABILITY. If Employee dies or becomes disabled
before her employment is otherwise terminated, the Corporation shall
immediately pay an amount of compensation equal to six (6) months' salary
as if Employee had been terminated without cause and all employee benefits
under Section four, paragraphs 1 and 4 theretofore provided to Employee
shall be continued for a period of one (1) year from the date of death or
disability as if Employee were still an employee of the Corporation. If
such termination is due to Employee's death, payment shall be made in one
lump sum to her beneficiary, to be named in writing by Employee on signing
this Agreement, which designation may be changed at any time by written
notice signed by Employee and delivered to the Secretary of the
Corporation; if no named beneficiary survives Employee, the entire amount
shall be paid to her estate. If such termination is due to Employee's
disability, payment shall be made in one lump sum to Employee. Said
compensation shall be in addition to that payable from any insurance
coverage providing compensation upon Death or Disability. "Disability" in
this Agreement shall mean a condition of physical or mental illness causing
Employee to be totally incapable of performing full-time duties.
4. TERMINATION FOLLOWING CHANGE OF CONTROL
-4-
<PAGE>
(a) For purposes of this Agreement, a Change in Control shall be deemed to
have occurred if (A) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, or
any syndicate or group deemed to be a person under Section 14(d)(2) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), is
or becomes the "beneficial owner" (as defined in Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), directly or
indirectly, of securities of the Corporation representing 25% or more
of the combined voting power of the Corporation's then outstanding
securities entitled to vote in the election of directors of the
Corporation; or (B) during any period of two (2) consecutive years
(not including any period prior to the effective date of this
Agreement), individuals who at the beginning of such period
constituted the Board and any new directors, whose election by the
Board or nomination for election by the Corporation's stockholders was
approved by a vote of at least three quarters (3/4) of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof.
(b) Irrespective of any other provisions in this Agreement regarding
termination, if either of the events described above constituting a
Change in Control shall have occurred, upon the subsequent termination
of Employee's employment (unless such termination is because of
Employee's death or disability, by the Corporation for cause or by
Employee other than for "Good Reason") Employee shall be entitled to
and will receive no later than the fifth (5th) day following the date
of termination a lump sum severance payment equal to two and one half
(2-1/2) times Employee's then current annual base salary. In
addition, all benefits then applicable to Employee shall be continued
for a period of twenty-four (24) months.
(c) Employee shall be entitled to terminate her employment for Good
Reason. For purposes of this Agreement, "Good Reason" shall mean,
without Employee's express written consent, any of the following:
(i) the assignment to Employee of any duties inconsistent with
Employee's status as Treasurer of the Corporation, or
Employee's removal from such position, or a substantial
alteration in the nature or status of Employee's
responsibilities from those in effect immediately prior to the
Change in Control;
(ii) a reduction by the Corporation in Employee's annual base salary
as in effect on the date hereof or as the same may have been
-5-
<PAGE>
increased from time to time or a failure by the Corporation to
increase Employee's salary at a rate commensurate with that of
other key executives of the Corporation;
(iii) the relocation of the office of the Corporation where Employee
is employed at the time of the Change in Control (the "CIC
Location") to a location more than fifty (50) miles away from
the CIC Location or the Corporation's requiring Employee 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 Employee's business travel
obligations just prior to the Change in Control);
(iv) the failure by the Corporation to continue to provide Employee
with benefits at least as favorable as those enjoyed by
Employee under any of the Corporation's life insurance,
medical, health and accident, disability, deferred
compensation, or savings plans in which Employee 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
Employee of any material fringe benefit enjoyed by Employee at
the time of the Change in Control, or the failure by the
Corporation to provide Employee with the number of paid
vacation days to which Employee is entitled on the basis of
years of service with the Corporation in accordance with the
Corporation's normal vacation policy in effect at the time of
the Change in Control; or
(v) the failure of the Corporation to obtain a satisfactory
agreement from any successor to assume and agree to perform
this Agreement or, if the business of the Corporation for which
Employee's services are principally performed is sold at any
time after a Change in Control, the purchaser of such business
shall fail to agree to provide Employee with the same or a
comparable position, duties, salary and benefits as provided to
Employee by the Corporation immediately prior to the Change in
Control.
(d) In the event of termination of Employee by reason of either a Change
in Control or for "Good Reason" as herein defined then, in addition to
the severance payment as provided in paragraph 4(b) hereof, Employee
shall be entitled to the following:
-6-
<PAGE>
(i) Employment search assistance to secure other comparable
employment for a period not to exceed one (1) year or until
such comparable employment is found, whichever is the sooner,
with the fees for such assistance paid by the Corporation;
(ii) Protection for the sale of Employee's residence in the amount
of the original purchase price, plus major improvements, or the
net realized therefrom; and
(iii) Payment of the cost of a one time move to a new location in the
event such a move becomes necessary in order for Employee to
accept new employment.
SECTION SEVEN
NON-TRANSFERABILITY
This is a personal agreement. None of Employee'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 to 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
CHOICE OF LAW
It is the intention of the parties hereto 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 proceeding 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 of any other forum, without regard to the
jurisdiction in which any action or special proceeding may be instituted.
