<PAGE>
HANOVER GOLD COMPANY, INC.
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 31, 1996
------------------------
To the stockholders of Hanover Gold Company, Inc.:
A special meeting ("Special Meeting") of stockholders of Hanover Gold
Company, Inc. a Delaware corporation, (the "Company"), will be held at 11:00
a.m. (Pacific Time) on Monday, July 31, 1996 at the offices of N.A. Degerstrom,
Inc., North 3303 Sullivan Road, Spokane, Washington 99216, for the following
purposes:
1. To approve the merger into the Company of Hanover Resources, Inc. and
Group S Limited, each of which is affiliated with the Company, pursuant to which
the Company will issue to the stockholders of such companies a total of
2,270,486 shares of the Company's common stock, in addition to the 3,625,000
shares of the Company held by Hanover Resources, Inc. which will, in effect, be
distributed to the stockholders of Hanover Resources, Inc.;
2. To amend the Company's certificate of incorporation to increase the
authorized capital stock of the Company from 25,000,000 shares to 50,000,000
shares, consisting of 48,000,000 shares of common stock, par value $.0001 per
share, and 2,000,000 shares of preferred stock, par value $.001 per share,
issuable in one or more series with such designations, rights, preferences and
limitations as the Board of Directors of the Company may from time to time
determine;
3. To consider and approve the Company's 1995 Stock Option Plan;
4. To elect seven members to the Board of Directors to hold office until
the next annual meeting of stockholders and until their respective successors
are duly elected and have qualified;
5. To authorize the appointment of BDO Seidman, Spokane, Washington, as the
independent public accountants of the Company for the fiscal year ending
December 31, 1996; and
6. To consider and vote upon such other matters as may properly come before
the meeting and any adjournment(s) thereof. Proxies voting against the merger
proposal may not be used by management to vote for the adjournment of the
meeting in order to solicit additional votes for the merger.
Only stockholders of record at the close of business on June 28, 1996, are
entitled to receive notice of and to vote at the Special Meeting.
The Board of Directors of the Company extends a cordial invitation to all
stockholders to attend the Special Meeting in person. Whether or not you plan to
attend the meeting, please fill in, date, sign and mail the enclosed proxy in
the return envelope as promptly as possible. Your proxy may be revoked by you at
any time prior to the meeting. The prompt return of your completed proxy will
assist the Company in obtaining a quorum of stockholders for the Special
Meeting, but will not affect your ability to change your vote by subsequent
proxy or by attending the meeting and voting in person. If you are unable to
attend, your signed proxy will assure that your vote is counted.
By Order of the Board of Directors
Wayne Schoonmaker,
SECRETARY
June , 1996
<PAGE>
HANOVER GOLD COMPANY, INC.
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
------------------------
PROXY STATEMENT
---------------------
SPECIAL MEETING OF STOCKHOLDERS
JULY 31, 1996
------------------------
This Proxy Statement is furnished to the stockholders of Hanover Gold
Company, Inc., a Delaware corporation (the "Company"), in connection with the
solicitation by and on behalf of the Company's Board of Directors (the "Board")
of proxies to be voted at the Special Meeting of Stockholders of the Company.
The meeting will be held on July 31, 1996 at 11:00 a.m. (Pacific Time) at the
offices of N.A. Degerstrom, Inc., North 3303 Sullivan Road, Spokane, Washington
99216, for the purposes set forth in the accompanying Notice of Special Meeting
of Stockholders. Officers and other employees of the Company, without additional
compensation, may solicit proxies personally or by telephone if deemed
necessary. Solicitation expenses, which are not expected to exceed $5,000, will
be paid by the Company.
All proxies that are properly executed and received prior to the Special
Meeting will be voted at the meeting. If a stockholder specifies how the proxy
is to be voted on any business to come before the meeting, it will be voted in
accordance with such specification. If a stockholder does not specify how to
vote the proxy, it will be voted FOR the merger into the Company of Hanover
Resources, Inc. ("Resources") and Group S Limited ("Group S"), each of which is
affiliated with the Company; FOR the amendment of the Company's certificate of
incorporation (the "Certificate of Incorporation"); FOR the approval of the
Company's 1995 Stock Option Plan; FOR the election of the seven nominees to the
Board named in this Proxy Statement; FOR the authorization of the appointment of
BDO Seidman as independent public accountants for the year ending December 31,
1996; and on such other business as may properly come before the meeting. The
proposals to amend the Certificate of Incorporation, to approve the 1995 Stock
Option Plan and to elect the management slate of directors are not contingent
upon the approval of the proposed merger. Any proxy may be revoked by a
stockholder at any time before it is actually voted at the meeting by delivering
written notification to the Secretary of the Company, by delivering another
valid proxy bearing a later date, or by attending the meeting and voting in
person.
This Proxy Statement and the accompanying proxy are first being sent to
stockholders on or about June , 1996. The Company will bear the cost of
preparing, assembling, and mailing the notice, Proxy Statement, and form of
proxy for the meeting.
VOTING SECURITIES
All voting rights are vested exclusively in the holders of the Company's
common stock, $.0001 par value per share (the "Common Stock"), with each share
entitled to one vote. Only stockholders of record at the close of business on
June 28, 1996 are entitled to receive notice of and to vote at the Special
Meeting or any adjournment. At the close of business on June 1, 1996, there were
16,029,678 shares of Common Stock issued and outstanding. A majority of the
shares of Common Stock issued and outstanding must be represented at the Special
Meeting, in person or by proxy, in order to constitute a quorum. Cumulative
voting is not allowed for any purpose.
The approval of the merger and the amendment of the Company's Certificate of
Incorporation each requires the affirmative vote of the holders of a majority of
the outstanding shares of the Company. The approval of the 1995 Stock Option
Plan and the authorization of the appointment of accountants each
2
<PAGE>
requires the affirmative vote of the holders of a majority of the shares present
and represented at the meeting. The election of directors requires the
affirmative vote of the holders of a plurality of the shares present and
represented at the meeting. The officers and directors of the Company have
advised it that they and their affiliates and assigns own approximately
9,311,000 shares (representing 58%) of the outstanding Common Stock of the
Company, and that they intend to vote in favor of the merger, if a majority of
unaffiliated stockholders (who vote) approve the merger, and in favor of the
other proposals.
A stockholder who abstains from voting or withholds his or her vote will be
counted as present for determining whether the quorum requirement is satisfied.
If a stockholder returns a signed proxy but fails to indicate a vote for or
against any proposal, for purposes of determining the outcome of the vote on any
such proposal, such stockholder will be deemed to have voted FOR the proposal. A
broker "non-vote" occurs when a nominee holding shares for a beneficial holder
does not have discretionary voting power and does not receive voting
instructions from the beneficial owner. Broker "non-votes" with respect to any
item to be voted upon at the Special Meeting will, however, be treated as shares
present and entitled to vote.
3
<PAGE>
SUMMARY OF MERGER
The principal item of business to come before the Special Meeting of
stockholders is the proposed merger of Hanover Resources, Inc. ("Resources") and
Group S Limited ("Group S") into the Company. The following boxed pages
summarize the proposed merger; however, reference is also made to the detailed
information about the merger appearing elsewhere herein.
PRINCIPAL REASON FOR THE MERGER
The principal reason for the merger is to consolidate the properties of
Resources and Group S with the adjoining properties of the Company in order to
attract prospective joint venturers to explore and develop all of the properties
more or less at the same time.
THE CONSTITUENT COMPANIES
The Company is a Delaware corporation with headquarters currently located at
1000 Northwest Boulevard, Suite 100, Coeur d'Alene, Idaho 83814, Telephone No.
(208) 664-4653. Its shares are traded in the NASDAQ SmallCap Market under the
symbol "HVGO". At the date of this Proxy Statement, the Company had 16,029,678
shares of Common Stock outstanding and owned or controlled the mining rights to
142 claims (and an option to acquire five additional claims) in the Alder Gulch
area of the Virginia City Mining District of Montana (the "Alder Gulch") with
gold mineral deposits. See "Properties of the Company".
Resources is a privately-owned company with headquarters in Roslyn, New
York. Resources owns 3,625,000 shares of Common Stock of the Company. Resources
owns or controls 70% of 28 claims (and the five additional claims that it
optioned to the Company), and has assigned the mining rights to such 28 claims
to the Company, in the Alder Gulch with gold mineral deposits. See "Properties
of Resources". Group S is a privately-owned company with headquarters in Roslyn,
New York. Group S owns 833,734 shares (representing 39%) of the common stock of
Resources and the mining rights to 216 claims in the Alder Gulch with gold
mineral deposits. See "Properties of Group S".
AFFILIATIONS
Fred R. Schmid is an officer and director of each of the constituent
companies. He owns beneficially 191,680 shares, representing nearly 9% of the
common stock of Resources. Mr. Schmid's family owns 90,090 shares, representing
nearly 73% of the common stock of Group S. Mr. Schmid owns 133,056 shares of
Common Stock of the Company and may be deemed the beneficial owner of 3,625,000
shares of the Company owned by Resources.
Other directors of the Company are also directors and stockholders of
Resources and Group S, and if the merger is approved and consummated, they will
receive substantial additional shares of the Company's Common Stock. See "SHARES
OWNED BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." BECAUSE OF SUCH
AFFILIATIONS, THERE WERE NO DISINTERESTED DIRECTORS OF THE COMPANY WHEN THE
MERGER OF RESOURCES AND GROUP S WAS AUTHORIZED BY THE COMPANY'S BOARD, SO THAT
WITHOUT STOCKHOLDER APPROVAL, THE MERGER WOULD BE VOID OR VOIDABLE UNDER
DELAWARE LAW. SEE "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
STOCKHOLDER MEETINGS; VOTE REQUIRED.
The merger was submitted to and approved by the stockholders of both
Resources and Group S on December 29, 1995. The merger will be submitted to the
stockholders of the Company at the Special Meeting scheduled to be held on July
31, 1996, and the affirmative votes of the holders of a majority of the
outstanding shares of Common Stock of the Company will be required to approve
the merger. The officers and directors of the Company have advised it that they
and their affiliates and assigns own approximately 9,311,000 shares
(representing 58%) of the Company's Common Stock and that they will vote their
shares in favor of the merger if the holders of a majority of the shares voted
by non-affiliated stockholders vote in favor of the merger.
4
<PAGE>
TERMS OF THE MERGER
If the merger is approved and consummated, the stockholders of Resources
will receive 4,896,110 shares of Common Stock of the Company in exchange for
their Resources stock, and the 3,625,000 shares of the Company's Common Stock
owned by Resources will be extinguished, resulting in a net increase of
1,271,110 shares; and the stockholders of Group S will receive 999,376 shares of
Common Stock of the Company in exchange for their Group S stock and the
cancellation of $477,254 owed by Group S to the Company. The terms of the merger
were NOT approved or reviewed by disinterested directors of the Company or
independent financial advisers. THE COMPANY DID NOT ENGAGE AN INDEPENDENT
FINANCIAL ADVISOR TO EXPRESS AN OPINION ON THE FAIRNESS OF THE TRANSACTION. See
"PROPOSED MERGER." There will be no differences in the rights of current
stockholders of the Company and stockholders of Resources and Group S who became
stockholders of the Company upon the merger of such companies into the Company.
RESULTS OF THE MERGER
As the result of the merger, Resources and Group S will be merged into the
Company which will emerge from the merger with:
- 18,300,164 shares of Common Stock issued and outstanding (after giving
effect to transactions involving the future issuances of stock, including
the Tabor transaction and the Moen Agreement described under "Recent
Developments");
- 363 contiguous claims containing approximately 26,000,000 tons of gold
mineral deposits that do not qualify as reserves or resources. Such
deposits are based on 31 diamond drill core holes and 18 rotary drill
holes for approximately 15,600 combined feet. The mineralized intercepts
have an average length of 74 feet, with an average grade of .0615 ounces
per ton.
Mineralized material or a mineral deposit is a mineralized body which has
been delineated by appropriate drilling and/or underground sampling to
support a sufficient tonnage and average grade of metal(s). Under the
standards of the Securities and Exchange Commission (the "Commission")
such material or deposit does not qualify as a reserve until a
comprehensive evaluation, based upon unit cost, grade, recoveries and
other factors, concludes economic feasibility. Judged by this standard,
the properties of the Company, Resources and Group "S" do not qualify as
reserves or resources.
There is no assurance that a commercially viable ore body (a reserve)
exists in the mining properties until further appropriate drilling and/or
underground sampling is done and an economic feasability study based on
such work is concluded.
- total assets of $9,657,815 and total liabilities and future obligations
totalling $9,527,194, consisting of future rents and royalties due to
landowners of $9,296,525 (after giving effect to the reduction of
$3,000,000 of rents pursuant to the Moen Agreement described below under
"Recent Developments"), and other liabilities of $230,669 (as of April 30,
1996). See "FINANCIAL STATEMENTS"; and
- the same two officers and seven directors of the Company as now hold
office in the Company. See "ELECTION OF DIRECTORS".
SUMMARY OF ACTUAL AND PRO FORMA COMBINED UNAUDITED FINANCIAL DATA ($000
OMITTED)(1)
<TABLE>
<CAPTION>
COMPANY RESOURCES GROUP S COMBINED (2)
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Assets.................................................. 8,991 1,404 786 9,657
Liabilities............................................. 216 411 642 231(3)
Equity.................................................. 8,774 993 144 9,427
Revenues................................................ 3.5 31.2 -- 34.7
Net Income (loss)....................................... (420) (16) (.8) (405)
</TABLE>
- ------------------------
(1) Balance sheet data as of April 30, 1996; income and loss data for the four
months ended April 30, 1996.
(2) After adjustments. (See "FINANCIAL STATEMENTS").
5
<PAGE>
(3) Does not include future rent and royalty obligations to landowners.
SUMMARY OF ACTUAL AND PRO FORMA COMBINED FINANCIAL DATA ($000 OMITTED)(1)
<TABLE>
<CAPTION>
COMPANY RESOURCES GROUP S COMBINED (2)
----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Assets.................................................. 8,310 1,919 1,288 8,992
Liabilities............................................. 359 942 1,143 427(3)
Equity.................................................. 7,952 977 145 8,565
Revenues................................................ 499 128 0 499
Net Income (loss)....................................... (2,322) 3 (10) (2,329)
</TABLE>
- ------------------------
(1) Balance sheet data as of December 31, 1995; income and loss data for the
year ended December 31, 1995.
(2) After Adjustments eliminating intercompany transactions.
(3) Does not include future rent and royalty obligations to landowners.
OTHER MATTERS
The Company will treat the merger as a non-taxable corporate reorganization,
under the federal Internal Revenue Code, as amended, and neither the Company nor
its stockholders will be required to recognize any gain or loss for federal tax
purposes. However, it has not sought and will not receive a legal opinion to
this effect. The stockholders of the Company are not entitled to appraisal or
dissenter's rights under Delaware law.
6
<PAGE>
SHARES OWNED BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information, as of June 1, 1996, with respect to
the beneficial ownership of the Company's Common Stock by each person known by
the Company to be the beneficial owner of more than 5% of its outstanding Common
Stock (including for this purpose shares purchasable pursuant to underlying
stock options and at a price below the current market value of such shares), by
each director of the Company, by each named executive officer, and by all
officers and directors of the Company as a group. Unless otherwise noted, each
stockholder has sole investment and voting power over the shares owned.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY PERCENT BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER RELATIONSHIP TO COMPANY OWNED (1) % OWNED (2) %
- ---------------------------------- ------------------------- ------------------ ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Hanover Resources, Inc. .......... Affiliated Company 3,625,000 20.87 None(3) None
P.O. Box B
Roslyn, NY
N.A. Degerstrom .................. Director 6,000,000(4) 34.54 6,000,000(4) 32.18
North 3303 Sullivan Rd.
Spokane, WA 99210
Frank Duval ...................... Affiliate 1,583,100(5) 9.11 1,583,100(5) 8.49
1000 Northwest Blvd.
Coeur d' Alene, ID 83814
Fred R. Schmid ................... Director 4,183,056(6)(8) 24.08 2,841,185(6)(8) 15.24
P.O. Box B
Roslyn, NY 11576
Nicholas S. Young ................ Director(7) 175,000(8) 1.01 388,128(8) 2.08
26 Glen Avon Drive
Riverside, CT 06878
Laurence Steinbaum ............... Director 155,780(8) 0.90 308,873(8) 1.66
P.O. Box 586
New Vernon, NJ 07976
James A. Fish .................... President, CEO and 43,000 0.25 43,000 .23
North 3303 Sullivan Rd. Director
Spokane, WA 99210
Pierre Gousseland ................ Director 140,000(8) 0.81 140,000(8) .75
4 Lafayette Court
Greenwich, CT 06830
F. D. Owsley ..................... Director 29,000 0.17 29,000 0.16
2465 Cherry Hill Road
Coeur d' Alene, ID 83814
All Officers, Directors
and Affiliate as a Group
(8 persons)..................... Record and Beneficial 10,653,836(9) 61.33 9,578,186(9) 51.38
</TABLE>
- ------------------------
(1) After attributing all shares of Resources to Fred Schmid.
(2) After attributing shares of Resources to the stockholders of Resources based
on their respective holdings of shares of Resources and giving effect to the
merger of Resources into the Company and the issuance of 1,271,110 shares
representing the merger value of Resources. See "PROPOSED MERGER".
7
<PAGE>
(3) The shares of the Company owned by Resources will be acquired by the Company
upon its merger with Resources. The Company will, however, issue the same
number of shares to the stockholders of Resources in the merger, and they
are reflected in the above table as owned by those persons.
(4) The foregoing table attributes to Mr. Degerstrom all of the shares of the
Company that have been purchased by him and his permitted assigns through
the date of this Proxy Statement pursuant to the Securities Purchase
Agreement dated June 1, 1995, as amended (the "Securities Purchase
Agreement") between the Company and Mr. Degerstrom, including the additional
shares that he is committed to purchase at various times through October 16,
1996 at a price of $.50 per share. 2,857,142 shares now owned by Mr.
Degerstrom and his permitted assigns were purchased for $0.35 per share;
1,600,000 of such shares were purchased for $.50 per share; 1,000,000 shares
were purchased for $1.00 per share; and 542,858 additional shares will be
purchased at the price of $0.50 per share. When the additional 542,858
shares are purchased, Mr. Degerstrom will be the beneficial owner of
6,000,000 shares, representing 32.18% of the Common Stock of the Company to
be outstanding (after giving effect to the merger).
Although all shares purchased by Mr. Degerstrom and his assigns are shown in
the table above as beneficially owned by Mr. Degerstrom, Schedule 13D dated
June 20, 1995, as amended through the date of this Proxy Statement, filed by
Mr. Degerstrom states that 2,623,142 of such shares have been registered in
Mr. Degerstrom's and his company's own name as of the date of this Proxy
Statement. Schedule 13D filed by Mr. Degerstrom and his permitted assigns
also states that neither he nor any of his assigns, all of whom are
identified as reporting persons in the Schedule 13D, controls the voting or
disposition of any shares of Common Stock of the Company other than those
shares owned by each such person, and on this basis Mr. Degerstrom disclaims
beneficial ownership of the shares owned by his assigns.
(5) Although Mr. Duval has not been elected to office as an executive officer or
director of the Company, by virtue of his activities in the name and on
behalf of the Company, he may be deemed to be an affiliate of the Company.
In addition, according to the Schedule 13D, filed by N. A. Degerstrom and
Mr. Duval, they have an understanding pursuant to which Mr. Duval may
purchase up to one-half of the shares of Common Stock of the Company
acquired by Mr. Degerstrom in his own name under the Securities Purchase
Agreement, at a price equal to the price paid by Mr. Degerstrom for such
shares. Such understanding presently encompasses 1,311,673 shares of Common
Stock, which is one-half of the number of shares acquired by Mr. Degerstrom,
personally, pursuant to the Securities Purchase Agreement as of the date of
this Proxy Statement, but could increase if and when Mr. Degerstrom
purchases additional shares pursuant to the Securities Purchase Agreement.
Such understanding has not been memorialized by agreement or other writing
as of the date of this Proxy Statement.
Mr. Duval was one of several defendants named in a civil administrative
proceeding initiated by the Commission in 1988 alleging violations of
certain of the reporting provisions of the Securities Exchange Act of 1934.
Mr. Duval settled such proceedings in 1988 by consenting to the entry of a
permanent injunction prohibiting further violations, without admitting or
denying any of the Commission's allegations, and without a finding that any
violation occurred. The events leading to the administrative proceeding
occurred while Mr. Duval was a consultant to Pegasus Gold Inc., a major
North American gold mining company.
In 1991, Star Phoenix Mining Company, an Idaho corporation with whom Mr.
Duval was affiliated as president, a director and a significant shareholder,
filed for protection from creditors under federal bankruptcy law following
the termination by Hecla Mining Company of a lease and option agreement
between Star Phoenix and Hecla covering the mining properties in Shoshone
County, Idaho Star Phoenix was then operating. Star Phoenix subsequently
brought suit against Hecla in Shoshone County (Idaho) District Court for
breach of the lease and option agreement, and in 1994 obtained a $20 million
judgment against Hecla which is now pending appeal before the Idaho Supreme
Court. Mr. Duval was also one of several guarantors of indebtedness incurred
by Star Phoenix. As a consequence of the
8
<PAGE>
bankruptcy, certain creditors of Star Phoenix brought suit against Mr. Duval
predicated on these guaranties, and obtained judgments against Mr. Duval
which have not yet been fully satisfied and are presently the subject of
further bankruptcy court review.
(6) Fred R. Schmid is a principal officer, director and stockholder of
Resources, is able to control the decisions of Resources and may be deemed
to have a beneficial interest in the 3,625,000 shares of the Company owned
by Resources. Such shares, when added to the 133,056 shares of the Company
owned by Mr. Schmid and the shares underlying the stock options held by Mr.
Schmid and his son, Stephen (see note (8) below) total 4,183,056 shares
beneficially owned by him. The 3,625,000 shares of the Company owned by
Resources are to be acquired by the Company in the merger of Resources, and
such shares will be extinguished. However, in the merger the Company will
issue the same number of shares to the stockholders of Resources, of which
Mr. Schmid will receive only 325,000 shares. Such 325,000 shares, when added
to the 133,056 shares of the Company he presently owns and the shares
underlying the stock options held by Mr. Schmid and his son, Stephen (see
note (8) below), represent 15.24% of the Company's outstanding Common Stock.
The shares shown in the table above as beneficially owned by Mr. Schmid
include 1,958,129 shares of the Company that other members of the Schmid
family will receive upon the merger of Resources into the Company, and Mr.
Schmid disclaims any beneficial interest in all such shares.
(7) Also a director of Resources.
(8) The beneficial ownership of shares by Messrs. Schmid, Young, Steinbaum and
Gousseland includes shares underlying stock options heretofore granted to
them under the Company's 1995 Stock Option Plan, which is subject to
stockholder approval. See "The 1995 STOCK OPTION PLAN". The following shares
underlie stock options granted to such directors in 1995:
<TABLE>
<S> <C>
250,000
Fred R. Schmid shares
175,000
Stephen J. Schmid shares
150,000
Nicholas Young shares
125,000
Lawrence Steinbaum shares
100,000
Pierre Gousseland shares
</TABLE>
(9) The totals include all of the shares attributed to Mr. Schmid (including his
family's shares) and all of the shares attributed to Mr. Degerstrom
(including his permitted assigns' shares).
------------------------
The following table sets forth information as of June 1, 1996, with respect
to the beneficial ownership of the Company's Common Stock by each person known
by the Company to be the beneficial owner of more than 5% of its outstanding
Common Stock, by each director of the Company, by each named executive
9
<PAGE>
officer and by all officers and directors as a group, assuming the merger of
Resources and Group S into the Company as of such date. Unless otherwise noted,
each stockholder has sole investment and voting power over the shares owned.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF COMPANY
OF THE COMPANY SHARES BENEFICIALLY PERCENTAGE OF
NAME AND ADDRESS OF RELATIONSHIP TO ACQUIRED IN OWNED AFTER THE SHARES TO BE
BENEFICIAL OWNER COMPANY THE MERGER MERGER OUTSTANDING (1)
- ---------------------------------- ---------------------- ----------------- --------------------- ---------------
<S> <C> <C> <C> <C>
N.A. Degerstrom .................. Director 0 6,000,000(2) 30.55
North 3303 Sullivan Rd.
Spokane, WA 99210
Frank Duval ...................... Affiliate 0 1,583,100(3) 8.06
1000 Northwest Blvd.
Coeur d' Alene, ID 83814
Fred R. Schmid ................... Director 2,666,887(4) 3,224,943(4)(5) 16.42
P.O. Box B
Roslyn, NY 11576
Nicholas S. Young ................ Director 331,179 719,307(5) 3.66
26 Glen Avon Drive
Riverside, CT 06878
Laurence Steinbaum ............... Director 133,983 442,856(5) 2.27
P.O. Box 586
New Vernon, NJ 07976
James A. Fish .................... President, CEO and 0 43,000 0.25
North 3303 Sullivan Rd. Director
Spokane, WA 99210
Pierre Gousseland ................ Director 50,017 190,017(5) 0.97
4 Lafayette Court
Greenwich, CT 06830
F. D. Owsley ..................... Director 0 29,000 0.15
2465 Cherry Hill Road
Coeur d' Alene, ID 83814
</TABLE>
- ------------------------
(1) Based on 19,643,022 shares, including 800,000 shares underlying outstanding
stock options and 542,858 shares to be purchased by Mr. Degerstrom and his
assigns.
(2) See note (4) to the first table under this heading.
(3) Consists of shares of the Company's Common Stock that Mr. Duval is entitled
to acquire from N. A. Degerstrom, a director of the Company, pursuant to an
understanding between them. See notes (4) and (5) to the first table under
this heading and "TRANSACTIONS WITH THE N.A. DEGERSTROM GROUP" below.
(4) The shares to be owned by Mr. Schmid includes 425,000 shares underlying
stock options held by Mr. Schmid and his son, Stephen, and 325,000 shares
that he will receive as a stockholder of Resources upon its merger into the
Company. In addition, members of Mr. Schmid's family beneficially own shares
of Resources and Group S, for which they will receive 2,341,887 shares of
the Company's Common Stock if and when Resources and Group S are merged into
Company, giving them 11.9% of the Common Stock to be outstanding. Mr. Schmid
disclaims any beneficial interest in the shares owned and to be owned by
members of his family.
(5) See note (8) to the first table under this heading.
10
<PAGE>
PROPOSED MERGER
BACKGROUND
Since 1992, the boards of directors of the Company, Resources and Group S
have discussed merging Resources and Group S into the Company. However, there
was no basis for determining the value of their respective properties, a key
factor in determining the terms of a merger, until Kennecott Exploration Company
("Kennecott") participated in a mining venture involving the properties of the
Company, Resources and Group S. See "Properties of the Company." From 1992 to
1995, Kennecott conducted exploration activities on the properties, and
representatives of the Company, Resources and Group S were able to identify
potential mineralized gold deposits of approximately 26,000,000 tons and an
average grade of .0615 ounces per ton on the companies' properties by using
Kennecott's exploration data. After discussions with independent mining
personnel and industry executives, such representatives were able to estimate
the mineral values of the companies' properties and thereby establish a basis
for the merger. In addition to Henry Follman, the Company's geological engineer,
representatives of the Company, Resources and Group S discussed estimated
mineral values of the properties with William T. Marston, an independent mining
engineer, J. David Mason, an independent mining consultant, and senior officers
of Kennecott, Latin-American Gold Company and Royal Gold Company. Discussions
with potential joint venture partners convinced the companies' managements that
the consolidation of their respective claims under single ownership would
improve opportunities for strategic alliances with larger mining companies and
would be better understood by the investment community and the Company's
stockholders. To date, no joint venture agreements have materialized. On April
18, 1995, the Company's Board approved the merger of Resources and Group S with
the Company.
REASONS FOR THE MERGER
In taking action to approve the merger, the Company's Board (and the boards
of directors of Resources and Group S) took into account a number of
considerations, the principal one being that the consolidation of their
respective mining properties under one ownership would facilitate more efficient
and economic exploration and development activities. Although the companies'
properties are contiguous, separate ownership and disparate contractual
relationships among the three companies have impeded comprehensive financing and
mine development plans. Management expects the consolidation of the properties
through the proposed merger to facilitate progress in this area, to simplify the
Company's accounting and recordkeeping, and to make the Company better known to
financing sources from whom capital may be solicited and to other mining
companies with whom joint venture or other strategic alliances may be sought for
the development of the properties. The proposed merger is also expected to
strengthen the Company's leverage, and thereby enhance its negotiating position
for acquiring other mining properties, in the Alder Gulch area. There can be no
assurance that the consolidation of the properties will achieve all or any of
the goals described.
OUTLINE OF THE MERGER
The Merger Agreement is included in this Proxy Statement as Exhibit 10(v).
Under the terms of the merger, the Company will issue 5,895,486 shares of Common
Stock of the Company upon the conversion of, and in exchange for, the
outstanding capital stock of Resources and Group S. Resources stockholders will
receive 4,896,110 shares, consisting of 3,625,000 shares (which will be
exchanged for the same number of shares of the Company that are currently owned
by Resources and will be extinguished) and 1,271,110 additional shares. Group S
stockholders will receive 999,376 shares (which reflects a reduction of 193,220
shares that will offset the Company's cash advances to Group S.) Therefore, the
number of additional shares to be issued upon the merger of Resources and Group
S into the Company will be 2,270,486 shares of the Company's Common Stock.
The Company did not obtain an independent financial adviser to express an
opinion on the fairness of the proposed merger.
FRED R. SCHMID AND NICHOLAS S. YOUNG ARE MEMBERS OF THE BOARDS OF DIRECTORS
OF THE COMPANY, RESOURCES AND GROUP S. LAWRENCE STEINBAUM AND PIERRE GOUSSELAND,
DIRECTORS OF THE COMPANY, ARE SUBSTANTIAL STOCKHOLDERS OF RESOURCES AND/OR GROUP
S. MESSRS. SCHMID (INCLUDING MEMBERS OF HIS FAMILY),
11
<PAGE>
YOUNG, STEINBAUM AND GOUSSELAND COLLECTIVELY OWN APPROXIMATELY 58% OF RESOURCES
AND APPROXIMATELY 85% OF GROUP S. DUE TO SUCH RELATIONSHIPS AND THE RESULTANT
CONFLICTS OF INTEREST, THE MERGER TERMS WERE NOT NEGOTIATED AT ARMS-LENGTH. THE
TERMS OF THE MERGER MAY BE MORE OR LESS FAVORABLE TO THE COMPANY AS THEY MIGHT
OTHERWISE HAVE BEEN HAD THE COMPANY DEALT WITH UNAFFILIATED PARTIES.
If the merger is approved, the Company's mining properties will consist of
363 contiguous claims, gold-bearing mineral deposits. Mineralized material or a
mineral deposit is a mineralized body which has been delineated by appropriate
drilling and/or underground sampling to support a sufficient tonnage and average
grade of metal(s). Under the standards of the Commission, such material or
deposit does not qualify as a reserve until a comprehensive evaluation, based
upon unit cost, grade, recoveries and other factors, concludes economic
feasibility. Judged by this standard, the Company's properties do not qualify as
reserves or resources.
THERE IS NO ASSURANCE THAT A COMMERCIALLY VIABLE ORE BODY (A RESERVE) EXISTS
IN THE MINING PROPERTIES UNTIL FURTHER APPROPRIATE DRILLING AND/OR UNDERGROUND
SAMPLING IS DONE, AND AN ECONOMIC FEASIBILITY STUDY BASED ON SUCH WORK IS
CONCLUDED.
DETERMINATION OF SHARES TO BE ISSUED
In determining the number of shares of the Company's Common Stock to be
issued in the merger of Resources and Group S into the Company, the Board
considered three factors; namely, each company's investment in the properties,
the estimated mineral value of the properties held by it, and (in the case of
Resources) the existing ownership by Resources of 3,625,000 shares of the
Company's Common Stock.
INVESTMENT IN THE PROPERTIES. As reflected on the balance sheets of
Resources and Group S as of December 31, 1995, attached to this Proxy Statement,
their combined capitalization of approximately $1.4 million represents cash
investments made in these two companies over a period of three years. The
proceeds of such investments, of which 84.92% was attributed to Resources and
15.08% was attributed to Group S, were used to acquire and maintain their
respective properties. The merger provides for the issuance of Common Stock for
the capitalized value of the companies at the rate of approximately $1.50 per
share. (That price represents a discount of 6% from the $1.60 price of the
Common Stock publicly offered by the Company in 1993 and 1994 and approximates
the market value of the Company's stock prior to Kennecott's announced
withdrawal from the mining venture. See "Properties of the Company". Following
the announcement of Kennecott's withdrawal, the market price fell substantially;
it was $0.625 per share at the time the merger was approved by the Board of the
Company.) The use of the price of $1.50 per share as applied to the $1.4 million
capital investment yields approximately 930,000 shares of the Company's Common
Stock.
ESTIMATED NOMINAL MINERAL VALUE OF THE PROPERTIES. The Kennecott
exploration data indicated that the properties of Resources and Group S
contained gold-bearing mineral deposits, of which approximately 60% were
indicated on Group S' claims and 40% were indicated on Resources' claims.
Kennecott's exploration and other activities were conducted over a period of
approximately three and one-half years, commencing in the spring of 1992, and
based upon such activities and Kennecott's reports of tonnages and grades, the
Company's own engineers allocated the mineralized deposits among the Company,
Resources and Group S, based on the location of such deposits and ownership of
claims. The Company has not sought an independent valuation of the properties to
validate Kennecott's data. Based on the information derived from Kennecott's
work on the properties of Group S and Resources (see "Properties of Resources"
and "Properties of Group S"), the nominal mineral value of the properties was
estimated, with an allowance for anticipated losses resulting from mining
methods and beneficiation or preparation. The properties of
12
<PAGE>
Resources and Group S were estimated to have a combined nominal mineral value of
$8 million. (1) The estimated nominal mineral value may not be accurate because
the Company did not obtain a current appraisal of the properties, and there is
no assurance that a commercially viable ore body (a reserve) exists in the
mining properties until further appropriate drilling and/or underground sampling
is done, and an economic feasibility study based upon such work is concluded.
The foregoing nominal mineral valuation is solely to determine the
appropriate exchange ratios between the Company adn Resources adn Group S for
the purpose of the merger. Such valuations will not appear in other filings by
the Company or be used for other purposes such as future offerings or resale
purposes.
In determining the number of shares to be issued for the estimated mineral
value of the properties, the Company deducted the number of shares to be issued
for the investments in the properties made by Group S and Resources (930,000
shares) multiplied by $3.00 per share (2), approximately $2.8 million, leaving a
balance of $5.2 million for the estimated mineral value of the properties. That
value in Company shares (valued $3.00 per share) resulted in the proposal to
issue 1,052,352 additional shares for the estimated mineral value of the
properties of Group S and 687,648 additional shares for the estimated mineral
value of the properties of Resources. Because the Company already controls 30%
of Resources' properties, the 687,648 shares were reduced by 206,294 shares. As
the result of such reduction, the Company is issuing 1,533,706 shares for the
mineral value of the properties of Group S and Resources.
RESOURCES' OWNERSHIP OF COMPANY STOCK. Resources currently owns 3,625,000
shares (representing 23%) of the Company's Common Stock outstanding as of June
1, 1996. As part of the merger consideration, the Company will issue to the
stockholders of Resources 3,625,000 shares, and the 3,625,000 shares of the
Company currently held by Resources will be extinguished.
EFFECT ON THE STOCKHOLDERS OF RESOURCES. 2,137,971 shares of Resources are
currently outstanding. Resources stockholders will receive 4,896,110 shares of
the Company's Common Stock, including, in effect, the 3,625,000 shares of the
Company currently held by Resources (resulting in the issuance of 1,271,110
additional shares by the Company, which is considered the "merger value" of
Resources). The 4,896,110 shares will be distributed to Resources stockholders
as follows:
The 3,625,000 shares of the Company will be exchanged, in effect, for
2,137,971 outstanding shares of Resources at the rate of 1.69553 shares of the
Company for each share of Resources. Fred R. Schmid has waived his right to
participate in the 1,271,110 additional shares of the Company's Common Stock to
be issued to the stockholders of Resources (representing the "merger value" of
Resources). Therefore, the remaining holders of Resources shares will receive
all of the 1,271,110 shares of the Company's Common Stock to be issued in the
merger of Resources, at the rate of 0.65309 shares of the Company for each share
of Resources, so that the overall exchange ratio for all stockholders of
Resources, except Mr. Schmid, is 2.34862
- --------------
(1) If, mining property consists of staked claims or concessions, with no work
having been performed, the mining industry would value such property at cost
of acquisition. If the amount of claims work consists of core-drilling,
trenching, geological and metallurgical testing which indicates but does not
"prove" gold resources, the "indicated" resource is valued between $10 and
$35 per ounce. The Company believes that its properties and the properties
of Resources and Group S fall within this category and valuation range, even
though the deposits are not classifiable as "resources" under prevailing
Commission standards. Management valued the mineral content of the Resources
and Group S properties at a nominal price of $10 per ounce because of the
burden of the underlying landowner payment obligations and to reflect the
conservative end of the range of values because of the less than arms-length
nature of the merger.
(2) The approximate market value per share of the Company's stock when Kennecott
was conducting its exploration work on Resources' and Group S' properties
under the mining venture agreement (see "Mining Claims of Resources and
Group S"), and when many investors became stockholders of the Company.
13
<PAGE>
shares of the Company for each share of Resources. Fred R. Schmid and members of
his family will receive 2,283,129 shares in the merger of Resources into the
Company. Such shares, together with the 558,056 shares currently owned by them
in the Company and the shares underlying stock options held by Fred R. Schmid
and Stephen J. Schmid, will represent 15.24% of the Common Stock of the Company
to be outstanding after the merger with Resources.
EFFECT ON THE STOCKHOLDERS OF GROUP S. 124,000 shares of Group S are
currently outstanding. 90,090 of such shares are owned by Mr. Schmid's family.
Group S stockholders will receive 999,376 shares of the Company's Common Stock
in the merger, after giving effect to the reduction of 193,220 shares to
eliminate advances of $477,254 from the Company to Group S. Mr. Schmid's family
has agreed to use a portion of its shares to absorb that reduction. Accordingly,
the exchange ratio for all stockholders of Group S, other than the Schmid
family, is 23.85 shares of the Company for each share of Group S. The exchange
ratio for the Schmid family, which is receiving 383,758 shares of the Company in
exchange for its Group S shares, is only 4.26 to 1.
In summary, the Company is issuing 2,270,486 additional shares of Common
Stock to acquire both Resources and Group S (1,271,110 shares for Resources and
999,376 shares for Group S).
Based upon all of the above described factors, the issuance of a total of
5,895,486 shares (including the 3,625,000 shares to be distributed to the
stockholders of Resources) of the Company's Common Stock was approved by the
Board of Directors for acquiring Resources and Group S by merger. Mr. Fred R.
Schmid and members of his family will receive a total of 2,666,887 shares from
the merger of Resources and Group S into the Company, and they will own a total
of 3,224,943 shares, representing 16.42%, of the outstanding Common Stock of the
Company, after giving effect to merger.
THE COMPANY DID NOT RETAIN AN INDEPENDENT FINANCIAL ADVISOR TO EXPRESS AN
OPINION ON THE FAIRNESS OF THE PROPOSED MERGER WITH RESOURCES AND GROUP S FROM
THE PERSPECTIVE OF THE COMPANY'S MINORITY STOCKHOLDERS. instead, the company's
directors reached the conclusion that the transaction was fair by approving the
valuation procedure described above; namely, a procedure which credited the
target companies (Resources and Group S) with the amounts they actually invested
to acquire and maintain the various mining claims held by them and with the
estimated mineral value of such claims (by applying the lower end of an
industry-wide standard for valuing mineralized gold deposits but not proven
reserves) to reflect the future royalties applicable to such claims.
OTHER RESULTS OF THE MERGER
As part of the merger, all intercompany agreements will be acquired by the
Company but its obligations under such agreements will be terminated. By virtue
of such agreements, the Company will realize the following benefits:
Under the Mineral Sublease and Purchase Option Agreement dated July 31, 1990
between Resources and the Company, the Company's obligation to pay a $10,000
minimum monthly royalty payment will be eliminated. Under the Claim Option
Agreement dated December 20, 1990 between Resources and the Company, the Company
will acquire five claims but will not be required to pay the $450,000 option
payment due December 20, 1996. Under the Assignment Agreement dated February 20,
1992 between Resources and the Company, the Company will acquire all of
Resources interest in 28 claims, but will not be required to give Resources 70%
of all the gold and silver product mined from the claims or to pay a $15,000 per
month management fee commencing January, 1997. Under the Mineral Sublease
Agreement dated August 31, 1993 between Group S and the Company, the Company's
obligation to pay a 20% net profits interest in cash or in kind to Group S from
the sale of products sold from the Apex Claim will be eliminated. See also "THE
COMPANY, RESOURCES AND Group S IN COMBINATION" elsewhere in this Proxy
Statement.
OTHER FACTORS RELEVANT TO THE MERGER
The Company's principal office is now located at 1000 Northwest Boulevard,
Suite 100, Coeur d'Alene, Idaho 83814 and its telephone number is 208-664-4653.
The Company has two elected officers, James A. Fish, its President and Chief
Executive Officer, and Wayne Schoonmaker, its Secretary and Treasurer. Both
Resources and Group S are affiliates of the Company, and their businesses are
managed by Fred R. Schmid
14
<PAGE>
from the same offices as the Company's former New York office. On December 29,
1995, the stockholders of Resources and Group S voted in favor of the merger of
those companies into the Company on the terms and conditions described above.
The businesses and properties of the Company, Resources and Group S are
described in detail below under "Properties of the Company"; "Properties of
Resources" and "Properties of Group S". The effects of the merger on certain
affiliated persons are discussed under "EFFECT OF PROPOSED TRANSACTIONS ON
CERTAIN PERSONS".
ACCOUNTING TREATMENT. Although the Company will account for the merger as a
purchase (and not as a pooling of interests), because of the affiliation of the
companies, the assets to be acquired from Resources and Group S will be recorded
by the Company at their respective costs, and such assets will be included in
the Company's financial statements from the effective date of the merger.
TAX CONSEQUENCES. The Company will treat the merger of Resources and Group
S into the Company for federal income tax purposes, as a reorganization under
Section 368(a) of the federal Internal Revenue Code. Accordingly, neither the
Company nor the stockholders of any of the constituent companies will be
required to recognize any gain or other income or loss for federal income tax
purposes from the merger itself. However, the Company has not sought and does
not expect to receive an opinion of counsel to such effect, and stockholders are
advised to consult their own tax advisors concerning their treatment under the
Code and applicable state income tax laws.
POSSIBLE RESALE OF SHARES. Resources and Group S are privately-owned
companies. The Company did not register under the Securities Act of 1933, as
amended (the "Securities Act") the shares of its Common Stock to be issued to
the stockholders of such companies before they considered and voted in favor of
the merger of Resources and Group S into the Company (in December 1995).
However, if the Company's stockholders approve the merger of Resources and Group
S into the Company and those companies are merged into the Company, the Company
has undertaken promptly after the effectiveness of the merger to register under
the Securities Act the shares of Common Stock that are to be issued to the
stockholders of Resources and Group S. The Company will keep the registration
statement current during the 18 months following the merger in order to enable
such stockholders to publicly reoffer and sell such shares during that period in
the over-the-counter market or otherwise.
Upon the effectiveness of the Registration Statement, a total of 5,895,486
shares to be issued in the merger, representing 30% of the Common Stock of the
Company to be outstanding, (including shares underlying outstanding stock
options and shares purchasable at a price below the current market value of such
shares) will be eligible for sale from time to time in the over-the-counter
market. Sales of such stock and the potential for such sales could have a
depressant effect on the market price of the Common Stock based on, among other
things, the large addition to the public float and the relatively small number
of market makers in the Common Stock.
REGULATORY MATTERS. The Company is not aware of any governmental or
regulatory approvals required for consummating the merger, other than compliance
with applicable securities laws.
FINANCIAL STATEMENTS. Reference is made to the Actual and Pro Form Combined
Financial Statements of the Company, Resources and Group S herein and to the
financial statements of the Company in its Annual Report on Form 10-K/A and its
Quarterly Report for the first quarter of 1996 on Form 10-Q included in this
Proxy Statement.
LACK OF DIVIDENDS. Neither the Company, Resources or Group S has ever paid
a cash dividend to its stockholders, and because of the Company's limited cash
resources and its future cash requirements, the Board of the Company does not
intend to declare any dividends for the foreseeable future.
MARKET PRICES. The Company's Common Stock is traded in the NASDAQ SmallCap
Market under the symbol "HVGO". During 1995, prior to the announcement of the
proposed merger with Resources and Group S in April 1995, the reported high and
low sale prices per share of the Company's Common Stock were $1.625 and $0.25,
respectively. Following the announcement of the proposed merger, the reported
high
15
<PAGE>
and low sale prices for such shares during the balance of 1995 were $2.50 and
$0.81, respectively. During 1996 through May 24, the reported high and low sale
prices for such shares were $2.00 and $1.00, respectively, and the last reported
sale price for such shares on May 24 was $1.75.
INAPPLICABILITY OF APPRAISAL RIGHTS. The stockholders of the Company do not
have appraisal or similar rights of dissent with respect to the proposed merger.
ACTUAL AND PRO FORMA COMBINED FINANCIAL STATEMENTS OF
THE COMPANY, RESOURCES, AND GROUP S
On April 18, 1995 the Board of Directors of the Company approved the merger
of two affiliated companies, Resources and Group S, subject to approval by
shareholders of the three companies. All of the outstanding common stock of
Resources is to be exchanged for 1,271,110 shares of the Company's Common Stock.
In addition, Resources owns 3,625,000 shares of the Company's Common Stock. The
Company will redeem these shares by the issuance of 3,625,000 shares of its
Common Stock according to the terms of the merger. Additionally, the Company
will issue 999,376 shares of its Common Stock for all of the outstanding common
stock of Group S.
The transaction has been accounted for as a purchase. The accounting
treatment follows the acccretion for the purchase of companies once common
control whereby assets and liabilities are transferred at historical cost ("as
of pooling").
