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PRELIMINARY COPY
5/30/96
HANOVER GOLD COMPANY, INC.
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE , 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, June__, 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 1, 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
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JUNE ___, 1996 WAYNE SCHOONMAKER, SECRETARY
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HANOVER GOLD COMPANY, INC.
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
JUNE _________, 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 June__, 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
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record at the close of business on June 1, 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 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.
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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".
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.
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.
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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
June ____, 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.
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. 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
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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.
- - - -- 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)
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COMPANY RESOURCES GROUP S COMBINED(2)
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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)
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____________
(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").
(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.
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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>
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Shares Shares
Relationship to Beneficially Percent Beneficially Percent
Name of Beneficial Owner Company Owned (1) % Owned (2) %
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<S> <C> <C> <C> <C> <C>
Hanover Resources, Inc. Affiliated 3,625,000 20.87 None (3) None
P.O. Box B Company
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 43,000 0.25 43,000 .23
North 3303 Sullivan Rd. and 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 Record and 10,653,836(9) 61.33 9,578,186(9) 51.38
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Affiliate as a Group Beneficial
(8 persons)
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</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".
(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
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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 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:
Fred R. Schmid 250,000 shares
Stephen J. Schmid 175,000 shares
Nicholas Young 150,000 shares
Lawrence Steinbaum 125,000 shares
Pierre Gousseland 100,000 shares
(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 officer
and by all officers and directors as a group, assuming the merger of
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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 Percentage
of the Company Shares beneficially of Shares
Name and Address Relationship to acquired in the owned after the Merger to be out-
of Beneficial Owner Company Merger standing(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 0 43,000 0.25
North 3303 Sullivan Rd. and 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
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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.
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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 gold
mineralized 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
-13-
<PAGE>
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), 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
-14-
<PAGE>
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 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 mineral value of the properties was estimated, with an allowance for
anticipated losses resulting from mining methods and beneficiation or
preparation. The properties of Resources and Group S were estimated to have a
combined mineral value of $8 million.(1) The estimated 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.
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),
- - - ----------------
1 Several methods are used in the mining industry to value gold resources.
"Proven and probable" reserves are normally defined by mining and mineral
exploration companies, using diamond drilling, bulk sampling, mapping, and
channel sampling, surface and underground development work, or any
combination of the above. The Company believes, based on current gold
price levels and market conditions, that gold properties in production are
valued from $70 to $175 per ounce of "proven and probable" reserves. If,
however, the property consists of staked claims or concessions, with no
work having been performed, the valuation would be no more than the cost of
acquiring such property. 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 merely $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
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<PAGE>
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 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 14.46% 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.
- - - -------------------------------------------------------------------------------
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.
-16-
<PAGE>
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
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<PAGE>
Secretary and Treasurer. Both Resources and Group S are affiliates of the
Company, and their businesses are managed by Fred R. Schmid 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
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<PAGE>
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 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, and not as a pooling
of interests. As a result, all transactions have been recorded at cost.
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
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<PAGE>
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.
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<PAGE>
HANOVER GOLD COMPANY, INC.
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
FOR THE PERIOD ENDED
APRIL 30, 1996
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
-------------------------------------------------------- ------------------------------------
ASSETS Hanover Gold Hanover Group S Limited Adjustments for Combined Balance
Current Assets Company, Inc. Resources, Inc. Combination Sheet
<S> <C> <C> <C> <C> <C> <C>
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>
<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 Gold Hanover Combined
Company, Inc. Resources, Inc. Group S Limited Adjustments for of Statement
Combination Income & Loss
------------- --------------- ---------------- --------------- -------------
<S> <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>
<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:
Hanover Resources, Inc. - Option deposit $ 90
Group S Limited - Option deposit 125,000
---------
Hanover Gold Company, Inc. ($125,090)
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:
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)
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:
Hanover Resources - Paid in capital $ 485,038
Group S - investment in the Hanover
Resource's common stock (485,038)
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.:
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)
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PROFORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD ENDED APRIL 30, 1996
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:
Group S Limited - Paid in Capital $ 166,670
- Retained Earnings ( 22,377)
Hanover Gold Company, Inc. - Common Stock ( 100)
- Paid in Capital (144,193)
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.
<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 Gold Hanover Combined
Company, Inc. Resources, Inc. Group S Limited Adjustments for Statement of
Combination Income & Loss
------------- --------------- ---------------- --------------- -------------
<S> <C> <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:
Hanover Resources, Inc. - Royalty Income $ 128,000
Hanover Gold Company, Inc. - G&A $ (128,000)
<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.
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED BALANCE SHEETS:
April 30, For the years ended December 31,
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
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
Sales 31,252 128,000 120,000 170,000 255,262 120,748
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.
<PAGE>
RESULTS OF OPERATIONS
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 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
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.
<PAGE>
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.
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.
<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.