SECTION NINE
BINDING EFFECT
-7-
<PAGE>
This Agreement shall be binding upon and shall inure to the benefit of the
Corporation, its successors or assigns, and to Employee, and her personal
representatives, heirs, executors and administrators.
SECTION TEN
DEFINITION OF CAUSE
Cause to terminate the Employee's employment shall mean (a) the willful and
continued failure by the Employee to substantially perform her duties, after
demand for substantial performance is delivered by the Corporation that
specifically identifies the manner in which the Corporation believes the
Employee has not substantially performed her duties, or (b) the willful
engagement by the Employee in misconduct which is materially injurious to the
Corporation, monetarily or otherwise, or (c) the willful violation by the
Employee of the provisions of this Employment Agreement.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for cause unless there shall have been delivered to the Employee a
copy of a notice of termination from the Corporation and, after reasonable
written notice, Employee and her counsel have been given an opportunity to be
heard by the Board of Directors of the Corporation and thereafter a resolution
has been duly adopted by the Directors of the Corporation then in office to the
effect that, in the good faith opinion of such Directors, the Employee was
guilty of conduct set forth above, which resolution shall set forth in
particular detail the facts and circumstances claimed to provide a basis for
termination of employment under the provisions so indicated.
SECTION ELEVEN
DIRECTORSHIPS
The Employee shall be entitled to accept positions as director of other
corporations, whether such corporations are engaged in the mining industry or
not, provided any such directorship is first approved by the Corporation, which
approval shall not be unreasonably withheld.
SECTION TWELVE
REPRESENTATIONS
-8-
<PAGE>
The Corporation and Pegasus jointly and severally represent and warrant to the
Employee, with the intent that Employee shall rely on such representations and
warranties in entering into this Agreement, as follows:
1. The common shares of Pegasus are listed for trading on the Toronto Stock
Exchange, Montreal Exchange and American Stock Exchange.
2. The financial statements, reports, and other information provided by the
Corporation, Pegasus and their respective officers and employees, both
orally and in writing, constitute complete and accurate disclosures of the
status of the affairs of Pegasus and the Corporation and the Corporation
and Pegasus do not know of any other information which, if disclosed to the
Employee, might reasonably be expected to cause the Employee to refrain
from agreeing to continued employment with the Corporation or affect the
value of Pegasus' shares.
SECTION THIRTEEN
CONFIDENTIALITY
Employee agrees that, except as required for the performance of her duties,
obligations and responsibilities hereunder, she 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 her during the course of her employment
and all such Confidential Information shall be kept confidential and deemed to
be the property of Corporation. For the purpose of this provision,
"Confidential Information" means information known to the Employee as a
consequence of her employment by Corporation and not generally known in the
industry in which the Corporation is engaged or not otherwise available to third
parties from sources unrelated to or controlled by Corporation.
SECTION FOURTEEN
SUPERSEDING EFFECT
This Agreement replaces and supersedes any and all prior contracts,
understandings and agreements among the parties relating to Employee's
employment.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Spokane,
Washington as of the day and year first above written.
PEGASUS GOLD CORPORATION
By
-------------------------------------------
Its President and Chief Executive Officer
------------------------------------------
PEGASUS GOLD INC.
By
-------------------------------------------
Its President and Chief Executive Officer
------------------------------------------
EMPLOYEE:
By
-------------------------------------------
Name: Michelle G. Viau
----------------------------------------
Address: 3808 E. Sumac
-------------------------------------
City, State: Spokane, Washington
---------------------------------
Zip Code: 99223
------------------------------------
Telephone Number: 509.448.9848
----------------------------
SS#:
-----------------------------------------
DESIGNATION OF BENEFICIARY
On this _____ day of November, 1997, Employee hereby designates Carm Viau, her
spouse, as her beneficiary for purposes of receiving, upon her death,
compensation and benefits under Section Six, Paragraph 3, hereof.
By
-------------------------------------------
-10-
<PAGE>
EXHIBIT 11.1
PEGASUS GOLD INC.
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, except for share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BASIC:
Earnings:
Net loss applicable to primary earnings calculation. . . . . . . . . . . . . . . . . . . ($512,832) ($21,603) ($2,953)
--------- --------- ----------
--------- --------- ----------
Weighted-average number of shares outstanding, as
adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,345 40,567 34,702
--------- --------- ----------
--------- --------- ----------
Net loss per share - basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($12.40) ($0.53) ($0.08)
--------- --------- ----------
--------- --------- ----------
DILUTED:
Earnings:
Net loss applicable to primary earnings per share
calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($512,832) ($21,603) ($2,953)
--------- --------- ----------
Add:
Interest relating to 6.25% Convertible Subordinated
Notes, net of amount capitalized3, . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,594 241 2,686
Amortization of issuance costs relating to 6.25%
Convertible Subordinated Notes, net of amounts
capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 --- 362
--------- --------- ----------
Net income (loss) applicable to diluted earnings per share
calculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($508,978) ($21,362) $95
--------- --------- ----------
--------- --------- ----------
Weighted-average number of shares outstanding:
Common shares and equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,345 40,567 34,702
Additional shares outstanding assuming exercise of stock
options reduced by the number of shares which could
have been purchased with the proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . 31 194 269
Additional average shares outstanding assuming
conversion of 6.25% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . 7,709 7,709 5,782
--------- --------- ----------
Weighted-average number of shares outstanding, as
adjusted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,085 48,470 40,753
--------- --------- ----------
--------- --------- ----------
Net income (loss) per share - fully diluted (a). . . . . . . . . . . . . . . . . . . . . . ($10.37) ($0.44) $0.00
--------- --------- ----------
--------- --------- ----------
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
85
<PAGE>
EXHIBIT 21.1
PEGASUS GOLD INC.