The following unaudited proforma, condensed consolidated balance sheet of
the Company, as of April 30, 1996, and unaudited proforma condensed consolidated
statement of income (loss) for the period then ended, is comprised of the
historical balance sheet and the historical statement of income for the Company,
and for Resources, and Group S, for the unaudited period January 1, 1996 to
April 30, 1996. Such unaudited financial statements of Resources and Group S are
included herein. The proforma financial statements reflect the acquisition and
merger by the Company, of Resources and Group S, as adjusted to give effect to
the other proforma adjustments described in the following footnotes. The
unaudited proforma adjustments are based on conditions existing at the effective
time and reflect the reorganization as if the merger of Resources and Group S
with the Company, had been consummated at April 30, 1996. The Company has not
had any significant, material transactions between March 31, 1996 (see the
Company's Quarterly Report on Form 10-Q for its first quarter) and April 30,
1996. Inter-Company transactions and balances have been eliminated in
consolidation. These proforma statements should be read in conjunction with the
notes thereto immediately following the proforma statement of income and loss.
In accordance with Rule 11.02 of the Commission's Regulation S-X, a proforma
profit and loss statement of the companies is presented as if the merger had
been consummated as of December 31, 1995.
Separate financial statements of the Company are included in its Annual
Report on Form 10-K/A and its Quarterly Report on Form 10-Q included elsewhere
herein, and separate financial statements of Resources and Group S are included
in this Proxy Statement starting after page 58.
16
<PAGE>
HANOVER GOLD COMPANY, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
FOR THE PERIOD ENDED APRIL 30, 1996
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------- PROFORMA
HANOVER ------------------------------
HANOVER GOLD RESOURCES, ADJUSTMENTS FOR COMBINED
COMPANY, INC. INC. GROUP S LIMITED COMBINATION BALANCE SHEET
------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash.................................. $ 122,842 $ 16,049 $ 8,801 $ 147,692
Inventory............................. 29,494 29,494
Prepaid Expenses...................... 64,762 11,000 75,762
Prepaid Fees.......................... 0 1,167 1,167
------------- -------------- --------------- -------------
Total Current Assets................ 217,098 28,216 8,801 254,115
------------- -------------- --------------- -------------
Resource Properties Claims & Fixed
Assets:
Exploration, Eng., Site Dev............ 2,225,106 2,225,106
Mining Properties..................... 5,559,831 1,342,720 292,838(2) (125,000) 7,070,389
Option................................ 90 (1) (90) 0
Fixed Assets.......................... 137,539 137,539
Accum Depreciation.................... (49,358) (49,358)
------------- -------------- --------------- --------------- -------------
Total Resource Properties, Claims &
Fixed Assets......................... 7,873,208 1,342,720 292,838 9,383,676
------------- -------------- --------------- -------------
Other Assets:
Reclamation Bonds..................... 19,924 19,924
Loan Receivables...................... 100 100
Due from Group S...................... 474,895 33,274 (3) (474,895) 0
(4) (33,274)
Due from Hanover Resources............ 405,809 (5) (405,809) 0
Investment in Hanover Resources....... 485,038(6) (405,809) 0
------------- -------------- --------------- -------------
Total Other Assets.................. 900,728 33,274 485,038 20,024
------------- -------------- --------------- -------------
Total Assets...................... $ 8,991,034 $ 1,404,210 $ 786,677 $ 9,657,815
------------- -------------- --------------- -------------
------------- -------------- --------------- -------------
LIABILITIES
Current Liabilities
Note & Loan Payable................... $ 6,565 $ 5,247 $ 11,812
Accounts Payable...................... 194,841 9,215 204,056
Accrued Expenses...................... 14,801 14,801
Due to Hanover Gold................... 405,809 474,895(3) 474,895 0
(5) 405,809
Due to Hanover Resources.............. 33,274(4) 33,274 0
------------- -------------- --------------- -------------
Total Current Liabilities........... 216,207 411,056 517,384 230,669
------------- -------------- --------------- -------------
Other Liabilities..................... (1) 90
Option Deposit........................ 0 90 125,000(2) 125,000 0
------------- -------------- --------------- -------------
Total Other Liabilities............. 0 90 125,000 0
------------- -------------- --------------- -------------
Total Liabilities................. 216,207 411,146 642,384 230,669
------------- -------------- --------------- -------------
Stockholder's Equity:................... (7) 21,379
Common Stock.......................... 1,470 21,379 (7) (127) 1,697
(8) (100)
Paid in Capital....................... 13,518,333 1,220,375 166,670(6) 485,038 14,170,425
(7) 1,220,375
(7) (992,937)
(8) 166,670
(8) (144,193)
(7) (248,690)
Retained Earnings (Loss).............. (4,744,976) (248,690) (22,377)(8) (22,377) (4,744,976)
------------- -------------- --------------- -------------
Total Equity Accounts................. 8,774,827 993,064 144,293 9,427,146
------------- -------------- --------------- -------------
Total Liabilities & Equity............ $ 8,991,034 $ 1,404,210 $ 786,677 $ 9,657,815
------------- -------------- --------------- -------------
------------- -------------- --------------- -------------
</TABLE>
17
<PAGE>
HANOVER GOLD COMPANY, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AND LOSS
FOR THE PERIOD ENDED APRIL 30, 1996
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
---------------------------------------------- ---------------------------------------
HANOVER COMBINED OF
HANOVER GOLD RESOURCES, ADJUSTMENTS FOR STATEMENT
COMPANY, INC. INC. GROUP S LIMITED COMBINATION INCOME & LOSS
------------- -------------- --------------- ----------------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUE
Sales................................. $ 3,511 $ 0 $ 0 $ 3,511
Royalty Income........................ 0 31,252 0 31,252
------------- -------------- --------------- --------------
Total Income........................ 3,511 31,252 0 34,763
------------- -------------- --------------- --------------
EXPENSE
Cost of Goods Mine.................... 0 0
Depreciation, depletion and
amortization......................... 10,344 10,344
General & administrative.............. 413,849 15,560 931 430,340
------------- -------------- --------------- --------------
Total Expense....................... 424,193 15,560 931 440,684
------------- -------------- --------------- --------------
Gross Profit (Loss)................... (420,682) 15,692 (931) (405,921)
------------- -------------- --------------- --------------
Other Income & expenses
Interest Income (Expense)............ 1,005 90 1,095
------------- -------------- --------------- --------------
Total other income and expense...... 1,005 0 90 1,095
------------- -------------- --------------- --------------
Net Income (Loss)..................... $ (419,677) $ 15,692 $ (841) $ (404,826)
------------- -------------- --------------- --------------
------------- -------------- --------------- --------------
Net loss per share.................... $ (0.03) $ 0.01 $ (0.01) $ (0.02)
Fully diluted weighted average common
shares outstanding................... 13,890,339 2,137,970 124,000 16,975,164
------------- -------------- --------------- --------------
------------- -------------- --------------- --------------
</TABLE>
18
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED APRIL 30, 1996
1 and 2. The options paid by the Company to the affiliated entities for the
following claim groups are reversed:
(I) Par value ($.0001) of 900,000 shares of common stock issued to
Resources, pursuant to the Claim Option Agreement, dated December 31, 1990,
giving the Company the option to acquire five claims adjacent to the Kearsarge
Group of Claims, and:
(ii) Elimination of the option fee paid to Group S Limited for the JTC,
Randolph and 20% of the Apex claim group:
<TABLE>
<S> <C>
Hanover Resources, Inc. -- Option deposit........................ $ 90
Group S Limited -- Option deposit................................ 125,000
---------
Hanover Gold Company, Inc........................................ $(125,090)
</TABLE>
3 through 5. Elimination of the intercompany balances reflected on each
companies records for advances made, and received in the normal course of
business involving; landowner rental payments, working capital, engineering
services and general administrative costs:
<TABLE>
<S> <C>
Group S -- Due to Hanover Gold................................... $ 474,895
Hanover Gold -- Due from Group S................................. (474,895)
Group S -- Due to Hanover Resources.............................. $ 33,274
Hanover Resources -- Due from Group S............................ (33,274)
Hanover Resources -- Due to Hanover Gold......................... $ 405,809
Hanover Gold -- Due from Hanover Resources....................... (405,809)
</TABLE>
6. The proposed merger of Resources and Group S with the Company,
necessitates the elimination of the investment account maintained by Group S for
costs incurred on behalf of the Company, by offsetting its respective balance
with the Company's equity account as follows:
<TABLE>
<S> <C>
Hanover Resources -- Paid in capital............................. $ 485,038
Group S -- investment in the Hanover Resource's common stock..... (485,038)
</TABLE>
7. Record extinguishment of Hanover Resources, Inc. capital accounts and
retained loss upon merger with the Company, and record the issuance of 1,271,110
(4,896,110 -- 3,625,000) shares of the Company's common stock at par value,
$.0001, for all of the outstanding common stock of Hanover Resources, Inc.:
<TABLE>
<S> <C> <C>
Hanover Resources, Inc. -- Common Stock....................... $ 21,379
-- Paid in capital.................... 1,220,375
-- Retained Earnings.................. (248,690)
Hanover Gold Company, Inc. -- Common Stock....................... (127)
-- Paid in capital.................... (992,937)
</TABLE>
8. Record extinguishment of Group S capital accounts and retained loss upon
merger with the Company, and record the issuance of 999,376 shares of the
Company's common stock at par value, $.0001, for all of the outstanding common
stock of Group S:
<TABLE>
<S> <C> <C>
Group S Limited -- Paid in Capital.................... $ 166,670
-- Retained Earnings.................. (22,377)
Hanover Gold Company, Inc. -- Common Stock....................... (100)
-- Paid in Capital.................... (144,193)
</TABLE>
19
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERIOD ENDED APRIL 30, 1996
9. The estimated cost of the transaction for legal, accounting, printing
and mailing costs, and filing fees, is $30,000, $30,000, $2,000, and $1,500,
respectively for a total of $63,500. These cost are not reflected on the
proforma balance sheet, and have not been accrued.
20
<PAGE>
ACTUAL AND PRO FORMA COMBINED FINANCIAL
STATEMENTS OF THE COMPANY, RESOURCES, AND GROUP S
Set forth below are the profit and loss statements of the Company, Resources
and Group S, each audited as of December 31, 1995, and a proforma combined
profit and loss statement of all three companies prepared as though by December
31, 1995 such companies have already been merged together. Such financial
statements should be read together with the note herein.
Separate, audited financial statements of the Company, on Form 10-K/A, and
Resources and Group S, as of December 31, 1995, are included in this proxy
statement, and should be read in conjuction with this profoma profit and loss
statement.
HANOVER GOLD COMPANY, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF
INCOME AND LOSS
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
---------------------------------------------- ------------------------------
HANOVER ADJUSTMENTS COMBINED
HANOVER GOLD RESOURCES, FOR STATEMENT OF
COMPANY, INC. INC. GROUP S LIMITED COMBINATION INCOME & LOSS
------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUE
Sales......................... $ 499,299 $ $ 0 $ 499,299
Royalty Income................ 128,000 (1) 128,000
------------- -------------- --------------- --------------
Total Income................ 499,299 128,000 0 499,299
------------- -------------- --------------- --------------
EXPENSE
Cost of Goods Mined........... 1,076,668 1,076,668
Depreciation, depletion and
amortization................. 38,229 38,229
General & administrative........ 922,847 125,103 11,032(1) (128,000) 930,982
Provision for bad debt.......... 779,921 779,921
------------- -------------- --------------- --------------
Total Expense............... 2,817,665 125,103 11,032 2,825,800
------------- -------------- --------------- --------------
Gross Profit (Loss)......... (2,318,366) 2,897 (11,032) (2,326,501)
------------- -------------- --------------- --------------
Other Income & expenses
Interest Income (Expense)....... 29,306 (75) 589 29,820
Loss on Equipment sale.......... (32,509) (32,509)
------------- -------------- --------------- --------------
Total other income and
expenses................... (3,203) (75) 589 (2,689)
------------- -------------- --------------- --------------
Net Income (Loss)............... $ (2,321,569) $ 2,822 $ (10,443) $ (2,329,190)
------------- -------------- --------------- --------------
------------- -------------- --------------- --------------
Net loss per share.............. $ (0.20) $ 0.00 $ (0.07) $ (0.15)
Fully diluted weighted average
common shares outstanding...... 11,728,882 2,137,970 153,875 15,920,164
------------- -------------- --------------- --------------
------------- -------------- --------------- --------------
</TABLE>
FOOTNOTES TO UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
LOSS PREPARED AS IF THE THREE COMPANIES WERE MERGED AS OF DECEMBER 31, 1995.
(1) The intercompany royalty paid by the Company to the affiliated entity is
reversed:
<TABLE>
<S> <C>
Hanover Resources, Inc. -- Royalty Income........................ $ 128,000
Hanover Gold Company, Inc. -- G&A................................ $(128,000)
</TABLE>
21
<PAGE>
HANOVER RESOURCES, INC.
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from, and should be read in conjunction with, Hanover Resources, Inc. (the
"Company") audited financial statements. The selected financial data for the
five years ended December 31, 1995 have been derived from the Company's audited
financial statements appearing elsewhere in this proxy, which have been audited
by Grossman, Tuchman & Shah, New York. The selected financial data should be
read in conjunction with, and is qualified by such financial statements and the
notes thereto.
The selected financial data for the interim period ended April 30, 1996, has
been derived from, and should be read in conjunction with, management's prepared
unaudited financial statements.
SUMMARY OF CONSOLIDATED BALANCE SHEETS:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
APRIL 30, ----------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Working Capital (deficit).......... $ 28,216 (58,191) (172,921) 63,007 (15,629) (24,339)
Current assets..................... 28,216 34,345 75,621 64,161 27,313 686
Total assets....................... 1,370,936 1,919,103 1,898,811 1,564,532 7,667,914 7,655,107
Current liabilities................ 0 92,536 248,542 1,154 42,942 25,025
Long-term obligations.............. 377,872 849,195 957,167 601,704 6,597,596 6,762,209
Total liabilities.................. 377,872 941,731 1,205,709 602,858 6,640,538 6,787,234
Stockholder's equity............... 993,064 977,372 693,102 961,674 1,027,376 867,873
</TABLE>
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Royalty Income.............. 0 120,000 120,000 120,000 120,000 120,000
Fee Income.................. 31,252 8,000 0 50,000 135,262 748
Net income (loss)........... 15,692 2,822 (12,659) (2,452) (119,503) 9,234
Net income (loss) per
share...................... 0.070 0.001 (0.006) (0.002) 0.100 0.008
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
On April 26, 1995, the Board of Directors of the Company approved the merger
with Hanover Gold Company, Inc. ("Hanover Gold"). On December 29, 1995, the
stockholders of the Company also approved the merger of their company with
Hanover Gold. Under the terms of the merger, the Company's stockholders will
receive 4,896,110 shares of common stock of Hanover Gold, consisting of
3,625,000 shares (which will be exchanged for the same number of shares that are
currently owned by the Company, and which will be extinguished upon receipt by
Hanover Gold) and 1,271,110 additional shares. In March of 1995, when Kennecott
announced its withdrawal from the mining venture that the Company, Hanover Gold
and Group S were parties to, it became apparent to the management of these
companies that they must consolidate their property holdings to successfully
attract another major mining partner for developing the Alder Gulch properties.
Neither of these companies have sufficient cash resources to independently
continue to explore and develop their claims. Hanover Gold was forced to curtail
their exploration and development activities at the Kearsarge/Apex mines due to
a lack of funds. Beginning in June 1995, and continuing through year-end, an
investment was made by the N. A. Degerstrom group. Additionally, Hanover Gold
had restructured its senior management team. Priority was given to consolidating
the properties in the Alder Gulch under Hanover Gold's control and to attracting
mining companies as potential joint venture partners. As of the date of this
report, the merger of the Company with Hanover Gold continues to be of
significant importance to the companies' management, and is awaiting a vote by
the Hanover Gold shareholders. Discussions are underway with several North
American mining companies who have expressed interest in a joint venture to
explore and develop the Alder Gulch property area, including the Company's
property.
22
<PAGE>
RESULTS OF OPERATIONS
APRIL 30, 1996 COMPARED TO APRIL 30, 1995. At April 30, 1996, the Company
had working capital of $28,216, current assets of $28,216, and current
liabilities of $0. This compares to current assets of $62,964 and current
liabilities of $32,520, at April 30, 1995. The increase of $2,228 in working
capital at April 30, 1996 is primarily attributable to an increase in cash and
the elimination of payroll and payroll taxes and other operating costs in
anticipation of the merger with Hanover Gold. Failing the approval of the merger
by Hanover Gold stockholders, the Company would not be liable for the payment of
Management's salaries that have been eliminated. Current assets consisted of
$16,049 of cash, and $11,000 of prepaid taxes, and $1,167 of prepaid fees; the
decrease in current assets is primarily attributable to a reduction in cash of
$14,748 used in operations, and $20,000 reduction in prepaid taxes.
Total assets of the Company at April 30, 1996 was $1,370,936, compared to
$1,898,274 for the same period in the previous year. At April 30, 1996, the
Company's total assets, net of current assets, was $1,342,720 which consisted of
patented (deeded) claims. This compares to $1,835,310 at April 30, 1995 which is
comprised of $1,278,480 in patented (deeded) claims, and $505,030 in receivables
from affiliated companies, and $51,800 in loan receivable from shareholders. The
$527,338 reduction in total assets was primarily due to $534,038 reduction in
due from affiliates and an increase of $13,871 in cash.
During the period January 1, 1996 to April 30, 1996, the Company had
revenues of $31,252, which was fee income. This compares to revenues of $40,000
from royalty receipts for the same period ending April 30, 1995.
For the period January 1, 1996 to April 30, 1996, the Company experienced
net income from operations of $15,692, which was attributable to a decrease of
$33,352 in payroll and payroll taxes and other operating costs when compared to
the same period in 1995, and an increase in administrative and other expenses by
$13,775, in anticipation of the proposed merger with Hanover Gold. This compares
to a net income of $838 for the period January 1, 1995 to April 30, 1995.
1995 COMPARED TO 1994. At December 31, 1995, the Company had working
capital deficit of $58,191, current assets of $34,345, and current liabilities
of $92,536. This compares to current assets of $75,621 and current liabilities
of $248,542, at December 31, 1994. The decrease of $172,921 in the working
capital deficit at year-end is primarily attributable to a $25,500 increase in
accrued professional fees, and a decrease of $181,526 of payroll and payroll tax
accruals. Current assets consisted of $2,178 of cash, and $31,000 of prepaid
taxes; the decrease in current assets during the year is primarily attributable
to a reduction in cash of $38,443 used in operations, and $4,000 reduction in
prepaid taxes.
Total assets of the Company at December 31, 1995 were $1,919,103, compared
to $1,898,811 for the previous year. At year-end 1995, the Company's total
assets, net of current assets, consisted of $1,342,720 in patented (deeded)
claims, and $542,038 in receivables from affiliated companies and shareholders.
This compares to $1,246,360 in patented (deeded) claims, and $576,830 in
receivables from affiliated companies and shareholders. The increase of $96,360,
which increased the patented (deeded) claim account, is attributable to
capitalizing landowner rental payments made to the landowners of the claims
during the year, and there was a slight increase of $34,792 in receivables from
affiliated companies and shareholders.
During the year ended December 31, 1995, the Company had revenues of
$128,000, of which, $120,000 was from royalty receipts, and $8,000 was fee
income. This compares to revenues of $120,000 from royalty receipts for the year
ended December 31, 1994.
For the year ended December 31, 1995 the Company experienced net income from
operations of $6,897, which was attributable to a decrease of $50,091 in payroll
and payroll taxes, an increase in professional fees of $14,922, a slight
decrease of $1,026 in travel expenses, a $47,444 decrease in contract services
and, a decrease in general and administrative expenses of $15,781. Additionally,
the Company paid taxes of $4,000 and interest expense of $75.
1994 COMPARED TO 1993. At December 31, 1994, the Company had working
capital deficit of $172,921, current assets of $75,621, and current liabilities
of $248,542. This compares to current assets of $64,161 and
23
<PAGE>
current liabilities of $1,154, at December 31, 1993. The increase of $235,928 in
the working capital deficit at year-end is primarily attributable to a $230,388
increase in payroll and payroll tax accruals. Current assets consisted of
$64,161 of cash; the increase in current assets during the year is primarily
attributable to a reduction in cash of $23,540 used in operations, and a $35,000
increase in prepaid taxes.
Total assets of the Company at December 31, 1994 were $1,898,811, compared
to $1,564,532 for the previous year. At year-end 1994, the Company's total
assets, net of current assets, consisted of $1,246,360 in patented (deeded)
claims, and $576,830 in receivables from affiliated companies and shareholders.
This compares to $1,141,240 in patented (deeded) claims, and $34,180 in
receivables from affiliated companies and shareholders, and $338,771 in
investment in affiliates. The increase of $105,120, which increased the patented
(deeded) claim account, is attributable to capitalizing landowner rental
payments made to the landowners of the claims during the year, and there was an
increase of $275,875 in receivables from affiliated companies and shareholders.
During the year ended December 31, 1994, the Company had revenues of
$120,000, from royalty receipts. This compares to revenues of $170,000, from
royalty receipts for the year ended December 31, 1993.
For the year ended December 31, 1994 the Company experienced a net loss from
operations of $2,452, which was attributable to an increase of $1,327 in payroll
and payroll taxes, an decrease in professional fees of $24,501, a decrease of
$21,573 in travel expenses, a $40,116 increase in contract services and, a
decrease in general and administrative expenses of $14,416. Additionally, the
Company paid taxes of $12,620 and interest expense of $22,942.
LIQUIDITY AND CAPITAL RESOURCES
JANUARY 1, 1996 TO APRIL 30, 1996. Cash flow from operating activities from
January 1, 1996 to April 30, 1996 reflected an increase of $13,871 in cash. The
increase was attributable to a $16,000 decrease in prepaid taxes; a $1,167
increase in prepaid fees; an increase of $32,120 in patented (deeded) claims; a
$412,000 decrease in due from stockholders; a $12,090 increase in due to
affiliated companies; an a $40,536 decrease in accrued expenses.
Cash flow from investing activities for the period was zero.
Cash flow from financing activities for the period was zero.
The Company has financed its operations primarily from royalty income it
receives from Hanover Gold pursuant to a lease agreement, and from advances from
its affiliates. Pending the merger of the Company and Hanover Gold, Hanover Gold
has assumed responsibility for all landowner royalty payments, and has suspended
making royalty payments to the Company.
1995 COMPARED TO 1994. Cash flow from operating activities in 1995
reflected the use of $38,443 in cash. The increased use of cash was attributable
to a decrease of $4,000 for prepaid taxes; an increase in prepaid fees of
$1,167; an increase in patented deeded claims of $96,360; a decrease in
shareholder loans of $63,800; an increase of $154,876 in receivables from
affiliates; a decrease in accrued expenses of $156,006, which was primarily for
payroll and payroll taxes; and a decrease in notes payable of $291,856 because
the note holders converted their notes to common stock of the Company as per the
terms of the note.
Cash flow from investing activities during the year was zero.
Cash flow from financing activities increase by $281,448 due to the
conversion of the note to shares of the Company's common stock.
1994 COMPARED TO 1993. Cash flow from operating activities in 1994
reflected a use of $23,540 in cash. The increased use of cash was attributable
to an increase of $35,000 for prepaid taxes; an increase in patented deeded
claims of $105,120; an increase in shareholder loans of $51,440; an increase of
$129,624 in payables to affiliates; an increase in accrued expenses of $247,388,
which was primarily for payroll and payroll taxes; and an increase in notes
payable of $11,558.
24
<PAGE>
Cash flow from investing activities increased by $149,750 attributable to
the proceeds from sale of Hanover gold warrants that the Company owned.
There was no cash flow generated from financing activities.
SUPPLEMENTARY FINANCIAL INFORMATION
The financial statements of the Company for the years ended December 31,
1995, and 1994 included elsewhere in this report, have been audited by Grossman,
Tuchman, & Shah, CPA, New York.
25
<PAGE>
GROUP S LIMITED
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from, and should be read in conjunction with, Group S Limited, (the "Company")
audited financial statements. The selected financial data for the five years
ended December 31, 1995 have been derived from the Company's audited financial
statements appearing elsewhere in this proxy, which have been audited by
Grossman, Tuchman & Shah, New York. The selected financial data should be read
in conjunction with, and is qualified by such financial statements and the notes
thereto.
The selected financial data for the interim period ended April 30, 1996, has
been derived from, and should be read in conjunction with, management's prepared
unaudited financial statements.
SUMMARY OF CONSOLIDATED BALANCE SHEETS:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
APRIL 30, ------------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Working Capital (deficit).................... $ (414) 427 36,385 22,332 10,773 30,622
Current assets............................... 8,801 9,642 36,385 22,332 11,523 30,622
Total assets................................. 786,677 1,288,282 623,272 494,701 204,527 207,386
Current liabilities.......................... 9,215 9,215 0 0 750 0
Long-term obligations........................ 633,169 1,133,933 425,695 293,195 0 0
Total liabilities............................ 642,384 1,143,148 425,695 293,195 750 0
Stockholder's equity......................... 144,293 145,134 197,577 201,506 203,777 207,386
</TABLE>
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Sales............................... 0 0 0 517 710 182
Net income (loss)................... (841) (10,443) (3,929) (2,271) (4,319) (1,284)
Net income (loss) per share......... (0.007) (0.080) (0.080) (0.050) (0.090) (0.030)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
On April 26, 1995, the Board of Directors of the Company approved the merger
with Hanover Gold Company, Inc. ("Hanover Gold"). On December 29, 1995, the
stockholders of the Company also approved the merger of their company with
Hanover Gold. Under the terms of the merger, the Company's stockholders will
receive 999,376 shares of common stock of Hanover Gold. In March of 1995, when
Kennecott announced its withdrawal from the mining venture that the Company,
Resources, and Hanover Gold were parties to, it became apparent to the
management of these companies that they must consolidate their property holdings
to successfully attract another major mining partner to develop the Alder Gulch
properties. Neither of these companies have sufficient cash resources to
independently continue to explore and develop their claims. Hanover Gold was
forced to curtail their exploration and development activities at the
Kearsarge/Apex mines due to a lack of funds. Beginning in June 1995, and
continuing through year-end, an investment was made by the N. A. Degerstrom
group. Additionally, Hanover Gold had restructured its senior management team.
Priority was given to consolidating the properties in the Alder Gulch under
Hanover Gold's control and to attracting mining companies as potential joint
venture partners. As of the date of this report, the merger of the Company with
Hanover Gold continues to be of significant importance to the companies'
management, and is awaiting a vote by the Hanover Gold shareholders. Discussions
are underway with several North American mining companies who have expressed
interest in a joint venture to explore and develop the Alder Gulch property
area, including the Company's property.
RESULTS OF OPERATIONS
APRIL 30, 1996 COMPARED TO APRIL 30, 1995. At April 30, 1996, the Company
had a working capital deficit of $414, current assets of $8,801, and current
liabilities of $9,215. This compares to current assets of $32,955 and current
liabilities of $0, at April 30, 1995. The decrease of $33,369 in working capital
at April 30, 1996
26
<PAGE>
compared to April 30, 1995, is primarily attributable to an increase in
intercompany accounts with Resources, and an increase in landowner royalty
payments. Current assets consisted of $8,801 of cash. The decrease in current
assets during the year is primarily attributable to a reduction in cash of
$24,154 used in operations and with affiliates.
Total assets of the Company at April 30, 1996 were $786,677 compared to
$619,842 at April 30, 1995. At April 30, 1996, the Company's total assets, net
of current assets, consisted of $292,839 in patented (deeded) claims, and
$485,038 in investment in Hanover Resources. This compares to $92,838 in
patented (deeded) claims, and $494,049 in receivables from affiliated companies
and shareholders. The increase of $200,001, which increased the patented
(deeded) claim account, is attributable to capitalizing landowner rental
payments made to the landowners of the claims during the year, while there was a
decrease of $494,049 in receivables from affiliated companies and shareholders,
and an increase of $485,038 in investment in Hanover Resources.
During the periods from January 1, to April 30, 1995 and 1996, the Company
did not have any operating revenue.
For the period January 1, 1996 to April 30, 1996, the Company had a net loss
from operations of $841, which was attributable to general and administrative
expenses, and for the same period in 1995, the loss of $3,430 was primarily
attributable to professional fees.
1995 COMPARED TO 1994. At December 31, 1995, the Company had working
capital of $427, current assets of $9,642, and current liabilities of $9,215.
This compares to current assets of $36,385 and current liabilities of $0, at
December 31, 1994. The decrease of $35,958 in working capital at year-end is
primarily attributable to a $10,000 decrease in intercompany accounts with
Hanover Gold, and approximately $13,000 spent on the claims. Current assets
consisted of $9,642 of cash. The decrease in current assets during the year is
primarily attributable to a reduction in cash of $26,743 used in operations.
Total assets of the Company at December 31, 1995 were $1,288,282, compared
to $623,272 for the previous year. At year-end 1995, the Company's total assets,
net of current assets, consisted of $292,839 in patented (deeded) claims, and
$500,764 in receivables from affiliated companies and shareholders. This
compares to $92,838 in patented (deeded) claims, and $494,049 in receivables
from affiliated companies and shareholders. The increase of $200,001, which
increased the patented (deeded) claim account, is attributable to capitalizing
landowner rental payments made to the landowners of the claims during the year,
and there was a slight decrease of $6,715 in receivables from affiliated
companies and shareholders.
During the years ended December 31, 1995 and 1994, the Company did not have
any operating revenue.
For the year ended December 31, 1995 the Company had a net loss from
operations of $10,443, which was attributable to an increase in professional
fees of $9,215, a decrease in general and administrative expenses of $4,194.
1994 COMPARED TO 1993. At December 31, 1994, the Company had working
capital of $36,385, current assets of $36,385, and current liabilities of $0.
This compares to current assets of $22,332 and current liabilities of $0, at
December 31, 1993. The increase of $14,053 in the working capital at year-end is
solely attributable to a $14,053 increase in cash.
Total assets of the Company at December 31, 1994 were $623,272, compared to
$494,701 for the previous year. At year-end 1994, the Company's total assets,
net of current assets, consisted of $92,838 in patented (deeded) claims, and
$494,049 in receivables from affiliated companies and shareholders. This
compares to $256,764 in patented (deeded) claims, and $215,605 in receivables
from affiliated companies and shareholders. The decrease of $163,925, in the
patented (deeded) claim account, is attributable to reclassifying a portion of
the previously capitalized landowner rental payments made to the landowners of
the claims during previous years, and an increase of $278,444 in receivables
from affiliated companies and shareholders.
During the years ended December 31, 1994, and 1993, the Company did not have
any operating revenues.
27
<PAGE>
For the year ended December 31, 1994 the Company experienced a net loss from
operations of $3,929, which was attributable to general and administrative
expenses of $6,011. Additionally, the Company paid taxes of $2,082.
LIQUIDITY AND CAPITAL RESOURCES
APRIL 30, 1996 COMPARED TO APRIL 30, 1995. Cash flow from operating
activities for the period January 1, 1996 to April 30, 1996 reflected the use of
$841 in cash. The increased use of cash was attributable to an increase in
administrative and office expenses of $506 over the same period during 1995.
Cash flow from investing activities for both periods was zero.
Cash flow from financing activities for both periods was zero.
The Company has financed its operations primarily from equity raised when
incorporated, and from advances from its affiliates. Pending the merger of the
Company and Hanover Gold, Hanover Gold has assumed responsibility for all
landowner royalty payments, and has suspended making advances to the Company.
1995 COMPARED TO 1994. Cash flow from operating activities in 1995
reflected the use of $500,295 in cash. The increased use of cash was
attributable to an increase of $363,925 in patented (deeded) claims; a decrease
in accounts payable of $9,215; a decrease in due from affiliates of $334,443; an
increase in shareholder loans of $41,700; and an increase of $534,038 in
payables to affiliates.
Cash flow from investing activities increased by $485,038 which was entirely
the result of the Company's acquisition of Hanover Group, Inc. (See footnote
number 6.)
Cash flow from financing activities increased by $42,000 for the same reason
as previously noted.
1994 COMPARED TO 1993. Cash flow from operating activities in 1994
reflected a use of $14,053 in cash. The increased use of cash was attributable
to an increase of $163,925 in patented deeded claims; and an increase of
$145,943 in payables to affiliates.
Cash flow from investing activities was zero.
There was no cash flow generated from financing activities.
SUPPLEMENTARY FINANCIAL INFORMATION
The financial statements of the Company for the years ended December 31,
1995, and 1994 included elsewhere in this report, have been audited by Grossman,
Tuchman, & Shah, CPA, New York.
PROPERTIES OF THE COMPANY
The Company was organized under the laws of Delaware corporation in 1984. On
September 24, 1990, it acquired Hanover International Limited ("International")
a corporation which held rights to a mineral claim (the "Kearsarge Claim") in
the Virginia City Mining District of Southwestern Montana. Since acquiring
International, through a series of agreements with its affiliates and third
parties, the Company has acquired mining interests in 142 additional mineral
claims subject in most cases to underlying royalty interests, and options to
acquire five other claims in the Alder Gulch area of the Virginia City district.
The Company also acquired from Bearcat Explorations, Inc., an unaffiliated
Canadian gas and oil company (the former owner), its 30% interest in 34 claims
(Kearsarge, 28 claims and 5 option claims), for 600,000 shares of Common Stock
of the Company, and an option to purchase 171,000 additional shares for $3.00
per share prior to May 14, 1995 (which has expired without being exercised) and
another option to purchase 500,000 additional shares of Common Stock for $10.00
per share prior to May 14, 1997. Claim payments are to be paid to landowners
through June 1, 2000, and if such payments are made, the Company will acquire
outright ownership of such claims or, in certain cases, the entire property
interest of the former owner. If such payments are not made, the landowners are
entitled to terminate the applicable agreements, and the claims and properties
will revert to the owners. In 1992, the Company's interest in the claims was
placed into
28
<PAGE>
Hanover JV along with the claims owned by its affiliates, Resources and Group S.
Each entity retained full ownership of its respective claim group. In 1992,
Hanover JV entered into a mining venture agreement with Kennecott, a major
mining company (the "Mining Venture Agreement").
Under the Mining Venture Agreement, Kennecott undertook an exploration and
development program on the Company's claims and the claims of Resources and
Group S. The agreement provided that in exchange for a 51% interest in the
mining claims and certain option rights, Kennecott would spend a total of $5.7
million in exploration, landowner payments, option payments, expenses payments
and assignment payments incurred on the claims. From 1992 to 1995, Kennecott
conducted exploration work on the claims in the mining venture and in the
district and estimated potential mineralized gold deposits of approximately
26,000,000 tons and an average grade of .0615 ounces per ton in the district, of
which approximately 91% were located on the claims held in Hanover JV. Under the
terms of the Mining Venture Agreement, the Company had the right to mine certain
claims independently of the mining venture, namely the Kearsarge and Apex Claims
and five claims under option. If and when Kennecott produced a feasibility
study, the claims being independently mined by the Company would become part of
the mining venture, and Kennecott would become the operator and manager of the
project. In the interim the Company was able to retain 100% of the gold it
extracted from these claims, subject to underlying royalty obligations.
On November 15, 1993, the Company entered into an Assignment of Lease and
Option to Purchase with a third party lessor for the mining and mineral rights
to the Randolph Claim, JTC Claim and 20% of the Apex Claim, for a cash payment
of $250,000 in the first year and additional cash payments each year thereafter
up to and including April 15, 1999, for total payments of $1,650,000. Underlying
net smelter royalties to landowners range from 1% to 5% on these claims under
certain conditions.
On March 31, 1994, the Company completed its public offering which had
commenced on April, 1993. A total of 4,135,600 shares of Common Stock were sold
in the offering, from which the Company received gross proceeds of $6,616,960.
The net proceeds from this offering were used to reopen the underground
Kearsarge and Apex Mines; for exploration activities, including drilling,
trenching, sampling, assaying, mapping, mining equipment purchases;
transportation equipment purchases; royalty payments; to advance funds for the
rehabilitation and exclusive use of a gravity and cyanide mill; to acquire
additional claims; and for working capital. Ore was shipped to the mill for
processing and gold production commenced during the third quarter of 1994.
Kennecott had previously estimated that gold-bearing deposits existed in the
area of the Kearsarge and Apex Mines which the Company had targeted for
underground mining operations. The Company was not allowed to engage in large
open pit mining and chemical processing of ore in the Alder Gulch area under the
Mining Venture Agreement.
Kennecott has advised the Company that it was withdrawing from the Mining
Venture Agreement because it was unable to negotiate a mineral lease on certain
adjacent properties which would have expanded the ore resource potential of the
area of interest. Management of the joint venture had believed it was in the
joint venture's best interest to seek the acquisition of the adjacent property,
which would have enabled the Company to consolidate its properties with
adjoining properties, thereby permitting the exploration and possible
development of all such properties more or less at the same time. As a result of
Kennecott's withdrawal from the mining venture all amounts due to the Company
from Kennecott were canceled. Although Hanover JV became the sole owner of the
claims, gold resource and exploration data as a consequence of the withdrawal,
it also became solely liable for the payment obligations to landowners on the
claims. As of April 30, 1996, such payment obligations, payable from 1996 to
2001, aggregated approximately $9,296,525 (after giving effect to the reduction
of $3,000,000 of rents pursuant to the Moen Agreement described below under
"Recent Developments"), of which the Company was responsible for approximately
$5,896,525 and Group S was responsible for approximately $3,400,000. Group S
also owes $19,300 for annual filing fees to the Bureau of Land Management on 193
unpatented claims. After Kennecott's withdrawal from the venture, because mining
crews had not yet reached the higher grade underground ore and poor ground
conditions and harsh winter weather were causing higher mining and handling
costs, the Company suspended all mining and processing operations on the
Kearsarge and Apex Mines. Also, by March 31, 1995, the
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Company's cash and cash equivalents were only $342,254. Although the Company has
received numerous inquires from major and junior mining companies expressing
interest in the property and possible joint venture opportunities in the
property held by Hanover JV, none has materialized into a contract to date.
The Company recently completed a compilation of data generated by Kennecott
and the Company on the Company's Kearsarge and Apex properties in Alder Gulch,
located six miles from Virginia City, Montana. Kennecott had drilled eight
diamond drill core holes, from the surface, to test mineralized structures known
as the Big Vein and the Kearsarge Vein of the historic Kearsarge and Apex Mines.
The Company drove an exploration-development level at the 7,000 foot elevation
of the Kearsarge Mine and reopened two levels of the Apex Mine to evaluate the
mineralization encountered by Kennecott's drilling. The Company drove
approximately 3,000 feet of lateral and cross cut workings in the Kearsarge and
the Apex Mines and drilled 23 diamond drill core holes along the Big Vein and
Kearsarge Vein. The recent work included mapping and sampling of the workings,
lithologic logging of all of the Company's drill holes and splitting and
assaying all unassayed intervals of these holes. This work resulted in wider
intercepts of ore grade mineralization and identification of the lithologies of
the gold bearing intervals.
The drill holes intercept mineralization over a strike length of 1,000 feet
with a thickness that varies from 100 to 200 feet and a vertical extent of at
least 480 feet. The vertically deepest hole ends in mineralization.
Mineralization is open in all directions, particularly depth and across
stratigraphic section. Drill holes representative of the grades and thickness
are tabulated below:
<TABLE>
<CAPTION>
DRILL HOLE FROM TO LENGTH AU OPT
- ------------------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C>
UGKS 1............. 95.0 135.0 40.0 0.061
UGKS 4............. 85.0 109.9 24.9 0.020
140.0 213.0 73.0 0.109
UGKS 5............. 55.0 75.8 20.8 0.076
114.7 191.0 76.3 0.115
UGKS 9............. 45.4 80.0 34.6 0.088
155.0 229.6 74.6 0.152
UGKS 11............ 51.0 106.2 55.2 0.213
UGKS 12............ 0.0 138.8 138.8 0.092
7000-1............. 5.5 103.9 98.4 0.222
7000-3............. 9.6 110.4 100.8 0.379
7000-6............. 5.0 88.6 83.6 0.094
KS 1............... 305.0 507.0 202.0 0.191
KS 2............... 313.0 383.0 70.0 0.051
428.0 453.0 25.0 0.135
465.0 507.0 42.0 0.157
KS 4............... 311.0 371.0 60.0 0.031
KS 5............... 404.0 479.0 75.0 0.094
KS 8............... 295.0 480.0 185.0 0.095
</TABLE>
Based on the Company's examination of the drill core, the underground
workings, and the geology maps and cross sections, management believes that the
mineral system is more extensive than the two parallel vein systems. The Big
Vein and Kearsarge Vein and the interval between these
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structures are mineralized. The mineralization occurs in lenticular shaped
bodies that vary in thickness on strike and dip. Additional drilling, however,
will be required to detail the configuration of the mineralization and to define
its limits in three dimensions. The estimated mineralized deposit to an average
depth of 500 feet below the surface is approximately 6,000,000 tons with an
average grade of .083 ounces of gold per ton.
The mineralization has been overprinted by one or more metamorphic events,
occurs in a major shear zone that is parallel to the regional strike of
stratigraphy and has been dislocated by post mineral faulting along northwest,
northeast and near horizontal faults. The data indicates the mineralization is
stratabound, and gold occurs in quartz carbonate feldspar rock units with
variable amounts of green muscovite, biotite, garnet, graphite and pyrite. The
mineral system is interpreted to be an Archean volcanogenic quartz carbonate
facies iron formation.
The Company's work added detail to the Kennecott data and supports its
estimate for the Kearsarge-Apex area. The volume of mineralization was indicated
by the drilling (1,000' x 150' x 480') assuming an average grade of 0.1 ounce of
gold per ton. However, these deposits have not been proven as reserves or
resources. The thickness and grade of mineralization and metallurgical studies
indicate that open pit mining with a carbon in leach mill are the preferred
methods for extracting the gold. At present, the Company lacks the financial
resources to resume mining.
Faced with the need to pay the landowner annual royalties and lacking
sufficient cash of its own, in June and August of 1995, the Company completed a
private placement of its Common Stock with N.A. Degerstrom. As of the date of
this Proxy Statement, N.A. Degerstrom and his associates have invested
$2,800,000 in the Company, and beneficially own a total of 5,457,142 shares of
Common Stock, representing 34.04% of the outstanding Common Stock of the
Company, excluding shares underlying stock options and shares not yet purchased
by Mr. Degerstrom. (See "SHARES OWNED BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT".)
RECENT DEVELOPMENTS
EASTON-PACIFIC. On February 26, 1996, the Company signed a letter of intent
(the "Letter of Intent") with Easton-Pacific and Riverside Mining Company
("Easton") a privately-owned company, contemplating a possible merger of Easton
into the Company in exchange for 14,368,713 shares of the Company's Common
Stock. (The number of shares was negotiated on the basis of a number of factors,
including the presumed value of Easton's mineral resources and the market price
of the Company's stock when negotiations began). The Easton properties are not
burdened with large landowner royalty payments.
Easton has advised the Company that it owns or controls 271 claims in the
Virginia City and Pony Mining Districts of Madison County, Montana. Certain of
the claims are contiguous to the Company's claims and may contain gold-bearing
and silver-bearing mineralized deposits.
The Letter of Intent provides for a 90-day due diligence period (which was
extended on May 26, 1996 for an additional period of 50 days, or until July 15,
1996) during which each company will investigate the mining claims, technical
data and mineral resources claimed by the other company, as well as any
environmental and litigation risks to which each may be subject. If by the end
of the due diligence period, the parties are satisfied with the results of their
investigations, they will proceed with a definitive merger agreement which will
be subject to required approvals of the boards of directors and the stockholders
of each company, the delivery of a fairness opinion by an independent financial
advisor and the preparation and effectiveness of a proxy statement/registration
statement to be filed with the Commission under the Securities Act. Discussions
leading to the Easton-Pacific letter of intent were predicated, in part, on the
voluntary dismissal of a shareholder derivative action initiated against certain
affiliates of Easton-Pacific in early 1995 by Neal A. Degerstrom and other named
plaintiffs, alleging the breach by the defendants of their fiduciary duties to
Easton-Pacific's shareholders in connection with certain acquisitions of
Easton-Pacific's capital stock. Such action followed an unsuccessful effort by
Mr. Degerstrom, his company, N. A. Degerstrom, Inc., and James A. Fish to
acquire a controlling interest in Easton-Pacific through a cash offer to
purchase a majority of the outstanding shares of Easton-Pacific's capital stock.
Such offer was initiated in April of 1995 and was
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<PAGE>
terminated some thirty days later; Mr. Degerstrom, N. A. Degerstrom, Inc. and
Mr. Fish collectively acquired 85,000 shares of Easton-Pacific's capital stock
pursuant to the offer, representing approximately 8.2% of Easton-Pacific's then
outstanding capital stock. Neither Mr. Degerstrom, N. A. Degerstrom, Inc. nor
Mr. Fish were affiliated with the Company during the pendency of the offer.
At this stage of the transaction, the Company's management is unable to
predict whether the Letter of Intent will culminate in a signed merger agreement
or whether the merger of the Company with Easton will occur. As a consequence of
its due diligence activities to date, the Company has discovered that Easton's
Norris and Pony mining claims, located some 35 miles from the Alder Gulch area,
may be subject to yet unasserted environmental claims under the Comprehensive
Environmental Response and Liability Act ("CERCLA") and the Montana
Comprehensive Environmental Cleanup and Responsibility Act (the "Montana Act").
Although Easton has expressed a willingness to segregate these claims from the
Alder Gulch claims, such segregation would not, in the opinion of management of
the Company, necessarily relieve the Company from successor liability for
environmental cleanup costs under CERCLA and the Montana Act. Moreover, were
Easton to segregate the Norris and Pony claims in an acceptable manner --
thereby reducing the likelihood that the Company would be liable for such costs
as a successor entity -- such segregation would result in the transaction being
restructured as an asset acquisition, as opposed to a merger, the effect of
which would render the transaction taxable to Easton and its shareholders. Based
on the Company's current discussions with Easton, it does not appear as if
Easton is amenable to proceeding with the transaction under these circumstances.