<TABLE>
<CAPTION>
SUMMARY OF CONSOLIDATED BALANCE SHEETS:
April 30, For the years ended December 31,
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
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
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
<PAGE>
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
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.
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
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.)
<PAGE>
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.
<PAGE>
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 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 gold mineralized 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.
-32-
<PAGE>
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 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
-33-
<PAGE>
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:
DRILL HOLE FROM TO LENGTH AU OPT
---------- ----- ----- ------ ------
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
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 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
-34-
<PAGE>
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 byMr. 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 60 additional days), 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.
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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, and
therefore it has 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.
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
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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.
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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 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
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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.
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
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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 claims will be controlled by the Company, and all gold deposits will be
consolidated with the Company's gold deposits, and will total approximately
26,000,000 tons of gold-bearing ore at an average grade of .0615 ounces of
gold 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.
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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
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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.
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
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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.
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
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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.
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.
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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>
Name of Optionee Relationship of Optionee to Company Number of Shares Optioned
- - - --------------------- ----------------------------------- -------------------------
<S> <C> <C>
Pierre Gousseland(1) Director 100,000
Fred R. Schmid Former Chairman of the Board and 250,000
President
Stephen J. Schmid Former Vice President, Treasurer, 175,000
Secretary and Director
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
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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.
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.
Year
First
Position and other Relationship Elected a
Name of Nominee Age with the Company Director
- - - ------------------- --- -------------------------------------- ---------
Neal A. Degerstrom 71 Director - Designee of Neal A. 1995
Degerstrom
James A. Fish 65 Chairman of the Board, President, CEO
and Director - Designee of Neal A. 1995
Degerstrom
Pierre Gousseland 72 Director and Member of the Stock 1992
Option Plan Committee
F. D. Owsley 63 Director - Designee of Neal A. 1995
Degerstrom
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Fred R. Schmid 62 Director 1990
Laurence Steinbaum 70 Director and Member of the Stock 1994
Option Plan and Compensation
Committees
Nicholas S. Young 47 Director and Member of the 1990
Compensation and Audit Committees
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.
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.
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<PAGE>
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
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<PAGE>
Company and 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.
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<PAGE>
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.
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 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.
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<PAGE>
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.
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.
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<PAGE>
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 collectively own at least 15% of the Company's issued and
outstanding Common Stock. The Securities Purchase Agreement also provides
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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 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 pursuant to the Securities Purchase Agreement as
of the date of this Proxy Statement. That number could increase if and when
Mr. Degerstrom 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:
Fred R. Schmid 3,224,943 shares(1)
Nicholas Young 331,179 shares
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Lawrence Steinbaum 133,983 shares
Pierre Gousseland 50,017 shares
______________
(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 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
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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
Board, which approved and authorized the Company to pay Fred R. Schmid, then
the President and Chief Executive Officer, a cash bonus of $150,000 for his
services in raising the initial working capital and completing the 1993
public financing for the Company. No such
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action has been taken for or in respect of 1995.
STOCK OPTIONS. Reference is made to "THE 1995 STOCK OPTION PLAN" for a
description of the Company's Stock Option Plan and the stock options granted
under the Plan. The Board has authorized the issuance to Mr. Fish of
restricted Common Stock as part of his compensation arrangement. That
arrangement is described below.
COMPENSATION OF OFFICERS FOR 1995, 1994 AND 1993. The following table
shows compensation paid to the Company's former Chief Executive Officer
during the fiscal years ended December 31, 1995, 1994, and 1993.
Annual Long-term All Other
Name and Compensation Compensation Compensation
Principal Position Year Salary ($) Awards ($)
- - - -------------------- ------ ------------- ------------ ------------
Fred R. Schmid 1995 137,435 -0- -0-
CEO and 1994 126,445 -0- 150,000 (1)
President 1993 114,950 -0- -0-
(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
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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 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.
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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
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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
<PAGE>
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;
(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.
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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
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any successors thereto.
(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
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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.
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.
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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 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
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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.
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 period
beginning on the third
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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
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<PAGE>
holding shares of Restricted Stock granted hereunder shall be entitled to
receive all dividends and other distributions paid 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;
-9-
<PAGE>
(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.
SECTION . REQUIREMENTS OF LAW
REQUIREMENTS OF LAW. The granting of Options or Restricted
Stock, and the issuance of
-10-
<PAGE>
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.
EXHIBITS TO
PROXY STATEMENT / REGISTRATION STATEMENT ON
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<PAGE>
FORM S-4
OF
HANOVER GOLD COMPANY, INC.
JANUARY , 1995
-12-
<PAGE>
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
<PAGE>
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.
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,
- 2 -
<PAGE>
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
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<PAGE>
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 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
- 4 -
<PAGE>
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.
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
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<PAGE>
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
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<PAGE>
CERTIFICATE OF THE SECRETARY
OF
HANOVER GOLD COMPANY, INC.
(a Delaware Corporation)
I, Stephen J. Schmid, 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
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<PAGE>
HANOVER RESOURCES, INC.