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Place of Percent
Subsidiary Incorporation/Formation Owned
- ---------- ----------------------- -----
<S> <C> <C>
Pegasus Gold Corporation . . . . . . . . . . Nevada. . . . . . . . . . . . . . 100%
Zortman Mining, Inc. . . . . . . . . . . . . Montana . . . . . . . . . . . . . 100%
Florida Canyon Mining, Inc. . . . . . . . . Washington. . . . . . . . . . . . 100%
Montana Tunnels Mining, Inc. . . . . . . . . Nevada. . . . . . . . . . . . . . 100%
Pegasus Aviation Services, Inc.. . . . . . . Nevada. . . . . . . . . . . . . . 100%
Pegasus Gold International, Inc... . . . . . Washington. . . . . . . . . . . . 100%
Pegasus Gold Finance Corporation . . . . . . Nevada. . . . . . . . . . . . . . 100%
Pegasus Gold Montana Mining, Inc.. . . . . . Arizona . . . . . . . . . . . . . 100%
Beal Mountain Mining, Inc. . . . . . . . . . Montana . . . . . . . . . . . . . 100%
Black Pine Mining, Inc.. . . . . . . . . . . Nevada. . . . . . . . . . . . . . 100%
Pangea International Holdings Corporation. . Nevada. . . . . . . . . . . . . . 100%
Pangea Explorations, Inc. . . . . . . . . . Arizona . . . . . . . . . . . . . 100%
Pangea Minerals, Inc.. . . . . . . . . . . . Nevada. . . . . . . . . . . . . . 100%
Pangea Resource Explorations, Inc... . . . . Nevada. . . . . . . . . . . . . . 100%
Pangea Gold Corporation. . . . . . . . . . . Nevada. . . . . . . . . . . . . . 100%
Hippocrene Holdings NV . . . . . . . . . . . The Netherlands Antilles. . . . . 100%
Pegasus Gold Australia Pty Ltd.. . . . . . . Northern Territory, Australia . . 100%
Pegasus Gold Australia Holdings Ltd. . . . . Victoria, Australia . . . . . . . 100%
Pegasus Gold Financing, L.L.C. . . . . . . . Delaware . . . . . . . . . . . . 100%
POV Corporation. . . . . . . . . . . . . . . Delaware. . . . . . . . . . . . . 100%
Pegasus Minera de Chile Ltda.. . . . . . . . Chile . . . . . . . . . . . . . . 100%
Diamond Hill Mining, Inc.. . . . . . . . . . Montana . . . . . . . . . . . . . 100%
Pegasus do Brasil Mineraco Ltda. . . . . . . Brazil. . . . . . . . . . . . . . 100%
Minera Pegasus de Panama, S.A. . . . . . . . Panama. . . . . . . . . . . . . . 100%
</TABLE>
86
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-8 (Amended and Restated Employee Savings Plan of Pegasus Gold
Corporation, File #33-98968) of our report dated March 27, 1998, on our
audits of the consolidated financial statements and financial statement
schedules of Pegasus Gold, Inc. as at 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
- ---------------------
Chartered Accountants
Vancouver, B.C., Canada
May 20, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DEC-31-1997 AND THE RELATED STATEMENTS
OF INCOME AND CASH FLOWS FOR THE 12-MONTH PERIOD THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,638
<SECURITIES> 0
<RECEIVABLES> 18,766
<ALLOWANCES> 0
<INVENTORY> 25,086
<CURRENT-ASSETS> 108,191
<PP&E> 84,700
<DEPRECIATION> 0
<TOTAL-ASSETS> 201,722
<CURRENT-LIABILITIES> 244,956
<BONDS> 0
0
0
<COMMON> 428,810
<OTHER-SE> (584,587)
<TOTAL-LIABILITY-AND-EQUITY> 201,722
<SALES> 226,463
<TOTAL-REVENUES> 226,463
<CGS> 176,324
<TOTAL-COSTS> 225,738
<OTHER-EXPENSES> 73,775
<LOSS-PROVISION> 531,359
<INTEREST-EXPENSE> 9,410
<INCOME-PRETAX> (557,434)
<INCOME-TAX> (44,602)
<INCOME-CONTINUING> (512,832)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (512,832)
<EPS-PRIMARY> (12.40)
<EPS-DILUTED> (12.40)
</TABLE>