The uncertainty of the Easton transaction is further compounded by the fact
that the Tabor and Moen transactions, which are described below under this
section of the Proxy Statement, have, in the opinion of the Company's
management, benefitted the Company's Alder Gulch mining claims (and thereby
increased their potential value, assuming mining activities are commenced),
without any corresponding increase in the potential value of Easton's Alder
Gulch mining claims. As a consequence, management of the Company presently
believes that the Easton transaction cannot be completed, as a merger or
otherwise, unless Easton agrees to a significant reduction in the number of
shares of the Company's Common Stock Easton would receive as consideration for
its Alder Gulch mining claims. Easton has conducted only limited exploration
activities on its properties, and thus far has not been able to demonstrate to
the Company that its mining claims contain a mineable gold deposit warranting
the consideration set forth in the Letter of Intent. The Company has therefore
advised the Commission staff that it cannot conclude that the merger with Easton
is more likely to occur than not. If, however, a merger agreement with Easton is
signed, the Company will seek to solicit stockholder approval by means of a
proxy statement that contains the required disclosure of the business and
properties, and includes the financial statements, of both companies.
TABOR PROPERTIES. Effective March 25, 1996, the Company signed an asset
purchase agreement with Tech Squared, Inc., a Minnesota corporation, to purchase
ten patented and 120 unpatented mining claims, and one mining lease, covering
properties located in the Alder Gulch area of the Virginia City Mining District
owned by Tech Squared's subsidiary, Tabor Resources Corporation ("Tabor").
Pursuant to the agreement, as amended, on April 19, 1996, the Company issued
525,000 shares of the Company's Common Stock, of which 125,000 shares were
issued to Tabor and 400,000 shares were issued in escrow, subject to the
conditions described below. The agreement provides that if, during the two year
period commencing with the effective date of the agreement, the average bid
price of the Common Stock of the Company during any period of 30 consecutive
trading days does not exceed $2.00 per share, then, promptly following the
expiration of such two year period, the Company will issue to Tabor such
additional shares as are sufficient to increase the aggregate market value of
the shares of Common Stock of the Company then owned by Tabor to $800,000. In
addition, the Company has agreed to prepare and file a registration statement
under the Securities Act covering the resale of 400,000 of the shares of Common
Stock to be issued to Tabor, and to use its best efforts to cause such
registration statement to be declared effective by the Commission within six
months after April 16, 1996. The Company is obligated under the agreement to
maintain such registration statement in effect for a period of 18 months and to
include any unsold shares in any other registration statement it files after
such 18 months.
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Pending the effectiveness of such registration statement, the documents to
convey the Tabor properties, and certificates for the 400,000 shares to be
issued by the Company, will be held in escrow. If the registration statement is
not declared effective by October 16, 1996, at Tabor's election such documents
and certificates will be returned to the respective parties, and the transaction
will be rescinded.
MOEN AGREEMENT. On March 26, 1996, the Company and Group S signed an
agreement with Roy Moen, the owner of the 216 claims to which Group S has
mineral rights (the "Moen Agreement"). Under the Mining Lease and Option
Purchase Agreement (see "Properties of Group S"), Group S was obligated to pay
Moen aggregate rentals of $7.5 million over a period of seven years, of which
$4.15 million was payable during a three year period beginning in 2001.
(Approximately $1.1 million of Group S's rental obligations to Moen had been
paid as of April 30, 1996. $474,895 of this amount was advanced by the Company
on Group S's behalf). In addition, once the claims were placed into production,
Group S was also obligated to pay Moen a landowner's production royalty
(essentially a royalty equal to the sales price of the minerals produced, less
smelting charges) of up to 5% if the price of gold was $425 per ounce or higher,
declining to 1% if the price of gold was less than $425 per ounce. The agreement
further provided that Group S would acquire a proportionate ownership interest
in the claims as rental payments were made, thereby reducing the risk of
forfeiture if Group S were unable to meet all its obligations.
The Moen Agreement reduces Group S' overall rental obligations by $3.0
million and reschedules bi-annual payments of $200,000 to $300,000, commencing
October 16, 1996 and ending September 1, 2002. The Moen Agreement also reduces
the production royalty Moen would receive if the claims are placed into
production. Like the former agreement, the production royalty declines if the
price of gold is less than $425 per ounce; unlike the former agreement, Group S
will not acquire a proportionate ownership interest in the claims as rental
payments are made. Instead, such ownership will become vested only when all
future rental payments, now totalling $3.4 million, have been made.
On April 27, 1996, the Company issued 250,000 shares of Common Stock to
Moen, and granted him three-year options, exercisable at the price of $2.00 per
share, to acquire 200,000 additional shares. The Company also has agreed to
prepare and file a registration statement under the Securities Act covering the
shares and options, which it will maintain in effect for a period of one year so
that Moen may resale them should he so choose.
In addition, the Company will forgive approximately $89,000 in indebtedness
which Moen and a related entity incurred in 1993 in connection with purchase of
equipment and the customizing of a mill facility near Virginia City. The Company
will also transfer two mine trucks to Moen, having a book value of $34,452, and
will cause Geneva Mill L.L.C. to assign and convey to Moen an unusable ore
processing facility located in Radersburg, Montana, together with approximately
20 acres of real property on which the facility is located. (As is disclosed in
Note 5 to the Financial Statements in the Company's Annual Report on Form
10-K/A, the carrying value of a promissory note issued to the Company by Geneva
Mill in 1994 in connection with the Company's financing of the mill's
acquisition and refurbishment was written down in 1995 to $220,000.) In
addition, N. A. Degerstrom, Inc., which is controlled by an affiliate of the
Company, has agreed to transfer to Moen certain equipment maintained at a
Degerstrom-operated milling facility near Soda Springs, Idaho. Such equipment is
estimated by Degerstrom to have a fair market value of approximately $30,000,
and the Company has agreed to compensate N. A. Degerstrom, Inc. for such value.
PROPERTIES OF RESOURCES
Resources is a New York State corporation organized in 1990. As of December
31, 1995, $1,393,600 of the development costs and landowner royalty payments
with respect to the Kearsarge Mine had been paid by Resources to the Company.
Such costs and payments have been treated as a capital contribution to the
Company.
Resources is privately-owned and was formed to invest in and acquire
precious metals claims for development and mining of gold and silver. Resources
acquired a 70% interest in the 34 Kearsarge Group of Claims, previously held by
Bearcat Explorations Inc. (a non-affiliated company). Such interest was
subleased to The Hanover Group, Inc. (a Schmid family-owned company), which
subsequently assigned the interest to
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<PAGE>
Resources under an Assignment Agreement dated April 26, 1990. Under this
agreement, Resources assumed the obligation of the underlying landowner
agreement and the right to explore, develop and mine the claims. The claims are
subject to a 5.0% net smelter royalty to the landowner, as well as minimum
annual rental payments through the year 2000, which are applicable toward the
purchase price of approximately $7.0 million. Bearcat Explorations Inc. retained
a 30% working interest in the 34 claims. That interest was later acquired by the
Company.
Under a Sublease and Purchase Option Agreement dated July 31, 1990,
Resources conveyed to International, then its wholly owned subsidiary, all of
Resources' rights to the Kearsarge Claim for an original purchase price of $6.3
million (payable in annual installments) and a payment of $10,000 per month to
Resources (see Note 9 to Financial Statements in the Company's Annual Report on
Form 10-K/A). Resources continued to pay an underlying landowner payment of
$8,760 per month on the claim. On September 24, 1990, the Company acquired 100%
of the capital stock of International in exchange for 700,000 shares of the
Company's Common Stock. The purchase price was modified on November 30, 1990 to
credit against the stated purchase price of $6.3 million the sum of $3.0
million, which was paid by the issuance to Resources of 1,500,000 shares of the
Company's Common Stock that were arbitrarily valued at $2.00 per share. The
number of shares was adjustable if the per share price was less than $2.00 after
one year. 500,000 additional shares was paid to Resources because the market
price of the Company's shares on December 1, 1991 was below $2.00 per share.
On December 20, 1990, the Company entered into a Claim Option Agreement with
Resources for five additional claims (part of Resources' original 34 Kearsarge
Group of Claims) adjacent to the Kearsarge Claim, subject to the underlying
agreements, under which the Company has an option, exercisable until December
1996, to acquire these claims for an option exercise price of $90,000 for each.
In addition, the Company agreed to pay to Resources a monthly rental payment of
$2,500 for each claim it elected to acquire. The Company also has the right to
purchase each claim for $600,000 during the first seven years of the Agreement,
with all rental and option exercise payments being applied toward the purchase
price on a claim-by-claim basis. In consideration of granting this option, the
Company issued 900,000 shares of its Common Stock to Resources. To date no
option has been exercised to acquire any of the claims. If Resources is merged
into the Company, the Claim Option Agreement will be terminated, and the Company
will acquire the claims outright.
Under the Assignment and Mineral Sublease Agreement dated February 20, 1992,
as part of the Mining Venture Agreement with Kennecott, Resources conveyed to
the Company its 70% interest in the remaining 28 claims held by Resources,
subject to the provisions of the underlying landowner agreements (see Note 11 to
Financial Statements in the Company's Annual Report on Form 10-K/A) and the
Mining Venture Agreement. Under the Mineral Sublease Agreement, Resources
received 70% of the Company's participating interest in the 28 claims, subject
to the provisions of any mining venture entered into by the Company. Under the
Mineral Sublease Agreement, Resources has the right to convert its 70% interest
in the 28 claims into shares of the Company's Common Stock at a rate equal to
75% of the average market value of the Common Stock during the 30 day period
following a valuation appraisal prepared by an independent mining engineer. In
addition, Resources has the right to receive a $15,000 per month management fee
commencing January 1, 1994, unless deferred beyond that date by Resources,
continuing until commercial production commences on these claims. Payment of the
management fee was subsequently deferred until January 1, 1997. No production
mining operations have commenced on these claims. If Resources is merged into
the Company, the Company will acquire Resources' interest in the claims
outright, and the Company's obligations under the Assignment and Mineral
Sublease Agreement will be terminated.
The various agreements between the Company and Resources described above
were negotiated through and between affiliates. They were not determined by any
independent appraisal or other generally recognized criteria of value.
Consequently, the transactions cannot be considered to be at "arms-length" and
may be deemed to be arbitrary transactions.
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<PAGE>
PROPERTIES OF GROUP S
Group S is privately-owned and was formed to invest in and acquire precious
metals claims for development and mining of gold and silver. On October 16,
1991, Group S entered into a Mining Lease and Option to Purchase Agreement with
a non-affiliated third party to acquire control of 216 claims in the Alder Gulch
area of the Virginia City Mining District. The agreement gives Group S the right
to explore, develop and mine all minerals on the claims. Group S has the right
to commingle ores extracted from the claims with ores derived from other lands
or properties, provided accurate records of weights or volumes are determined.
The term of the agreement is 12 years and for so long thereafter as development,
mining, processing or marketing operations are carried out with respect to the
claims in good faith and on a continuous basis.
During the term of the agreement, Group S must pay incremental annual rental
payments on the anniversary date totaling approximately $7.5 million over 12
years. To date, approximately $1.1 million has been paid in annual payments. The
balance remaining as of April 30, 1996 was approximately $3.4 million, after
giving effect to the Moen Agreement described above under "Recent Developments"
(see "Note 4 to Financial Statements of Group S"). All rentals will be credited
toward the purchase price of $4.5 million. Group S may elect to pre-pay all or a
portion of these rental payments discounted at the prime interest rate quoted by
Citicorp/Citibank in New York at the time of prepayment plus 1%. The claims
carry a production royalty between 1% to 5% depending upon the market price of
gold on the New York COMEX Exchange Market. See "Recent Developments; Moen
Agreement" for a description of the agreement reducing future rental
obligations.
On August 31, 1993, the Company entered into a Mineral Sublease Agreement
with Group S pursuant to which the Company acquired the Apex Claim (patented
(deeded) property adjacent to the Kearsarge Claim) for $125,000 in cash, a 20%
net profits interest in favor of Group S, and 150,000 shares of the Company's
Common Stock. To date no payments have been made to Group S. There is a net
smelter royalty due to the landowner on the claim which ranges between 4% and
.8% depending on the price of gold. If Group S is merged into the Company, the
Company's obligations under the Mineral Sublease Agreement will be terminated,
the 20% net profits interest will be extinguished, but the net smelter royalty
due the landowner will become the obligation of the Company.
The agreements between the Company and Group S described above were
negotiated through and between affiliates. They were not determined by any
independent appraisal or other generally recognized criteria of value.
Consequently, the transactions cannot be considered to be at "arms-length" and
may be deemed to be arbitrary transactions.
MINING CLAIMS OF RESOURCES AND GROUP S
From 1992 through 1994, Kennecott conducted exploration work on a portion of
Resource's 28 claims and the five option claims, and on 216 claims of Group S.
According to Kennecott's reports, potential mineral deposits of approximately
20,100,000 tons of open-pittable gold-bearing ore were reported on their claims,
at an average grade of 0.055 ounces of gold per ton (of which approximately 86%
were reported on Resources and Group S claims). Kennecott also reported that the
average grade and strip ratios derived by these calculations were similar to
those of the Golden Sunlight Mine (Placer Dome USA) located approximately 50
miles to the north of Alder Gulch.
THE COMPANY, RESOURCES AND GROUP S IN COMBINATION
If and after the three companies are merged, all agreements between the
Company and its affiliates will be assumed by the Company, except that the
Company will have no monthly payments, option exercise payments, net profit
interest royalties or other payment obligations to either of the merged
companies. The Company will acquire all of the claims held by its affiliates in
the underlying landowner agreements, and intercompany obligations will be
extinguished. The Company will be responsible for all obligations and payments
under the terms of the leases directly to the underlying landowners. As of
December 31, 1995, the total landowner payments due on the combined properties
was $12,681,565. See "Recent Developments; Moen Agreement" for a description of
the agreement reducing future payments due to a landowner. All
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<PAGE>
claims will be controlled by the Company, and all gold deposits will be
consolidated with the Company's gold deposits, and will total a potential
mineralized gold of approximately 26,000,000 tons of gold-bearing ore and an
average grade of .0615 ounces per ton.
As the result of the merger, assuming all conditions to the merger are met,
the Company will have 19,643,022 shares of Common Stock outstanding, including
shares underlying outstanding stock options and shares purchasable at a price
below the current market value of such shares. The net tangible book value per
share of Common Stock of the Company, on a pro forma basis, as of April 30, 1996
is $0.48 per share.
The Board of the Company and the boards of directors and stockholders of
Resources and Group S have approved the merger of the three companies on the
terms set forth herein.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSED MERGER OF THE
THREE COMPANIES. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE ISSUED
AND OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK ENTITLED TO VOTE THEREON IS
NECESSARY TO APPROVE THE PROPOSED MERGER WITH RESOURCES AND GROUP S.
THE SHARES OF COMMON STOCK REPRESENTED BY PROXIES IN THE ACCOMPANYING FORM
WILL BE VOTED TO APPROVE THE PROPOSED MERGER OF THE THREE COMPANIES, UNLESS THE
STOCKHOLDER SIGNING THE PROXY SPECIFIES OTHERWISE.
PROPOSED AMENDMENT OF CERTIFICATE OF INCORPORATION TO INCREASE
AUTHORIZED COMMON STOCK AND TO AUTHORIZE SERIES PREFERRED STOCK
On July 10, 1995, the Company's Board unanimously approved a resolution to
be submitted to the stockholders to consider and act on proposed amendment of
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's capital stock from 25,000,000, the number of shares
currently authorized, to 50,000,000 shares, to consist of 48,000,000 shares of
Common Stock, par value $.0001 per share, and 2,000,000 shares of preferred
stock, par value of $.001 per share (the "Preferred Stock"), with such rights,
preferences, limitations and other characteristics as two-thirds of the members
of the Board from time to time may determine. The text of the amendment is
attached hereto as Exhibit A.
For the reasons described below, the Company's Board believes adoption of
the proposed amendment is essential for the Company to have the ability to
structure financing for possible future acquisitions and to meet the Company's
other financing needs.
REASONS FOR PROPOSAL
The Company believes that the amendment of the certificate of incorporation
to increase the authorized capital stock to 50,000,000 shares and to authorize
2,000,000 shares of Preferred Stock will enhance the Company's ability to
acquire additional precious metals claims, to finance the development of its
claims, and to participate in other types of business transactions.
Specifically, the Board deems it appropriate to increase the number of
authorized shares of Common Stock and to authorize the Preferred Stock in order
to facilitate purchases of key properties, equity financing, mergers and other
acquisitions.
The Board also believes that the use of the Preferred Stock will afford
management a substantial degree of flexibility in future financing transactions
to fund the development of properties as well as possible acquisitions using
stock or cash. The availability of Preferred Stock may also be used to thwart an
outsider from acquiring control of the Company through the issuance to existing
stockholders of rights (sometimes referred to as a "poison pill") to receive
preferred stock with voting and conversion rights that would be onerous to an
outsider if it acquired shares of Common Stock in excess of a stated threshold.
At present, the Company has no plans to issue "poison pill" rights to its
stockholders. The amendment requires the vote of two-thirds of the Board to
authorize the issuance of the Preferred Stock and to fix the designations,
powers, preferences and rights of each series.
36
<PAGE>
RISK OF FUTURE ISSUANCES.
If the stockholders approve the amendment of the Certificate of
Incorporation, to increase the authorized Common Stock and to authorize the
Preferred Stock, the Company's Board will be able to authorize the issuance of
such shares from time to time without further stockholder approval. Furthermore,
the Company does not intend to seek further authorization from its stockholders
to issue shares unless, in the Company's opinion, such approval is required or
advisable. It is possible, therefore that the interests of the current
stockholders could be substantially diluted without their participation or
consent. It is also possible that a change of control of the Company could
occur. For example, the sales of stock to the Degerstrom Group in June and
August of 1995 created a new control group, and the Company's stockholders had
no vote on the matter. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS;
Transactions With The N.A. Degerstrom Group"). However, management believes that
any Common Stock or Preferred Stock would be bought by a relatively large number
of different purchasers so that such purchasers would have to act in concert to
effect a change in control. If the Company determines to issue additional shares
to a large and diverse group of investors, it will be required to register the
shares thus to be offered under the Securities Act. Such a registration would be
time-consuming and expensive.
Although there is a Letter of Intent with Easton (see "PROPOSED MERGER;
Recent Developments.") the Company's management is unable to predict whether the
proposed merger, which would involve the Company's issuance of 14,368,713 shares
of Common Stock, will occur. Other than the Letter of Intent, the acquisition of
the Tabor Properties and the Moen Agreement described under "Recent
Developments", there are at present no specific understandings, arrangements or
agreements with respect to any future acquisitions or other transactions which
would require the Company to issue any additional Common Stock or any Preferred
Stock, except when Mr. Degerstrom purchases 542,858 additional shares of Common
Stock later in 1996. See "CERTAIN TRANSACTIONS; Transactions With The N.A.
Degerstrom Group".
No holder of the Company's Common Stock or Preferred Stock has or would have
any preemptive or similar right to acquire or subscribe for additional unissued
Common Stock or Preferred Stock or any other securities of any class, or rights,
warrants or options.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSED AMENDMENT OF
THE CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF SHARES OF CAPITAL
STOCK WHICH THE COMPANY IS AUTHORIZED TO ISSUE FROM 25,000,000 SHARES TO
50,000,000 SHARES, TO CONSIST OF (a) 48,000,000 SHARES OF COMMON STOCK, PAR
VALUE $.0001 PER SHARE, AND (b) 2,000,000 SHARES OF PREFERRED STOCK, PAR VALUE
$.001 PER SHARE.
THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE ISSUED AND
OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK ENTITLED TO VOTE THEREON IS
NECESSARY TO APPROVE THE PROPOSED AMENDMENT. THE SHARES OF COMMON STOCK
REPRESENTED BY PROXIES IN THE ACCOMPANYING FORM WILL BE VOTED TO APPROVE THE
AMENDMENT UNLESS A CONTRARY DIRECTION IS INDICATED.
37
<PAGE>
THE 1995 STOCK OPTION PLAN
At the Special Meeting, the stockholders will be asked to consider and
approve the Company's 1995 Stock Option Plan (the "Plan"), which was adopted by
the Company's Board on May 17, 1995. The text of the Plan is set forth below as
Exhibit B. The following is a summary of the material terms of the Plan:
Under the Plan, the Company may grant both "incentive stock options" and
other options that will not be treated as "incentive stock options" under the
Federal Internal Revenue Code, as amended (the "Code"), stock appreciation
rights ("SARs") and shares of restricted stock.
The total number of shares of Common Stock which may be issued and on which
options may be granted under the Plan from time to time is 4,000,000, of which
800,000 shares are available for directors, and 3,200,000 shares are available
for officers and other key employees ("Eligible Employees"). As of May 1, 1996,
the options listed in the table below under "Stock Option Grants" had been
granted under the Plan. In addition to the officers and directors to whom
options were granted on June 2, 1995, all of the other officers and directors of
the Company, namely, Messrs. Fish, Schoonmaker, Degerstrom and Owsley, are
eligible to receive options on up to 250,000 shares each. None has been granted
any options to date. If any such options are issued, they will be issued at no
cost to the grantee and may have an option price that is less than the fair
market value of the Company's Common Stock at the date of the grant. No SARs or
shares of restricted Common Stock have been issued to date or are intended to be
issued during 1996. A stock option committee of the Board (the "Committee") has
been established to administer the Plan. The Committee consists of two Board
members who are not officers of the Company. The Committee, in its discretion,
will determine the employees who are eligible to participate in the Plan and the
number of shares, if any, on which options are to be granted, the SARs, if any,
to be granted with respect to such options and the shares of restricted Common
Stock, if any, to be issued, to Eligible Employees.
Except for options to purchase up to 750,000 shares, all options granted
under the Plan will be exercisable at a price equal to the fair market value of
the shares at the time the options are granted. If options intended as
"incentive stock options" are granted to any employee who is a holder of more
than 10% of the total combined voting power of all classes of stock of the
Company outstanding, the exercise price will not be less than 110% of the then
current fair market value of the optioned shares. If the aggregate fair market
value (determined at the time such option is granted) of the shares purchasable
for the first time by any grantee during any calendar year exceeds $100,000, the
option to purchase such excess shares may not be treated as an "incentive stock
option". No option may be exercised more than 10 years after the date on which
it is granted, except that no option may be exercised more than five years after
the date of grant if it is granted to an employee who holds more than 10% of the
total combined voting power of all classes of stock of the Company.
Options to purchase up to 750,000 shares are not intended to qualify as
"incentive stock options" under the Code. They may be granted to Eligible
Employees under the Plan and will have such exercise prices and such other terms
and conditions as the Committee may determine in its discretion.
Options granted under the Plan will not be transferable other than by the
laws of descent and distribution and during the grantee's life may be exercised
only by such grantee. All rights to exercise options will terminate upon
termination for cause of the holder's employment or directorship.
Shares purchased upon exercise of options, in whole or in part, must be paid
for in cash or, in the discretion of the Committee, by tendering shares of
Common Stock, held for more than six months, valued at their fair market value,
or a combination of cash and such shares. At the discretion of the Committee,
SARs may be granted in connection with the grant of any option under the Plan.
An SAR will entitle the holder of the related option to surrender such option,
or any portion thereof to the extent unexercised, and receive payment in an
amount equal to the excess of the fair market value of the Common Stock on the
date of exercise of such SAR over the exercise price of the related option
multiplied by the number of shares of Common Stock as to which such SAR is
exercised. Payment of the amount due upon the exercise of an SAR may be made, at
the discretion of the Committee, in shares of Common Stock having a fair market
value on the date preceding the date the SAR is exercised equal to such payment
or in cash.
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<PAGE>
The Plan also provides that shares of restricted Common Stock may be granted
to Eligible Employees on such terms and in such amounts as the Committee
determines. Such shares of Stock will be issued under a written agreement which
will contain restrictions on transfers thereof as may be required by law and as
the Committee may determine in its discretion.
The Plan will terminate on June 2, 2005, or earlier if and when the total
number of shares of restricted stock and shares underlying stock options,
granted under the Plan equal 4,000,000 shares or the Board determines to end the
Plan. The authorized number of shares may be increased, and the Plan's date of
termination may be extended, only by stockholder action.
REASONS FOR THE PLAN
The Company believes that the adoption of the Plan and the issuance of stock
options, SARs or restricted shares thereunder are necessary to attract and
retain the services of key employees and directors whose salaries and other
compensation levels are below those that prevail at larger companies. As
described under "Stock Option Grants" below, the Board has granted a total of
800,000 stock options under the 1995 Stock Option Plan, subject to stockholder
approval of the Plan.
The Company's executive compensation, including grants under the Plan, is
linked to individual and corporate performance and stock price appreciation. The
Committee intends to continue the policy of linking executive compensation to
corporate performance and returns to stockholders, recognizing that the ups and
downs of the business cycle and in particular the depressed gold prices from
time to time may result in an imbalance for a particular period.
STOCK OPTION GRANTS
On June 2, 1995, acting upon the recommendations of the Committee, the Board
granted options to the persons named below, subject to stockholder approval of
the Plan. Stock options had not previously been granted by the Company. On the
date of grant, the fair market value of the Common Stock as reported by NASDAQ
was $0.515 per share. The exercise price of each stock option granted was fixed
at $1.60 per share, an amount (i) equal to the price paid by investors to
purchase shares of the Common Stock in the Company's 1993-1994 public offering
and (ii) approximately 3.1 times the market price per share of the Common Stock
on June 2, 1995 as reported by NASDAQ. The term of each stock option granted on
June 2, 1995 is five years.
The table below lists the stock options granted on June 2, 1995 and the
relationship of each grantee to the Company:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF OPTIONEE RELATIONSHIP OF OPTIONEE TO COMPANY SHARES OPTIONED
- --------------------------- --------------------------------------------------- ---------------
<S> <C> <C>
Pierre Gousseland (1) Director 100,000
Fred R. Schmid Former Chairman of the Board and President 250,000
Stephen J. Schmid Former Vice President, Treasurer, Secretary and
Director 175,000
Laurence Steinbaum (1) Director 125,000
Nicholas S. Young Director 150,000
</TABLE>
- ------------------------
(1) Member of the Committee. Messrs. Gousseland and Steinbaum were formerly
members of the Company's Board of Advisers (which no longer exists), and
such membership was taken into account in the determination of the number of
shares optioned to them.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE THE PLAN. THE
AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE SHARES OF COMMON STOCK
REPRESENTED AT THE SPECIAL MEETING IS NECESSARY TO APPROVE THE PLAN. THE SHARES
OF COMMON STOCK REPRESENTED BY THE PROXIES IN THE ACCOMPANYING FORM WILL BE
VOTED TO APPROVE PLAN UNLESS A CONTRARY DIRECTION IS INDICATED.
39
<PAGE>
ELECTION OF DIRECTORS
The Company's By-laws fix the number of directors at nine. As of the date of
this Proxy Statement, the Board consists of seven members. The Company's
management does not currently plan to fill the existing vacancies on the Board,
or the vacancies that will be created after the election of the seven nominees.
Accordingly, the proxies will be authorized to vote for only seven directors,
leaving two vacancies on the Board. If conditions change in the future, the
Company reserves the right to fill the such vacancies. Under the Company's
by-laws, vacancies can be filled by the Board without stockholder vote. There is
no provision for cumulative voting in the election of directors. Directors will
be elected by a plurality vote of the shares represented at the Special Meeting.
The following table lists the names (in alphabetical order), ages, and the
positions held with the Company of the persons nominated to be directors of the
Company for the ensuing year and until their respective successors are duly
elected and qualify. All of the nominees are incumbent directors, and three of
them (Messrs. Degerstrom, Fish and Owsley) are designees of N.A. Degerstrom
pursuant to the Securities Purchase Agreement. Additional information regarding
the business experience, length of time served in each capacity, and other
matters relevant to each individual is set forth below the table.
<TABLE>
<CAPTION>
YEAR
FIRST
ELECTED A
NAME OF NOMINEE AGE POSITION AND OTHER RELATIONSHIP WITH THE COMPANY DIRECTOR
- ----------------------- --- ------------------------------------------------- ---------
<S> <C> <C> <C>
Neal A. Degerstrom 71 Director -- Designee of Neal A. Degerstrom 1995
James A. Fish 65 Chairman of the Board, President, CEO and 1995
Director -- Designee of Neal A. Degerstrom
Pierre Gousseland 72 Director and Member of the Stock Option Plan 1992
Committee
F. D. Owsley 63 Director -- Designee of Neal A. Degerstrom 1995
Fred R. Schmid 62 Director 1990
Laurence Steinbaum 70 Director and Member of the Stock Option Plan and 1994
Compensation Committees
Nicholas S. Young 47 Director and Member of the Compensation and Audit 1990
Committees
</TABLE>
NEAL A. DEGERSTROM was elected a Director of the Company in September, 1995.
Mr. Degerstrom has been President of N.A. Degerstrom, Inc., a company engaged in
heavy highway and bridge construction, large open pit mining, dams and mineral
exploration. Prior to that he was the managing partner of N.A. Degerstrom
Company. He has been a member of the Advisory Board to the College of
Engineering at Washington State University, president of the Spokane Chapter of
Associated General Contractors, a member of the Society of Explosives Engineers,
Society of Mining Engineers and a Trustee for the Northwest Mining Association.
Mr. Degerstrom received a Civil Engineering degree from Washington State
University in 1959.
JAMES A. FISH was elected Chairman of the Board on April 24, 1996, President
and Chief Executive Officer of the Company on March 3, 1996 and a Director of
the Company in September, 1995. He has been Vice President and general counsel
for N.A. Degerstrom, Inc. since September, 1987. Prior to that he was in private
law practice at Winston & Cashatt, Spokane, Washington, from 1980-1987, and at
Fish, Schultz and Tombari, also located in Spokane, from 1962-1980. He was
employed as superintendent at S&F Construction from 1955-1962. Mr. Fish received
a AB degree in geology from Berea College in Kentucky and a law degree from
Gonzaga University Law School, Washington in 1962.
40
<PAGE>
PIERRE GOUSSELAND has been a Director of the Company since July, 1992. He is
currently a director of SMB North America, Inc., SIRE, Latin-American Gold
Company and Royal Gold, Inc. He was the former Chairman of the Board, Chief
Executive Officer and director of AMAX, a director with AIG, Inc., Chase
Manhattan International, Degussa AG, French American Banking Corp. Saurer Group
Investments Ltd., IBM World Trade Europe/Middle East Africa Corp. and
Pancontinental Mining Europe GmbH. Mr. Gousseland received the degree of
Ingenieur Civil des Mines from the Ecole Nationale Superieure des Mines and a
law degree from the Sorbonne. He has been awarded the National Order of Merit in
France and the Chevalier of Legion of Honor from France.
F. D. OWSLEY was elected a Director of the Company in September, 1995. He
was formerly employed by ASARCO as General Manager, Northwest Mining Department,
responsible for silver mines in the Coeur d'Alene, and lead-zinc and
silver-copper mines in Colorado and Montana respectively. Mr. Owsley spent 34
years in various mining positions with ASARCO before his retirement in 1993. He
graduated from Montana School of Mines with a Bachelor of Science-Mining
Engineering degree in 1955 and has received honorary degrees from the Montana
College of Mineral Science & Technology Montana.
FRED R. SCHMID was Chairman of the Board from September 1990 to April 24,
1996, and President and Chief Executive Officer of the Company from September
1990 to March 3, 1996. Mr. Schmid is Chairman of the Board and President of
Resources and Group S, privately-held companies which he founded in April 1990
and September, 1991 respectively, both of which are affiliates of the Company.
From 1972 to December 1995, he was Chairman of the Board, Chief Executive
Officer and President of The Hanover Group, Inc., a privately-held company he
founded, which was merged into Group S in December 1995. Mr. Schmid has owned
other companies engaged in aspects of mining, including all phases of
administration, engineering, marketing, trading and extraction operations
relating to the mining industry. Prior to starting his own companies, Mr. Schmid
was President of National Equipment Rental, Ltd., a company engaged in
international equipment leasing and finance. He was employed with IBM in
marketing, manufacturing and scientific research early in his business career.
He graduated from New York University, College of Engineering, with a Bachelor
of Science degree in Industrial Engineering in 1963.
LAURENCE STEINBAUM has been a Director of the Company since December 1994.
From October 1990 through December 1994, he was co-chairman of the Company's
Board of Advisors. Since 1986 he has been a private financier and owner/investor
of several businesses, including restaurants, real estate, and oil and gas
producing companies. Between 1960 and 1985, he was Executive Director of the
Sommerset Hills School, a private school located in New Jersey for handicapped
children, which he owns. From 1975 to 1980, he owned a major dredging company in
Florida. He graduated from New York University in 1951 receiving a Bachelor of
Science Degree and completed courses toward a Masters Degree at the School of
Social Sciences.
NICHOLAS S. YOUNG has been a Director of the Company and International since
October 1990. From October 1990 through December 1994, he was co-chairman of the
Company's Board of Advisors. Mr. Young has been a director of Resources since
October 1990 and a director of Group S since September 1991. Presently, he is a
director of Spencer Stuart, a privately-held international executive search
consulting firm headquartered in New York. Since July 1992, Mr. Young has served
as President of TriCoastal Steel Corp. Prior thereto, he was Vice President of
Citibank where he founded and managed the Global Gold Business Department, which
provided corporate finance and investment banking services to governments,
corporations and private investors using gold as the medium of exchange. Prior
thereto, Mr. Young held various sales, marketing, trading and management
positions with large multinational corporations, including AMAX, Kennecott and
Hudson Bay Mining. He attended Franconia College and Harvard Business and
Management School.
Frank Duval has not been elected as a director of the Company; however, by
virtue of his activities in the name and on behalf of the Company, he may be
deemed a DE FACTO director. See "SHARES OWNED BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT".
The Company believes that Messrs. Degerstrom, Fish, Owsley, and Duval were
delinquent in filing reports on Form 3 to disclose their beneficial ownership of
Common Stock of the Company (a) in June 1995 when the Degerstrom group purchased
and agreed to purchase 2,857,142 shares of the Company and
41
<PAGE>
received an option (which has since been transformed into an obligation) to
purchase 2,142,858 additional shares, and (b) in September 1995, when Messrs.
Degerstrom, Fish and Owsley were elected as directors of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL SEVEN
NOMINEES TO THE BOARD. THE AFFIRMATIVE VOTE OF A PLURALITY OF THE SHARES OF
COMMON STOCK PRESENT OR REPRESENTED AT THE SPECIAL MEETING IS NECESSARY TO ELECT
DIRECTORS. THE SHARES REPRESENTED BY PROXIES IN THE ACCOMPANYING FORM WILL BE
VOTED TO ELECT THE NOMINEES LISTED ABOVE UNLESS A CONTRARY DIRECTION IS
INDICATED.
BOARD MEETINGS AND COMMITTEES
During 1995, the Company's Board met seven times.
The Company's Audit Committee consists of Messrs. Fred Schmid and Young. The
Audit Committee recommends to the Board the selection and appointment of the
Company's independent certified public accountants and reviews the proposed
scope, content, and results of the audit performed by the accountants, and any
reports and recommendations made by them. Six meetings were held with
representatives of Zeller, Weiss & Kahn, the Company's current accountants, to
review the audit of the Company's financial statements as at, and for the year
ended, December 31, 1995.
The Company's Compensation Committee consists of Messrs. Steinbaum, Young
and Fred Schmid. Prior to the formation of the Committee, compensation decisions
for the Company's executive officers generally were made by the Company's Board.
The Compensation Committee reviews and makes recommendations to the Company's
Board concerning the salaries paid to the Company's officers.
The Company's Stock Option Plan Committee was not formed until December 1994
and consists of Messrs. Gousseland and Steinbaum. Prior to the formation of the
Committee no stock option plan existed. The Stock Option Plan Committee reviews
and makes recommendations to the Company's Board concerning the stock options to
be granted. The stock options granted in 1995 to Messrs. Gousseland and
Steinbaum were approved by the other members of the Board. The Committee held
two meetings in 1995.
The Company has no nominating or executive committee.
AUTHORIZATION TO APPOINT NEW INDEPENDENT PUBLIC ACCOUNTANTS
The Board, with the recommendation of the Audit Committee, has appointed BDO
Seidman to audit the Company's financial statements as of, and for the fiscal
year ending, December 31, 1996. The Board of Directors recommends that the
stockholders authorize that appointment. The firm of Zeller Weiss & Kahn audited
the Company's financial statements as of, and for the fiscal year ended,
December 31, 1995, which are included herein.
THE SHARES OF COMMON STOCK REPRESENTED BY THE PROXIES IN THE ACCOMPANYING
FORM WILL BE VOTED TO AUTHORIZE THE APPOINTMENT OF BDO SEIDMAN AS THE COMPANY'S
INDEPENDENT PUBLIC ACCOUNTANTS UNLESS A CONTRARY DIRECTION IS INDICATED. THE
AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES PRESENT OR REPRESENTED AT THE
SPECIAL MEETING IS REQUIRED FOR SUCH AUTHORIZATION.
RELATIONSHIP WITH CURRENT INDEPENDENT PUBLIC ACCOUNTANTS
The Company has requested representatives of Zeller Weiss & Kahn, its
present auditors, to be available during the Special Meeting. The Company will
give such representatives an opportunity to make a statement if they so desire,
and it expects them to be available by telephone to respond to appropriate
questions from stockholders.
42
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH RESOURCES AND GROUP S
The transactions described under "PROPOSED MERGER; Properties of the
Company; Properties of Resources and Properties of Group S" and the following
transactions involved entities which are affiliated and are principally owned or
controlled, directly or beneficially, by Fred Schmid, the former President of
the Company. Mr. Schmid is a director and major stockholder of the Company. Due
to such relationships, none of these transactions can be deemed to have resulted
from arms-length negotiations. The terms of these transactions may not be as
favorable to the Company as they might otherwise have been had the Company dealt
with unaffiliated parties.
Through November 30, 1995, $1,393,600 of the development costs and rental
payments with respect to the Kearsarge Mine had been paid by Resources to the
Company and has been treated by the companies as a capital contribution. On
April 18, 1995, the Company's Board determined in principle to acquire
additional Alder Gulch precious metals claims held by its affiliates, Resources
and Group S, and authorized the acquisition of the affiliates by the merger
described under "PROPOSED MERGER" above. The merger should not be considered an
"arms-length" transaction. The terms of the merger were not reviewed or passed
upon by an independent investment banker or broker. Instead the Company relied
on the results of the Kennecott's exploration work that resulted in Kennecott
defining a potential of approximately 26,000,000 tons of gold mineralized
deposits and an average grade of .0615 ounces per ton on the properties of the
Company, Resources and Group S. The proposed merger has been approved by the
boards of directors and stockholders of Resources and Group S.
From time to time during 1994 and 1995, the Company advanced to Group S a
total of $474,895 (including interest) for landowner royalties payable under the
Mining Venture Agreement with Kennecott. Although Kennecott owed Group S
$300,695 to reimburse some of the royalties, when Kennecott terminated the
Mining Venture Agreement it ceased to be liable for such reimbursement. If the
merger with Group S is approved, Group S will reimburse $477,254 to the Company
by accepting 193,220 fewer shares in the merger (see "PROPOSED MERGER"). From
time to time during 1994 and 1995, the Company paid $120,000 to Resources for
royalty payments that Resources was obligated to pay under the Sublease and
Purchase Option Agreement dated July 31, 1990, and Resources assumed $105,207 of
accrued payroll and payroll tax liabilities due and payable to Fred R. Schmid by
the Company (see "Footnotes to Financial Statements").
From the effective date of his employment contract, October 1990, the
Company has accrued, and not paid, Fred R. Schmid's salary. Such unpaid salary
amounted to $381,282 as of December 31, 1994, and which was reduced to $360,795
as of December 31, 1995. During 1990, 1991 and 1992, the Company accrued the
salary of Stephen J. Schmid. Stephen J. Schmid is the son of Fred R. Schmid is
the former Vice President, Treasurer and Secretary who resigned effective
January 1, 1996. All such accrued salary was paid in 1993, except $56,165, which
was due to him as of December 31, 1994 and which was paid in full during 1995.
Stephen J. Schmid was not owed any accrued salary as of December 31, 1995.
For the years 1994 and 1995, Resources accrued a total of $170,568 and
$60,974 in salary for Messrs. Fred R. Schmid and Stephen J. Schmid,
respectively. By December 31, 1995, the balance owed to Fred R. Schmid increased
to $274,718, and the balance owed to Stephen J. Schmid decreased to $11,214.
43
<PAGE>
As a result of the proposed merger among the Company, Resources and Group S,
the total salary obligation that would be due and owing from the Company to Fred
R. Schmid would amount to $635,512. Since he had received advances from
Resources of $497,515, and advances from Group S of $62,715, upon completion of
the merger, a balance of $75,282 would remain due to Fred R. Schmid for
previously accrued salary, and $11,214 would remain due to Stephen J. Schmid for
previously accrued salary. In December 1995, Fred R. Schmid paid a vendor
$10,000 on behalf of Resources. Assuming the merger of Resources into the
Company, the Company would owe Fred R. Schmid such $10,000 increasing the
Company's obligation to him to $85,282, as of December 31, 1995. However,
Messrs. Schmid have agreed to waive their rights to have such amounts reimbursed
to them if and when Resources and Group S are merged into the Company.
Messrs. Gousseland, Steinbaum, Young , Stephen J. Schmid and Fred R. Schmid
are stockholders of Group S, Fred R. Schmid and Stephen J. Schmid are directors
and officers of Group S, and Mr. Young is a director of Group S. Messrs.
Steinbaum, Young, Stephen J. Schmid and Fred R. Schmid are shareholders of
Resources and Mr. Young is a director, and Stephen J. Schmid and Fred R. Schmid
are directors and officers of Resources.
TRANSACTIONS WITH THE N. A. DEGERSTROM GROUP
The Company and N. A. Degerstrom are parties to the Securities Purchase
Agreement pursuant to which the Company agreed to issue and sell, and Mr.
Degerstrom (acting in his own behalf and as representative of permitted assigns)
agreed to purchase 2,857,142 shares of the Company's Common Stock, and received
options for the purchase of an additional 2,142,858 shares of its Common Stock,
exercisable by Mr. Degerstrom or his assigns at any time on or before 5:00 p.m.,
Spokane time, on April 15, 1996, at the exercise price of $0.50 per share.
As of October 31, 1995, the Company and Mr. Degerstrom amended the
Securities Purchase Agreement to provide for the issuance and sale by the
Company, and the purchase by Mr. Degerstrom (again acting in his own behalf and
as representative of permitted assigns), of 300,000 additional shares of Common
Stock, at the price of $1.00 per share. As of December 1, 1995, the Company and
Mr. Degerstrom further amended the Securities Purchase Agreement to provide for
the issuance and sale by the Company, and the purchase by Mr. Degerstrom or his
permitted assigns of 700,000 additional shares of Common Stock at the price of
$1.00 per share, and to revise the dates when the options previously granted to
him could be exercised. As of March 3, 1996, the Securities Purchase Agreement
was again amended to transform the previously granted options into a purchase
obligation on the part of Mr. Degerstrom and his permitted assigns.
As of June 1, 1996, the Company had issued and sold to Mr. Degerstrom and
his permitted assigns an aggregate of 5,457,142 shares of the outstanding Common
Stock of the Company, for total consideration of $2,800,000. In addition, Mr.
Degerstrom is obligated to purchase 542,858 additional shares of Common Stock
will be purchased at the price of $0.50 per share, on or before 5:00 p.m.,
Spokane time, on October 16, 1996. All shares of the Common Stock, which have
been or will be sold to Mr. Degerstrom and his permitted assigns, were sold or
will be sold, as the case may be, in private placements which are exempt from
the registration requirements of the Securities Act, pursuant to Section 4(2)
thereof and are being held by the purchasers for investment. When all such
shares are purchased, Mr. Degerstrom and his assigns will own 6,000,000 shares,
representing approximately 30.55%, of the outstanding Common Stock after giving
effect to the issuance of such shares, shares underlying outstanding stock
options and the shares issuable in the merger.
CONTROL RIGHTS. The Securities Purchase Agreement provides, in part, that
when Mr. Degerstrom and his permitted assigns purchase 2,857,142 shares pursuant
to the agreement, they have the exclusive right to designate four nominees for
election to the Company's Board. They have nominated three directors, and if
they nominate a fourth director, Messrs. Schmid, Young, Steinbaum and Gousseland
have the right to nominate another director to the Company's Board. The
Securities Purchase Agreement further provides that the Company and its Board,
consistent with their fiduciary obligations, will take any and all such action
as is appropriate and consistent with their powers to ensure that this right of
nomination may be exercised by Mr. Degerstrom and his permitted assigns, and
that such right shall continue for so long as the purchasers
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<PAGE>
collectively own at least 15% of the Company's issued and outstanding Common
Stock. The Securities Purchase Agreement also provides that when Mr. Degerstrom
and his permitted assigns shall have purchased 2,857,142 shares pursuant to the
agreement, the purchasers will have the exclusive right to nominate the
Company's president, that the Company and the Board, consistent with their
fiduciary obligations, will take any and all such action as is appropriate and
consistent with their powers to ensure that this right of nomination may be
exercised by the purchasers, and that such right shall continue for so long as
the purchasers collectively own at least 15% of the Company's issued and
outstanding Common Stock.
Mr. Degerstrom and his permitted assigns partially exercised such rights at
meetings of the Board held on August 17, 1995 and September 13, 1995, when
Messrs. Degerstrom, Fish and Owsley were nominated and elected to the Company's
Board. Pursuant to the Securities Purchase Agreement, on March 3, 1996, Mr.
Degerstrom and his permitted assigns nominated, and the Board elected, James A.
Fish as President and chief executive officer of the Company, in lieu of Fred R.
Schmid.
THE DUVAL INTEREST. According to the Schedule 13D dated July 20, 1995, as
amended, filed by N. A. Degerstrom and other reporting persons as a group, Mr.
Degerstrom and Frank Duval have an understanding (which is not memorialized by
any agreement or other writing), pursuant to which Mr. Duval may purchase up to
one-half of the shares of Common Stock acquired by Mr. Degerstrom or his
Company, N. A. Degerstrom, Inc. under the Securities Purchase Agreement, at the
same price Mr. Degerstrom paid for such shares. Such understanding presently
encompasses 1,311,673 shares of Common Stock, which is one-half of the number of
shares acquired by Mr. Degerstrom and N. A. Degerstrom, Inc. pursuant to the
Securities Purchase Agreement as of the date of this Proxy Statement. That
number could increase if and when Mr. Degerstrom or N. A. Degerstrom Inc.
purchases 542,858 additional shares pursuant to the agreement. See "SHARES OWNED
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT".