AUDITED REPORT
FOR THE PERIOD
JANUARY 1, 1995
TO
DECEMBER 31, 1995
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hangover 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. 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 include 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, 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
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 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.
<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
REVENUES 1994 1995 .December 31, 1995
------------ ------------ -------------------
<S> <C> <C> <C>
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.
<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.
<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.
<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
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
<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
4. PATENTED (DEEDED) CLAIMS (CONTINUED)
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.
As of December 31, 1995, the payment obligations to two landowners on the claims
are as follows:
First Landowner:
June 1, 1996 $600,000
June 1, 1997 $600,000
June 1, 1998 $600,000
June 1, 1999 $2,735,000
----------
$4,535,000
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.
<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
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:
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)
------------
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:
Investments in Hanover Gold Company, Inc. $ 255,913
Losses recognized in prior years 255,913
------------
Net investment at December 31, 1995 $ 0
------------
<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
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.
<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
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 due on demand.
As of December 31, 1995 and 1994 the Company had receivables and payables with
affiliate companies as follows:
1994 1995
----- ----
Due from (to) Group S Limited $(438,049) $95,989
Due from (to) Hanover Gold Company, Inc. $(171,325) $(405,809)
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, 1995, and at December 31, 1994, the Company owned 3,625,000 shares
(27% and 41%, respectively), of the outstanding common stock of Hanover Gold
Company, Inc.
<PAGE>
HANOVER RESOURCES, INC.
INTERIM MANAGEMENT REPORT
FOR THE PERIOD
JANUARY 1, 1996
TO
APRIL 30, 1996
<PAGE>
HANOVER RESOURCES, INC.
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS December 31, December 31, April 30,
1994 1995 1996
(audited) (audited) (unaudited)
------------ ------------ -----------
<S> <C> <C> <C>
Current Assets
Cash $ 40,621 $ 2,178 $ 16,049
Prepaid Income Taxes 35,000 31,000 11,000
Prepaid Fees 0 1,167 1,167
---------- ---------- ----------
Total Current Assets $ 75,621 $ 34,345 $ 28,216
---------- ---------- ----------
Other Assets
Patented (Deeded) Claims (Note 4) 1,246,360 1,342,720 1,342,720
Investment in Hanover Gold Company, Inc. (Note 5) 0 0 0
Loan Receivable Shareholders (Note 6) 71,800 8,000 0
Due from Affiliated Company (Note 12) 505,030 534,038 0
---------- ---------- ----------
Total Other Assets $1,823,190 $1,884,758 $1,342,720
---------- ---------- ----------
Total Assets $1,898,811 $1,919,103 $1,370,936
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued Expenses (Note 7) $ 248,542 $ 92,536 $ 0
---------- ---------- ----------
Total Current Liabilities $ 248,542 $ 92,536 $ 0
---------- ---------- ----------
Long term Liabilities
Due to Affiliated Companies (Note 12) 665,221 849,105 377,782
Notes Payable and Accrued Interest (Note 8) 291,856 0 0
Option Payment 90 90 90
---------- ---------- ----------
Total Long term Liabilities $ 957,167 $ 849,195 $ 377,872
---------- ---------- ----------
Total Liabilities $1,205,709 $ 941,731 $ 377,872
---------- ---------- ----------
Stockholder's 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 21,379
Additional paid in Capital 945,834 1,220,375 1,220,375
Deficit accumulated during the development stage (267,204) (264,382) (248,690)
---------- ---------- ----------
Total Stockholder's Equity $ 693,102 $ 977,372 $ 993,064
---------- ---------- ----------
Total Liabilities & Stockholders' Equity $1,898,811 $1,919,103 $1,370,936
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to financial statements.