The Securities Purchase Agreement was entered into in order to provide the
Company with funds sufficient to meet its obligations to the holders of certain
mining properties in which the Company has an interest, and in order to provide
the purchasers, collectively, with a meaningful ownership interest in the
Company.
EFFECT OF PROPOSED TRANSACTIONS ON CERTAIN PERSONS
Certain of the proposals covered by this Proxy Statement will benefit
certain directors of the Company if such proposals are approved by the
stockholders and are implemented.
If the proposed merger is approved by the stockholders of the Company and is
consummated, the following persons, each a director and nominee for reelection
as a director of the Company, will receive additional shares of Common Stock of
the Company in exchange for shares owned by them in Resources or Group S or
both, as follows:
<TABLE>
<S> <C>
3,224,943
Fred R. Schmid shares(1)
Nicholas Young 331,179 shares
Lawrence Steinbaum 133,983 shares
Pierre Gousseland 50,017 shares
</TABLE>
- ------------------------
(1) Of which Mr. Schmid will receive 708,056 shares and his family will receive
2,516,887 shares in which Mr. Schmid disclaims any beneficial interest.
See the tables under "SHARES OWNED BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT".
The approval by the stockholders of the Company's 1995 Stock Option Plan is
a condition to the stock options granted to Fred R. Schmid (250,000 options),
Nicholas S. Young (150,000 options), Laurence Steinbaum (125,000 options) and
Pierre Gousseland (100,000 options) each a director, and Stephen J. Schmid
(175,000 options), a former officer and director. If the Plan is approved, such
grants will be
45
<PAGE>
unconditional. See "THE 1995 STOCK OPTION PLAN". In the case of Fred R. Schmid
and Stephen J. Schmid, such options are in addition to their consulting fees
from the Company which will aggregate $148,230 during 1996. See "COMPENSATION."
COMPENSATION
DIRECTORS
From the Company's inception through the end of 1994, it did not pay its
directors. In 1995, the Company agreed to pay its directors, who are not
officers or employees or otherwise retained by the Company, an annual director's
fee of $1,200, plus $300 for each Board meeting attended, and $250 for each
meeting of the Compensation, Stock Option Plan and Audit Committees attended by
such director. The Company reimburses its directors for expenses incurred in
attending meetings. Through the date of this Proxy Statement, the directors have
not been compensated, except for direct reimbursement of expenses and the grant
by the Board on May 17, 1995 to the five persons who were then directors of a
total of 800,000 stock options, subject to stockholder approval of the Plan.
(See "The 1995 STOCK OPTION PLAN".)
EXECUTIVE COMPENSATION
POLICY. The salaries of the Company's executive officers are determined by
the Board. The Compensation Committee of the Board is responsible for
considering specific information and making recommendations to the full Board.
The Compensation Committee consists of two outside directors appointed annually
by the Company's Board. The Compensation Committee's consideration of and
recommendations regarding executive compensation are guided by the factors
described below. The objectives of the Company's executive compensation policy
are to attract and retain the best possible executive talent, to provide an
economic framework to motivate the Company's executives to achieve goals
consistent with the Company's business strategy, to provide an identity between
executive and shareholder interests through stock options, and to provide a
compensation package that recognizes an executive's individual results and
contributions to the Company's overall business objectives.
In making recommendations, the Compensation Committee reviews individual
executive compensation, corporate performance, stock price appreciation, and
total return to stockholders of the Company as well as a peer group of public
North American gold-mining companies. The Committee recommends to the Board
compensation levels for the President (the Chief Executive Officer) and other
officers of the Company, the Committee takes into account the views of the
Company's Chief Executive Officer.
SALARIES. The key elements of the Company's executive compensation are
salary and stock options. The Board's Compensation Committee acts on salaries of
officers and its Stock Option Plan Committee acts on employee stock option
awards. Together, they combine an overall executive compensation package.
Salaries for executive officers are based on the responsibilities of the
position held and the experience of the individual, and the competitive
marketplace for executive talent, and salaries for comparable positions at other
gold-mining companies. In the past, salaries of the Chief Executive Officer and
other officers of the Company for each year were generally set by the Board at
its final meeting in the preceding year. Specific individual performance and
overall performance are reviewed to determine the salary of each individual
officer. The Compensation Committee, where appropriate, also considers other
performance measures, such as increase in market share, safety, environmental
awareness, and improvements in relations with stockholders, employees, the
public, and government regulators.
In setting the compensation of Fred R.Schmid, the Company's President and
Chief Executive Officer during 1995, and the other officers of the Company, the
Compensation Committee, the Stock Option Plan
Committee and the Board concluded that their salaries were in the lower half of
peer-group levels and that their performance incentives had to be heavily based
on their equity interest and stock options in the Company.
CASH BONUSES. From time to time, acting upon the recommendation of the
Compensation Committee, the Board may approve cash bonuses to executives and key
employees based on outstanding achievements in the performance of their duties.
In 1994, the Company's Compensation Committee recommended to the
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<PAGE>
Board, which approved and authorized the Company to pay Fred R. Schmid, then the
President and Chief Executive Officer, a cash bonus of $150,000 for his services
in raising the initial working capital and completing the 1993 public financing
for the Company. No such action has been taken for or in respect of 1995.
STOCK OPTIONS. Reference is made to "THE 1995 STOCK OPTION PLAN" for a
description of the Company's Stock Option Plan and the stock options granted
under the Plan. The Board has authorized the issuance to Mr. Fish of restricted
Common Stock as part of his compensation arrangement. That arrangement is
described below.
COMPENSATION OF OFFICERS FOR 1995, 1994 AND 1993. The following table shows
compensation paid to the Company's former Chief Executive Officer during the
fiscal years ended December 31, 1995, 1994, and 1993.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
NAME AND COMPENSATION COMPENSATION ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) AWARDS COMPENSATION ($)
- ------------------------------------- --------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Fred R. Schmid....................... 1995 137,435 -0- -0-
CEO and President 1994 126,445 -0- 150,000(1)
1993 114,950 -0- -0-
</TABLE>
- ------------------------
(1) Fred R. Schmid received a cash bonus approved by the Board for his services
in raising the initial working capital and completing the public financing
for the Company.
EMPLOYMENT CONTRACTS
FRED R. SCHMID. On March 14, 1995, the Company amended Fred R. Schmid's
employment agreement retroactive to August 27, 1994, employing him as its
President and Chief Executive Officer until August 31, 1997. The agreement
called for a base salary of $125,000 for the first year, $137,000 for the second
year and $150,000 for the third year, payable in equal monthly installments. In
addition to salary, Mr. Schmid is entitled to receive cost-of-living increases
based upon increases in the applicable consumer price index. The agreement also
provided Mr. Schmid with a yearly cash bonus equal to 3% of the Company's
pre-tax net revenues, a severance package equal to the greater of $2,500,000 or
10% of the Company's net worth, or if Mr. Schmid terminated the agreement for
"good reason", an amount equal to 300% of his base compensation, and certain
other benefits.
In January 1996, Mr. Schmid and the Company agreed to terminate the
employment agreement, and Mr. Schmid agreed to resign as President of the
Company effective upon the election of a new President. On March 3, 1996, Mr.
Schmid resigned as President and Chief Executive Officer and the Board elected
James A. Fish as President and Chief Executive Officer of the Company following
Fred R. Schmid's resignation. On April 24, 1996, Mr. Schmid resigned as Chairman
of the Board. He has been engaged as a consultant for the Company for a fee of
$7,965 a month through December 31, 1996. He will retain his stock options and
rights under the Plan to purchase up to 250,000 shares of the Common Stock of
the Company for $1.60 per share through the end of the year 2000. In addition,
the Company has released Mr. Schmid from any claims which the Company has or
might have as a result of all actions taken or omitted by Mr. Schmid in his
capacities as an officer, director or employee of the Company, unless the
Company can demonstrate that he committed a criminal or deliberately fraudulent
act resulting in actual damages to the Company.
STEPHEN J. SCHMID. On September 5, 1995, the Company entered into an
agreement with Stephen J. Schmid, then the Company's Vice President, Treasurer
and corporate Secretary, to become effective only if there is a "change in
control" of the Company as defined in the agreement. If such "change in control"
occurs, the Company agreed to continue Mr. Schmid's employment for a period of
24 months thereafter, unless Mr. Schmid elects to terminate the agreement after
12 months, at an annual base salary essentially equal to Mr. Schmid's base
salary immediately before the change in control. In addition, Mr. Schmid is
entitled to terminate the agreement and to receive his salary for the balance of
the 12 to 24 month period for "good reason" as defined in the agreement.
In January 1996, Mr. Schmid and the Company agreed to terminate the
agreement, and Mr. Schmid agreed to resign as an officer and director of the
Company effective upon the election of a new Vice
47
<PAGE>
President, Treasurer or corporate Secretary. On March 3, 1996, the Board elected
Wayne Schoonmaker as Treasurer and Secretary of the Company upon Stephen J.
Schmid's resignation. Mr. Schmid has been engaged as a consultant for the
Company for a fee of $5,850 per month from January 1, 1996 through September 30,
1996, reduced by any compensation he earns from new employment during the period
from April 1, 1996 through September 30, 1996. He will retain his stock options
and rights under the Plan to purchase up to 175,000 shares of Common Stock of
the Company for $1.60 per share through the end of the year 2000. In addition,
the Company has released Mr. Schmid from any claims which the Company has or
might have as a result of all actions taken or omitted by Mr. Schmid in his
capacities as an officer, director or employee of the Company unless the Company
can demonstrate that he committed a criminal or deliberately fraudulent act
resulting in actual damages to the Company.
JAMES A. FISH. On March 28, 1996, the Board approved a compensation
arrangement for Mr. Fish, the Company's President, at the annual rate of
$90,000, payable each month in the form of $3,750 in cash and $3,750 in shares
of restricted Common Stock based on 60% of the average of the "asked" market
price quotations for the Common Stock during the preceding calendar month. The
aggregate compensation payable to Mr. Fish during 1996, without attributing any
value to the 40% discounted price of the stock, is expected to total $75,000.
STOCKHOLDER PROPOSALS
Proposals by stockholders of the Company to be presented at the 1997 Annual
Meeting of Stockholders must be received by the Company no later than March 10,
1997 to be included in the Company's Proxy Statement and proxy for that meeting.
The proponent must be a record or beneficial owner entitled to vote on his or
her proposal at the next Annual Meeting and must continue to own such security
entitling him or her to vote through that date on which the meeting is held.
ANNUAL REPORT
The Annual Report to Stockholders concerning the Company's operations during
the fiscal year ended December 31, 1995, including certified financial
statements as of and for the year then ended, has previously been furnished to
stockholders. The Annual Report is attached to and incorporated in this Proxy
Statement and should be considered part of the soliciting material.
OTHER MATTERS
The Board of Directors knows of no other business to be presented at the
Special Meeting of Stockholders. If other matters properly come before the
Special Meeting, the persons named in the accompanying form of proxy intend to
vote on such other matters in accordance with their best judgment.
By Order of the Board of Directors
Wayne Schoonmaker,
SECRETARY
June , 1996
48
<PAGE>
EXHIBIT A
Article Fourth of the Company's Certificate of Incorporation , as heretofore
amended and restated, is amended by striking out Article Fourth thereof and by
substituting in lieu of said Article the following new Article:
"FOURTH: The total number of shares of all classes of stock which the
corporation is authorized to issue is FIFTY MILLION (50,000,000) shares
consisting of (a) 48,000,000 shares of common stock, each of which is to have a
par value of $.0001 (the "Common Stock"), and (b) 2,000,000 shares of preferred
stock, each of which is to have a par value of $.001 (the "Preferred Stock"),
with such rights, preferences, limitations and other characteristics as
two-thirds of the members of the Board of Directors from time to time may
determine".
The designations, relative rights, preferences and limitations of the shares
of Common Stock and Preferred Stock are as follows:
A. COMMON STOCK.
VOTING. The holders of Common Stock shall at all times vote as one class,
with each holder of record entitled to one vote for each share held. A holder of
shares of Common Stock shall have no right to cumulate his votes.
DIVIDENDS. Each issued and outstanding share of Common Stock shall entitle
the holder thereof to receive dividends (whether payable in cash, stock or
otherwise), when, as and if declared by the board of directors of this
corporation out of funds legally available therefore, SUBJECT, HOWEVER, to the
right of the holders of the Preferred Stock to first receive dividends payable
with respect to the Preferred Stock if and as fixed by the board of directors of
the corporation.
LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any liquidation,
dissolution or winding up of the affairs of this corporation, whether voluntary
or involuntary, each issued and outstanding share of Common Stock shall entitle
the holder of record thereof to receive ratably and equally all the assets and
funds of this corporation available for distribution to its shareholders,
whether from capital or surplus, SUBJECT, HOWEVER, to the rights of the holders
of the Preferred Stock to first receive such assets and funds with respect to
the Preferred Stock if and as fixed by the board of directors of the
Corporation.
PREEMPTIVE RIGHTS. A holder of shares of Common Stock shall not be entitled
to preemptive rights to acquire additional shares of capital stock of this
corporation.
B. PREFERRED STOCK.
BOARD DETERMINATION OF CERTAIN CHARACTERISTICS. The Board of Directors of
this corporation, if it obtains the votes of two-thirds of its members, will be
able to authorize, subject to the limitations prescribed by law and the
provisions hereof, at its option, from time to time to divide all or any part of
the Preferred Stock into series thereof; to establish from time to time the
number of shares to be included in any such series; to fix the designations,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof; and to determine
variations, if any, between any series so established as to all matters,
including, but not limited to, the determination of the following:
(a) the number of shares constituting each such series and the
distinctive designation of such series;
(b) the rate of dividend, if any, and whether dividends shall be
cumulative or noncumulative;
(c) the voting power of holders of such series, if any, including,
without limitation, the vote or fraction of vote to which such holder may be
entitled, the events upon the occurrence of which such holder may be
entitled to vote, and any restrictions or limitations upon the right of such
holder to vote, except on such matters as may be required by law;
(d) whether or not such series shall be redeemable and, if so, the terms
and conditions of such redemption, including the date or dates after which
the shares constituting such series shall be redeemable and the amount per
share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
<PAGE>
(e) the extent, if any, to which such series shall have the benefit of
any sinking fund provisions for redemption or repurchase of shares;
(f) the rights, if any, of such series in the event of the dissolution
of this corporation or upon any distribution of these assets of this
corporation, including, with respect to the voluntary or involuntary
liquidation, dissolution or winding up of this corporation, the relative
rights of priority, if any, of payment shares of such series;
(g) whether or not the shares of such series shall be convertible and,
if so, the terms and conditions in which shares of such series shall be so
convertible; and
(h) such other powers, designations, preferences and relative
participation, optional or other special rights, and such qualifications,
limitations or restrictions thereon as are permitted by law.
2
<PAGE>
EXHIBIT B
HANOVER GOLD COMPANY, INC.
1995 STOCK PLAN
SECTION. ESTABLISHMENT, PURPOSE, AND EFFECTIVE DATE OF PLAN
ESTABLISHMENT. Hanover Gold Company, Inc., a Delaware corporation (the
"Company") hereby establishes the "1995 STOCK PLAN" (the "Plan") for its key
employees, directors and advisors. The Plan permits the grant of Stock Options,
Stock Appreciation Rights and Restricted Stock.
PURPOSE. The purpose of the Plan is to advance the interests of the Company
and its Subsidiaries and promote continuity of management by encouraging and
providing key employees, directors and advisors with the opportunity to acquire
an equity interest in the Company and to participate in the increase in
shareholder value as reflected in the growth in the price of the shares of the
Company's Stock and by enabling the Company to attract and retain the services
of key employees and directors upon whose judgment, interest, skills, and
special effort the successful conduct of its operations is largely dependent.
EFFECTIVE DATE. The Plan shall become effective on the date it is adopted
by the Board of Directors of the Company, subject to the approval by the
affirmative votes of the holders of a majority of the shares of the Stock.
SECTION. DEFINITIONS; CONSTRUCTION
DEFINITIONS. Whenever used herein, the following terms shall have their
respective meanings set forth below:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
(b) "Board" means the Board of Directors of the Company, which shall
determine all matters concerning Options, Restricted Stock and Stock
Appreciation Rights granted to Eligible Directors.
(c) "Change in Capitalization" means any increase or reduction in the number
of shares of Stock, or any change (including, but not limited to, a change in
value) in the shares of Stock or exchange of shares of Stock for a different
number or kind of shares or other securities of the Company or any other
corporation or other entity, by reason of a reclassification, recapitalization,
merger, consolidation, reorganization, spin-off, split-up, issuance of warrants
or rights or debentures, stock dividend, stock split or reverse stock split,
extraordinary dividend, property dividend, combination or exchange of shares or
otherwise.
(d) A "Change in Control" means an event or series of events after the
Effective Date by which (i) any "person" or "group" (as such terms are used in
Section 13(d) and 14(d) of the Act) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Act), directly or indirectly, of more than 50% of the
aggregate voting power of all the capital stock of the Company normally entitled
to vote in the election of directors or (ii) during any period of two
consecutive calendar years, individuals who at the beginning of such period
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then still in office
who either were directors at the beginning of such period or whose election or
nomination was previously so approved) cease for any reason to constitute a
majority of the directors then in office.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a committee of the Board designated to administer the
Plan consisting solely of two or more members of the Board who are
"disinterested" within the meaning of Rule 16b-3 under the Act or "outside
directors" within the meaning of Section 162(m) of the Code. If no Committee is
designated or is administering the Plan, all references to the Committee herein
shall refer to the Board, the decisions of which shall be made by
"disinterested" members and "outside directors" as aforesaid.
(g) "Company" means Hanover Gold Company, Inc., a Delaware corporation, and
any successors thereto.
3
<PAGE>
(h) "Disability" means the inability to engage in any substantial activity
by reason of any medically determinable, physical or mental impairment that can
be expected to result in death or that has lasted or can be expected to last for
a continuous period of not less than 12 months.
(i) "Eligible Employee" means any key employee designated by the Committee
as eligible to participate in the Plan pursuant to Subsection 3.1. "Eligible
Director" means a director of the Company or a Subsidiary designated by the
Board to participate in the Plan pursuant to Subsection 3.1.
(j) "Fair Market Value" means the mean of the high and low prices at which a
share of the Stock is reported to have traded on the relevant date as reported
on the NASDAQ Electronic Interdealer Quotation System ("NASDAQ System"); and if
there is no trade on such date, the Fair Market Value means the mean of the low
asked and high bid prices on such date as reported on the NASDAQ System. If the
principal market for the Stock becomes a national securities exchange then the
Fair Market Value means the mean of the high and low prices at which a share of
the Stock is reported to have traded on the relevant date; and if there is no
trade on the relevant date, the Fair Market Value shall mean the mean of the low
asked and high bid prices on such date. If no Fair Market Value has been
established in accordance with the foregoing, Fair Market Value shall be the
value established by the Board in good faith and, in the case of an incentive
stock option, in accordance with Section 422 of the Code.
(k) "Option" means the right to purchase Stock at a stated price for a
specified period of time. For purposes of the Plan an Option may be either (i)
an "incentive stock option" within the meaning of Section 422 of the Code or
(ii) a "nonstatutory stock option."
(l) "Option Agreement" means the agreement evidencing the grant of an Option
as described in Subsection 6.2.
(m) "Option Price" means the price at which Stock may be purchased pursuant
to an Option.
(n) "Optionee" means a person to whom an Option has been granted under the
Plan.
(o) "Participant" means an Eligible Employee or an Eligible Director who has
been granted and, at the time of reference, holds an Option Restricted Stock or
Stock Appreciation Right.
(p) "Period of Restriction" means the period during which shares of
Restricted Stock are subject to restrictions pursuant to Section 9 of the Plan.
(q) "Restricted Stock" means Stock granted pursuant to Section 9 of the
Plan.
(r) "Stock" means the Common Stock of the Company, par value of $.001 per
share.
(s) "Stock Appreciation Right" means the right to receive the increase in
the value of Stock subject to an Option in lieu of purchasing such Stock.
(t) "Subsidiary" means any present or future subsidiary of the Company, as
defined in Section 424(f) of the Code.
NUMBER. Except when otherwise indicated by the context, the singular shall
include the plural, and the plural shall include the singular.
SECTION. ELIGIBILITY AND PARTICIPATION
ELIGIBILITY AND PARTICIPATION. Eligible Employees in the Plan shall be
selected by the Committee from among those officers and other key employees of
the Company and its Subsidiaries who, in the opinion of the Committee, are in a
position to contribute materially to the Company's continued growth and
development and to its long-term financial success. Eligible Directors in the
Plan shall be selected by the Board based on its opinion that their judgment,
interest in the Company and special efforts on behalf of the Company warrant
their selection.
4
<PAGE>
SECTION. STOCK SUBJECT TO PLAN
NUMBER. The total number of shares of Stock subject to issuance under the
Plan shall not exceed 4,000,000, of which not more than 800,000 shares shall be
reserved for Eligible Directors. The maximum number of shares of Stock with
respect to which Options or Stock Appreciation Rights may be granted to any
person during the term of the Plan cannot exceed 250,000. The shares to be
delivered under the Plan may consist, in whole or in part, of authorized but
unissued Stock or treasury Stock, not reserved for any other purpose. The
numbers of shares of Stock referred to herein shall be subject to adjustment
upon occurrence of any of the events indicated in Subsection 4.5.
UNUSED STOCK; UNEXERCISED RIGHTS. If any shares of Stock are subject to an
Option, which for any reason expires or is terminated unexercised as to such
shares, or any shares of Stock subject to a Restricted Stock grant made under
the Plan are reacquired by the Company pursuant to Section 9 of the Plan, such
shares shall again become available for issuance under the Plan.
EXERCISE OF STOCK APPRECIATION RIGHT. Whenever a Stock Appreciation Right
is exercised and payment of the amount determined in Subsection 8.1 (b) is made
in cash, the shares of Stock allocable to the portion of the Option surrendered
may again be the subject of Options or Restricted Stock hereunder. Whenever a
Stock Appreciation Right is exercised and payment of the amount determined in
Subsection 8.1 (b) is made in shares of Stock, no shares of Stock with respect
to which the Stock Appreciation Right is exercised may again be the subject of
Options or Restricted Stock hereunder.
RESTRICTED STOCK. Whenever any shares of Stock are forfeited pursuant to
Section 9 herein, such shares may again be the subject of Options or Restricted
Stock hereunder, but only if the Participant had not been paid any dividend or
received any other benefit of ownership of such forfeited shares.
ADJUSTMENT IN CAPITALIZATION.
(a) In the event of a Change in Capitalization, the Committee shall
conclusively determine the appropriate adjustments, if any, to the (i) maximum
number and class of shares of Stock or other securities with respect to which
Options or Restricted Stock may be granted under the Plan; (ii) the number and
class of shares of Stock or other securities which are subject to outstanding
Options or Restricted Stock granted under the Plan, and the purchase price
therefor, if applicable; and (iii) the maximum number of shares of Stock or
other securities with respect to which Options or Stock Appreciation Rights may
be granted during the term of the Plan.
(b) Any such adjustment in the shares of Stock or other securities subject
to outstanding incentive stock options (including any adjustments in the
purchase price) shall be made in such manner as not to constitute a modification
as defined by Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code.
(c) If, by reason of a Change in Capitalization, a grantee of Restricted
Stock shall be entitled to, or an Optionee shall be entitled to exercise an
Option with respect to new, additional or different shares of stock or
securities, such new, additional or different shares shall thereupon be subject
to all of the conditions, restrictions and performance criteria which were
applicable to the Restricted Stock or shares of Stock subject to the Option, as
the case may be, prior to such Change in Capitalization.
SECTION. DURATION OF PLAN
DURATION OF PLAN. The Plan shall remain in effect, subject to the Board's
right to earlier terminate the Plan pursuant to Subsection 12.3 hereof, until
all Stock subject to the Plan shall have been purchased or acquired pursuant to
the provisions hereof. Notwithstanding the foregoing, no Option or Restricted
Stock may be granted under the Plan on or after the tenth anniversary of the
Effective Date.
SECTION. OPTION GRANTS
GRANT OF OPTIONS. Subject to Sections 4 and 5, Options may be granted to
Eligible Employees or Eligible Directors at any time and from time to time as
determined by the Committee or by the Board, as the case may be. The Committee
shall have complete discretion consistent with the terms of the Plan in
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determining whether to grant Options, the number of Options to be granted to
each Eligible Employee, and whether an Option is to be an incentive stock option
within the meaning of Section 422 of the Code or a nonstatutory stock option.
The Board shall have and may exercise such discretion in respect of options to
be granted to Eligible Directors. Nothing in this Section 6 of the Plan shall be
deemed to prevent the grant of nonstatutory stock options in excess of the
maximum established by Section 422 of the Code.
OPTION AGREEMENT. Each Option shall be evidenced by an Option Agreement
that shall specify the type of Option granted, the Option Price, the duration of
the Option, the number of shares of Stock to which the Option pertains and such
other provisions as the Committee or the Board, as the case may be, shall
determine.
OPTION PRICE. The Option Price for each Option shall be determined by, or
in the manner specified by, the Committee in the case of Options for Eligible
Employees and by the Board in the case of Options for Eligible Directors;
provided that (i) subject to Subsection 4.5 hereof, Options with respect to no
more than 750,000 shares of Stock may have an Option Price that is less than the
Fair Market Value of the Stock on the date the Option is granted and (ii) in the
case of an incentive stock option, no Option shall have an Option Price that is
less than the Fair Market Value of the Stock on the date the Option is granted
(110% of Fair Market Value in the case of an incentive stock option granted to
any person who owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any Subsidiary (a "Ten Percent
Stockholder").
DURATION OF OPTIONS. Each Option shall have a duration of ten years from
the time it is granted, except that an incentive stock option granted to a Ten
Percent Stockholder shall have a duration of five years from the time it is
granted.
EXERCISE OF EMPLOYEE OPTIONS. Each option granted under the Plan shall not
be exercisable for the first 3 months from the time it is granted and thereafter
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee or the Board, as the case may be, shall in each
instance approve. Such restrictions and conditions need not be the same for each
Participant.
SECTION. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS
PAYMENT. The Option Price shall be payable to the Company in full upon
exercise of an Option either (i) in cash or its equivalent, (ii) at the
discretion of the Committee or the Board, as the case may be, by tendering
shares of Stock held by the Optionee for more than six months having a Fair
Market Value at the time of exercise equal to the Option Price, or (iii) by a
combination of (i) and (ii). The proceeds from such a payment shall be added to
the general funds of the Company and shall be used for general corporate
purposes.
RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee or the Board, as the
case may be, may impose such restrictions on any shares of Stock acquired
pursuant to the exercise of an Option under the Plan as it may deem advisable,
including. without limitation, restrictions under applicable Federal securities
law, under requirements of any stock exchange upon which such shares of Stock
are then listed and under any blue sky or state securities laws applicable to
such shares.
TERMINATION DUE TO RETIREMENT. The Option Agreement may provide that if the
employment of the Optionee is terminated, or if the directorship of the Optionee
expires, for a reason other than for Cause or following a Change in Control, any
outstanding Options granted to the Optionee which are then exercisable shall
continue to be exercisable at any time prior to the earlier of the expiration
date of the Options and one year after the date of termination, and any Options
not then exercisable shall terminate immediately, subject to such exceptions
(which shall be set forth in the Option Agreement) as the Committee or the Board
may, in its sole discretion, approve.
TERMINATION DUE TO DEATH OR DISABILITY. The Option Agreement may provide
that the rights of an Optionee under any then outstanding Option granted to the
Optionee pursuant to the Plan if the employment or directorship of the Optionee
is terminated by reason of death or Disability shall survive for up to one year
after such death or Disability.
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TERMINATION OF EMPLOYMENT FOR CAUSE. Notwithstanding anything to the
contrary herein, if the employment of the Optionee shall terminate for cause or
if the Optionee is removed as a director for cause, any then outstanding Option
granted pursuant to the Plan to the Optionee shall terminate immediately.
NONTRANSFERABILITY AND EXERCISABILITY OF OPTIONS. No Option granted under
the Plan may be sold, transferred, pledged, assigned or otherwise alienated or
hypothecated, otherwise than by will or by the laws of descent and distribution.
Further, all Options granted to an Optionee under the Plan shall be exercisable
during his lifetime only by such Optionee.
SECTION. STOCK APPRECIATION RIGHTS
STOCK APPRECIATION RIGHTS. The Committee or the Board, as the case may be,
may, in its discretion, in connection with the grant of an Option, grant to the
Optionee Stock Appreciation Rights, the terms and conditions of which shall be
set forth in an agreement. A Stock Appreciation Right shall cover the same
shares of Stock covered by the Option (or such lesser number of shares of Stock
as the Committee or the Board may determine) and shall, except as provided in
this Section 8, be subject to the same terms and conditions as the related
Option. Stock Appreciation Rights shall be subject to the following terms and
provisions:
(a) A Stock Appreciation Right may be granted either at the time of grant,
or at any time thereafter during the term of the Option if related to a
nonstatutory stock option; or only at the time of grant if related to an
incentive stock option.
(b) A Stock Appreciation Right will entitle the holder of the related Option
upon exercise of the Stock Appreciation Right, to surrender such Option or any
portion thereof to the extent unexercised, and to receive payment of an amount
determined by multiplying (i) the excess of the Fair Market Value of the Stock
on the date of exercise of such Stock Appreciation Right over the Option Price
under the related Option, by (ii) the number of shares as to which such Stock
Appreciation Right has been exercised. Notwithstanding the foregoing, the
agreement evidencing the Stock Appreciation Right may limit in any manner the
amount payable with respect to any Stock Appreciation Right.
(c) A Stock Appreciation Right will be exercisable at such time or times and
only to the extent that a related Option is exercisable, and will not be
transferable except to the extent that such related Option may be transferable.
A Stock Appreciation Right granted in connection with an incentive stock option
shall be exercisable only if the Fair Market Value of the Stock on the date of
exercise exceeds the Option Price in the related Option.
(d) Upon the exercise of a Stock Appreciation Right, the related Option
shall be canceled to the extent of the number of shares of Stock as to which the
Stock Appreciation Right is exercised, and upon the exercise of an Option
granted in connection with a Stock Appreciation Right, the Stock Appreciation
Right shall be canceled to the extent of the number of shares of Stock as to
which the Option is exercised or surrendered.
(e) A Stock Appreciation Right may be exercised by an Optionee only by a
written notice delivered in person or by mail to the Secretary of the Company at
the Company's principal executive office, specifying the number of shares of
Stock with respect to which the Stock Appreciation Right is being exercised. The
Optionee shall deliver the agreement evidencing the Stock Appreciation Right
being exercised and the agreement evidencing any related Option to the Secretary
of the Company who shall endorse thereon a notation of such exercise and return
such agreement to the Optionee.
(f) Payment of the amount determined under Subsection (b) may be made by the
Company in the discretion of the Committee or the Board, as the case may be,
solely in whole shares of Stock in a number determined at their Fair Market
Value on the date preceding the date of exercise of the Stock Appreciation Right
or solely in cash, or in a combination of cash and Stock. If payment is made in
Stock and the amount payable results in a fractional share, payment for the
fractional share will be made in cash. Notwithstanding the foregoing, no payment
in the form of cash may be made upon the exercise of a Stock Appreciation Right
pursuant to Subsection (b) to an officer or director of the Company or a
Subsidiary who is subject to Section 16 of the Act, unless the exercise of such
Stock Appreciation Right is made either (i) during the
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period beginning on the third business day and ending on the twelfth business
day following the date of release for publication of the Company's quarterly or
annual statements of sales and earnings or (ii) pursuant to an irrevocable
election to receive cash made at least six months prior to the exercise of such
Stock Appreciation Right.
(g) No Stock Appreciation Right may be exercised within three months after
it is granted.
(h) Subject to the terms of the Plan, the Committee or the Board, as the
case may be, may modify outstanding awards of Stock Appreciation Rights or
accept the surrender of outstanding awards of Stock Appreciation Rights (to the
extent not exercised) and grant new awards in substitution for them.
Notwithstanding the foregoing, no modification of an award of Stock Appreciation
Rights shall adversely alter or impair any rights or obligations under the
agreement granting such Stock Appreciation Rights without the Optionee's
consent.
SECTION. RESTRICTED STOCK
GRANT OF RESTRICTED STOCK. Subject to Sections 4 and 5, the Committee or
the Board, as the case may be, at any time and from time to time, may grant
Restricted Stock under the Plan to such Eligible Employees and Eligible
Directors and in such amounts as it determines in its sole discretion. Each
grant of Restricted Stock shall be made pursuant to a written agreement which
shall contain such restrictions, terms and conditions as the Committee or the
Board may determine in its discretion. Restrictions upon Restricted Stock shall
be for such period or periods (herein called "Period(s) of Restriction") and on
such terms and conditions as the Committee or the Board may, in its discretion,
determine.
TRANSFERABILITY. Except as provided in this Section 9, the shares of
Restricted Stock granted hereunder may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated for such period of time as shall
be determined by the Committee or the Board, as the case may be, and shall be
specified in the Restricted Stock grant, or upon earlier satisfaction of other
conditions set forth in the Restricted Stock grant; provided that Restricted
Stock granted to officers, directors or any person who owns, directly or
indirectly, more than 10% of any class of equity security of the Company which
is registered pursuant to Section 12 of the Act may not be sold for at least six
months after the date of grant.
OTHER RESTRICTIONS. The Committee or the Board, as the case may be, may
impose such other restrictions on any shares of Restricted Stock granted to any
Participant pursuant to the Plan as it may deem advisable including, without
limitation, restrictions under applicable federal or state securities laws, and
shall legend the certificates representing Restricted Stock to give appropriate
notice of such restrictions.
CERTIFICATE LEGEND. In addition to any legends placed on certificates
pursuant to Subsection 9.3 hereof, each certificate representing shares of
Restricted Stock granted pursuant to the Plan shall bear the following legend:
"The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary or by operation of law, is
subject to certain restrictions on transfer set forth in Hanover Gold
Company, Inc.'s 1995 Stock Plan and Restricted Stock agreement dated [TO
BE COMPLETED WITH THE DATE OF GRANT]. A copy of the Plan and such
Restricted Stock agreement may be obtained from the Secretary of Hanover
Gold Company, Inc."
REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Section 9,
shares of Restricted Stock covered by each Restricted Stock grant made under the
Plan shall become freely transferable by the Participant after the last day of
the Period of Restriction. Once the shares are released from the restrictions,
the Participant shall be entitled to have the legend required by Subsection 9.4
removed from his stock certificate.
VOTING RIGHTS. During the Period of Restriction, Participants holding
shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those shares.
DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction,
Participants holding shares of Restricted Stock granted hereunder shall be
entitled to receive all dividends and other distributions paid
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with respect to those shares while they are so held. If any such dividends or
distributions are paid in shares of Stock, such shares shall be subject to the
same restrictions as the shares of Restricted Stock with respect to which they
were paid.
SECTION. BENEFICIARY DESIGNATION
10.1 BENEFICIARY DESIGNATION. Subject to Subsections 7.6 and 9.2, each
Participant may, from time to time, name any beneficiary or beneficiaries (who
may be named contingently or successively) to whom any benefit under the Plan is
to be paid in case of the Participant's death before he or she receives any or
all of such benefit. Each designation will revoke all prior designations by the
same Participant, shall be in a form prescribed by the Committee and will be
effective only when filed by the Participant in writing with the Committee
during the life time of the Participant. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be paid to the estate
of the Participant.
SECTION. RIGHTS OF PARTICIPANTS
EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way
the right of the Company to terminate any Participant's employment, directorship
or service at any time nor confer upon any Participant any right to continue in
the employ or service or as a director of the Company. No person shall have a
right to be selected as an Eligible Employee or an Eligible Director or, having
been so selected, to be selected again as an Optionee or recipient of Restricted
Stock. The preceding sentence shall not be construed or applied so as to deny a
person any participation in the Plan solely because he or she was a Participant
in connection with a prior grant of benefits under the Plan.
SECTION. ADMINISTRATION; POWERS AND DUTIES OF THE COMMITTEE AND THE BOARD
ADMINISTRATION. The Committee shall be responsible for the administration
of the Plan as it applies to Eligible Employees, and the Board shall be
responsible for the administration of the Plan as it applies to Eligible
Directors; provided that if no Committee is designated or is administering the
Plan as it applies to Eligible Employees, all references to the Committee shall
be to the Board, subject to Subsection 2.1(f). The Committee, by majority action
thereof, is authorized to interpret the Plan, to prescribe, amend, and rescind
rules and regulations relating to the Plan, to provide for conditions and
assurances deemed necessary or advisable to protect the interests of the
Company, and to make all other determinations necessary or advisable for the
administration of the Plan, but only to the extent not contrary to the express
provisions of the Plan. Determinations, interpretations, or other actions made
or taken by the Committee pursuant to the provisions of the Plan shall be final
and binding and conclusive for all purposes and upon all persons whomsoever. No
member of the Committee shall be personally liable for any action, determination
or interpretation made or taken with respect to the Plan, and all members of the
Committee shall be fully indemnified by the Company with respect to any such
action, determination or interpretation.
CHANGE IN CONTROL. Without limiting the authority of the Committee as
provided herein, the Committee, either at the time Options or shares of
Restricted Stock are granted, or, if so provided in the applicable Option
Agreement or Restricted Stock grant, at any time thereafter, shall have the
authority to take such actions as it deems advisable, including the right to
accelerate in whole or in part the exercisability of Options and/or to reduce
the Period of Restriction upon a Change in Control. The Option Agreements and
Restricted Stock grants approved by the Committee may contain provisions which,
if there is a Change in Control, accelerate the exercisability of Options and/or
the Period of Restriction automatically or at the discretion of the Committee or
if the Change in Control is approved by a majority of the members of the Board
or depending such other criteria as the Committee may specify. Nothing herein
shall obligate the Committee to take any action upon a Change in Control.
AMENDMENT, MODIFICATION AND TERMINATION OF PLAN. The Board may at any time
terminate, and from time to time may amend or modify the Plan provided, however,
that no such action of the Board, without approval of the stockholders, may:
(a) increase the total amount of Stock which may be issued under the Plan,
except as provided in Subsection 4.5 of the Plan;
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(b) materially increase the cost of the Plan or materially increase the
benefits to Participants;
(c) extend the period during which Options or Restricted Stock may be
granted;
(d) extend the maximum period after the date of grant during which Options
may be exercised; or
(e) change the class of individuals eligible to receive Options or
Restricted Stock.
Any amendment which requires stockholder approval in order for the Plan to
continue to comply with Rule 16b-3 of the Act or any other law, regulation or
stock exchange requirement shall not be effective unless approved by the
requisite vote of stockholders. No amendment, modification or termination of the
Plan shall in any manner adversely affect any Options or Restricted Stock
theretofore granted to any Participant under the Plan, without the consent of
that Participant.
INTERPRETATION. Unless otherwise expressly stated in the relevant
Agreement, any grant of Options, Stock Appreciation Rights and Restricted Stock
is intended to be performance-based compensation within the meaning of
162(m)(4)(C) of the Code. The Committee shall not be entitled to exercise any
discretion otherwise authorized hereunder with respect to such Options, Stock
Appreciation Rights or Restricted Stock if the ability to exercise such
discretion or the exercise of such discretion itself would cause the
compensation attributable to such Options to fail to qualify as such
performance-based compensation.
SECTION. TAX WITHHOLDING
TAX WITHHOLDING. At such times as a Participant recognizes taxable income
in connection with the receipt of shares, securities, cash or property hereunder
(a "Taxable Event"), the Participant shall pay to the Company an amount equal to
the federal, state and local income taxes and other amounts as may be required
by law to be withheld by the Company in connection with the Taxable Event (the
"Withholding Taxes") prior to the issuance, or release from escrow, of such
shares or the payment of such cash. The Company shall have the right to deduct
from any payment of cash to a Participant an amount equal to the Withholding
Taxes in satisfaction of the obligation to pay Withholding Taxes. In
satisfaction of his obligation to pay Withholding Taxes to the Company, the
Participant may make a written election (the "Tax Election"), which may be
accepted or rejected in the discretion of the Committee, to have withheld a
portion of the shares of Stock then issuable to him having an aggregate Fair
Market Value, on the date preceding the date of such issuance, equal to the
Withholding Taxes, provided that in respect of a Participant who may be subject
to liability under Section 16(b) of the Act, either: (i) the Tax Election is
made at least six months prior to the date of the Taxable Event and the Tax
Election is irrevocable with respect to all Taxable Events of a similar nature
occurring prior to the expiration of six months following a revocation of the
Tax Election; or (ii) in the case of the exercise of an Option (A) the Optionee
makes the Tax Election at least six months after the date the Option was
granted, (B) the Option is exercised during the ten (10) day period beginning on
the third business day and ending on the twelfth business day following the
release for publication of the Company's quarterly or annual statement of sales
and earnings (a "Window Period"), and (C) the Tax Election is made during the
Window Period in which the related Option is exercised or prior to such Window
Period and subsequent to the immediately preceding Window Period; or (iii) in
the case of a Taxable Event relating to the grant of shares of Restricted Stock
(A) the Participant makes the Tax Election at least six months after the date
such stock was granted and (B) the Tax Election is made (x) in the case of a
Taxable Event occurring within a Window Period, during the Window Period in
which the Taxable Event occurs, or (y) in the case of a Taxable Event not
occurring within a Window Period, during the Window Period immediately preceding
the Taxable Event relating to such Restricted Stock. Notwithstanding the
foregoing, the Committee may, by the adoption of rules or otherwise, (i) modify
the provisions of this Subsection 13.1 or impose such other restrictions or
limitations on Tax Elections as may be necessary to ensure that the Tax
Elections will be exempt transactions under Section 16(b) of the Act, and (ii)
permit Tax Elections to be made at such other times and subject to such other
conditions as the Committee determines will constitute exempt transactions under
Section 16(b) of the Act.
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SECTION. REQUIREMENTS OF LAW
REQUIREMENTS OF LAW. The granting of Options or Restricted Stock, and the
issuance of shares of Stock upon the exercise of an Option shall be subject to
all applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed
in accordance with and governed by the laws of the State of New York without
giving effect to the choice of law principles thereof, except to the extent that
such law is preempted by federal law.
LISTING, ETC. Each Option or share of Restricted Stock is subject to the
requirement that, if at any time the Committee or the Board, as the case may be,
determines, in its discretion, that the listing, registration or qualification
of Stock issuable pursuant to the Plan is required by any securities exchange or
under any state or federal law, or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in connection
with, the grant of an Option or the issuance of Stock, no Options or Restricted
Stock shall be granted or payment made or shares of Stock issued, in whole or in
part, unless such listing, registration, qualification, consent or approval has
been affected or obtained free of any conditions which are unacceptable to the
Committee or the Board, acting in good faith.
14.4 RESTRICTION ON TRANSFER. Notwithstanding anything contained in the
Plan or any Agreement to the contrary, if the disposition of Stock acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended, and is not otherwise exempt from
such registration, such Stock shall be restricted against transfer to the extent
required by said Act, and Rule 144 or other regulations thereunder. The
Committee or the Board, as the case may be, may require anyone receiving Stock
pursuant to an Option or Restricted Stock granted under the Plan, as a condition
precedent to receiving such Stock, to represent and warrant to the Company in
writing that such Stock is being acquired without a view to any distribution
thereof and will not be sold or transferred other than pursuant to an effective
registration thereof under said Act or pursuant to an exemption applicable under
said Act, or the rules and regulations promulgated thereunder. The certificates
evidencing any shares of such Stock shall be appropriately legend to reflect
their status as restricted securities.
The Plan further provides that the Company may from time-to-time or at any
time advance funds to holders of Options granted under the Plan on a short-term
basis solely for the purpose of enabling such holders to exercise their Options.
All such advances will be evidenced in writing, will provide for the payment of
interest on terms then prevailing and will be secured by pledges of the common
stock issuable upon the exercise of the Options and if such common stock is to
be resold, the proceeds of such sale. It is presently anticipated that no such
advance will remain outstanding for more than a period of thirty days.
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EXHIBIT 10(V)
PLAN AND AGREEMENT OF MERGER
OF GROUP S LIMITED AND HANOVER RESOURCES, INC.
INTO HANOVER GOLD COMPANY, INC.
AGREEMENT OF MERGER made as of this 1st day of March, 1996, between Group S
Limited, a Montana Corporation (hereinafter called the "First Company"), Hanover
Resources, Inc., a New York corporation (hereinafter called the "Second
Company"), and Hanover Gold Company, Inc., a Delaware Corporation (hereinafter
called the "Third Company").
WHEREAS, the First Company has an authorized capital stock consisting of
160,000 shares of Common Stock, par value $.01 per share, of which 124,000
shares have been duly issued and are now outstanding, and
WHEREAS, the Second Company has an authorized capital stock consisting of
2,150,000 shares of Common Stock, par value $.01 per share, of which 2,137,971
shares have been duly issued and are now outstanding, and
WHEREAS, the Third Company has an authorized capital stock consisting of
25,000,000 shares of Common Stock, par value $.0001 per share, of which
12,472,678 shares have been duly issued and are now outstanding, and
WHEREAS, the Boards of Directors of the First Company, the Second Company,
and the Third Company, respectively, deem it advisable and generally to the
advantage and welfare of the three corporate parties and their respective
shareholders that the First Company and the Second Company merge with and into
the Third Company under and pursuant to the provisions of the Business
Corporation Act of Montana, the Business Corporation Law of New York and the
General Corporation Law of Delaware.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained and of the mutual benefits hereby provided, it is
agreed by and between the parties hereto as follows:
1. MERGER. The First Company and the Second Company shall be and each of
them hereby is merged with and into the Third Company.
2. EFFECTIVE DATE. This Agreement of Merger shall become effective
immediately upon compliance with the laws of the States of Montana, New York and
Delaware, the time of such effectiveness being hereinafter called the "Effective
Date".
3. SURVIVING CORPORATION. The Third Company shall survive the merger
herein contemplated and shall continue to be governed by the laws of the State
of Delaware, but the separate corporate existence of the First Company and the
Second Company shall cease forthwith upon the Effective Date.
4. AUTHORIZED CAPITAL. The authorized capital stock of the Third Company
following the Effective Date shall be 50,000,000 shares, consisting of
48,000,000 shares of Common Stock, par value $.00001 per share and 2,000,000
shares of Preferred Stock, par value $.001 per share, unless and until the same
shall be changed in accordance with the laws of the State of Delaware.
5. CERTIFICATE OF INCORPORATION. The Certificate of Incorporation set
forth as Appendix A hereto shall be the Certificate of Incorporation of the
Third Company following the Effective Date unless and until the same shall be
amended or repealed in accordance with the provisions thereof, which power to
amend or repeal is hereby expressly reserved, and all rights or powers of
whatsoever nature conferred in such Certificate of Incorporation or herein upon
any shareholder or director or officer of the Third Company or upon any other
persons whomsoever are subject to the power thus reserved. Such Certificate of
Incorporation shall constitute the Certificate of Incorporation of the Third
Company separate and apart from this Agreement of Merger and may be separately
certified as the Certificate of Incorporation of the Third Company.
6. BYLAWS. The Bylaws of the Third Company as they exist on the Effective
Date shall be the Bylaws of the Third Company following the Effective Date
unless and until the same shall be amended or repealed in accordance with the
provisions thereof.
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7. BOARD OF DIRECTORS AND OFFICERS. The members of the Board of Directors
and the officers of the Third Company immediately after the Effective Date shall
be those persons who were the members of the Board of Directors and the
officers, respectively, of the Third Company immediately prior to the Effective
Date, and such persons shall serve in such offices, respectively, for the terms
provided by law or in the Bylaws, and until their respective successors are
elected and qualified.
8. FURTHER ASSURANCE OF TITLE. If the Third Company should determine or be
advised that any acknowledgements or assurances in law or other similar actions
are necessary or desirable in order to acknowledge or confirm in and to the
Third Company any right, title, or interest of the First Company or the Second
Company held immediately prior to the Effective Date, the First Company or the
Second Company and their respective officers and directors shall execute and
deliver all such acknowledgements or assurances in law and do all things
necessary or proper to acknowledge or confirm such right, title, or interest in
the Third Company as shall be necessary to carry out the purposes of this
Agreement of Merger, and the Third Company and the proper officers and directors
thereof are fully authorized to take any and all such action in the name of the
First Company or the Second Company, as the case may be, or otherwise.
9. STATUS OF OUTSTANDING STOCK OF THE THIRD COMPANY. Upon the Effective
Date, none of the shares of the Common Stock of the Third Company currently
issued and outstanding shall be retired or changed, and such shares of Common
Stock and other issued and outstanding securities of the Third Company shall
remain issued and outstanding in respect thereof, except that the 3,625,000
shares of Common Stock of the Third Company held by the Second Company shall be
retired and restored to authorized and unissued Common Stock of the Third
Company.
10. CONVERSION AND OTHER TREATMENT OF OUTSTANDING STOCK OF THE FIRST
COMPANY AND THE SECOND COMPANY.
A. FIRST COMPANY SHARES. Forthwith upon the Effective Date, the issued and
outstanding shares of Common Stock of the First Company and all rights in
respect thereof, except for the 74,000 shares owned by the former shareholders
of The Hanover Group, Inc., shall be converted into 1,192,596 fully paid and
nonassessable shares of Common Stock of the Third Company at the rate of
23.85192 shares of the Third Company for each share of the First Company. The
74,000 shares owned by the former shareholders of The Hanover Group, Inc. and
all rights in respect thereof shall be converted into 1,958,130 fully paid and
non-assessable shares of Common Stock of the Third Company at the rate of
26.46122 shares of the Third Company for each share of the First Company. The
former shareholders of The Hanover Group, Inc. shall contribute to the capital
of the Third Company 193,220 shares of the Third Company that they receive by
virtue of their holdings of Common Stock of the First Company. Each certificate
nominally representing shares of Common Stock of the First Company shall for all
purposes be deemed to evidence the ownership of the number of shares of Common
Stock of the Third Company into which they are converted as aforesaid.
B. SECOND COMPANY SHARES. Forthwith upon the Effective Date, each of the
issued and outstanding shares of Common Stock of the Second Company and all
rights in respect thereof, except for 191,680 shares owned by Fred R. Schmid and
833,734 shares owned by the First Company, shall be converted into 2,612,980
fully paid and nonassessable shares of Common Stock of the Third Company at the
rate of 2.34862 shares of the Third Company for each share of the Second
Company, and (1) each of the 191,680 shares of Common Stock of the Second
Company owned by Fred R. Schmid and all rights in respect thereof shall be
converted into 325,000 fully paid and non-assessable shares of Common Stock of
the Third Company, at the rate of 1.69553 shares of the Third Company for each
share of the Second Company, and (2) the 833,734 shares of the Second Company
owned by the First Company, being the equivalent of the 1,958,130 shares of the
Third Company to be received by the former shareholders of The Hanover Group,
Inc. with respect to their holdings in the First Company pursuant to
subparagraph A of this paragraph 10, shall be canceled and extinguished. Each
certificate nominally representing shares of Common Stock of the Second Company
shall for all purposes be deemed to evidence the ownership of the number of
shares of Common Stock of the Third Company into which they are converted as
aforesaid.
C. STOCK CERTIFICATES. The holders of all certificates representing shares
of the First Company or the Second Company shall not be required immediately to
surrender the same in exchange for certificates of
2
<PAGE>
Common Stock in the Third Company but, as certificates nominally representing
shares of Common Stock of the First Company or the Second Company are
surrendered for transfer, the Third Company will cause to be issued certificates
representing shares of Common Stock of the Third Company. At any time after the
Effective Date, upon surrender by any holder of certificates nominally
representing shares of Common Stock of the First Company or the Second Company,
the Third Company will cause to be issued therefor certificates for the number
of shares of Common Stock of the Third Company to which such holder is entitled
under this Paragraph 10.
11. RIGHTS AND LIABILITIES OF THIRD COMPANY. At and after the Effective
Date, the Third Company shall succeed to and possess, without further act or
deed, all of the estate, rights, privileges, powers, and franchises, both public
and private, and all of the property, real, personal, and mixed, of each of the
parties hereto; all debts and accounts due to the First Company and the Second
Company shall be vested in the Third Company; all claims, demands, property,
rights, privileges, powers and franchises and every other interest of any of the
parties hereto shall be as effectively the property of the Third Company as they
were of the respective parties hereto; the title to any real estate vested by
deed or otherwise in the First Company or the Second Company shall not revert or
be in any way impaired by reason of the merger, but shall be vested in the Third
Company; all rights of creditors and all liens upon any property of any of the
parties hereto shall be preserved unimpaired, limited in lien to the property
affected by such lien at the Effective Date; all debts, liabilities, and duties
of the respective parties hereto shall thenceforth attach to the Third Company
and may be enforced against it to the same extent as if such debts, liabilities,
and duties had been incurred or contracted by it; and the Third Company shall
indemnify and hold harmless the officers and directors of each of the parties
hereto against all such debts, liabilities and duties and against all claims and
demands arising out of the merger.
12. BOOK ENTRIES. The merger contemplated hereby shall be treated as a
purchase, and as of the Effective Date, entries shall be made upon the books of
the Third Company, consistent with such treatment and in accordance with the
following:
(a) The assets and liabilities of the First Company and the Second
Company shall be recorded at the amounts at which they are carried on their
respective books immediately prior to the Effective Date with appropriate
adjustment to reflect the retirement of the 3,625,000 shares of Common Stock
of the Third Company presently issued, outstanding and held by the Second
Company.
(b) There shall be credited to Capital Account of the Third Company the
aggregate par value of all shares of the Common Stock of the Third Company
resulting from the conversion of the outstanding Common Stock of the First
Company and the Second Company in accordance herewith.
(c) There shall be credited to Capital Surplus Account (or its
equivalent) of the Third party an amount equal to the Capital Surplus
Accounts (or their equivalent) of the First Company and the Second Company
immediately prior to the Effective Date.
(d) There shall be credited to Earned Surplus Account (or its
equivalent) of the Third Party an amount equal to the Earned Surplus
Accounts (or their equivalent) of the First Company and the Second Company
immediately prior to the Effective Date.
13. SERVICE OF PROCESS ON THIRD COMPANY. The Third Company agrees that it
may be served with process in (a) the State of Montana in any proceeding for
enforcement of any obligation of the First Company as well as for the
enforcement of any obligation of the Third Company arising from the merger,
including any suit or other proceeding to enforce the right of any shareholder,
if any, as determined in appraisal proceedings pursuant to the provisions of the
Business Corporation Act of Montana; and (b) the State of New York in any
proceeding for enforcement of any obligation of the Second Company as well as
for the enforcement of any obligation of the Third Company arising from the
merger, including any suit or other proceeding to enforce the right of any
shareholder, if any, as determined in appraisal proceedings pursuant to the
provisions of the Business Corporation Law of New York.
3
<PAGE>
14. TERMINATION. This Agreement of Merger may be terminated and abandoned
by action of the Board of Directors of the First Company or the Board of
Directors of the Second Company at any time prior to the Effective Date, whether
before or after approval of the merger by the shareholders of the three
corporate parties hereto.
15. PLAN OF REORGANIZATION. This Agreement of Merger constitutes a Plan of
Reorganization to be carried out in the manner, on the terms and subject to the
conditions herein set forth.
16. EXPENSES AND RIGHTS OF DISSENTING SHAREHOLDERS. The Third Company
shall pay all expenses of carrying this Agreement of Merger into effect and of
accomplishing the merger, including amounts, if any, to which dissenting
shareholders of the First Company or the Second Company may be entitled by
reason of this merger.
IN WITNESS WHEREOF each of the corporate parties hereto, pursuant to
authority duly granted by its Board of Directors, has caused this Agreement of
Merger to be executed by its President or Vice President and attested by its
Secretary or Assistant Secretary and its corporate seal to be hereunto affixed.
Corporate Seal GROUP S LIMITED
(First Company)
ATTEST:
BY:
- ----------------------------------- -----------------------------------
Secretary
Corporate Seal HANOVER RESOURCES, INC.
(Second Company)
ATTEST:
BY:
- ----------------------------------- -----------------------------------
Secretary
Corporate Seal HANOVER GOLD COMPANY, INC.
(Third Company)
ATTEST:
BY:
- ----------------------------------- -----------------------------------
Secretary
4
<PAGE>
CERTIFICATE OF THE SECRETARY
OF
HANOVER GOLD COMPANY, INC.
(A DELAWARE CORPORATION)
I, Wayne Schoonmaker, the Secretary of Hanover Gold Company, Inc. (the
"Corporation"), hereby certify that the Agreement of Merger to which this
certificate is attached, after having been first duly signed on behalf of the
Corporation by the President and Secretary under the corporate seal of the
Corporation, was duly approved and adopted at a meeting of the stockholders of
the Corporation held on , 1996 by the holders of a majority of the
outstanding stock entitled to vote thereon.
WITNESS my hand and seal of said this day of , 1996.
(CORPORATE SEAL)
-----------------------------------
Secretary
5
<PAGE>
HANOVER RESOURCES, INC.
AUDITED REPORT
FOR THE YEARS ENDED
DECEMBER 31, 1994, AND 1995,
AND FOR THE PERIOD
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hanover Resources, Inc.
Roslyn, New York
We have audited the accompanying balance sheet of Hanover Resources, Inc. as
of December 31, 1995 and December 31, 1994 and the related statements of income
(loss) and accumulated deficit and cash flows for the years then ended, and for
the period April 26, 1990 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hanover Resources, Inc. as
of December 31, 1995 and 1994, and the results of its operations and cash flows
for each of the years then ended, and April 26, 1990 (inception) to December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 11, the Company has been in the development stage since
April 26, 1990.
May 16, 1996
F-2
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Current Assets
Cash............................................................................... $ 40,621 $ 2,178
Prepaid Income Taxes............................................................... $ 35,000 $ 31,000
Prepaid Fees....................................................................... $ 0 $ 1,167
------------ ------------
Total Current Assets........................................................... $ 75,621 $ 34,345
------------ ------------
Other Assets
Patented (Deeded) and Claims (Note 4).............................................. 1,246,360 1,342,720
Investment in Hanover Gold Company, Inc. (Note 5).................................. 0 0
Loan Receivable Shareholders (Note 6).............................................. 71,800 8,000
Due from Affiliated Company (Note 12).............................................. 505,030 534,038
------------ ------------
Total Other Assets............................................................. $1,823,190 $1,884,758
------------ ------------
Total Assets................................................................... $1,898,811 $1,919,103
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued Expenses (Note 7).......................................................... $ 248,542 $ 92,536
------------ ------------
Total Current Liabilities...................................................... $ 248,542 $ 92,536
------------ ------------
Long Term Liabilities
Due to Affiliated Companies (Note 12).............................................. 665,221 849,105
Notes Payable and Accrued Interest (Note 8)........................................ 291,856 0
Option Payment..................................................................... 90 90
------------ ------------
Total Long Term Liabilities.................................................... $ 957,167 $ 849,195
------------ ------------
Total Liabilities.............................................................. $1,205,709 $ 941,731
------------ ------------
Stockholders' Equity
Common Stock, (Notes 1 and 10).....................................................
Authorized -- 2,150,000 shares $.01 par value......................................
Issued and outstanding --
December 31, 1994 1,447,214 shares............................................... 14,472
December 31, 1995 2,137,970 shares............................................... 21,379
Additional paid in Capital........................................................... 945,834 1,200,375
Deficit accumulated during the development stage..................................... (267,204) (264,382)
------------ ------------
Total Stockholders' Equity..................................................... $ 693,102 $ 977,372
------------ ------------
Total Liabilities & Stockholders' Equity....................................... $1,898,811 $1,919,103
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME (LOSS) AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED APRIL 26, 1990
DECEMBER 31, DECEMBER 31, (INCEPTION) TO
1994 1995 DECEMBER 31, 1995
------------ ------------ -----------------
<S> <C> <C> <C>
REVENUES
Royalty and Fee Income........................................... $ 120,000 $ 128,000 $ 822,731
------------ ------------ -----------------
EXPENSES
Payroll........................................................ 105,000 56,667 460,834
Payroll Taxes.................................................. 9,982 8,224 40,519
Professional Fees.............................................. 27,845 42,767 134,891
Promotion and Travel........................................... 4,218 3,192 53,262
Contract Services.............................................. 52,444 5,000 177,157
Administrative and other expenses.............................. 21,034 5,253 53,585
------------ ------------ -----------------
Total Expenses................................................. $ 220,523 $ 121,103 $ 920,248
------------ ------------ -----------------
Income (Loss) from Operations.................................. $ (100,523) $ 6,897 $ (97,517)
------------ ------------ -----------------
Other Income (Expense)
Loss on investment in Hanover Gold Co., Inc.................... $ 0 $ 0 $ (255,913)
Gain on Sale of Securities..................................... 98,393 0 172,243
Interest Income................................................ 2,000 0 5,486
Interest Expense............................................... (11,559) (75) (69,990)
State Income Taxes............................................. (970) (4,000) (18,691)
------------ ------------ -----------------
Total other Income (Expense)................................... $ 87,864 $ (4,075) $ (166,865)
------------ ------------ -----------------
Net Income (Loss)................................................ (12,659) 2,822 (264,382)
Accumulated Deficit at
Beginning of Period............................................ (254,545) (267,204) --
------------ ------------ -----------------
End of Period.................................................. $ (267,204) $ (264,382) $ (264,382)
------------ ------------ -----------------
------------ ------------ -----------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED APRIL 26, 1990
DECEMBER 31, DECEMBER 31, (INCEPTION) TO
1994 1995 DECEMBER 31, 1995
------------ ------------ -----------------
<S> <C> <C> <C>
Operating Activities
Net Income (Loss) from Operations.............................. $ (12,659) $ 2,922 $ (338,232)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities
Gain on sale of securities..................................... (98,393) 0 (98,393)
Changes in Operating Assets and Liabilities
(Increase) decrease in prepaid taxes........................... (35,000) 4,000 (31,000)
Increase in prepaid fees....................................... -- (1,167) (1,167)
(Increase) in Patented (Deeded) Claims......................... (105,120) (96,360) (1,342,720)
(Increase) in Investment in Hanover Gold Company, Inc.......... -- -- (185,219)
(Increase) decrease in due from shareholder.................... (51,440) 63,800 (8,000)
Increase (decrease) in due to Affiliates....................... (129,624) 158,876 315,067
(Decrease) increase in Accrued Expenses........................ 247,388 (156,006) 92,536
Increase (decrease) in notes payable & accrued interest........ 11,558 (291,856) 0
Increase in option payment..................................... -- -- 90
------------ ------------ -----------------
Net cash provided by (used in) operating activities:............. $ (173,290) $ (319,891) $ (1,597,038)
------------ ------------ -----------------
Investing Activities
Proceeds on sale of Hanover Gold Company, Inc. Warrants........ 149,750 0 357,462
------------ ------------ -----------------
Net cash provided by investing activities:....................... $ 149,750 $ 0 $ 357,462
------------ ------------ -----------------
Financing Activities
Proceeds from sale of common stock............................. 0 0 960,306
Converted Preferred Note....................................... -- 281,448 281,448
------------ ------------ -----------------
Net cash provided by financing activities........................ $ 0 $ 281,448 $ 1,241,754
------------ ------------ -----------------
Net Increase (Decrease) in cash.................................. (23,540) (38,443) 2,178
Cash, Beginning of Period........................................ 64,161 40,621 --
------------ ------------ -----------------
Cash, End of period.............................................. $ 40,621 $ 2,178 $ 2,178
------------ ------------ -----------------
------------ ------------ -----------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
1. ORGANIZATION AND NATURE OF BUSINESS
Hanover Resources, Inc. ("Company") was incorporated in New York on April
26, 1990. The objectives of the Company are to invest in precious metal claims,
namely gold and silver deposits having economic and mining potential, and
related activities in the precious metals and mining industries.
On May 2, 1990, the Company formed Hanover International Limited
("International") as a wholly owned subsidiary and transferred it interest in
the Kearsarge Lode Claim to International in exchange for 100% of the
outstanding common stock of International. On July 31, 1990, International was
acquired by Hanover Gold Company, Inc. ("Hanover Gold") in exchange for
14,000,000 shares of Hanover Gold common stock. As of December, 1990, Hanover
Gold reverse split its shares 1 for 20.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
DEPLETION:
The Company depletes the cost of resource properties by an estimate of the
amount of natural resources to be extracted in tons of material, which is the
estimated recoverable units, divided into the total cost to arrive at the rate
per unit. The rate is multiplied by the number of units extracted to determine
the annual depletion expense.
PATENTED (DEEDED) CLAIMS AND RESOURCE PROPERTIES:
The Company accounts for resource properties and claims at the actual cost
incurred for exploration, engineering and site development and for the purchases
of mining properties and the options to purchase additional claims.
The Company capitalizes lease payments which are to be allocated to the
acquisition cost of the mining claims upon completion of the term of the lease.
The provisions of the lease call for termination of the lease for any default in
payments and allow for the acquisition of the claims at the end of the lease for
the total rental payments made.
The Company amortizes the acquisition costs of mining claims as the claims
are put in service based on the allocated cost of the claim divided by the
stimulated recoverable units of ore multiplied by the units of ore extracted.
The Company writes off to operating expense the unamortized cost of the
resource property when it determines that the carrying amount of the property
may not be recoverable and the asset value is impaired.
EARNINGS PER SHARE:
Earnings per share has been computed based on the weighted average number of
shares of common stock outstanding during each period. There would have been no
material diluting effect on net loss per share for any outstanding stock
warrants.
INVESTMENTS:
The Company accounts for investments in affiliated companies, which
constitute 20% to 50% of the equity of the investee company, by the equity
method.
F-6
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. SFAS No. 121
requires that Long-Lived Assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company reviews
the cost of Mining Properties for impairment when events indicate that the
carrying value of the asset may not be recoverable.
Additionally, The Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." The effective date of SFAS No. 123 is for fiscal years beginning
after December 15, 1995, and establishes a method of accounting for stock
compensation plans based on fair value. The Company does not believe the SFAS
No. 123 will have an impact on its financial statements.
3. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES
The Company has had no significant operating history and must be considered
a development stage enterprise. As such, the Company is subject to all of the
risks inherent in a new mining operation and business enterprise, including the
absence of an operating history, established banking relations and community and
industry recognition.
4. PATENTED (DEEDED) CLAIMS
The Company acquired the mining rights to 34 patented precious metals claims
through an assignment of an agreement ("Primary Agreement") between The Hanover
Group, Inc. ("Group") and the Company dated April 26, 1990. The Company acquired
all the rights and obligations from Group for which Group received 100% of the
Company's common stock.
Pursuant to a Mineral Sublease and Purchase Option (the "Secondary
Agreement") between the Company and International dated May 2, 1990, the Company
conveyed all of its rights in and to the Kearsarge Claim, leaving the Company
with the balance of 33 claims under the Primary Agreement. The transfer was made
subject to the former owner's 30% interest and landowner rent and royalty
obligations, and the obligation to pay a royalty of $10,000 per month to the
Company.
On December 20, 1990, Hanover Gold acquired an option until December 20,
1995 for the mining rights to five additional claims for the Company in exchange
for 900,000 shares of Hanover Gold common stock. This option has been extended
until December 20, 1996 for no additional consideration.
In 1992, the Company entered into a mining venture agreement with Kennecott
Exploration Company. As part of the agreement the Company conveyed to Hanover
Gold its interest in 28 claims, subject to a reserved 70% interest in all
precious metals mined from the claims, and a management fee of $15,000 per
month, commencing January 1, 1996. The commencement date for payment of the
management fee has been extended until January 1, 1997 for no additional
consideration. Under the various agreements Hanover Gold is obligated to pay the
underlying landowner's royalty payments on the 34 claims.
F-7
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
4. PATENTED (DEEDED) CLAIMS (CONTINUED)
As of December 31, 1995, the payment obligations to two landowners on the
claims are as follows:
FIRST LANDOWNER:
<TABLE>
<S> <C>
June 1, 1996............................................ $ 600,000
June 1, 1997............................................ $ 600,000
June 1, 1998............................................ $ 600,000
June 1, 1999............................................ $2,735,000
---------
$4,535,000
</TABLE>
The obligation to the second landowner consist of monthly payments of $8,760
through April 1999. As of December 31, 1995, the total remaining payments are
$346,565.
If Hanover Gold does not make these payments, then the 34 claims revert back
to the Company and it becomes the obligation of the Company to pay. Failure of
the Company to pay these monthly and annual payments to the landowners would
trigger a default and the claims would then revert back to the landowners.
Under a Modification Agreement dated December 3, 1990 the Company agreed to
assume $3.0 million of Hanover Gold's obligation to the first landowner. In
exchange for this assumption by the Company, Hanover Gold issued 1,500,000
shares of its common stock to the Company. In accordance to the terms of the
agreement, the Company received an additional 500,000 shares of Hanover Gold
stock based on the fair market value of Hanover Gold common stock on December
31, 1991.
5. INVESTMENT IN HANOVER GOLD COMPANY, INC.
As of December 31, 1995 the Company owned 3,625,000 shares of Hanover Gold
common stock that it accounts for on the equity method. The shares were acquired
in exchange for various mining rights (see Note 4) and the assumption of Hanover
Gold's liability to the first landowner by the Company. Hanover Gold's condensed
balance sheet and condensed income statement at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
ASSETS
Total Current Assets............................................ $ 850,242
Resource property and claims.................................... 6,147,279
Property and equipment.......................................... 102,819
Other assets.................................................... 1,210,024
----------
Total Assets................................................ $8,310,364
----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities............................................. $ 358,860
Other Liabilities............................................... 0
Stockholder Equity.............................................. 7,951,504
----------
Total Liabilities and Shareholder's Equity.................. $8,310,364
----------
Gross Revenues.................................................. $ 499,299
----------
Cost of Goods Mined............................................. $ 830,197
----------
General & Administrative........................................ $1,934,655
----------
Loss from Operations............................................ $(2,265,553)
----------
</TABLE>
F-8
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
5. INVESTMENT IN HANOVER GOLD COMPANY, INC. (CONTINUED)
As specified in Regulation S-X, summarized financial information has been
presented for the investment in Hanover Gold. The investment account of the
Company in Hanover Gold Company, Inc. is as follows:
<TABLE>
<S> <C>
Investments in Hanover Gold Company, Inc........................ $ 255,913
Losses recognized in prior years................................ 255,913
----------
Net investment at December 31, 1995......................... $ 0
----------
</TABLE>
F-9
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
5. INVESTMENT IN HANOVER GOLD COMPANY, INC. (CONTINUED)
As required by ABP 18 paragraph 19(i) the cumulative losses on the
investment in Hanover Gold Company, Inc. as of December 31, 1995 amounted to
$1,651,553. The Company has discontinued applying the equity method as of
December 31, 1992 since the investment has been reduced to zero. The Company
will resume applying the equity method once its share of the net income equals
the share of net losses not recognized during the period the equity method was
suspended.
6. LOANS RECEIVABLE SHAREHOLDERS
The Company has advanced funds to several shareholders who have been active
in the management of the Company's affairs. The loans are fully secured,
non-interest bearing, and are due on demand.
7. ACCRUED EXPENSES
The balance of $92,536, as of December 31, 1995, includes salaries, payroll
taxes payable and accrued professional fees of approximately $38,803, $11,213
and 42,520, respectively.
8. NOTES PAYABLE AND ACCRUED INTEREST
In 1991, the Company borrowed $215,170 by issuing preferred, convertible
notes, bearing simple interest at 10% per annum, to shareholders of the Company.
During 1995, these note holders elected to convert their notes and accrued
interest into 574,076 shares of the Company's common stock.
9. FOUNDER'S PACKAGE
In December 1993, the Company's Board approved, with Fred R. Schmid not
voting, a Founders Stock Package ("Package") granting shares of the Company's
common stock to Fred R. Schmid. Pursuant to the Package, Fred R. Schmid
purchased 75,000 shares for $750, and was granted 116,680 shares of the
Company's common stock at no cost, which was approved by the shareholders.
Subject to approval of the merger of the Company with Hanover Gold, by the
Hanover Gold shareholders, Fred R. Schmid would receive a total of 325,000
shares of Hanover Gold's common stock, in exchange for Fred R. Schmid's 191,680
shares of the Company's common stock.
10. INCREASE IN CAPITAL STOCK
The shareholders have approved an increase in the Company's authorized
shares of common stock from 2,000,000 shares to 2,150,000 shares and the Company
has filed the necessary documents with the State of New York.
11. DEVELOPMENT STAGE COMPANY
The Company's operations have been centered around its organization,
evaluation of the mining industry, start-up financing of its operations,
including acquisition of the mining properties, evaluation of engineering data,
obtaining necessary mining permits and formulation and implementation of its
business plan. From April 21, 1990 through the period ending December 31, 1995
the Company has required financing form shareholders and affiliated companies to
fund the development and rental payments of the mining properties. The Company
has incurred losses in connection with its operations during period from
inception to December 31, 1995 of $264,382.
12. RELATED PARTIES
The inter-company balances represent payments to and advances from
affiliated companies in the normal course of business. The balances are
non-interest bearing and are due on demand.
F-10
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
APRIL 26, 1990 (INCEPTION) TO DECEMBER 31, 1995
12. RELATED PARTIES (CONTINUED)
As of December 31, 1994 and 1995 the Company had receivables and payables
with affiliated companies as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
$ 505,030 $ 534,038
(438,049) (438,049)
----------- -----------
Due from (to) Group S Limited....................................... $ 66,981 $ 95,989
Due from (to) Hanover Gold Company, Inc............................. $ (227,172) $ (405,809)
</TABLE>
Certain of the officers and directors of the Company are also officers and
directors of the affiliated companies, namely, Group S Limited, and Hanover Gold
Company, Inc. Additionally, certain of the principal shareholders of the
affiliated companies are also shareholders in the Company. Furthermore, at
December 31, 1994, and at December 31, 1995, the Company owned 3,625,000 shares
(41% and 27%, respectively), of the outstanding common stock of Hanover Gold
Company, Inc.
F-11
<PAGE>
HANOVER RESOURCES, INC.
INTERIM MANAGEMENT REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1995, AND
FOR THE PERIODS
JANUARY 1, TO
APRIL 30, 1995, AND 1996, AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------ ------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
Current Assets
Cash............................................................................... $ 2,178 $ 16,049
Prepaid Income Taxes............................................................... 11,000 11,000
Prepaid Fees....................................................................... 1,167 1,167
------------ ------------
Total Current Assets........................................................... $ 34,345 $ 28,216
------------ ------------
Other Assets
Patented (Deeded) Claims (Note 4).................................................. 1,342,720 1,342,720
Investment in Hanover Gold Company, Inc. (Note 5).................................. 0 0
Loan Receivable Shareholders (Note 6).............................................. 8,000 0
Due from Affiliated Company (Note 12).............................................. 134,038 0
------------ ------------
Total Other Assets............................................................. $1,994,750 $ 1,342,729
------------ ------------
Total Assets................................................................... $1,919,103 $ 1,370,936
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued Expenses (Note 7).......................................................... $ 92,536 $ 0
------------ ------------
Total Current Liabilities...................................................... $ 92,536 $ 0
------------ ------------
Long term Liabilities
Due to Affiliated Companies (Note 12).............................................. 949,105 377,782
Notes Payable and Accrued Interest (Note 8)........................................ 0 0
Option Payment..................................................................... 90 90
------------ ------------
Total Long term Liabilities.................................................... $ 849,195 $ 377,872
------------ ------------
Total Liabilities.............................................................. $ 941,731 $ 377,872
------------ ------------
Stockholders' Equity
Common Stock, (Notes 1, and 10)
Authorized -- 2,150,000 shares $.01 par value
Issued and outstanding
December 31, 1994 -- 1,447,214 shares............................................
December 31, 1995 -- 2,137,970 shares............................................ 21,379 21,379
Additional paid in Capital........................................................... 1,220,375 1,220,375
Deficit accumulated during the development stage..................................... (264,392) (249,690)
------------ ------------
Total Stockholders' Equity..................................................... $ 977,372 $ 993,064
------------ ------------
Total Liabilities & Stockholders' Equity....................................... $1,919,103 $ 1,370,936
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME (LOSS) AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
APRIL 26,
JANUARY 1, JANUARY 1, 1990
1995 TO 1996 TO (INCEPTION TO
APRIL 30, APRIL 30, APRIL 30,
1995 1996 1996
----------- ----------- -------------
<S> <C> <C> <C>
REVENUES
Royalty and Fee Income................................................ $ 40,000 $ 31,252 $ 853,983
----------- ----------- -------------
EXPENSES
Payroll............................................................... 19,000 0 460,834
Payroll Taxes......................................................... 2,740 0 40,519
Professional Fees..................................................... 9,305 0 134,891
Promotion and Travel.................................................. 865 0 53,262
Contract Services..................................................... 1,442 0 177,157
Administrative and other expenses..................................... 1,785 15,560 69,145
----------- ----------- -------------
Total Expenses...................................................... $ 35,137 $ 15,560 $ 935,808
----------- ----------- -------------
Income (Loss) from Operations......................................... $ 4,863 $ 15,692 $ (61,825)
----------- ----------- -------------
Other Income (Expense)
Loss on investment in Hanover Gold Co., Inc........................... $ 0 $ 0 $ (255,913)
Gain on Sale of Securities............................................ 0 0 172,243
Interest Income....................................................... 0 0 5,486
Interest Expense...................................................... (25) 0 (69,990)
State Income Taxes.................................................... (4,088) 0 (18,691)
----------- ----------- -------------
Total Other Income (Expense)........................................ $ (4,025) $ 0 $ (166,865)
----------- ----------- -------------
Net Income (Loss)....................................................... 830 15,692 (245,690)
Accumulated Deficit at
Beginning of Period................................................... $ 254,545 $ (248,698) $ (248,690)
----------- ----------- -------------
End of Period......................................................... $ (253,767) $ (248,698) $ (248,690)
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
APRIL 26,
1990
JANUARY 1, JANUARY 1, (INCEPTION)
1995 TO APRIL 1996 TO APRIL TO APRIL 30,
30, 1995 30, 1996 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Operating Activities
Net Income (Loss) from Operations.............................. $ 838 $ 15,692 $ (322,540)
Adjustments to reconcile net income (loss) to net cash provided
by (used for) operating activities
Gain on sale of securities..................................... (98,393)
Changes in Operating Assets and Liabilities
(Increase) decrease in prepaid taxes........................... 4,000 20,000 (11,000)
(Increase) in prepaid fees..................................... (1,167) -- (1,167)
(Increase) in Patented (Deeded) Claims......................... (32,120) -- (1,342,720)
(Increase) in Investment in Hanover Gold Company, Inc.......... -- -- (185,219)
(Increase) decrease in due from Shareholder.................... 20,000 8,000 0
Increase (decrease) in due to Affiliates....................... 50,625 62,715 377,782
(Decrease) increase in Accrued Expenses........................ (52,000) (92,536) 0
Increase (decrease) in notes payable & accrued interest........ -- -- 0
Increase in option payment..................................... -- -- 90
-------------- -------------- -------------
Net cash provided by (used in) operating activities.......... $ (9,824) $ 13,871 $(1,583,167)
-------------- -------------- -------------
Investing Activities
Proceeds on sale of Hanover Gold Company, Inc. Warrants........ -- -- 357,462
-------------- -------------- -------------
Net cash provided by investing activities........................ $ 0 $ 0 $ 357,462
-------------- -------------- -------------
Financing Activities
Proceeds from sale of common stock............................. -- -- 1,241,754
-------------- -------------- -------------
Net cash provided by financing activities........................ $ 0 $ 0 $ 1,241,754
-------------- -------------- -------------
Net Increase (Decrease) in cash.................................. (9,824) 13,871 16,049
Cash, Beginning of Period........................................ 40,621 2,178 --
-------------- -------------- -------------
Cash, End of Period.............................................. $ 30,797 $ 16,049 $ 16,049
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
1. ORGANIZATION AND NATURE OF BUSINESS
Hanover Resources, Inc. ("Company") was incorporated in New York on April
26, 1990. The objectives of the Company are to invest in precious metal claims,
namely gold and silver deposits having economic and mining potential, and
related activities in the precious metals and mining industries.
On May 2, 1990, the Company formed Hanover International Limited
("International") as a wholly owned subsidiary and transferred its interest in
the Kearsarge Lode Claim to International in exchange for 100% of the
outstanding common stock of International. On July 31, 1990, International was
acquired by Hanover Gold Company, Inc. ("Hanover Gold") in exchange for
14,000,000 shares of Hanover Gold common stock. As of December, 1990, Hanover
Gold reverse split its shares 1 for 20.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements have been prepared by the Company in
accordance with generally accepted accounting principals for interim financial
information as required by Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements, In the opinion of the
Company's management, all adjustments (consisting of only normal recurring
accruals) considered necessary of a fair presentation have been included.
Operating results for the four month period ended April 30, 1996 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1996.
For further information refer to the financial statements, and footnotes
thereto, for the year ended December 31, 1995, incorporated elsewhere herein.
REVENUE RECOGNITION:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
DEPLETION:
The Company depletes the cost of resource properties by an estimate of the
amount of natural resources to be extracted in tons of material, which is the
estimated recoverable units divided into the total cost to arrive at the rate
per unit. The rate is multiplied by the number of units extracted to determine
the annual depletion expense.
PATENTED (DEEDED) CLAIMS AND RESOURCE PROPERTIES:
The Company accounts for resource properties and claims at the actual cost
incurred for exploration, engineering and site development and for the purchases
of mining properties and the options to purchase additional claims
The Company capitalizes lease payments which are to be allocated to the
acquisition cost of the mining claims upon completion of the term of the lease.
The provisions of the lease call for termination of the lease for any default in
payments and allow for the acquisition of the claims at the end of the lease for
the total rental payments made.
The Company amortizes the acquisition costs of mining claims as the claims
as put in service based on the allocated cost of the claim divided by the
estimated recoverable units of ore multiplied by the units ore extracted.
The Company writes off to operating expense the unamortized cost of the
resource property when it determines that the carrying amount of the property
may not be recoverable and the asset value is impaired.
F-5
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE:
Earnings per share has been computed based on the weighted average number of
shares of common stock outstanding during each period. There would have been no
material diluting effect on net loss per share for any outstanding stock
warrants.
INVESTMENTS:
The Company accounts for investments in affiliated companies, which
constitute 20% to 50% of the equity of the investee company, by the equity
method.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. SFAS No. 121
requires that Long-Lived Assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company reviews
the cost of Mining Properties for impairment when events indicate that the
carrying value of the asset may not be recoverable.
Additionally, The Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." The effective date of SFAS No. 123 is for fiscal years beginning
after December 15, 1995, and establishes a method of accounting for stock
compensation plans based on fair value. The Company does not believe the SFAS
No. 123 will have an impact on its financial statements.
3. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES:
The Company has had no significant operating history and must be considered
a development stage enterprise. As such, the Company is subject to all of the
risks inherent in a new mining operation and business enterprise, including the
absence of an operating history, established banking relations and community and
industry recognition.
4. PATENTED (DEEDED) CLAIMS
The Company acquired the mining rights to 34 patented precious metals claims
through an assignment of an agreement ("Primary Agreement") between The Hanover
Group, Inc. ("Group") and the Company dated April 26, 1990. The Company acquired
all the rights and obligations from group for which Group received 100% of the
Company's common stock.
Pursuant to a Mineral Sublease and Purchase Option (the "Secondary
Agreement") between the Company and International dated May 2, 1990, the Company
conveyed all of its rights in and to the Kearsarge Claim, leaving the Company
with the balance of 33 claims under the Primary Agreement. The transfer was made
subject to the former owner's 30% interest and landowner rent and royalty
obligations, and the obligation to pay a royalty of $10,000 per month to the
Company.
On December 20, 1990, Hanover Gold acquired an option until December 20,
1995 for the mining rights to five additional claims from the Company in
exchange for 900,000 shares of Hanover Gold common stock. This option has been
extended until December 20, 1996 for no additional consideration.
In 1992, the Company entered into a mining venture agreement with Kennecott
Exploration Company. As part of the agreement the Company conveyed to Hanover
Gold its interest in 28 claims, subject to a
F-6
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
4. PATENTED (DEEDED) CLAIMS (CONTINUED)
reserved 70% interest in all precious metals mined from the claims, and a
management fee of $15,000 per month, commencing January 1, 1996. The
commencement date for payment of the management fee has been extended until
January 1, 1997 for no additional consideration. Under the various agreements
Hanover Gold is obligated to pay the underlying landowner's royalty payments on
the 34 claims.
As of April 30, 1996, the payment obligations to two landowners on the
claims are as follows:
FIRST LANDOWNER:
<TABLE>
<S> <C>
June 1, 1996............................................ $ 600,000
June 1, 1997............................................ $ 600,000
June 1, 1998............................................ $ 600,000
June 1, 1999............................................ $2,735,000
---------
$4,535,000
</TABLE>
The obligation to the second landowner consist of monthly payments of $8,760
through April 1999. As of April 30, 1996, the total remaining payments are
$311,525.
If Hanover Gold does not make these payments, then the 34 claims revert back
to the Company and it becomes the obligation of the Company to pay. Failure of
the Company to pay these monthly and annual payments to the landowners triggers
a default and the claims would revert back to the landowners.
Under a Modification Agreement dated December 3, 1990 the Company agreed to
assume $3.0 million of Hanover Gold's obligation to the first landowner. In
exchange for this assumption by the Company, Hanover Gold issued 1,500,000
shares of its common stock to the Company. In accordance to the terms of the
agreement, the Company received an additional 500,000 shares of Hanover Gold
stock based on the fair market value of Hanover Gold common stock on December
31, 1991.
F-7
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
5. INVESTMENT IN HANOVER GOLD COMPANY, INC.
As of April 30, 1996 the Company owned 3,625,000 shares of Hanover Gold
common stock that it accounts for on the equity method. The shares were acquired
in exchange for various mining rights (see Note 4) and the assumption of Hanover
Gold's liability by the Company. Hanover Gold's condensed balance sheet and
condensed income statement at December 31, 1995, and April 30, 1996 are as
follows:
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------- -------------
<S> <C> <C>
Total Current Assets............................................ $ 850,242 $ 217,098
Resource property and claims.................................... 6,147,279 7,785,027
Property and equipment.......................................... 102,819 88,181
Other assets.................................................... 1,210,024 900,728
------------- -------------
Total Assets................................................ $ 8,310,364 $ 8,991,034
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities............................................. $ 358,860 $ 216,207
Other Liabilities............................................... 0 0
Stockholder Equity.............................................. 7,951,504 8,774,827
------------- -------------
Total Liabilities and Shareholders' Equity.................. $ 8,310,364 $ 8,991,034
------------- -------------
Gross Revenues.................................................. $ 499,299 $ 3,511
------------- -------------
Cost of Goods Mined............................................. $ 830,197 $ 0
------------- -------------
General & Administrative........................................ $ 1,934,655 $ 424,193
------------- -------------
Loss from Operations............................................ $ (2,265,553) $ (420,682)
------------- -------------
</TABLE>
As specified in Regulation S-X, summarized financial information has been
presented for the investment in Hanover Gold. The investment account of the
Company in Hanover Gold Company, Inc. is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------ ----------
<S> <C> <C>
Investment in Hanover Gold Company, Inc............................ $ 255,913 $ 255,913
Losses recognized in prior years................................... 255,913 255,913
------------ ----------
Net investment at December 31, 1995 and April 30, 1996............. $ 0 $ 0
------------ ----------
</TABLE>
As required by ABP 18 paragraph 19(i) the cumulative losses on the
investment in Hanover Gold Company, Inc. as of April 30, 1996 amounted to
$1,755,213. The Company has discontinued applying the equity method as of
December 31, 1992 since the investment has been reduced to zero. The Company
will resume applying the equity method once its share of the net income equals
the share of net losses not recognized during the period the equity method was
suspended.
F-8
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
6. LOANS RECEIVABLE SHAREHOLDERS
The Company has advanced funds to several shareholders who have been active
in the management of the Company's affairs. The loans are fully secured,
non-interest bearing, and are due on demand.
7. ACCRUED EXPENSES
The balance of $92,536, as of December 31, 1995, includes salaries, payroll
taxes payable and accrued professional fees of approximately $38,803, $11,213
and 42,520, respectively. The balance at April 30, 1996 is zero.
8. NOTES PAYABLE AND ACCRUED INTEREST
In 1991, the Company borrowed $215,170 by issuing preferred, convertible
notes, bearing simple interest at 10% per annum, to shareholders of the Company.
During 1995, these note holders elected to convert their notes and accrued
interest into 574,076 shares of the Company's common stock.
9. FOUNDER'S PACKAGE
In December 1993, the Company's Board approved, with Fred R. Schmid not
voting, a Founders Stock Package ("Package") granting shares of the Company's
common stock to Fred R. Schmid. Pursuant to the Package, Fred R. Schmid
purchased 75,000 shares for $750, and was granted 116,680 shares of the
Company's common stock at no cost, which was approved by the shareholders.
Subject to approval of the merger of the Company with Hanover Gold, by the
Hanover Gold shareholders, Fred R. Schmid would receive a total of 325,000
shares of Hanover Gold's common stock, in exchange for Fred R. Schmid's 191,680
shares of the Company's common stock.
10. INCREASE IN CAPITAL STOCK
The shareholders have approved an increase in the Company's authorized
shares of common stock from 2,000,000 shares to 2,150,000 shares and the Company
has filed the necessary documents with the State of New York.
11. DEVELOPMENT STAGE COMPANY
The Company's operations have been centered around its organization,
evaluation of the mining industry, start-up financing of its operations,
including acquisition of the mining properties, evaluation of engineering data,
obtaining necessary mining permits and formulation and implementation of its
business plan. From April 21, 1990 through the period ending December 31, 1995
the Company has required financing from shareholders and affiliated companies to
fund the development and rental payments of the mining properties. The Company
has incurred losses in connection with its operations during period from
inception to April 30, 1996 of $248,690.
12. RELATED PARTIES
The inter-company balances represent payments to and advances from
affiliated companies in the normal course of business. The balances are
non-interest bearing and are due on demand.
F-9
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
12. RELATED PARTIES (CONTINUED)
As of December 31, 1995, and April 30, 1996, the Company had receivables and
payables with affiliated companies as follows:
<TABLE>
<CAPTION>
DEC 31, APRIL 30,
1995 1996
----------- -----------
<S> <C> <C>
$ 534,038
(438,049)
-----------
Due from Group S Limited............................................ $ 95,989 $ 33,274
Due (to) Hanover Gold Company, Inc.................................. $ (405,809) $ (405,809)
</TABLE>
Certain of the officers and directors of the Company are also officers and
directors of the affiliated companies, namely, Hanover Group, Inc., Hanover
Resources, Inc., and Hanover Gold Company, Inc. Additionally, certain of the
principal shareholders of the affiliated companies are also shareholders in the
Company. Furthermore, for the year ended December 31, 1995, and at April 30,
1996, the Company owned 3,625,000 shares (27%, and 25%, respectively) of the
outstanding common stock of Hanover Gold Company, Inc.
F-10
<PAGE>
GROUP S LIMITED
AUDITED REPORT
FOR THE YEARS ENDED
DECEMBER 31, 1994, AND 1995,
AND FOR THE PERIOD
SEPTEMBER 9, 1991 (INCEPTION) TO DECEMBER 31, 1995
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Group S Limited
Roslyn, New York
We have audited the accompanying balance sheet of Group S Limited as of
December 31, 1995 and December 31, 1994 and the related statements of income
(loss) and accumulated deficit and cash flows for the years then ended, and for
the period September 9, 1991 (inception) to December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Group S Limited as of
December 31, 1995 and 1994, and the results of its operations and cash flows for
each of the years then ended, and September 9, 1991 (inception) to December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 10, the Company has been in the development stage since
September 9, 1991.