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME (LOSS) AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
REVENUES YEAR ENDED YEAR ENDED JANUARY 1, 1996 APRIL 26, 1900
DECEMBER 31, DECEMBER 31, TO APRIL 30, (INCEPTION) TO
1994 1995 1996 APRIL 30, 1996
---- ---- ---- --------------
<S> <C> <C> <C> <C>
Royalty and Fee Income $ 120,000 $ 128,000 $ 31,252 $ 853,984
---------- ---------- ---------- ----------
EXPENSES
Payroll 105,000 56,667 0 460,834
Payroll Taxes 9,982 8,224 0 40,519
Professional Fees 27,845 42,767 0 134,891
Promotion and Travel 4,218 3,192 0 53,262
Contract Services 52,444 5,000 0 177,157
Administrative and other expenses 21,034 5,253 15,560 69,145
------ ------ ------ ------
Total Expenses $ 220,523 $ 121,103 $ 15,560 $ 935,808
---------- ---------- ---------- ----------
Income (Loss) from Operations $ (100,523) $ 6,897 $ 15,692 $ (81,825)
---------- ---------- ---------- ----------
Other Income (Expense)
Loss on investment in Hanover
Gold Co., Inc. $ 0 $ 0 $ 0 $ (255,913)
Gain on Sale of Securities 98,393 0 0 172,243
Interest Income 2,000 0 0 5,486
Interest Expense (11,559) (75) 0 (69,990)
State Income Taxes (970) (4,000) 0 (18,691)
------ ------ ------ ------
Total Other Income (Expense) $ 87,864 $ (4,075) $ 0 $ (166,865)
---------- ---------- ---------- ----------
Net Income (Loss) (12,659) 2,822 15,692 (248,690)
Accumulated Deficit at
Beginning of Period (254,545) (267,204) (264,382)
---------- ---------- ---------- ----------
End of Period $ (267,204) $ (264,382) $ (248,690) $ (248,690)
---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
HANOVER RESOURCES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JANUARY 1, 1996 APRIL 26, 1900
DECEMBER 31, DECEMBER 31, TO APRIL 30, (INCEPTION) TO
1994 1995 1996 APRIL 30, 1996
---- ---- ---- --------------
Operating Activities
<S> <C> <C> <C> <C>
Net Income (Loss) from Operations $ (12,659) $ 2,822 $ 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) (98,393)
Changing in Operating Assets and
Liabilities (Increase) decrease in
prepaid taxes (35,000) 4,000 20,000 (11,000)
(Increase) in prepaid fees -- (1,167) -- (1,167)
(Increase) in Patented (Deeded) Claims (105,120) (98,360) -- (1,342,720)
(Increase) in Investment in Hanover
Gold Company -- -- -- (185,219)
(Increase) decrease in due from
Shareholder (51,440) 63,800 8,000 0
Increase (decrease) in due to
Affiliates (129,624) 154,876 62,715 377,782
(Decrease) increase in Accrued
Expenses 247,388 (156,006) (92,536) 0
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) $ 13,781 $(1,583,167)
Investing Activities
Proceeds on sale of
Hanover Gold Company, Inc.
Warrants 149,750 -- -- 357,462
---------- ---------- ---------- ----------
Net cash provided by investing
activities: $ 149,750 $ 0 $ 0 $ 357,462
---------- ---------- ---------- ----------
Financing Activities
Proceeds from sale of common stock -- 281,448 -- 1,241,754
---------- ---------- ---------- ----------
Net cash provided by financing
activities: $ 0 $ 281,448 $ 0 $1,241,754
---------- ---------- ---------- ----------
Net Increase (Decrease) in cash (23,540) (38,443) 13,871 16,049
Cash, Beginning of Period 64,161 40,621 2,178 --
---------- ---------- ---------- ----------
Cash, End of Period $ 40,621 $ 2,178 $ 16,049 $ 16,049
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
HANOVER RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, AND 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
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.
<PAGE>
HANOVER RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, AND 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.
HANOVER RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
<PAGE>
YEAR ENDED DECEMBER 31, 1994, AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996 AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
4. PATENTED (DEEDED) CLAIMS (CONTINUED)
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 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:
June 1, 1996 $ 600,000
June 1, 1997 $ 600,000
June 1, 1998 $ 600,000
June 1, 1999 $2,735,000
----------
$4,535,000
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.
<PAGE>
HANOVER RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, AND 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:
<TABLE>
<CAPTION>
ASSETS
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>
<PAGE>
HANOVER RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
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 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.
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.
<PAGE>
HANOVER RESOURCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
APRIL 26, 1990 (INCEPTION) TO APRIL 30, 1996
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.
As of December 31, 1994 and 1995, and April 30, 1996, the Company had
receivables and payables with affiliated companies as follows:
<TABLE>
<CAPTION>
Dec 31, Dec 31, April 30,
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Due from (to) Group S Limited $(438,049) $ 95,989 $ 33,274
Due from (to) Hanover Gold Company, Inc. $(171,325) $(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 years ended December 31, 1994, and 1995, and at
April 30, 1996, the Company owned 3,625,000 shares (41%, 27%, and 25%,
respectively) of the outstanding common stock of Hanover Gold Company, Inc.
<PAGE>
GROUP S LIMITED
AUDITED REPORT
FOR THE PERIOD
JANUARY 1, 1995
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.
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, 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
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
---------------- -------------
<S> <C> <C>
ASSETS
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.
<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.
<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.
<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.
<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
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
<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
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:
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
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.
6. INVESTMENT IN HANOVER RESOURCES, INC.
The Company acquired 100% of the outstanding common stock of Hanover
Group, Inc. ("Group") for which the Company 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 for accounting for assets of
related companies, the assets have been valued at cost. Group's cost for
833,734 shares of Hanover Resources, Inc. common stock transferred to the
Company as a result of the merger (see note 8) is $485,038.
<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
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.
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 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.
<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
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:
1994 1995
---------- ----------
Due from (to) Hanover Group, Inc. $ 56,000 $ 0
Due from (to) Hanover Resources, Inc. $ 438,049 $ (95,989)
Due from (to) Hanover Gold Company, Inc. $ (300,695) $ (474,895)
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.