May 16, 1996
F-2
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Current Assets
Cash............................................................................... $ 36,385 $ 9,642
------------ ------------
Total Current Assets............................................................. $ 36,385 $ 9,642
------------ ------------
Other Assets
Patented (Deeded) and Unpatented Claims (Note 4)................................... 92,838 292,838
Due from Affiliates (Note 11)...................................................... 494,049 438,049
Due from Shareholder (Note 5)...................................................... 0 62,715
Investment in Hanover Resources, Inc. (Note 6)..................................... 0 485,038
------------ ------------
Total Other Assets............................................................... $ 586,887 $1,278,640
------------ ------------
Total Assets..................................................................... $ 623,272 $1,288,282
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable................................................................... $ 0 $ 9,215
------------ ------------
Total Current Liabilities........................................................ $ 0 $ 9,215
------------ ------------
Long Term Liabilities
Due to Hanover Gold Company, Inc. (Note 11)........................................ 300,695 474,895
Due to Hanover Resources, Inc. (Note 11)........................................... 0 534,038
Option Payment (Note 7)............................................................ 125,000 125,000
------------ ------------
Total Long Term Liabilities...................................................... $ 425,695 $1,133,933
------------ ------------
Total Liabilities................................................................ $ 425,695 $1,143,148
------------ ------------
Stockholders' Equity
Common Stock, (Notes 1, 9 & 10)
Authorized:
December 31, 1994 -- 50,000 shares no par value..................................
December 31, 1995 -- 160,000 shares no par value.................................
Issued and outstanding:
December 31, 1994 -- 50,000 shares............................................... 208,670
December 31, 1995 -- 124,000 shares.............................................. 166,670
(Deficit) accumulated during the development stage (Note 10)....................... (11,093) (21,536)
------------ ------------
Total Stockholders' Equity....................................................... $ 197,577 $ 145,134
------------ ------------
Total Liabilities & Stockholders' Equity......................................... $ 623,272 $1,288,282
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME (LOSS) AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SEPTEMBER 9, 1991
DECEMBER 31, DECEMBER 31, (INCEPTION) TO
1994 1995 DECEMBER 31, 1995
------------ ------------ ------------------
<S> <C> <C> <C>
REVENUES
Revenues......................................................... $ 0 $ 0 $ 0
------------ ------------ --------
EXPENSES
Administrative and office...................................... 6,011 1,817 15,951
Professional Fees.............................................. 0 9,215 9,215
------------ ------------ --------
Total Expenses................................................. $ 6,011 $ 11,032 $ 25,166
------------ ------------ --------
Income (Loss) from Operations.................................. $ (6,011) $ (11,032) $ (25,166)
------------ ------------ --------
Other Income (Expense)
Interest Income................................................ $ 2,082 $ 589 $ 4,079
Interest Expense............................................... 0 0 (449)
------------ ------------ --------
Total other Income (Expense)................................... $ 2,082 $ 589 $ 3,630
------------ ------------ --------
Net Income (Loss)................................................ (3,929) (10,443) (21,536)
Accumulated Deficit at
Beginning of Period............................................ (7,164) (11,093) --
------------ ------------ --------
End of Period.................................................. $ (11,093) $ (21,536) $ (21,536)
------------ ------------ --------
------------ ------------ --------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SEPTEMBER 9, 1991
DECEMBER 31, DECEMBER 31, (INCEPTION) TO
1994 1995 DECEMBER 31, 1995
------------ ------------ -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) from Operations............................... $ (3,929) $ (10,443) $ (21,536)
Changes in Operating Assets and Liabilities
(Increase) Decrease in Patented (Deeded) Claims................. 163,925 (300,000) (292,838)
Increase in accounts payable.................................... 9,215 9,215
(Increase) Decrease in due from Affiliates...................... (278,443) 56,000 (438,049)
Increase (Decrease) in Due to Hanover Gold Company, Inc......... 132,500 174,200 474,895
Increase in option payment...................................... 125,000
(Increase) Decrease in due from Shareholder..................... (62,715) (62,715)
Increase in due to Affiliates................................... 534,038 534,038
------------ ------------ -----------------
Net cash provided by (used in) operating activities: $ 14,053 $ 500,295 $ 328,010
------------ ------------ -----------------
INVESTING ACTIVITIES:
(Increase) in Investment in Hanover Resources, Inc.............. (485,038) (485,038)
------------ ------------ -----------------
Net cash used in investing activities:............................ $ 0 $ (485,038) $ (485,038)
------------ ------------ -----------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock.............................. 208,670
Cost of common stock acquired................................... (42,000) (42,000)
------------ ------------ -----------------
Net cash provided by financing activities......................... $ 0 $ (42,000) $ 166,670
------------ ------------ -----------------
Net Increase (Decrease) in cash................................... 14,053 (26,743) 9,642
Cash, beginning of period......................................... 22,332 36,385 --
------------ ------------ -----------------
Cash, end of period............................................... $ 36,385 $ 9,642 $ 9,642
------------ ------------ -----------------
------------ ------------ -----------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
SEPTEMBER 9, 1991 (INCEPTION) TO DECEMBER 31, 1995
1. ORGANIZATION AND NATURE OF BUSINESS
Group S Limited (the "Company") was incorporated in Montana on September 9,
1991. The objectives of the Company are to invest in precious metals claims,
namely gold and silver deposits having economic and mining potential, and
related activities in the precious metals and mining industries.
On October 16, 1991, the Company entered into a Mining Lease and Option to
Purchase Agreement to acquire 216 claims. On May 19, 1992 the Company entered
into a Mining Venture Agreement with Kennecott Exploration Company for the
purpose of exploring, and if warranted, developing and mining the claims.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
DEPLETION:
The Company depletes the cost of resource properties by an estimate of the
amount of natural resources to be extracted in tons of material, which is the
estimated recoverable units, divided into the total cost to arrive at the rate
per unit. The rate is multiplied by the number of units extracted to determine
the annual depletion expense.
PATENTED (DEEDED) CLAIMS AND RESOURCE PROPERTIES:
The Company accounts for resource properties and claims at the actual cost
incurred for exploration, engineering and site development and for the purchases
of mining properties and the options to purchase additional claims.
The Company capitalizes lease payments which are to be allocated to the
acquisition cost of the mining claims upon completion of the term of the lease.
The provisions of the lease call for termination of the lease for any default in
payments and allow for the acquisition of the claims at the end of the lease for
the total rental payments made.
The Company amortizes the acquisition costs of mining claims as the claims
are put in service based on the allocated cost of the claim divided by the
estimated recoverable units of ore multiplied by the units of ore extracted.
The Company writes off to operating expense the unamortized cost of the
resource property when it determines that the carrying amount of the property
may not be recoverable and the asset value is impaired.
EARNINGS PER SHARE:
Earnings per share has been computed based on the weighted average number of
shares of common stock outstanding during each period. There would have been no
material diluting effect on net loss per share for any outstanding stock
warrants.
INVESTMENTS:
The Company accounts for investments in affiliated companies, which
constitute 20% to 50% of the equity of the investee company, by the equity
method.
F-1
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
SEPTEMBER 9, 1991 (INCEPTION) TO DECEMBER 31, 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121
requires that Long-Lived Assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company reviews
the cost of Mining Properties for impairment when events indicate that the
carrying value of the asset may not be recoverable.
Additionally, The Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." The effective date of SFAS No. 123 is for fiscal years beginning
after December 15, 1995, and establishes a method of accounting for stock
compensation plans based on fair value. The Company does not believe the SFAS
No. 123 will have an impact on its financial statements.
3. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES
The Company has had no significant operating history and must be considered
a development stage enterprise. As such, the Company is subject to all of the
risks inherent in a new mining operation and business enterprise, including the
absence of an operating history, established banking relations and community and
industry recognition.
4. PATENTED (DEEDED) AND UNPATENTED CLAIMS
The Company acquired the mining rights to 22 patented and 194 unpatented
claims (Note 1). The agreement gives the Company the right to explore, develop
and mine all minerals by any method whatsoever. As of December 31, 1995, payment
obligations of $6,400,000 remain on the claims as follows:
<TABLE>
<S> <C>
October 16, 1996........................................ $ 350,000
October 16, 1997........................................ 400,000
October 16, 1998........................................ 450,000
October 16, 1999........................................ 500,000
October 16, 2000........................................ 550,000
October 16, 2001........................................ 1,100,000
October 16, 2002........................................ 1,350,000
October 16, 2003........................................ 1,700,000
---------
$6,400,000
</TABLE>
Pursuant to an amendment dated March 26, 1996, the lessor has agreed to
reduce the Company's rental obligations under the agreement from $6,400,000 to
$3,400,000 for various considerations provided by the Company and other
entities.
In 1991, the Company issued 2,500 shares of its common stock, to a third
party, in connection with the negotiations leading up to the Mining Venture
Agreement with Kennecott Exploration Company. The fair market value of the
services rendered were $16,670 and have been capitalized as part of the Patented
(Deeded) and Unpatented Claim account.
5. DUE FROM SHAREHOLDER
The balance represents unsecured advances to a majority stockholder and is
payable on demand.
F-2
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
SEPTEMBER 9, 1991 (INCEPTION) TO DECEMBER 31, 1995
6. INVESTMENT IN HANOVER RESOURCES, INC.
Prior to the merger of Hanover Group, Inc. ("Group") with the Company, Group
was a major stockholder of Hanover Resources, Inc. ("Resources"). As a result of
the merger of Group into the Company, the Company acquired the investment that
Group previously owned in Resources and thereby the Company became a shareholder
in Resources.
When the Company acquired 100% of the outstanding common stock of Group, it
issued 103,875 shares of its common stock which has been recorded on its books
at no value. In accordance with Generally Accepted Accounting Principals' rules
for accounting for assets of related companies, the assets have been valued at
cost. Group's cost for 833,734 shares of Resources common stock transferred to
the Company as a result of the merger (see note 8) is $485,038.
7. OPTION PAYMENT
The Company received $125,000 from Hanover Gold as an option payment
granting Hanover Gold the right to acquire additional claims owned by the
Company for a period expiring in 2003, at a price equal to the fair market value
of the claims at the time of exercise.
8. MERGER WITH HANOVER GROUP, INC.
On November 29, 1995 the Board of Directors of the Company and the Hanover
Group, agreed to an exchange of the Company's shares of common stock for the
shares of common stock of Group pursuant to the acquisition of Group by the
Company under the purchase method of accounting. Under the terms of the
acquisition, the Company issued 103,875 shares of common stock of the Company in
exchange for the outstanding common stock of Group. Among the assets acquired
are 29,875 shares of the Company's common stock which have been canceled. The
Company's outstanding capital stock has been reduced by Group's cost of $42,000.
The Company acquired all of the assets of Hanover Group, Inc. by assumption of
$534,038 of Hanover Group Inc.'s liabilities. The acquisition of Group's shares
by the Company will have no material effect on the proposed merger between the
Company and Hanover Gold, and Company's shareholders. The acquisition of Group
by the Company will have no effect on the number of shares of Hanover Gold
common stock that the Company's shareholders will receive upon the merger of the
Company into Hanover Gold. The acquisition of Group by the Company is not
material to the operations of the Company since Group has been largely inactive,
incurring insignificant general and administrative expenses which have been
funded by its stockholders.
9. INCREASE IN CAPITAL STOCK
The shareholders have approved an increase in the Company's authorized
shares of common stock from 50,000 shares to 160,000 shares, and the Company has
filed the necessary documents with the State of Montana.
10. DEVELOPMENT STAGE COMPANY
The Company's operations have been centered around its organization,
evaluation of the mining industry, start-up financing of its operations,
including acquisition of the mining properties, evaluation of engineering data,
obtaining necessary mining permits and formulation and implementation of its
business plan. From September 9, 1991 through the period ending December 31,
1995 the Company has required financing from shareholders and affiliated
companies to fund the development and rental payments of the mining properties.
The Company has incurred losses in connection with its operations during the
period from inception to December 31, 1995 of $21,536.
F-3
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
SEPTEMBER 9, 1991 (INCEPTION) TO DECEMBER 31, 1995
11. RELATED PARTIES
The inter-company balances represent advances to and from affiliated
companies in the normal course of business. The balances are non-interest
bearing and due on demand.
As of December 31, 1995 and 1994 the Company had receivables and payables
with affiliated companies as follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Due from (to) Hanover Group, Inc.................................... $ 56,000 $ 0
$ 438,049
(534,039)
-----------
Due from (to) Hanover Resources, Inc................................ $ 438,049 $ (95,989)
Due from (to) Hanover Gold Company, Inc............................. $ (300,695) $ (474,895)
</TABLE>
Certain of the officers and directors of the Company are also officers and
directors of the affiliated companies, namely, Hanover Group, Inc., Hanover
Resources, Inc., and Hanover Gold Company, Inc. Additionally, certain of the
principal shareholders of the affiliated companies are also shareholders in the
Company. Furthermore, at December 31, 1995, the Company owns 833,734 shares
(39%) of the outstanding common stock of Hanover Resources, Inc. At December 31,
1994, the Company did not own any of the affiliates common stock.
F-4
<PAGE>
GROUP S LIMITED
INTERIM MANAGEMENT REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1995, AND
FOR THE PERIODS
JANUARY 1, TO
APRIL 30, 1995, AND 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
<PAGE>
GROUP S LIMITED
(A DEVELOPED STAGE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 30,
1995 1996
------------ (UNAUDITED)
(AUDITED) -----------
(AUDITED)
<S> <C> <C>
Current Assets
Cash.......................................................................... $ 9,642 $ 9,901
------------ -----------
Total Current Assets........................................................ $ 9,642 $ 9,801
------------ -----------
Other Assets:
Patented (Deeded) and Unpatented Claims (Note 4).............................. 292,838 292,838
Due from Affiliates (Note 11)................................................. 438,049 0
Due from Shareholder (Note 5)................................................. 62,715 0
Investment in Hanover Resources, Inc. (Note 6)................................ 485,038 485,038
------------ -----------
Total Other Assets.......................................................... $1,278,640 $ 777,876
------------ -----------
Total Assets.................................................................. $1,288,282 $ 786,677
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.............................................................. $ 9,215 $ 9,215
------------ -----------
Total Current Liabilities................................................... $ 9,215 $ 9,215
------------ -----------
Long-term Liabilities
Due to Hanover Gold Company, Inc. (Note 11)................................... 474,895 474,895
Due to Hanover Resources, Inc. (Note 11)...................................... 534,038 33,274
Option Payment (Note 7)....................................................... 125,000 125,000
------------ -----------
Total Long-term Liabilities................................................. $1,133,933 $ 633,169
------------ -----------
Total Liabilities............................................................. $1,143,148 $ 642,384
------------ -----------
Shareholders' Equity:
Common Stock, (Notes 1, 9, & 10)
Authorized:
December 31, 1994 -- 50,000 shares no par value
December 31, 1995 -- 160,000 shares no par value
Issued and outstanding
December 31, 1994 -- 50,000 shares
December 31, 1995 -- 124,000 shares......................................... 166,670 166,670
(Deficit) accumulated during the development state.............................. (21,536) (22,377)
------------ -----------
Total Stockholders' Equity.................................................... $ 145,134 $ 144,293
------------ -----------
Total Liabilities and Stockholder's Equity.................................... $1,288,282 $ 786,677
------------ -----------
------------ -----------
</TABLE>
See notes to financial statements.
F-2
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME (LOSS) AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1, SEPTEMBER 9, 1991
TO APRIL TO APRIL (INCEPTION) TO
30, 1995 30, 1996 APRIL 30, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
REVENUES
Revenues............................................................... $ 0 $ 0 $ 0
----------- ----------- --------
EXPENSES
Administrative and office............................................ 425 931 16,882
Professional Fees.................................................... 3,221 0 9,215
----------- ----------- --------
Total Expenses....................................................... $ 3,646 $ 931 26,097
----------- ----------- --------
Income (Loss) from Operations........................................ $ (3,646) $ (931) $ (26,037)
----------- ----------- --------
Other Income (Expense)
Interest Income...................................................... $ 216 $ 90 $ 4,169
Interest Expense..................................................... 0 0 (449)
----------- ----------- --------
Total Other Income (Expense)......................................... $ 216 $ 90 $ 3,720
----------- ----------- --------
Net Income (Loss)...................................................... (3,430) (842) (22,377)
Accumulated Deficit at
Beginning of Period.................................................. (7,164) (22,536) --
----------- ----------- --------
End of Period........................................................ $ (10,594) $ (22,377) $ (22,377)
----------- ----------- --------
----------- ----------- --------
</TABLE>
See notes to financial statements.
F-3
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
JANUARY 1, JANUARY 1, SEPTEMBER 9, 1991
TO APRIL 30, TO APRIL 30, (INCEPTION) TO
1995 1996 APRIL 30, 1996
------------ ------------ -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income (Loss) from Operations............................... $ (3,430) $ (841) $ (22,377)
Changes in Operating Assets and Liabilities
(Increase) Decrease in Patented (Deeded) Claims................. (292,838)
Increase in accounts payable.................................... 9,215
(Increase) Decrease in due from Affiliates...................... 438,049 0
Increase (Decrease) in Due to Hanover Gold Company, Inc......... 474,895
Increase in option payment...................................... 125,000
(Increase) Decrease in due from Shareholder..................... 62,715 0
Increase (Decrease) in due to Affiliates........................ (500,764) 33,274
------------ ------------ -----------------
Net cash provided by (used in) operating activities:.............. $ (3,430) $ (841) $ 327,169
------------ ------------ -----------------
INVESTING ACTIVITIES:
(Increase) in Investment in Hanover Resources, Inc.............. $ (485,038)
------------ ------------ -----------------
Net cash used in investing activities............................. $ 0 $ 0 $ (485,038)
------------ ------------ -----------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock.............................. 208,670
Cost of common stock acquired................................... (42,000)
------------ ------------ -----------------
Net cash provided by financing activities......................... $ 0 $ 0 $ 166,670
------------ ------------ -----------------
Net Increase (Decrease) in cash................................... (3,436) (841) 8,801
Cash, beginning of period......................................... 36,385 9,642 --
------------ ------------ -----------------
Cash, end of period............................................... $ 32,955 $ 8,801 $ 8,801
------------ ------------ -----------------
------------ ------------ -----------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
1. ORGANIZATION AND NATURE OF BUSINESS
Group S Limited (the "Company") was incorporated in Montana on September 9,
1991. The objectives of the Company are to invest in precious metals claims,
namely gold and silver deposits having economic and mining potential, and
related activities in the precious metals and mining industries.
On October 16, 1991, the Company entered into a Mining Lease and Option to
Purchase Agreement to acquire 216 claims. On May 19, 1992 the Company entered
into a Mining Venture Agreement with Kennecott Exploration Company for the
purpose of exploring, and if warranted, developing and mining the claims.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial statements have been prepared by the Company in
accordance with generally accepted accounting principals for interim financial
information as required by Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of only normal recurring
accruals) considered necessary of a fair presentation have been included.
Operating results for the four month period ended April 30, 1996 are not
necessarily indicative of the results that may be expected for the full year
ending December 31, 1996.
For further infomation refer to the financial statements, and footnotes
thereto, for the year ended December 31, 1995, incorporated elsewhere herein.
REVENUE RECOGNITION:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
DEPLETION:
The Company depletes the cost of resource properties by an estimate of the
amount of natural resources to be extracted in tons of material, which is the
estimated recoverable units, divided into the total cost to arrive at the rate
per unit. The rate is multiplied by the number of units extracted to determine
the annual depletion expense.
PATENTED (DEEDED) CLAIMS AND RESOURCE PROPERTIES:
The Company accounts for resource properties and claims at the actual cost
incurred for exploration, engineering and site development and for the purchases
of mining properties AND THE options to purchase additional claims.
The Company capitalizes lease payments which are to be allocated to the
acquisition cost of the mining claims upon completion of the term of the lease.
The provisions of the lease call for termination of the lease for any default in
payments and allow for the acquisition of the claims at the end of the lease for
the total rental payments made.
The Company amortizes the acquisition costs of mining claims as the claims
are put in service based on the allocated cost of the claim divided by the
estimated recoverable units of ore multiplied by the units of ore extracted.
The Company writes off to operating expense the unamortized cost of the
resource property when it determines that the carrying amount of the property
may not be recoverable and the asset value is impaired.
F-5
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE:
Earnings per share has been computed based on the weighted average number of
shares of common stock outstanding during each period. There would have been no
material diluting effect on net loss per share for any outstanding stock
warrants.
INVESTMENTS:
The Company accounts for investments in affiliated companies, which
constitute 20% to 50% of the equity of the invested company, by the equity
method.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121 , "Accounting for Impaired of Long-Lived
Assets and for Long-Lived Assets to Be Disposed of." SFAS No. 121 requires that
Long-Lived Assets and certain identifiable intangibles to be held and used by
the Company be reviewed for impairment whenever events indicated that the
carrying amount of an assets may not be recoverable. The Company reviews the
cost of Mining Properties for impairment when events indicate that the carrying
value of the asset may not be recoverable.
Additionally, The Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." The effective date of SFAS No. 123 is for fiscal years beginning
after December 15, 1995, and establishes a method of accounting for stock
compensation plans based on fair value. The Company does not believe the SFAS
No. 123 will have an impact on its financial statements.
3. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES
The Company has had no significant operating history and must be considered
a development stage enterprise. As such, the Company is subject to all of the
risks inherent in a new mining operation and business enterprise, including the
absence of an operating history, established banking relations and community and
industry recognition.
4. PATENTED (DEEDED) AND UNPATENTED CLAIMS
The Company acquired the mining rights to 22 patented and 194 unpatented
claims (Note 1). The agreement gives the Company the right to explore, develop
and mine all minerals by any method whatsoever.
F-6
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
4. PATENTED (DEEDED) AND UNPATENTED CLAIMS (CONTINUED)
Pursuant to an amendment dated March 26, 1996, the lessor has agreed to reduce
the Company's rental obligations under the agreement from $6,400,000 to
$3,400,000 for various considerations provided by the Company and other
entities. The revised schedule of payments, as of April 30, 1996, is as follows:
<TABLE>
<S> <C>
October 16, 1996................................. $ 350,000
March 1, 1997.................................. 200,000
September 16, 1997............................. 200,000
March 1, 1998.................................. 225,000
September 1, 1998................................ 225,000
March 1, 1999.................................... 250,000
September 1, 1999.............................. 250,000
March 1, 2000.................................... 250,000
September 1, 2000.............................. 250,000
March 1, 2001.................................... 300,000
September 1, 2001.............................. 300,000
March 1, 2002.................................... 300,000
September 1, 2002.............................. 300,000
--------------
$3,400,000
--------------
</TABLE>
In 1991, the Company issued 2,500 shares of its common stock to a third party,
in connection with the negotiations leading up to the Mining Venture Agreement
with Kennecott Exploration Company. The fair market value of the services
rendered were $16,670 and have been capitalized as part of the Patented (Deeded)
and Unpatented Claim account.
5. DUE FROM SHAREHOLDER
The balance represents advances to a majority stockholder and is payable on
demand.
6. INVESTMENT IN HANOVER RESOURCES, INC.
Prior to the merger of Hanover Group, Inc. ("Group") with the Company, Group
was a major stockholder of Hanover Resources, Inc. ("Resources"). As a result of
the merger of Group into the Company, the Company acquired the investment that
Group previously owned in Resources and thereby the Company became a shareholder
in Resources.
When the Company acquired 100% of the outstanding common stock of Group, it
issued 103,875 shares of its common stock which has been recorded on its books
at no value. In accordance with Generally Accepted Accounting Principals' rules
for accounting for assets of related companies, the assets have been valued at
cost. Group's cost for 833,734 shares of Resources common stock transferred to
the Company as a result of the merger (see note 8) is $485,038.
7. OPTION PAYMENT
The Company received $125,000 from Hanover Gold as an option payment
granting Hanover Gold the right to acquire additional claims owned by the
Company for a period expiring in 2003, at a price equal to the fair market value
of the claims at the time of exercise.
F-7
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
8. MERGER WITH HANOVER GROUP, INC.
On November 29, 1995 the Board of Directors of the Company and the Hanover
Group, agreed to an exchange of the Company's shares of common stock for the
shares of common stock of Group pursuant to the acquisition of Group by the
Company under the purchase method of accounting. Under the terms of the
acquisition, the Company issued 103,875 shares of common stock of the Company in
exchange for the outstanding common stock of Group. Among the assets acquired
are 29,875 shares of the Company's common stock which have been canceled. The
Company's outstanding capital stock has been reduced by Group's cost of $42,000.
The Company acquired all of the assets of Hanover Group, Inc. by assumption of
$534,038 of Hanover Group Inc.'s liabilities. The acquisition of Group's shares
by the Company will have no material effect on the proposed merger between the
Company and Hanover Gold, and Company's shareholders. The acquisition of Group
by the Company will have no effect on the number of shares of Hanover Gold
common stock that the Company's shareholder will receive upon the merger of the
Company into Hanover Gold. The acquisition of Group by the Company is not
material to the operations of the Company since Group has been largely inactive,
incurring insignificant general and administrative expenses which have been
funded by its stockholders.
9. INCREASE IN CAPITAL STOCK
The shareholders have approved an increase in the Company's authorized
shares of common stock from 50,000 shares to 160,000 shares, and the Company has
filed the necessary documents with the State of Montana.
10. DEVELOPMENT STAGE COMPANY
The Company's operations have been centered around its organization,
evaluation of the mining industry, start-up financing of its operations,
including acquisition of the mining properties, evaluation of engineering data,
obtaining necessary mining permits and formulation and implementation of its
business plan. From September 1991 through the period ending December 31, 1995
the Company has obtained required financing from shareholders and affiliated
companies to fund the development and rental payments of the mining properties.
The Company has incurred losses in connection with its operations during the
period from inception to April 30, 1996 of $22,377.
11. RELATED PARTIES
The inter-company balances represent advances from affiliated companies in
the normal course of business. The balances are non-interest bearing and due on
demand.
As of December 31, 1995, and April 30, 1996, the Company had receivables and
payables with affiliated companies as follows:
<TABLE>
<CAPTION>
DEC 31, APRIL 30,
1995 1996
----------- -----------
<S> <C> <C>
Due from (to) Hanover Group, Inc.................................... $ 0 $ 0
$ 438,049
(534,038)
-----------
Due from (to) Hanover Resources, Inc................................ $ (95,989) $ (33,274)
Due from (to) Hanover Gold Company, Inc............................. $ (474,895) $ (474,895)
</TABLE>
Certain of the officers and directors of the Company are also officers and
directors of the affiliated companies, namely, Hanover Group, Inc., Hanover
Resources, Inc., and Hanover Gold, Inc. Additionally, certain of the principal
shareholders of the affiliated companies are also shareholders in the Company.
F-8
<PAGE>
GROUP S LIMITED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
11. RELATED PARTIES (CONTINUED)
Furthermore, at December 31, 1995, and at April 30, 1996, the Company owned
833,734 shares (39%) of the outstanding common stock of Hanover Resources, Inc.
At December 31, 1994, the Company did not own any of the affiliates common
stock.
F-9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-23022
HANOVER GOLD COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 11-2740461
(State or other (IRS Employer
jurisdiction Identification No.)
of incorporation)
</TABLE>
1000 NORTHWEST BOULEVARD, SUITE 100
Coeur d'Alene, Idaho 83814
(Address of principal executive offices)
Registrant's telephone number, including area code: (208) 664-4653
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of outstanding shares of the registrant's common stock at May 15,
1996 was 14,829,678 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HANOVER GOLD COMPANY, INC. QUARTERLY REPORT
ON FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1996
TABLE OF CONTENTS
<TABLE>
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PAGE
-----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1: Financial Statements........................................................................... 1
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................... 1
PART II -- OTHER INFORMATION
Item 1: Legal Proceedings.............................................................................. 3
Item 2: Changes in Securities.......................................................................... 3
Item 3: Defaults Upon Senior Securities................................................................ 3
Item 4: Submission of Matters to a Vote of Security Holders............................................ 3
Item 5: Other Information.............................................................................. 3
Item 6: Exhibits and Reports on Form 8-K............................................................... 4
</TABLE>
SIGNATURES
[The balance of this page has been intentionally left blank.]
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The unaudited consolidated financial statements of the Company for the
periods covered by this report are included elsewhere in this report, beginning
at page F/S-1.
The unaudited condensed consolidated financial statements have been prepared
by the Company in accordance with generally accepted accounting principles for
interim financial information with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, all
adjustments (consisting of only normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 1996 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 1996.
For further information refer to the consolidated financial statements and
footnotes thereto incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSES OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS FOR THE PERIOD ENDED MARCH 31, 1996 COMPARED TO THE
PERIOD ENDED MARCH 31, 1995.
The Company had total assets of $8,946,598 at March 31, 1996, compared to
$8,310,364 for the year ended December 31, 1995. At March 31, 1995, these assets
consisted of $370,738 in current assets, $7,585,027 in resource properties and
claims, $137,270 in property and equipment, net of depreciation, and $900,728 in
reclamation bonds and other assets, which includes $880,804 in notes receivable
from affiliates. This compares to $6,147,279 in resource properties and claims,
$150,494 in property and equipment, $1,210,024 in reclamation bonds and other
assets, inclusive of the $880,804 in notes receivable from affiliates, at
December 31, 1995. The increase in total assets at March 31, 1995 is
attributable primarily to an increase in resource properties and claims stemming
from the company's acquisition of additional mining claims and interests in the
Alder Gulch area. The decrease in current assets is primarily due to a decrease
in cash for the period, which is itself attributable to: the payment of
increased expenses of operation; payment of consulting fees to former executive
officers of the Company and the Company's geological consultant, a portion of
which were accrued during the year ended December 31, 1995; payment of directors
and officers liability insurance premiums; and increased legal and accounting
expenses incurred in connection with the acquisition of additional mining claims
and interests.
The Company's current assets at March 31, 1996 consisted of $265,001 in
cash, $29,494 in inventory and $76,243 in prepaid expenses, compared to $723,162
in cash, $29,494 in inventory and $97,586 in prepaid expenses at December 31,
1995.
Total liabilities at March 31, 1996 were $8,695,178, compared to total
liabilities of $7,951,504 at December 31, 1995. At March 31, 1996, these
liabilities consisted of $14,982 in notes payable, $225,179 in accounts payable
and $11,259 in accrued expenses. This compares to $48,654 in notes payable,
$221,756 in accounts payable and $38,450 in accrued expenses at December 31,
1995. The decrease in notes payable is attributable to the payment during the
quarter of premiums for directors and officers liability insurance, the effect
of which reduced a note formerly given in conjunction with the financing of such
premiums. The slight increase in accounts payable during the three months ended
March 31, 1996 is primarily due to increased activities involving the
acquisition of additional mining claims and interests in the Alder Gulch area.
Revenues for the three month period ended March 31, 1996 consisted of $3,511
received from the sale of carbon to ASARCO. General and administrative expenses
for the 1996 period were $303,733, down from $413,088 during the comparable
period in 1995. The decrease in general and administrative expenses is primarily
attributable to the fact that the Company was not engaged in mining activities
during the first quarter of 1996, and, secondarily, to a decrease in the amounts
payable to executive officers during the period.
1
<PAGE>
During the three months ended March 31, 1996, the Company experienced a loss
from operations of $299,326, or approximately $0.02 per share, compared to a
loss of $627,743, or approximately $0.07 per share, during the comparable period
in the previous year. The significant decrease in losses is due primarily to the
fact that the Company was not engaged in mining activities in the Alder Gulch
during the period ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES.
As previously reported, as a consequence of Kennecott's withdrawal from the
mining venture in March 1995, the Company assumed full responsibility for
certain landowner rental and royalty obligations on its Alder Gulch mining
claims. At December 31, 1995 the rental and royalty obligations payable in 1996
totalled $1,255,120. Management believes the Company will meet its 1996, largely
because of financing commitments that have been made by Neal A. Degerstrom and
associated persons under the June 1995 securities purchase agreement and
amendments. Mr. Degerstrom and such persons are obligated to purchase an
additional 2,142,858 shares of common stock at various times during the seven
month period ending October 16, 1996, which will result in proceeds to the
Company of approximately $1 million. Mr. Degerstrom purchased 400,000 of such
shares on April 15, 1996. However, unless the Company is able to negotiate a
joint venture or other agreement with a major mining company for the continued
exploration and development of the Alder Gulch claims, it may continue to
experience a shortage of working capital.
The Company has incurred aggregate losses of $4,624,625 from inception
through March 31, 1996 because it has not yet been able to place the Alder Gulch
properties into large-scale production. The Company's inability to achieve this
objective is attributable to a number of factors, including Kennecott's
unexpected withdrawal from the mining venture and the Company's lack of success,
judged at least historically, in consolidating the various claims and interests
in the area. Although the Company was able to conduct fairly extensive
exploration and limited development of the properties, largely as the result of
its former arrangement with Kennecott, significant additional work must be
performed to support further development efforts. The Company has received
expressions of interest from several North American mining companies regarding a
joint venture or other economic arrangement to explore and develop the
properties, and believes such an arrangement will be concluded during the second
quarter of 1996.
As previously reported, the Company has recently restructured its management
and taken significant additional steps to consolidate the Alder Gulch claims. In
addition, the Company has completed a compilation of geologic and other
technical data generated from its and Kennecott's prior exploration activities.
Management believes these activities will have a positive effect on the
Company's performance during 1996, and that the Company will be successful in
negotiating a joint venture or other arrangement with a major mining company to
explore and, if warranted, develop its properties.
Although the Company's operations are subject to general inflationary
pressures, these pressures have not had a significant effect on operations,
particularly since early 1995 when mining and processing operations were
suspended for lack of funds. If the Company resumes exploration and development
activities, which can be expected during 1996 if it is successful in negotiating
a joint venture or other economic arrangement with another mining company,
inflation will result in an increase in the cost of goods and services necessary
to its mining operations.
2
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Neither the registrant nor any of its mining properties are subject to any
pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
Neither the constituent instruments defining the rights of the registrant's
securities holders nor the rights evidenced by the registrant's outstanding
common stock have been modified, limited or qualified.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The registrant has no outstanding senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the registrant's security holders
during the period covered by this report.
ITEM 5. OTHER INFORMATION.
PURCHASE BY DEGERSTROM OF ADDITIONAL SHARES OF COMMON STOCK. As previously
reported, pursuant to a third amendment dated March 3, 1996 to a securities
purchase agreement between the registrant and N. A. Degerstrom, Mr. Degerstrom
firmly committed to purchase 2,142,858 shares of the registrant's common stock
represented by options previously granted to Mr. Degerstrom and subsequently
canceled. These shares are to be purchased by Mr. Degerstrom, at the price of
$0.50 per share (which is equal to the exercise price of the former options), on
or before the dates the former options were to have been exercised: 400,000
shares will be purchased on April 15, 1996; an additional 1,200,000 shares will
be purchased on June 1, 1996; and the remaining 542,858 shares will be purchased
on or before October 16, 1996. Proceeds received by the Company from the
purchase of these shares will be used to ensure payment of rental and royalty
obligations coming due in 1996. Mr. Degerstrom purchased 400,000 of such shares
on April 15, 1996.
CONSUMMATION OF MOEN TRANSACTION. As previously reported, the registrant's
Group S subsidiary entered into an agreement with Roy Moen and related interests
effective March 26, 1996 amending the terms of an October 1991 lease and option
agreement covering 216 mining claims in the Alder Gulch area. The amendment
reduces Group S's overall rental obligations by $3,000,000 and establishes a new
payment schedule providing for bi-annual payments of $200,000 to $300,000,
commencing October 16, 1996 and ending September 1, 2002. The revised agreement
also reduces from 5% to 2.5% the production royalty Moen would receive if the
claims are placed into production. Like the former agreement, the production
royalty declines to 1% in the event the price of gold is less than $425 per
ounce; unlike the former agreement, Group S will not acquire a proportionate
ownership interest in the claims as rental payments are made. Rather, such
ownership will become vested only when all future rental payments, now totalling
$3.4 million, have been made. In consideration of the agreed reductions in Group
S's rental and royalty obligations to Moen, the Company has agreed to issue
250,000 shares of common stock to Moen, and grant him three-year options,
exercisable at the price of $2.00 per share, to acquire an additional 200,000
shares. As further consideration for the agreed reductions, the Company will
forgive approximately $92,000 in indebtedness which Moen and a related entity
incurred in 1993 in connection with purchase of equipment and the customizing of
a mill facility near Virginia City. The Company will also transfer two mine
trucks to Moen, having a book value at December 31, 1995 of $43,183, and will
cause Geneva Mill L.C. to assign and convey to Moen an unusable ore processing
facility located in Radersburg, Montana, together with approximately twenty
acres of real property on which the facility is located. (As was disclosed in
the registrant's annual report on Form 10-K for the year ended December 31, 1995
and in Note 5 to the consolidated financial statements included therein, the
carrying value of a promissory note issued to the Company by Geneva Mill L.C. in
1994 in connection with the Company's financing of the mill's acquisition and
refurbishment was written down in 1995 to $220,000.) In addition, N. A.
Degerstrom, Inc., which is controlled by an affiliate of the Company, has agreed
to transfer to Moen certain equipment maintained at a Degerstrom-operated
milling facility near Soda Springs, Idaho.
3
<PAGE>
The transactions evidenced by the amendment between Group S and Moen were
consummated in April of 1996.
AMENDMENT TO TABOR TRANSACTION AND CLOSING IN ESCROW. As previously
reported, effective March 25, 1996 the registrant entered into an asset purchase
agreement with Tabor Resources Corporation, a Minnesota corporation, for the
purchase of ten patented and 120 unpatented mining claims, and one mining lease,
covering properties located in the Alder Gulch area. The registrant agreed to
issue Tabor 400,000 shares of common stock and three-year options exercisable at
the price of $2.00 per share for the purchase of an additional 300,000 shares in
the transaction. The registrant also agreed that if, during the two year period
commencing with the effective date of the agreement, the average bid price of
the common stock during any period of thirty consecutive trading days does not
exceed $2.00 per share, it would issue Tabor such number of additional shares
sufficient to raise the aggregate market value of the shares then owned by Tabor
to $2.00.
The asset purchase agreement was amended effective as of April 19, 1996 to
delete those provisions pertaining to the issuance of options to Tabor and to
substitute, in their stead, new provisions providing for the issuance of an
additional 125,000 shares of the registrant's common stock to Tabor as further
consideration. Certificates for the 125,000 additional shares were issued to
Tabor as of such date. The remaining 400,000 shares of common stock issuable by
the registrant pursuant to the agreement, together with conveyancing documents
covering the mining claims and leases owned by Tabor, were deposited into an
escrow account as of such date as well. As previously reported, the registrant
has agreed to prepare and file a registration statement under the Securities Act
covering the 400,000 shares issued to Tabor, and to cause such registration
statement to be declared effective within six months of the effective date of
the agreement, as amended (or on or before October 16, 1996). The registrant
also has agreed to thereafter maintain the registration statement in effect for
a period of eighteen months to enable Tabor to resell the shares should it so
choose. Pending effectiveness of the registration statement, conveyancing
documents covering the claims and certificates for the 400,000 shares are to be
held in escrow. In the event the registration statement is not declared
effective within six months of closing, such documents and certificates may at
Tabor's election be returned to the respective parties, in which event the
transaction will be deemed to have been rescinded.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS. The following exhibit is filed as part of this report:
10.12 Amendment to Asset Purchase Agreement dated as of April 19, 1996
between the registrant and Tabor Resources Corporation.
REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the registrant
during the period covered by this report.
4
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Condensed Consolidated Balance Sheet..................................................................... F/S-1
Condensed Consolidated Statements of Income (Loss)....................................................... F/S-2
Condensed Consolidated Statement of Stockholders' Equity................................................. F/S-3
Condensed Consolidated Statements of Cash Flow........................................................... F/S-4
Notes to Condensed Consolidated Financial Statements..................................................... F/S-5
</TABLE>
(i)
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
(UNAUDITED) (AUDITED)
Current Assets:
Cash............................................................................. $ 265,001 $ 723,162
Inventory (Note 3)............................................................... 29,494 29,494
Prepaid expenses................................................................. 76,243 97,586
------------- -------------
Total current assets........................................................... 370,738 850,242
Resource properties and claims:
Exploration, engineering and site development.................................... 2,225,106 2,225,106
Mining properties (Notes 5 and 6)................................................ 5,359,831 3,922,083
Option........................................................................... 90 90
------------- -------------
Total resource properties and claims........................................... 7,585,027 6,147,279
Property and equipment, at cost.................................................... 137,270 150,494
Less accumulated depreciation...................................................... 47,165 47,675
------------- -------------
Net property and plant and equipment............................................. 90,105 102,819
------------- -------------
Other Assets:
Reclamation bonds................................................................ 19,924 19,924
Note receivable (Note 4)......................................................... 309,296
Due from Group S, Ltd............................................................ 474,895 474,895
Due from Hanover Resources, Inc.................................................. 405,909 405,909
------------- -------------
Total resource properties and claims........................................... 900,728 1,210,024
------------- -------------
Total assets................................................................. $ 8,946,598 $ 8,310,364
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note Payable..................................................................... $ 14,982 $ 48,654
Loans payable -- shareholder..................................................... 50,000
Accounts Payable................................................................. 225,179 221,756
Accrued Expenses................................................................. 11,259 38,450
------------- -------------
Total current liabilities...................................................... 251,420 358,860
------------- -------------
Stockholders' equity:
Common stock, $.0001 par value, authorized 25,000,000 shares; issued and
outstanding 13,649,678 and 14,304,678 shares respectively....................... 1,430 1,365
Additional paid-in capital....................................................... 13,318,373 12,275,438
Deficit accumulated during the development stage................................. (4,624,625) (4,325,299)
------------- -------------
8,695,178 7,951,504
------------- -------------
Total liabilities & stockholders' equity....................................... $ 8,946,598 $ 8,310,364
------------- -------------
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</TABLE>
F/S-1
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 1996 31, 1995
-------------- --------------
<S> <C> <C>
Revenue.......................................................................... $ 3,511 $ 180,948
Cost of goods mined.............................................................. 669,488
--------------
Gross profit (loss).............................................................. 3,511 (488,540)
General and administrative expenses.............................................. 303,733 413,088
-------------- --------------
Loss from operations............................................................. (300,222) (901,628)
Interest and Other Income........................................................ 896 23,885
Option Received.................................................................. 250,000
--------------
Net Loss......................................................................... $ (299,326) (627,743)
-------------- --------------
-------------- --------------
Net Loss per share............................................................... $ (0.02) $ (0.07)
-------------- --------------
-------------- --------------
Weighted average common shares outstanding....................................... 13,692,205 9,095,857
-------------- --------------
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</TABLE>
F/S-2
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
ADDITIONAL DURING THE
COMMON COMMON PAID-IN DEVELOPMENT
SHARES STOCK CAPITAL STAGE
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994................................. 8,845,857 $ 885 $ 9,838,572 $ (2,003,730)
Issuance of 250,000 shares of common stock to Hanover
Resources, Inc. as per Modification Agreement dated
12/31/90 ($1.60/share).................................... 250,000 25
Issuance of 2,142,856 shares of common stock to N.A.
Degerstrom as per Securities Purchase Agreement dated
06/01/95 ($0.35/share).................................... 2,141,856 214 749,786
Issuance of 714,286 shares of common stock to N.A.
Degerstrom as per Securities Purchase Agreement dated
06/01/95 ($0.35/share).................................... 714,286 71 249,929
Issuance of 200,000 shares of restricted common stock
pursuant to a private placement ($1.00/share)............. 200,000 20 199,980
Issuance of remaining 250,000 shares of common stock to
Hanover Resources, Inc. as per Modification Agreement
dated 12/31/90 ($.0001/share)............................. 250,000 25
Issuance of 69,679 shares of common stock in satisfaction
of vendor obligations ($1.06/share)....................... 69,679 7 74,089
Issuance of 200,000 shares of common stock in satisfaction
of vendor obligations ($1.00/share)....................... 200,000 20 199,980
Issuance of 1,000,000 shares of common stock to N.A.
Degerstrom per amendment to Securities Purchase Agreement
dated 06/01/95 ($1.00/share).............................. 1,000,000 100 999,900
Redemption of previously issued shares ($1.60/share)....... (23,000) (2) (36,798)
Net loss................................................... (2,321,569)
-------------
Balance, December 31, 1995................................. 13,649,678 1,365 12,275,438 (4,325,299)
Issuance of 5,000 shares of common stock to W.W. Goodridge
pursuant to Agreement of Assignment dated 11/30/95
($1.00/share)............................................. 5,000 5,000
Issuance of 400,000 shares of common stock to Tabor
Resources Corporation pursuant to Asset Purchase Agreement
dated March 25, 1996 ($1.62/share)........................ 400,000 40 647,960
Issuance of 250,000 shares of common stock to Roy A. Moen
pursuant to Agreement and Amendment to Mining Lease &
Option to Purchase dated March 26, 1996 ($1.56/share)..... 250,000 25 389,975
Net loss................................................... (299,326)
-------------
Balance, March 31, 1996.................................... 14,304,678 $ 1,430 $ 13,318,373 $ (4,624,625)
------------
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</TABLE>
F/S-3
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH ENDED MARCH
31, 1996 31, 1995
-------------- --------------
<S> <C> <C>
Operating Activities:
Net loss....................................................................... (299,326) (627,743)
Adjustments to reconcile net cash and equivalents provided by operating
activities:
Depreciation................................................................... 8,152 7,566
Depletion...................................................................... 5,068
Changes in operating assets & liabilities:
(Increase) decrease in subscription receivable................................. 558,621
(Increase) decrease in inventory............................................... 42,639
(Increase) decrease in prepaid expenses........................................ 21,343 29,045
Increase (decrease) in accounts payable........................................ 3,423 (34,450)
Increase (decrease) in accrued expenses........................................ (21,409) (52,231)
Changes in other assets and liabilities:
(Increase) decrease in reclamation bond........................................ (53)
(Increase) decrease in notes receivable........................................ 309,296 (77,700)
(Increase) decrease in due to Group S, Ltd..................................... 118,165
(Increase) decrease in due to Hanover Resources, Inc........................... 105,207
Increase (decrease) in note payable............................................ (83,672)
(Decrease) in option payable................................................... (250,000)
Increase (decrease) in Payroll Taxes & Disability.............................. (5,783) 41,062
-------------- --------------
Net cash used in operating activities............................................ (67,975) (134,804)
-------------- --------------
Investing Activities:
Purchase of property and equipment............................................. (30,891) (11,496)
Increase in mining properties.................................................. (1,437,748)
--------------
Net cash used in investing activities............................................ (1,468,639) (11,496)
-------------- --------------
Financing Activities:
Disposition of equipment for mining interests.................................. 35,453
Issuance of common stock for mining interests.................................. 1,043,000 (399,975)
-------------- --------------
Net cash provided by financing activities........................................ 1,078,453 (399,975)
-------------- --------------
Net increase (decrease) in cash.................................................. (458,161) (546,275)
Cash, beginning of period........................................................ 732,162 646,141
-------------- --------------
Cash, end of period.............................................................. 265,001 99,866
-------------- --------------
-------------- --------------
</TABLE>
F/S-4
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financing information presented in the Company's quarterly reports follow
the policies set forth in its Annual Report to Stockholders and its Annual
Report on Form 10-K filed with the Securities and Exchange Commission. In
accordance with generally accepted accounting principles for interim financial
information, the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X,
these quarterly reports do not include all of the information and footnotes.
In the opinion of the Company's management, all adjustments (consisting of
only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
full year ending December 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
1. NATURE OF BUSINESS:
The objectives of the Company are to invest in precious metal claims, namely
gold and silver deposits having economic potential for development and mining
and related activities in the precious metals and mining industries.
2. ORGANIZATION:
Hanover Gold Company, Inc. was incorporated in Delaware on December 6, 1984
and on September 24, 1990 exchanged 14,000,000 shares of its $.0001 par value
common stock for 100% of the outstanding stock of Hanover International Limited.
On July 31, 1990 the Company acquired the Kearsarge Lode Claim, south of
Virginia City, Montana, entering into a Sublease and Purchase Option Agreement
with the Hanover Resources, Inc. As of December 1990 the company reverse split
the stock 1 for 20.
3. INVENTORIES:
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
<S> <C> <C>
Raw materials................................................ $ 29,494 $ 29,494
Work in process.............................................. 0 126,581
Yard and Supplies............................................ 0 46,199
Inventory write-down......................................... 0 (103,869)
------- --------------
Total Inventory.......................................... $ 29,494 $ 138,599
------- --------------
------- --------------
</TABLE>
4. NOTE RECEIVABLE:
In February, March and April 1993, the Company made total loans of $100,000
to Moen Builders, Inc. and M&W Milling and Refining, Inc. (Collectively referred
to as "M&W") for M&W to acquire certain equipment to complete its custom mill
facility. M&W is not affiliated with the Company. The Company secured this loan
with a fully executed and recorded UCC Financing Statement covering certain
equipment. M&W was obligated to repay the notes from cash flow proceeds at the
rate of $3.33 per ton of the Company's Ore processed by M&W at the mill and at
the rate of $2.00 per ton for third party ore processed by M&W at the mill. As
of December 31, 1994 M&W had paid back $7,897, leaving a balance due from M&W of
$92,103. As of December 31, 1995 M&W paid back $2,806, leaving a balance due of
$89,297.
During 1994, the Company acquired the exclusive use of the gravity and
carbon-in-leach mill processing facility known as Geneva Mill, L.C. at Toston,
Montana. The Company entered into an agreement with Geneva Mill, L.C. on June
14, 1994 and provided the necessary funds for Geneva Mill, L.C. to acquire and
refurbish the facility. In addition to the note receivable to M&W, the Company
had made loan advances in
F/S-5
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. NOTE RECEIVABLE: (CONTINUED)
1994 to Geneva Mill, L.C. in the amount of $1,221,922 and an additional amount
in 1995 of $373,278, for plant acquisition, crushing equipment, refurbishing
used mill equipment, installation of new pumps, construction of tailings ponds
and liners, transportation trucking equipment, and loaders and working capital.
The terms of the repayment of the loans were based on the tons of ore processed
at the mill at the rate of $45 per ton plus a $5 credit per ton as a payment
toward the advance. For 1994 and 1995 Geneva Mill, L.C. repaid from processing
$240,642 and $266,137 respectively, and made cash payments of $88,500 in 1995.
In 1995 all operations between Geneva Mill, L.C. and Hanover Gold ceased. The
balance due to the Company prior to the write-off of the uncollectible portion
of the amounts due was $999,921. Management determined to write off $779,921 as
an uncollectible bad debt for 1995 due to the prospect that the mill would no
longer be utilized and the inability of Geneva Mill, L.C. to repay the loan. The
remaining balance of $220,000 was secured by tangible assets and a security
interest.
The Company's Group S subsidiary entered into an agreement with Roy Moen and
related interests effective March 26, 1996 amending the terms of an October 1991
lease and option agreement covering 216 mining claims in the Alder Gulch area.
As part consideration for amending the agreement, the Company became obligated
for the issuance of 250,000 shares of its common stock; the granting of a three
year option for the issuance of an additional 200,000 shares of its common stock
at an exercise price of $2.00 per share; the transfer of two mining trucks that
it owns free and clear of encumbrances with a book value of approximately
$35,000; the forgiveness of the note receivable in the amount of $89,297 due
from M&W, and release of the UCC filing the Company held as security for that
note; and the elimination of the note receivable in the amount of $220,000 due
from Geneva Mill, L.C. in exchange for a $3,000,000 reduction in the landowner
rental obligations that are owed to M&W by Group S, Ltd., which, upon approval
of the pending merger of Group S, Ltd. and the Company, would become the
Company's obligation to pay M&W. M&W will also take title to all of the assets
owned by Geneva Mill, L.C. as part of the consideration for the reduction in
rental payments to be received by M&W.
F/S-6
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. PATENTED (DEEDED) CLAIMS:
The Company acquired the mining rights to the Kearsarge Load Claim, a
precious metals tract from Hanover Resources, Inc. pursuant to a Mineral
Sublease and Purchase Option Agreement dated July 31, 1990. The agreement
provides for the payment of rent as follows:
<TABLE>
<S> <C>
On or before November 1, 1990................................... $ 100,000
March 1, 199 ................................................... 100,000
June 1, 1991.................................................... 125,000
September 1, 1991............................................... 50,000
December 1, 1991................................................ 50,000
January 1, 1992................................................. 25,000
February 1, 1992................................................ 25,000
March 1, 1992................................................... 25,000
April 1, 1992................................................... 25,000
May 1, 1992..................................................... 50,000
September 1, 1992............................................... 50,000
June 1, 1993.................................................... 150,000
June 1, 1994.................................................... 100,000
June 1, 1995.................................................... 350,000
June 1, 1996.................................................... 400,000
June 1, 1997.................................................... 400,000
June 1, 1998.................................................... 400,000
June 1, 1999.................................................... 875,000
---------
$3,300,000
---------
---------
</TABLE>
6. AGREEMENTS:
On February 13, 1992, the Hanover Group, Inc. entered into an agreement with
Bearcat for Bearcat's 30% working interest in the 34 claims known as the
Kearsarge Group of Claims. Hanover Group then assigned the agreement to the
Company without consideration and thereafter the Company acquired the working
interest for a consideration of 600,000 shares of restricted common stock issued
by the Company to Bearcat. The negotiated value of the stock between the Company
and Bearcat on the closing date was $2.0 per share or a total of $1,200,000 for
the working interest. In addition, Bearcat was granted two future stock options
by the Company, one at $3.00 per share for 171,000 shares of legended common
stock which expired May 14, 1995, and another at $10.00 per share for 500,000
shares of legend common stock which expires May 14, 1997.
F/S-7
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. AGREEMENTS: (CONTINUED)
On February 20, 1982, the Company entered into an Assignment and Mineral
Sublease agreement with Hanover Resources, Inc. The Agreement provides for the
Company to pay the underlying landowner rental obligations as follows:
<TABLE>
<S> <C>
June 1, 1992.................................................... $ 150,000
September 1, 1992............................................... 50,000
June 1, 1993.................................................... 112,500
June 1, 1994.................................................... 85,000
June 1, 1995.................................................... 200,000
June 1, 1996.................................................... 200,000
June 1, 1997.................................................... 200,000
June 1, 1998.................................................... 200,000
June 1, 1999.................................................... 1,377,500
---------
$2,775,000
---------
---------
</TABLE>
Additionally, on November 10, 1993 the Company entered into an Option to
Purchase Agreement, with an unrelated party, for the remaining 20% of the Apex
claim and two additional claims, the JTC and Randolph claims for $1,650,000 and
a five percent (5%) Net Smelter Return royalty. Under the Agreement, the Company
has the right to purchase this claim package for $1,650,000 less the amount
previously paid of $250,000. This is pursuant to the underlying landowner rental
payment obligations as follows:
<TABLE>
<S> <C>
April 15, 1995.................................................. $ 150,000
April 15, 1996.................................................. 200,000
April 15, 1997.................................................. 250,000
April 15, 1998.................................................. 300,000
April 15, 1999.................................................. 500,000
---------
$1,400,000
---------
---------
</TABLE>
Effective March 25, 1996 the Company entered into an asset purchase
agreement with the Tabor Resources Corporation, a Minnesota corporation, for the
purchase of ten patented and 20 unpatented mining claims, and one mining lease,
covering properties located in the Alder Gulch area. The Company agreed to issue
Tabor 400,000 shares of common stock and three-year options exercisable at the
price of $2.00 per share for the purchase of an additional 300,000 shares in the
transaction.
7. DEVELOPMENT STAGE COMPANY:
The Company's operations have been centered around its organization,
evaluation of the mining industry, start-up financing of its operations,
including acquisition of the Kearsarge Mine, evaluation of engineering data,
obtaining necessary mining permits and formulation and implementation of tis
business plan. From May 2, 1990 through the period ending March 31, 1996, the
Company has secured required financing from its public warrant offering, and
Hanover Resources, Inc. its principal shareholder, in the total aggregate amount
of $11,076,514, which financing has been in the form of cash for exploration,
engineering, site development and rental payments for the Kearsarge Claim.
Additionally, financing has been provided form the public offering of the
Company's warrants. The Company has incurred losses in connection with its
operations through the period ended March 31, 1996 of $4,624,625.
F/S-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER GOLD COMPANY, INC.
By: /s/ JAMES A. FISH_________________
James A. Fish, its President
Date: May 14, 1996
By: /s/ WAYNE SCHOONMAKER_____________
Wayne Schoonmaker, its Principal
Accounting Officer
Date: May 14, 1996
F/S-9
<PAGE>
10.12 AMENDMENT TO ASSET PURCHASE AGREEMENT DATED AS OF APRIL 19, 1996 BETWEEN
THE REGISTRANT AND TABOR RESOURCES CORPORATION.
AMENDMENT TO
ASSET PURCHASE AGREEMENT
This amendment to asset purchase agreement (the "Amendment") is made
effective as of April 19, 1996, between Tabor Resources Corporation, a Minnesota
corporation (hereinafter referred to as "Seller"), whose address is 5198 West
76th Street, Edina, Minnesota 55439, and Hanover Gold Company, Inc., a Delaware
corporation (hereinafter referred to as "Buyer"), having its principal office at
1000 Northwest Boulevard, Suite 100, Coeur d'Alene, Idaho 83814.
RECITALS:
A. The Seller and Buyer are parties to that certain Asset Purchase Agreement
dated effective as of March 25, 1996 (the "Purchase Agreement"), pursuant to
which Seller has agreed to sell, transfer, assign and convey to Buyer, and Buyer
has agreed to purchase from Seller, certain patented and unpatented mining
claims and a lease located in the Alder Gulch area of the Virginia City Mining
District in southwestern Montana, in consideration for which Buyer has agreed to
issue Seller shares of Buyer's common stock and to grant Seller options to
acquire additional shares of Buyer's common stock.
B. Seller and Buyer have agreed to amend the terms of the Purchase
Agreement to increase the number of shares of Buyer's common stock to be issued
to Seller and to delete the provisions of the Purchase Agreement providing for
the grant of options.
NOW, THEREFORE, in consideration of the premises and other good and valuable
consideration, Seller and Buyer hereby amend the Purchase Agreement as follows.
1. Section 1.2 of the Purchase Agreement is amended to read in its entirety
as follows:
1. BASE PURCHASE PRICE. The base purchase price of the Properties (the
"Base Purchase Price") shall consist of the issuance by Buyer of 525,000 shares
(the "Shares") of its common stock, par value $.0001 per share (the "Common
Stock"). The Shares shall be issued to Seller at the Closing pursuant to the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 4(2) thereof. As provided in
subsection 1.4 of this Agreement, Buyer agrees to prepare and file a
registration statement under the Securities Act covering the Shares for resale
by Seller, and cause the same to be declared effective within six months of the
effective date of this Agreement.
2. Section 1.3 of the Purchase Agreement is amended to read in its entirety
as follows:
1.3 ADJUSTMENTS TO BASE PURCHASE PRICE. In addition to the Base Purchase
Price, Buyer agrees to issue Seller additional shares of Common Stock (the
"Additional Shares") under the following circumstances and in the following
amount. If, during the two year period commencing with the effective date of
this Agreement, the average bid price of the Common Stock during any period of
thirty consecutive trading days has never exceeded $2.00 per share, then,
promptly following the expiration of such two year period, Buyer shall issue
Seller such number of Additional Shares as are sufficient to raise the aggregate
market value of the Shares then owned by Seller (being those of the 525,000
shares of Common Stock issued to Seller pursuant to subsection 1.2, above, then
owned by Seller beneficially or of record) to $2.00. The number of Additional
Shares to be issued to Seller in such event shall be determined by the following
formula:
X = (2/FV X Y) - Y
where "X" equals the number of Additional Shares, "Y" equals the number of
Shares then owned by Seller, and "FV" equals the average bid price of the Common
Stock as reported on the Nasdaq Stock Market during the period of thirty
consecutive trading days immediately preceding the expiration of such two year
E-1
<PAGE>
period. Such Additional Shares (if required to be issued), when added to the
Shares comprising the Base Purchase Price payable by Buyer as hereinabove
provided, shall constitute the full consideration for the Properties.
3. Section 1.4 of the Purchase Agreement is amended to read in its entirety
as follows:
1.4 SECURITIES ACT REGISTRATION. Buyer, at its sole expense, shall prepare
and file a registration statement under the Securities Act covering the Shares
for resale by Seller, and shall cause such registration statement to be declared
effective by the Securities and Exchange Commission within six months of the
effective date of this Agreement. Buyer shall maintain such registration
statement in effect for a period of eighteen months.
4. Section 1.5 of the Purchase Agreement is amended to read in its entirety
as follows:
1.5 PIGGY-BACK REGISTRATION. If Buyer should prepare and file a
registration statement under the Securities Act subsequent to the date the
registration statement specified in subsection 1.4 of this Agreement ceases to
be effective (whether such registration statement is filed for the account of
Buyer or for the account of shareholders of Buyer), then Buyer shall include in
such registration statement, upon Seller's written request and at Buyer's sole
cost and expense, such shares of Common Stock issued and sold to Seller pursuant
to this Agreement then remaining unsold. Buyer shall provide Seller with timely
written notice of any registration statement it may choose to prepare and file
pursuant to this subsection 1.5 in order that Seller may determine whether any
such unsold shares are to be included.
5. Section 2.1 of the Purchase Agreement is amended to read in its entirety
as follows:
2.1 CLOSING DATES. The closing of the sale and purchase of the Shares
hereunder (the "Closing") shall be held in person at the offices of Randall &
Danskin, P.S., 1500 Seafirst Financial Center, Spokane, Washington 99201, or by
telephonic confirmation, no later than 5:00 p.m., Spokane time, on April 19,
1996 or as soon thereafter as is reasonably practicable, between Seller, who
will be present at or represented at the Closing by the law firm Lommen, Nelson,
Cole & Stageberg, P.A., 1800 IDS Center, 80 South 8th Street, Minneapolis,
Minnesota 55402, and Buyer, who will be present at or represented at the Closing
by the law firm Randall & Danskin, P.S., 1500 Seafirst Financial Center,
Spokane, Washington 99201, or at such other place upon which Seller and Buyer
shall agree, and shall be evidenced by the completion of the transaction
contemplated hereby.
The parties hereto will have previously forwarded all necessary Closing
documents to the other party's attorneys at such addresses pending the Closing.
The date of the Closing is hereinafter referred to as the "Closing Date."
6. Section 2.2 of the Purchase Agreement is amended to read in its entirety
as follows:
2.2 DELIVERY. At the Closing, Seller shall deliver the following items
into escrow pursuant to the terms of an escrow agreement substantially in the
form annexed to and made a part of this Agreement as Exhibit B (the "Escrow
Agreement): an assignment of claims and lease (as to the unpatented claims and
leases comprising a portion of the Properties) in substantially the form annexed
to and made a part of this Agreement as Exhibit C and a deed (as to the patented
claims comprising a portion of the Properties and the lease) in substantially
the form annexed to and made a part of this Agreement as Exhibit D. At the
Closing, Buyer shall: (i) deliver into escrow pursuant to the terms of the
Escrow Agreement eight stock certificates in 50,000 share increments (400,000
shares in total) and (ii) deliver directly to Seller, and not as part of the
escrow provided by the Escrow Agreement, three additional certificates
aggregating 125,000 shares; such certificates collectively shall constitute the
Base Purchase Price. The Escrow Agreement shall provide for the release of the
items deposited into escrow to Buyer and Seller, as the case may be, upon the
effective date of the registration statement specified in Section 1.4, or such
earlier date upon Seller's written request.
E-2
<PAGE>
7. Section 3.1 of the Purchase Agreement is amended to read in its entirety
as follows:
3.1 KNOWLEDGE, SOPHISTICATION AND INVESTMENT INTENT. Seller and its board
of directors or other controlling persons have such knowledge and information
concerning the business and affairs of Buyer, and its financial and operating
condition, that they are capable of fully evaluating the merits and risks
associated with the acquisition of the Shares (and any Additional Shares, if
required to be issued) in consideration for the Properties. Seller or its
representatives have had the opportunity to ask questions of, and receive
answers from, representatives of Buyer with respect to such matters, and on or
prior to the Closing Date, shall have been furnished with copies of all
information requested by Seller concerning the condition, financial or
otherwise, of Buyer.
Seller understands and acknowledges that its acquisition of the Shares (and
any Additional Shares, if required to be issued) has not been registered under
the Securities Act or under certain state securities laws, in reliance upon
certain exemptions for transactions not involving a public offering, and that
the Shares (and any Additional Shares) must be held indefinitely unless sold
pursuant to an offering registered under the Securities Act and under certain
state securities laws, or unless an exemption from registration is available.
Seller is acquiring the Shares (and any Additional Shares, if required to be
issued) for investment purposes only, and not with a view toward immediate
resale or further distribution.
8. Exhibit B is amended to delete reference to the options and is
superseded in its entirety by the form of escrow agreement annexed hereto.
9. Exhibit E to the Purchase Agreement is deleted in its entirety.
No other agreements, terms or conditions of the Purchase Agreement shall be
affected by this Amendment, and all such agreements, terms and conditions shall
continue in full force and effect, as if fully set forth herein.
Executed and effective as of the date first above written.
<TABLE>
<S> <C>
SELLER: TABOR RESOURCES CORPORATION,
a Minnesota corporation
By: /s/ Joel Ronning
duly authorized officer
BUYER: HANOVER GOLD COMPANY, INC.,
a Delaware corporation
By: /s/ James A. Fish
its duly authorized officer
</TABLE>
E-3
<PAGE>
Subject to the limitation set forth in subparagraph 6.3 of the Purchase
Agreement, Tech Squared, Inc., a Minnesota corporation, hereby guarantees the
payment of any obligation of Tabor Resources Corporation, its wholly-owned
subsidiary, under the terms of the Purchase Agreement as hereby amended.
<TABLE>
<S> <C>
TECH SQUARED, INC.,
a Minnesota corporation
By: /s/ Joel Ronning
its duly authorized officer
</TABLE>
E-4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
</TABLE>
COMMISSION FILE NUMBER 1-8372
HANOVER GOLD COMPANY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-23022 11-2740461
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
</TABLE>
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 664-4653
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
<TABLE>
<S> <C>
COMMON STOCK THE NASDAQ STOCK MARKET
Title of each Name of each exchange on which
class registered
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant at May 29, 1996 was $10,917,852. The number of shares of common stock
outstanding at such date was 16,029,678.
Certain information contained in the registrant's proxy statement filed
under the Securities Act of 1933, as amended, in connection with its 1996
special meeting of stockholders is incorporated by reference in Part IV of this
report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HANOVER GOLD COMPANY, INC.
ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PART II
Item 6: Selected Financial Data........................................................................... 1
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations............. 2
Item 8: Financial Statements and Supplementary Data....................................................... F/S-1
SIGNATURES
</TABLE>
EXPLANATORY NOTE
This amendment to the registrant's annual report on Form 10-K for the year
ended December 31, 1995 has been prepared and is being filed solely for the
purposes of correcting (i) certain non-material information contained in the
registrant's previously filed financial statements and (ii) related disclosure
in the section of the report entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
[The balance of this page has been intentionally left blank.]
(i)
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from, and should be read in conjunction with the Company's consolidated
financial statements. The selected financial data for the five years ended
December 31, 1995 have been derived from the Company's consolidated financial
statements appearing elsewhere in this report, which have been audited by Zeller
Weiss & Kahn, Mountainside, New Jersey. The selected financial data should be
read in conjunction with, and is qualified by such financial statements and the
notes thereto.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF CONSOLIDATED BALANCE SHEETS:
Working capital (deficit)..................... $ 491,382 $ 459,814 $ 3,294,147 $ (143,742) $ (116,326)
Current assets................................ 850,242 917,075 3,855,227 240,850 61,202
Total assets.................................. 8,310,364 8,293,628 8,112,529 3,098,652 1,375,188
Current liabilities........................... 358,860 457,261 505,064 364,359 177,528
Long-term obligation.......................... -- 250,000 250,000 100,000 --
Total liabilities............................. 358,860 707,261 755,064 464,359 177,528
Stockholders' equity.......................... 7,951,504 7,586,367 7,357,465 2,634,293 1,197,660
SUMMARY OF CONSOLIDATED STATEMENTS OF
OPERATIONS:
Sales......................................... 499,299 216,418 -- -- --
Net income (loss)............................. (2,321,569) (1,247,973) (252,046) (205,263) (260,486)
Net income (loss) per share................... (0.20) (0.15) (0.03) (0.05) (0.07)
</TABLE>
[The balance of this page has been intentionally left blank.]
1
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
1995 was a transitional year for the Company. It began disappointingly in
March with Kennecott's decision to withdraw from the mining venture with the
Company, Hanover Resources and Group S, a decision that forced the Company and
its affiliates to curtail their exploration and development activities on the
Alder Gulch properties due to a lack of funds. Starting in June, however, the
Company was buoyed by an infusion of new capital from an investor group lead by
Neal A. Degerstrom, and by the business and technical mining experience Mr.
Degerstrom and his associates brought to the Company. By the end of the year,
the Company had restructured its senior management team and had significantly
progressed its agenda to consolidate the mining claims in the Alder Gulch area
for possible large-scale development. As of the date of this report, the Company
does not have the cash resources necessary to explore or develop its properties,
nor a development agreement with any major mining company. The Company has
received expressions of interest from a number of North American mining
companies concerning a joint venture or other economic arrangement to explore
and develop the properties, and is presently discussing such possibilities with
representatives of these companies.
RESULTS OF OPERATIONS
1995 COMPARED TO 1994. At December 31, 1995, the Company had working
capital of $491,382, current assets of $850,242 and current liabilities of
$358,860. This compares to current assets of $917,075 and current liabilities of
$457,261 at December 31, 1994. The increase in working capital at year-end is
attributable to sales of common stock to Neal A. Degerstrom and associated
persons during the year. Current assets consisted of $723,162 of cash, $29,494
of inventory and $97,586 of prepaid expenses; the decrease in current assets
during the year is primarily attributable to adjustments to the market value of
inventory.
Total assets of the Company at December 31, 1995 were $8,310,364, compared
to $8,293,628 for the previous year. At year-end 1995, the Company's total
assets, net of current assets, consisted of $6,147,279 in resource properties
and claims, $102,819 in property and equipment, net of depreciation, and
$1,210,024 in reclamation bonds and other assets, including $880,804 in note
receivables from affiliates. This compares to $5,616,829 in resource properties
and claims, $139,114 in property and equipment, net of depreciation, $1,620,610
in reclamation bonds and other assets, including $527,572 in note receivables
from affiliates for the prior year. The increase of $530,450 in resource
properties and claims during the year is the result of the capitalization of
rental payments made to the landowner-lessors of the claims during the year, and
the slight decreases in property and equipment, and reclamation bonds and other
assets is attributable to equipment sales. The $764,087 reduction in notes
receivable from affiliates during the year is primarily the result of the write
down of the note receivable from Geneva Mill L.C.
During the year ended December 31, 1995 the Company generated revenues of
$499,299, of which $250,000 was attributable to a non-recurring option payment
under the Kennecott mining venture and $249,299 was attributable to sales of
refined gold during the year. Gold sales during the previous year, by
comparison, were $216,418. The increase in gold sales during the year is
attributable to increased production at the mill and higher ore grades at the
Kearsarge mine. The Company's mining operations were suspended in March of 1995
due to a lack of funds following Kennecott's withdrawal from the mining venture;
mill operations were similarly suspended in April of 1995.
The Company experienced a net loss from operations of $2,321,569, or $0.20
per share, in 1995, compared to a net loss of $1,247,973, or $0.15 per share,
for the year ended December 31, 1994. The increase in losses is primarily
attributable to an increase of $291,031 in general and administrative expenses
(which aggregated $922,847 for the year), the $779,921 write down of the note
receivable from Geneva Mill L.C., a $32,509 loss on the sale of equipment and a
$9,814 increase in depreciation expense. The cost of goods mined increased by
$165,853, to $1,076,668, in 1995, compared to $910,815 in the previous year. The
increase in general and administrative expenses is primarily due to a $78,281
increase in insurance costs, a $126,770 increase in public relations expenses, a
$79,545 increase in officers salary, a $53,142 increase in professional fees and
a $21,999 in consulting and engineering costs. During the year ended December
31, 1995, auto expenses decreased by $14,924 and meeting-related expenses,
travel and entertainment expenses and office
2
<PAGE>
and telephone charges decreased by $57,315. The Company earned $29,306 in
interest income during the year, compared to $106,655 for the year ended
December 31, 1994. The decrease in interest income is attributable to
significantly lower levels of invested funds during the year.
DURING THE YEAR-ENDED DECEMBER 31, 1995. In 1995 the Company reversed
accrued salary payable to Fred R. Schmid for the period ended December 31, 1991,
1992, 1993 and 1994. The total accrued salary at December 31, 1994 amounted to
$542,347. The reversal of the accrued salary came as a result of a correction of
salary incorrectly accrued by the principal officer, which resulted in a
commensurate decrease in accrued expenses. The Company also recognized a
decrease of $779,921 in the carrying value of a $1,595,200 note received from
Geneva Mill L.C. in 1994 in connection with its acquisition and rehabilitation
of a carbon-in-leach processing facility near Radersburg, Montana, some 60 miles
from the Company's Alder Gulch properties. The decision to finance the
acquisition of the mill was made prior to Kennecott's withdrawal from the mining
venture, and was based on prior management's belief that its Alder Gulch claims
could be mined underground and that the ores could be economically transported
and milled at the Geneva Mill facility. New management has since concluded that
the claims can be more economically mined using open pit methods and that the
Geneva Mill lacks the capacity for large-scale processing. At December 31, 1995,
the Company was attempting to sell the equipment at the mill on behalf of Geneva
Mill L.C. and estimated that approximately $220,000 could ultimately be
recovered. Approximately $779,921 of the amount advanced to Geneva Mill L.C was
expended to acquire materials used in operations, and to pay for power and labor
at the facility. As previously noted in this report, the Company has entered
into an agreement with Roy Moen and related interests providing for the transfer
of the Geneva Mill facility and related real properties in partial consideration
for a reduction in rental and royalty obligations payable with respect to mining
claims leased by the Company's Group S affiliate.
1994 COMPARED TO 1993. The Company had total assets of $8,293,628 at
December 31, 1994, compared to $8,112,529 at December 31, 1993. At December 31,
1994, these assets consisted of $917,075 in current assets, $5,616,829 in
resource properties and claims, $139,114 in property and equipment, net of
depreciation, and $1,620,610 in reclamation bonds and other assets, including
$1,600,955 in notes receivable from affiliates. This compares to $2,966,781 in
current assets, $4,154,883 in resource properties and claims, $83,019 in
property and equipment, and $285,206 in reclamation bonds and other assets at
December 31, 1993. The increase in total assets at December 31, 1994 is
attributable primarily to an increase in the Company's receivables from
affiliates, the most significant of which were $981,279 in advances to Geneva
Mill L.C. during the year for plant acquisition, crushing equipment,
refurbishing, the installation of new pumps, the construction of tailings ponds
and liners, trucking equipment, end loaders and working capital, and a $130,000
advance to Group S so that it could meet its royalty payment obligations. As
previously noted, Group S is affiliated with the Company.
The Company's current assets at December 31, 1994 consisted of $646,141 in
cash and accounts receivable, $181,238 of inventory and $89,696 of prepaid
expenses, compared to $2,884,368 in cash, $835 in accounts receivable, $70,439
of inventory and $11,139 of prepaid expenses at December 31, 1993. Operating
revenues of the Company for the year ended December 31, 1994 were $216,418. No
operating revenues were received in 1993.
Total liabilities at December 31, 1994 were $707,621, compared to total
liabilities of $755,064 at December 31, 1993. At year-end 1994, these
liabilities consisted of $411,930 in accounts payable, $45,331 in accrued
expenses and $250,000 in deposits against a purchase option. This compares to
$97,525 in accounts payable, $16,109 in accrued expenses and $250,000 in
deposits at December 31, 1993. In addition, the Company owed $13,819 to its
Hanover Resources affiliate, which was paid during 1994. The increase in
accounts payable during 1993 is primarily due to increased mine-related
activities. The Company had no sales in 1993, compared to gold sales of $216,418
during 1994.
During the year ended December 31, 1994, the Company experienced a loss from
operations of $1,247,973, compared to a loss of $252,046 in the previous year.
The increase in losses during 1994 is due primarily to an increase in mining
costs of $910,815 during the year, an increase in depreciation of $23,500, an
increase in general and administrative costs of $362,566 and an increase in
interest income of $84,536.
3
<PAGE>
The cost of goods mined increased to $910,815 in 1994, which was the
Company's first year of production. Milling, smelting and timber costs amount to
$283,049 during the year, contract mining expenses amounted to $117,177, and
haulage and direct labor amounted to $104,656 and $117,350, respectively.
General and administrative expenses were primarily due to a $55,000 increase
in officers salaries, a $15,326 increase in auto expenses, a $41,492 increase in
insurance costs, a $97,173 increase in deferred offering and public relations
costs, a $16,483 increase in professional fees, a $17,729 increase in rent, a
$13,121 increase in repairs, a $48,730 increase in travel expenses, a $24,008
increase in office-related expenses, an $11,133 increase in transfer agent's
fees and a $9,365 increase in telephone expenses.
The increase in interest income during 1994 is attributable to significantly
higher levels of invested funds during the year.
LIQUIDITY AND CAPITAL RESOURCES
As a consequence of Kennecott's withdrawal from the mining venture in March
1995, the Company assumed full responsibility for certain landowner rental and
royalty obligations on its Alder Gulch mining claims. At December 31, 1995 the
rental and royalty obligations payable in 1996 totalled $1,255,120. Management
believes the Company will meet its 1996, largely because of financing
commitments that have been made by Neal A. Degerstrom and associated persons
under the June 1995 securities purchase agreement and amendments. Mr. Degerstrom
and such persons are obligated to purchase an additional 2,142,858 shares of
common stock at various times during the seven month period ending October 16,
1996, which will result in proceeds to the Company of approximately $$1 million.
However, unless the Company is able to negotiate a joint venture or other
agreement with a major mining company for the continued exploration and
development of the Alder Gulch claims, it may continue to experience a shortage
of working capital.
The Company has incurred aggregate losses of $4,325,299 from inception
through December 31, 1995 because it has not yet been able to place the Alder
Gulch properties into large-scale production. The Company's inability to achieve
this objective is attributable to a number of factors, including Kennecott's
unexpected withdrawal from the mining venture and the Company's lack of success,
judged at least historically, in consolidating the various claims and interests
in the area. Although the Company was able to conduct fairly extensive
exploration and limited development of the properties, largely as the result of
its former arrangement with Kennecott, significant additional work must be
performed to support further development efforts. The Company has received
expressions of interest from several North American mining companies regarding a
joint venture or other economic arrangement to explore and develop the
properties, and believes such an arrangement will be concluded during 1996.
As discussed elsewhere in this report, the Company has recently restructured
its management and taken significant additional steps to consolidate the Alder
Gulch claims. In addition, the Company has completed a compilation of geologic
and other technical data generated from its and Kennecott's prior exploration
activities. (See the section of this report entitled "Narrative Description of
Business.") Management believes these activities will have a positive effect on
the Company's performance during 1996, and that the Company will be successful
in negotiating a joint venture or other arrangement with a major mining company
to explore and, if warranted, develop its properties.
Although the Company's operations are subject to general inflationary
pressures, these pressures have not had a significant effect on operations,
particularly since early 1995 when mining and processing operations were
suspended for lack of funds. If the Company resumes exploration and development
activities, which can be expected during 1996 if it is successful in negotiating
a joint venture or other economic arrangement with another mining company,
inflation will result in an increase in the cost of goods and services necessary
to its mining operations.
1995 COMPARED TO 1994. Cash flow from operating activities in 1995
reflected the use of $1,869,350 in cash, which is a decrease in the use of cash
during 1994 of $884,737. The increased use of cash during 1995 was attributable
to higher net operating losses during the year, which amounted to $2,321,569, an
increase of $1,073,596 over the prior year; a decrease in accounts payable and
accrued expenses during the year of $122,959, an increase of $137,364 over the
prior year; an increase of $198,867 in amounts due from Hanover
4
<PAGE>
Resources during the year, an increase of $181,454 over the prior year; and a
decrease in the option payable of $250,000. In addition, cash flow increased
during 1995 by $764,087, an increase over 1994 of $1,739,859 as the result of a
decrease in notes receivable during the year of $1,739,859, a decrease in
inventory of $262,543, a decrease in prepaid expenses of $78,557 and an increase
in loans payable of $$214,638.
Cash flow from investing activities during the year reflected the use of
$564,843 in cash, as compared to $1,546,855 in 1994, which was a difference of
$982,012. The decrease in cash flow from investing activities during 1995 is
primarily attributable to a decrease in the amount of mining properties and
other intangible assets purchased during the year.
Cash flows from financing activities increased during 1995 by $448,498 over
1994. Of this increase, $349,844 was attributable to proceeds received from the
sale of the Company's common stock during the year, $48,654 was attributable to
a note receivable and $50,000 was attributable to a loan from Neal A.
Degerstrom, an affiliate of the Company.
1994 COMPARED TO 1993. Cash flows from operating activities in 1993
reflected the use of $212,919, primarily as the result of a net loss of $252,046
during the year. Cash was used during the year primarily to offset increases in
notes receivable of $97,611, inventory increases of $70,439, increases in
amounts due from affiliates of $266,079 (of which $97,884 is attributable to
Hanover Resources and $168,195 was attributable to Group S) and a decrease in
loans payable of $311,829. Sources of cash during the year were a decrease in
deferred offering expenses of $95,716, an increase in accounts payable of
$397,525, accrued expenses of $152,893 and an option payable of $150,000.
Cash flow from investing activities reflected the use of $1,174,415 of cash
during the year, which was primarily attributable to purchases of property and
equipment aggregating $81,210 and the purchase of mining properties and other
intangible assets which aggregated $1,093,205.
Cash flow from financing activities during the year reflected an increase in
cash of $4,127,578, which reflects proceeds received by the Company from the
sale of its common stock.
Cash flows from operating activities in 1994 reflected the use of $2,754,087
of cash, an increase of $2,541,168 of cash used in operating activities during
1993. The primary uses of cash during 1994 were to offset a net loss during the
year of $1,247,973 (which was an increase in net losses of $995,927 over the
prior year) and an increase in notes receivables during the year of $975,772 (an
increase of $878,161 over 1993 amounts). Cash flow increased by $14,405 during
1994, as compared to a cash flow increase of $550,418 during 1993, and was
primarily attributable to increases in accounts payable and accrued expenses.
Cash flow increased by $14,405 during 1994 due to an increase in accounts
payable and accrued expenses as compared to 1993, where the increase in cash
flow was $550,418. Other increases in cash flow during 1993 compared to 1994
were due to an increase in an option payable, which was $150,000 in 1993 and
zero in 1994.
Cash flow from investing activities reflected the use of $1,546,855 in cash
during 1994, an increase of $372,440 compared to 1993. The increase is
attributable to an increase in mining properties and other intangible assets
during the year.
5
<PAGE>
Cash flows from financing activities in 1994 reflect an increase of
$2,062,716 in cash, which is due to the receipt during the year of proceeds from
the sale of the Company's common stock. This represents a decrease of $2,064,862
during 1994 over 1993, when the Company received $4,127,578 from the sale of its
common stock.
[The balance of this page has been intentionally left blank.]
6
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent auditors' report........................................................ F/S-2
Consolidated financial statements:
Balance sheet..................................................................... F/S-3
Statement of income (loss)........................................................ F/S-4
Statement of stockholders' equity................................................. F/S-5
Statement of cash flows........................................................... F/S-7
Notes to consolidated financial statements........................................ F/S-8
Supplementary information to consolidated financial statements:
Report of independent auditors on financial statement schedules................... F/S-25
Schedule II..................................................................... F/S-26
Schedule V...................................................................... F/S-27
Schedule VI..................................................................... F/S-28
Schedule IX..................................................................... F/S-29
Schedule X...................................................................... F/S-30
</TABLE>
F/S-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hanover Gold Company, Inc.
Roslyn, New York
We have audited the accompanying consolidated balance sheet of Hanover Gold
Company, Inc. and Subsidiary as of December 31, 1995 and December 31, 1994, and
the related consolidated statements of income (loss) and stockholders' equity
and cash flows for the years ended December 31, 1995, 1994 and 1993 and for the
period May 2, 1990 (inception) to December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements present fairly the
financial position of Hanover Gold Company, Inc., and Subsidiary, as of December
31, 1995 and 1994 and the consolidated statements of income (loss),
stockholders' equity and cash flow for the years ended December 31, 1995, 1994
and 1993 and May 2, 1990 (inception) to December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 12, the Company has been in the development stage since
May 2, 1990.
Zeller Weiss & Kahn
March 29, 1996, except for
Note 24 as to which the
date is May 28, 1996
F/S-2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
HANOVER GOLD COMPANY, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(RESTATED)
(NOTE 18)
DECEMBER 31, DECEMBER 31,
1994 1995
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 646,141 $ 723,162
Inventory (Note 7)................................................................ 181,238 29,494
Prepaid expenses.................................................................. 89,696 97,586
------------- -------------
Total current assets............................................................ 917,075 850,242
------------- -------------
Resource properties and claims:
Exploration, engineering and site development (Note 8)............................ 2,228,118 2,225,106
Mining properties (Notes 9 & 11).................................................. 3,388,621 3,922,083
Option (Note 10).................................................................. 90 90
------------- -------------
Total resource properties and claims............................................ 5,616,829 6,147,279
------------- -------------
Property and equipment, at cost (Note 3)............................................ 167,319 150,494
Less accumulated depreciation....................................................... 28,205 47,675
------------- -------------
Net property plant and equipment................................................ 139,114 102,819
------------- -------------
Other assets:
Reclamation bonds (Note 15)....................................................... 19,655 19,924
Note receivable (Note 5).......................................................... 1,073,383 309,296
Due from Group S, Ltd. (Note 13).................................................. 300,695 474,895
Due from Hanover Group, Inc. (Note 13)............................................ 19,835 0
Due from Hanover Resources, Inc. (Note 13)........................................ 207,042 405,909
------------- -------------
Total resource properties and claims............................................ 1,620,610 1,210,024
------------- -------------
Total assets.................................................................... $ 8,293,628 $ 8,310,364
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................................................... $ 0 $ 48,654
Loans payable -- shareholder (Note 13)............................................ 50,000
Accounts payable.................................................................. 411,930 221,756
Accrued expenses.................................................................. 45,331 38,450
------------- -------------
Total current liabilities....................................................... 457,261 358,860
------------- -------------
Other liabilities:
Option deposit.................................................................... 250,000 0
Stockholders' equity:
Common stock, $.0001 par value, authorized 25,000,000 shares issued and
outstanding 8,845,857 and 13,649,678 shares respectively......................... 885 1,365
Additional paid in capital........................................................ 9,838,572 12,275,438
Deficit accumulated during the development stage.................................. (2,003,730) (4,325,299)
Less: Subscription receivable (Note 6)............................................ (249,360) 0
------------- -------------
7,586,367 7,951,504
------------- -------------
Total liabilities and stockholders' equity...................................... $ 8,293,628 $ 8,310,364
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
F/S-3
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF INCOME (LOSS)
<TABLE>
<CAPTION>
(RESTATED) (RESTATED) MAY 02, 1990
(NOTE 18) (NOTE 18) (INCEPTION)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Sales............................................... $ 0 $ 216,418 $ 499,299 $ 715,717
------------ ------------- ------------- -------------
Expenses:
Cost of goods mined................................. 0 910,815 1,076,668 1,987,483
Depreciation, depletion and amortization............ 4,915 28,415 38,229 71,559
General and administrative.......................... 269,250 631,816 922,847 2,547,297
Provision for bad debt.............................. 779,921 779,921
------------ ------------- ------------- -------------
Total cost and expenses........................... 274,165 1,571,046 2,817,665 5,168,204
------------ ------------- ------------- -------------
Gross profit (loss) operations........................ (274,165) (1,354,628) (2,318,366) (4,452,487)
------------ ------------- ------------- -------------
Other income and expenses:
Interest income..................................... 22,119 106,655 29,306 159,697
Loss on sale of equipment........................... (32,509) (32,509)
------------ ------------- ------------- -------------
Total other income and expenses................... 22,119 106,655 (3,203) 127,188
------------ ------------- ------------- -------------
Net loss.......................................... $ (252,046) $ (1,247,973) $ (2,321,569) $ (4,325,299)
------------ ------------- ------------- -------------
------------ ------------- ------------- -------------
Earnings per common share:
Primary............................................. $ (0.03) $ (0.15) $ (0.20)
Weighted average common shares outstanding.......... 7,498,786 8,314,859 11,728,882
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to consolidated financial statements.
F/S-4
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
ADDITIONAL DURING THE
COMMON COMMON PAID IN DEVELOPMENT
STOCK STOCK CAPITAL STAGE
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance, May 2, 1990........................................ 700,000 $ 70 $ 264,311
Issuance of common stock, Sept. 24, 1990 ($0.07/share).... 86,250 9 6,009
Issuance of common stock for modification, Dec. 31, 1990
($.0001/share)........................................... 1,500,000 150
Issuance of common stock for additional claims Dec. 31,
1990 ($.0001/share)...................................... 900,000 90
Payments by Hanover Resources, Inc.:
Deferred offering expense............................... 12,636
Exploration, engineering and site development........... 26,280
Deposit, Kearsarge Lode Claim........................... 100,000
Cash infusion........................................... 5,000
Net loss.................................................. (37,962)
----------- ---------- ---------- ------------
Balance, December 31, 1990.................................. 3,186,250 318 414,236 (37,962)
Payment by Hanover Resources, Inc.:
Deposit purchase of claim............................... 325,000
Issuance of common stock to directors ($.0001/share).... 200,000 20
Issuance of common stock for claims and engineering
costs ($2.50/share).................................... 229,007 23 572,496
Exercise 74,400 A&B Warrants ($.60/share)................. 74,400 7 44,633
Exercise 111,500 C Warrants ($1.25/share)................. 111,500 11 139,363
Net loss.................................................. (260,486)
----------- ---------- ---------- ------------
Balance, December 31, 1991.................................. 3,801,157 380 1,495,728 (298,448)
Issuance of common stock ($2.00 per share)................ 712,500 71 1,424,918
Payment by Hanover Resources, Inc.:
Deposit purchase of claim............................... 93,659
Deposit, purchase of Kearsarge Claim.................... 62,500
Deferred offering expense............................... 3,144
Exploration, engineering and site development........... 5,603
Exercise 41,600 Class C Warrants ($1.25/share)............ 41,600 5 51,996
Net loss.................................................. (205,263)
----------- ---------- ---------- ------------
Balance, December 31, 1992.................................. 4,555,257 456 3,137,548 (503,711)
Write off on deferred offering expense.................... (148,507)
Purchase of Apex Claim at $1.50 per share................. 150,000 15 224,985
Exercise 3,061,703 Class C Warrants ($1.60/share)......... 3,061,703 306 4,898,419
Net loss.................................................. (252,046)
Balance, December 31, 1993.................................. 7,766,960 777 8,112,445 (755,757)
Exercise 1,328,897 Class C Warrants ($1.60 per share)..... 1,328,897 133 2,126,102
Cancellation of previously issued shares ($1.60/share).... (250,000) (25) (399,975)
Net loss.................................................. (1,247,973)
----------- ---------- ---------- ------------
Balance, December 31, 1994.................................. 8,845,857 885 9,838,572 (2,003,730)
</TABLE>
See notes to conolidated financial statements
F/S-5
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
ADDITIONAL DURING THE
COMMON COMMON PAID IN DEVELOPMENT
STOCK STOCK CAPITAL STAGE
------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.............................. 8,845,857 $ 885 $ 9,838,572 $ (2,003,730)
Issuance of 250,000 shares of common stock to Hanover
Resources, Inc. as per Modification Agreement dated
12/31/90 ($1.60/share)............................... 250,000 25
Issuance of 2,142,856 shares of common stock to N.A.
Degerstrom as per Securities Purchase Agreement dated
06/01/95 ($.35/share)................................ 2,142,856 214 749,786
Issuance of 714,286 shares of common stock to N.A.
Degerstrom as per Securities Purchase Agreement dated
06/01/95 ($.35/share)................................ 714,286 71 249,929
Issuance of 200,000 shares of restricted common stock
pursuant to a private placement (1.00/share)......... 200,000 20 199,980
Issuance remaining 250,000 shares of common stock to
Hanover Resources, Inc. as per Modification Agreement
dated 12/31/90 ($.0001/share)........................ 250,000 25
Issuance of 69,679 shares of common stock in
satisfaction of vendor obligations ($1.06/share)..... 69,679 7 74,089
Issuance of 200,000 shares of common stock in
satisfaction of vendor obligations ($1.00/shares).... 200,000 20 199,980
Issuance of 1,000,000 shares of common stock to N.A.