<PAGE>
GROUP S LIMITED
INTERIM MANAGEMENT REPORT
FOR THE PERIOD
JANUARY 1, 1996
TO
APRIL 30, 1996
<PAGE>
GROUP S LIMITED
(A DEVELOPED STAGE COMP)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, APRIL 30,
1994 1995 1996
----- ---- -----
<S> <C> <C> <C>
Current Assets $ 36,385 $ 9,642 $ 9,901
--------- ---------- ----------
Total current assets 36,385 9,642 9,801
--------- ---------- ----------
Other assets:
Patented (deeded) and
unpatented claims (Note 4) 92,838 292,838 292,838
Due from affiliates (Note 11) 494,049 438,049 0
Due from shareholder (Note 5) 0 62,715 0
Investment in Hanover Resources,
Inc. (Note 6) 0 485,038 485,038
--------- ---------- ----------
Total other assets 586,887 1,278,640 777,876
----------- ----------- ----------
Total assets $623,272 $1,288,282 $786,677
--------- ---------- ----------
--------- ---------- ----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 0 $ 9,215 $ 9,215
--------- ---------- ----------
Total current liabilities 0 9,215 9,215
--------- ---------- ----------
Long-term liabilities
Due to Hanover Gold Company, Inc.
(Note 11) 0 474,895 474,895
Due to Hanover Resources, Inc.
(Note 11) 0 534,038 33,274
Option payment (Note 7) 125,000 125,000 125,000
--------- ---------- ----------
Total long-term liabilities 425,695 1,133,933 633,169
--------- ---------- ----------
Total liabilities 425,695 1,143,148 642,384
--------- ---------- ----------
Shareholders' equity:
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 166,670 166,670
(Deficit) accumulated during the
development state ( 11,093) ( 21,536) ( 22,377)
--------- ---------- ----------
Total stockholders' equity 197,577 145,134 144,293
--------- ---------- ----------
Total Liabilities and
stockholder's equity $ 623,272 $1,288,282 $786,677
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
See notes to financial statements.
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
STATEMENTS OF INCOME (LOSS) AND ACCUMULATED DEEFICITE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JANUARY 1, SEPTEMBER 9, 1991
DECEMBER 31, 1995 DECEMBER 31, 1995 TO (INCEPTION) TO
REVENUE APRIL 30, APRIL 30, 1996
1996
<S> <C> <C> <C> <C>
----------------- ---------------- --------------- ---------------
REVENUES $ 0 $ 0 $ 0 $ 0
----------------- ---------------- --------------- ---------------
EXPENSES
Administrative and office 6,011 1,817 933 16,882
Professional Fees 0 9,215 0 9,215
----------------- ---------------- --------------- ---------------
Total Expenses $ 6,011 $ 11,032 $ 931 $ 26,097
----------------- ---------------- --------------- ---------------
----------------- ---------------- --------------- ---------------
Income (Loss) from Operations $ 6,011 $ (11,032) $ (931) $ (26,097)
----------------- ---------------- --------------- ---------------
----------------- ---------------- --------------- ----------------
Interest Income $ 2,082 $ 589 $ 90 $ 4,169
0 0 0 (449)
----------------- ---------------- --------------- ---------------
Total Other Income (Expense) $ 2,082 $ 989 $ 90 $ 3,720
----------------- ---------------- --------------- ---------------
Net Income (Loss) (3,929) (10,443) (841) (22,377)
Accumulated Deficite at
Beginning of Period (7,164) (11,093) (21,536) -
----------------- ---------------- --------------- ---------------
End of Period $ (11,093) $ 21,536) $ (27,377) $ (22,377)
----------------- ---------------- --------------- ----------------
----------------- ---------------- --------------- ----------------
</TABLE>
<PAGE>
GROUP S LIMITED
(A DEVLOPEMENT STAGE COMPANY)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JANUARY 1, SEPTEMBER 9, 1991
DECEMBER 31, DECEMBER 31, TO APRIL 30, (INCEPTION) TO
1994 1995 1996 APRIL 30, 1995
--------- ---- ---- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES $ (3,292) $ (10,443) $ (841) $ (22,377)
Net Income (Loss) form Operations
Changes in Operating Assets
and Liabilities
(Increase) Decrease in Patented
(Deeded)Claims 163,925 (200,000) (292,838)
Increase in accounts payable 9,215 9,215
(Increase) Decrease in due for Affiliates (278,443) 56,000 438,049 0
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 0
Increase (Decrease) in due to Affiliates 534,038 (500,764) 33,274
--------- -------- --------- ------
Net cash provided by (used in) operating
activities: $ 14,053 $ 500,295 $ (841) $ 327,169
--------- ------- ----- --------
INVESTING ACTIVITIES:
(Increase in Investment in Hanover
Resources, Inc. (391,359) $ (485,038)
------- -------- ----- ---------
Net cash used in investing activities $ 0 $(391,359) $ 0 $ (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) $ 0 $ 166,670
Net Increase (Decrease) in cash 14,053 66,936 (841) 8,801
Cash, beginning of period 22,332 36,385 9,642 ---
------- -------- ----- --------
Cash, end of period $ 36,385 $ 103,321 $ 8,801 $ 8,801
------- -------- ----- ---------
------- -------- ----- ---------
</TABLE>
See notes to financial statements.
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 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
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.
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
4. PATENTED (DEEDED) AND UNPATENTED CLAIMS (CONTINUED)
method whatsoever. 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:
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
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.
The Company acquired 100% of the outstanding common stock of Hanover Group,
Inc. ("Group") for which the Company 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
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
6. INVESTMENT IN HANOVER RESOURCES, INC. (CONTINUED)
cost for 833,734 shares of Hanover Resources, Inc. 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 shareholder will receive upon
the merger of the Company into Hanover Gold.
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.
<PAGE>
GROUP S LIMITED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
JANUARY 1, 1996 TO APRIL 30, 1996, AND
SEPTEMBER 9, 1991 (INCEPTION) TO APRIL 30, 1996
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, 1994 and 1995, and April 30, 1996, the Company had
receivables and payables with affiliated companies as follows:
<TABLE>
<CAPTION>
Dec 31, Dec 31, April 30,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Due from (to) Hanover Group, Inc. $ 56,000 $ 0 $ 0
Due from (to) Hanover Resources, Inc. $ 438,049 $ (95,989) $ (33,274)
Due from (to) Hanover Gold Resources, Inc. $ (300,695) $ (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.
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.
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the 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: 2-23022
HANOVER GOLD COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2740461
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
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
PAGE
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
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.
1
<PAGE>
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.
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
3
<PAGE>
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.
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
PAGE
----
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
(i)
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
(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
----------- ------------
----------- ------------
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
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
-------------- --------------
-------------- --------------
F/S - 2
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT)
ACCUMULATED
ADDITIONAL DURING THE
COMMON COMMON PAID-IN DEVELOPMENT
SHARES STOCK CAPITAL STAGE
--------- ------- ---------- -------------
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)
----------
----------
F/S - 3
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
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
-------------- --------------
-------------- --------------
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 interm 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:
March 31, 1996 March 31, 1995
-------------- --------------
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
-------------- --------------
F/S - 5
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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:
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
----------
----------
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)
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:
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
----------
----------
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:
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
----------
----------
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
<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:
1.2 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
E-1
<PAGE>
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 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.
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
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.
TECH SQUARED, INC., a Minnesota corporation
By: /s/ Joel Ronning
---------------------------
its duly authorized officer
E-3
<PAGE>
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[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 ________
Commission file number 1-8372
HANOVER GOLD COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-23022 11-2740461
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
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:
Common Stock The Nasdaq Stock Market
Title of each class Name of each exchange on which registered
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
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
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."
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(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>
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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
2
<PAGE>
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 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, the Company also reversed a
prior period salary accrual of $542,347 attributable to Fred R. Schmid, 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.
3
<PAGE>
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.
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
4
<PAGE>
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 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.
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6
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
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
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
ASSETS
<TABLE>
<CAPTION>
Restated)
(Note 18)
December 31, December 31,
1994 1995
----------- ------------
<S> <C> <C>
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 ($.0001/share) 900,000 90
Payments by Hanover Resources, Inc.:
Deferred offering expense 12,636
Exploration, engineering and site development 26,280
Deposit, Kearsarge Lode Claim 100,000
Cash infusion 5,000
Net loss (37,962)
--------- -------- ---------- -----------
Balance, December 31, 1990 3,186,250 319 414,236 (37,962)
Payment by Hanover Resources, Inc.:
Deposit purchase of claim 325,000
Issuance of common stock to directors
($.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 consolidated financial statements.
F/S-5
<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, 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, 1993 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 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.
F/S-8
<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
3. Summary of significant accounting policies (continued):
Principles of consolidation (continued):
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.
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.
F/S-9
<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
3. Summary of significant accounting policies (continued):
Resource properties and claims (continued):
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.
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.
F/S-10
<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
4. Nature of operations, risks and uncertainties (continued):
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 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
F/S-11
<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
5. Note receivable (continued):
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:
December 31 December 31
1994 1995
----------- -----------
Raw materials $ 83,825 $29,494
Work in process 71,984 0
Yard & supplies 25,429 0
-------- -------
Total inventory $181,238 $29,494
-------- -------
-------- -------
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.
F/S-12
<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
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
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:
December 31, 1995
-----------------
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
----------
----------
F/S-13
<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
9. Patented (deeded claims) (continued):
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.
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.
F/S-14
<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
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.
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.
F/S-15
<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
11. Agreements (continued):
The Agreement provides for the Company to pay the underlying
landowner rental payment obligations as follows:
December 31, 1995
-----------------
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
----------
----------
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.