Degerstrom per amendment to Securities Purchase
Agreement dated 06/01/95 ($1.00/share)............... 1,000,000 100 999,900
Redemption of previously issued shares
($1.60/share)........................................ (23,000) (2) (36,798)
Net loss.............................................. (2,321,569)
------------- ----------- -------------- --------------
Balance, December 31, 1995.............................. 13,649,678 $ 1,365 $ 12,275,438 $ (4,325,299)
------------- ----------- -------------- --------------
------------- ----------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
F/S-6
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 2, 1990
(INCEPTION)
YEAR ENDED YEAR ENDED YEAR ENDED TO
DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1993 1994 1995 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss.................................................. $ (252,046) $ (1,247,943) $ (2,321,569) $ (4,325,299)
Adjustments to reconcile net cash and equivalents provided
by operating activities:
Loss on sale of equipment............................... 32,509 32,509
Amortization............................................ 225
Depreciation............................................ 4,915 21,885 30,529 58,734
Depletion............................................... 6,530 7,700 14,230
Common stock issued for public relations fees........... 200,000 200,000
Changes in operating assets & liabilities:
(Increase) decrease in accounts receivable............ 175 835
(Increase) decrease in deferred offering expense...... 95,716 (7,890) 21,574
(Increase) decrease in notes receivable............... (97,611) (975,772) 764,087 (309,296)
(Increase) decrease in inventory...................... (70,439) (110,799) 151,744 (29,494)
(Increase) decrease in prepaid expenses............... (11,139) (78,557) (97,586)
(Increase) decrease in accounts payable............... 397,525 14,405 (116,078) 221,756
Increase (decrease) in accrued expenses............... 152,893 (6,881) 38,450
Increase (decrease) in loan payable, stockholder...... (311,829) (214,638)
Changes of other assets and liabilities:
(Increase) decrease in reclamation bond............... (5,000) (255) (269) (19,924)
(Increase) decrease in due to Group S, Ltd............ (168,195) (132,500) (174,200) (474,895)
(Increase) decrease in due from Hanover Group, Inc.... (19,835) 19,835
(Increase) decrease in due to Hanover Resources,
Inc.................................................. (97,884) (17,413) (198,867) (369,110)
Increase in option payable............................ 150,000 (250,000)
Organizational cost................................... (202)
------------ ------------ ------------ ------------
Net cash used in operating activities............... (212,919) (2,754,087) (1,869,350) (5,038,328)
------------ ------------ ------------ ------------
Investing activities:
Proceeds from sale of equipment........................... 13,871 13,871
Purchase of subsidiary.................................... (6,018)
Purchase of property and equipment........................ (81,210) (77,980) (40,614) (207,933)
Increase in exploration, engineering and site
development.............................................. (855,705) (908,475) (1,765,335)
Increase in deposit, purchase of claims................... (112,500) (162,500)
Increase in mining properties............................. (125,000) (560,400) (538,100) (1,358,382)
------------ ------------ ------------ ------------
Net cash used in investing activities............... (1,174,415) (1,546,855) (564,843) (3,486,297)
------------ ------------ ------------ ------------
Financing activities:
Increase in notes receivable.............................. 48,654 48,654
Increase in loans from N.A. Degerstrom.................... 50,000 50,000
Proceeds from sale of common stock........................ 4,127,578 2,062,716 2,412,560 9,149,032
------------ ------------ ------------ ------------
Net cash provided by financing activities........... 4,127,578 2,062,716 2,511,214 9,247,686
------------ ------------ ------------ ------------
Net increase in cash................................ 2,740,244 (2,238,226) 77,021 723,061
Cash, beginning of year..................................... 144,124 2,884,368 646,141 101
------------ ------------ ------------ ------------
Cash, end of year................................... $ 2,884,368 $ 646,142 $ 723,162 $ 723,162
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 864 $ 864
------------ ------------
------------ ------------
Supplemental schedule on non-cash investing and financing
activities (Note 23).......................................
</TABLE>
See notes to consolidated financial statements.
F/S-7
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
1. NATURE OF BUSINESS:
The objectives of the Company are to invest in precious metal claims, namely
gold and silver deposits having economic potential for development and mining
and related activities in the precious metals and mining industries.
2. ORGANIZATION:
Hanover Gold Company, Inc. was incorporated in Delaware on December 6, 1984
and on September 24, 1990 exchanged 14,000,000 shares of its $.0001 par value
common stock for 100 % of the outstanding stock of Hanover International
Limited. On July 31, 1990 the Company acquired the Kearsarge Lode Claim, south
of Virginia City, Montana entering into a Sublease and Purchase Option Agreement
with Hanover Resources, Inc. As of December 1990 the Company reverse split the
stock 1 for 20.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
the Company and the Company's wholly owned subsidiary, Hanover International
Limited, Inter-Company transactions and balances have been eliminated in
consolidation.
PRINCIPLES OF ORGANIZATION:
The acquisition of the Company's subsidiary on September 24, 1990 has been
accounted for as a reverse purchase of the assets and liabilities of the Company
by Hanover International Limited. Accordingly, the consolidated financial
statements represents assets, liabilities, and operations of only Hanover
International Limited prior to September 24, 1990 and the combined assets,
liabilities and operations for the ensuing period. The financial statements
reflect the purchase of the stock of Venture Enterprises, Inc., the former name
of Hanover Gold Company, Inc., by Hanover International Limited, for the value
of the historical cost of the assets acquired. All significant intercompany
profits and losses from transactions have been eliminated.
Hanover International Limited was incorporated May 2, 1990 in the State of
New York for the purpose of acquiring economic interests in precious metal
deposits, namely gold and silver claims. On July 31, 1990 the Company acquired
the Kearsarge Lode Claim, south of Virginia City, Montana by entering into a
Sublease and Purchase Option Agreement with Hanover Resources, Inc.
The Company, after giving effect to a 20 for 1 reverse split of its stock,
issued 700,000 shares of its authorized 25,000,000 shares of $.0001 par value
stock to Hanover Resources, Inc., which owned 100% of Hanover International
Limited. As part of the reverse acquisition of Hanover Gold Company, Inc. by
Hanover International Limited the 700,000 shares represented 89.0% of all the
outstanding stock of Hanover Gold Company, Inc. which was exchanged for $898,203
of actual costs incurred by Hanover Resources, Inc., the 100% owner of Hanover
International Limited. The $898,203 consisted of the original capitalization of
$264,381 plus additional paid in capital contribution of $633,822 of which
$581,159 was for purchase deposits of the Kearsarge Claim, $15,780 was for
deferred offering costs, $31,883 was for exploration, engineering and site
development and the site development and the balance of $5,000 was for working
capital.
INVENTORIES:
Inventory consists of costs for extracting and hauling ore to various
stockpiles at the mine and mill. Market value is determined by assay samples and
milling costs to convert the ore into concentrates. Inventories are stated at
the lower of cost or market.
F/S-8
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost. The Company computes
depreciation substantially by the straight-line method over the estimated useful
lives of the related assets.
REVENUE RECOGNITION:
The Company maintains its books and records on the accrual basis of
accounting, recognizing revenue when goods are shipped and expenses when they
are incurred.
DEPLETION:
The Company depletes the cost of resource properties by an estimate of the
amount of natural resources to be extracted in tons of material, which is the
estimated recoverable units, divided into the total cost to arrive at the rate
per unit. The rate is multiplied by the number of units extracted to determine
the annual depletion expense.
RESOURCE PROPERTIES AND CLAIMS:
The Company accounts for resource properties and claims at the actual cost
incurred for exploration, engineering and site development and for the purchases
of mining properties and the options to purchase additional claims.
The Company capitalizes lease payments which are to be allocated to the
acquisition cost of the mining claims upon completion of the term of the lease.
The provisions of the lease call for termination of the lease for any default in
payments and allow for the acquisition of the claims at the end of the lease for
the total rental payments made.
The Company amortizes the acquisition costs of mining claims as the claims
are put in service based on the allocated cost of the claim divided by the
estimated recoverable units of ore multiplied by the units of ore extracted.
The Company writes off to operating expense the unamortized cost of the
resource property when it determines that the carrying amount of the property
may not be recoverable and the asset value is impaired.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impaired of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of. "SFAS No. 121
requires that Long-Lived Assets and certain identifiable intangibles to be held
and used by the Company be reviewed for impairment whenever events indicated
that the carrying amount of an asset may not be recoverable. The Company reviews
the cost of Mining Properties for impairment when events indicate that the
carrying value of the asset may not be recoverable.
Additionally, The Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation." The effective date of SFAS No. 123 is for fiscal years beginning
after December 15, 1995, and establishes a method of accounting for stock
compensation plans based on fair value. The Company does not believe the SFAS
No. 123 will have an impact on its financial statements.
F/S-9
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
EARNINGS PER SHARE:
Earnings per share has been computed based on the weighted average number of
shares of common stock outstanding during each period. There would have been no
material diluting effect on net loss per share for any outstanding stock
warrants.
4. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES:
The Company has had no significant operating history and must be considered
a development stage enterprise. As such, the Company is subject to all of the
risks inherent in a new mining operation and business enterprise, including the
absence of an operating history, established banking relations and community and
industry recognition. Due to the lack of sufficient capital to commence
sustainable mining operations the Company is focusing its efforts on plotting
and mapping its data base, logging its core samples taken over the previous six
months, exploring selected claims and discussing possible joint venture
arrangements with major mining companies for the purpose of putting its claims
into commercially feasible production. There can be no guarantees that the
Company will be successful negotiating a joint venture with a major mining
company.
The Company maintains cash balances at several financial institutions
located in Montana, Idaho and New York. Accounts at each institution are insured
by the Federal Deposit Insurance Corporation up to $100,000. At December 31,
1995, the Company had a $600,000 uninsured cash balance at one institution and
at December 31, 1994 there were no uninsured cash balances.
5. NOTE RECEIVABLE:
In February, March and April 1993, the Company made total loans of $100,000
to Moen Builders, Inc. and M&W Milling and Refining, Inc., (collectively
referred to as "M&W") for M&W to acquire certain equipment to complete its
custom mill facility. M&W is not affiliated with the Company. The Company has
secured this loan with a fully executed and recorded UCC Financing Statement
covering certain equipment. M&W is obligated to repay the notes from cash flow
proceeds at the rate of $3.33 per ton of the Company's ore processed by M&W at
the mill and at the rate of $2.00 per ton for third party ore processed by M&W
at the mill.
Instead of investing directly in machinery and equipment to develop its own
mill at that time, the Company determined that it was advantageous and cost
effective to lend M&W these funds, which represent a fraction of the total mill
cost, in order that M&W could complete the mill. As noted previously, the
Company will recoup its loan as a credit from ore processed at the mill. As of
December 31, 1994 M&W has paid back $7,897, leaving a balance due from M&W of
$92,103. As of December 31, 1995 M&W paid back $2,806, leaving a balance due of
$89,297.
During 1994, the Company acquired the exclusive use of the gravity and
carbon-in-leach mill processing facility known as Geneva Mill, L.C. at Toston,
Montana. This step was considered advisable by management following the
cancellation of the agreement with M&W Milling & Refining, Inc. due to numerous
problems encountered in processing the Company's ore, and in not achieving
satisfactory gold recoveries. The Company entered into an agreement with Geneva
Mill, L.C. on June 15th, 1994 and provided the necessary funds for Geneva Mill,
L.C. to acquire and refurbish the facility. The facility was permitted as a
custom mill to handle the Company's ore. If the Company had decided to construct
a facility it could possibly have taken up to 24 months, provided the State
granted the Company a construction permit. If the Company acquired ownership of
the mill, the mill would have lost its grandfathered permit and the Company
would have had to refile for a new permit with no guarantees that it would have
been successful in obtaining one. In addition to
F/S-10
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
5. NOTE RECEIVABLE (CONTINUED):
the note receivable to M&W, the Company had made loan advances in 1994 to Geneva
Mill, L.C. in the amount of $1,221,922 and an additional amount in 1995 of
$373,278, for plant acquisition, crushing equipment, refurbishing used mill
equipment, installation of new pumps, construction of tailings ponds and liners,
transportation trucking equipment, and loaders and working capital. The terms of
the repayment of the loans are based on the tons of ore processed at the mill at
the rate of $45 per ton plus a $5 credit per ton as a payment toward the
advance. For 1994 and 1995 Geneva Mill, L.C. repaid from processing $240,642 and
$266,137 respectively, and made cash payments of $88,500 in 1995. In 1995 all
operations between Geneva Mill, L.C. and Hanover Gold have ceased. The balance
due to the Company prior to the write off of the uncollectible amounts due was
$999,921. Management has determined to write off $779,921 as an uncollectible
bad debt for 1995 due to the prosect that the mill will no longer be utilized
and the inability of Geneva Mill, L.C. to repay the loan. The balance of
$220,000 is secured by tangible assets and a security interest. Management has
considered this value to be unimpaired and recoverable.
6. SUBSCRIPTION RECEIVABLE:
During the year ended December 31, 1994 the Company had outstanding a
subscription receivable for the sale of 405,850 Class C Warrants at $1.60 per
share for a total of $649,360. Subsequent to the year ending December 31, 1994,
250,000 shares were withdrawn from the subscription for a total of $400,000. The
balance at December 31, 1994 was reduced to $249,360.
As of December 31, 1995 the Company has received payments of $249,360 for
the remaining 155,850 shares.
7. INVENTORIES:
Raw materials consists of costs associated with extracting and transporting
the ore to the stockpiles. Work in process consists of costs associated with
transporting ore to the mill and processing it at the mill. Yard and supplies
consist of mine materials and repair and maintenance items.
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1994 1995
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 83,825 $ 29,494
Work in process................................................... 71,984 0
Yard & supplies................................................... 25,429 0
------------ ------------
Total inventory................................................. $ 181,238 $ 29,494
------------ ------------
------------ ------------
</TABLE>
8. EXPLORATION, ENGINEERING AND SITE DEVELOPMENT:
The Company has capitalized the amounts that have been paid by the Company,
and by Hanover Resources, Inc. for services rendered in the exploration,
drilling, sampling, engineering and other related technical, managerial and
professional services toward the evaluation and development of the Kearsarge
Group of Claims. The Company continues to capitalize these charges until
production begins. The total unamortized cost capitalized at 1995 and 1994 are
$2,225,106 and $2,228,118 respectively.
9. PATENTED (DEEDED CLAIMS):
The Company has acquired the mining rights to the Kearsarge Lode Claim, a
precious metals tract, from Hanover Resources, Inc. (the "Sub lessor"), pursuant
to a Mineral Sublease and Purchase Option
F/S-11
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
9. PATENTED (DEEDED CLAIMS) (CONTINUED):
Agreement dated July 31, 1990. Under the original agreement, the Company has the
right to purchase the Kearsarge Claim for $6,075,000. During the first nine
years of the agreement, all paid rental payments shall be applied as a credit
toward the purchase price.
On December 3, 1990 and which became effective after December 31, 1990, the
Company entered into a Modification Agreement and renegotiated the terms of the
purchase option. The Company's option to purchase the Kearsarge Lode Claim was
converted to $3,300,000 in cash, upon the same terms and conditions as the
original cash purchase price, and the issuance of 1,500,000 shares of the
Company's common stock. This Modification Agreement further provided that the
shares were accepted in full payment of the stated reduction in the purchase
price of $3,000,000, but that should the fair market price for the share not
attain a price of $2.00 per share on or before December 1, 1991, then an
additional number of shares would be issued based upon the then current market
price for the shares so that the market price of the shares on that date would
equal $3,000,000. Should the market price of the Company's shares on December 1,
1991 be $2.00 or more, then there would be no adjustment of the number of shares
issued. As of December 1, 1991 the market value of the stock was $1.50 per
share, therefore as of December 31, 1995 the Company issued an additional
500,000 shares of its common stock pursuant to this Agreement.
The Agreement permits the Company to develop, mine and extract the minerals
contained in the Kearsarge Lode Claim for a period of nine years commencing
September 1, 1990, or to exhaustion of the minerals by exercising the purchase
option, and calls for the payment of a minimum monthly payment of $10,000 to
Hanover Resources, Inc. beginning October 1, 1990 and on the first day of each
month thereafter, unless terminated as provided for in the agreement. In
addition, the agreement provides for the annual rentals as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
December 1, 1991........................................................... $ 50,000
January 1, 1992............................................................ 25,000
February 1, 1992........................................................... 25,000
March 1, 1992.............................................................. 25,000
April 1, 1992.............................................................. 25,000
May 1, 1992................................................................ 12,500
September 1, 1992.......................................................... 50,000
June 1, 1993............................................................... 200,000
June 1, 1994............................................................... 130,000
June 1, 1995............................................................... 400,000
June 1, 1996............................................................... 400,000
June 1, 1997............................................................... 400,000
June 1, 1998............................................................... 400,000
June 1, 1999............................................................... 400,000
June 1, 2000............................................................... 757,500
-----------------
$ 3,300,000
-----------------
-----------------
</TABLE>
It should be noted that the Company has only purchased the rights to mine
the property and can purchase the property for $3,300,000 under the December 31,
1990 modification to the Purchase Option Agreement.
F/S-12
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
9. PATENTED (DEEDED CLAIMS) (CONTINUED):
As a condition of the pending merger with Hanover Resources, Inc. the
minimum monthly payment of $10,000 was terminated and the Company has agreed to
pay directly to the underlying landowner of an additional group of claims, in
lieu of the $10,000 monthly payments, which shall resume if the pending merger
does not take effect, rental payments of $8,760 per month through March 1999
with a final payment in April 1999 of $4,925. The total remaining rental
payments amount to $346,565, at December 31, 1995 and will be applied toward the
purchase of the claims at the termination of the lease. In addition to the
$8,760 monthly landowner rental payment, the Company shall pay an overriding
production royalty of five percent (5%) of the net smelter return from the
Kearsarge Group of claims to the same landowner.
As of December 31, 1995 and 1994, the Company has made payments toward the
Kearsarge Group of Claims of $3,922,083 and $3,388,621 respectively. The amounts
represent payments to the landowners as rental payments applied to the purchase
of the claims.
10. OPTION:
In December 1990, the Company entered into an Option Agreement to purchase
five additional mining claims which are contiguous to the Kearsarge Mining
Claim, from Hanover Resources, Inc. which expires December 31, 1997.
Under this Option Agreement, the Company has agreed to pay $90,000 per claim
for a total of $450,000 as an exercise option fee, which payment is contingent
upon the results of further exploratory testing of these properties and subject
to the necessary due diligence. In addition to the exercise fee, the Company has
agreed to pay a minimum royalty of $2,500 per month and a 5% net smelter return,
for each claim that the Company retains following the exercise of its option.
The Company has the option of acquiring less than all of the claims at the sole
discretion of management.
In addition, the Company has the right to purchase each of the five claims
for a payment of $600,000 per claim during the first seven years of the
Agreement with all rental payments and option exercise fees being applied toward
the purchase price on a claim by claim basis. In consideration of granting this
Option Agreement, the Company has issued 900,000 shares of its common stock at
par value of $90 to Hanover Resources, Inc.
11. AGREEMENTS:
On February 13, 1992, The Hanover Group, Inc. entered into an agreement with
Bearcat for Bearcat's 30% working interest in the 34 claims known as the
Kearsarge Group of Claims. Hanover Group then assigned the agreement to the
Company without consideration and thereafter, the Company acquired the working
interest for a consideration of 600,000 shares of restricted common stock issued
by the Company to Bearcat. The negotiated value of the stock between the Company
and Bearcat on the closing date was $2.00 per share or a total of $1,200,000 for
the working interest. In addition, Bearcat was granted two future stock options
by the Company. One at $3.00 per share for 171,000 shares of legended common
stock which expired May 14, 1995, and another at $10.00 per share for 500,000
shares of legended common stock which expires May 14, 1997.
On February 20, 1992, the Company entered into an Assignment and Mineral
Sublease Agreement with Hanover Resources, Inc. Under the agreement, Hanover
Resources, Inc. assigned 70% interest in the remaining 28 claims of the original
34 claims held by Hanover Resources, Inc. and to five claims held under the
Option Agreement to the Company.
F/S-13
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
11. AGREEMENTS (CONTINUED):
The Assignment and Mineral Sublease Agreement permits the Company to mine,
extract, process, concentrate, refine or otherwise treat, sell and dispose of
such minerals (the "Products") contained in the 28 claims through April 15,
1999, or if any claim is in production all of the claims can be mined until
exhaustion. This agreement also obligates the Company to pay Hanover Resources,
Inc. $15,000 per month commencing January 1, 1996 through December 31, 1997 and
thereafter $20,000 per month until the agreement is terminated or upon the
commencement of commercial production on the claims which ever comes first. The
commencement of the management fee payment of $15,000 had been deferred until
January 1, 1997, as a result of the proposed merger with the Company, which is
subject to shareholder approval.
Hanover Resources, Inc. is entitled to receive 70% of the products mined
from the claims in kind multiplied by the Company's participating interest in
the claims, subject to the provision of any joint venture mining agreement the
Company may enter into. The Company shall receive 30% of the products mined from
the claims in kind multiplied by its participating interest in the claims
subject to the provisions of any joint venture mining agreement that the Company
may enter into. Hanover Resources has an option to assign to the Company the
monetary value of its share of any independently appraised Products contained in
the claims in exchange for additional shares in the Company at 75% of the then
public market price of the stock.
The Agreement provides for the Company to pay the underlying landowner
rental payment obligations as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
June 1, 1992..................................................... $ 150,000
September 1, 1992................................................ 50,000
June 1, 1993..................................................... 112,500
June 1, 1994..................................................... 85,000
June 1, 1995..................................................... 200,000
June 1, 1996..................................................... 200,000
June 1, 1997..................................................... 200,000
June 1, 1998..................................................... 200,000
June 1, 1999..................................................... 200,000
June 1, 2000..................................................... 1,377,500
-----------------
$ 2,775,000
-----------------
-----------------
</TABLE>
Under the Agreement, the Company has the right to purchase the claims from
the landowner for $2,775,000. If this right is exercised, all rental payments
paid to the landowner shall be applied as credit toward the purchase price.
From January 1992, to May, 1992 the Company had been negotiating an
agreement, known as the Mining Venture Agreement, with Kennecott Exploration
Company ("Kennecott"), a major mining company capable of undertaking the
development of the Alder Gulch properties under a joint venture (the "mining
venture"). In order to accommodate Kennecott, the Company consolidated its
interests with Group S, Ltd., and Hanover Resources, Inc., affiliated entities,
and on May 1, 1992, formed "Hanover JV". Each of these three entities
contributed their claim interests to the Hanover JV for a total of 250 claims in
the Alder Gulch region. Although each entity contributed their claim interests
to the Hanover JV, each entity retained their respective rights and obligations
to their respective claims.
F/S-14
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
11. AGREEMENTS (CONTINUED):
To further clarify the Mining Venture Agreement and Hanover JV, the
arrangement refers to separate entities which are involved in the mining
venture. The participants are Group S, Ltd, and Hanover Resources, Inc. which
are separate entities from the Company, and the Company (under the Hanover JV),
and Kennecott. Each entity is separate and apart from each other, as are the
claims controlled by each participant. The claims of Group S, Ltd. are not
commingled with the claims of the Company and each participant is responsible
for their portion of the operating expenses as it pertains to their individual
group of claims.
As of December 31, 1994, the mining venture had no assets or liabilities and
had not conducted business. There had been no accounting for the mining venture
since Kennecott was required to complete the initial exploration phase in order
for the mining venture to commence. On March 16, 1995, Kennecott notified the
Company that it was unilaterally terminating the Mining Venture Agreement.
On August 31, 1993, the Company entered into a Mineral Sublease Agreement
with Group S, Ltd. and acquired 80% of the Apex Claim, a patented (deeded)
property adjacent to the Kearsarge Claim for a payment of $125,000 and 150,000
restricted shares of Hanover Gold Company, Inc. common stock at a value of $1.50
per share. Under the Agreement, Group S, Ltd. also retains a 20% net profit
interest payable quarterly in cash or in kind.
Pursuant to Kennecott's instructions, the Company entered into an Assignment
of Lease and Option to Purchase Agreement with a third party landowner on
November 15, 1993, for the acquisition of two precious metals claims, known as
the JTC Lode and the Randolph Lode claims, and for the 20% of the Apex Lode
Claim that it did not already control.
The responsibility for the landowner royalty payments under this Agreement
were Kennecott's by virtue of the Mining Venture Agreement which assigns
landowner rental payments to Kennecott for any claims in the Hanover JV. The
first payment of $120,000 was paid by Kennecott. In 1994, the landowner was due
a royalty payment of $130,000 on April 15, which Kennecott informed Hanover JV
it would not make. Since, Hanover Gold's management felt that it was advisable
to retain this claim group as it mined the Apex Lode claim and prospected on the
JTC Lode and Randolph Lode claims, it made the second payment of $130,000.
Under the Agreement, the Company has the right to purchase this claim
package for $1,650,000, less the amount previously paid of $250,000. This is
pursuant to the underlying landowner rental payment obligations as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
April 15, 1995............................................................. $ 150,000
April 15, 1996............................................................. 200,000
April 15, 1997............................................................. 250,000
April 15, 1998............................................................. 300,000
April 15, 1999............................................................. 500,000
-----------------
$ 1,400,000
-----------------
-----------------
</TABLE>
Included in the April 15, 1999 payment is a purchase buy out required to
effectuate the purchase of the claim group.
On April 18, 1995, the Company's Board of Directors approved the merger of
Hanover Resources, Inc. and Group S Ltd. with the Company, for the purpose of
consolidating the precious metals claims of all three
F/S-15
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
11. AGREEMENTS (CONTINUED):
companies in the Alder Gulch, Virginia City, Montana. Under the terms of the
merger, the Company will issue a total of 5,895,486 shares of its Common Stock
upon the conversion of, and in exchange for, the outstanding capital stock of
Hanover Resources, Inc. and Group S Ltd. Pursuant to the merger, the Company
will acquire the 3,625,000 shares of its Common Stock presently held by Hanover
Resources, Inc. and such shares will be extinguished. The Company will replace
these acquired shares with 3,625,000 shares of registered stock. Therefore, the
net additional number of shares to be outstanding after giving effect to the
replacement of the 3,625,000 shares of the Company to be acquired from Hanover
Resources, Inc. will be 2,270,486 shares of the Company's Common Stock.
12. DEVELOPMENT STAGE COMPANY:
The Company's operations have been centered around its organization,
evaluation of the mining industry, start-up financing of its operations,
including acquisition of the Kearsarge Mine, evaluation of engineering data,
obtaining necessary mining permits and formulation and implementation of its
business plan. From May 2, 1990 through the period ending December 31, 1995, the
Company has secured required financing from its public warrant offering, and
Hanover Resources, Inc., its principal shareholder, in the total aggregate
amount of $11,076,514 which financing has been in the form of cash contributions
of $10,178,311 and advance payments for exploration, engineering, site
development and rental payments for the Kearsarge Claim in the amount of
$898,203. The Company has incurred losses in connection with its operations
during this same period of $4,325,299.
13. RELATED PARTY TRANSACTIONS:
As of December 31, 1995 and 1994 the Company was due from affiliated
companies the following amounts:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Due from Group S, Ltd................................................. $ 300,695 $ 474,895
Due from Hanover Group, Inc........................................... 19,835 0
Due from Hanover Resources, Inc....................................... 207,042 405,909
</TABLE>
Certain of the officers and directors of the Company are also officers and
directors of the affiliated companies. The principal shareholders of the
affiliated companies are also shareholders in the Company. Hanover Resources,
Inc. is a major stockholder in the Company and owns 3,625,000 shares. The
Company has advanced landowner rental payments to Group S, Ltd. Hanover
Resources, Inc. was paid advances to cover expenses and salary advances to Fred
R. Schmid. As a result of the proposal merger these balances will be eliminated.
On June 1, 1995 the Company entered into a Securities Purchase Agreement
with N.A. Degerstrom, acting on his own behalf and for others, giving him the
right to purchase 2,857,142 shares of common stock at $.35 per share and
granting him an option to purchase an additional 2,142,858 shares at $.50 per
share. Effective October 31, 1995 the Company and N.A. Degerstrom executed
Amendment Number One to the Securities Purchase Agreement, in which, the Company
agreed to sell, and N.A. Degerstrom agreed to purchase, an additional 300,000
shares of the Company's common stock at the price of $1.00 per share. On
December 1, 1995, Amendment Number Two to the Securities Purchase Agreement was
executed between the parties noted previously, in which the Company agreed to
sell to N.A. Degerstrom an additional 700,000 shares of the Company's common
stock at the price of $1.00 per share. As of December 31, 1995 the
F/S-16
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
13. RELATED PARTY TRANSACTIONS (CONTINUED):
Company issued 3,857,142 shares for a total amount of $2,000,000 to N.A.
Degerstrom and his associates. In addition, N.A. Degerstrom had advanced $50,000
in loans to the Company at 9% interest which was repaid January 4, 1996.
On March 3, 1996, the Company and N.A. Degerstrom executed Amendment Number
Three to the Securities Purchase Agreement, which rescinded the option that N.A.
Degerstrom held for the purchase of an additional 2,142,858 shares at $.50 per
share, and instead obligates N.A. Degerstrom to purchase the 2,142,858 shares
according to the following schedule:
<TABLE>
<CAPTION>
TOTAL @ $.50
ON OR BEFORE SHARES PER SHARE
- ------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
April 15, 1996..................................................... 400,000 $ 200,000
June 1, 1996....................................................... 1,200,000 600,000
October 16, 1996................................................... 542,858 271,429
---------- ------------
Total............................................................ 2,142,858 $ 1,071,429
---------- ------------
---------- ------------
</TABLE>
14. SUBSEQUENT EVENTS:
On February 26, 1996 the Company executed a letter of Intent with
Easton-Pacific & Riverside Mining Company for the purpose of merging the two
entities into the Company, and consolidating their respective mineral resources
in the Virginia City Mining District, in Madison County, Montana. The letter of
intent provides for a 90 day due diligence period, which may be extended for an
additional sixty days, during which each company will investigate each others
mining claims, technical data, mineral resources and any environmental or
litigation risks to which either may be subject. Depending on the results of
these investigations, the letter of intent contemplates the merger of
Easton-Pacific and Riverside Mining into the Company in exchange for 14,368,713
shares of the Company's common stock, subject to the companies entering into a
definitive merger agreement, consummation of which will be dependent upon
receiving the approvals of the Board of Directors and stockholders of each
company, the delivery of a fairness opinion by an independent financial advisor
and the preparation and effectiveness of a registration statement under federal
and state securities law. As of the date of this report, management of the
Company cannot predict whether these due diligence investigations will culminate
in a definitive merger agreement with Easton-Pacific or whether such agreement
will be approved by the Company's Board of Directors and stockholders.
On January 18, 1996 the Company filed a registration statement/proxy
statement with Securities and Exchange Commission seeking shareholder approval
to:
1. Approve the merger of Hanover Resources, Inc. and Group S, Ltd.,
affiliated companies, into the Company pursuant to which the Company will
issue to the shareholders of such companies 2,270,486 shares of the
Company's common stock, in addition to the 3,625,000 shares of the
Company held by Hanover Resources, Inc. which will, in effect, be
distributed to the stockholders of Hanover Resources, Inc.
2. Amend the Company's Certificate of Incorporation to increase the total
number of all shares of capital stock which the Company is authorized to
issue from 25,000,000 to 50,000,000 consisting of (a) 48,000,000 shares
of common stock, each of which have a par value of $.0001 (the "Common
Stock") and (b) 2,000,000 shares of preferred stock, each of which have a
par value of $.001 (the "Preferred Stock").
3. Consider and approve the Company's 1995 Stock Option Plan.
F/S-17
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
14. SUBSEQUENT EVENTS (CONTINUED):
4. Elect seven members of the Board of Directors to hold office until the
next annual meeting of shareholders or until their respective successors
are elected to have qualified.
5. Authorize the appointment of independent public accountants for the
fiscal year.
6. Consider and vote upon such other matters as may properly come before
the meeting or any adjustment(s) thereof.
The registration statement is currently under review by the Securities and
Exchange Commission and has not been effective as of March 29, 1996.
Effective March 25, 1996, the Company entered into an asset purchase
agreement with an unaffiliated landowner for the purchase of 10 patented and 120
unpatented mining claims and one mining lease covering properties located in the
Alder Gulch near the Company's landholdings. The lease agreement calls for the
issuance of 400,000 shares of the Company's common stock and three year options
exercisable at the price of $2.00 per share for the purchase of an additional
300,000 shares of the Company's common stock. Additionally, the lease states
that if, during the two year period commencing with the effective date of the
agreement, the average bid price of the Company's common stock during any period
of thirty consecutive trading days does not exceed $2.00 per share it will issue
the landowner such number of additional shares sufficient to raise the aggregate
market value of the shares then owned by the landowner to $2.00.
Effective March 26, 1996, the Company became obligated for the issuance of
250,000 shares of its common stock; the granting of a three year option for the
issuance of an additional 200,000 shares of its common stock at an exercise
price of $2.00 per share; the transfer of two mining trucks that it owns free
and clear of encumbrances and that have a book value of approximately $43,000;
the forgiveness of a note receivable in the amount of $89,297 due from M&W, and
release of the UCC filing the Company holds as security for that note; and the
elimination of a note receivable in the amount of $220,000 due from Geneva Mill,
L.C. in exchange for a $3,000,000 reduction in the landowner rental obligations
that are owed to M&W by Group S, Ltd. which, upon approval of the pending merger
of Group S, Ltd. and the Company, would become the Company's obligation to pay
M&W. M&W also takes title to all of the assets owned by Geneva Mill, L.C. as
part of the consideration for the reduction in rental payments to be received by
M&W.
15. RECLAMATION BONDS:
At December 31, 1995 and 1994, reclamation bonds were outstanding and are
secured by certificates of deposit.
16. INCOME TAX:
The Company has adopted SFAS No. 109 "Accounting for Income Taxes", as of
December 31, 1992. FASB Statement No. 109 is required for all fiscal years
beginning after December 15, 1992. This statement requires that deferred taxes
be established for all temporary differences between book and tax basis of
assets and liabilities. There was no cumulative effect of adoption or current
effect on continuing operations mainly because the Company has been in a
development stage since inception, May 2, 1990, and has sustained net operating
losses during this period. The Company has made no provision for a deferred tax
asset due to the net operating loss carryforward because a valuation allowance
has been provided which is equal to the deferred tax asset. It cannot be
determined at this time that a deferred tax asset is more likely than not to be
realized.
F/S-18
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
16. INCOME TAX (CONTINUED):
The Company has a loss carryforward of $4,283,477 that may be offset against
future taxable income. The carryforward losses expire at the end of the years
2005 through 2020.
The Company has established a valuation allowance equal to the tax benefit.
17. LEASE AGREEMENTS:
The Company has entered into a two year lease for office space, from which
it conducts its financial and accounting operations and its engineering
analysis. The lease expires in November 1997. The Company has prepaid six months
worth of rental payments for a total of $9,000 and paid an additional $700 for a
security deposit. During the first year the monthly rental payment is $1,500 and
during the second year the monthly rental payment is $1,700. In addition to the
monthly rental payments, the Company is obligated for all utility charges.
The Company maintains additional office space under a lese which expires in
July 1996, from which it conducts administrative duties. The monthly cost is
approximately $1,400.
During November 1995, the Company entered into a 20 year lease with a
landowner which granted the Company the right to mine and extract materials from
the landowners property. The Company must pay $2,500 per year to maintain its
right to mine, plus 3% of the revenue received by the Company from the sale of
minerals extracted from the property that is the subject of this lease. As of
December 31, 1995 no material has been extracted.
18. RESTATED FINANCIAL STATEMENTS:
In 1995 the Company reversed accrued salary payable to Fred R. Schmid for
the period ended December 31, 1991, 1992, 1993 and 1994. The total accrued
salary at December 31, 1994 amounted to $542,347. The reversal of the accrued
salary came as a result of a correction of salary incorrectly accrued by the
principal officer.
<TABLE>
<S> <C>
1992 and prior.................................................... $ 137,823
1993.............................................................. 270,895
1994.............................................................. 133,629
---------
$ 542,347
---------
---------
</TABLE>
In 1995 the Company also reversed the accrued salary payable to Stephen
Schmid for the period ended December 31, 1992 and 1993. The total accrued salary
at December 31, 1994 amounted to $56,165. The reversal of the accrued salary
came as a result of a correction of salary incorrectly accrued by Stephen
Schmid.
<TABLE>
<S> <C>
1992.............................................................. $ 20,382
1993.............................................................. 35,783
---------
$ 56,164
---------
---------
</TABLE>
F/S-19
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
19. OPTIONS AND WARRANTS:
STOCK OPTION PLAN:
On June 2, 1995 the Board of Directors granted options to the following
officers, key employees, directors and advisors of the Company, subject to
shareholder approval of the Plan. The exercise price of the stock option was
established at $1.60 per share.
<TABLE>
<CAPTION>
OFFICER OR DIRECTOR OPTIONS GRANTED EXPIRATION DATE
- ------------------------------------------------------------ --------------- ---------------
<S> <C> <C>
Pierre Gousseland........................................... 100,000 June 1, 2000
Fred R. Schmid.............................................. 250,000 June 1, 2000
Stephen J. Schmid........................................... 175,000 June 1, 2000
Laurence Steinbaum.......................................... 125,000 June 1, 2000
Nicholas S. Young........................................... 150,000 June 1, 2000
</TABLE>
WARRANTS:
All warrants outstanding have expired as of December 31, 1994.
20. EMPLOYEE CONTRACTS:
On March 14, 1995 the Company amended the employment agreement retroactive
to August 27, 1994 employing Fred R. Schmid as its President and Chief Executive
Officer until August 31, 1997. The agreement calls for a base salary of:
<TABLE>
<S> <C>
First year........................................................ $ 125,000
Second year....................................................... 137,000
Third year........................................................ 150,000
</TABLE>
The agreement provides for cost of living increases and a bonus equal to 3%
of the Company's pre-tax net revenues and a severance package equal to the
greater of $2,500,000 or 10% of the Company's net worth. If Mr. Schmid
terminated the agreement for good reason he will receive an amount equal to 300%
of the base compensation.
On September 5, 1995 the Company entered into an agreement with Stephen J.
Schmid, the Company's Vice President, Treasurer and Corporate Secretary, to
become effective only if there is a "change in control" of the Company. If a
change occurs the Company agrees to continue Mr. Schmid's employment for a
period of 24 months.
In January 1996 all employment contacts were terminated and both Fred Schmid
and Stephen Schmid agreed to remain as consultants to the Company under
consultant agreements, in the case of Fred Schmid for a monthly fee of $7,500
until December 31, 1996, and in the case of Stephen Schmid, $5,500 until
September 30, 1996.
F/S-20
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
21. CALCULATION OF EARNINGS PER SHARE:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1993 1994 1995
---------- ------------ ------------
<S> <C> <C> <C>
Number of shares:
Weighted average shares outstanding................................... 6,136,089 8,306,409 10,012,215
Incremental shares for outstanding stock warrants..................... 1,362,697 8,450
Incremental shares for outstanding stock options and purchase
commitments.......................................................... 1,716,667
---------- ------------ ------------
7,498,786 8,314,859 11,728,882
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding and shares that would be
outstanding assuming exercise of dilutive stock options and warrants. All of
which are considered to be common stock equivalents. Fully diluted earnings per
share are the same as primary earnings per share for December 31, 1993, 1994 and
1995.
22. PRIVATE PLACEMENTS:
On October 19, 1995, in a private placement, the Company sold 200,000 shares
of restricted common stock to one investor at a price of $1 per share for a
total of $200,000.
23. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Supplemental schedule of non cash investing and financing activities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1993 1994 1995
---------- ------------ ----------
<S> <C> <C> <C>
On August 31, 1993 the Company issued cash of $125,000 and 150,000 shares
of restricted common stock valued at $1.50 for a total consideration of
$350,000 for the purpose of subleasing an 80 percent (80%) interest in the
Apex Claim. (see Note 8).................................................. $ 225,000
Issuance of 500,000 shares of common stock for modification agreement of
Hanover Resources, Inc. (See Note 8)...................................... $ 50
Issuance of 269,679 shares of common stock to vendors in settlement of
invoices due.............................................................. 274,096
---------- ------------ ----------
$ 225,000 0 $ 274,146
---------- ------------ ----------
---------- ------------ ----------
</TABLE>
24. SIGNIFICANT CHANGES IN THE FOURTH QUARTER:
The Company recognized a $250,000 non-recurring option payment under the
Kennecott mining venture agreement. Under the agreement, if Kennecott withdrew
from the joint venture the option payable would be recognized as income.
During the fourth quarter 1995 it became clear to the Company that the note
receivable from Geneva Mill L.C. would not be collectible. Kennecott's
withdrawal from the joint venture, the inability of Geneva Mill L.C. to attract
any new business and the decision to curtail mining operation by the Company
caused Geneva Mill L.C.'s facilities to cease operations. As a result, an
allowance for bad debt of $779,921 was set up in the fourth quarter.
F/S-21
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND THE PERIOD
MAY 2, 1990 (INCEPTION) TO DECEMBER 31, 1995
24. SIGNIFICANT CHANGES IN THE FOURTH QUARTER (CONTINUED):
In addition, in the fourth quarter a write down of inventory in the amount
of $69,339 occurred to lower inventory to the lower of cost or market.
Finally, in the fourth quarter a loss on sale of assets of $32,509 occurred
when the Company began liquidating unused assets.
F/S-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
Hanover Gold Company, Inc. and Subsidiary
Roslyn, New York
We have audited the consolidated financial statements of Hanover Gold
Company, Inc. and Subsidiary as of December 31, 1995, our report thereon dated
March 29, 1996. In connection with our audit of these financial statements, we
audited the financial statement schedules.
In our opinion, these financial statements schedules present fairly, in all
material respects, the information stated therein, when considered in relation
to the consolidated financial statements taken as a whole.
Zeller Weiss & Kahn
March 29, 1996
F/S-23
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES
SCHEDULE II
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING
OF AMOUNTS
NAME OF DEBTOR PERIOD ADDITIONS COLLECTED CURRENT
- ----------------------------------------------------------------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Group S, Ltd..................................................... $ 300,695 $ 174,200 $ 474,895
Hanover Group, Inc............................................... 19,835 $ 19,835
Hanover Resources, Inc........................................... 207,042 198,867 405,909
</TABLE>
F/S-24
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
PROPERTY, PLANT AND EQUIPMENT
SCHEDULE V
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OTHER CHANGES- BALANCE AT
OF ADDITIONS ADD (DEDUCT)- END OF
CLASSIFICATION PERIOD AT COST DESCRIBE PERIOD
- ---------------------------------------------------------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Equipment................................................. $ 132,696 $ 34,754 $ (57,439) $ 110,011
Building improvements..................................... 17,566 17,566
Office equipment.......................................... 15,557 2,260 17,817
Vehicle................................................... 1,500 3,600 5,100
</TABLE>
F/S-25
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
SCHEDULE VI
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO COSTS END OF
DESCRIPTION OF PERIOD AND EXPENSES RETIREMENTS PERIOD
- ------------------------------------------------------- ----------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Equipment.............................................. $ 19,448 $ 23,430 $ 11,059 $ 31,819
Building improvements.................................. 3,177 2,503 5,680
Office equipment....................................... 5,130 3,636 8,766
Vehicle................................................ 450 960 1,410
</TABLE>
F/S-26
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
SHORT-TERM BORROWINGS
SCHEDULE IX
<TABLE>
<CAPTION>
MAXIMUM WEIGHTED
WEIGHTED AMOUNT AVERAGE AMOUNT AVERAGE
BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF APPROPRIATE AT END OF INTEREST DURING THE DURING THE DURING THE
SHORT-TERM BORROWING PERIOD RATE PERIOD PERIOD PERIOD
- ------------------------------------------------ --------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Note payable.................................... $ 48,654 8.44% $ 65,260 $ 57,273 8.44%
Loan payable -- shareholder..................... 50,000 9.00% 50,000 50,000 9.00%
</TABLE>
F/S-27
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
SUPPLEMENTARY INCOME STATEMENT INFORMATION
SCHEDULE X
<TABLE>
<CAPTION>
CHARGED TO
COSTS AND
ITEM EXPENSES
----- ------------
<C> <S> <C>
1. Maintenance and repairs...................................................................... $ 4,629
2. Depreciation and amortization of intangible assets, preoperating costs and similar
deferral.................................................................................... 38,229
3. Taxes, other than payroll and income taxes................................................... 16,364
4. Royalties.................................................................................... 120,000
5. Advertising costs............................................................................ 223,943
</TABLE>
F/S-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HANOVER GOLD COMPANY, INC.
By: /s/ WAYNE SCHOONMAKER
-----------------------------------
Wayne Schoonmaker,
its PRINCIPAL ACCOUNTING OFFICER
Date: May 29, 1996
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Hanover Gold Company, Inc. and Subsidiary
P.O. Box B
Roslyn, New York 11576
We hereby consent to the use in this Proxy Statement of our report dated
March 29, 1996 except for Note 24 as to which the date is May 28, 1996, relating
to the financial statements of Hanover Gold Company, Inc. and Subsidiary and to
the references to our firm under the caption: "Selected Financial Data" and
"Experts" in the Prospectus.
Our examination of the financial statements referred to in the above-
mentioned report also included the related financial statement schedules. In
our opinion, such schedules present fairly the information required to be set
forth therein.
/s/ Zeller Weiss & Kahn
ZELLER WEISS & KAHN
Mountainside, New Jersey
June 20, 1996
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Group S Limited
P.O. Box B
Roslyn, New York 11576
We hereby consent to the use in this Proxy statement of our report dated
May 16, 1996, relating to the financial statements of Group S Limited and to the
references to our firm under the caption: "Seleted Financial Data" and "Experts"
in the Prospectus.
/s/ Grossman, Tuchman & Shah, LLP
Grossman, Tuchman & Shah, LLP
New York, New York
June 20, 1996
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Hanover Resources, Inc.
P.O. Box B
Roslyn, New York 11576
We hereby consent to the use in this Proxy statement of our report dated
May 16, 1996, relating to the financial statements of Hanover Resources, Inc.
and to the references to our firm under the caption: "Seleted Financial Data"
and "Experts" in the Prospectus.
/s/ Grossman, Tuchman & Shah, LLP
Grossman, Tuchman & Shah, LLP
New York, New York
June 20, 1996