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.
F/S-16
<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
11. Agreements (continued):
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:
December 31, 1995
-----------------
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
----------
----------
F/S-17
<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
11. Agreements (continued):
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 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:
1994 1995
-------- --------
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
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.
F/S-18
<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
13. Related party transactions (continued):
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 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:
Total @ $.50
On or before Shares per share
------------ ---------- -------------
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
--------- ----------
--------- ----------
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.
F/S-19
<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
14. Subsequent events (continued):
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.
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.
F/S-20
<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
14. Subsequent events (continued):
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.
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.
F/S-21
<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
17. Lease agreements (continued):
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.
1992 and prior $137,823
1993 270,895
1994 133,629
--------
$542,347
--------
--------
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.
1992 $20,382
1993 35,783
-------
$56,164
-------
-------
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.
Officer or Director Options Granted Expiration Date
------------------- --------------- ---------------
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
Warrants:
All warrants outstanding have expired as of December 31, 1994.
F/S-22
<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
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:
First year $125,000
Second year 137,000
Third year 150,000
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.
21. Calculation of earnings per share:
December 31,
1993 1994 1995
---------- ------------ -----------
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
--------- --------- ----------
--------- --------- ----------
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.
F/S-23
<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
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:
December 31,
1993 1994 1995
---------- ------------ -----------
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
-------- -------- --------
-------- -------- --------
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.
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-24
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-25
<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
Balance at
Name of beginning of Amounts
Debtor period Additions Collected Current
------- ------------ --------- --------- --------
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
F/S-28
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A Development Stage Company)
PROPERTY, PLANT AND EQUIPMENT
SCHEDULE V
Balance at Other Changes-
beginning of Additions add (deduct)- Balance at
Classification period at cost describe end of period
- - - -------------- ------------ --------- -------------- -------------
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
F/S-28
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A Development Stage Company)
ACCUMULATED DEPRECIATION, DEPLETION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
SCHEDULE VI
Additions
Balance at charged
beginning of to costs and Balance at
Description period expenses Retirements end of period
- - - ----------- ------------ ------------ ----------- -------------
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
F/S-28
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A Development Stage Company)
SHORT-TERM BORROWINGS
SCHEDULE IX
<TABLE>
<CAPTION>
Maximum
Weighted amount Weighted
average outstanding Average amount average interest
Category of appropriate Balance at interest during outstanding rate during the
short-term borrowing end of period rate the period during the 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-29
<PAGE>
HANOVER GOLD COMPANY, INC. AND SUBSIDIARY
(A Development Stage Company)
SUPPLEMENTARY INCOME STATEMENT INFORMATION
SCHEDULE X
<TABLE>
<CAPTION>
Item Charged to costs and expenses
---- -----------------------------
<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-30
<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>
PRELIMINARY COPY
5/30/96
HANOVER GOLD COMPANY, INC.
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE , 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, June__, 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 1,
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
<PAGE>
June ___, 1996 Wayne Schoonmaker, Secretary
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<PAGE>
HANOVER GOLD COMPANY, INC.
1000 NORTHWEST BOULEVARD, SUITE 100
COEUR D'ALENE, IDAHO 83814
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
JUNE _________, 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 June__, 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
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<PAGE>
record at the close of business on June 1, 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 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.
-4-
<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".
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.
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.
-5-
<PAGE>
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 June ____, 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.
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. 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
-6-
<PAGE>
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.
- - - - 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)
COMPANY RESOURCES GROUP S COMBINED(2)
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)
____________
(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").
(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.
-7-
<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
Name of Beneficial Owner Relationship to Beneficially Percent Beneficially Percent
Company Owned (1) % Owned (2) %
- - - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Hanover Resources, Inc. Affiliated 3,625,000 20.87 None (3) None
P.O. Box B Company
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 Record and 10,653,836(9) 61.33 9,578,186(9) 51.38
- - - -------------------------------------------------------------------------------------------------------
</TABLE>
-8-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Affiliate as a Group Beneficial
(8 persons)
- - - -------------------------------------------------------------------------------------------------------
</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".
(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
-9-
<PAGE>
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 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:
Fred R. Schmid 250,000 shares
Stephen J. Schmid 175,000 shares
Nicholas Young 150,000 shares
Lawrence Steinbaum 125,000 shares
Pierre Gousseland 100,000 shares
(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).
---------------------
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<PAGE>
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 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 Number of Company Percentage
Shares Shares beneficially of Shares
Name and Address Relationship to of the Company owned after the Merger to be out-
of Beneficial Owner Company acquired in the standing (1)
Merger
- - - ---------------------------------------------------------------------------------------------------
<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 0 43,000 0.25
North 3303 Sullivan Rd. and Director
Spokane, WA 99210
Pierre Gousseland Director 50,017 190,017(5) 0.97
4 Lafayette Court
Greenwich, CT 06830
F. D. Owsley
2465 Cherry Hill Road
Coeur d' Alene, ID 83814 Director 0 29,000 0.15
- - - ---------------------------------------------------------------------------------------------------
</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.
-11-
<PAGE>
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.
-12-
<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 gold mineralized 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
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<PAGE>
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),
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
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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 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 mineral value of
the properties was estimated, with an allowance for anticipated losses
resulting from mining methods and beneficiation or preparation. The
properties of Resources and Group S were estimated to have a combined
mineral value of $8 million.(1) The estimated 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.
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),
- - - -------------------------
(1) Several methods are used in the mining industry to value gold
resources. "Proven and probable" reserves are normally defined by
mining and mineral exploration companies, using diamond drilling,
bulk sampling, mapping, and channel sampling, surface and
underground development work, or any combination of the above.
The Company believes, based on current gold price levels and
market conditions, that gold properties in production are valued
from $70 to $175 per ounce of "proven and probable" reserves. If,
however, the property consists of staked claims or concessions,
with no work having been performed, the valuation would be no
more than the cost of acquiring such property. 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 merely $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
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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 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 14.46% 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.
- - - -----------------------------------------------------------------------
"Mining Claims of Resources and Group S"), and when many
investors became stockholders of the Company.
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<PAGE>
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
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<PAGE>
businesses are managed by Fred R. Schmid 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
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<PAGE>
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 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, and not as a
pooling of interests. As a result, all transactions have been recorded at
cost.
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
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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 54.
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<PAGE>
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 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 gold mineralized 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.
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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 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
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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:
Drill Hole From To Length Au opt
---------- ------ ------ ------ ------
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
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
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
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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 60 additional days), 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.
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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,
and therefore it has 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.
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
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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.
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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 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
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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.
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
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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 claims will be controlled by the
Company, and all gold deposits will be consolidated with the Company's gold
deposits, and will total approximately 26,000,000 tons of gold-bearing ore
at an average grade of .0615 ounces of gold 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.
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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
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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.
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
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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.
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.
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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.
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
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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>
Name of Optionee Relationship of Optionee to Company Number of Shares Optioned
- - - ---------------- ----------------------------------- -------------------------
<S> <C> <C>
Pierre Gousseland(1) Director 100,000
Fred R. Schmid Former Chairman of the Board and 250,000
President
Stephen J. Schmid Former Vice President, Treasurer, 175,000
Secretary and Director
Laurence Steinbaum(1) Director 125,000
Nicholas S. Young Director 150,000
</TABLE>
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<PAGE>
(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.
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
Position and other Relationship Elected a
Name of Nominee Age 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
Designee of Neal A. Degerstrom
- - - --------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
- - - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pierre Gousseland 72 Director and Member of the Stock 1992
Option Plan 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 1994
Option Plan and Compensation
Committees
Nicholas S. Young 47 Director and Member of the 1990
Compensation and Audit 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.
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
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<PAGE>
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".
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<PAGE>
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 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.
-38-
<PAGE>
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.
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
-39-
<PAGE>
Company relied on the results of the Kennecott's exploration work that
resulted in Kennecott defining approximately 1.4 million ounces of
drill-indicated gold resources 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.
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
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<PAGE>
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 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
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<PAGE>
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 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 pursuant to the Securities Purchase Agreement as
of the date of this Proxy Statement. That number could increase if and when
Mr. Degerstrom 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.
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<PAGE>
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:
Fred R. Schmid 3,224,943 shares(1)
Nicholas Young 331,179 shares
Lawrence Steinbaum 133,983 shares
Pierre Gousseland 50,017 shares
______________
(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 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."
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<PAGE>
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
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<PAGE>
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 Board, which approved and authorized the Company to pay Fred R. Schmid,
then the President and Chief Executive Officer, a cash bonus of $150,000 for
his services in raising the initial working capital and completing the 1993
public financing for the Company. No such action has been taken for or in
respect of 1995.
STOCK OPTIONS. Reference is made to "THE 1995 STOCK OPTION PLAN" for
a description of the Company's Stock Option Plan and the stock options
granted under the Plan. The Board has authorized the issuance to Mr. Fish
of restricted Common Stock as part of his compensation arrangement. That
arrangement is described below.
COMPENSATION OF OFFICERS FOR 1995, 1994 AND 1993. The following
table shows compensation paid to the Company's former Chief Executive Officer
during the fiscal years ended December 31, 1995, 1994, and 1993.
- - - -------------------------------------------------------------------------------
Annual Long-term All Other
Name and Compensation Compensation Compensation
Principal Position Year Salary ($) Awards ($)
- - - -------------------------------------------------------------------------------
Fred R. Schmid 1995 137,435 -0- -0-
CEO and 1994 126,445 -0- 150,000(1)
President 1993 114,950 -0- -0-
- - - -------------------------------------------------------------------------------
(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.
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<PAGE>
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 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
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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
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June __________, 1996
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